Agricultural Economics

1. Agricultural Economics
Lecture 1

2. What is Agricultural Economics?
•“…an applied social science that deals with
how producers, consumers and societies use
scarce resources in the production, processing,
marketing and consumption of food and fiber
products”.

3. What is Agricultural Development?
• Here development means what happens over time
• change, evolution, growth
• it may be an improvement… or not.
• We focus on what happens to the whole country
• to the entire agricultural sector,
• given overall economic development:
– higher income, production and consumption
– improved health and life expectancy
– and many other changes…

4. • A key change over time is that people get richer, so when we talk of
“more” or “less” developed, what we usually mean is “richer” or
“poorer”.
• We will usually be descriptive, asking:
–what happens over time,
• as countries get richer?
–what differs across countries
• between rich & poor?
• And sometimes we will be prescriptive, asking
– what should be done,
• to help people get what they want?

5. • Development involves accumulation, that economists call “capital”:
– physical capital (houses, roads, machines)
– human capital (education, health)
– institutional capital (“rules of the game”)
• The accumulation of capital makes it more abundant and cheaper.
• But accumulation doesn’t happen automatically.
• To build up capital, people must save and invest from one year to the
next.

6. • Development also involves innovation, which economists call
“technical change”:
– new physical things (seeds, chemicals, etc.)
– new ideas (crop rotations, etc.)
– new institutions (futures markets, etc.)
• Innovation makes it possible to produce more of what people
want, from the resources they have.
• But innovation doesn’t happen automatically.
• To innovate, people must be able to change what they do.

7. Agriculture as a share of GDP vs. GNP per
capita, 1989
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York:

8. Agriculture as a share of employment vs. GNP
per capita, 1985
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York:
McGraw Hill, 1993.

9. Percent of income spent on food vs. GNP per
capita, 1980s
ce: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993

10. 0
50.000
100.000
150.000
200.000
250.000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
GNP (Millions, $) GNP in Agriculture (Millions, $)

11. 0
20.000
40.000
60.000
80.000
100.000
120.000
140.000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
GNP (Billions, TL) AGRICULTURE (Billions, TL) INDUSTRY (Billions, TL) SERVICES (Billions, TL)

12. 0
10
20
30
40
50
60
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Share of Agriculture (%) Share of Industry (%) Share of Services (%)

13. YEARS SHARE OF AGRICULTURE (%) SHARE OF INDUSTRY (%) SHARE OF SERVICES (%)
1980 24,2 20,5 55,4
1981 22,6 21,5 55,9
1982 22,7 21,9 55,4
1983 21,6 22,4 56
1984 20,3 23,1 56,6
1985 19,4 23,6 57
1986 18,8 25 56,2
1987 17,2 24,9 57,9
1988 18,3 25,1 56,7
1989 16,6 25,9 57,5
1990 16,3 25,9 57,9
1991 16,1 26,5 57,4
1992 15,8 26,5 57,8
1993 14,5 26,5 59
1994 15,3 26,6 58,1
1995 14,4 27,7 57,9
1996 14 27,7 58,3
1997 12,7 28,1 59,2
1998 13,4 27,6 59
1999 13,4 27,9 58,7
2000 13,1 27,8 59
2001 13,7 28,5 57,8
2002 13,7 29,3 56,9
2003 12,6 29,9 57,5

14. 0
10.000.000
20.000.000
30.000.000
40.000.000
50.000.000
60.000.000
70.000.000
1927
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
POPULATION (TOTAL) POPULATION (CITY) POPULATION (VILLAGE)

15. 0
10
20
30
40
50
60
70
80
90
100
1927 1940 1950 1960 1970 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
VILLAGE POPULATION / TOTAL POPULATION (%)
VILLAGE POPULATION / TOTAL POPULATION (%)

16. 0
5.000
10.000
15.000
20.000
25.000
1923 1930 1940 1950 1960 1970 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
EMPLOYMENT (x1000) EMPLOYMENT IN AGRICULTURE (x1000)

17. 0
10
20
30
40
50
60
70
80
90
100
1923 1930 1940 1950 1960 1970 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
SHARE OF AGRICULTURE IN EMPLOYMENT (%)
SHARE OF AGRICULTURE IN EMPLOYMENT (%)

18. 0
5.000
10.000
15.000
20.000
25.0001988
1989
1990
1991
1992
1993
1994
1994
1995
1996
1997
1998
1998
1999
1999
2000
2001(1)
LABOR IN AGRICULTURE (x1000) LABOR IN INDUSTRY (x1000) LABOR IN SERVICES (x1000) TOTAL (x1000)

19. The Functions of Agriculture
Function 1: Provide food for humankind
Malthus’ theory of the capacity of world to feed
humankind: Geometric increase in human
population vs. arithmetic increase in food
poduction.

20. • Function 2: Provide raw material for the
industry
• Function 3: Provide opportunity for rural
lanscape
• Function 4: Source for capital accumulation
for development
• Function 5: Source of labor for the industry

21. Why Does Agriculture’s Share Declines in
Economic Development?
• Inelastic income elasticity of demand for
staple foods: as per capita income rises,
declining proportion of household
expenditure is devoted to food.
• By Engel's law, as per-capita income rises, the
proportion of income spent on food declines
relative to other products.

22. • As household demand for food declines in
relation to other products, relative prices of
foods decline, other things equal.
• This in turn reduces returns to factors used in
agricultural production, causing a net
migration of labor and capital to other sectors.
•  Share of agriculturen declines over the
economic development process..

23. • Almost always, agriculture declines
– In employment share
– In share of GDP or GNP (national income)
– In share of consumer expenditure
• Do farmers get poorer?
• Are there fewer farmers?

24. Agricultural Policy
• Policy is guiding principle leading to a course of action that is pursued by
the government.
• Policies and programs
• Major forces for policy change:
– Instability
– Globalization
– Technology
– Food safety
– Environmeny
– Industrialization of agriculture
– Politics
– Unforseen events

25. What is Agricultural Policy?
• A subset of public policy directed primarily but
not exclusively at the farm and agribusiness
sectors of society.

26. Agricultural policy applies to two markets:
• 1. AGRICULTURAL INPUT MARKETS
• USE OF LAND AND OTHER NATURAL RESOURCES
• AGRICULTURAL CREDIT AND FINANCE
• LABOR
• INDUSTRIAL PRODUCTS
• 2. AGRICULTURAL OUTPUT MARKETS
• PRODUCTION
• CONSUMPTION
• MARKETING
• INTERNATIONAL TRADE

27. • Food is one of the great universals in our lives
and one of the things that brings us together.
– The industrial complex that produces, processes,
and distributes it is one of the largest industries in
the world.
• On a global basis the food industry is the
largest industry in terms of people employed
and value of product.
The following slides are from E. Drummond and J.W. Goodman.
Agricultural Economics, Pearson, 2011

28. • The food industry can be divided into four major
sectors:
– Farm service, producers, processors, and marketers.
• For every $100 spent at the supermarket…
– The farm service sector accounts for about $12.
– The production sector (i.e., farmers), about $7.
– The remaining $81 goes to processors of agricultural
commodities, and the marketing system that brings
food to your table.

29. Farm Service Sector
• The farm service sector provides
producers with the inputs such as feed,
fertilizer, fuel, equipment, and
chemicals.
– Many firms are multinational
corporations with household names
such as John Deere, DuPont, and
Monsanto.
There is also a variety of small, local
service companies that serve diverse
needs of local farmers for irrigation
equipment, farm structures, etc.
2
3
4

30. Farm Service Sector
• There are also numerous firms that provide
farmers with services such as banking, accounting,
insurance, legal advice, and agronomic consulting.
• As farming becomes increasingly complex, farmers
are pressed to rely heavily on providers of farm
services—a fast-growing, highly localized sector
of the food industry.

31. Producers• The producers sector includes all of
those firms engaged in the
biological processes associated with
production of food & fiber.
– Examples include farmers,
ranchers, grove & nursery owners.
Producers buy from the farm service
sector and sell to the processor
sector.
3
4

32. Producers• Unique about producers is the link, often
nostalgic, to the biological processes of
producing raw food products—Mother Nature.
– While the link is appealing, most producers are
rapidly becoming little more than food factories.

33. Processors• The processors sector
creates value converting
agricultural commodities
into those products that
consumers want.
– Processors change the
form of food and create
value in the process.
4

34. Processors• Processors can be divided into two groups:
– Commodities processors - (milling wheat into flour).
– Food products processors - (bakers who turn flour
into bread).
• Frequently, a company engages in both activities:
– Hershey processes cocoa beans & makes chocolate bars.
– ConAgra Foods processes soybeans into oil, to make
Blue Bonnet®
, Fleischmann’s®
, and Parkay®
margarines.
• ConAgra Foods also sells soybean oil directly.

35. Processors
• Food product processors can be further divided
into:

36. Processors
• Food product processors can be further divided
into:
– Those that produce for the retail food consumer.

37. Processors
• Food product processors can be further divided
into:
– Those that produce for the retail food consumer.
– Those that produce for food service distributors.
Today roughly one-half of all spending on
food is for food eaten away from home
This is the market food product processors serve.

38. Processors• A good example of a food product processor is the
Coca-Cola Company.
– It buys high-fructose corn sweetener from a commodity
processor such as ADM or Cargill.

39. Processors• It combines the HFCS with other ingredients, using
their secret formula, to produce Coke®
.
– In cans and bottles for the retail market.
– In bulk for the food service industry.

40. Processors
• Following the diagram,
we can understand that
Coca-Cola also plays the
role of wholesaler and
distributor in the
marketing sector.
Coca-Cola spans both the last half
of the processing sector and the
first half of the marketing sector.

41. Marketers• The marketers sector also
creates value in the food
industry by changing the
time and place of food.
It brings the consumer what he/she
wants, where & when it is wanted.
– The distribution system that
ties producer and consumer
together is the marketing
system.

42. Marketers• The food marketing system is so effective and efficient
that most of us take it for granted.
– Only when the system is disrupted by a hurricane or a
massive snow storm do we recognize how flawlessly
and easily the food distribution system usually operates.

43. FOOD INDUSTRY CONTEMPORARY
ISSUES
• Like any other major industry, the food industry is
in a continuous dynamic of change and adjustment.

44. Globalization• In most instances, commodity processors tend to
be on the forefront of globalization.
– Because demand for processing technologies is truly
global—we all need food to survive.
• Among commodity processors, the most
successful are very internationalized, with
processing facilities all over the globe.
– To fail to behave globally in the commodity processing
business is a recipe for corporate failure.

45. Globalization
• Globalization in food products processing has not been
as strong, as consumers in each country have different
tastes and preferences.
– The final food product soybeans may be soy protein meal
in one country, tofu in another, and a nice steak in a third.
• Many food product processors are making a push to
globalize, seeing growth of the processed food market
exploding in many developing countries.
– Growth of the market in the U.S. is basically stagnant.
• There are three truly global food product processing
companies:
– Coca-Cola, Unilever, and Nestlé.

46. Globalization - Nestlé• Nestlé is the largest processor of food products in
the world.
– Their strong suit is the infant formula market.
• Most may associate Nestlé with chocolate bars
and hot cocoa mix.
– Nestlé also appears as Nescafé®
,
Taster’s Choice®
, Perrier®
, Friskies®
, Alpo®
, Mighty Dog®
,
Baby Ruth®
, Butterfinger®
, PowerBar®
, and Carnation®
.

47. Globalization - Criticisms• Food security—every country wants to be certain its
nutritional needs will be met.
– As the industry becomes globalized, individual countries are
losing control to multinational companies that may have
objectives different from those individual countries.
• Global concentration—similar to the issue of industrial
concentration.
– A Brazilian firm, the world’s largest beef processor has acquired of
one of the largest U.S. beef processors.
• Many individuals are concerned about the loss of national
identity associated with globalization.
– Skeptics see the future of a homogenized world in which French
and Swiss cheeses all turn into cheddar.

48. Coordination• Marketers are the companies that tie the final food
consumer to the processor.
– Their job is to make certain that whatever the consumer
wants is there when and where the consumer wants it.
As shown, the traditional
retail marketing system
is quite distinct from the
food service distribution
system.
The communication system that conveys consumer
wants to the producer is called coordination.

49. Coordination
• Traditionally, coordination has been
accomplished by prices sending messages from
one link in the marketing chain to the next.
– This is changing, with management & strategic
alliances replacing markets & the price system of
allocation.
• Most food purchased for home consumption is
purchased at a retail supermarket.
– Using technology, consumers can send signals to
producers using hotlines, websites & product blogs.

50. Coordination
• Traditionally, most retail stores purchased food
from wholesalers, who purchased in bulk from
processors, selling in smaller batches to retailers.
– Many—particularly smaller—retailers still use this
system.
• Many larger chains combine wholesale and retail
functions in a single firm, reducing transaction
cost.
– Reduced costs can be passed on to consumers as
lower prices, or captured by the producer as higher
profits.

51. Coordination - Vertical Integration
• Vertical integration allows a firm to
coordinate different stages in the food system
through management.
• With vertical integration as a dominant trend,
we are seeing a rise in the role of
management.
– And a decline in the role of markets in the
coordination
of the food system.