Need for change trumpeted at NICE: farm bill task force proposes actions to reserve farm-income downward spiral

Rural Cooperatives, Sept-Oct, 2001 by Dan Campbell

Agribusiness still comparatively small

In another session dealing with concentration, Steve Sonka, University of Illinois ag economist, said recent large mergers--such as Suiza Foods/Dean Foods, Cargill/Continental Grain, Dupont/Pioneer Seeds and Tysons Meats' ongoing effort to acquire IBP meat packing-have made them all bigger, but they are still small fry compared to their cousins in heavy industry, petroleum and electronics. ConAgra today is a $12 billion company, ADM $9 billion, Tysons $4 billion and Dean/Suiza $3 billion. But consider that General Electric does $420 billion in business annually, Exxon/ Mobile $300 billion and Microsoft $300 billion.

"Wall Street continues to think most food companies are too small," and that they are paying too much for their capital, Sonka said, adding that "agribusiness did not grow fast enough in the last half of the 1990s."

"Why don't we have 20 meat packers today? Because they would not be as efficient" [as the four or five that dominate the industry], he said. Today, there is much talk about the "evil vertical integrators" who have taken over pork production in the Southeast, Sonka said. "But when I was growing up [on a farm in Iowa], I was taught that corn farmers who also grew hogs were evil vertical integrators."

The cost of analyzing data and communicating is dropping rapidly, Sonka said. "The world has changed. Walls came down. Information flows more freely today." Less expensive technology makes vertical coordination better than vertical integration, Sonka said. He noted that Nike owns no bricks and mortar, and Microsoft owns little in the way of plants. Commodity returns, he said, are "just enough to keep you in business. Is that fair? Who cares? Not the market."

Co-ops, Sonka said, need to look more to brand development, knowledge accumulation and risk taking, all of which have high value in today's market.

Co-ops should focus on how to get producers involved in the world of knowledge. If farmers would stop purchasing corn varieties that rank in the lowest 25 percent for yield, they could earn an extra $28 per acre, he said. "That's easy money -- more than enough to buy a jacket for the friend who sells you that low-yield seed."

Sonka said co-ops are struggling to find successful value-added activity, but that "90 brands fail for every 10 that are successful. But the value of the 10 that win will far exceed the value of the 90 that fail."

Concentration is likely to continue and could even intensify, Sonka said. "It is valid to have concerns and emotions about this trend, but the real issue is performance. For co-ops, and for the rest of ag sector, the key will be boosting intangible assets."

In response to questions about the ethics of co-ops competing with producers (in areas such as hog feeding), Sonka responded that producers should look at these co-ops as businesses they own which generate profits that they can share in. Learn why this activity is successful and bring that knowledge gained to your own operation," he urged.