Agribusiness

An International Perspective

Julian Roche

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351039727
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Agribusiness offers a unique introduction to the business of agriculture: what agribusiness is, why it matters, what the role of technology is, how trade fits into the picture, what its key risks are, who is lending and investing and why, and what returns they are getting. It is both practical in orientation – focusing on the role of managers in the industry as well as that of lenders and investors – and international in scope – drawing on case studies and interviews with key figures all over the world.

The text ranges across various agricultural commodities to stress that there is no 'one size fits all' solution and successful management, lending or investment in agribusiness requires understanding specifics. Readers are introduced to the economics of the supply and demand of food, the role of agricultural trade, agricultural marketing and farm management along with key business aspects including:

• Main drivers of agribusiness value;
• Principal risks of agribusinesses;
• Agribusiness as an investment class; and
• Agribusiness lending: why, who and how.

This engaging textbook offers a complete guide to the international business of agriculture which is ideal for all students, scholars and practitioners.

A selection of eResources is also available to supplement this text, and instructors will find PowerPoint slides, discussion questions, case studies and further teaching materials available to them.

CHAPTER

1

The need for agribusiness

Introduction: what is agribusiness?

One of the most vexing questions about agribusiness is, perhaps alarmingly, its definition. Or more accurately, what are its boundaries? We might usefully paraphrase Wittgenstein’s famous point about games, that there is nothing that all agribusinesses have in common, yet all are agribusinesses nonetheless. In an effort to throw a ring around the subject matter, there have however been over time a number of attempts to define an agribusiness.

The most successful, at least judged by frequency of citation, is still the original definition:

the sum total of all operations involved in the manufacture and distribution of farm supplies; production operations on the farm; and the storage, processing and distribution of farm commodities and items made from them (Davis & Goldberg, 1957:9).

However there have been a number since:

• In a revised definition that included retailers, Sonker & Hudson (1999) defined agribusiness as a sequence of interrelated sub-sectors made up of: (1) genetic and seedstock firms, (2) input suppliers, (3) agricultural producers, (4) merchandisers or first handlers, (5) processors, (6) retailers and (7) consumers. Notably still absent from this definition were trading companies and land and timber investors.
• The Missouri Department of Agriculture’s definition from 2003 was similar: farmers and ranchers producing food, fibre and other raw materials, but also processors, handlers, transportation agents and operators, wholesalers, and finally retailers (Ricketts & Ricketts, 2009:5). Again, traders and investors were left out.
• The Agribusiness Council of Australia said that it welcomed all definitions, because it is the commonly held perceptions about agribusiness that is relevant to its acceptance throughout the wider community. In summary, though, it says, the two concepts are:

(i)‘In the context of agribusiness management in academia, each individual element of agriculture production and distribution may be described as agribusiness. However, the term ‘agribusiness’ most often emphasises the ‘interdependence’ of these various sectors within the production chain’; and

(ii)‘Among critics of large-scale, industrialized, vertically integrated food production, the term agribusiness is used negatively, synonymous with corporate farming. As such, it is often contrasted with smaller family-owned farms.’ (ACA, 2018)

Generally, definitions have become wider over time, and as farming has become more technical and capital-intensive, it has been increasingly recognised as agribusiness, practitioners even being described as ‘production agriculturalists’ rather than ‘farmers’. In accounting for the heterogeneity of the agribusiness sector, it would at least be wise to distinguish between primary and manufacturing agribusiness products, most obviously by using the Standard Industrial Classification (SIC) system. Primary agribusiness includes three categories (agriculture; livestock; forestry), whereas manufacturing agribusiness includes ten categories to reflect the variety of traded products (canned; cereals; drinks; leather; meat; oils; paper; tobacco; wood; other). In addition, there are service agribusinesses, notably supermarkets. Finally, there are the traders and the investors, especially in farmland.

Agribusiness now includes all businesses whose raw materials are primarily products of the land and the sea. Finally, it is worth noting that not all ‘businesses’ are there to make a profit, or exclusively to do so, especially those owned by the public sector. But however broad the definition, there is no escaping the negative connotations of ‘agribusiness’ in certain quarters, which should neither be ignored nor celebrated. Rather, advocacy and criticisms of large-scale production should be treated alike, as calls for empirical analysis and evidence-based policymaking wherever possible. As with any contentious subject, this path is not easily trod.

The development of agriculture

The history of agriculture and farming should be swiftly summarised in a contemporary perspective on agribusiness.

Homo sapiens began as nomadic hunters and gatherers, eating wild vegetables, fish and fowl, using fire for cooking. This was followed by farming, and for millennia, agriculture was farming – following the seasons in planting and harvesting crops and domesticating animals – to which should be added fishing. Wooden sickles and ploughs gave way to metal in the Bronze Age, which although rainfall appears to have been higher than now also saw irrigation in Egypt and Mesopotamia (Araus et al., 2014), and the use of the wheel; in the Iron Age crops first became part of a commercial system, with the Roman Empire for example prospering on a substantial Mediterranean grain trade (Kessler & Temin, 2007). In the Middle Ages in Europe, crop rotation, fencing, and even limited selective breeding began (Parain, 1966). Increasing efficiency was paralleled by progressively more crops and different animals introduced into agriculture (National Geographic, 2018). The use of grains and the development of more productive crops were central to population growth. And grow population did. When farming began, somewhere around 10–15,000 years ago, global human population was probably only 1–10 million. Reaching 300 million around the time of Jesus’ birth, it doubled in the next millennium and a half. It then rose from 1.5 billion in 1900 to about 7 billion now, and is still rising. True, fertility has declined in most countries, as the ‘demographic transition’ cuts in, especially in cities, but there are still important exceptions (Zaidi & Morgan, 2017), and the strategic trend is quite dramatic, as Figure 1.1 amply demonstrates. Although it does not include the additional billion people already added since the turn of the century, the figure demonstrates the close correlation between population growth and change in the agricultural systems necessary to support it:

Figure 1.1Population growth and agricultural systems

Source: Mazoyer & Roubart (2006:63)

In the later 20th century, artificial insemination for livestock, electric fencing, better ploughs, chemical fertilisers, insecticides and pesticides were all introduced into production agriculture (Federico, 2005). Risk management techniques improved and agricultural finance became far more widespread. Production grew dramatically, as Figure 1.1 shows, but the effect of the mechanisation that primarily drove production growth was also a dramatic decline in the number of people working in agriculture in advanced economies.

Figure 1.2Number of people employed in agriculture over time

Source: Roser (2015)

In the 20th century, economies of scale underlay the consolidation of farms that became the norm in developed economies. Whereas in 1900 in the USA there were 5.7 million farms covering 839 million acres, giving an average size of 146 acres (59 hectares), little changed by 1930, in 1997 there were 1.9 million farms covering 932 million acres, giving an average size of 487 acres (197 hectares) (USDA, 2017a). This compares to the EU-28, where in 2013 there were 10.8 million agricultural holdings covering 175 million hectares (some 40.0% of the total land area), giving an average size of 16.1 hectares per agricultural holding (Eurostat, 2015). In France the average farm size is around 50 hectares. And in Australia, home of the largest farm in the world at almost 2.5 million hectares, of all farms with grain in their enterprise mix, the national average for the annually cropped area per farm is just over 800 hectares (ABS, 2018).

In China, however, the average farm size is still just 1 hectares, whilst in Africa smallholders are working with even smaller landholdings (FAO, 2018). In the poorest 20% of countries the average farm size is 1.6 hectares, while in the richest 20% of countries the average farm size is 54.1 hectares, a 34-fold difference. In poor countries, very small farms (less than 2 hectares) account for over 70% of total farms, whereas in rich countries they account for only 15%. In poor countries, by contrast, there are still virtually no farms over 20 hectares, while in rich countries these account for 40% of the total number of farms (Adamopoulos & Restuccia, 2014).

The debate over the survival of family farms has been prolonged. On the one hand is the belief that only massive subsidies are preventing their total eclipse. ‘Using smallholdings agriculture as a development policy is like promising an automobile to everyone in the world, but limiting construction to hand labor’ (Blumenthal, 2013:112). On the other is the contention that many company farms are family companies, incorporated only for taxation purposes, and that even in developed countries, most farms continue to be operated by families, employing labour in addition to family members. But even Brookfield & Parsons (2007), the last celebrated enthusiasts for family farms, recognised that in what was for them the future there will be fewer of them than before, albeit that some farms will continue to grow whilst others ebb.

Table 1.1 ABARES categorisation of Australian broadacre dairy farms

	Small	Medium	Large
Turnover	<A$450,000	A$450,001–A$1m	>A$1m
% number	70%	20%	10%
% total value of sales	24%	27%	49%
Capital value	<A$5m	A$5–9m	A$9m+
% off-farm income	>50%	<50%	Small percentage

Source: ABA RES (2017:155)

This is a far larger definition of ‘small’ than even the current USDA definition of a farm, which is ‘any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the year’ (USDA, 2014). The USDA’s Economic Research Service (ERS) divides farms into four, based on turnover:

• Small family farms both low <$150,000 and medium $150–349,000;
• Mid-size family $350–999,000;
• Large-scale family $1m+, very large $5m+; and
• Non-family farms – primary operator’s family does not own 50% or more of the business.

In the 2010s, the USA depended on 7% of its farms, about 155,000 farmers, to produce 80% of the country’s agricultural production, and this percentage seems more or less to have stabilised. Dividing farms by income probably makes more sense than by size, especially in countries such as Australia: whilst in Victoria the minimum viable farm size is probably still around 50–100 hectares, even in the more fertile western part of the Wheatbelt of Western Australia 3000 hectares is probably an equivalent, whilst some farmers have more, especially in the East of the Wheatbelt, where the bush becomes the Outback. Generalising across large geographic areas is dangerous, though – parts of the WA Wheatbelt are very fertile, while in others, where the same production requires twice the area or even more, ‘low rainfall eastern wheatbelt of Western Australia may cause the optimal farm plan to shift away from strategic cropping to a more extensive grazing system with opportunistic cropping’ (Kingwell & Payne, 2015:32–33).

Now, in developed countries, farming ...