The U.S. Food and Fiber Industry Chapter 2

Discussion Topics Review of key measurement concepts before we start What is the food and fiber industry? Changing complexion of farming Other sectors in the food and fiber industry

Output and Price Indices Apple Production Price of apples Year (million pounds)Output Index ($/pound)Price index , $ , , is the base year Page 18

Output and Price Indices Apple Production Price of apples Year (million pounds)Output Index ($/pound)Price index , $ , , is the base year 1.06 = 5,823÷5,515 Output 6% higher in 1997 than it was in 1990… = 5,823÷5,515 Output 6% higher in 1997 than it was in 1990…. Page 18

Output and Price Indices Apple Production Price of apples Year (million pounds)Output Index ($/pound)Price index , $ , , is the base year 1.06 = 5,823÷5,515 Output 6% higher in 1997 than it was in 1990… = 5,823÷5,515 Output 6% higher in 1997 than it was in 1990…. Page = 0.91÷0.72 Price 26% higher in 1997 that it was in 1990….

Nominal and Real Expenditures Nominal Expenditures CPI Real Expenditures Year (million dollars) =100 (Million dollars) average is the base year for the CPI Page 19

Nominal and Real Expenditures Nominal Expenditures CPI Real Expenditures Year (million dollars) =100 (Million dollars) average is the base year for the CPI CPI was 61.1% higher in 1995 than it was in period CPI was 61.1% higher in 1995 than it was in period Page 19

Nominal and Real Expenditures Nominal Expenditures CPI Real Expenditures Year (million dollars) =100 (Million dollars) average is the base year for the CPI CPI was 61.1% higher in 1995 than it was in period CPI was 61.1% higher in 1995 than it was in period = 354.4÷1.611 The increasing CPI eroded the purchasing power of the dollar….

Characteristics of the Food and Fiber System

The Nation’s food and fiber system consists of four sectors that provide food and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that provide food and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that provide food and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that provide food and fiber products to their ultimate consumer. Page 21

The Nation’s food and fiber system consists of four sectors that provide food and fiber products to their ultimate consumer. Page 21

Changing Complexion of Farming Physical structure Fewer number of farms but larger-sized farms Increasing use of capital relative to labor Increasing productivity or output per unit of input Financial structure and performance Volatility of net farm income reduced by by subsidies Declining debt use strengthens equity position Recovering real estate values after sharp declines during the financial crises in the mid-1980s Pages 22-32

Page 29 Year Expansion of Agricultural Production Output Index 1996=1.0

Page 27 Index of Inputs 1996=1.0 Declining Role of Hired Farm Labor

Farm Profitability Cash receipts from farm marketings + Government payments + Other income from farm sources = Gross farm income Page 29

Farm Profitability Cash receipts from farm marketings + Government payments + Other income from farm sources = Gross farm income – Production expenses = Nominal net farm income Page 29

Farm Profitability Cash receipts from farm marketings + Government payments + Other income from farm sources = Gross farm income – Production expenses = Nominal net farm income ÷ Broadly-based price deflator = Real net farm income Page 29

Page 30 Nominal Net Farm Income Instability of Net Farm Income Real net farm income in 1983 had the same purchasing power as 1933

Financial Structure Value of real estate assets + Value of nonreal estate assets + Value of financial assets = Total assets Page 31

Financial Structure Value of real estate assets + Value of nonreal estate assets + Value of financial assets = Total assets – Total liabilities or debt = Equity or net worth Page 31

Liabilities Or debt Liabilities Or debt Assets Equity or net worth Start of Farm Financial crisis Start of Farm Financial crisis

Page 31 Liabilities Or debt Liabilities Or debt Assets Equity or net worth Duration of Farm Financial crisis Duration of Farm Financial crisis

Other Sectors Farm input suppliers Providers of variable production inputs Providers of fixed production inputs Page 33

Relative Importance of Farm Input Expenditures Page 33

Other Sectors Farm input suppliers Providers of variable production inputs Providers of fixed production inputs Food processors, wholesalers and retailers Agent middlemen firms Speculative middlemen firms Processors and manufacturers Facilitative organizations Pages 33-34

The bulk of farm production flows through assemblers and brokers to food manufacturers and processors…. The bulk of farm production flows through assemblers and brokers to food manufacturers and processors…. Agriculture Assemblers, Brokers, etc. Food manufacturers And processors Page 37

After value is added by food processors and manufacturers, the next stop is wholesalers, brokers and chain warehouses... After value is added by food processors and manufacturers, the next stop is wholesalers, brokers and chain warehouses... Imports Food manufacturers and processors Wholesalers, brokers, Chain warehouses Page 37

Finally, the bulk of value added production flows through grocery stores to consumers….. Finally, the bulk of value added production flows through grocery stores to consumers….. Consumers Institutional market Grocery stores Specialty food stores Wholesalers, brokers, Chain warehouses Page 37 Military

Page 39 Where a food dollar goes

Only 20 percent of each dollar spent on food products goes to farmers and ranchers… Only 20 percent of each dollar spent on food products goes to farmers and ranchers… Page 39 Where a food dollar goes

In Summary Increasing role of capital Productivity Weak real profitability Government subsidies Interrelationship among sectors in the food and fiber industry Farmers/ranchers share of food dollar

Chapter 3 starts a series of three chapters that focus on the demand curve for food and fiber products….