Overview of the Food System Jim Dunn Agricultural Economics

Overview of the food system What is the food system? Location of production Location of consumption Paths to the consumer

The Food System – elements Products and services Value added Information Money

The Food System Information Money

Location of production Depends on product Agriculture is increasingly specialized Individual farms specialize Regions specialize Key factors: –Where the resources are –Where the consumers are –Transportation system

General Characteristics of U.S. Agriculture U.S. has about 5% of world’s people 17% of cotton 43% of corn 60% soybeans 6% of land 22% of apples Cotton

Economies of Size in Farming Larger farms can specialize more Use equipment better Spread management over more units Get better rates on shipping and purchasing For crops maximum size hit limits because of distance

Family Farms Most farms are still family farms 48,000 PA Farms 7 have more than 10 stockholders 117 are not family corporations Corporate farming doesn’t work very well Returns low Hired workers don’t work as hard Hours an issue

Unique characteristics of farm supply. Commodity products - low barriers to entry, no product differentiation Often one crop per year Perishability- strawberries, cattle - can't sit on product waiting for better price -sell it or smell it. Producers small compared to market - price takers

More unique characteristics Time lags introduce expectations- don't know price when decision is made Short-run versus long-run elasticity One crop versus all food - limited amount of land Price variability - inelastic supply and demand makes prices variable

US Population 2000 Census Million 0 to 5 5 to to to to to 35

Expenditure share of types of food in the U.S. consumer’s food basket TypeShare Meat33.7% Fruit and vegetables14.0% Cereal & bakery products12.6% Dairy13.6% Sugar & sweets4.2% Fats & oils2.7% Non-alcoholic beverages11.0% Other prepared foods8.4%

Paths to the consumer Food consumed at home and food away from home Food away from home: –33% of food consumed –46% of the money spent on food Farmer’s share of the money: –25% of food at home –16% of food away from home

Share depends on product All Food (2000) Farm receipts $123 billion Marketing costs $538 billion

Farmer’s Share ProductShareProductShare Eggs53%Applesauce16% Beef49%Sugar27% Milk34%Potato chips8% Apples21%Corn flakes4% Oranges15%TV Dinner14%

What accounts for the marketing costs?

The share of marketing costs is rising

Source: Economic Report of the President

Source: USDA

Source: Bureau of Labor Statistics

Food away from home continues to increase in importance Source: USDA

Demographics Population growing by 1.5% per year (half immigration) Family size shrinking One person households growing Two-wage earner families growing College educated growing Non-European portion growing Segmented market

The Role of Income Doesn’t affect quantity in U.S. in measurable amounts Affects food choice Affects food away from home Vastly more important elsewhere – 50% of income for food in some countries

Diet, Health, & Food Marketing A growing concern – aging Baby-boomers Health foods a growing market Organic foods rapidly growing market – 2% of all food – recession has hit it hard Big disconnect between talk & action – salty snacks

Obesity in the United States Nearly 2 out of 3 adult Americans are overweight or obese Overweight prevalence among children and adolescents has risen from 5% in 1970s to 15% in 2000 Linked to increased risk of heart disease, diabetes, several types of cancer Increased medical costs, lower productivity and output 2001 Surgeon General’s report identifies cost of $117 billion to U.S. economy – much more now

Recent Food Scares Chinese pet food with melamine California spinach Mexican green onions Mad cow disease Bird flu Genetically modified foods

Reasons to Buy Local Cincinnati Enquirer – August 7, 2007 Support local businesses Food safety Fossil fuel use Taste Nutrition

Does Eating Local Food Save Energy? No long-distance transportion Where do you buy it? How much driving does this entail? How much do you buy per trip? Long-distance transport of food doesn’t use much energy per pound Full semi-truckloads The Economist cited research that half of energy use in food transport is by consumer (Britain) If you preserve food to keep it through the winter it uses a lot of energy (even commercially)

Some questions Could we feed ourselves with locally grown food? Is locally grown food safer? Do we need to import food? Is food from elsewhere riskier than domestically raised food? Is our food safe? Is it riskier than 10 years ago?

Could we feed ourselves with locally grown food? No! And if we tried it would be prohibitively expensive And we would have very little variety Lack of specialization would sacrifice all economies of size We are surrounded by cities and very little farmland Lots of labor needed – immigration issue

Is locally grown food safer? Probably not! Bigger, specialized farms can concentrate on details Small, multi-product farms have too many balls in the air

Do we need to import food from abroad? Not necessarily We would lose variety in our diet Food costs would go up No bananas or coffee or tea or chocolate No grapes in the winter We export enormous amounts of food They won’t buy our stuff unless we reciprocate

Variety of Food Vastly greater than in past Fresh fruits & vegetables in winter Prepared foods Ethnic foods – Chinese, Mexican, other Asian – not just Italian Hamburger Helper Rice helper Foods of foreign origin Meal solutions

Concluding Comments Marketing makes the food system work Regional specialization requires lots of transportation Diverse consumer needs require services (added value) Lots of services – all have to be paid for Each product has its own story