Overview of the Food System

Jim DunnAgricultural 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

<= 55 - 7.57.5 - 1010 - 1515 - 2525 - 50

US Dairy States2008 Production (bil. lbs.)

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

Million0 to 55 to 1010 to 1515 to 2020 to 3030 to 35

Expenditure share of types of food in the U.S. consumer’s food basketType Share

Meat 33.7%

Fruit and vegetables 14.0%

Cereal & bakery products 12.6%

Dairy 13.6%

Sugar & sweets 4.2%

Fats & oils 2.7%

Non-alcoholic beverages 11.0%

Other prepared foods 8.4%

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 productAll Food (2000)

Farm receipts

$123 billion

Marketing costs $538 billion

Farmer’s Share

Product Share Product Share

Eggs 53% Applesauce 16%

Beef 49% Sugar 27%

Milk 34% Potato chips 8%

Apples 21% Corn flakes 4%

Oranges 15% TV Dinner 14%

What accounts for the marketing costs?

The share of marketing costs is rising

Real Income and Food Prices

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1970 1975 1980 1985 1990 1995 2000 2005

Inco

me

0

0.5

1

1.5

2

real

foo

d pr

ices

income

real food

Source: Economic Report of the President

1980 1985 1990 1995 2000 20050

0.2

0.4

0.6

0.8

1Legend

milkcornbeef

PriceIndex

Real Farm Price Indices1980-2007

Source: USDA

1970 1975 1980 1985 1990 1995 2000 2005

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Legendpoultrybreadpotatoesmilk

PriceIndex

Real Retail Price Indices1970-2007

Source: Bureau of Labor Statistics

Food away from home continues to increase in importance

United States: Share of Total Food Expenditures Away from Home

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002P

erce

nt

of

tota

l exp

end

itu

res

on

fo

od

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 LocalCincinnati 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