ABUS+101FoodIndustryCH1Drummond
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£ e xii PREFACE and /or the university foundation through gifts and grants. On the returns side, so- ciety captures some returns because a college graduate will presumal?ly bg a bet- ter citizen and will be less likely to become a burden on society as a prison inmate. These are benefits society receives from your education that you do not directly capture. Hence they are externalities. A FINAL WORD Economics is frequently called “the dismal science.” Itis our fervent hope that your study of economics and the reading of this book will not be a dismal experience. In fact, we hope it will be an enlightening and enjoyable one. In an effort to keep a po- tentially ponderous text somewhat light, we occasionally poke fun at one target or another. Rest assured, our intention is to amuse and not to offend. If you feel of- fended by anything in this text or have any other comments about the text, please drop us an e-mail at evd@ufl.edu. We would like to thank the following reviewers for their valuable input: Joey Mehlhorn, Middle Tennessee State University; C. Matthew Rendleman, Southern Ilinois University; and Bryan Schurle, Kansas State University. In addition, we’'d also like to thank the reviewers from the first edition: Delmy Calderon-Salin, Texas A&M University-Kingsville; Bert Greenwalt, Arkansas State University; Robert N. Shulstad, University of Georgia; Larry Eichmeier, North Towa Area Community College; and Kenneth Pippin, Arkansas Technical University. H. Evan Drummond John W. Goodwin The Food Industry n an earlier time, farmer Brown entered his pig pen and hollered “soo-e” to call his steeds to dinner. On college campuses today a similar call of “pizza” can usually attract an immediate crowd of students. Food is one of the great universals in our lives and one of the things that brings us together. The industrial complex that produces, processes, and distributes that food is one of the largest industries in the world. It is estimated that approximately 23 percent of all jobs in the United States are related to some aspect of the food industry, even though farmers repre- sent only 2 percent of the population. In many developing countries, more than half of the labor force is engaged in agriculture. There can be little doubt that on a global basis the food industry is the largest industry in terms of people employed and value of product. In a later chapter we will talk about that industry in the de- veloping world. For now, we will talk about the food industry in the United States and the rest of the developed world. MAJOR SECTORS—AN OVERVIEW There is a universal myth that Mom (or Grandma) prepares the Thanksgiving feast, and it is a wonderful myth that is sure to endure. The reality is that someone other than Mom produced the feed that was fed to the turkey in Minnesota or North Car- olina, and that someone else converted that turkey on the hoof to the Butterball® that Mom bought at the store, and that someone else delivered that turkey to Mom’s favorite supermarket in faraway Deming, New Mexico. Each “someone” is part of the food industry that prepared the Thanksgiving feast—Mom (or Grandma) was little more than the final actor on the stage when the curtain came down. The food industry (other than Mom or Grandma) can be divided into four ma- jor sectors: farm service, producers, processors, and marketers. For every $100 spent at the supermarket, the farm service sector accounts for about $13 while the produc- tion sector (i.e., farmers) accounts for about $8. The remaining $79 goes to processors of agricultural commodities and the marketing system that brings food to your table. Farm Service Sector As shown in Figure 1-1 the farm service sector provides the producer with the in- puts he or she buys, such as feed, fertilizer, fuel, equipment, and chemicals. Many of the firms in the farm service sector are household names such as John Deere, DuPont, and Monsanto. These are large, multinational corporations with a net- work of local sales representatives. There are also a variety of small, local service companies in any rural community that serve the diverse needs of local farmers for irrigation equipment, farm structures, and so on. CHAPTER L Food industry all firms, large and small, engaged in the production, processing, and/or distribution of food, fiber, and other agri- cultural products. Farm service sector those firms that produce and distribute the goods and services that farmers (producers) buy as a part of their business activities.
R e | Producers sector those firms engaged in the production of raw food, fiber, and other agricultural products. Processors sector those firms that convert raw agricul- tural products into food products in the form that the consumer eventually buys. CHAPTER 1 Farm Service Sector (implement dealers, chemical sales, etc.) Y Producers (Farmers, ranchers, etc.) Processors (Manufacturers, bottlers, etc.) Y Marketers (Distributors, retailers, etc.) FIGURE 1-1 The Food Industry The farm service sector is not limited to the sellers of goods. There are also numerous firms that provide farmers with services such as banking, accounting, insurance, legal advice, and agronomic consulting. As farming becomes increas- ingly complex, farmers are pressed to rely heavily on providers of farm services. It is a fast-growing and highly localized sector of the food industry. Producers The producers sector includes all of those firms engaged in the biological processes associated with the production of food and fiber. Farmers, ranchers, grove owners, and nursery owners are examples of producers. As shown in Figure 1-1, produc'ers buy from the farm service sector and sell o the processor sector. The unique thing about producers is the link, often a nostalgic link, to the biological processes qf pro- ducing raw food products. While the link to mother nature is appealing, we w1]} see shortly that most producers are rapidly becoming little more than food factories. Processors The processors sector creates value by converting raw agricultural commodities into those products that the consumer wants. Processors change the form of food and create value in the process. Processors can be divided into two groups—the processors of commodities (such as flour milling which turns wheat into flqur), and the processors of food products (such as the bread baker who turns flour into bread). Frequently, one company will engage in both activities, such as Hershey, which processes cocoa beans and manufactures chocolate bars, or ConAgra Foods, which processes soybeans into soybean oil and produces margarine under the Blue Bonnet®, Fleischmann’s®, and Parkay® brands. Incidentally, ConAgra Foods also The Food Industry processes turkeys under the Butterball® brand name, and sells soybean oil directly under the Wesson® brand. Marketers The marketers sector also creates value in the food industry by changing the time and place of food. Wheat is harvested in Kansas in June. The consumer wants a hamburger bun in Rhode Island in December. The distribution system that ties the producer and consumer together is the marketing system. It brings the consumer what she wants, where she wants it, and when she wants it. The absolutely in- credible thing about the marketing system is that you can almost always get what you want, when and where you want it. The food marketing system is so effective and efficient that most of us take it for granted. Only when the system is disrupted by a hurricane or a massive snow storm do we remember how flawlessly and eas- ily the food distribution system usually operates. MAJOR SECTORS—TRENDS AND ISSUES The food industry, like any other major industry, is in a continuous dynamic of change and adjustment. In the remainder of this chapter we will highlight some of the trends and issues in each sector. The issues and trends in the farm service sec- tor and the processing sector are virtually identical, so we will not specifically deal with the farm service sector. Producers and Farm Structure In a Jeffersonian view of the nation, farmers were the bedrock of democracy. In the reality of today, farmers constitute less than 2 percent of the population, and only one-twelfth of the farms really produce the food we eat. Characterizing the attrib- utes of the American farms and farmers is known as the study of farm structure. That is, what do farms in the United States look like today? If there is one lesson to be learned from the study of farm structure in the United States, it is that there is no such thing as an “average” farm. As is the case in many situations, averages cover up more than they reveal. Number of Farms There are roughly 2 million farms in the United States. The United States Depart- ment of Agriculture (USDA) defines a farm as any establishment that produces (or should have produced) at least $1,000 of farm products each year.! Thus, an indi- vidual who sells a couple of fattened cattle is considered to be a farmer. Since there are roughly 290 million Americans, the average American farmer feeds himself and 145 other Americans. Agricultural exports account for : ! Farm prloducts include food, fiber, turfgrass, ornamentals, flowers, and a variety of other specialty crops. Excluded are seafood and forestry. Commodities raw agricultural products that have not been processed. Wheat, cattle, and raw milk are examples. Food products food and agricultural commodities that have been processed into the form where they are ready for sale to the consumer. Marketers sector that set of firms that distributes food products from proces- sors to the final consumer when and where the consumer wants it. That consumer may be a retail shopper or someone eating at an away from home dining facility. Farm structure the study and analysis of farm characteristics such as the physical and economic size of farms, ownership of farms, and character- istics of the farm manager and his or her family. Farm defined by the U.S. Department of Agriculture as any establishment that has (or should have had) at least $1,000 of sales of agricultural products during the year.
S iy Typology a system developed by the USDA that classifies farms based on economic size and characteristics of the farm operator. CHAPTER 1 an additional 50 or so mouths to feed, so the average American farmer actually feeds approximately 200 people. Thus, our food chain, viewed as an inverted pyramid from producer to consumer, has a very narrow base. Ownership There is a myth, frequently propagated by the popular press, that farming is be- ing taken over by large, corporate farms. The other side of this coin is that the fam- ily farmer—owner and operator—is disappearing. To some extent, in limited cases, the myth has some validity, but in the broad scheme of things it is little more than a myth. Of the 2 million farms in the United States, more than 90 percent are sole pro- prietorships, meaning that the farm operator is self-employed.2 Family corpora- tions and partnerships account for most of the remaining 10 percent of farms. Non-family corporations only account for 1 percent, or approximately 20,000, of all farms. The self-employed family farmer is still very much a part of our social fabric. Farm Types Recently the USDA has started classifying farms into a typology based on the char- acteristics of the farm operator and the value of farm sales. In creating this typology, one of the critical questions asked of farm operators is “What is your primary occu- pation?” About 14 percent or nearly 300,000 farmers responded “retired.” An as- tounding 40 percent of farm operators listed their primary occupation asa non-farm occupation. That is, they are just hobby farmers who work off the farm and maintain the farm as part of their lifestyle. As a group, these hobby farms operated at an eco- nomic loss. Retirement and hobby farms sure aren’t producing what the rest of us eat. Another 38 percent of farm operators listed their primary occupation as farm- ing, but had gross sales of less than $250,000. Assuming a profit rate of 3 percent of sales, a farm with sales of $250,000 would only generate $7,500 of profit—hardly enough to support a farm family. In addition, most of these farms had sales of less than $100,000. These economically non-viable farmers aren’t the folks who are pro- ducing much of what the rest of us eat, either. That leaves 8 percent, or about 160,000, of farms that are large, economically viable farms that produce most of the food and fiber in the food industry. In fact, these few farms produce about two-thirds of the sales of all farms. So, what is the typical American farm like? In terms of numbers, most farms are either retirement homes or hobby farms. The trend among these “farms” is in- creasing numbers and smaller farm units—it is a way of life rather than an eco- nomic unit. In terms of food production, there are about 160,000 farms that produce most of what we eat. Almost all of these farms are family farms, with only about 20,000 large, non-family farms. And the clear trend among these food producers is toward fewer, larger farm units. Also, these large farms are becoming increasingly specialized in what they produce, legitimizing the term “food factories.” 2 Data for this and the next section are drawn from Structural and Financial Characteristics of ULS. Farms: 2001 Family Farm Report, Robert A. Hoppe, editor, Economic Research Service, USDA, Agriculture Information Bulletin #768, May 2001. The Food Industry Commodity Processors Food Product Processors At-Home | Food Service Wholesalers Distributors Retailers Restaurants, Institutions, etc. Final Food Consumer FIGURE 1-2 Detail of the Processors and Marketers Sectors Processors—Extending the Reach Food processors are those companies that turn raw agricultural commodities into food and/or food ingredients. As shown in Figure 1-2, the processing sector can be divided into those firms that primarily process commodities and those that process food products. Food product processors can be further divided into those that produce for the retail food consumer and those that produce for food service providers. Today roughly one-half of all spending on food is for food eaten away from home—it is this market that the food service processors serve. Commodity Processors Commodity processors buy raw agricultural commodities from producers or from storage facilities called assemblers. The raw commodities are then shipped to a large industrial processing plant where they are converted into food ingredients that can be used by food product processors. For example, soybean processors buy raw soybeans from the farmer and process those beans into soybean oil and soy- bean meal. The oil is used by food processors to make margarine, cooking oil, may- onnaise, and a variety of other products. The meal is primarily used as an ingredient by feed producers in the farm service sector. For the most part, com- modity processors are companies that most of us have never heard of. Some of the leading commodity processors are Staley, Cargill, CPC (formerly Corn Products Company), and Archer Daniel Midland (ADM). In fact, ADM is the world’s largest processor of corn, oilseeds, and cocoa. ADM is also the country’s largest processor of wheat. Nonetheless, you have never seen a bag of ADM flour on the supermar- ket shelf because ADM only sells in bulk to food processing companies. Food Product Processors Food product processors buy food ingredients and combine them to produce the food we buy in the store or eat at a restaurant. Because many food product proces- sors sell food under their own brand names, many of these companies are very common household names such as Campbell’s, Heinz, Hershey’s, and Nabisco. Many common food brands are produced by processors that produce under a va- riety of brand names. For instance, Jell-O® and Kool-Aid® are produced by Kraft; Food service that segment of the food industry that processes for and distributes to the away from home market for food. Assemblers those firms that buy raw agricultural commodi- ties directly from farmers (producers) in small quantities and sell to processors in larger quantities.
e e ~—— k™ Concentration the dominance of an industry by a few firms, usually measured by the percent of the total market owned by the largest four (or any other number) firms. Market power the ability of a firm or group of firms to control price and/or quantity traded in a market because of the dominance of the firm(s) in the market. Globalization the expansion of firms across national boundaries. TP T Y CHAPTER 1 and Reese’s® peanut butter candies and JollyRancher® candies are produced by Hershey Foods. A good example of a food product processor is the Coca-Cola Company. It buys high fructose corn sweetener from a commodity processor such as ADM and other ingredients from other processors and combines them using their se- cret formula to produce Coke® in cans and bottles for the retail market and in bulk for the food service industry. Following the diagram in Figure 1-2, Coca- Cola also plays the role of wholesaler and distributor in the marketing sector. So, Coca-Cola spans both the last half of the processing sector and the first half of the marketing sector. Concentration in Processing A current concern, and one that has generated several legislative proposals at the national level, is the degree of industrial concentration in some of the food pro- cessing sectors. Concentration is an economic concept that refers to the degree to which a small number of firms control a large share of the market. The most com- mon method for measuring concentration is the percent of the total market ac- counted for by the four (or any other number) largest producers. For instance, in the United States 87 percent of breakfast cereal is produced by the four largest pro- ducers, and virtually all baby food is produced by the three largest processors. By far the greatest concern about concentration among agricultural proces- sors is in the meat packing business. About 85 percent of all beef is processed (i.e., slaughtered) by four companies that have been rapidly buying out smaller com- petitors as the industry consolidates. Moreover, the largest poultry producer, Tyson Foods, recently bought the second-largest beef processor. In other words, concentration and consolidation is crossing species lines that have previously sep- arated processors. Some cattle producers have called for federal legislation that would prevent any further consolidation. Is concentration bad? Processors say that by consolidating into fewer, larger processors they are able to cut costs which benefits consumers. Opponents argue that concentration provides the processors with unusual market power that allows them to buy from farmers who have little market power at prices that border on exploitation. For example, it is becoming common for meat packers (i.e., proces- sors) to force producers to sign secret contracts such that no one knows what price other cattle producers are receiving or what price other packers are paying. Globalization In most instances, food processors tend to be on the forefront of globalization be- cause the demand for processing technologies is truly global. We all need food to survive. Among the commodity processors, most of the successful processors are very internationalized with processing facilities all over the globe. To fail to behave globally in the commodity processing business is a recipe for corporate failure. In food products processing, the drive to globalization hasnotbeen as strong, as consumers in each country have different tastes and preferences. While a soybean is a soybean in every country, the final food product may be soy protein meal in one coun- try, tofu in another, and a nice steak in a third. There are three truly global food prod- uct processing companies: Coca-Cola, Unilever, and Nestlé, which is the largest processor of food products in the world. While most Americans only associate Nestlé L s The Food Industry with chocolate bars and hot cocoa mix, Nestle also appears in this country under brand names such as Nescafé®, Taster’s Choice®, Perrier®, Friskies®, A1p0® Mighty Dog®, Baby Ruth®, Butterfinger®, PowerBar®, and Carnation®. On a global ba/sis their strong suit is in the infant formula market. Many food product processing comp/anies are making a big push to globalize, realizing that growth of the domestic food market in the United States is basically stagnant, while the growth of the processed food mar- ket in many developing countries is exploding. This is an emerging challenge for do- mestic stand-outs like the Campbell Soup Company, H. J. Heinz, and Hershey Foods. Marketers Marketers are the companies that tie the final food consumer to the processor. Their job is to make certain that whatever the consumer wants is there when and where the consumer wants it. As shown in Figure 1-2, the traditional retail marketing sys- tem is quite distinct from the food service distribution system. Wholesale-Retail Marketers As noted earlier, about one-half of expenditures on food is for food to be prepared at home. Notwithstanding the bucolic appeal of farmers’ markets and roadside vendors, most food purchased for home consumption is purchased at a retail su- permarket. Traditionally, most retail stores purchased food from wholesalers, who purchased food in bulk from processors and sold it in smaller batches to ret:;ilers. Many retailers, particularly the smaller ones, still use this system. However, many of the larger chains combine the wholesale and retail functions into a singl,e firm, thereby reducing transaction costs. ' The largest food retailer in the United States in terms of sales volume is Kroger. It sells about $50 billion of food per year through 2,300 retail outlets, many of which carry the Kroger name.? Like most retail chains (Wal-Mart is a no: table exception), Kroger has grown by acquiring small local chains and adding the small chains to the Kroger distribution system. Many of these stores still bear their local name, such as Ralphs, King Soopers, City Market, Dillons, Smith’s Fry’s, QFC, Kessel, Cala Bell, Owen’s, JayC, Fred Meyer, Hilander, Ge’rbes Pa}; Less, Food4Less, and Foods Co. In addition, Kroger runs convenience store,s un- dgr the Turkey Hill, Kwik Shop, Loaf ‘N Jug, Quik Stop, and Tom Thumb names Like most larger retail chains, Kroger is not only into wholesaling but also fOOCi product processing with 42 manufacturing plants producing some 3,000 prod- ucts that are sold through the Kroger chain. ’ This illustrates one of the dominant trends in the food system—vertical in- tggration. This refers to combining several steps in the food system chain into a single firm. Examples of vertical integration, such as Kroger, abound in the food system. Tyson Foods is an example of a company that is in the farm service sec- tor, p;oducing its own chicken feed; the production sector, hiring farmers to raise the birds; and the processing sector. Con-Agra is both a commodity processor and a food products processor. Smithfield Farms is both a producer and proces- sor of Pork products. Vertical integration allows the firm to coordinate different stages in the food system through management, whereas without integration 3 Total food expenditures in the United States are about $800 billi L . 0 billion. About half of that, billion, is through retail outlets, so Kroger commands about one out of eight retail food doll;r’:r 00 Vertical integration the combination of different businesses at different stages of the production/marketing sequence under a single management.
| e Food service distributors those firms that distribute food products from ‘ I food processors to away from home dining facilities. CHAPTER 1 that coordination is accomplished through the ebb and flow of markets and mar- ket prices. So, with vertical integration as a dominant trend, we are seeing a rise in the role of management and a decline in the role of markets in the food system. Food Service System About half of our food expenditures are for “away from home” food. This includes food consumed at restaurants, cafeterias, and other for-hire eating establishments; as well as institutional food provided by entities such as prisons, schools, the mil- itary, and college campuses. Food delivered by the food service distributors is ei- ther delivered in bulk (a gallon of catsup for the military mess) or in individual portions (a cordon bleu ready to be microwaved by a restaurant). To keep the verbiage simple, we will hereafter refer to all providers of away from home meals as “restaurants.” Most restaurants get most of the food they serve from food service distributors. This is a specialized part of the food marketing chain. Unlike food retailers that wait for customers to come to them, food service distributors go to the customer, usually with daily delivery available. These dis- tributors maintain large warehouses of food produced by food service processors and distribute it to restaurants as it is needed. One of the largest food service distributors is Sysco, with annual sales in ex- cess of $20 billion. Most of what Sysco sells to restaurants are products produced by food service processors; but not unlike Kroger, Sysco has vertically integrated backward into the food service processing sector and now sells both its own prod- ucts and those of other food service processors. Some restaurants, like McDonald’s, have vertically integrated by providing their own food service distribution network. In this case, the restaurant chain buys in bulk from food service processors and then distributes that food to individual stores in the chain using their own trucks. As with all vertical integration, this gives management more control over a broader range of the marketing chain. SUMMARY The food industry consists of literally millions of firms working in one or more of four distinct sectors: the farm service sector, the producers sector, the processors sector, and the marketers sector. While the activities performed in each of the four sectors are distinct, many firms in the food industry have vertically integrated across sector boundaries. In the farm service sector we find firms that produce inputs and/or services that are purchased by producers. These include feed manufacturers, implement dealers, chemical companies, lawyers, bankers, and farm consultants. The com- mon thread of all firms in the farm service sector is that their primary consumer is the producer (farmer, rancher, and so on). Producers refer to all who produce and harvest our food, fiber, and other agricultural commodities. Farmers, ranchers, nursery operators, vineyard and or- chard operators, grove owners, and others are included in the producers sector. Most farms in the United States produce very little because producing food and fiber is not the primary objective of the owners of most farm units. Most farms are recreational or retirement activities. About 8 percent of all farm units—those with sales in excess of $250,000 per year—produce most of our food and fiber. The Food Industry ] Processors buy raw agricultural commodities from producers and sell fin- ished food products to the marketers sector. Some processors are commodity processors. These firms buy, store, and transport raw agricultural commodities and then convert those commodities into food ingredients. Food product proces- sors buy these ingredients and use them to produce the food products we eat. Some fn_'ms are commodity processors only, others are food product processors only, and still others do both. An important public policy issue facing processors is cor{cem about the level of concentration in food processing and the effects of that concen- tration on both producers and consumers. Marketer firms buy food products from processors in bulk, store them, trans- port them, and distribute them to consumers in small, convenient lots. On’e mar- keter chain serves the needs of the retail food customer while another serves the needs of the food service sector. Tk}roughout the food system examples of vertical integration are found. Most of Fhe bigger, faster-growing firms in the food sector tend to be vertically integrated W1t-h vertical integration comes market power and market coordination—both of which raise questions about the impact of vertical integration on the final consumer. KEY TERMS Assemblgrg Food service distributors Commodities Globalization Concentration Market power Farm ) Marketers sector Farm service sector Processors sector Farm _structure Producers sector Food industry Typology Food products Vertical integration Food service PROBLEMS AND DISCUSSION QUESTIONS 1. Identify the four sectors in the food industry. For firms in each of the four sectors, identify what they buy and what they sell. From what firms do they buy inputs, and to what firms do they sell their outputs? 2. An irpportant part of the farm service sector is the Cooperative Extension Service, which has an office in virtually every county of the United States Contact the local office of your Cooperative Extension Service or visit ’rhe. website of your state office of Cooperative Extension Service to determine what this publicly funded agency does. Who are the clientele and what are the services provided? 3. What proportion of all farm units in the United States is economically viable with sales of at least $250,000 per year? . Discuss t1.1e follow'mg proposition and its implications: most farm owners are more interested in a rural way of life than in food production. . Arc_her Daniels Mifiland is not only the largest commodity processor in the United States, but it is also unique in that it has virtually no vertical
™ 10. 11, 124 13. 14. 15. CHAPTER 1 integration in either direction. Get a profile of this interesting company by visiting them at admworld.com. ' ConAgra Foods is an example of a large commodity processor that ha§ ahigh level of vertical integration. It is a food processor as well as a commodlty. processor and produces for both the consumer market and the food service market. Visit conagra.com to profile this major agricultural processor. . Kraft Foods is the largest food processor in the United States. While the Kraft name is usually associated with cheese, it produces a varie"cy of food products under a large number of brand names. List the Flomestlc brands used by Kraft. You can prepare your list from their website at kraft.com. . What is vertical integration? What are the advantages of vertical integration? What are the concerns about vertical integration? . What is concentration in the processor sector and why is it considered to be a threat to producers? . Identify the major beef packers (i.e., commodity processors) in the United States and the share of the market held by each. What is globalization? At almost any highly visible international meeting there are groups (?f protesters who are against globalization. One of th'e largest, most visible protest groups is Greenpeace. Visit their U.S. web51t§ at. greenpeaceusa.org to learn why they oppose globalization. What are their arguments against globalization? ' Food retailing tends to be a regional phenomenon. What are the leafimg food retailers in your region? Are these retailers part of a larger chain such as Kroger or Albertson’s? 4 During the 1990s Wal-Mart went from no food retailing to ‘beilng the third largest food retailer in the United States. Has Wal—Marfc, with its ) Superstores, arrived in your community as a food retaflgr? Meet with the store manager of a local supermarket and ask what the.lmpact of Wal-Mart will be, or has been, for food retailing in your community. What food service distributor serves your student union? Get on the Internet or visit with a sales representative to learn more about this foc?d service distributor. The director of your student union can help you with this task. 3 Introduction to Agricultural Economics s the name rightly implies, agricultural economics is that part of economics that A surveys agriculture in its many facets and forms. The agricultural economist is concerned with the entire food and fiber system, from the inputs used in production all the way through the production, processing, distribution, and consumption chain. The food and fiber system is related to almost every facet of our economy and our environment. As a result, the study of agricultural economics necessarily en- compasses a great deal more than just the activities of the farmer or rancher. Since the food and fiber system is an important part of our natural environment, some agricultural economists deal with issues of resource conservation, pollution con- trol, and water management. Others study the agribusiness sector as purchasers, processors, and distributors of food and fiber products. As these examples illustrate, the scope of agricultural economics is very broad and quite diverse. The common thread is that each deals with one of the many facets of the food system described in the previous chapter. AGRICULTURAL ECONOMICS Economics is a social science. The objective of any scientific inquiry is to observe and describe a particular range of phenomena, to organize those observations into recognizable patterns, and, where sufficient regularity warrants, to formulate “laws.” It is these laws that gives the scientist a basis on which to make predictions. The social scientist must deal with the laws of human nature, and since humans are not consistent in their behavior, the laws of the social scientist are necessarily less reliable and more open to exception than those of the physical or biological scien- tist. Nevertheless, the economic behavior of most persons is generally consistent and, therefore, to some degree predictable. Economics is that particular social science that deals with the allocation of scarce resources among an unlimited number of competing alternative uses. Econ- omists use the word “resources” to describe anything tangible: wheat, barbed wire, hamburgers, water, labor, clean air, and recreation facilities. Every resource is rela- tively scarce, meaning that the availability of every resource is insufficient to satisfy all of its potential users. Scarcity creates the need for a system to allocate the avail- able resource among some of those potential users. Agricultural economics is the social science that deals with the allocation of scarce resources among those com- Ppeting alternative uses found in the production, processing, distribution, and con- sumption of food and fiber. CHAPTER s Economics the social science that deals with the alloca- tion of scarce resources among an unlimited number of competing alternative uses. Agricultural economics the social science that deals with the alloca- tion of scarce resources among those competing alter- native uses found in the production, processing, distribu- tion, and consumption of food and fiber. 1