AGRIBUSINESS ECONOMICS AND MANAGEMENT

ROBERT P. KING, MICHAEL BOEHLJE, MICHAEL L. COOK, AND STEVEN T.

SONKA

Agribusiness scholarship emphasizes an integrated view of the food system that

extends from research and input supply through production, processing, and distribution
to retail outlets and the consumer.
This article traces development of agribusiness scholarship over the past century by
describing nine significant areas of contribution by our profession:(1) economics of
cooperative marketing and management, (2) design and development of credit market
institutions, (3) organizational design, (4) market structure and performance analysis,
(5) supply chain management and design, (6) optimization of operational efficiency, (7)
development of data and analysis for financial management, (8) strategic management,
and (9) agribusiness education.
Key words: agribusiness, cooperative, credit market, business organization, market
structure, supply chain, operations, strategy, education. JEL codes: L10, M10, M20,
Q13, Q14. In January 1956 John H. Davis, director of the program in agriculture and
business at the Harvard Business School, published “From Agriculture to Agribusiness”
in the Harvard Business Review (Davis 1956). The following year Davis and Ray A.
Goldberg published A Concept of Agribusiness. These two publications introduced and
defined the term “agribusiness” as 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. Thus, agribusiness essentially encompasses today the functions which the term
agriculture denoted 150 years ago. (Davis and Goldberg 1957, p. 2)
By the end of 1959, the term had appeared in at least forty published articles and book
reviews in ten journals, ranging from the Journal of Farm Economics and the American
Economic Review to Agricultural History and the Journal of Marketing.
The key insight articulated by Davis and Goldberg was that the food system needs to be
viewed as an integrated system. Management strategies and public policy initiatives
designed to address problems in the food system would be doomed to failure if they
focused on only one portion or segment of that integrated system. Their work
stimulatednew interest in the linkages between segments of the food system, in
coordination across segments, in systemwide performance, and in strategy formulation
in a context of interdependence.AsCookand Chaddad (2000, pp. 209–210) note:
[A]gribusiness research evolved along two parallel levels of analysis: the study of
coordination between vertical and horizontal participants within the food chain, known
as agribusiness economics, and the study of decision-making within the alternative food
chain governance structures, known as agribusiness management. In 1956 our
association was approaching its fiftieth anniversary. Though the term “agribusiness” had
not been used prior to that time, agricultural economists had been making significant
contributions on issues related to agribusiness for many years. As early as 1913,
Charles J. Brand (1913, pp. 85–86) noted that the farmer needed “suitable and
convenient arrangements for securing credit” and “assistance in the establishment of a
marketing system which will return him the true value of the particular qualities of the
various crops that he produces, minus reasonable charges for handling, transportation
and the legitimate profits of middlemen.” These concerns led to significant work on farm
credit and cooperative marketing in the 1920s, as well as articles on vertical integration,
the organization and operation of marketing firms, and the role of business economics
in our teaching programs. New concerns emerged during the 1930s, including the
structure of the food distribution system and marketing margins. Other new issues
related to agribusiness emerged during the 1940s and early 1950s. These included the
rapid growth and concentration of food processing and retailing businesses, analysis of
costs and efficiency in food processing plants, and the dynamics of food retailing.
Building on this previous work and stimulated by changing economic circumstances and
important new conceptual and methodological developments in economics, the
publications by Davis and Goldberg helped initiate a rapid expansion and redirection of
agribusiness scholarship during the association’s second half century. In the late 1950s
and early 1960s, annual meetings included sessions on cooperatives, farm supply
markets, industrial organization, vertical integration, market power of food processing
and farm supply firms,antitrust decisions, and bargaining. In the mid-1960s the National
Commission on Food Marketing was established “to study and appraise the changes
taking place in the ‘marketing structure’ of the food industry and where they might lead;
efficiency; services to consumers; market power; regulatory activities; services such as
market news;and the effects of imports” (Brandow 1966, p. 1319). Key papers on
cooperative theory and agricultural finance also appeared during the 1960s. Research
on the evolving sector structure continued in the 1970s along with discussions about
how well teaching programs were serving the needs of the rapidly growing nonfarm
segments of the food system. Work on food system structure and performance
continued into the 1980s, leading to landmark publications by members of the North
Central Regional Project 117 (NC-117), “Organization and Control of the U.S. Food
Production and Distribution System.”
The 1980s also was a time for questioning the place of agribusiness scholarship within
the agricultural economics profession. The first issue of a new journal, Agribusiness,
appeared in 1985. Sonka and Hudson (1989) subsequently provided a conceptual
assessment of the need for agribusiness scholarship from both academic and industry
perspectives.
The interplay emanating from the cultural, biological, and political aspects of food and
the differing competitive market structures along the agricultural supply chain were
noted as particularly distinctive features of the sector.
This article articulated the need for use of a broader range of behavioral sciences within
agribusiness scholarship, while recognizing the continued value of economic analysis.
In 1990 the International Agribusiness Management Association (IAMA) was formed
under the leadership of Ray Goldberg with the objective of extending the range of
disciplines contributing to agribusiness research and to foster more interaction between
the academic and industry practitioner communities.
This article traces the development of agribusiness scholarship over the past 100 years
by describing nine significant areas of contribution by members of our profession—five
associated with agribusiness economics and four linked to agribusiness
management.Work in all nine of these areas began before the publications by Davis
and Goldberg and has continued in subsequent years. Our review of key contributions
cannot possibly be comprehensive, but we believe it does characterize the evolution of
work in this important area. In doing so, it also establishes a platform for looking ahead
to future challenges and opportunities in agribusiness.

Agribusiness Economics
Agribusiness economics is concerned with understanding how institutions,
organizations, and markets affect vertical and horizontal coordination within the food
system. This section describes five significant contributions that members of our
profession have made to the design and analysis of institutions, organizations, and
markets.
Contribution #1: Agricultural economists have played important roles in introducing
economic reasoning and pioneering theoretical advances in the study of agricultural
cooperative marketing and management In the first major paper on cooperatives in the
newly published Journal of Farm Economics, Asher Hobson (1921) struck a theme that
agricultural economists would continually restate for the next 50 years—the importance
of understanding basic economic principles in farmer decision making when initiating
joint vertical integration. Emphasizing scale economies, asymmetric information,and
other market failure elements as rational economic reasons for forming cooperatives,
agricultural economists often confronted the advocacy frenzy of politicians and farm
leaders rushing to organize producers into agricultural cooperatives in the post–World
War I depression (Nourse 1922; Erdman 1924). They also published warnings of the
dangers of moving too quickly without understanding market structure forces or the
debilitating implications of inadequate capital and human resources.
During these early years, agricultural economists advanced understanding of market
coordination through detailed descriptions of market functions and the costs of
participating privately or collectively in specific supply chains. Their emphasis on
analyzing the performance and welfare role of marketing cooperatives relative to
multipurpose cooperatives continues today.
In addition to the competitive yardstick function and coordination role, agricultural
marketing economists concentrated primarily on (a) the role of cooperatives in
controlling agricultural supply (Erdman 1927), (b) the importance of cooperatives in
establishing quality standards (Nourse 1922),and (c) microanalysis of organizational
design (Jesness 1925).Three insightful diagnostic annual meeting proceedings articles
by Erdman (1950), Knapp (1950), and Koller (1950) indicate a major turning point in the
form of contributionmadeby agricultural economists regarding the study of this complex
governance structure.
These articles would be the last of the descriptive stage of cooperative analysis. For the
next twenty years, agricultural economists introduced a stream of more rigorous
neoclassical frameworks to inform the understanding of the agricultural cooperative.
Bodies of theoretical work evolved around two structural design camps. First, the
Robotka/Phillips school defined a cooperative as a collection of profit-maximizing
economic enterprises engaged in economic activity involving the use of a common set
of productive assets and interacting in Cournot-like fashion in response to individual
sets of marginal cost and benefit relationships—in other words, a cooperative is an
extension of the farm. The second school was initiated by the models of Helmberger
and Hoos (1962). Their work identified the agricultural cooperative as an economic
enterprise consisting of a production function, an efficiency-maximizing criterion, and a
rule that distributes the economic surplus to the suppliers of one of the input resources.
In their model the cooperative is a firm.
In his summary of the seminal study Cooperative Theory: New Approaches (Royer
1987), Staatz (1989) credits Emelianoff (1942), Robotka (1947), and Phillips (1953) as
the original formal modelers viewing cooperatives as a form of vertical integration. They
argue that the principle of “service at cost” implied that only cooperative members
incurred profits or losses. Consequently each member determined her optimal level of
output by equating the sum of the marginal costs in all plants (farm and cooperative)
with the marginal revenue in the plant from which the product was marketed. The heroic
Cournot–Nash assumption implied in the model, applied only to marketing cooperatives,
is the major criticism of this “multi-plant firm modeling” approach.
The cooperative-as-a-firm approach draws on Enke’s (1945) work on consumer
cooperatives.
Enke’s theory posits simply that the welfare of cooperative members and society is
optimized if a cooperative maximizes the sum of the cooperative’s producer surplus and
the members’ consumer surplus. This approach needs a hierarchical decision maker or
coordinator—similar to the role assumed by the CEO or general manager of an
investor-owned firm.
The major criticism of this approach is that it does not lead to a stable equilibrium. In
advancing this work, Helmberger and Hoos (1962) convert Enke’s logic to explain
marketing cooperatives’ decision making. Based on the assumptions of a known net
revenue function, price taking, and zero surplus objective function,the Helmberger–
Hoos marketing concept of the cooperative as a firm suffers from the same equilibrium
shortcomings as the Robotka/Phillips approach.
By the 1980s, economic theories and decision models designed to address more
complex intra-firm relationships began to emerge. New approaches such as agency
theory, behavioral theories of the firm, incomplete contract theory, transaction cost
economics, and property rights approaches allowed for more detailed investigation
between inter- and intra-firm coordination decision making.
The following twenty years saw advances utilizing new institutional economic
approaches by Fulton (2001), Cook (1995), Hendrikse and Veerman (2001), and
Hendrikse and Bijman (2002), among others. Additionally, advances in neoclassical
frameworks increased understanding of the role of cooperatives not only in remaining
as a competitive yardstick but also in laying the groundwork for advances in the
cooperative organizational design. Sexton (1990),building on the Helmberger–Hoos
findings, used neoclassical theory to model spatial competition in agricultural marketing
industries.
The model derives price-output equilibria for investor-oriented firms and cooperative
processors in oligopsonistic spatial markets focusing on the pro-competitive effects of
cooperatives by formally establishing the conditions and magnitude of the cooperative
yardstick effect in oligopsonistic markets.This work has interesting and controversial
public policy implications. Its findings support favorable public policy toward open-
membership cooperatives, but similar pro-competitive effects cannot be claimed for
restricted membership cooperatives.
Contribution #2: Agricultural economists have played a key role in the development and
design of institutions that are the foundation for agricultural credit markets Surveys and
analyses initiated early in the twentieth century on agricultural credit conditions and
markets showed that “farmers were not being adequately supplied with capital for
certain types of farm operations…. [T]he commercial banking machinery of the country
was ill-adapted to making certain loans for the periods required by the farmer…, and the
cost of farm loans was disproportionately high in comparison with the loans acquired for
operating purposes in other industries”(Lee 1925,p. 425).
Congressional discussions and debate concerning the appropriate response to the
problems identified by Lee included formation of cooperative or joint-stock banks, with
an exclusive focus on agricultural loans, and the issuance of long-term bonds to finance
amortized loans for the purchase of farmland and other capital assets. Legislation
originating with the 1916 Federal Farm Loan Act andeventually culminating in the Farm
Credit Act of 1933 formed the base for the current Farm Credit System (FCS), which
today is a major supplier of credit to farmers, farmer cooperatives, and rural
homeowners.
William I. Myers’ role in the development of the FCS in its formative years is legendary;
he served as governor of the Farm Credit Administration from 1933 to 1938. At the
annual meetings of the American Farm Economic Association, he emphasized the
cooperative nature of the system and that “generally speaking the Farm Credit System
is not lending government money…. [I]ts object is to set up machinery through which
farmers may obtain funds for financing their farm businesses from the investment
markets at the lowest possible cost” (Myers 1934, p. 36).
Following the recovery of the agricultural sector from the Depression, the issue of the
role of public credit institutions relative to private sector lenders became the focal point
of the debate over the appropriate institutional structure of the agricultural credit
markets. Benedict (1945) argued that commercial banks should be the principal source
of short-term credit; the FCS lenders should be self-supporting and charge competitive
but not-lower-than-market interest rates, since “[a]rtificially low interest rates on farm
mortgages tend to be translated to high land values without long-term advantage either
to the farmer or the public” (p. 103). Moreover, loans for emergencies must be
evaluated by comparing the costs with the “social values resulting from the loans” (ibid).
The result of this debate was the formation of the FarmersHome Administration (FmHA)
in 1946 to provide supervised credit to farmers unable to obtain commercial credit. The
farm lending activities of the FmHA expanded modestly during the 1950s and 60s ( Herr
1969). Authorities were added in the 1970s to finance selected rural infrastructure such
as housing, water supply, and waste disposal, as well as rural business and industrial
development (Brake and Melchar 1970,p. 455). More recently these programs have
been administered by the Farm ServicesAgency (FSA), with increased emphasis on
guaranteed rather than direct loans and loans to beginning and socially disadvantaged
farmers (Ahrendsen et al. 2005).
Farm sector debt increased significantly during the 1950s, 1960s, and 1970s. Declining
incomes in the early 1980s, combined with the increased debt load, resulted in
significant debt service problems by the mid-80s. Jolly et al. (1985, p. 1114) indicated
that based on data from the USDA Farm Costs and Returns Survey, “about 50% of farm
operators and assets did not have a positive cash flow and that 64% of debt was not
fully serviced in 1984.” Much of the early debate about the appropriate response
focused on how lending institutions and their farmer-borrowers might resolve debt-
servicing problems and prevent foreclosures or bankruptcy filings. But as evidence
began to mount that the problems were more serious than originally thought, the debate
turned to the appropriate public sector response. Harl (1990) strongly advocated a
public sector debt restructuring/principal write-down/federal guarantee program (p. 44).
Passage of the Agricultural Credit Act of 1987 included (a) debt restructuring
requirements for FCS (as well as FmHA) for debt in default, (b) an insurance program
along the lines of the Federal Deposit Insurance Corporation and modifications to joint
and several liability obligations of all FCS banks for system obligations, (c) and federal
assistance to the FCS in the form of government loans to recapitalize FCS institutions
experiencing financial problems. The system obtained $1.261 billion of U.S. Treasury
guaranteed bond funds subsequent to this legislation and repaid the federal government
(principal plus) interest in 2005.
Agricultural economists also contributed to the development of more efficient and
effective capital and financial markets and institutions to serve the agricultural sector in
developing countries. Adams, Graham, and von Pischke (1984) focused on the
development of viable credit institutions for farmers to obtain financing for fertilizer,
seed, and chemical purchases. In essence, their work indicated that government/state-
owned financial institutions frequently encountered long-term viability problems, in large
part because of the political pressure to forgive loan obligations of borrowers in default.
They were also critical of the common policy of governmentrun financial institutions of
charging belowmarket interest rates, argued that informal lenders often provided more
valuable services than is generally perceived, and suggested that financial institutions in
developing countries should emphasize mobilization of local savings as a key source of
funds rather than relying on international funding agencies such as the World Bank and
the International Monetary Fund. Contribution #3: Agribusiness scholars utilizing
interdisciplinary approaches and new economic frameworks have become instrumental
in diagnosing and understanding the incentives/disincentives embedded in agribusiness
organizational architecture and complementary networks A graph of our profession’s
interest in organizational design of agribusiness enterprises might look like a U-shaped
curve. In the early days of the profession, agricultural economists offered many
thoughtful observations about the recommended or optimal form that agricultural trade
organizations, processing firms, and agricultural cooperatives might take. Their insights
into aligning residual claim and residual control rights and efficient allocation of
incentive-driven decision authority were utilized as benchmarking tools for organizers of
said entities (Jesness 1925). But as formal modeling advanced utilizing neoclassical
economic theories which tentatively treated the firm as a “black box,” additional work on
organizational design did not appear until more intra-firm incentive models came into
practice beginning in the late 1980s.
By the mid-1990s numerous conceptual pieces, including those of Moore and Noel
(1995), Fulton (1995), Hind (1994), Chaddad and Cook (2004) and Hendrikse
andVeerman (2001), began to appear in the American Journal of Agricultural
Economics and related journals. Empirical pieces soon followed.
For example, Holland and King (2004) and Detre, Wilson, and Gray (2007) explored
why producer-owned hybrids which are more investor driven than previous patron-
driven forms of collective action were increasing as an organizational form favored by
agricultural producers. Examination of the Hendrikse and Bijman (2002) analysis
expands on these conceptual advances as producers address complex governance
structure choices. Their approach analyzes the impact of ownership and control
structure on investments in a multiple tier net chain utilizing a property rights–
incomplete contract framework. They continue the quest to determine under what
market and incentive structures it is beneficial for producers to integrate downstream
through their own investment. Employing game-theoretic models and analyzing
scenarios with distribution of bargaining power as the variant, the authors generate first-
best efficient ownership structures given alternate investment situations. Using
comparative statics with the incorporation of residual claim levels, optimal ownership
structures are derived. The contribution of the incomplete contract approach to
governance structure choices is evident. Attempting to advance understanding and
utilization of these deductively generated set of hypotheses, Chaddad and Cook (2004)
identify a typology of discrete organizational models ranging from traditional open-
membership cooperatives described and analyzed by the first generation of agricultural
economists to complex hybrids to investor-owned organizational forms. Their ownership
rights typology challenges the next generation of agribusiness scholars studying the
performance of food and agribusiness net chains and their participants. Organizational
design studies continue to diminish the concept of the cooperative as a black box.
Contribution #4: Agricultural economists have documented, developed, and applied
theories to explain changes in market structure and performance in the food system The
structure and performance of the processing, distribution, and retailing segments of the
food system have been a focus of inquiry since the early days of our association. In a
paper presented at the 1922 annual meeting, Price (1923, p. 129) noted that marketing
systems could be studied from the perspective of “inter-unit” or “intra-unit” organization.
The former focuses on the number of intermediary firms between the farm and the
consumer and the economic relationships among these firms. The latter focuses on the
internal organization of marketing businesses.1 Price focused on intra-unit organization,
presenting operating cost information for butter plants and grocery stores.
There was also much interest in inter-unit organization. For example, in 1930 an annual
meeting session organized by Miller (1930) examined the evolving structure of the food
distribution system. Several years laterWaugh (1934) published his important paper
on“Margins in Marketing,” which presented estimates of farm–retail price spreads and
outlined key issues for future research on marketing margins.
In 1940,A. C. Hoffman (1940) began a paper on the “Changing Structure of Agricultural
Markets” by noting: It is probably correct to say that the organization of agricultural
markets has changed more in the last 25 years than during the preceding century….
From a system comprised almost wholly of small, functionally specialized business
enterprises there has been a transition to vertically integrated concerns operating on a
regional and even a national basis. (p. 162) Hoffman described the emergence of mass
retailing and the then-recent appearance of the supermarket. He went on to discuss
size economies, the limits of management control in large organizations, vertical
integration, and the problems created by monopoly power in food retailing. He also
observed that forces leading to consolidation and market power in retailing were also
likely to be seen in food manufacturing. In that same issue of the Journal, William H.
Nicholls (1940) published “Market-Sharing in the Packing Industry,” another
foundational paper on industrial organization of the food system.
Nicholls drew on recently developed theories of imperfect competition to explain how
observed patterns in packers’ purchase shares in terminal markets were consistent with
collusionthat would likely harm farmers and consumers.
The trends identified by Hoffman (1940) continued over the next several decades,
prompting establishment of the National Commission on Food Marketing in the 1960s
(Brandow 1966), lively debates on the structure of the food system during the 1970s,
and the establishment of NC-117, “Organization and Control of the U.S. Food
Production and Distribution System.”This remarkable project brought together a strong
team of researchers who combined insights from emerging theories in the field of
industrial organization with careful observation,data collection,and empirical analysis to
investigate the structure of the food system, the forces driving change in the structure,
the effects of alternative laws and regulations on that system, and the consequences of
alternative public policies and private actions on its performance. An article by Shaffer
(1980) explores the conceptual framework for the project’s efforts, and many key
findings of NC-117 are summarized in three widely cited books: The Food
Manufacturing Industries (Connor et al. 1985), The Organization and Performance of
the U.S. Food System (Marion and NC-117 Committee 1986), and Food Processing
(Connor 1988).
This work has been the foundation for more recent research on antitrust issues
(e.g.,Connor 2001), pricing policies (e.g., Cotterill, Putsis, and Dhar 2000), and generic
advertising (e.g., Kaiser et al. 2005).
During the latter twenty years of the twentieth-century globalization, industrialization and
consolidations accelerated changes in the horizontal and vertical relationships between
participants of the global food and fiber system. Many of the organizational and
transactional arrangements that emerged during this period addressed the increasingly
strategic nature of the market structure and growing strategic interdependence between
chain and network rivals and partners.Agribusiness economics and management
scholars seeking outlets for new conceptual frameworks, methodologies, and insights,
as well as more interdisciplinary-friendly outlets, helped establish a plethora of new
journals, including Agribusiness; International Food and Agribusiness Management
Review; the Journal of Agricultural & Food Industrial Organization; the Journal of
Cooperatives; the Journal of Agribusiness; the Journal of Chain and Network Science;
and the Journal of Supply Chain Management. Perusal of the special editions of these
journals (on topics such as eco-labeling, food retailer strategies, food vs. fuel, the
hybridization of cooperative organizational forms) demonstrates the complexity and
expansion of the original issues identified in this subfield of agribusiness economics and
management.
Contribution #5: Agricultural and applied economists have focused attention on key
economic questions related to supply chain management and design A supply chain or
value chain, as defined by Boehlje (1999, p. 1032), is a set “of value creating activities
in the production-distribution process and the explicit structure of linkages among these
activities or processes.”
The fundamental question in supply chain design and management is that of how a
chain can most effectively deliver quality and value to consumers. The focus is on
systemwide performance with an emphasis on information flows and coordination
mechanisms.
The terms “value chain” and “supply chain” first appeared in publications of the
American Agricultural Economics Association (AAEA) in 1987 and 1995, respectively,
but agricultural and applied economists were doing significant work on the economics of
supply chains long beforehand by posing questions that have advanced the study of
supply chains well beyond the simple description of linked production–distribution
activities and processes.
One fundamental concern in supply chain research is how flows of product, information,
and financial resources through the chain can best be governed. Building on transaction
cost concepts developed by Coase (1937) andWilliamson (1975),Sporleder (1992)
examined the determinants of vertical coordination arrangements, giving particular
attention to strategic alliances. Several years later, Hobbs (1996) presented a more
thorough overview of transaction cost economics and outlined methodological
approaches for studying vertical coordination,including multi-industry evaluations using
secondary data, industry-specific investigations of transaction costs using secondary
data, and industry-specific investigations of transaction costs using primary data.
Inter-firm incentives are also a key concern in supply chain design. Embodied in formal
or informal contracts, these systems help align incentives and reduce losses induced by
information asymmetries. Contract design became an important focus for work in the
mid-1990s,at a time when first handlers and processors were expanding the use of
contracts with farm producers and were experimenting with a variety of new contract
forms. Knoeber andThurman’s (1995) work shed light on the risk-shifting role of relative
performance-based contracts in the broiler industry and offered important insights on
methods for empirical analysis of contract provisions. Sheldon’s (1996) review paper
provided an important overview of contract theory and helped set the stage for later
work such as that by Goodhue (2000) on production contracts and by Hueth and Ligon
(2001) on relative performance contracts in the produce sector.
The distribution of revenues, costs, and gains from improved system performance
among supply chain participants is another key issue in supply chain design and
management. Marketing margins were a subject of concern and debate in the 1930s
(Waugh 1934) as the farm share of consumer food expenditures continued to shrink.
Work at that time was largely descriptive, but forty years later Gardner (1975)
developed a model of simultaneous equilibrium in the markets for retail food, farm
products, and marketing services. That model motivated later work on price
transmission by Wohlgenant (1989) and others—research that can have important
implications for supply chain design. More recently, in a very different analytical
framework, Hendrikse and Bijman (2002) showed how the allocation of ownership of
essential assets affects the distribution of returns across the chain and investments that
affect overall productivity.
Finally,members of our profession have also asked how public and private sector
institutional mechanisms—such as product and process quality standards or regulations
—shape supply chain performance. Caswell, Bredahl, and Hooker’s (1998) paper on
qualitative management metasystems laid the foundation for work on this question.
Food quality metasystems are general strategies, such as ISO 9000 and “just in time”
logistics, that are broadly applied across supply chains and across firms within a supply
chain. Caswell, Bredahl, and Hooker (1998) note that the development of quality
metasystems, whether through the public or private sector initiatives, can stimulate
structural change and influence competitiveness. Subsequent work—e.g., by Starbird
(2005) on sampling inspection and by Carriquiry and Babcock (2007) on the
reputational effects of quality assurance systems—has confirmed the importance of
quality metasystems.
Research on these important economic questions related to supply chain design and
management has been and will continue to be crucial in developing our ability to meet
the critical need that Boehlje (1999) identifies for ex ante rather than ex post analyses of
structural change in the food system. It contributes significantly to our ability to support
both agribusiness economics and agribusiness management.
Agribusiness Management
Agribusiness management is concerned with decision making within the organizations
that comprise the food system. This section describes four areas in which members of
our profession have contributed significantly to understanding and supporting
operational, financial,and strategic decisions in agribusiness firms. Contribution #6:
Agricultural economists have created robust methods and tools that foster more
efficient operations within the agribusiness sector Transforming agricultural
commodities into food products typically requires conversion of large amounts of lower-
value materials into more valuable products and transport (of agricultural inputs and
food product outputs) over considerable distances. To address this economic challenge,
managers need to be able to assess both cost of production alternatives within a single
production facility as well as the total cost-effectiveness of locating several facilities
across a region. A similar challenge exists in terms of designing the most effective
production and transportation system to provide inputs to farm production operations.
Greater operational efficiency results in higher performance levels for agribusiness firms
and enhances social welfare through lower food
costs and higher-quality food products.
Over the last 100 years, application of
microeconomic principles along with use of
evolving quantitative analytical tools has provided
significant opportunity for innovation
throughout the agribusiness sector. Especially
in the middle decades of the 1900s, agricultural
economists led both intellectually and
in application of these capabilities to enhance
operational efficiency of supply, processing,
and distribution in the sector.
In the 1940s, the economic engineering
approach to estimation of plant cost relationships
began to be employed to address
the more managerially relevant question of
optimal plant size for a specific commodity
and setting. The work of R. G. Bressler and
numerous colleagues made a particularly profound
contribution to application of the economic
engineering approach in the food sector.
Early work focused on Connecticut and the
dairy industry (Bressler 1952), while numerous
later efforts were conducted at the University
of California. The economic engineering
approach focused on synthesizing cost functions
from engineering, biological, and other
sources of information, including accounting
data, based upon process level input-output
relationships.
Although an individual food manufacturing
facility might achieve exceptional internal
efficiency, the overall economic performance
of that unit can be materially affected by
the costs of obtaining agricultural inputs and
of distributing the factory’s output. As food manufacturing firms are likely to have several
production facilities, the firm’s managers need
to be able to optimize a system of facilities.
One of the first rigorous efforts to address
this challenge was detailed in Stollsteimer’s
(1963) article focused on assessing plant numbers,
size, and location for pear production
and processing in California. He developed
a modeling specification consistent with
the challenge of minimizing the combined
cost of assembling and processing agricultural
commodities. Essentially an extension
of the basic linear programming transportation
model, Stollsteimer’s work included plant
numbers and locations as internal variables
and allowed for economies of size. Over time,
this basic approach was extended to more
accurately reflect the circumstances of alternative
agricultural commodities and the actual
dynamics of the marketplace. For example,
Polopolus (1965) examined multiple-product
plants, and Ladd and Halvorson (1970) developed
means to assess the sensitivity of model
results.
The post–WorldWar II period saw an explosion
of activity relating to the study of operational
efficiency in the agribusiness sector.
This marked increase in academic productivity
was the joint result of interacting forces such
as changing societal needs, advances in theory
and computational capabilities, and the infusion
of federal funding targeted to agricultural
marketing. French’s (1977) review article interpreted
the vast array of literature produced in
that time period. In addition to comprehensively
documenting the productivity of prior
works, this effort undertook an extensive and
thorough interpretation of the challenges and
accomplishments of the stream of work relating
to productive efficiency in agricultural marketing.
It thus provided the single reference
point for legions of researchers, instructors,and
students working in this area.
Agricultural economists have continued to
provide empirical assessments focused on
enhancing efficiency within individual processing
facilities and among systems of facilities.
As computational capabilities and modeling
methods have advanced, these innovations
have been incorporated within increasing
sophisticated studies to inform decision makers.
Akridge’s (1989) analysis of multipleproduct
fertilizer retailing plants employed a
frontier multiproduct cost function to measure
productive efficiency. The potential for
significant reductions in variable costs was
identified. Starbird’s (1990) assessment of tomato processing plant efficiency adopted
a novel approach to estimation of response
surface identification. A cost-function metamodel
is successfully applied to estimated
factor-demand equations, resulting in reduced
specification error. A bootstrapping regression
approach was employed by Schroeder
(1992) to separately identify the extent of scale
and scope economies for a sample of supply
and marketing cooperatives. Distinguishing
between these types of potential economies
provides relevant decision-making information
for agribusiness managers. These studies
demonstrate the continuing commitment of
agricultural economists to identify means for
measuring and enhancing productive efficiency
in agribusiness operations.
Contribution #7: Agricultural economists have
developed financing instruments and
arrangements tailored to the characteristics of
the farm sector; loan portfolio, credit analysis,
and capitalization structures for financial
institutions serving the sector; and valuable
public data resources on sector and firm
financial structure and performance
Early work in agricultural finance focused primarily
on how effectively lenders were serving
their farm customers in terms of loan terms,
interest rates, and credit standards and in general
adequately fulfilling and responding to
farmers’ credit needs. Black (1930) argued that
“information should be uncovered to permit
him [the farmer] to learn to use credit intelligently,
to control credit instead of being controlled
by it” (p. 249). This focus on credit use
dominated not only the research agenda, but
also data collection, outreach activities of the
USDA and Land Grant System, and widely
used textbooks such as Murray’s (1941) early
editions of Agricultural Finance. Development
of amortization concepts, matching repayment
terms to income/earnings capacity and viewing
credit as a resource that could be used
(i.e. converted into debt) or held in reserve
to manage potential financial stress (Barry and
Baker 1971), was the focus through the 1970s.
It was not until the work on farm firm growth
models (Baker 1968; Boehlje and Eisgruber
1972) that capital allocation and investment
decisions were added to the agenda. The focus
returned to appropriate use of credit and more
accurate measurement and documentation of
the financial performance of farm firms in the
1980s through the work of the Farm Financial
Standards Council (1991). During the 1970s the structural changes in
the financial markets and the pressures for
consolidation of the institutions in both the
commercial banking sector and the FCS stimulated
work on the cost and efficiency of
the consolidated/restructured financial institutions,
and the effectiveness and commitment
of these generally larger and less locally controlled/
owned institutions to serve the farm
sector and rural communities. Such work
is summarized by Ellinger, Hartarska, and
Wilson (2005) and Gustafson, Pederson, and
Gloy (2005). Beginning in the 1990s, attention
shifted to issues of capital structure, loan
and asset portfolio composition,and credit risk
management of the financial institutions serving
agriculture. This work was stimulated in
part by the bank and FCS failures of the 1980s
combined with the deregulation of the financial
markets, which placed more burdens on
the individual institution to manage its financial
risk in an increasingly competitive market.
Notable work on these issues is summarized by
Gustafson, Pederson, and Gloy (2005).
Additionally, a mainstay of the agricultural
finance work since its early years has been
the collection and analysis of financial data.
This work started with the farm records/farm
accounts programs ofWarren and colleagues at
Cornell that were an integral part of their farm
management programs. It continues today in
the form of farm records programs and activities
of both the Land Grant System and the
private sector.
Data in the form of descriptive statistics for
both the farming sector and the financial institutions
serving that sector,which were the focal
point of work by the USDA under the leadership
of Garlock (1966) and Tostlebe (1957),
were used to characterize the changing financial
condition of agriculture early in the twentieth
century. Extension of this work resulted in
the USDA’s first publication of the sectorwide
Balance Sheet of Agriculture and Farm Income
Situation in 1940.These data sets continue to be
developed today. The Federal Reserve System
initiated surveys of farm lenders and their lending
activity late in the 1940s. Melichar (1979)
and colleagues issued their first Agricultural
Finance Data book in 1976, which continues
today to be an extensive and exhaustive data
set summarizing the changing financial characteristics
of farm borrowers and lenders. The
USDA implemented an annual Farm Cost and
Returns Survey in 1991, which is a forerunner
to the current Agricultural Resource Management
Systems (ARMS) data set. In more recent times, additional data on the financial
and resource characteristics of the farm family,
including labor allocation, nonfarm income,
and investments and family expenditures, have
been collected as part of this survey. As with
the earlier survey work of the Federal Reserve
Banks, the ARMS data set has been used
extensively by the USDA and Land Grant
agricultural economists in their research programs.
The extensive financial data collected
and the numerous analyses that these data have
supported document that although the agricultural
sector and farm businesses were characterized
by low incomes and weak financial
performance earlier in the twentieth century,
in recent times that performance has become
more competitive with other industries.
Contribution #8: Agricultural economics
scholarship has informed business strategy
formation by monitoring, interpreting, and
anticipating the changing business
environment of agriculture
Business strategy focuses on optimizing the
linkages between the firm and its surrounding
business environment (Porter 1985). This
managerial function inherently incorporates a
longer-run perspective, striving to ensure that
the firm not only is well aligned with current
conditions but also is being positioned to adapt
to the dynamic and uncertain business environment
of tomorrow. A key element of strategy
can be paraphrased as a“how will we compete”
question (Aaker 1988). Business management
concepts such as competitive advantage, distinctive
competencies, and the resource-based
view of strategy have been intertwined in the
scholarship addressing this question, especially
during the last three decades.
Understanding how to compete within the
context of a dynamic agricultural sector and
an evolving global economy is a key challenge
for agribusiness decision makers. Throughout
the last 100 years, the scholarship of agricultural
economists has contributed to improving
decision-maker understanding of the business
environment of agriculture.
In addition to his seminal work with Davis,
Goldberg pioneered in employing the case
study method within agribusiness. He utilized
this form of scholarship to uncover relationships
and to communicate the dynamics of
change to legions of decision makers.The more
than 300 Harvard Business School case studies
he has coauthored address a vast array
of factors affecting global agriculture. The Agribusiness Seminar he has led also has
been a powerfully effective means of educating
agribusiness managers.
Key empirical work, especially from the
1950s to the 1980s, focused on providing an
enhanced, quantitative understanding of the
evolving production agriculture sector. These
developments were critically important as
the size and scope of input supply andcommodity
marketing firms are inherently connected to
the regional nature of agricultural production.
Asthe underlying technologies supporting production
agriculture evolved, the dynamics of
regional production underwent considerable
change.
The development of mathematical programming
allowed for detailed analysis of interregional
competition in a “systematic and
manageable way” (Jenson 1977, p. 47). From
the 1950s into the 1980s, Heady and others
at Iowa State University developed a
series of increasingly sophisticated mathematical
models focused on the dynamics of
interregional competition. A primary building
block for those analyses, and for others
conducted throughout the profession, was
described in USDA Technical Bulletin 1241,
Regional Adjustments in Grain Production:
A Linear Programming Analysis (Egbert and
Heady 1963). That work was initiated in 1955,
as soon as the 1954 Census of Agriculture was
available. Grain production (shifts in location,
resource use, and output levels) was the primary
focus of this pioneering work. The direct
output was explicit definition of comparative
regional production efficiencies, as well as optimal
production patterns, associated land rents,
and prices for feed grains and wheat. Based
on that pioneer effort, numerous extensions
and advancements were completed over the
following decades.
Although technical change has been a constant
driving force within agriculture, the 1980s
saw an intense interest in the potential for
biotechnology and information technology to
profoundly alter agricultural systems, in concert
with other structural and financial challenges
occurring in the sector. There was an
urgent need for comprehensive analyses of
these interlinkages. One effort which accomplished
that goal was published as Technology,
Public Policy, and the Changing Structure of
American Agriculture (US Congress 1986).
Employing a mix of published research and
qualitative methods, this assessment specified
scenarios of change for the agricultural
sector, and it advanced policy prescriptions focused on the future structure of the
sector.
More recently, the methods of agricultural
economists have advanced along with the general
management literature and the nature of
change in the sector. As a result, the scholarly
capabilities of agricultural economists have
been directly applied to decision-making issues
within agribusinesses. These efforts have necessarily
required explicit consideration of the
manager as more than only a strictly rational,
economic being (Mintzberg 1978).
An article by Fisher, Sonka, and Westgren
(2004) sets a standard for work that contributes
to professional scholarship while investigating
strategically important issues with actual
decision makers. It reports on an intervention
where sophisticated information technology
tools (animated, three-dimensional visualization
techniques driven by estimates from a
system dynamics simulation model) were used
to help managers assess future options and
chart strategic directions. Focused on potential
scenarios for global protein needs, the article’s
more significant contribution was in empirically
documenting the effect of the use of
visualization techniques and economic modeling
on strategic thinking. In addition to its
research impact, this work was used in executive
education programs for numerous decision
makers from throughout the global soybean
industry.
Contribution #9: Educational programs in
agribusiness have developed human capital
that has contributed significantly to
productivity growth in the food system
Educational programs have been a central concern
for our profession over the past century.
Long before the term “agribusiness”was introduced,
the key role of business education in
our undergraduate and graduate programs was
clearly recognized. For example, in a presentation
at the 1926 annual meeting of our association,
Buechel (1927) discussed the importance
of business education and expressed concerns
that business administration programs might
draw students away from programs offered by
agricultural economics departments. Twenty
years later, Wood (1947) reported results of
a survey of potential employers for graduates
from Purdue’s agricultural business program
and described a suggested curriculum
designed to meet the needs identified by potential
employers. Several years later, John D.
Black, who would soon be joined at Harvard by John Davis and Ray Goldberg, reported
on
findings from a survey of the profession on the
role of economics in undergraduate curricula.
Black (1953) concluded that
departments of agricultural economics
in the larger colleges at least
should consider offering three curricula,
one of the general-agriculture
type to serve especially the needs of
future farmers and extension workers,
one in agricultural business to
serve the needs of young men looking
forward to a career in businesses serving
farmers, and one to prepare agricultural
economic specialists. (p. 491)
Hewent on to note that the agricultural business
curricula would often rely on coursework
in undergraduate business colleges.
Stimulated by growing interest in agribusiness
within the profession and by growing
demand from rapidly expanding agribusiness
firms, agricultural business programs continued
to develop and evolve in the 1960s and
1970s. There were tensions as members of
the profession developed stronger ties with
the broader agribusiness sector. A. C. Hoffman,
vice president of Kraft Foods Company,
criticized existing undergraduate programs for
their emphasis on economics. He stressed that
“the agribusiness economist should be trained
not only in economics but also for general business
management” and went on to note that
traditional agricultural economics programs
were not “adequate for this purpose” (Hoffman
1969, p. 449). Discussants responding to
Hoffman’s paper acknowledged problems but
also emphasized positive accomplishments and
changes under way at many universities.
Part 2 of the November 1973 issue of
the American Journal of Agricultural Economics
was devoted to papers presented at
a workshop on the Improvement of Education
in Agricultural Economics by Defining
Goals, Developing Curricula, and Improving
Instruction. This issue includes descriptions of
undergraduate curricula at the University of
California–Davis (Parker 1973), Southern Illinois
University (Wills 1973), Michigan State
University (Connor 1973), and Texas A&M
University (Grady 1973). The curriculum at
each institution except Southern Illinois University
included some form of agribusiness
track or concentration,andWills noted that the
lack of this option at his university was due to budget restraints. There was great
diversity in
the structure of agribusiness programs at that
time, reflecting historical and contextual differences
as well as the recognition that there was
value in experimenting with new models.
Graduate and professional programs in
agribusiness were somewhat slower to develop.
Litzenberg, Gorman, and Schneider (1983)
identified four existing professional graduate
programs and two under development. In 1989
the National Agribusiness Education Commission
was organized “(a) to develop guidelines
for a masters degree in agribusiness management,
(b) to suggest strategies for continuing
education and executive development courses
for employees, and (c) to recommend steps
to cultivate faculty resources in agribusiness
education” (Woolverton and Downey 1999, p.
1050).Woolverton and Downey reported that
relatively little progress had been made in
the decade following the commission’s report.
They went on to note (p. 1055) that the need for
well-trained agribusiness managers might be
met by“continued expansion of undergraduate
programs in agribusiness management coupled
with five to six top-quality agribusiness MBA
and continuing education programs.”
In 2002 the USDA provided funding for the
National Food and Agribusiness Management
Education Commission to assess the current
state of agribusiness management education
and develop recommendations for addressing
key issues that face these programs. The commission’s
2006 report (Boland and Akridge
2006) presents specific recommendations in six
key areas: (1) curriculum assessment and revision,
(2) communication/writing/critical thinking
skills, (3) industry linkages, (4) student
recruitment for food and agribusiness management
programs, (5) introductory and capstone
undergraduate courses, and (6) graduate programs
in food and agribusiness management.
These recommendations will be a roadmap for
campus-based agribusiness education as our
profession enters its second century.
Finally, our educational impact extends
beyond campus-based programs to include
direct involvement with agribusiness decision
makers. The Agribusiness Seminar at
the Harvard Business School has long been
recognized for its important contributions.
Other noteworthy programs include the Center
for Agricultural Business at Purdue University,
the Executive Development Program
of the George Morris Centre in Canada, the
Executive Program for Agricultural Producers
at Texas A&M University, the Food and Agricultural Policy Research Institute at the
University of Missouri–Columbia and at Iowa
State University, and the Graduate Institute
of Cooperative Leadership at the University
of Missouri–Columbia. These and other programs
have been exemplary in their ability
to integrate research scholarship and outreach
to advance strategic decision making in the
agribusiness sector.
Opportunities and Challenges for the Future
Our association’s first century was a period of
unprecedented change in food production, distribution,
and consumption. The following are
forces for future change.
• The agricultural sector is increasingly a
source of raw materials for sectors outside
of the traditional food and fiber
system. Agricultural products are being
used to produce biofuels, industrial products
such as polymers and bio-based synthetic
chemicals and fibers, and pharmaceutical/
health products such as functional
foods, growth hormones, and organ transplants.
This is blurring industry boundaries
and creating new strategic and competitive
challenges for agribusiness firms, and
it will have profound implications for the
structure and operations of the supply
chains in the industry.
• Agribusiness organizations are becoming
more flexible and complex, more decentralized
and yet reliant on collective action
and cohesiveness. This poses challenges
for managers designing the incentive systems
and internal institutions that are the
foundation for intra-firm structure, strategy,
and governance. At the same time,
technological change and the emergence
of new globalization–localization tensions
will stimulate changes in socioeconomic
relationships, reshape scope and scale
economies, increase risks, introduce new
and novel interdependencies, give birth
to new rivals and potential partners, and
mold more hybrid organizational forms.
This will complicate inter-firm coordination
for agribusiness managers and food
system policymakers.
• With the approach of peak world oil production,
the prospect for international
agreements to reduce greenhouse gas
emissions, and the potential for significant
geographic shifts in food production patterns due to climate change, there are
likely to be large shifts in relative prices
over the next quarter century. This could
trigger an unpredictable, radical restructuring
of the food system and critical
strategic positioning issues for agribusiness
firms.
Understanding and anticipating the dynamics
of the global agribusiness environment
will be increasingly critical.These challenges—
along with advances in theoretical frameworks,
diagnostic tools, and empirical techniques
for addressing them—will afford agribusiness
scholars an ample supply of issues, approaches,
and motives to expand and broaden inquiry
into an ever-increasing complex and important
global food system. They will also offer us
new opportunities to help students, managers,
and policymakers through agribusiness teaching
and outreach programs. While economics
will continue to be the foundation for our work,
concepts from other social science disciplines
and sophisticated new computational tools also
will be necessary.
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