Large scale farming is driven by a relentless quest for efficient production and concentration along the food supply chain - Richard Sexton

13 August 2018 - Agri-food markets often exhibit high levels of concentration at all stages of the supply chain – "from farm to fork". As processors get bigger, they demand that farms grow to match the higher demand for standardized products. As a result, small and mid-sized farms face severe economic challenges, while the number of large farms is growing. Richard J. Sexton, Professor in Agricultural and Resource Economics at the University of California, Davis, explains to his view on the dynamics of structural change in agriculture in the US.

Nowadays we observe growing farm sizes all over the world. What drives this development?

The increasing market concentration driven by economies of scale across all production stages (farming, processing, and retail) is one of the driving forces. Then there is also the economies-of-scope factor which implies that, in food manufacturing, suites of differentiated products are produced most efficiently under the auspices of multiproduct processors. Less obvious but also important are the economies associated with vertical coordination and transfer of information across stages of the supply chain, which are also facilitated by scale and concentration. Another important development is the worldwide ’supermarket revolution’ and the increasing role of discounters such as Walmart. These multinational companies have been very effective at minimizing costs along the supply chain, meaning only the most efficient farmers survive. Typically those are the largest. And last but not least, the increasing use of contracts and vertical coordination and elimination of “middlemen” also contribute to concentration.

What are the benefits and the problems caused by large scale farming?

The benefit of large scale farming is the reduced cost of food. Consolidation and vertical coordination have not only reduced costs, but also expanded diversity of food products and solved information problems. However, the expansion of food production has also involved substantial increases in the use of nitrogen, phosphorus, and water for irrigation. Negative environmental consequences of large scale farming can include land degradation, losses of biodiversity, excessive use of pesticides, causing concerns about health impacts on humans and other species, excessive emissions of carbon and criteria pollutants, animal waste disposal issues, etc. Some also argue that large-scale farming has contributed to health issues including obesity and to the detriment of farmers, consumers and farm workers through the exercise of market power. The evidence in support of such charges is, however, very weak, and plentiful economic arguments suggest that large-scale agriculture will perform best in terms of food safety.

There have been protests against large farms in the USA because of the environmental impact like huge amounts of manure, bad smell, air and water pollution. Do you think the accusations are well grounded?

Sometimes rural communities resist the expansion of large farms in the United States because these farms have negative effects on the environment. They can cause air and water pollution. A lot of the citizens are living near these farms, so they sign the petitions as a protest against these farms. But these are just localized protests. If you were living next to a 10,000 cow dairy operation, then you would also protest that type of thing exactly in the same way. At the same time, it is true that many farms do not do enough to reduce negative effects of their production on environment. They aim to produce at the least cost, and dealing with emissions would raise costs. The key is for governments to impose effective regulations on emissions that producers are required to meet.

Is there a debate in the US on the optimal farm size?

The optimal size of a farm is not a major issue in the US. I do not know what would be the optimal or maximum farm size because when farms pollute and create this type of externalities, farms have to be forced to manage them. The answer isn’t to simply mandate smaller farms. I think, there seems to be no finite limit to where the economies of size and scope would cease to matter. So the trend toward larger farms will be ongoing. There have been attempts by the U.S. government agencies to impose policies to produce a level playing field for small farms. However, those policies, by and large, have not been implemented because there was considerable opposition to them. Therefore, I frankly do not see an end to the growth of large farms.

Do you think that factory farms will continue to develop in the US?

I think that is largely true. I grew up on a small dairy farm in rural Minnesota, and that type of farm has not survived, nor has it existed for quite a number of years. Now people who own the property in my home area use it for hunting but they are often not permanent residents. The trend in dairy now is toward big farm sizes of 5,000 to 10,000 cows. This development is driven by fierce competition on the dairy market and the need for producers to exploit all available efficiencies. Dairy marketing is very competitive in places where producers are not subsidized. And the US dairy producers are no longer subsidized in meaningful ways. Added to this is the orientation of the US dairy industry toward export where it faces New Zealand as a very aggressive competitor.

Nevertheless, there are market niches for small farms. Some of the product characteristics that are largely demanded by the markets today, for example, organic produce, started out from small scale farming in the US. However, when a new product succeeds, then larger enterprises move in and they are more efficient. That is how organic is now part of the agribusiness supply chain. Without subsidies, small operations just cannot compete anywhere except for little niche markets. These niches are temporary because when the niche or the innovation is successful the big companies come in.