External Economic Drivers and U.S. Agricultural Production Systems

Authors: Halloran, John; Archer, David

Submitted to: Renewable Agriculture and Food Systems
Publication Type: Peer Reviewed Journal
Publication Acceptance Date: 10/9/2007
Publication Date: 12/1/2008
Citation: Halloran, J.M., Archer, D.W. 2008. External Economic Drivers and U.S. Agricultural Production Systems. Renewable Agriculture and Food System. 23(4):296-303.

Interpretive Summary: U.S agriculture operates in a market driven economy. As with other businesses, agricultural producers respond to economic incentives and disincentives and make decisions to maximize their welfare. In this paper we examine external economic drivers that shape agricultural systems. Three drivers were examined, technological advances, U.S. farm legislation, and changing market conditions and structure. In general technological changes have favored larger and more specialized agricultural systems. However, in certain circumstances more diversified and integrated systems can be more profitable. The impact of U.S. farm legislation is ambiguous. Although benefits tied to production of specific commodities have lessened with changes in legislation, there has been no large adoption of more diversified/integrated systems. Changes in market structure and consumer demand have exerted two opposing forces. The drive for increased efficiency within marketing systems has also favored larger and to some degree more specialized operations. However, varied consumer demand for how goods are produced and where has created opportunities for agricultural production systems that are more completely integrated and diversified.

Technical Abstract: U.S agriculture operates in a market driven economy. As with other businesses, agricultural producers respond to economic incentives and disincentives and make decisions to maximize their welfare. In this paper we examine external economic drivers that shape agricultural systems. Specifically, we consider the influence of technological advancements, the income supports of various Farm bills, and the changes in market structure and consumer demand. We find that changes in technology have favored large scale and specialized operations. Often the technology is commodity specific. However, there is some evidence more diversified production units are able to achieve scale economies and economies of scope as well. The commodity support programs’ influence is ambiguous. As various farm legislation evolved to decouple the production decision from program benefits, the incentives to specialize in program crops have diminished. However, wealth and risk affects, depending upon the individual producer, may promote or inhibit the adoption of a more integrated system. The changes in market structure, channels, and consumer demand over the last fifty years has been dramatic. Firm consolidation has occurred at all levels in the marketing system, with increased emphasis on productivity. This development has favored large scale production units that can also provide more services (e.g. inventory management) than the traditional family farm. However, the great diversity of consumer demand also creates opportunities for more integrated farm operations. There are an increasing number of consumers who are concerned about how their food is produced and where. Most major food retailers and food manufactures are responding to these concerns. The markets for organic, locally-produced, free range and the like are expected to continue to show strong growth.