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Montana farmer-stockman. [volume] (Great Falls, Mont.) 1947-1993, October 01, 1960, Image 5

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Persistent link: https://chroniclingamerica.loc.gov/lccn/sn86075096/1960-10-01/ed-1/seq-5/

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Agribusiness
What Vertical Integration May
Mean to Montana Agriculture
By M. E. QUENEMOEN*
VERTICAL INTEGRATION IS cur
rently the much talked about phenom
enon in agriculture. It refers to
the linking together, including the
coordination of the decision making
process, of two or more stages of pro
duction or marketing. Vertical arrange
ments can extend from connections
only slightly closer than an open mark
et relationship to the complete owner
ship and operation of the two processes
by one firm.
Vertical integration can essentially
be accomplished by three means.
1. Contract. Contractual arrange
ments between producer and processor
or between processor and retailer are
common in the agribusiness industry
of today. These contracts are legal
documents that link together two stages
, of production or marketing. Examples
f are contracts between feed companies
and broiler producers; and between
'meat packers and livestock feeders.
2. Ownership. In some cases vertical
integration can be achieved by out
* right ownership of related stages of
production or marketing. A common
example of this is where meat pack
ers own their own feed yards.
3. Cooperatives. In purchasing sup
plies, or selling their products through
cooperatives, farmers and ranchers
achieve a degree of vertical integra
tion. Some cooperatives are very large
and perform many of the marketing
services necessary to move products
from producer to consumer.
Natural Development
In a sense, all production and mar
keting must be integrated if it is to
take place on a coordinated and con
tinuing basis. Price is the coordinat
ing tool that helos move products
through the markets to the consumer.
However, businessmen have never been
willing to rely on price alone as the
iniegrating force in our economy.
Whenever possible they have made
use of trade barriers, monopoly ar
rangements, protection of technological
developments through patents and oth
er regulatory devices.
Thus the current interest in vertical
integration is an understandable de
velopment in agribusiness. It is cen
tered around contracts, mergers, own
ership and other business arrangements
designed to bring order and less uncer
tainty into the production-marketing
complex.
Early history of agriculture showed
a high degree of integration. Farmers
produced, processed and consumed
most of their commodities. Even that
which was not consumed was processed
and marketed by the /armer —a rather
high level of integration.
Trend to Specialization
Then, for many years, the trend
was away from this kind of integration.
Farmers began more and more spe
cialization as producers, processors
specialized in processing agricultural
products, and retailers specialized in
the final movement of commodities to
consumers.
Now a counter force is noted moving
back toward new integrated arrange
ments. It should be recognized, how
ever, that the components of integra
* Montana Extension SerWoe Economist
This is the second of a series of three articles treating various phases
of agribusiness, the term now used to designate the modern complex
organization of farm and ranch and business firms engaged in the pro
duction of a finished food or fiber commodity.
This composite of agriculture businesses is dynamic by nature and marked
by constant change. The changes have been particularly great in the field
of production and these were discussed in the first article of the series,
"Changes in Farming and Ranching." which appeared in the Sept. 15
issue. These changes in the field of production as well as in marketing and
consumption have set the trend to vertical integration, the subject of the
present article.
tion are now on a much larger basis
than formerly. In other words, inte
gration involves the joning together
of large, specialized processing firms,
large farm producers, and large food
distribution enterprises.
It should be pointed out here that
integration is not strictly a phenome
non that affects farms and ranches.
For example, in the agribusiness com
plex, the small retail food stores of
past decades have undergone a consid
erable development toward vertical
integration. Many of the smaller food
stores have become affiliated with
wholesale distributors on either a co
operative or contractual basis.
Horizontal Integration
Developing concurrently with ver
tical integration has been the enlarge
ment of farms and agribusiness firms.
The enlargement of firms is often
called horizontal integration. Whereas
vertical integration involves the joining
together of two or more stages of pro
duction and marketing, horizontal inte
gration involves the expansion in size
or scale or a single phase of produc
tion or marketing. As firms have en
larged in size they have found it more
feasible and more purposeful to enter
into the vertical arrangements.
An example can be found in the
dairy industry. As smaller dairy farms
have been forced to merge or develop
into larger farms because of certain
technological developments, they have
experienced high capital costs. Once
in the position of having high fixed
costs, the assurance of a market for
their product becomes extremely crit
ical. Therefore we have experienced
interest by many such firms in con
tractual arrangements with processors.
In other words, large firms with high
investments and high fixed costs are in
a less flexible pbsition than the small
firms of former years. To overcome
the disadvantages of a less flexible
position these firms have relied on
vertical arrangements.
Why Vertical Integration
It has already been pointed out that
consumers are presently well heeled.
In spending less than a fourth of their
income for food they have come to
demand a continuous supply of stand
ardized product. Competition at re
tail level has also put considerable
emphasis on low price products.
As this consumer pressure is passed
on to retailers there is likewise incen
tive to insure a continuous supply of
a standard product. Under keen price
competition retailers rely on volume
and
Volume
merchandising,
sales and mass merchandising is suc
cessful only for products where supply
and standardization are assured. Thus
mass
the retailers are provided the iooen
tive to enter into vertical arrangements
with processors and wholesale distribu
tors.
As the processors are faced with
changes in the requirements of whole
salers and retailers, they use contracts
and other means to assure adequate
and timely supplies of a specified qual
ity of products. They also attempt to
increase volume and stabilize their
supplies in an effort to reduce costs.
Pressure Reaches Farmer
As this kind of pressure is passed
along the line it eventually reaches
the farmer and rancher. Thus we come
up with the following reasons why
farmers enter into vertically integrat
ed arrangements: 1. Assure a place
to sell their product. 2. Shift price risk.
3. Obtain capital. 4. Buy more econom
ically. 5. Sell more economically, S.
Increase size of business. 7. Provide
employment for unused resources. 8.
Obtain technical assistance.
Another category of agribusiness
firms, the suppliers of items used in
production, enter into vertically inte
grated arrangements for other reasons.
While outside the chain of functions
from production to consumption, they
are in a strongly competitive position
and attempt to extend the market for
their product through vertical arrange
ments. They try to achieve large vol
ume, continuous flow and low unit
costs.
Problems for Farmers
Loss of freedom is one of the most
frequently mentioned problems that
farmers fear in connection with ver
tical integration. It is characteristic
of contracts to bind both parties to cer
tain obligations and specifications. In
this sense there is undoubtedly some
loss of individual freedom.
However, both parries to any contract
weigh the gains against the disadvan
tages in making their decision as to
whether or not to enter the contract.
Freedom, however, involves personal
values and it is therefore difficult te
make any generalizations.
Another problem that farmers have
faced in agricultural industries that
have entered into highly integrated ar
rangements has been that of overpro
duction. A good example is the broiler
industry. Large, efficient firms have
increased production and caused peri
odic serious price problems.
Management Techniques
Specialization is often brought about
by vertically integrated arrangements.
Specialization requires a different kind
of management from what most farm
ers are accustomed to and therefore
presents a problem. Adjustments te
changing economic conditions may be
come more difficult for highly spe
cialised terms.
We have already considered the
ample of highly specialized dairy farms
adjusting to the loss of a milk market.
Farmers and ranchers generally
faced with the problem of learning
management techniques in conducting
highly speialized business ventures.
ex
new
If vertical integration résulté in few
er farms, social problems will likely
result,
small
For example, the support of
villages
schools, churches, and other services
will become difficult with a
and communities.
more
sparse rural population.
Farmers and ranchers are not the
only businessmen facing important ad
justment problems. Changes in market
structure is accompanying the trend to
ward vertical integration. In many
cases some market steps will be by
passed as contracts are made with
firms closer to the consumer.
We have already seen the decline o£
terminal livestock markets. The prob
lem here is what happens to the bar
gaining power of farmers, ranchers
and other small firms as they ne
gotiate directly with firms other than
the established markets as we havo
known them in the past?
Vertical Integration in Montan«
Grain and Livestock. In the grata
and livestock industry we find several
factors that seem to set the climat«
for potential vertically integrated ar
rangements. For example, wheat acre
age allotments during the past lew
years, have resulted in relatively large
supplies of feed grains in this area.
There is still a substantial amount
of unemployed winter labor in the agri
cultural areas of Montana and this,
coupled with a short supply of market
hogs and cattle for iocal markets, cro
ates a situation where vertically inte
grated arrangements may appear quit«
profitable.
Fruit and Vegetables. The develop
ment of fruit and vegetable production
in any area requires aggressive no
tion. Production, processing and mar
keting must be developed simultane
ously. This requires a good deal ef
organization and coordination to bo
successful. To be successful in Mon
tana the development of fruit and veg
etable production will likely be highly
integrated.
Sugar Beets. A good example oI
vertical integration is the sugar beet i
industry of Montana. Sugar beets are
grown under contract foeta>g(iaranteed
price and according te specified cul
tural practices. |
Wheat. The effects of vertical inte- 1
gration are unlikely te'"be* fll telt very I
strongly in the production of wheat. I
The quality of wheat is so affected by I
climatic conditions which vary from I
year to year that it is difficult to pro- I
duce under contract and meet quality I
specifications.
Malting Barley. The production of I
malting barley under contract is pos- I
sible, particularly in the irrigated area« I
of Montana. Under dryland condition« I
quality control is, as in the case of I
wheat, the major limiting factor from I
the standpoint of contract production. ■
Seed Production. The possibilities of |
integrated seed production and
^Continued on page tel

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