Progress 07/01/98 to 06/30/04
Outputs
Project UTA00009 was completed as of June 30, 2004. One of the objectives of the project was to investigate input markets and adaptation to changing input markets in agriculture. Since Utah and most of the western United States was experiencing six years of drought and adjustments in water allocations for irrigation purposes, a study of agricultural producer responses to water policies was conducted using data and water allocation information from northern Utah and southern Idaho relative to Bear River surface water allocation. A mathematical programming model was developed to simulate impacts of changes in surface water allocations on acreage in production and crop mix. Simulations were made for reductions of up to 30 percent. A reduction of 30 percent imposes a considerable irrigated acreage use change but does not appear to significantly impact crop mix in this alfalfa-grains-silage crop pattern region. Revenues are reduced but mainly reduced from reductions in
alfalfa sales, and additions to feed costs because of the loss of corn silage production. There is little change in irrigation capital intensity. Farm level data for the summer of 2004, which accounted for late season truncation of surface water use in the region, suggest that the acreage change simulated overestimates the acreage change obtained from farm level data. Producers may be substituting inputs in much greater rates than imposed in the mathematical programming model used to generate the simulations. The impacts simulated suggest changes as the extensive margin whereas the field data suggest, at least at a preliminary summarization of such data, that there is more adjustment at the intensive margin than imposed in the model. More investigation of regional versus farm-level modeling and spatial aggregation needs to be completed. This work has been transferred to the research effort of another project.
Impacts
Drought affects nearly every farm producer in Utah and has directly impacted producers in the Utah Middle Bear area of the Bear River region, who possibly face more than six years of drought. Many farmers have had to reduce or halt late summer irrigation because allocations from water rights have been exhausted. Regional simulations were made of the economic impacts of a continued drought condition. A 22% reduction in acreage of the main irrigated crops of alfalfa, corn silage, corn grain, barley and wheat is projected under continued drought conditions and reduced or terminated irrigation. Acreage in corn silage is projected to decrease by 23% and corn for grain is eliminated. Net income from irrigated alfalfa production is reduced by 28% as acreage is reduced, later cutting yields are reduced, or adjustments result in increased mixed hay production. The farm level simulations indicate, however, that producers can make adjustments in water use and timing to reduce
income losses, but corn silage acreage and alfalfa yields are still reduced. The dairy industry, which uses the alfalfa and silage inputs, survives. However, the farm simulations project that outside feed has to be brought in at higher cost, reducing net income on a representative dairy operation by 13% from current levels.
Publications
- No publications reported this period
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Progress 01/01/03 to 12/31/03
Outputs
The main thrust of research associated with this project for this reporting period has been to investigate the influence of heterogeneous and stochastic preferences on decisions made in various markets in the agricultural sector. With the advent of various new services, including information services, producers are now purchasing several new information-intensive and capacity-constrained inputs such as new seeds, internet services, and various nutrient/nutrient management inputs. Information inputs are forms of 'expert' services whose complete usefulness or necessity to buyers may be known only to the vendors. Therefore there may be incentives to offer such services in varying quality, or selectively supply, depending on the cost to supply and/or the valuation of such services by the buyer. Using a limited and proprietary data set on nutrient input/nutrient management services and producer purchases, and estimating a stochastic preferences model for these services,
some evidence was found that selective supply of services arises in the presence of stochastic preferences and heterogeneous valuation of the services by buyers of the services. There is also evidence that the level of a particular nutrient management service varies with the cost of the vendor's supply across customers. There is limited evidence that buyers may withhold information from the vendors about operations and irrigation patterns, possibly out of concern for the selective supply incentives that vendors may have, but information may not be disclosed because of lack of information on water availability, weather patterns, and other uncertainties about the future of the growing horizon. A stochastic preference model was also estimated using data from the University of California Internet Demand Experiment in order to determine how buyers of internet services value quality-differentiated services. Internet service quality is a shared service and is determined by
capacity-constrained resources. The choice in this experiment is on bandwidth and each bandwidth comes with a different price for byte volume transmitted and subscription time spent in this bandwidth. Estimation of the model suggests there is considerable variation in choice between users and each user when comparing the user's connections, but this variation could be related to types of use applications in a particular connection. Users also exhibit even larger variation in valuation of service as actual consumption proceeds. This suggests that internet services can be quality-differentiated and depends on buyer valuation by particular internet application.
Impacts
Agricultural producers are increasingly purchasing information and capacity-constrained inputs. This trend is productive to producers but also is increasingly redefining the market relationships between input suppliers and the producers. The service suppliers and information connection via the internet are now having increased influence on producer's production decisions. There may be incentives for input and information suppliers to short-cut services or to over-emphasize the value of services in conditions where the vendor may have more knowledge of the usefulness of such services than the buyer, and these incentives may arise because of variation in the valuation of a specific services or service treatments. Producers may find their costs structures for information inputs to be quite variable as productivity increases as induced by the employment of these services.
Publications
- No publications reported this period
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Progress 01/01/02 to 12/31/02
Outputs
The main objective of this research is to investigate the impact of emerging production and marketing decision processes and contracting on the agricultural sector. Previous research investigated the impacts of highly concentrated agribusiness industries on prices both at the farm and retail levels. The current research has used a data set on production and marketing in the biotechnology industry to derive some information on the contracting operations of the industry and the further development of biotechnology that may impact the agricultural sector and other sectors. Agricultural biotechnology has a high potential for facilitating low-input agricultural production, so appropriate development of the industry is important. There has been a considerable consolidation in the agricultural biotechnology industry following somewhat a similar pattern as the consolidation in the agribusiness sector in general. Using data on firm acquisitions and matching acquiring firms
with targeted firms in a fixed effects logistic regression model to estimate acquisition probability, we find that acquiring firms with less enforceable patents and more uncertainty in the value of their innovation portfolio are more likely to make acquisitions. The acquisitions that are made are predominantly of firms with fewer innovations in the portfolio but innovations with enforceable patent portfolios. Acquisitions are made of firms that have similar technology. Agricultural biotechnology firms are more likely acquired by firms with agricultural biotechnology divisions or sole purpose agricultural biotechnology firms. Many of the firms being consolidated have some roots to academic research and researchers, but the role of academic research currently is more of a background research role. Upon tracing the mergers, it appears that several were completed while patent blocking disputes were ongoing. The possibilities of contracting between private agricultural biotechnology
companies and academic research units were also investigated. There is considerable divergence in control and interest in such contracting, and academic units have not captured private funding in a big way at the same time that federal funding for biotechnology research has declined. Using limited survey data, a conditional logit model was estimated to capture the effect of research interest, funding, and funding restrictions on the utility of research by companies relative to academic units. As expected, academic unit researchers/administrators utility is significantly and positively influenced by research area interest and negatively influenced by funding/research purpose restrictions, while firm's utility is significantly and positively influenced by funding/purpose restrictions. But these latter conclusions are based on a somewhat limited data observation base. However, using a key player bargaining model, and the estimates from this model, at least bargaining simulations indicate
there is a mutual gain bargaining space whereby firms and academic units could negotiate joint research contracts and funding in agricultural biotechnology.
Impacts
Agricultural biotechnology is consolidating which is following a similar pattern of the consolidation of agribusiness in general. One of the main roles that agricultural biotechnology plays in the agricultural sector is the provision of more productive inputs such as seeds and cultivars that are resistant to pests and diseases and the facilitation of low-input agricultural production, thus reducing costs of production and promoting efficiency in the market channel. However, with industry consolidation and consolidation based on the enforceability of patents, there exists a potential for monopoly pricing without cost efficiencies. Ideally, cost efficiencies induced by consolidation bring about pricing strategy that simulates price taking instead of administered pricing whereby cost reductions are passed to the downstream sectors of the market channel. The study also suggests there is some potential for joint research contracting in agricultural biotechnology by private
firms and academic research units.
Publications
- Said, A., T. Glover, D. Stevens, and G. Sehlke. 2002. Water demand and quality impacts on water use sustainability. In John, L.M., (editor) Proceedings of the 2002 American Water Resource Association. 484pp., pp. 437-442.
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Progress 01/01/01 to 12/31/01
Outputs
Continuing the investigation of the impacts of the trends in the industrialization of agriculture, an investigation of market power and cost conditions of the potato and onion processing sectors was completed. The objective of the study was to determine if the firms of these highly concentrated industries have market power that enables them to administer prices in the downstream retail market channel or whether their behavior simulates what would be a price-taking behavior with cost reductions enhanced by the concentration. Demand-supply-margin equation representations of the market behavior of these industries were developed and statistically estimated using both aggregate and limited firm-level data. The estimated parameters of market power for the frozen potato, potato chip, and processed onion sub-sectors suggest no price-administering power for these sub-sectors. A new tractable utility model representative of imperfect competition was also used to model demand
in order to characterize monopoly-selling elements that have not been present in previous models of the processing sector. This latter representation was estimated using the limited firm-level data. Similar results for market power were derived. The results also indicate no cost efficiency in either the potato chip or frozen potato industries. However, there are apparent cost efficiencies as shown by the estimated margin equation parameters for the processed onion firms using the limited firm data for this sub-sector. This latter result suggests that the increased concentration, contracting, and raw product specification being implemented in the processed onion industry has been leading to cost reductions and the passing of these efficiencies to the downstream retail market channel. The potato chip industry poses a unique market structure in the food industry. There is only one national firm and then there are several local and regional firms that compete in the market. A few firms
dominate the frozen potato processing industry and one of these firms is the dominant supplier to the retail sector. The frozen potato market and the processed onion market are highly influenced by the growth of the fast food industry. Over 85 percent of all frozen potatoes are distributed through institutional establishments, particularly the fast-food restaurants. The fast food industry, currently dominated by four national firms, could be acting as a modifying force of processor market power that otherwise could be expressed by the potato and onion processors.
Impacts
The statistical estimates of the demand-supply-margin representations of the frozen potato, potato chip, and onion processing industries suggest that there is no apparent price-enhancing power exercised by firms in this industry on the retail markets. As an alternative to monopoly pricing there could be cost efficiencies induced by the increased concentration in these industries, but no apparent cost efficiencies were derived for the frozen potato and potato chip industries. Cost efficiencies are accounted for, however, in the processed onion industry suggesting that the so-called "superior efficiency" pricing strategy is used by the onion processing industry whereby the pricing simulates price taking rather than price administering behavior and cost reductions are passed on to the downstream retail sector.
Publications
- No publications reported this period
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Progress 01/01/00 to 12/31/00
Outputs
Part of what could be termed the industrialization of agriculture in the U.S. is the transformation that is changing traditional marketing channels. These changes have induced more vertical coordination in the agricultural products supply chains. Because of changes in the nature of consumer demand for food products that have moved to preferences for variation and niche-type food products, agricultural inputs used in food processing now have to meet certain specifications to move through the supply chain. Price signals were formerly the primary mechanism of market communication to signal the general information of the market. However, more detailed information on product and input specification is required, and contracts are now set up in order to outline these specifications and the complexity of current food product markets. Price does convey general market information but does not communicate the current market complexity associated with current movement of a
variety, and at the same time, differentiated food product through the market channels. Primary agricultural products are produced under a wide variety of very detailed size and downstream use specifications required in a contract. Their movement through the market is dependent on meeting the specifications for food product assembly, manufacture and specialized retail consumption use. There are certain preferred attributes or cut-out (meats) that are outlined in contracts. Price differentiation for the specifications is hard to come by in the industry although there are movements toward pricing observable attributes and/or forms of differentiation. Using data on beans, onions, potatoes, and carrots we find that the specifications of the contract for the raw produce are the main market operation transmission mechanisms. Onions in Utah, Idaho, Oregon, and Washington are, for example, produced to a certain size for processing specifications such as dicing, powder, onion ring, and
assembled product requirements that reflect the retail market preferences. Contract and market choice are influenced by the degree to which a product specification is associated with a non-traditional use as well as the degree to which attributes can be observed and verified. It is observed that products that are sold in spot markets or discrete contract markets are either products associated with non-traditional use (variation) or verifiable attributes. If both of these elements are present, then the products are moved through highly efficient markets. More complex procurement operations and long term market arrangements are the more usual case for products with less attribute verifiability.
Impacts
Commodity and food market transactions are now being replaced by a variation of contracts and/or vertical coordination and integration. With this movement comes concern about the efficiency of the markets. We find, however, that along with the vertical links that are now being used, other modes of coordination that do not supersede the spot market are seemingly coordinating efficient, and value revealing, transactions in today's more detailed food system.
Publications
- No publications reported this period
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Progress 01/01/99 to 12/31/99
Outputs
Formal and empirical modeling of the market conditions and projected conditions for new food product development and/or further product differentiation was conducted. Products are designed with multiple costly attributes. If substantial numbers of consumers do not know all the attributes or are misinformed about others, firms may make a choice not to include these attributes, a decision that is called a pandering product design. Since some consumers acquire information at a cost and others do not or do so at lower cost, the marketplace can fragment into well-designed products and others which are of the pandering design variety. Some firms then offer an inferior (lower quality, no upgrade, perhaps higher fat content, etc.) design that costs more to meet perceived consumer requirements. Increasing the number of firms (presumably making the market more competitive) can lead to less efficient outcomes, while monopoly equilibria must approach the efficient outcome as
product attribute reviews become cheaper, worsening market structure conditions but producing new designs at lower cost. This is a mixed welfare impact. Recent mergers of large agribusiness firms along with vertical integration has raised some concerns about adverse producer price impacts. Our results show that the inducement for merger as well as integration of all parts of the production and marketing phases is highly related to the importance of capacity constraints. Our preliminary results indicate the entry threshold ratio of market sizes increases in the importance of capacity. While varying pre-merger equilibria from choices on quantity to choices on price, a merger that involves less than 60 percent of the firms in the industry is not profitable to the merging firms if capacity constraints exist. Advances in technology intended to reduce capacity constraints may result in a merger wave, but we have seen the mergers come in the form of integrating producers, and setting up
performance-based and uniform pricing, and sometimes lower prices paid to producers via contracting. Profitable merger at less market size may exist under certain circumstances, depending on the sub-industry since a choice on quantity oligopoly does not exclude a long-run post merger of the choice on price (Bertrand ) type, which can reach a Nash equilibrium where prices are equal to marginal costs. Further investigation of the reason that firms form alliances was conducted. A small set of patent data from the biotechnology industry was used to make some tests. While the biotechnology industry actively engages in high rates of R&D alliance formation, partner firms do not appear to move into each other's areas of expertise post-alliance. It does appear that the benefit to alliance is to bring complementary inputs and assets to the alliance. More information on this process is needed from food product development alliances where alliances appear to bring together an integration of
different major channels in the market such as genetics, production, processing, marketing/exporting.
Impacts
Consumer food market fragmentation and agricultural industrialization may be leading to less selling competition and value differentiation that is not least cost, but such results depend on market structure.
Publications
- Glover,T.F. 1999. Infrequency of purchase and demand system empirics. Paper, Conference on Empirical Modeling of Multi-Stage Games and Product Differentiation, Sacramento, California. September 8-9.
- Glover, T.F. 1999. Mergers and technology. Paper, Conference on Value Added and Marketing, Washington, D.C. August 26-27. (Forthcoming Proceedings for February, 2000)
- Glover, T.F. 1999. Measuring the economic welfare impacts of new food products and value added. Paper, Conference on Value Added and Marketing, Washington, D.C. August 26-27. (Forthcoming Proceedings for February, 2000)
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Progress 01/01/98 to 12/31/98
Outputs
Through the use of a formal economic model of the motivations and effects of generic advertising as well as derived and final product demand, we derived some information on the impacts of promotion activities and expenditure targeted to consumers. Generic advertising by an intermediate good production/marketing association can increase the overall level of rents in the vertically-dependent industry (such as the beef or milk producing industry) and shift the percentage shares of these rents from one level of the industry to another. Preliminary empirical investigation of the milk industry indicates that the upstream market (milk producers) is more price-sensitive than the final demand market. These results indicate that positive levels of rents from the advertising effect initiated by producers can be shifted from the downstream industry (processors) to the producers. This suggests that generic advertising by dairy farmers that is not firm specific can be successful as
a rent-seeking vehicle. Similar investigation of the beef industry produces mixed results. Promotion does increase final and derived demand, but the implications for shifting rents from the final demand market to the beef producer are uncertain. Further investigation of this issue in the beef industry needs to be undertaken.
Impacts
(N/A)
Publications
- Glover, T. F. 1998. Incentives for market pool development. Proceedings of the Conference Strategic Behavior in Markets. Anderson School of Business. pp. 67-74.
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