Significant changes are occurring in the relationships among the stages of the food and fiber systems from input supply to retail. Changing end‐use markets and technology are primary drivers of what is often characterized as the industrialization of agriculture. The fundamental research issue is what structural changes and realignments will occur in the agricultural production and distribution system to efficiently and effectively supply various end‐use markets, and how these changes, combined with the increasing role of knowledge and information in improving physical and financial performance of the system, will affect the relative efficiency of traditional impersonal markets compared with personal negotiation in coordinating the production and distribution chain. Analysis is based on observation of trends in the food sector and the integration of world markets for agricultural products. Deductive reasoning is used to infer changes in agricultural business practices needed to accommodate consumer demands in a worldwide market. The industrialization of agriculture will result in a significantly different industry—one characterized by a manufacturing approach to creating specific products for unique end uses, and negotiated coordination of the stages of the production and distribution chain from genetics to final consumer. The manufacturing mentality will emphasize intensive scheduling and use of resources; alliances with others to reduce costs, lower risk, and capture value; and total systems rather than stage optimization to increase efficiency and reduce losses. Negotiated coordination in the form of contract production, vertical coordination, and strategic alliances will replace much of the impersonal open markets coordination that has dominated commodity markets in the past. Information will be a major driver and determinant of the form of coordination as well as who has power in the food production and distribution system. Research Question Significant changes are occurring in the relationships among the stages of the food and fiber systems from input supply to retail. Changing end‐use markets and technology are primary drivers of what is often characterized as the industrialization of agriculture. The fundamental research issue is what structural changes and realignments will occur in the agricultural production and distribution system to efficiently and effectively supply various end‐use markets, and how these changes, combined with the increasing role of knowledge and information in improving physical and financial performances of the system, will affect the relative efficiency of traditional impersonal markets compared with personal negotiation in coordinating the production and distribution chain. Literature Summary Urban has popularized the recent transformation of agriculture from an industry that raises commodities to one that manufactures final consumer goods as the industrialization of agriculture. Barkema and Cook have described the specific implications of this process for the pork sector. Boehlje and Schrader have commented specifically on the reasons for and implications of the replacement of open spot market coordination of the stages in the agricultural production and distribution chain with negotiated coordination through contracts or ownership. Sporleader, Martin et al., and King have discussed in more detail the potential use of strategic management, transactions costs, and the value of information concepts in understanding the difference in various coordination systems. Barry et al. have identified the need for quantitative research on the issues and consequences of industrialization. Study Description Specific end use markets for agricultural products including feed, food, and industrial products are identified, and supply strategies for blending and processing generic commodities to produce raw materials that possess specific attributes needed in final products are discussed. Then various grower or producer segments including traditional growers and manager dealmakers are described. Next, two of the fundamental phenomena of industrialized agriculture‐a manufacturing mentality and negotiated coordination of the stages in the production and distribution channel will be reviewed. The concept of system power and control and the critical role of information in improving efficiency and increasing competitive advantage and market power is also discussed. The study concludes that the industrialization of agriculture will result in a significantly different industry—one characterized by a manufacturing approach to creating specific products for unique end‐uses, and negotiated coordination of the stages of the production and distribution chain. The manufacturing mentality will emphasize intensive scheduling and use of resources; alliances to reduce costs, lower risk, and capture value; and total systems rather than stage optimization. Negotiated coordination in the form of contract production, vertical coordination, and strategic alliances will replace the impersonal open markets coordination that has dominated commodity markets in the past. Information will be a major driver and determinant of the form of coordination as well as who has power in the food production and distribution system. Applied Questions What are the expected end‐use markets and supply strategies for the products of agricultural production? End‐use markets for agricultural production include feed, food, and industrial uses of products ranging from generic commodities like yellow dent corn to biological raw materials that have specific attributes such as soybeans with particular protein and amino acid composition and processing qualities to be used in tofu production. Supply strategies include: (i) blending commodities from different sources into a specific product that meets specified commodity standards; (ii) segment, select, and sort commodities from various sources to target products with different characteristics to specific end‐uses; (iii) acquire only raw materials that possess specific attributes through contractual or other arrangements, including specification of production practices that are essential or have high value in the final end‐use; and (iv) separate generic commodities into components and then use processing technology to manufacture the attributes needed by the end‐use markets. What grower segments will develop in the future, and what will be the characteristics of these grower segments? Grower segments will include traditional growers and industrial growers of three types—large scale commodity producers, contract growers, and managers or dealmakers who operate with a manufacturing mentality. The manufacturing mentality is characterized by systemization and routinization, specialization, scheduling, input packages, systems or process flow, geographic separation of production stages, stage coordination through negotiation, partnering and alliances to reduce investment and leverage volume, a purchasing agent approach to buying inputs, and systems cost control. What is the role of knowledge and information in this industrialized agriculture? Information will be a major driver of the form of coordination as well as who has power in the food system. Improved flow of information from consumer to raw material supplier with a contract or ownership coordination approach results in significant advantages for this form of coordination as consumers demand attributes in their food that can be most effectively acquired as characteristics of the raw materials. For commodities without these specific attributes, impersonal, open markets are effective in transferring the information needed for efficient system coordination. As end users become increasingly demanding, contract or ownership coordinated production and distribution systems will have a comparative advantage and dominate market coordination of independent firms. In a negotiation based (contract or ownership) coordinated system, information and knowledge will be the basis for system power and control, and allow those firms or stages with the most unique information and knowledge to extract larger relative rewards and transfer more risk to other participants in the system. Recommendation Significant changes in the agricultural production and distribution sector will dramatically affect the management of production and distribution firms from sourcing of inputs through operations, finance, and marketing to end users. These changes have profound implications for the skills and knowledge needed to be successful. Without a doubt, technical knowledge and skills will be essential with the growing sophistication of the production process as well as the variety and demands of end‐use markets. But technical skills and knowledge are not expected to be the core source of strategic competitive advantage. The skills needed to be successful in the future are more likely negotiation ability, creativity and innovation, vision and strategic thinking, evaluation and acceptance of new technologies and institutional arrangements, recognition of segments, niches, and diversity. These critical skills are more difficult to develop, but those who do so are expected to have a sustainable strategic advantage in the changing world of agriculture.
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Boehlje et al. (1996) studied this question.