What is in this article?:
- Crop agriculture is clearly no stranger to change. This article examines the key forces affecting change in U.S. crop production.
- Concentration has been on a steady rise for several decades.
- Productivity increases have been significant.
- Producers are adopting larger pieces of equipment and more sophisticated technologies.
Agricultural production is characterized by a high degree of competitive rivalry. Efforts to develop branded or specialized products are quickly and effectively copied, and meaningful differentiation is difficult to achieve. The competitive rivalry plays out most clearly in bidding for productive resources. Here, producers typically bid most of their long-term potential profitability into the price of fixed assets such as farmland. As a result, rivalry has a very detrimental impact on individual profitability in the sector. However, it also encourages firms to be extremely efficient and productive as cost competition is the most likely source of competitive advantage. Rivalry has also clearly manifested itself on the global stage as South American agricultural production has rapidly increased to the point where Brazil and Argentina are key world soybean producers. Further, continuing genetic improvements, such as drought resistance, are allowing production of crops in regions once not suitable.
There are important substitution considerations for grain/oilseed producers. Movements away from or towards animal proteins in the diet can have a significant impact on grain consumption. Grain products also compete in a variety of industrial based markets, such as energy and bioplastics where they serve as a substitute for petroleum-based products. These markets are quite large, but are also highly competitive. The large quantities of these available substitutes will limit producer profitability.
Barriers to Entry
There are few meaningful barriers to entry in production agriculture. While the capital requirements can be substantial to a young person trying to begin a career in farming, these requirements are not prohibitive for most businesses considering large-scale entry. For larger investors and pension funds considering entry into agriculture, the barrier in the United States is typically finding enough land in one geographic area to make a significant investment. While still limited in number, there are more farm management companies pursuing large scale farmland investments operated through both internal and external management arrangements. Funding for these enterprises increasingly comes from equity markets. The relative ease with which parties with access to capital can enter crop production will limit the upside profitability potential for current producers.