Putting Globalization and Concentration in the Agri-food Sector into Context



Current Agriculture, Food & Resource Issues

D. Sparling and E. van Duren


Products and Production

Several production and product related factors affect globalization and concentration:
economies of scale and economies of scope, and acquisition of new products and
intellectual property.

Economies of Scale. This factor has been frequently cited as the major incentive for
M&As in the agri-food sector, particularly in primary processing. Economies of scale are
generally limited by technological factors, but those limits continue to increase with
technological advances (MacDonald et al., 2000; Ollinger, MacDonald and Madison,
2000). In red meats in particular, economies of scale, combined with shrinking markets
and increased price competition, have resulted in high degrees of concentration at the
packing level. The market share of the top four U.S. beef packing firms (CR4) is roughly
80 percent, more than double the CR4 in 1980 (MacDonald et al., 2000).

Economies of Scope. Synergies, real or perceived, among product lines have been a
factor in numerous acquisitions. The concept of convergence, where the distinction
between business lines blurs, is taking on increasing relevance, particularly in the area of
biotechnology and related inputs. Numerous acquisitions may be attributed to the desire to
match chemical and seed sales, or agricultural and pharmaceutical biotechnology
competencies, or production and distribution activities (Hayenga, 1998). Convergence is
also seen at the retail level where firms are expanding the range of products and activities.

Scope and Scale Relationships. The relationship between economies of scale and
scope will need to be rethought, as the basis for global competition moves away from
markets and towards core competencies and products. While economies of scale enable
low-cost producers to win in their marketplaces, if they are not based on core
competencies that can be used to shift to other products, they may become liabilities. Red
meat producers would be well advised to think about this future due to developed-
economy demographics and social trends.

Acquisition of New Products and Intellectual Property. For many firms, the need
for new products exceeds their ability to develop those products internally. This is
particularly true in the area of agricultural biotechnology, where patents generally protect
new products. During the mid to late 1990s, firms seeking to acquire knowledge and
intellectual property more rapidly than they could develop them internally completed a
multitude of acquisitions and alliances (Lesser, 1998). This trend may also become more
pronounced in the agri-food sector as internationalization of localized cuisine creates
further incentives for global food companies to acquire an international array of products.
Nestlé has been building its business on this premise for over a century.

Financial Market Influences

Senior managers may be driven by financial market expectations for growth. For
companies pursuing growth strategies, acquisitions are often the only way to meet those
expectations. Markets fund the growth, but will only continue to do so if management
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