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Disruptive Trends in Food and Agriculture

In the past couple weeks, I've had several opportunities to engage with some forward looking farmers and agribusiness executives, and a common theme seems to have emerged around many of the conversations: what are the issues or food and agricultural technologies on the horizon that could be potentially disruptive for the current incumbents?  

1) Block chain technology.  This isn't bitcoin, but rather the underlying technology that facilitates bitcoin trades, which could be applied to many other industries.  This Reuters article from earlier in the week, for example, indicates, "A cargo of U.S. soybeans shipped to China has become the first fully-fledged agricultural trade conducted using blockchain."  The thought is that blockchain technology might prove to be a mechanism that can more rapidly disseminate many types of information about trades (the Reuters article mentions the "sales contract, letter of credit and certificates") more widely and rapidly.  Big players like Walmart and IBM are also talking about using blockchain to improve traceability and food safety.

2) Plant-based and cellular-based protein.  This is a topic I've written about many times in the past (e.g., here or here).  What's changed is the high level of investment flowing into this space, including by companies like Tyson and Cargill.  Moreover, there are now products from companies like Impossible Foods, Beyond Meat, JUST, and others that are actually in the market.  If sales ramp up, what are the impacts on producers of current animal feeds (primarily corn and soy)?  What are the new agricultural inputs for these plant-based meat/egg/dairy alternatives? 

3) CRISPR.  Again, the basic science isn't necessarily new,  but there are new applications coming on board (non-browning apples, hornless Holsteins, etc.) and potential changes in the regulatory landscape that could accelerate (or decelerate) adoption and consumer acceptance.

4) Agricultural analytics.  This includes precision agriculture, sensing, big data, drones, modeling, etc.  Yes, these have been around for a while and there have been many discussions about data ownership and rights, but there is a sense that the data and technology have moved to a point where some adopters may be able to start gaining a competitive advantage. 

5) Online food buying.  Will Amazon do to the food supply chain what they've done in other industries?  Walmart is also making big moves into this space.  What are the implications for traceability, tracking, and vertical market coordination?

6) Trade.  Agricultural trade has a big impact on US agriculture, and it appears there may be changes in trade policy on the horizon. 

What have I missed?

Are Steaks Too Big?

Then answer, according to a paper just published in the journal Food Policy by Josh Maples, Derrell Peel, and me is "yes" - at least for most consumers.  

The issue is that improved genetics and feeding technologies, along with various economic incentives, have led to much larger cattle.  To provide some perspective, USDA data indicate that the average weights of commercially slaughtered cattle hovered around 1,000 lbs from the 1950s and the mid 1970s.  Since that time, however, there has been a fairly steady increase in the size of cattle.  Since 1975, finished cattle weights have increased about 9 lbs/year on average.  In 2016, the average weight was 1,363 lbs.  That's a whopping 366 lbs higher in 2016 than in 1975!

Larger cows mean larger steaks.  On the surface, that seems like a good thing for consumers as it means we have more steaks.  However, most people don't want to eat a 32oz steak.  In fact, most restaurants and grocery stores offer relatively fixed serving sizes for steaks like 12oz or 16oz, for examples.  So, what happens if cattle carcasses have gotten much bigger, and along with it, the muscles that are cut into steaks, but consumers still only want a 16oz steak?  The consequence is that today, steaks are cut thinner.  Thus, the core question is: for a fixed weight, do consumers prefer "traditional" thicker steaks that take up a smaller area or "newer" thinner steaks that take up a larger area?  

To answer this question, we surveyed over 1,000 US consumers and presented them with a series of choices like the following that varied the type of steak, the thickness or the steak, the area of the steak, and price.  Note that one you know the thickness and the area of a steak, the weight is pre-determined.  

 

steakCE.JPG

The findings?

Our results imply that consumers are heterogeneous in preferences for steak size but are generally in unison in their dislike for the thinnest cuts of steaks

About half the consumers preferred steaks with the largest area, but about half preferred steaks with a medium-sized area.  Overall, the results suggest that the roughly 50% of consumers who prefer steaks with larger areas is way more than offset by the near universal dislike of steaks becoming much thinner.   

Here's an excerpt from the conclusion:

The decrease in consumer welfare by moving from a choice set containing small area and thick steaks to a choice set that includes large area and thin steaks implies that the changes in carcass size have led to a decrease in consumer utility from today’s steak choices relative to the steak choices of a few decades ago. The aggregate welfare loss from the increase in carcass weight with respect to ribeye and sirloin steaks is $8.6 billion for the two largest classes. Of course, steaks are only one piece of the carcass, and the increase in carcass size may have increased welfare with respect to other beef cuts. The decrease in welfare due to larger steaks can be offset by increased welfare resulting from the increases in quantity produced of other cuts. Ground beef is a prominent example. Because the form of this product remains generally unchanged as carcass size increases, the increased efficiency (i.e. more meat per animal) has likely led to increases in consumer welfare through lower prices (or smaller increases in prices resulting from the decrease in number of cattle slaughtered). However, steaks represent an important portion of the total carcass value and it is possible that the increasing size of other cuts have also created less desirable end products for consumers. Future research should focus on the impact of increased carcass weights on consumer welfare across multiple cuts. Such studies might find that while welfare losses exist for some cuts, the gains in welfare from other cuts lead to a net increase in consumer welfare due to larger cattle.

Do we produce enough food already?

Earlier this week I had the pleasure of giving the George Morris AgriFood Policy lecture at the University of Guelph.  I primarily focused my talk on the benefits of food and agricultural technologies and the importance of productivity growth for solving our future world food problems.  

At the conclusion of my talk, an audience member played devils advocate asked an important question that deserves more widespread discussion.  In short, the question was something along the lines of the following: don't we produce enough food already?  It is a question reflected in many popular writings.  This headline, for example, is "We Don't Need to Double World Food Production by 2050." Here's Mark Bittman writing in the New York Times: "The world has long produced enough calories . . .".  Here's Bittman again under a headline in the same outlet "Don't Ask How to Feed the 9 Billion" because, in his words, "The solution to malnourishment isn’t to produce more food." 

Here are my main main thoughts on this line of thinking:

1) Even if we produce enough calories today to meet today's population, that doesn't mean we produce enough for tomorrow's population.  Productivity growth is gradual and incremental, and if we found ourselves in a situation of needing more food, the new technologies to produce them cannot be created over night.  This is particularly true of our ability to produce in the future is hampered by climate change.

2) There is no binary category of "enough food."  Greater food production leads to lower food prices and lower food insecurity.  I haven't yet met a food consumer who wouldn't prefer paying lower food prices, holding quality constant. 

3) I may be true in an accounting sense that we produce enough calories today to meet total caloric needs.  But accounting isn't economics, and we need to consider the incentives of the system that produces the sufficient calories today relative to an alternative system that is either less productive or involves widespread redistribution.  Massive redistribution of food can destroy the incentives of people to produce the food.  One cannot disentangle the fantastic productivity of our current system with the market forces that led to it's origin.  Stated differently, there is no reason to imagine we'd produce the same number of calories if "the system" were changed to one with massive confiscation/redistribution.  Brady Deaton altered me to this fascinating paper in the Journal of Political Economy showing that 75% of the increase in China's agricultural productivity after 1978 was due to strengthening of individual incentives.

4) It's important to look at productivity through the lens of sustainability.  Higher productivity means getting more (or the same) amount of food output using fewer inputs and resources.  Are people really wanting to argue that they'd prefer systems that require more of our natural resources - more land, more water, more fossil fuels? Since when is lower productivity and inefficiency preferred?  Even if "enough" food is produced today, improved productivity means we can keep producing the same quantity but shrink agricultural's footprint on the land, use less water, fewer pesticides, etc.    

5) If the solution to the food problem is simply shipping food from high productivity countries and sending (or stated more pejoratively "dumping") in lower productivity countries with hungrier citizens, this may harm the livelihoods of producers in low productivity countries and reduce their incentives to adopt efficient forms of agriculture.

6) If places like the US decided to forego new food and agricultural technologies and farmers were forced or incentivized to adopt lower productivity systems, what would happen to patterns of global trade and production.  US farmers compete with farmers all over the world to serve US consumers and consumers worldwide.  Not only would such policies likely reduce US exports, it would make imports relatively more attractive.  Is the solution then import tariffs to prop up our lower productivity system?

7) One can go back to writings from over 100 years ago and find claims that the problem of production and scarcity had essentially been solved, and all that was needed was a heavier handed state to ensure "fair" distribution (e.g., see Edward Bellamy's Looking Backward, published in 1888).  Imagine the world we would live in today if that premise were widely accepted back in 1888 - that the state of production was "good enough" and we could stop worrying about growth and progress.  How much growth would we have lost out on had we stopping innovation in 1888?  We'd still be hand-picking cotton, planting with mules, eating much more salt- and vinegar-cured meats, and more.  What will the food and agriculture future look like in 2088, and what will we give up if we stop working on productivity-enhancing technologies today? 

Agricultural Productivity and Food Security

There are two competing narratives about the future of food.  One is that the world population is growing and we need to increase agricultural productivity to "feed the world".  The other argument is that we don't need to produce more food - we already produce enough food to feed the world and our problems are really more about distribution than production.  Folks in the later camp often advocate for lower-productivity forms of agriculture that they perceive to have health or environmental benefits.  Like most arguments, there are elements of truth to both sides.  

As a proponent of improved agricultural productivity (which, I've argued is the key metric to improved sustainability), it bears asking: if a country's agriculture is more productive are it's people better fed?  

To delve into this question, I combined two data sets.  The first is a measure of a country's agricultural productivity from the World Bank in the year 2015.  In particular, they calculate for a large number of countries, the agricultural value added per worker.  In their words:

Agriculture value added per worker is a measure of agricultural productivity. Value added in agriculture measures the output of the agricultural sector (ISIC divisions 1-5) less the value of intermediate inputs. Agriculture comprises value added from forestry, hunting, and fishing as well as cultivation of crops and livestock production. Data are in constant 2010 U.S. dollars.

By this measure, the most productive countries are Slovenia, Singapore, Norway, France, Lebanon, Canada, New Zealand, Finland, and the United States, each of which produced more than $80,000 in agricultural value per worker in 2015 (measured in 2010 dollars).  Places like Malawi, Congo, Mozambique, Gambia, and Madagascar had some of the lowest productivity, with agricultural value added at around $400/worker or less.

Secondly, I collected data from the Global Food Security Index, a project ran by The Economist and supported by DuPont.  In their words:

The Global Food Security Index considers the core issues of affordability, availability, and quality across a set of 113 countries. The index is a dynamic quantitative and qualitative benchmarking model, constructed from 28 unique indicators, that measures these drivers of food security across both developing and developed countries.

This index is the first to examine food security comprehensively across the three internationally established dimensions. Moreover, the study looks beyond hunger to the underlying factors affecting food insecurity. This year the GFSI includes an adjustment factor on natural resources and resilience. This new category assesses a country’s exposure to the impacts of a changing climate; its susceptibility to natural resource risks; and how the country is adapting to these risks.

From this project, I pulled each country's overall food insecurity score (calculated in September 2017), which took on the values of around 30 for countries like the Congo, Madagascar, Chad, and Malawi, and was above 80 for countries like the U.S., the U.K., Ireland, and France.  Although they call this a measure of food insecurity, a higher score actually means a country is more food secure.   

So, what did I find?

food security by value added.JPG

There is a strong positive relationship between a country's agricultural productivity and how well it's people are fed and how food secure they are.  Fitting a logarithmic relationship between the two variables suggests that 82% of the variation in the food security scores across countries is explained by differences in agricultural productivity.  

Now, there are a lot of other things going on here as agricultural productivity is likely correlated with and affected by other factors affecting a country's general productivity and development, but the above figure might give pause to those arguing for lower productivity forms of agriculture. 

At the top end, the curve suggests one can sacrifice some productivity with only a small reduction in food security (going from $80,000/worker to $40,000/worker) reduces the food security scale from about 80 to 75.  But, at the lower end, going from, say, $20,000 in agricultural output per worker to $10,000/worker reduces the food security scale from about 70 to 60, and reducing productivity another $10,000 lowers the food security scale down to the 30s.  

Technology and evolving supply chains in the beef and pork industries

That's the title of a new article in Food Policy written by Josh Maples, Darrell Peel, and me.  The paper will ultimately be part of a special issue on technology and supply chains. 

Here is part of the lead in.

The structural shifts in the beef and pork industries have occurred alongside (and perhaps because of) technological innovation and its effect on the flow of these meats through their respective supply chains. Technology innovations have been a major factor in the changing economics of the beef and pork industries. Improved nutrition, growth promotion technologies, better genetics, and economic conditions have all played a role in livestock becoming more efficient (Lusk, 2013). The values of improved technologies between 1977 and 2012 in the beef and pork sectors have been estimated at $11 billion annually and $7.6 billion annually, respectively (Lusk, 2013).

We discuss the nature and causes of different market structure in the beef and pork industries.

Even with the presence of marketing agreements, the beef industry is easily the least vertically integrated of the big three protein industries (Ward, 1997). The key reasons for this revolve around the aforementioned asset specificity as well as the biological makeup of cattle. There is a greater incentive to vertically integrate or engage in contracting in livestock industries in which genetic changes can be made more rapidly (Ward, 1997). The biological production cycle is about two years for cattle, which is twice as long as that of hogs and the genetic base of cattle is relatively diverse and is not narrowing (Ward, 1997). Alternatively, market coordination has allowed the pork industry genetic base to narrow toward the most efficient hogs for production. The number of hogs marketed today is 29 percent greater than in 1959 from a breeding stock that is 39 percent smaller (Boyd and Cady, 2012). Geographical concentration also plays an important role. During the cow-calf stage, cattle are scattered throughout the U.S. due to the required land and forage needed while hog production is centered in the Midwest (and more recently the Southeast) near the heaviest corn-producing states. These factors create significant barriers to integration in the beef industry.

And, we discuss the impacts of various technologies on the industries.  Here's a segment on effects of pharmaceutical innovations in the cattle industry.

Vaccinations, parasite control, ionophores, antibiotics, growth promotant implants (often referred to as growth-promoting hormones), and beta-agonists have been the most widely-used of these innovations (Arita et al., 2014 ; APHIS, 2013). The productivity and economic impacts of these technologies are large. Lawrence and Ibarburu (2007) estimated that the cumulative direct cost savings of the technologies was over $360 per head for cattle over the lifetime of an animal while Capper and Hayes (2012) estimated that the increased cost of U.S. beef production without growth enhancing technologies would be the equivalent of an 8.2 percent tax on beef. Elam and Preston (2004) discussed each of these technologies at length in their summary of the technological impact in the beef industry. They found that growth implants increase rate of gain by 15–20 percent and improve feed efficiency 8–12 percent. Growth-promoting hormone implants are believed to be used on approximately 90 percent of cattle in U.S. feedlots (Johnson, 2015). Elam and Preston (2004) also found ionophores increase average daily gain by 1–6 percent and improve feed efficiency by 6–8 percent. Lawrence and Ibarburu (2007) used a meta-analysis approach to find estimates for the farm level economic value of these five technologies in the beef industry. They estimated that beta agonists improve feedlot average daily gain by 14 percent and that the combination of implants, ionophores, antibiotics and beta-agonists account for a 37 percent increase in average daily gain in feedlots. These increases in feed and gain efficiency have direct effects on the profitability per animal. Lawrence and Ibarburu (2007) estimated that sub-therapeutic antibiotics impact cattle profitability by $5.86 per head, ionophores have an $11–$13 impact, and the use beta-agonists impacts per head profitability by $13.02 per head. The use of growth promoting implants has the largest impact on cattle profitability at between $68 and $77 per head ( Lawrence and Ibarburu, 2007; Wileman et al., 2009).