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Food Manufacturing Productivity and Its Economic Implications
Kuo S. Huang
Technical Bulletin No. (TB1905), November 2003
The food processing and beverage industry accounts for about
one-sixth of the U.S. manufacturing sector's activity and has
contributed significantly to the Nation's economic growth. This
important sector is materials-intensive, with raw and semi-processed
agricultural products and packaging materials accounting for
60 percent or more of the value of output. Measuring productivity—how
effectively inputs (materials, labor, capital, and energy) are
turned into output (food products)—provides a good indication
of the economic efficiency of the food manufacturing sector.
Productivity measures capture the effects of more efficient
techniques, technologies, or equipment on the manufacturing
process, such as a labor-saving technology that allows a food
company to make more corn chips per shift with fewer employees.
Food Manufacturing Productivity and Its Economic Implications,
a new study from the USDA's Economic Research Service (ERS),
examines productivity trends in the food manufacturing sector
and the relationship between inputs and outputs.
What Is the Issue?
Productivity in U.S. food manufacturing has been growing slower
than productivity in U.S. manufacturing overall. Between 1975
and 1997, productivity growth for U.S. food manufacturers averaged
0.19 percent per year, versus 1.25 percent for all U.S. manufacturers.
Identifying trends in productivity, and understanding the reasons
for these trends, provides insight into the overall health of
the food manufacturing sector, and the Nation's economy as a
whole. Often, increases in productivity result from investments
in research and development (R&D) into new production methods
that lead to improved efficiencies.
How Was the Study Conducted?
Most agricultural productivity studies in the United States
are focused at the farm level. Considerably less attention has
been devoted to research on productivity beyond the farmgate,
such as food manufacturing. Food Manufacturing Productivity
and Its Economic Implications attempts to close this research
gap by measuring the productivity indexes of both gross and
net outputs in food manufacturing, realizing that food manufacturing
is material input-intensive in relation to other industries.
The producer price of processed foods deflated by the consumer
price index declined an average 2.13-percent per year over the
period 1975-97. This study looks at whether food manufacturing
productivity has influenced this trend. This study also compares
productivity growth across types of food manufacturing, including
meats, dairy products, preserved fruits and vegetables, grain
mill products, bakery products, sugar and confections, fats
and oils, beverages, and miscellaneous foods.
What Did the Study Find?
Between 1975 and 1997, productivity growth for U.S. food manufacturers
averaged 0.19 percent per year, versus 1.25 percent for all
U.S. manufacturers. Food manufacturing industries ranged in
annual productivity growth from -0.42 percent to 1.12 percent.
In general, less processed food industries like meatpacking
and fluid milk showed little productivity growth. These industries
use relatively expensive raw materials to make highly standardized
products. On the other hand, the beverage and bakery industries—which
rely more on labor, elaborate packaging, and sophisticated extrusion
technologies—had productivity gains of around 1 percent
each year.
Labor's not to blame: output per labor hour in food manufacturing
increased steadily over the 22-year period. Food manufacturing's
sluggish productivity growth may be due to modest expenditures
in research and development (R&D) of late. According to
ERS data, R&D spending by food manufacturers grew an average
of 2.22 percent per year (adjusted for inflation) during 1975-97.
Over the same period, the National Science Foundation estimates
that private R&D expenditures by all U.S. manufacturing
companies grew 5.78 percent yearly.
The efficiencies associated with higher productivity often
lead to lower prices or smaller price increases. Given the findings
of this study, one might expect to find prices increasing in
the food manufacturing industry. In fact, inflation-adjusted
wholesale prices for processed foods declined an average of
2.13 percent per year over 1975-97. Given this industry's low
productivity growth and its materials-intensive nature, these
lower prices more likely resulted from a decrease in the prices
of raw agricultural products (3 percent yearly during 1975-97).
This study also found that a 10-percent increase in both capital
and labor inputs would increase the food manufacturing sector's
net output by $4.3 billion. In addition, a 10-percent increase
in capital input alone would increase the sector's capital intensity,
and consequently its labor productivity (net output per unit
of labor), by $1.43 per worker-hour. A 10-percent increase in
labor input alone would reduce the sector's capital intensity
and reduce its labor productivity by $1.58 per worker-hour.
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