Concentration: A measure of the relative size of an industry's largest firms. There are many specific concentration measures. The most common measure is the four-firm concentration ratio (CR4), which measures the combined share of industry sales held by the four largest firms in an industry. Another commonly used measure is the Herfindahl-Hirschman Index, which is the sum of the squared market shares of the firms in a market. In many food and agricultural contexts, where buyer concentration is of concern, concentration may focus on purchases of an agricultural input, such as cattle or corn. Increases in concentration generally reflect declines in the number of competing firms in a market.
Consolidation: The process by which production is organized into fewer but larger plants or farms. For example, in 1987, 243,000 U.S. farms reported inventories of hogs, and the total onfarm inventory in the week of the survey was just over 52 million hogs. Ten years later, the onfarm hog inventory reached over 61 million hogs but on only 110,000 farms. As farm numbers fell, average sizes rose. Whereas concentration focuses on the largest firms and their size among competing firms, consolidation focuses on the size of firms and plants.
Economic performance: The success of a market in producing benefits for society through product innovation and efficiency in the use of resources. In turn, efficiency of resource use includes the relationship between prices and costs, the degree to which products are produced without wasted resources, and the response of the industry to changing consumer demands.
Economies of scale: A situation in which average (per unit) cost falls as output increases; conversely, diseconomies of scale result if average cost increases as output increases. Scale economies can occur at the level of individual plants or farms, in which case they generally reflect elements of the production process within a plant or firm. Scale economies at the level of a firm may also reflect elements of marketing and distribution costs. Scale economies and diseconomies are sometimes further distinguished as technological, reflecting changes in input use as output expands, or pecuniary, reflecting changes in prices paid for inputs as output expands.
Economies of scope: A situation in which it is less costly for one firm to produce two separate products than for two specialized firms to produce the products separately.
Efficient Foodservice Response (EFR): An initiative to promote cooperative relationships between foodservice manufacturers, distributors, and retailers. The goals of EFR include helping companies to cost effectively respond to consumer demand.
eFS Network: An electronic supply chain network for the foodservice industry, as proposed by leading foodservice companies. Its purpose is to allow firms to automate order processing and facilitate exchanging and validating purchase orders, shipping data, payment information, and other information.
Entry barriers: Factors that limit the flow of new entrants into profitable markets. One example of a barrier may be direct government restrictions on entry. A second example would be large economies of scale in relation to the size of a market so that an entrant would need to enter at a large size and with a consequent large addition to industry output. In that case, a potential entrant might forego entry into a market in which incumbents are making large profits because the entry itself would substantially drive prices down and cause losses for the entrant. A third example would be lack of access of potential entrants to key raw materials or production technology. A fourth example would be slow response of buyers to lower prices or improved quality of a product.
Farm share: The percentage of the price of food that is explained by what farmers earn for the agricultural commodities needed to produce the food items. Estimates of farm share shed light on marketing costs but do not measure farm income or profitability.
Industrial organization: The number, size, and economic power of firms in an industry, the methods that they use to coordinate the production and exchange of goods and services, and the factors that influence the ways that they compete with one another in markets. The economic performance of food and agricultural industries is closely related to, and often determined by, the industries' industrial organization.
Market power: A firm's strength in its product market to the extent that it can profitably raise prices above competitive levels. Conversely, a firm has market power in an input market to the extent that it can profitably reduce prices below competitive levels. Generally, firms are more likely to possess market power in markets with high concentration and entry barriers.
Merger: A transaction in which the assets of two or more firms are combined into a new firm. Mergers can be a means to industry consolidation. Conversely, divestitures are transactions in which some assets of a firm are split off to create a new firm or are sold to another existing firm.
Price spread: The difference between two prices of a commodity at different stages of its supply chain. For example, the farm-to-retail price spread is the difference between the price paid by consumers for a food item at retail and the amount of money received by farmers for the commodities used to produce that same food item. Estimates of price spreads shed light on value added to farm product, and the value consumers place on these contributions, but do not measure farm income or profitability.
Spot markets: Traditional method of resource transfer in agricultural industries, whereby a firm remains uncommitted to a specific market outlet until the production process has been completed. Prices serve as the coordinating mechanism, generating signals for adjusting quantity and quality of product. Also referred to as open market exchange.
Structural change: Broad and long-term changes in key industry characteristics, frequently including consolidation and changes in concentration, methods of vertical coordination, and the mix of products and services offered by firms in an industry.
Supply chain (value chain): The network of firms that bring products to market, from companies that produce raw materials to retailers and others that deliver finished products to consumers. Economic value is added through the coordinated management of the flow of physical goods and associated information at each stage of the chain.
UCCNet: A universal foundation for industry standards-based electronic commerce. It provides product registry services that enable the synchronization of item and location information among trading partners and trade exchanges, and facilitates collaborative trading relationships based on industry standards and synchronized compliant data.
Value added: In economic statistics, the difference between the value of shipments (net selling value at the plant) and the cost of materials, supplies, containers, fuel, purchased electricity, and contract work. Major components of value added include employee compensation, capital costs, and profits. In agribusiness parlance, value added often refers to activities that involve further processing or more timely distribution of a product (and hence "add value").
Vertical coordination: A general term that refers to the methods by which goods and services may be exchanged between different stages of production, as among farmers, agricultural wholesalers, processors, and retailers. Broadly, exchange may be coordinated through spot markets, where many buyers and sellers interact on a frequent basis and establish daily cash prices that direct products among different buyers; contracts, in which specific buyers and sellers reach more formal and longer term agreements that specify product characteristics, terms and duration of exchange, and product volumes; or vertical integration, in which units at different stages of production are owned by the same firm and product flows are coordinated through administrative means.
Vertical integration: Method of vertical coordination representing the greatest degree of control that a firm can gain over another stage of production. Coordination of two or more stages occurs under common ownership via management directive.