Agriculture is the source of food, and some raw materials
Also forestry is similar
Sometimes fishing
Natural, biological resources
A primary (extractive) industry
Economically, farming is different from the others:
Investment in machines, training, and "abstinence"
Leave land fallow, use less profitable crops
Artificial fertilizers, pesticides ( & other pest control)
Like a service or process industry?
Because of labor intensity, many people are involved
Because nature and industry are mixed,
cultural factors become important
Agriculture is labor-intensive
Agricultural labor force is 1% (U.S.), 2.5% (Japan),
10% (France), more in LDCs
Labor force is most rural -- social services are hard to deliver
Agriculture is risky
Output is hard to plan
Decide how much area of land, seed, etc. but...
Weather and pests determine actual output
"Market-wide" conditions: good weather -> supply up,
price down
Agricultural prices are very volatile because both supply
and demand are very inelastic: large price adjustments
are needed to bring small supply or demand changes into
equlibrium
Potential for losing a large fraction of output is high
(loss/firm size ratio is high) -- local weather, local outbreak
of disease
Dealing with risk
Derivative markets: rice futures in Osaka in 1600
Pay a fee now to arrange a contract to buy or sell at a fixed
date in the future at a price decided now
Continuous trading -- allows hedging based on current future
price (low) vs expected spot price (high)
Insurance -- doesn't really exist (risks are too high and
irregular -- premia would be large compared to payout)
Price volatility
Asymmetric risk: bad weather is self-healing, because price
will rise to compensate
If there is overproduction, price falls dramatically, but there
is no way to compensate
Agriculture is often exempted from antitrust (antimonopoly) laws
Farmers are allowed to join in marketing cooperatives which
set price (and may restrict quantity per farmer)
Not very effective: quantity restraints by government -- focus
on area planted, and very good weather brings low price as usual
Character of Japanese Agriculture
Cultivation of rice in "paddies" rather than dry fields
Water management is central
Huge investment in waterways (irrigation) and in the paddies
Changes social organization
In Western tradition, farmers are self-reliant
In rice cultivation, waterways are a social investment
More village-oriented, family farm emphasis vs Western (US)
corporate farms (smaller scale)
More reliance on direct support from the government
While high quality produce from small-scale family farms are
demanded, this becomes a specialty market
Scale increases, farmers exit -- but more often, don't enter
Aging labor force on farms (rural areas in general)
Competition increases, lowering margins
Especially puts pressure on small-scale, family farms
Exit is hard, labor is specialized and unskilled for the rest of
the economy
Outside opportunities for inefficient farmers are low, little
exit, means average efficiency is low, wages tend to be low:
can't attract more efficient workers
Modernization of farm management
Can't solve the problem of specialized workers without good
outside opportunities
Hidden unemployment: agriculture is very seasonal, it's hard
to tell whether someone is "unemployed" or "employed but
waiting for work"
Quality/safety management
Traditional farming depends on the expertise of the experienced
farmer to care for quality; safety is generally handled by the
government but can fail dramatically (Meat Hope)
Collecting statistics on quality and price movements
What are consumers willing to pay for quality?
Measuring quality: mixtures, for example
Government standards for reporting content
Internal procedures
Management to have better records of problems
Regular reports, check for trends, unusual levels
If there is a problem, can defend that "our procedures are
good, but nobody could find this problem"
Overseas markets
Everybody is globalizing; farms should too
But national security and food self-sufficiency
Exports (and imports) of specialty food items (even rice)
Marketing cooperatives and other expertise
Cooperatives for marketing (quantity restriction/planning)