Glossary
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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.