5
Drivers of Structural Change, Changes in Knowledge and Information, Implications for Policy

Innovation results in change, and change almost invariably has a structural component. Because research and development (R&D) and technology transfer are important components and sources of innovation, it is not surprising that the activities and policies of the public and private sectors have structural impacts; the summaries of research in Chapters 3 and 4 clearly document many of them. This chapter first places R&D and technology transfer in context as drivers or determinants of structural change in the agricultural sector. The committee acknowledges that a discussion of drivers other than public-sector R&D is tangentially related to the charge of this study, but this context is critical to understanding the relative magnitude of impact of different drivers on structural change. Second, we briefly identify the characteristics of the agricultural sector of the future that are most likely to result from those fundamental drivers of change. Then, our discussion turns to important structural implications of the changing role of knowledge, information, and R&D that should be considered in the design of public-sector R&D and technology transfer policy. Finally, a set of research opportunities based on these arguments will be identified.

DRIVERS OF STRUCTURAL CHANGE

The U.S. food production and distribution industry is in the midst of major structural changes—changes in product characteristics, in worldwide production



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture 5 Drivers of Structural Change, Changes in Knowledge and Information, Implications for Policy Innovation results in change, and change almost invariably has a structural component. Because research and development (R&D) and technology transfer are important components and sources of innovation, it is not surprising that the activities and policies of the public and private sectors have structural impacts; the summaries of research in Chapters 3 and 4 clearly document many of them. This chapter first places R&D and technology transfer in context as drivers or determinants of structural change in the agricultural sector. The committee acknowledges that a discussion of drivers other than public-sector R&D is tangentially related to the charge of this study, but this context is critical to understanding the relative magnitude of impact of different drivers on structural change. Second, we briefly identify the characteristics of the agricultural sector of the future that are most likely to result from those fundamental drivers of change. Then, our discussion turns to important structural implications of the changing role of knowledge, information, and R&D that should be considered in the design of public-sector R&D and technology transfer policy. Finally, a set of research opportunities based on these arguments will be identified. DRIVERS OF STRUCTURAL CHANGE The U.S. food production and distribution industry is in the midst of major structural changes—changes in product characteristics, in worldwide production

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture and consumption, in technology, in size of operation, and in geographic location. Productivity technology and public-sector R&D investments have been and will continue to be major determinants of comparative advantage and competitive position, including such considerations as public-sector support for research and technology transfer, the commercialization of new scientific discoveries, global trends and investments in new technology, and the status of intellectual property rights. However, R&D investments, technology, and innovation are only one component of many forces that drive change in agriculture. Other drivers contribute as well: pressures from consumers and end-use markets, changing demographics and work habits of U.S. families, changing attitudes about food safety and quality, increasing competition from global market participants, economies of size and scope in production and distribution, the inelastic characteristic of the demand for food1, risk mitigation and management strategies of buyers and suppliers, strategic positioning, market power, and control strategies of individual businesses, and private sector R&D and technology transfer policies. Finally, the availability and cost of resources, including capital and finance, personnel and human resources, and information and industry infrastructure in general will significantly affect the future structure of the farming sector. Relative Price of Labor and Capital A critical interaction between resources and technology has occurred in the United States and in other places around the world. In the past, production agriculture in America was driven by technology to save physical labor. The cotton gin, steel plow, reaper, tractor, and combine harvester all conserved physical labor and increased efficiency. More recently, electronic and information technologies have been used to alleviate the scarcity of managerial labor and expand the size of business one manager can supervise. The implications of technology and innovation for changes in the agricultural industry cannot be well understood without an appreciation for the concept of induced innovation (Hayami and Ruttan, 1985). According to the induced-innovation concept, a fundamental driver of R&D investments is the relative price of a resource—specifically capital or labor. R&D investments are 1   The traditional literature on agricultural policy (Cochrane, 1993; Gardner, 1992; Schultz, 1964) argues that consolidation in agriculture results from a high rate of technologic change and low price and income elasticities of demand (where reduction in price or increase in income do not significantly alter quantity consumed). Technologic changes tend to increase supply and with low elasticities, the increase in supply results in significant reduction in farm prices. Thus technologic change and price elasticity have contributed to the falling relative prices of agricultural products and some of the resulting policy and structural issues.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture focused on technology and innovation that will reduce the cost or increase the efficiency of the most expensive resources: Those resources that were more expensive before the innovation become more productive and less expensive. They are consequently used more in the production process. The essence of the argument is that resource prices and market forces encourage or induce R&D investments that result in changes in relative resource productivity, and when these changes result in substituting the less expensive resource for the more expensive resource, structural change occurs. Hayami and Ruttan (1985) focused their analysis of induced innovation on the R&D investments in labor-saving, capital-using technology in the United States and contrasted that R&D investment with the labor-increasing, capital-saving investment in Japan. Their work documented that the high opportunity cost of labor relative to capital in the United States encouraged R&D and technology innovation in labor-saving machinery, equipment, and livestock facilities that can be most efficiently implemented by units of larger scale. In contrast, the relatively high price of capital and land relative to labor in Japan encouraged R&D investments that were labor and land intensive and better implemented by small-scale production units. Studies by Kislev and Peterson (1981, 1982, 1996) bear out with the induced-innovation model, indicating that the high cost of labor in U.S. agriculture (in part because of attractive off-farm employment opportunities) has been seen in annual increases of 2–3 percent for labor costs and in the decreasing price of capital. The authors provide evidence that, during the late 1970s and early 1980s, when the price of labor relative to capital declined because of higher fuel costs, average farm size in the United States actually declined somewhat. Those data further support the hypothesis that the rising cost of labor relative to capital was the main cause of increase in farm scale. The logical economic response of a relative price change is to substitute capital for labor, and given the indivisibility of most capital items, it becomes more efficient to use capital-intensive technology on larger scale units. The consequence of this increase in the relative costs of capital and labor is more capital-intensive and larger scale farm units. An additional consequence is the incentive for R&D investments and technology transfer to further increase the efficiency of labor through innovations that increase its productivity—further reinforcing capital-labor substitution and growth in farm size. The technology treadmill identified by Cochrane (1979) also has been important in American agriculture, and it has driven the adoption of much new technology and hence structural change. As new technology is introduced, the first few farmers to adopt the practice gain doubly. They increase the volume of their product and, in addition, gain revenue from market prices that largely depend on the old technology’s production volume. There is a tremendous incentive to be an early adopter. As more and more farmers adopt a practice, supply increases, and prices fall. This forces the remaining farmers to adopt the new technology to increase production to compensate for lower prices. Thus,

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture over time, the market drives farmers to adopt new technology if they wish to stay in farming. Since largest farmers are more likely to support the fixed costs of adoption of new technologies, they are most likely to adopt technologies early. Knowledge and Information: A Changing Role Farmers have long recognized the importance of education as a source of competitive advantage and continuous improvement in business and financial performance. Knowledge and information have always been important, but their relative importance has increased in recent years (Drucker, 1992; Peters, 1992). Whereas the physical resources of land, labor, and capital combined with some knowledge and information were the determinants of financial success in the past, the role of knowledge and information has and will likely become more important in the future for successful farm management. Superior knowledge and information will position farmers to use land, labor, and capital efficiently. The system and mechanism by which farmers obtain new technology and information is changing dramatically. The number of private-sector providers of R&D and information is expanding relative to what is available from the public sector. Information is becoming more detailed with the potential for increased accuracy and resolution. Dissemination technology has reduced the cost of accessing information and will make real-time personalized messages available anytime and anywhere. Knowledge and information are becoming increasingly important drivers of control and structural change in agriculture, and access to information and intellectual property rights is an increasing source of conflict as information increases in value, and that value can be captured by the private sector. Farmers now have access to more information from the private sector (for large-scale or integrated producers, or from internal sources) and less from the public sector. In many cases, providers of key farm inputs, such as veterinary pharmaceuticals and agricultural chemicals, also have become important suppliers of information, leaving the traditional extension service and land grant university-USDA (U.S. Department of Agriculture) complex at a significant disadvantage in providing the latest technology and information. Larger producers rate traditional public-sector information sources, such as county extension agents and university specialists, significantly lower than many other sources of information for production, marketing, or financial decisions (Ortmann et al., 1993). Privatization of information, R&D, and technology transfer often also restricts the access of scientists in the public sector to the latest scientific knowledge and advancements. The public-sector scientist’s ability to test and verify the claims of private-sector providers or to further the scientific base of their own R&D activities is limited. These dramatic changes—

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture both in the importance of information and in who will be its preferred provider—raise questions about the changing role of the public sector. Government Policy and Structure Government policies other than R&D policy can profoundly influence the path of development in any industry. Policy that will shape the U.S. food system includes farm income support and risk mitigation (for example, crop insurance and disaster payment) programs; antitrust rules and the regulation of competition in the food system markets; international trade policy and agreements; public incentives and investments in technology transfer and the creation of knowledge; intellectual property rules and regulations; interest rate and tax policy; and regulation of food safety, the environment, worker safety, the transportation system, resource use, and conservation. Studies of the direct influence of government policies on size and type of farms are limited and out of date. Analysis of tax policy in the 1980s indicated that, in the aggregate, tax burdens for farmers reflected the progressive rate structure of the tax code at that time but that taxes were generally lower and less progressive for farmers than they were for other taxpayers (Sisson, 1982). Specific agricultural industries, including the beef sector and specialty crops (tree crops and other perennials), provided significant tax-sheltering potential that was generally more advantageous to those with higher taxable incomes—whether that income came from agricultural production or from other sources (Carman, 1997; USDA, 1981). The tax deductions associated with capital investment (depreciation of equipment or debt interest) reduced the cost of capital relative to labor, encouraging capital-for-labor substitution and the use of larger production units when increased size enabled farmers to spread out the fixed costs of capital investment. A more recent Economic Research Service (ERS) analysis of the structural effects of Federal tax law reported that recent changes to Federal estate tax provisions will make it easier to pass farms to the next generation by exempting most small family farms from tax payment. The report also notes that the ability to transfer larger farms, combined with preferential treatment for farmland and other business assets, could, however, help to accelerate the trend toward fewer and larger farms (Durst and Monke, 2001). There is disagreement about the structural implications of farm support programs. Using econometric analysis, Tweeten (1993) and Huffman and Evenson (2001) concluded that commodity programs did not affect farm number or farm size significantly in the long term. Other analysts argue that government payments favor larger farmers. A recent General Accounting Office (GAO) review of USDA’s Agricultural Resource Management Study and Program Payments Reporting System found that in recent years, more than 80 percent of farm payments have been made to large- (gross sales of $250,000 or more) and

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture medium-sized farms (gross sales between $50,000 and $250,000), while small farms (gross sales under $50,000) have received less than 20 percent of the payments. Because payments are generally based on volume of production, the average payment of small farms that received payments was much less. The portion of the payments that has gone to large farms has increased and the portion to small farms has decreased during the period from 1996 to 1999 (GAO, 2001). Similarly, an Environmental Working Group analysis of over 30 million subsidy payment records between 1996 and 1998 concluded that the flow of farm subsidies has favored large operations: 10 percent of the recipients collected 61 percent of the payments (Williams-Deny and Cook, 2000). Goetz and Debrtin (in press) argue that in counties where there are already exits from agriculture (which is part of farm consolidation), the amount of farm payments is correlated with the number of exits. In areas where exits have not begun—generally where there is more differentiation—farm payments are inversely correlated with exits from agriculture, suggesting that in these cases, farm payments decrease concentration. Data from ERS show that small farms (less than $250,000 in annual sales) receive 83 percent of the payments from conservation programs (Conservation Reserve Program, Wetlands Reserve Program, and the Environmental Quality Incentive Program; USDA, 1998a). Regulatory policy has had variable distributional and structural effects by region. Analysis of the ban on the use of methyl parathion in some crops suggested significant effects among agricultural producers (Zilberman et al., 1991). Zilberman et al. (1991) studied the effect of banning methyl parathion use in lettuce and found that the overall effect on producers was not as significant as the effect on producers individually. Another study showed that the methyl parathion ban in apples and almonds would reduce consumer welfare because of higher prices but that the overall effect for producers would be relatively insignificant (Lichtenberg et al., 1988). There were, however, drastic differences in the effect of the ban within the producer sector. Although methyl parathion was an effective pesticide, many growers did not use it, and so they gained from the ban. Among pesticide users, in regions where pest control substitutes could be used, the impact of the ban was minimal. However, in two or three regions without pesticide alternatives, the elimination of methyl parathion resulted in a loss. Public-sector R&D policy is not an exclusive driver of structural change in agriculture. Other factors, especially market forces and government policies other than R&D policy, are significant. To the extent that public and private R&D are heavily market driven, they have important structural implications. Private-sector R&D, which has grown in importance relative to public-sector R&D, focuses on value creation and on reducing the expense attributable to the highest cost resources. Larger farms will have more opportunities to capture value and reduce cost. Similarly, market forces that drive public-sector R&D also have structural implications.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture CHANGES IN FARMING Based on the drivers noted in the previous section, production agriculture will continue to face dramatic changes that have implications for the structure of agriculture and for the public agricultural research agenda. Agriculture is increasingly characterized by the changes discussed below (for additional detail, see Boehlje and Schrader, 1996; Boehlje, 1999; Tyner and Boehlje, 1997). All of them merit research. Global Competition Expanded market access is important to the future of global markets and international trade, but international transfer of capital and global access to technology and R&D are likely to be the most important dimension of more open trade. In the past, most private-sector technology transfer and R&D activity has focused on the United States and Western Europe. Today, these are relatively mature markets for R&D in terms of acreage growth and expansion of livestock production capacity. Growth opportunities for agricultural products are likely to be greater in Canada, Mexico, South America, Eastern Europe, and Asia. With the opportunities for global-oriented companies to expand their markets, one would expect substantial expansion in commercial technology transfer and R&D activity specifically focused on geographic regions outside the United States and Western Europe. The long-term consequences will be a narrowing of the gap between the productivity in those parts of the world versus traditionally dominant production regions and an increase in worldwide production capacity. This increased efficiency, productivity, and capacity in other production areas, along with the worldwide sourcing and selling strategies of global food companies, means that the United States and Europe might not be dominant players and that they will face increased competition in world markets. Industrialized Agriculture “Industrialized production” is large-scale production using standardized technology and management linked to the processor by formal or informal arrangements. Size and standardization are important characteristics in lowering production costs and in producing more uniform crop products and animals that fit processor specifications and meet consumers’ food safety concerns and desires for specific product attributes. Smaller operations that are not associated with an industrialized system will have increasing difficulty gaining the economies of size and the access to technology required to be competitive, except perhaps in niche markets. Smaller operations can remain in production for longer periods, however, if they have less debt on facilities and are able to

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture use family labor. Technologic advances, combined with continued pressures to control costs and improve quality, are expected to provide incentives for further industrialization of agriculture. Differentiated Products The transformation of crop and livestock production from commodity to differentiated product industries will be driven by consumer demand for highly differentiated food products, food safety, and trace-back ability for quality assurance; continued advances in technology; and the need to minimize total costs of production, processing, and distribution. Food systems will attempt to differentiate themselves and their products by science or through marketing. Scientific differentiation could include gaining exclusive rights to genetics through patentable biotechnologic discoveries, exclusive technology in processing systems, and superior food safety practices. Marketing differentiation could include branding, advertising, packaging, food safety, product quality, product attributes, bundling with other food products for holistic nutritional packages, and presentation of products in nontraditional ways. Based on analysis of the competitive success in ten leading trading nations, Porter (1998) makes a case for shifting from competitive advantage based on supplying lowest cost products to competitive advantage based on supplying differentiated products to sophisticated buyers. Precision (Information-Intensive) Production Production management is expected to move toward more micromanagement of specific production sites, spaces, and even acres or animals. The shift will be driven by the influx of information about environmental and biologic factors that affect production. The motivation for adopting micromanagement will be to minimize costs and enhance quality. Increased use of monitoring technology, including sensors for individual monitoring and control systems, will greatly expand the amount of information available regarding what affects plant and animal growth and well-being. In addition, greater understanding of how various growth and environmental factors interact to affect biologic performance will be forthcoming. This understanding will then be integrated into management systems that incorporate the optimum combinations and apply them at a micro or localized level.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture Ecologic Agriculture In recent decades there has been an increased awareness of the importance of ecologic agriculture. Proponents argue that agriculture cannot function as an isolated system—one that has no exchange of matter or energy with its environment (Daley, 1996). They argue that agriculture must consider the limits of the natural resources used to produce commodities as well as the limits of the sinks needed to dispose of waste. In contrast to “therapeutic intervention” approaches, including chemical and biotechnologic pest management that lead to new problems because of the evolution of pest resistance, agroecologic approaches involve improving internal relationships in the system—improving predator-prey relationships, for example (Lewis et al., 1997; NRC, 2000b). Some practitioners (notably biointensive integrated pest management operators and organic farmers) have made fundamental shifts in management practice by putting those principles into practice. In particular, they tend to use nutrient cycling instead of nutrient flows, self-regulating pest management systems instead of pesticide applications, and diverse crop-livestock systems instead of monoculture. Some practitioners have developed sophisticated production systems that have significantly reduced their energy input, substituted management skill for purchased input, and reduced their aggregate production costs. Whereas conventional approaches tend to be more capital intensive—they require the annual purchase of external inputs—agroecologic systems can require fewer capital outlays. Ecologic approaches to land management are particularly relevant to the structure of agriculture, given that small farms (farms with less than $250,000 in annual gross sales) collectively hold 72 percent of U.S. farm assets, including 74 percent of land (measured in acres) owned by farms. Small farms thus can play a major role as stewards of natural resources and the environment, conserving collective public goods such as clean air, clean water, and biodiversity (USDA, 1999a). Food Supply Chains Managing and optimizing supply or value chains, from the genome to the consumer, will be increasingly emphasized. This supply chain approach will improve efficiency through better flow scheduling and use of resources; increase producers’ ability to manage and control quality throughout the chain; reduce the food safety risk associated with contamination; and increase the ability of the crop and livestock industries to respond quickly to changes in consumer demand. Food safety is a major driver in the formation of chains. One way to manage risk is to monitor the production and distribution process from genetics to final product. A trace-back system, combined with HACCP (Hazard Analysis and Critical Control Point) quality assurance procedures, can minimize the

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture chance of contamination or quickly and easily identify sources of contamination. Trace-back may also be critical to implement identity-preservation systems and respond to consumers’ concerns about food production processes and product characteristics. A supply chain approach will increase interdependence among the various stages in the food chain; it will encourage strategic alliances, networks, and other linkages to improve logistics, product flow, and information flow. Future competition will not occur in the form of individual firms competing with each other for market share, but in the form of supply chains competing for their share of the consumers’ food expenditures. Increasing Risk Agricultural production has always been risky, but it will be increasingly so in the future. Not only will the traditional variables, of price, weather, and disease, for example, continue to buffet the industry, new sources of risk are likely. Some food distribution channels could require particular quality characteristics that are not available in predictable quantities in open, spot markets. The risk of changing consumer preferences or a food safety scare could be much more difficult and important to manage than price or availability of raw materials. Unintended consequences of transgenic technologies may pose other new sources of risk. Contractual arrangements to obtain raw materials from a qualified supplier reduce price, availability, and contamination risks while ensuring predictable quality in the final product. However, this arrangement can reduce flexibility and introduce relationship risk—the risk that the qualified-supplier arrangement might be terminated. The transformation of a segment of agriculture from a commodity industry to one that produces differentiated products introduces at least three new risks (Boehlje and Ray, 1999). First, differentiated products are positioned to respond to unique market segments that value the differentiated attribute. Assuming an attribute is measurable (which could be a risk in itself because many food attributes, including quality, are difficult to measure), consumers’ and end-users’ attitudes and willingness to pay for some attributes may change over time. For example, consumer attitudes with respect to food additives, biotechnology, and genetically modified organisms do not appear to be stable or predictable across cultures and time. Second, alternative techniques to accomplish product differentiation could change, and the number of producers could increase. Thus, differentiated products are regularly commoditized over time, and initially high margins erode as new competitors appear. The rate of that process is also a source of uncertainty.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture Finally, differentiated products in the food market, particularly branded products, also carry the risk as well as the reward of branding. Brand value can be destroyed quickly by defects or quality lapses. In food product markets, lack of food safety can destroy brand value quickly. Increasing Diversity Production agriculture in the future could be characterized by increasing diversity, which can overlap, but is different from, increasing diversification. Diversification involves expanding the number of activities or enterprises managed and controlled by one company. Diversity arises in the differences among the enterprises that constitute an industry. In fact, agriculture in the future could exhibit more specialization (less diversification) within a business but more diversity among businesses. Agriculture in the past was characterized by typical or representative farms for various geographic regions, crops, or livestock products. Now, however, agriculture is characterized not by similarities among business entities, but by differences among them. Farms now produce corn and soybeans or hogs, whereas in the past one farm would produce all three products. Some farms specialize in breeding, gestation, and farrowing in pork production, and others specialize in finishing, the final feeding phase of pork production. Diversity also increasingly characterizes the products of a segment of agriculture. With increasing diversity in consumer demands and with the opportunity for product differentiation at the production level, many farmers no longer produce commodity crop and livestock products exclusively. For example, some farmers produce high-oil corn, while their neighbors produce white or high-starch corn. Another source of diversity is the commitment to and dependence on farming as a source of family income. Many farm families combine farm employment with jobs in town or nonagricultural, home-based businesses. Farming operations are now more diverse in size. Although large-scale businesses are growing rapidly in some parts of the livestock industries, smaller scale production units continue to be a significant part of agriculture. Smaller scale production frequently targets local customers (such as restaurants and higher income customers) and markets for specialty products, such as for premium hams produced without antibiotics or in free-range conditions. Diverse marketing and financial strategies also characterize those operations, including farmers’ markets, roadside stands, farm-to-chef direct marketing, community-supported agriculture (CSA), and regional food systems, in which local producers and manufacturers provide food for a significant portion of a local population. In Iowa, for example, local producers and manufacturers have potential to provide food for a large portion of a local population. Practical Farmers of Iowa has helped to broker locally produced food for 47 different

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture conference events at Iowa State University and at other locations in Iowa (Practical Farmers of Iowa, 2000). A hospital in Waterloo purchased $6,428 in local produce during the growing-season months—about 20 percent of the total produce it purchased. The hospital also purchased about $37,853 in locally produced meat in 2000. Before 1998, the hospital had purchased no local produce, and before 2000 it had purchased no local meat (Enshayan, 2000). CSA arrangements in Iowa have grown from 2 in 1995 to more than 50 in 2000 (Iowa State University, 2000). Production technology adds an additional dimension of diversity. Some producers depend heavily on purchased inputs; others are more focused on sustainable production systems that recycle resources. Some farmers use highly capital-intensive production systems, whereas others who have more labor than capital find it more profitable to use labor-intensive technology and production systems. Thus there is increasing diversity in production technology, management and business practice, and financing and organization. INFORMATION, INNOVATION, AND THE STRUCTURE OF AGRICULTURE We have briefly reviewed the forces shaping the structure of the agricultural industry, including market forces, government policy, and innovation. We now turn more specifically to the structural implications of the changing role and sources of knowledge, information, and R&D. The discussion focuses on four dimensions or implications: structure and coordination, intellectual property rights and distributional consequences; globalization of information; and access to technology and the potential for disenfranchisement that should be considered in the design of future R&D policy. Structure and Coordination Many forces and drivers contribute to the structural changes in agriculture, but information and knowledge are particularly significant. As in other industries characterized by contractual arrangements, people who have unique and accurate information and knowledge have the power and control in the food production system that provide them capacity to profit from and transfer risk to the less powerful. The increase in importance of knowledge and information for obtaining control, increasing profits, and reducing risk is occurring for two fundamental reasons: The food business has grown more sophisticated and complex so those with more knowledge and information about detailed processes and how to combine them into in a total system (a supply chain) will have a comparative

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture advantage. The dramatic increase in information about the chemical, biologic, and physical processes of agricultural production will confer advantage to those who can put that knowledge to practical use. In the past, production agriculture focused primarily on commodity products with coordination through open-access markets. The increased specificity in raw-material requirements, combined with the potential for producing specific attributes in agricultural products, is transforming part of the agricultural market from a commodity-product market to a differentiated product market. The need for greater diversity, more exacting quality control, and flow control will tax the ability of open markets to coordinate production and processing effectively. Open-access markets are a blunt instrument for conveying information about product attributes (quantity, quality, timing, etc.) and transaction characteristics (including services). Where open markets fail to achieve the needed coordination, other options—contracts, integration, joint ventures—will be used. The speed of information flow and the rate of adoption with different coordination mechanisms are related to the difficulty in conveying information through open-access markets. In general, contract or ownership coordination results in more rapid transmission of information among the various economic stages. Consequently, the production and distribution system as a whole can react more quickly to changing consumer demands, economic conditions, or technology improvements. The ability to adjust rapidly is increasingly important because of the similarly rapid changes in economic and social systems worldwide. The ability to respond quickly to changes in the economic climate is critical to maintaining profit margins. Likewise, it is essential to recognize poor decisions quickly and to make appropriate adjustments. A market-coordinated system characterized by biologic lags (e.g., a poor harvest) cannot respond to changing conditions as quickly as can an integrated or contract-coordinated system. That is, the response at one stage of a market-coordinated system can be initiated only after a price change signals a need. With little flexibility for adjustment during the growing and maturing processes, the change in quantity or quality is observed only after a full production cycle. By their nature, contract-or ownership-coordinated systems require more frequent and direct communication among the decision makers at each stage on a wider variety of product and service characteristics than is typically possible with more traditional open-access markets. The improved flow of information and more rapid adoption and adjustment allow contract- or ownership-coordinated systems to function more effectively in rapidly changing markets. The logical question for individuals in the food manufacturing chain is how to obtain access to knowledge and information. Particularly for independent producers, knowledge and information are obtained from public sources and from commercial sources—genetics companies, feed companies, building and equipment manufacturers, packers, and processors. In general, independent

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture producers obtain knowledge and information much the same way as they obtain physical and financial resources and inputs. In contrast, in contract- or ownership-coordinated systems of manufacture, in which production, processing, and distribution are completely integrated, knowledge and information come from a combination of internal and external sources. Many of these enterprises or alliances of enterprises have internal R&D staffs who enhance the knowledge and information base. The information they obtain frequently is proprietary, and so it is not shared outside the enterprise. Control over proprietary knowledge confers strategic competitive advantage. R&D in contract- or ownership-coordinated systems is more focused on total system efficiency and effectiveness than it is on individual components of the system. It is more efficient to integrate the nutrition, genetics, building and equipment design, health care, and marketing strategy than it is to address those areas separately. In addition to more effective R&D, such alliances or integrated businesses can implement new technology more rapidly over a larger volume of output to obtain a larger volume of innovator’s profits. In the event that a new technology proves defective or an experiment fails, contract- or ownership-coordinated systems generally have monitoring and control procedures to detect deteriorating performance earlier and make adjustments more quickly than will market-coordinated systems. As knowledge and information become more important sources of competitive advantage, those who have access will be more successful than those who do not. Given the declining public-sector funding for R&D and information dissemination, the expanded capacity of integrated systems to generate and adapt proprietary technology enables the participants in that system to more regularly capture innovator’s profits at the same time that they increase control and reduce risk. This provides a formidable advantage to the contract- or ownership-coordinated production system over the system of independent stages and decision making. Intellectual Property Rights and Distributional Consequences Patent legislation, court decisions, and U.S. Patent and Trademark Office (PTO) rulings since the 1980s have dramatically changed the setting in which intellectual property rights must be considered (NRC, 1997a). Plant and animal innovations were unprotected by the original Patent Act in 1790. Since then, numerous changes have occurred to extend the range of intellectual property protections. Of particular importance was the 5–4 1980 U.S. Supreme Court decision in Diamond v. Chakrabarty, which opened the door to patenting genetically engineered organisms under the original Patent Act. Since that ruling, PTO has further interpreted the Patent Act to include new plants, seeds, germplasm, and nonhuman animals as inventions. Numerous acts of Congress

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture and presidential orders, notably the Government Patent Policy (Bayh-Dole) Act of 1980 (U.S. Congress, 1980) and the Federal Technology Transfer Act of 1986, (U.S. Congress, 1986), have mandated patenting of federally funded endeavors and the promotion of technology transfer. Until the 1980s, most publicly funded research that resulted in information and knowledge provided to producers was in the public domain. Since the 1980s, however, suppliers, consultants, and service firms increasingly gather data for production agriculture; the private sector plays a larger role in providing data, knowledge, and information; and private property rights have replaced common property concepts. Private property rights enable individuals who have those rights to capture value—to extract profits or payment from those who use property. Consequently, with the growing privatization of the knowledge and information markets, intense debates and litigation have occurred over the intellectual property rights to these resources, property rights to data, and control of data accessibility. Differential values based on the exclusivity or other dimensions of property rights can affect who will receive the most valuable information. For example, in smaller farm operations the value of data might be much lower than is the cost of collecting the data, so there is no incentive to collect or analyze information. Smaller farms therefore are at a disadvantage as privatization of knowledge and information increasingly favors larger businesses that can capture relatively more profit from the property rights in knowledge, data, and information. If the public role in providing data and information continues to decline and private-sector activity continues to increase, there will be three distributional consequences. First, a major purpose of public information and data services historically has been to provide open access to potential users, irrespective of size or other characteristics. Expanded private-sector activity in the information markets would result in more of the information being provided at a profit instead of for the common good. Thus, knowledge and information access will generally become less open as public sources decline in relative importance (or begin to exhibit profit-seeking behavior the way private-sector providers do). Second, because profit-seeking behavior is an important determinant for private-sector knowledge and information providers, those of the target audience who can and will pay the most will obtain the most and best information. One would expect that the largest, most sophisticated, and most specialized companies could pay more and would receive more attention by private-sector knowledge and information providers. The less affluent enterprises would receive less information—and profit less from it. Finally, private-sector information providers would extract payment or capture profits, thus redistributing revenues from the production sector to the service sector. Note, however, that if the information increases efficiency and adds value, it could bolster the incomes of the information provider and the producer alike—depending on the cost to the buyer extracted and how incremental revenue is shared.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture With growing privatization of knowledge and information, public-sector providers will increasingly face scrutiny about access to their information, the constraints they place on availability, and the audiences they target (who gets the information and at what cost). Growing concern about benefits and the economic and political power conferred by differential access to information will fuel this questioning. Global R&D and Information At the same time that knowledge and information are becoming more critical resources for success in production agriculture, globalization is fundamentally changing the nature of competition in the agricultural industry. During the 1970s and 1980s, two critical changes occurred: Public-sector and private-sector investments increased in almost all geographic regions of the world, and more technology and innovations were shared across national borders through public-sector international research centers and internationalization of agribusiness (Pardey, 1992). Globalization of agricultural research and development in technology contributes significantly to increased international competitiveness in agricultural product markets; no longer does one country or region of the world have exclusive and unique access to the latest information or technology with respect to genetics, nutrition, veterinary management, or pest control, for example. The combination of globally adaptable production technology with site-specific information on soils and climatic conditions has added to the intensity of international competition. Information, as noted earlier, is increasingly a source of competitive advantage, and it is now being acquired and transmitted globally. The significant and profound implications are that internationalization of information and technology markets contributes further to international sourcing of products by agribusiness, international distribution of inputs by suppliers, and generally increased global competitiveness in the agricultural sector (Pray, 1993). A logical and yet largely unresolved public policy challenge involves distribution of international intellectual property rights. Access to Technology and Disenfranchisement The privatization of agriculture R&D and information markets, the profound structural changes occurring in the food production and distribution industry, and the narrowly defined criteria for allocating public-sector R&D funding all have the potential to restrict the access of some producers to the latest technology and innovation. Privatization also can block access to technology and R&D—even to those in the public sector. For example, if

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture private-cost-driven, productivity-efficiency criteria are used for the selection and assessment of public-sector R&D activities, activities that might emphasize value-added production for producers would not fare well. Neither will sustainable-production practices that consider public as well as private cost. Nor will R&D focused on maintaining diversity to reduce risk if that diversity requires giving up some efficiency and incurring cost. Research focused on unique technologies of small-scale producers and labor-intensive operators also is not likely to be funded with the narrowly defined productivity-efficiency criteria of evaluation or assessment. The privatization of knowledge, information, and R&D; the induced structural change that results from that privatization; and the narrowly defined criteria for assessing and evaluating public-sector R&D have significant implications for producers. For an increasingly large number of producers, those factors will result in disenfranchisement and in restricted access to public- and private-sector innovation and R&D. The implications of increasing diversity in the farm sector also are important in terms of access to innovation and new technology. As each farm operation becomes increasingly different from its neighbor, the knowledge, information, and R&D needs of all farms will diverge. Increased diversity requires information and technology providers to design products and services for individual customers or producers. This goes beyond the well-recognized rule that “one size does not fit all”; now, “one size fits only one or at the most very few” customers or information users. The complexity of serving an increasingly diverse industry points to the need for more sophisticated service and information delivery systems to replace ineffective mass distribution systems. The complexity also increases the likelihood that some segments of the farm population will be underserved or excluded from the knowledge, information, or inputs they need to compete efficiently and effectively. Increased diversity could contribute to the disenfranchisement of some segments of the farm population and cause conflict among others. The farming population today shares little commonality of interest, objectives, and understanding based on common experiences, and it competes more than ever before for limited resources to meet the demands of different customers, constituencies, and clienteles. Increased diversity poses a significant challenge to those who want to provide knowledge, information, and technology to the production sector, and to those who want to represent the production sector in the shaping of public policy, including farm programs and public-sector R&D policy. In essence, the increased diversity in production agriculture results in increasingly diverse demands with respect to public-sector assistance or support for the industry.

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture RESEARCH OPPORTUNITIES Based on the arguments articulated in the previous sections, the committee developed the following list of research opportunities relating to drivers of structural change: Research is needed to better explain the market forces that drive structural change and the specific influence of these market forces on consolidation (the number and size of farms, processors, input suppliers, and retailers), and on vertical coordination between various stages of the food production and distribution value chain. Research is needed on government policies that drive structural change and their specific consequences for consolidation (the number and size of farms, processors, input suppliers, and retailers) and for vertical coordination among various stages of the food production and distribution value chain. Research is needed on the implications of the transformation of agriculture from a market-coordinated commodity industry to a more tightly aligned, vertically coordinated, differentiated-product industry for the consolidation of production and distribution enterprises in the industry, the size and structure of those companies, the distribution of risk and returns they experience, and the potential for market power to result in monopolistic control or profits in the food industry. Research is needed to explain the implications of the privatization of knowledge and the expanding use of intellectual property rights for incentives to innovate, the distribution of costs and benefits from innovation, access to R&D, and consolidation and coordination of the agricultural production and distribution system. Research is needed to assess the implications of increasing global access to the latest information and technology from public- and private-sector R&D and technology transfer activities for the competitive and comparative advantage of U.S. farmers and the food production-distribution system, as well as for global consolidation and vertical coordination of input supply, production, processing, and food-retailing businesses. SUMMARY Many forces other than public-sector R&D policy affect the structure of agriculture. Those forces include the relative prices of labor and capital, the changing role of knowledge and information, and public policy. The structural implications of public-sector R&D and innovation policy should not be ignored, although it is likely that significant structural changes will occur in the agricultural sector irrespective of the structural bias or neutrality of public R&D

OCR for page 86
Publicly Funded Agricultural Research and the Changing Structure of U.S. Agriculture policy. The privatization of the R&D and innovation processes, combined with the increased diversity in the industry, raise legitimate concerns about access to the latest and best technology for all industry participants, regardless of size, business model (independent versus contract), or other structural characteristics. Consequently, a public-policy response to increase access to technology, target disenfranchised groups, serve a broader constituency, and evaluate (as well as include as part of funding criteria) the structural impacts of R&D investments is appropriate.