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posted on 10 October 2017

Consolidation, Concentration, And Competition In The Food System

from the Kansas Fed

-- this post authored by James M. MacDonald

There are powerful movements toward consolidation throughout the food system and toward high concentration - with only a few buyers or sellers - in many of its markets. Some consolidation follows from economies of scale and innovation and can therefore be a channel for productivity growth. However, high concentration can, in some circumstances, lead to reduced efficiency, reduced innovation, and slower productivity growth.

I use the term “consolidation" to refer to shifts in production to larger farms and firms; in the context of mature, slow-growing industries, such shifts also imply fewer farms and firms. Agriculture is consolidating, but it is not very concentrated, because there are still many producers of almost all specific commodities. However, farms do face high and growing concentration in many markets with only a few suppliers of inputs or services or only a few buyers of farm products.

Rising concentration across the U.S. economy has become a matter of widespread comment and concern in recent years. Some public policies are directly concerned with concentration, primarily the effect of concentration on competition. However, farm consolidation also affects the design and effectiveness of farm, trade, and environmental policies that are not directly concerned with concentration or consolidation.

In this article, I summarize consolidation and concentration in the food system and distinguish those policies that are directly aimed at the effects of concentration from those aimed at consolidation. I focus first on dairy farming, because it provides a canonical example of dramatic consolidation and of some key points regarding policy, and then expand the story to the rest of U.S. agriculture. Finally, I discuss the food system outside of agriculture, where the policy emphasis shifts more to competition and antitrust policy.

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Source ~/ media/files/ publicat/econrev/ econrevarchive/ 2017/ si17macdonald.pdf

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