Why agribusiness is different

[This post was first published in the NZ Sunday Star Times on 23 February 2014]

There is a common perception within Business Schools that agribusiness should operate by the same principles as other businesses. The reality is somewhat different. Agribusiness plays by its own complex set of biophysical rules, and beats to its own drum.

There are at least six defining reasons why agribusiness is different from most other types of business. It is these differences which make agribusiness so complex, so fascinating, and at times so frustrating. It is these same differences that can also cause so-called business experts to struggle when they apply their textbook skills to agribusiness.

The six defining characteristics are long investment cycles, long production cycles, production volatility, food safety issues, the politics of food security and environmental implications. The specific ways that these characteristics play out vary from situation to situation.

The long investment cycles, which are driven by the biology of the specific enterprise, can typically mean that there can be lags of several years between planning and outcomes. Whereas a factory can typically be built in a year, a vineyard takes several years during which market conditions can change dramatically. Forestry is perhaps the ultimate of long term investments, with an investment lag of 30 years or more.

Long production cycles affect even annual crops. For example, the key management decisions relating to the Northern Hemisphere wheat crop were made between August and October last year, yet the crop will not be available until June of this year. In the beef industry, a decision to increase production actually causes a short term decline in marketable beef for at least two years, with the same animals being both potential investment capital and production output. In recent years we have seen this play out in the American beef industry, with disinvestment in cows leading to increased beef production. Once the American ranchers decide to increase cow numbers again, then the immediate effect will be that beef production will actually go down.

Production volatility caused by climatic and related conditions can lead to major swings in agricultural output from year to year. The 2013 autumn drought in New Zealand caused sheep slaughtering to increase markedly. The American drought of 2012 led to global increases in grain prices.

In non-agribusiness industries, a firm typically produces output to meet expected market demand. In agribusiness, firms have to market whatever the weather and pest conditions may determine. Merino wool producers, for example, not only have to deal with changing fleece weights, but the diameter of the fibre, which is a key determinant of price, also changes with environmental conditions. Some of these risks can be managed through use of financial derivatives such as futures and options. Others have to be allowed to play out wherever the chips may fall.

Risk management issues in food industries have implications far beyond those in most other industries. The implications of Fonterra’s botulism scare, including the inevitable time delays associated with biological tests, are the types of issue that most industries never have to think about. Also, the regulatory issues around food are so much more complex than for non-food items.

The politics of food create unique issues. Essentially, the world has already moved to free trade for manufactured goods. However, trade in food items remains bedevilled by quotas, tariffs, and non-trade barriers, some of which mask as bio-security issues.

It is impossible to produce food without environmental implications. Here in New Zealand, it is the dairy industry which typically hits the headlines. However, similar issues affect all livestock industries. The main cause of nitrogen leaching is the urine from grazing animals. We can deal with that by bringing the animals inside for the autumn and winter, but then we have to deal with potential issues of animal welfare and odour. So nothing is easy and straight forward in livestock farming.

Given the spatial variation in farming environments, the farming systems have to be adapted to specific contexts. The notion that ‘best practice’ will be the same in Northland as Southland is incredibly naïve. In agriculture, production recipes provide a pathway to failure. Good managers need analytical skills that can address diverse and changing situations.

All of the above have implications for education for the agri-food industries. For example, farm management education builds on a knowledge of both biological and business principles. It is also about creating resilient systems within an uncertain and constantly changing environment.

Here in New Zealand our resourcing of agricultural and agribusiness education appears to take little account of the complexities of the systems we have to manage. Given our reliance on the agri-food industries, that has always seemed to me as being somewhat remarkable. Back in the 1980s, when the Prime Minister of the day and also many other New Zealanders considered farming a ‘sunset industry’, then there may have been some logic to that position, albeit misguided. However, in the current world we live in then there can be little doubt that agri-food is fundamental to our economic standing as a nation. Our education policies need to reflect this.

I have some views as to what we could and should be doing about this. A starting point is to recognise that we do indeed have important issues to deal with. Also, that it is not only the number of graduates that we need, but the type of graduates. The debate as to the specifics of what we could and should be doing will have to wait until another week.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, The Fairfax SST Articles. Bookmark the permalink.

2 Responses to Why agribusiness is different

  1. Pingback: Rural round-up | Homepaddock

  2. one can also talk about the characteristics of agricultural raw material i.e seasonality, perishability and the high cost of raw material

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