Vertical Integration and Different Forms of Agribusiness

The agricultural industry forms the backbone of our society. For the food we eat to make it onto the dinner table, it first must travel through a long supply chain, with many different forms of agribusiness playing a unique yet vital role. 

You understand the importance of maintaining and boosting profitability despite potentially thin profit margins. Agribusiness tools from DTN can help you have the right tools to make the right business decisions to minimize risk, improve efficiency, and drive profit.

One concept growing in popularity among agricultural businesses is vertical integration. What does vertical integration mean, and how does it coincide with consumers’ brand choices? How can an agribusiness know if vertical integration will be profitable or damaging to its long-term prosperity?

 

What is Vertical Integration?

Outsourcing is a very familiar concept in modern business. Finding a way to outsource a project to an external company can be an efficient way to cut costs and remain focused. However, with vertical integration, some in the agribusiness industry handle multiple sectors themselves. 

An excellent example of vertical integration on a large scale would be grocery giants Kroger and Costco. Kroger has implemented vertical integration in their dairy products, such as milk, cheese, butter, and ice cream. In addition to the processing and sale to the end consumer, Kroger has taken on dairy farm management and set up manufacturing sites to produce up to half of its private-label milk. 

Costco has its own well-known store-brand Kirkland, yet many shoppers connect a trip to Costco with a well-priced rotisserie chicken. Costco has invested millions of dollars in a poultry production facility to control every aspect of production, from egg to processing. 

This is a challenge for some businesses, as it requires a company to acquire and establish independent suppliers, manufacturers, distributors, or even physical retail locations. However, their ability to create a direct ownership supply chain creates stable control over agriculture productivity and protects market share. 

As with any business ideology, there are both pros and cons to this corporate structure:

 

Pros: 

• Greater efficiencies
• Reduced costs
• Control over fertilizer and pesticides to limit environmental impact
• Standardized product control, leading to greater food security
• Less reliance on unpredictable market trends
• Stay competitive among peers
• Speed up technology progress
• Relative income security without fear of being squeezed out by larger enterprises

 

Cons: 

• Significant setup costs
• Possible price fluctuations which impinge on profits
• Costly course corrections after errors in judgment
• Risk of exploitation
• Lack of flexibility in producing new highly profitable crops
• Increased specialization could engender an unbalanced relationship between farmer and integrator
• Potential for less control over the decision-making by primary producers

So, is vertical integration right for your business? Thorough research on market share, consumer impact, competitor changes, and the impact on your bottom line will help you decide whether the benefits outweigh any potential risks. 

Making the best business decisions to maintain an edge in the market requires operational intelligence based on the best information and analytical tools available. DTN will be your most trusted partner in gaining that edge. 

 

Forms of Agribusiness

Agribusiness generally falls within one of the three main sectors: the agricultural input sector, the production sector, and the processing-manufacturing sector. 

 

Agricultural input

The agricultural input sector provides farmers with what they need to operate based on their selected products. This can include machinery producers that offer tractors or slaughterhouse equipment. 

Some companies specialize in helping find the right employees for a specified position. They are experts in human resources, but often the leader of such a company has a farming background so that they can complete consultations on behalf of other agribusiness companies.

Chemical companies that create fertilizers and pesticides are also essential forms of agribusiness. Many of these companies employ researchers to ensure their individualized business needs are met without sacrificing product quality or efficiency.

Having agricultural input companies as part of your larger enterprise allows you to have more control over tools, people and processes that are part of your production. 

 

Production sector

The production sector includes either large, corporate farms or smaller, family farms that directly produce the food products. With large agricultural corporations, it is more common to have multiple farms in different regions and climates, producing various crops or livestock, so they are not as reliant on localized supply and demand changes.

Small scale farms may choose to specialize in one or two types of crops or livestock depending on local supply and demand so that they can focus on enhanced quality and efficient production processes. 

Many food manufacturers have opted to purchase corporate farms to have more control over their product. This system can be beneficial to both the farmer and the company, as it creates a direct ownership supply chain. 

 

Processing and manufacturing

The food processing and manufacturing sectors incorporate all the final processing of agricultural commodities and the subsequent distribution to retail locations for purchase by final customers.

These companies provide options to both large-scale and small business producers. They can complete the packaging and food processing of a farm’s product, or they may lease out part of their plant to outside groups so they can incorporate their own customized packaging.  

Generally speaking, vertical integration in the processing and manufacturing sectors involves the manufacturer purchasing companies that support earlier processes and  provide key inputs. For example, a cereal manufacturer may purchase a wheat farm and a company that produces paperboard boxes.

Purchasing these types of businesses allows the manufacturer to have more control over the production process, which can lead to increased efficiency and higher quality products. It can also help the manufacturer save money by reducing transportation costs and ensuring a consistent supply of key inputs.

 

How DTN can transform your business decisions

The agribusiness market is constantly on the move. Whether weather, disease, market changes, regulations, or tight competition, each day presents a new set of variables you need to consider. DTN provides agribusinesses with the 24/7 monitoring and insights they need to make effective business decisions. 

Powered by timely, proprietary information offered by DTN, your business will be poised to respond to any market changes, adapting your models appropriately to capitalize on market trends. With a suite of over 15 products available, you will find one that fits your needs. 

Agribusiness tools by DTN include:

• Market research, analysis, and insights
• Marketing and sales
• Soil conditions and pest problems
• Weather data and forecasting

Learn more today about all the Agribusiness information, products, and services available to you and how you can put the most robust, accurate information in the industry to work for your business.