Vertical Integration

Vertical integration is an industrial business tactic that has increasingly been applied to the agricultural industry. It is also known as vertical combination, vertical expansion, or vertical acquisition. Vertical integration occurs when a single corporation gains control over all aspects of a product, from the supply of raw materials and other inputs needed for production to the transportation, distribution, and sale of the finished product. Horizontal integration is a related tactic in which a corporation dominates a particular sector or aspect of production.

Vertical integration exists to varying degrees within individual corporations. It can include control of input production, such as farm machinery, seed, feed, fertilizer, pesticides, grain silos and elevators, poultry hatcheries, or livestock operations, control of transportation, distribution centers and retail outlets, or both. Vertical integration can be achieved through a variety of methods, including mergers and acquisitions, the use of legally owned subsidiaries, control of contracted farmers or growers, and the use of tactics such as overproduction, rice reductions, and informal agreements to reduce the number of competing firms.

Historically, U.S. agriculture was a subsistence-based enterprise consisting mainly of small, self-sufficient family farms. These farms traditionally grew a diversified array of crops, raised animals, and provided most of their own inputs, such as seeds, tools, and labor. Family farms produced mainly for their own consumption, with any small surpluses sold or traded within the local community. The development of the Industrial Revolution in England and the United States in the early 19th century changed the practice of agriculture as well as of business. Most factories were located in or near cities and towns, giving rise to ever-larger urban populations that no longer produced their own food, placing more commercial demand on farmers.

As farming thus became increasingly commercialized, many industrial business practices such as vertical integration were adopted by agribusiness. The earlier pattern of subsistence agriculture was slowly overtaken by commercial agriculture, or agribusiness. Farms grew in size, leading to the clearance of large amounts of land for planting or grazing. Initially, many smaller local companies were competitive in a marketplace, but gradually fewer larger firms came to dominate. This system arrived in agriculture later than other industries, but had largely taken hold by the mid-20th century. Examples of large agribusiness corporations include ConAgra, Tyson Foods, Phillip Morris, Altria, Monsanto, Cargill, Maple Leaf Foods, Smithfield, Philip Morris, British Nutrition, Chiquita, and Imperial Foods.

Vertical integration within agribusiness gave rise to a new business arrangement between large corporations and farmers and growers known as contract production. Under [Page 448]this system, the corporation pays the farmer or grower on a piece rate basis and controls all major aspects of the production process. Contract production is most common in the poultry sector, where the corporation provides a grower with chickens, feed, and other necessary inputs, as well as specifies building designs and equipment. Farmers and growers function as hired labor reliant on large corporations rather than as independent businessmen.

Many farmers and growers remain trapped in a cycle of debt because they borrow capital to raise buildings and must periodically update buildings and equipment. They also have little to no choice of contracting corporations as fewer and fewer corporations operate within a single geographic area and contracting corporations enter into informal agreements not to use growers contracted to competing firms. Once independent family farmers are now commercial farmers, dependent on middlemen to provide inputs and transport, distribute, and market their goods. Due to vertical integration, these middlemen often consist of subsidiaries of the same large corporation.

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