The days of vertical business integration are returning, according to Al Mussell, senior policy analyst at Agri-Food Economic Systems.
The economic climate has become uncertain, he writes in his recent report, prompting businesses to bring operations under one roof as a way to reduce uncertainty.
That’s a reversal of recent business strategy which was to concentrate on one aspect of production to do it well and out-source the other aspects which could be purchased for less.
“Companies outsource when contracting is relatively easy and inexpensive; companies regularly review, and spurn, unprofitable divisions,” is the way Mussell described that strategy.
“Breaking up integrated firms has been seen as unlocking shareholder value. The result has been a decline in the conglomerate agribusiness firm.
“The risk environment that generated our existing approach to firm structure in agribusiness is sharply different from today”, he wrote.
“Owning assets and conducting activities internally is a natural hedge against greater systematic risks.
"Distributed agri-food supply chains will not come to a screeching halt, but this more volatile operating environment should move us toward more integration of activities within agribusiness firms”.
Maple Leaf Foods is a recent example of the previous business strategy, breaking hog production and slaughter off as Canada Packers and concentrating assets on processing meats into packaged products.
Parrish and Heimbecker is an example of the other approach. It has built out from grain marketing into flour and feed production and egg farming and processing.
