How does vertical integration impact your agribusiness?

1 Types of vertical integration

There are three main types of vertical integration: backward, forward, and balanced. Backward integration occurs when an agribusiness acquires or controls the inputs or suppliers of its products, such as seeds, feed, or land. Forward integration occurs when an agribusiness acquires or controls the outputs or customers of its products, such as processors, distributors, or retailers. Balanced integration occurs when an agribusiness achieves both backward and forward integration to a similar extent.

2 Benefits of vertical integration

Vertical integration can offer several advantages for your agribusiness, such as reducing transaction costs and risks associated with external markets, increasing bargaining power and market share over competitors, suppliers, or customers, and enhancing quality control and traceability of products along the value chain. Additionally, it can diversify income sources and create synergies among different activities, which can lead to increased profitability and resilience. Moreover, vertical integration can help you innovate and adapt to changing consumer preferences and regulatory standards, creating competitive advantages and differentiation.

3 Challenges of vertical integration

However, vertical integration also poses some challenges for your agribusiness, such as large capital investments and operational costs that can reduce liquidity and increase debt, legal and regulatory barriers or restrictions that can affect efficiency and profitability, and complex operations that can increase coordination and communication costs. Additionally, managing the interests of different stakeholders, such as shareholders, employees, suppliers, customers, and communities can be difficult. Furthermore, vertical integration can limit flexibility and responsiveness to market changes.

4 Examples of successful vertical integration

Successful vertical integration in agribusiness can be seen in companies like Tyson Foods, Chiquita Brands International, and Deere & Company. Tyson Foods, the largest meat producer in the world, integrates backward by owning or contracting farms, feed mills, hatcheries, and slaughterhouses, and forward by owning or contracting processing plants, distribution centers, and foodservice outlets. Chiquita Brands International, one of the biggest banana producers and marketers in the world, integrates backward by owning or leasing plantations in Latin America and forward by owning or chartering ships, ports, ripening facilities, and distribution networks in North America and Europe. Deere & Company is the largest manufacturer of agricultural equipment in the world and integrates backward by producing engines, transmissions, and components for its machines; they also integrate forward by providing financing, insurance, and service solutions for its customers.

5 Examples of unsuccessful vertical integration

Examples of unsuccessful vertical integration in agribusiness include Monsanto, one of the largest biotechnology companies in the world, which tried to acquire seed companies and distributors but was met with resistance from farmers, competitors, and regulators. Ultimately, it sold its seed business to Bayer in 2018. Another example is Fonterra, one of the largest dairy cooperatives in the world, which invested in processing and marketing facilities in China but suffered huge losses and scandals due to quality problems, corruption, and overcapacity. It eventually divested most of its assets in China in 2020. Lastly, Archer Daniels Midland tried to integrate backward by buying or leasing farmland in Brazil but faced legal and environmental challenges and conflicts with local farmers. Consequently, it sold its land holdings in Brazil in 2016.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?