BACKGROUND PAPER

Public Policy and

the Changing Structure

of American Agriculture

September 1978

Congress of the United States

Congressional Budget Office
ERRATA

Public Policy and the Changing Structure

of American Agriculture

The reader should be aware of errors on pages 46 and 47. On page 46, lines 4-6 of the first full paragraph should read "The value of government- held stocks peaked at slightly more than $8.0 billion in I960 and 1961, and

direct payments to farmers climbed to about $4.0 billion in 1972." On page

47, Table 8, insert 7.4 for 1965 and 5.4 for 1970 in column 3, "Government

Commodity Stocks, Jan. 1." Column 4, "All Farms," should read as follows:

0.1, 0.7, 2.5, 3.7, 4.0, 2.6, 0.5, and 0.6.

PUBLIC POLICY AND THE CHANGING

STRUCTURE OF AMERICAN AGRICULTURE

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Oovernment Printing Office

~ Washington, D.C. 20402

PREFACE

American agriculture is changing. Farms have become fewer and

larger, capital-intensive, more specialized, and highly dependent on the

nonfarm sector for production inputs. Marketing channels have changed to

accommodate the demands of an urbanized society, sometimes greatly

reducing the bargaining power of individual farmers. Public policies adopted

by the Congress, though certainly not the only determinant of structure,

have contributed to the changes described above. Commodity price and

income supports, tax rules, agricultural credit, and research have been

influential for many years. And legislation has recently been proposed to

help young people get started in farming, to regulate contractual agreements between farmers and processors, and to prohibit the entry of

"outside" capital into farming.

At the request of the House Subcommittee on Family Farms, Rural

Development and Special Studies, the Congressional Budget Office has

prepared this Background Paper, Public Policy and the Changing Structure

of American Agriculture. The study discusses the changing structural

organization of agriculture, factors that are causing it to change, and

consequences of alternative future structures. Special attention is directed

to the impact of public policies on the future of agriculture. In keeping with

CBO's mandate to provide an objective and nonpartisan analysis of issues

before the Congress, no recommendations are offered.

The principal author of this paper is Peter M. Emerson. The paper

was prepared in CBO's Natural Resource and Commerce Division under the

direction of Assistant Director Raymond C. Scheppach. The author

particularly wishes to acknowledge the contributions of Lynn M. Daft, who

initiated the project, and James G. Vertrees, who provided many constructive comments and suggestions. This paper has received extensive external

review. Marion F. Houstoun edited the manuscript and Misi Lenci prepared

it for publication.

Alice M. Rivlin

Director

August 1978

111

CONTENTS

PREFACE iii

SUMMARY xi

CHAPTER I. INTRODUCTION 1

Changes in the U.S. Farm Sector 2

Public Policy and the Farm Sector 5

CHAPTER H. CURRENT STRUCTURE AND FUTURE

TRENDS OF AMERICAN

AGRICULTURE 7

Characteristics and Types of U.S. Farms Today .. . 7

Characteristics of Farms, By Size of Sales . . 9

Selected Farm Types 11

Current Modes of Coordinating the Farm and

Nonfarm Sectors 23

Future Prospects 24

CHAPTER m. DETERMINANTS OF STRUCTURE ... . 29

Technology 29

Resource Mobility 34

Financing 38

Risk and Uncertainty 42

Public Policy 45

CHAPTER IV. CURRENT POLICY OPTIONS CON- CERNING THE FUTURE STRUCTURE OF

AGRICULTURE 59

Alternative Structures 59

Policy Tools 63

Consequences 65

General Implications 70

TABLES

Page

TABLE 1. DISTRIBUTION OF FARMS, CASH RECEIPTS,

INCOME, AND CAPITAL GAIN ON REAL ESTATE

BY ANNUAL GROSS SALES, 1977 10

TABLE 2. ESTIMATES OF THE SHARE OF ALL FARMS AND

TOTAL CASH RECEIPTS ACCOUNTED FOR BY

FAMILY FARMS, FOR SELECTED YEARS: IN

PERCENTS 12

TABLE 3. SMALL FARM PROFILE: SELECTED CHARACTERISTICS OF FARMS AND FARM OPERATORS

WITH ANNUAL GROSS SALES OF LESS THAN

$20,000 15

TABLE 4. INDEXES OF FARM PRODUCTION, FARM INPUTS,

AND PARITY RATIO, 1950-1976 (1967=100) . . 30

TABLE 5. INDEXES OF USE OF SELECTED FARM INPUTS,

1950-1976 (1967=100) 34

TABLE 6. SEVEN TYPICAL FARMING OPERATIONS, BY

TYPE OF FARM PRODUCTS AND REGION,

1975 36, 37

TABLE 7. REAL WAGES AND INCOME EARNED IN FARMING

AND DISPOSABLE INCOME OF FARM PEOPLE

RELATIVE TO NONFARM PEOPLE, 1950-1976:

IN DOLLARS 39

TABLE 8. CROPLAND IDLED BY GOVERNMENT PROGRAMS,

COMMODITY CREDIT CORPORATION STOCKS,

AND GOVERNMENT PAYMENTS, 1955-1975 . . 47

TABLE 9. COMPARATIVE CONSEQUENCES OF ALTERNATIVE FARM POLICIES 66

Vll

FIGURES

Page

FIGURE 1.

FIGURE 2.

FIGURE 3.

FIGURE 4.

FIGURE 5.

THE CHANGING U.S. FARM SECTOR,

1945-1977

ESTIMATED CURRENT SHARE OF NUMBER

OF ALL FARMS AND OF TOTAL CASH

RECEIPTS, BY MAJOR FARM TYPES ... .

AVERAGE COST CURVES FOR IRRIGATED

COTTON FARMS, TEXAS HIGH PLAINS, 1967

FARM DEBT/AS SET RATIO

NET RETURN TO EQUITY IN PRODUCTION

ASSETS

22

32

40

40

IX

33-046 O - 78 - 2

SUMMARY

"Farmers are typically people whose assets are in real prop- erty and whose liabilities are in money."

—David Kirk

The structure of American agriculture is changing. Farms are

becoming fewer in number, larger in size, highly specialized in production, and more dependent on the nonfarm sector. Old patterns of resource

ownership, financing, and decision making are breaking down. And today

some farmers who invested in new equipment and land to meet expanding

export demand in the early 1970s face financial hardship due to lower world

grain prices and inflation-fed production costs. These changes in the

structural organization and performance of the U.S. farm sector raise three

questions of interest to public policymakers:

o How and why is the structure of agriculture changing?

o What difference does it make—and to whom?

o Are the major changes in structure taking us where we want to

go? If not, can public policy be used to do something about it?

The Changing Farm Sector

In 1945, there were 5.9 million farms, and a farm labor force (farm

operators, hired workers, and unpaid family workers) of nearly 11 million;

today, there are 2.7 million farms and about 4 million workers. Such

substantial resource adjustments in farming are not surprising, given the

steady introduction of new technology—particularly, farm mechanization.

Big machines, such as a 4-wheel drive tractor, encourage farm-size growth

by allowing a single operator to farm many more acres per unit of time. In

what is described as "economic cannibalism from within agriculture," small

farms are being replaced by much larger farms using modern machines and

production practices to achieve higher incomes and a rising standard of

living. As a result, a typical modern farm may now require sophisticated

managerial skills and a capital investment of a half-million dollars or more.

XI
The structure of agriculture is determined by the interaction of

several factors, but public policy is one of the most important. Although

nearly all public programs are enacted to help family owned and operated

farms, benefits are generally distributed in direct proportion to their volume

of output, leaving little doubt that public policy has discouraged small

farms. Commodity programs, which have been used to support and stabilize

farm prices and incomes since the 1930s, provide an excellent example of

the way in which public policies have created greater concentration in

farming. Expansion-oriented farmers have converted program benefits—

reduced uncertainty, higher market prices, and government payments—into

additional land, modern machines, and highly specialized production

processes. Since the benefits of commodity programs have been capitalized

into land values, the programs reward the role of landowner rather than the

role of farm operator or farm worker.

Federal tax policy extends special treatment to individuals engaged

in agricultural production; encourages the conversion of farm income into

capital gain, which is taxable at a lower rate; and allows investment tax

credits and accelerated depreciation. These provisions tend to attract

additional capital into farming, encourage rapid mechanization, and yield

absolute benefits in direct proportion to taxable income. Once again, the

final outcome is a capital-intensive agriculture with high land prices and

fewer farms.

The impact on farm structure of other public policies are best

described as mixed. For example, government-subsidized agricultural credit

assists young farmers and small-scale farmers who cannot obtain credit

elsewhere, but it also increases the supply of credit, thereby promoting the

expansion of existing farms. And while many aspects of agricultural

research and extension are neutral with respect to farm size, relatively

more attention has been directed to the production and marketing problems

of large farms.

Consequences of Structural Change

Despite these structural changes, the U.S. farm sector is highly

heterogeneous. Today, there are many sizes and types of farms and many

different production practices and marketing arrangements; in addition,

there are substantial variations in the level, source, and stability of farm

family income.

In 1977, there were 162,000 farms with annual gross sales of $100,000

or more. These "large farms" accounted for only about 6 percent of all

farms, though they contributed 53 percent of total cash receipts from

XII
farming that year. Their average income per farm, which includes all offfarm income of the farm operator and his family, was nearly $48,000; 80

percent of that income came from farming.

About 70 percent of all farms in 1977—nearly 2 million farms—had

annual gross sales of less than $20,000. These "small farms" accounted for

only 11 percent of all cash receipts from farming. Their average income per

farm operator family was estimated to be more than $15,000, but 85 percent

of that income came from off-farm sources. Although the incidence of

poverty among farm families has dropped dramatically during the last few

decades, between 15 and 20 percent of the small-farm population today falls

below the official "poverty line."

Farms can be classified according to the degree of their differentiation between capital ownership, management, and labor as well as

according to the amount of their annual sales. Although there is no

universally accepted definition of a family owned and operated farm, for

statistical purposes, a family farm is commonly defined as any farm that

annually uses less than 1.5 man-years of hired labor and is not operated by a

hired manager. On the basis of that definition, an estimated 90 percent of

all farms today are family farms. These farms play a leading role in food

and feed grain production, dairying, most livestock enterprises, tobacco, and

most diversified farming. Family farms vary widely according to their cash

receipts; but together they account for 60 percent of total cash receipts

from farming.

The remaining farms in U.S. agriculture today can be classified as

industrialized farms, that is, farms that use assembly-line production

techniques and have highly differentiated capital ownership, management,

and labor; or larger-than-family farms—nonindustrialized farms that use

more than 1.5 man-years of hired labor. Only 2 percent or less of all farms

today are industrialized, but they account for from 15 to 20 percent of all

cash receipts from farming. These farms are most often found in broiler

chickens, sugar cane, citrus fruit, seed production, some processing fruits

and vegetables, and cattle feeding. Larger-than-family farms (4 to 8

percent of all farms) contribute 20 to 25 percent of total cash receipts.

These farms produce many kinds of agricultural commodities and they are

most prevalent in the West and South, which have historically had larger

than average farms.

As farms today are becoming more highly mechanized, specialized,

and closely tied to the nonfarm sector, farmers compete vigorously for the

limited amount of available farmland. The price of land is therefore rising,

leaving established farm owners in a strong equity position, which they often

Xlll
use to finance newer machinery and to expand their land base. Some

probable consequences of this ongoing process are:

o Increasing reliance on production and marketing practices that

require large-scale and specialized farm operations;

o Higher capital requirements for farming, making it difficult for

young people to enter farming and creating cash flow problems

for heavily indebted farmers when commodity prices fall;

o Increasing displacement of farm operators and farmworkers who

would prefer to remain in farming or who are not prepared for

nonfarm employment;

o Fewer farm families and workers to patronize businesses in rural

communities, resulting in contraction of the local labor force,

fewer public services, and reduced participation in social and

civic organizations.

o These steadily rising land prices, and favorable tax treatment,

attract individuals and businesses to farmland as an investment

opportunity and hedge against inflation rather than as a primary

means of income. Pressure to separate land ownership from

farming therefore mounts, and farmers may ultimately be outbid

in the land market.

Alternative Future Structures

The public policies now in place ensure a continuation of the current

trend toward fewer, larger and more specialized farms; nevertheless, the

majority would continue to be family owned and operated. If current

policies are pursued, there will be about 1.6 million farms in 2000, with

returns to individual farmers varying greatly according to farm size and

other farm resources. If policymakers desire, specific changes in public

policies—for example, targeting the benefits of commodity programs to

smaller, diversified farms—could decelerate the current structural trend

and increase the number of farms, by .3 to .4 million, to 1.9 or 2.0 million in

2000. Alternatively, public policies could be used to reduce the production

costs of large farms and encourage closer coordination with the nonfarm

sector through contracting and direct ownership. These strategies would

accelerate the current trend and would probably further decrease the

number of farms, by .6 to .7 million, to 0.9 to 1.0 million in 2000.

xiv
Accelerating the current trend would primarily benefit the consumers

and relatively few owners of the largest farms. Lower production costs and

fewer farms might increase average net farm income by 25 percent and

decrease retail food prices by 3 to 5 percent, as compared with continuing

the current trend. This relative decline in retail food prices is based on the

assumption that efficiencies gained from accelerating the current trend

would be reflected forward to consumers. Under any alternative farm

structure, retail food prices are expected to rise in future years, primarily

because of increased processing and marketing services and higher wages.

Accelerating the current trend would, however, impose major costs

on rural communities: total cash receipts to the farm sector would fall,

farm employment would decline, and local economic activity would

contract. Thus, though society would gain an efficiency-oriented farm

sector under this option, farm income would be skewed in favor of a few

large farms, rural communities would suffer, and the decrease in the number

of farms would increase the possibility of interruptions in food supply.

Slowing down the current trend toward larger and fewer farms would

stimulate income generation in local economies and rural communities, but

this option would also lower average net farm income and raise food prices.

As compared with continuing the current trend, the higher total cash

receipts and higher employment in the farm sector under this option might

cause secondary income generation to rise 15 percent, average net farm

income might fall as much as 20 percent, and retail food prices might rise 3

percent. Federal budget costs would also increase, because decelerating the

current structural trend would require more government support of farm

incomes and rural industrialization. However, if continuing or accelerating

the current trend led to substantial increases in federal spending in order to

assist people displaced from farming, this difference could be reversed.

In short, in percentage terms, food price differences under the three

alternatives considered here—continuing, decelerating, or accelerating the

current trend toward larger and more specialized farms—appear modest, as

compared with the trade-offs involved in total cash receipts to farming, the

level and distribution of net farm income, and the viability of rural

communities. Thus, the highly publicized conflict between farmers and

consumers—higher commodity prices versus lower retail food prices—may

not be a primary consideration in decisions concerning the future structure

of agriculture.

xv

CHAPTER I. INTRODUCTION

From its earliest days, American agriculture has been characterized

by a large number of relatively small, family-owned and operated farms, and

the "family farm" soon came to be viewed as an integral part of our cultural

experience, as an American heritage. Similarly, from its very beginnings,

U.S. agricultural policy has been dominated by the Jeffersonian principle, if

not always the practice, that "small land holders are the most precious part

of a state."

The U.S. farm sector today is one of the last surviving examples of an

industry that even remotely resembles the textbook description of pure

competition, in the sense that most farms remain relatively small, individual

farmers continue to lack price-setting power, and they are comparatively

free to enter or leave farming. Nevertheless, the U.S. farm sector is

neither as stable nor as homogeneous as it appears in nostalgic, and often

selective, memory.

This paper is concerned with the impact of public policy on American

agriculture. More specifically, it seeks to describe the changing structure

of agriculture (the number and size of farms, barriers to entry, resource

ownership and control, modes of organization, and market power); present

the key determinants of that structure; and outline public policy options

that could be used to influence its future structure. Chapter I introduces

the subject with a brief explanation of how and why the U.S. farm sector is

changing and a discussion of several policy questions that suggest a relationship between farm structure and public policy.

Changes In the U.S. Farm Sector

Farming in the United States has changed greatly during the past few

decades. In the late 1930s, the number of farms peaked at 6.8 million; by

1945, it had declined to 5.9 million; and in 1977, there were only 2.7 million

farms (see Figure 1). Farm numbers today continue to decline, though at a

much slower rate than prevailed in the 1950s. \J As the number of farms

\j Figure 1 suggests, however, that the annual decline in farm numbers

may now be accelerating again, bringing to an end a decelerating trend

that lasted about 15 years.

33-046 O - 78 - 3
Figure 1.

The Changing U.S. Farm Sector, 1945 -1977

NUMBER OF FARMS AND NUMBER OF ACRES PER FARM

Millions of Farms

6

Acres Per Farm

400

Thousands of Farms ANNUAL CHANGE IN NUMBER OF FARMS

0

-100

1945 1950 1955 1960 1965

Calendar Years

Source: U.S. Department of Agriculture, Agricultural Statistics, 1977, p. 422.

1970 1975
decreased, their average size and value increased. In 1950, all farms

averaged about 210 acres and $43,000 in total assets; today, the average

farm has around 400 acres and $106,000 in total assets (farm assets are

valued in 1967 prices for comparability). Moreover, during the last two

decades, the number of farms of 500 acres or more increased, while the

number of farms of less than 180 acres fell sharply. Between 1945 and 1977, the total farm labor force (that is, all farm operators, hired workers, and

unpaid family workers) also declined precipitously, from nearly 11 million to

only slightly more than 4 million workers. Opportunities to enter farming

likewise decreased—and modern farm technology and management in- creasingly require large capital investments, sophisticated managerial skills, and a high level of technical expertise from farm owners and operators.

Modern technology and postwar industrialization have profoundly

affected farming, farm productivity, and the organization and control of

farm resources—and there is considerable evidence to suggest that such

structural changes will continue to occur. 2/ The prosperous but labor- scarce years of World War II helped initiate a wave of farm mechanization, which radically increased farm productivity. To utilize the new machines

fully, farmers purchased or leased land previously farmed by their neighbors. Hence, mechanization not only displaced farmworkers, it also led to an

increase in the size of farms and in the amount of capital and the kinds of

skills needed to sustain them. This, in turn, led to a decrease in the number

of both farms and farmers.

Important functions once performed on the farm—such as the manu- facture of feed, fertilizer, seeds, and fuel, and the processing, storing, distribution, and marketing of farm products—shifted from the farm to the

nonfarm sector. Purchased inputs, for example, now account for about 55

percent of the total farm input bundle, as compared with 44 percent in 1950. 3_/ Further, as specialization increased and agribusiness flourished, jobs

moved away from rural communities as well as off the farm.

In addition, farm product prices since the Korean War have declined

relative to the prices that farmers pay for production inputs, such as farm

machines, fertilizer, and feed. This relative price decline led farmers to

increase efficiency and to expand the volume of farm production, in order to

2/ Peter Dorner, "Transformation of U.S. Agriculture: The Past Forty

Years," Agricultural Economics Staff Paper No. 126, University of

Wisconsin, Madison, June 1977, pp. 1-22.

3/ Purchased inputs include all inputs except operator and unpaid family

labor and operator-owned real estate and other capital inputs.
maintain their farm income. The steady rise in wages and salaries in the

nonfarm sector also increased the pressure on those who remained in

farming to buy more machines and to expand their land base. And, finally,

the farm sector today is contracting, in the sense that, as real per capita

income increases, consumers spend a declining fraction of their income on

food and other farm products. In the economist's jargon, the income

elasticity of demand for farm products (at the farm) is less than unity.

Given growth in real per capita income and in population, over time, the

demand for farm products increases less than the demand for all other goods

and services, requiring continuous resource adjustment in farming. 4/ Much

of that adjustment has occurred through an outflow of labor from the farm

sector.

In short, American farms today are left with the single task of

providing raw materials for processing, distributing, and marketing by

nonfarm industries, upon whom they have become highly dependent. To a

significant degree, this new structure of U.S. agriculture both reflects and is

a consequence of an urbanized and industrialized society, which more often

than not demands products that offer uniformity for efficient handling,

extensive shelflife for shipping and storage, and a high degree of processing

for consumer convenience. Similarly, modern farms are themselves more

specialized than they were in the past: A farmer is now far more likely to

concentrate on the production of one or two commodities than to engage in

general farming. And today the farm population—farm operators and their

families living on farms—is less easily distinguished from the nonfarm

population. Indeed, increasing numbers of farm people engage in nonagricultural employment, on either a part-time or a full-time basis.

Public Policy and the Farm Sector

But are these ongoing changes in the organization and control of farm

resources in the public interest? In particular, is the family farm—a

farming operation in which a single family provides most of the labor,

capital, and management—economically feasible today? How has the

decline in the number of small farms affected the viability of rural

communities and the effectiveness of local governments? How has the

distribution of farm program benefits affected farm resource ownership and

how will it affect future ownership and organizational patterns? In the

4/ D. Gale Johnson, Farm Commodity Programs, American Enterprise

Institute for Public Policy Research, Washington, B.C. (May 1973), pp.

16-19.
future, who will make key management decisions in agriculture—farm

owners and operators, agribusiness executives, or government officials?

Public policy is by no means the only determinant of the structure of

agriculture, but existing research indicates that it was a significant element

in shaping the current structure and the changes now underway. Over the

years, the Congress has insisted that the Jeffersonian goal of supporting the

family farm remain a central theme in agricultural policy, and most experts

agree that family farms have benefited from publicly supported farm credit,

land grant colleges, and the agricultural extension service. On the other

hand, commodity price supports, tax policy, and most government programs

provide farm benefits in direct proportion to farm output; they have

therefore encouraged farms—including family owned and operated farms—to

grow large in size.

What happens to the American farm will, in large measure, depend

upon the future direction of U.S. agricultural policy. But before policy

decisions are made concerning the future structure of agriculture, it may be

desirable to determine what type of structure is preferred. The options

include continuing the current trend toward fewer, larger, and more

specialized farms; slowing down the current trend, which would help

preserve the relatively large number of small farms that now exist and keep

more management decisions in the hands of individual farmers; or accelerating the current trend, which would produce a farm sector in which a small

number of very large farms would account for nearly all production.

A wide variety of policy tools are available to help achieve the

preferred structure. Large farms could be discouraged from further growth

through a progressive property tax, or a special tax levied on the sale of

large-scale farm machinery. Businesses with nonfarm assets exceeding a

certain amount could be prohibited from engaging in farming. Aliens could

be subject to special disclosure laws or prohibited from buying farmland.

Alternatively, the trend toward fewer and larger farms could be encouraged

by relaxing commodity program payment limitations, focusing public research and extension activities exclusively on the needs of large farms, or

by encouraging greater integration of the farm and the nonfarm sectors

through the promotion of contracting and direct ownership rather than open

markets.

The central purpose of this paper is to provide the Congress with

background information concerning the future of the American farm by

examining two questions:
What are the major implications of the structure of agriculture

as it is now evolving? and

If an alternative structure is desired, what are the public policy

options for altering the current structure?
CHAPTER H. CURRENT STRUCTURE AND FUTURE TRENDS OF

AMERICAN AGRICULTURE

The U.S. farm sector today is highly heterogeneous. A review of

available data shows a confusing multitude of sizes and types of farms,

many different technologies and production practices, and farm people with

different characteristics, pursuing diverse and sometimes conflicting objectives. Furthermore, different segments of the farm sector are changing at

different rates and even in different directions. While some farmers are

rapidly adopting new production and marketing practices, others are trying

to preserve or revert back to the "old ways" of farming. And, lastly, the

multiple concepts and definitions used in describing the farm sector are

themselves often a major source of confusion. Specific topics discussed in

this chapter include: the census definition of a farm, characteristics of

selected farm types, types of linkages between the farm and nonfarm

sectors, and some future prospects for farming.

CHARACTERISTICS AND TYPES OF U.S. FARMS TODAY

The Definition of a Farm. The task of defining a farm is to some

extent simplified by familiarity—nearly everyone thinks he knows what a

farm is—but it is also complicated by obsolete perceptions and a tendency

for attention to shift from the characteristics of the impersonal farm to

problems of farm people.

In general, we may think of a farm as a production unit, or business

enterprise, that brings together a pool of resources (principally, capital,

land, labor, technical knowledge, and management expertise) in order to

produce "agricultural products"—that is, crops, livestock, dairy products, or

poultry. Within this broad functional concept are included all farms, both

traditional and nontraditional; for example, family-owned and operated

farms and ranches, part-time farms, specialized fruit or vegetable farms,

highly industrialized cattle feedlots and poultry operations, and many

others. Some depend completely on family labor, others hire many workers;

some own the land they farm, others rent land; and some are financed

through equity capital supplied by the farmer, while others depend heavily

on borrowed capital.
The major way in which farms are defined and classified for

statistical purposes is according to the size of their annual gross sales. I/ In

1850, the Census Bureau of the U.S. Department of Commerce first defined

a farm as a place of any size producing at least $100 worth of agricultural

products each year. Over the years, however, the official definition of a

farm has been changed frequently, generally to exclude operations thought

to be too small to be considered farms. 2J Census agricultural data for 1959

through 1974 are based on the following definition:

"A farm is any place that sells (or normally would sell) $250 or

more in agricultural products during the census year; or any

place of 10 acres or more that sells $50 or more."

It is important to note that this definition, which underlies all farm

data series found in this report, is based on an operational rather than an

ownership definition of a farm unit. Thus, for example, four tenants

operating separate subunits of one ownership tract are counted as four

farms.

In August 1975, the Census Bureau and the Department of Agriculture (USDA) announced a new definition of a farm, one that excludes

farms selling less than $1,000 worth of agricultural products a year, on the

grounds that more accurate data on the current structure of farming could

be obtained by excluding farms making only a minor contribution to total

agricultural production. Opponents of this new definition contended that it

would "count out farmers" and reduce the number of farms by 27 percent;

they also argued that, given the diversity of the farm sector, more—not

less—information is needed. 3/ Neither proponents of the definition, who

wanted to exclude very small farms, nor opponents, who projected a large

decline in the number of farms, fully anticipated, however, the effects of

the 79-percent increase in farm product prices between 1969 and 1974. The

resulting higher annual gross sales for all farms significantly offset the

\J Annual gross sales includes total cash receipts from farming, government payments to farmers, and other farm income from sources such

as recreation, machine hire, and custom work.

y David E. Brewster, "Some Historical Notes on the Farm Definition,"

Agricultural Economics Research, vol. 29 (January 1977), p. 28.

3_/ Jim Hightower and Susan Sechler, "Counting Out Farmers," Agribusiness Accountability Project, 1000 Wisconsin Avenue, N.W.

Washington, D.C., February 1973.
decline in farm numbers that was expected to follow from the new

definition. An examination of total farm numbers reported by the Census

Bureau in 1974 4/ shows that the change in definition actually resulted in

only a 6-percent decline in the total number of farms.

Characteristics of Farms, By Size of Sales

The distribution of farms by the size of their annual gross sales,

presented in Table 1, reveals the remarkable diversity among U.S. farms

today. Although almost 1.0 million, or 35 percent, of the 2.7 million farms

in 1977 had annual gross sales of less than $2,500, the remaining 1.7 million

were fairly evenly distributed over the five larger sales classes, with the

notable exception of the $100,000 or more sales class, which had the

smallest number of farms (162,000 or only 6 percent of all farms).

There were also remarkable differences among sales classes with

respect to their relative contribution to total cash receipts from farming.

5_/ In particular, the nearly 1.0 million farms with annual gross sales of

$2,500 or less accounted for only slightly more than 1 percent of all cash

receipts from farming; the 162,000 farms with annual gross sales of

$100,000 or more accounted for 53 percent.

Capital gain on real estate per farm in 1977 also varied widely, and

according to sales size. Not surprisingly, farms in the highest sales class

showed the greatest capital gain on real estate; those in the lowest, the

least. Although Table 1 provides only a one-time snapshot of the magnitude

and distribution of capital gain in farming, substantial benefits appear to

accrue today to the owners of farming operations with extensive acreage.

Table 1 also shows wide variations in both the level and the source of

income per farm operator family, and indicates substantial differences in

the degree to which these families today depend on income from nonfarm

sources. For many farmers, farming is clearly a sideline activity and not a

4/ Farm data for 1974 are published for both the old (1959) and new

definitions. The Census Bureau and USDA have not yet revised their

time series data according to the new definition.

5/ Cash receipts include gross receipts from commercial market sales of

farm products as well as loans (net of redemptions) made or guaranteed by the Commodity Credit Corporation and other purchases under

price support programs.
TABLE 1. DISTRIBUTION OF FARMS, CASH RECEIPTS, INCOME, AND CAPITAL GAIN ON

REAL ESTATE BY ANNUAL GROSS SALES, 1977

Annual

Gross

Sales a/

$100,000 or

More

$ 40,000 to

$ 99,999

$ 20,000 to

$ 39,999

$ 10,000 to

$ 19,999

$ 5,000 to

$ 9,999

$ 2,500 to

$ 4,999

Less than

$ 2,500

Total or

All Farms

SOURCE:

Percent

of Total

Number Percent Cash

of of All Receipts from

Farms b/ Farms Farming c/

(thousands)

162 6.0 52.6

348 12.9 25.6

321 11.9 11.1

311 11.5 5.4

302 11.2 2.7

304 11.2 1.4

958 35.3 1.4

2,706 100.0 100.0

U.S. Department of Agriculture, Farm

(July 1978), pp. 53-60.

U.S. Department of Agriculture, Balance

Average Percent Capital

Income per of Average Gain on

Farm Operator Income from Real Estate

Family d/ Farming per Farm e/

(dollars) (dollars)

47,946 80 74,586

24,513 75 30,586

16,946 59 18,209

14,453 35 12,482

14,875 18 9,099

16,067 9 8,036

16,595 9 6,238

19,035 39 16,120

Income Statistics, Statistical Bulletin No. 609

Sheet of the Farming Sector, 1978, (forthcoming

October 1977).

a/ Includes total cash receipts from farming, government payments to farmers, and other farm

income from sources such as recreation, machine hire, and custom work.

b/ A farm is any place that sells (or normally would sell) $250 or more in agricultural products, or

any place of 10 acres or more that sells $50 or more.

£/ Includes gross receipts from commercial market sales of farm products as well as loans (net of

redemptions) made or guaranteed by the Commodity Credit Corporation and other purchases

under price support programs.

d/ Realized net income from farming plus off-farm income of farm operator family divided by

number of farms. For the purpose of these calculations, it is assumed that each farm has 1

resident farm operator family.

ej Annual change in the value of farm real estate less the net investment in farm real estate.
very important one at that. In fact, as a group, the farm population is more

dependent on income from nonfarm sources than from farming. In 1977,

only 39 percent of all farmers' income came from farming. On average,

only operators of farms with annual gross sales of $20,000 or more derived

the major component of their income from farming. Further, although the

average income of farm operator families was $19,035, it ranged by sales

class from $48,000 to $16,595.

Selected Farm Types

Four types of farms are of special interest to policymakers concerned

about the future structure of agriculture and the well-being of the farm

population: family farms, small farms, part-time farms, and corporate

farms. This section attempts to describe and quantify the role of these

often overlapping farm types in the current structure of agriculture; review

the major economic and social issues that each raises; and, lastly, show how

each fits into a typology that classifies all farms in terms of their degree of

differentiation between capital ownership, management, and labor.

Family Farms. Notwithstanding the significance that public policymakers have always accorded the American family farm, there is today no

universally accepted, or statistically adequate, definition of the term.

Typically, however, this concept is used to refer to farms that are

characterized by a dependence on family labor, except for seasonal work;

family ownership of land or other capital items; and family control of

management decisions. As such, a farm is considered to be family owned

and operated if its resources are under the independent control of the farm

operator and family, regardless of that farm's mode of business organization.

This concept of a family farm has intuitive appeal, but it is not well

suited to quantification. To resolve this problem, it has become common

practice to define a family farm as any farm that annually uses less than 1.5

man-years of hired labor and is not operated by a hired manager.

Using this definition, Nikolitch has estimated that family farms

accounted for 95 percent of all farms and more than 60 percent of all cash

receipts from 1949 through 1969 (the most recent data available, see Table

2). The share of cash receipts by family farms varies, however, a great deal

by commodity. For cash grain farms, 85 percent of all cash receipts came

from family farms in 1964. In contrast, family farms accounted for only 15

percent of cash receipts from vegetable farms and 29 percent of fruit and

nut farm cash receipts that year. Along with these commodity differences,

there are also significant regional differences. In the Midwest, family farms

11
TABLE 2. ESTIMATES OF THE SHARE OF ALL FARMS AND TOTAL

CASH RECEIPTS ACCOUNTED FOR BY FAMILY FARMS,

FOR SELECTED YEARS: IN PERCENTS

Year

Nikolitch's Estimate a/

Cash Receipts

Farms from Farming

Rodefeld's Estimate b/

Farms

Cash Receipts

from Farming

1949 c/

1959

1964

1969 d/

95

95

95

95

63

70

65

62

_ _

76 50

79 49

— —

SOURCES: Radoje Nikolitch, Family-Size Farms in U.S. Agriculture,

U.S. Department of Agriculture, ERS 499, February 1972, p.

4; Richard D. Rodefeld, "Trends in U.S. Farm Organizational

Structure and Type," Priorities in Agricultural Research of

the U.S. Department of Agriculture, Hearing before the

Subcommittee on Administrative Practice and Procedure of

the Committee on the Judiciary, United States Senate,

Ninety-Fifth Congress, First Session, October, 1977, p. 377.

a/ Any farm not operated by a hired manager and using less than 1.5 manyears of hired labor is classified as a family farm.

b/ Any farm not operated by a hired manager, or a tenant, and using less

than 1.5 man-years of hired labor is classified as a family farm.

c/ Data for 1949 corrected for change in farm definition in 1959.

Sharecropper operations are not considered as independent farms but as

parts of their respective multiple-unit operations.

d/ Estimated by projecting census information.

12
accounted for over 80 percent of all cash receipts from farming in most

states in 1964 and closer to 90 percent in the major farm states of Indiana,

Illinois, and Iowa. In the South, Southeast, and West, the share is far lower,

with family farms accounting for only 20 percent of cash receipts in Florida

and 21 percent in California. These regional differences are a consequence

of earlier settlement and cultural patterns as well as a result of variations

in the labor requirements of different commodities.

Although widely used, Nikolitch's findings have been criticized as

resting on an imperfect statistical indicator of family owned and operated

farms. On the basis of a somewhat revised definition—one that corrects for

census changes in the definition of a farm and excludes farms operated by

tenants as well as those operated by hired managers—Rodefeld has

estimated that family farms accounted for slightly less than 80 percent of

all farms and about 50 percent of all cash receipts in both 1959 and 1964

(see Table 2 for a comparison of these two estimates).

On the other hand, however, the statistical definition of a family

farm may also be criticized on the ground that its selection of 1.5 manyears as the upper limit of family farm dependency on hired labor

understates the number of family farms and their contribution to cash

receipts. This criterion was selected on the basis of two assumptions: that

the average farm family supplies about 1.5 man-years of labor annually, and

that a farm on which an operator and his family supply less than half the

total labor is not a family farm. But there is no reason to believe that a

family-owned and operated farm which uses, for example, as much as 5

man-years of hired labor is fundamentally different from one that uses less

than 1.5 man-years of hired labor. And if this alternative criterion were

adopted, it would raise the family farm share of all farms in 1964 to 98

percent and its share of all cash receipts to around 80 percent.

The public policy objective of maintaining the family farm as the

dominant type of farm in U.S. agriculture appears quite successful, if

measured simply in terms of farm numbers according to any of the

definitions of family farm discussed above. Nevertheless, their considerably

smaller share of total cash receipts indicates that they have not dominated

U.S. agriculture to the extent generally believed. If, however, the upper

limit of their use of hired labor is expanded to 5 man-years, family farms

can be viewed as heavily dominant on both dimensions. As emphasized

earlier, farming has changed. Many family owned and operated farms have

grown larger in size, use more purchased inputs, require a tremendous

amount of scientific expertise, and have become more dependent on

nonfarm income. But perhaps the greatest change is that all farmers

(including family farmers) must now interface with farm input and food

processing industries, which to a large extent, are best described as

13
oligopoly-like structures. Q Thus, the modern family farm, with negligible

market power, operates in an environment where other business firms have

sufficient power to engage in noncompetitive behavior and influence the

terms of trade.

In addition to its value as a social institution, the family farm has

historically provided society with at least one important economic benefitguaranteed continuity in agricultural output. 7/ With its relatively low

variable costs, a high commitment of family labor and family-owned capital,

and a capacity to defer fixed costs, the family farm has a strong incentive

to maintain output even if farm product prices are very low. Stories of the

resilience and staying power of the small family farm, particularly during

periods of economic adversity, abound. Because of its ability to absorb

economic errors and miscalculations, the family farm has either made a

great social contribution or has been inordinately exploited by society,

depending on one's viewpoint. It seems likely that many farm families will

continue to work in the farm sector in the future. But their willingness and

ability to defer production costs will diminish and society will lose some of

the continuity that has characterized farming, as the U.S. increasingly

moves away from small-scale production units.

Small Farms. The recent revival of interest in small-scale farming is

heavily laden with value judgments. But rising energy prices, pollution

abatement costs, and increasing recognition of the social costs created by

the massive displacement of farm people as farms have become larger have

led many to question seriously the conventional wisdom that large-scale

farms are more efficient. 8_/

For illustrative purposes, a profile of small farms—which are commonly defined as those with annual gross sales of less than $20,000—was

6/ Forrest E. Walters, "Impact of Changing Structure of the Food

Industries on Food Supply and Prices," American Journal of Agricultural Economics, vol. 57 (May 1974), p. 193.

7/ Paul W, Barkley, "A Contemporary Political Economy of Family

Farming," American Journal of Agricultural Economics, vol. 58

(December 1976), pp. 812-817.

8/ Ray Marshall and Allen Thompson, Status and Prospects of Small

Farmers In The South, (Atlanta, Ga: Southern Regional Council, Inc.,

1977), pp. 1-17.

14
constructed (see Table 3). 9_/ On the basis of this profile, small farms can be

characterized as follows:

o Though they represent just over 70 percent of the total number of

farms, small farms are not a major factor in food and fiber

production, accounting for only 11 percent of total cash receipts

from farming.

o Nevertheless, small-scale farmers control 31 percent of total

farm assets, their assets are relatively unencumbered by debt, as

compared with larger farms, and proprietor's equity per farm

averages a little more than $80,000.

o The small-farm population is extremely diverse. Some small-farm

families are completely dependent on income from farming; some

use nonfarm earnings to supplement their farm income; others

work mainly off the farm. A few may be classified as retirement

homes, rural residences, or hobby farms.

o The average small-scale farmer is slightly older and less well

educated than other farmers.

Small-scale farms are heavily concentrated in such commodities as

cotton, tobacco, and labor-intensive specialty crops; but many small-scale

farmers also raise beef cattle and feeder pigs. Approximately 70 percent of

the small-farm population is found in the Southeast and the North Central

states. Only 4 percent of the small-farm population are minority-group

members, but more than 90 percent of all minority farmers fall in the small

farm category. As compared with other small-scale farmers, minority

operators are generally older, work fewer days off-farm, have smaller

farms, and tend to be engaged primarily in crop production. 10/ Minority

small-farm families are also probably somewhat more dependent on farm

earnings as a component of total income than other small-scale farmers.

£/ This criterion, of course, excludes the larger farms, which account for

most of total farm sales and realize a substantial majority of their net

income from farming.

10/ James A. Lewis, White and Minority Small Farm Operators in the

South, U.S. Department of Agriculture, AER-353, December 1976.

p.iii.

15
TABLE 3. SMALL FARM PROFILE: SELECTED CHARACTERISTICS OF

FARMS AND FARM OPERATORS WITH ANNUAL GROSS

SALES OF LESS THAN $20,000

Characteristics of Farms with

Annual Gross Sales of Less than

$20,000

Number of Farms, 1976 1,917,000

Percent of Total Number of Farms, 1976 71

Percent of Total Farm Assets, 1976 31

Percent of Total Farm Liabilities, 1976 17

Percent of Total Cash Receipts, 1976 11

Percent of Total Federal Farm Program Payments,

1976 25

Average Value of Cash Receipts, 1976 ($) 5,516

Average Net Income from Farming, 1976 ($) 2,206

Proprietor's Equity per Farm, 1976 ($) 82,902

Average Income per Farm Operator Family, 1976 a/ ($) 15,169

Percent of Family Income from Off-Farm Sources

1976 85

Percent of Families in Poverty, 1976 15-20

Average Age of Operator, 1974 52

Percent of Operators under 35 Years, 1974 13

Percent of Operators 65 Years or Older, 1974 23

Percent of Operators with Less than High School

Education, 1970 67

Percent of Operators Working Off-Farm 200 Days or

More, 1974 40

Percent of Operators who are Minorities, 1974 4

a/ Estimated by summing realized net income from farming and offfarm income, dividing by the number of farms, and assuming one

family per farm.

SOURCE: U.S. Department of Agriculture, Economic Research Service,

Farm Income Statistics (July 1978) and Balance Sheet of

Farming Sector (September 1977). U.S.Departmentof Commerce,

Bureau of the Census, U.S. Census of Agriculture, 1974.

U.S. Department of Commerce, Bureau of the Census, Current

Population Reports (September 1977).
Since more than 80 percent of the income of all small farm families

comes from nonfarm sources, low annual gross farm sales does not necessarily imply family poverty. In 1976, the average family income for small

farms was $15,169. Nevertheless, an estimated 15 to 20 percent of the

small-scale farm population in 1976 fell below the "poverty line." ll/ More

generally, in a recent assessment of farm poverty, Edwards and TToffman

report five major findings:

o The incidence of poverty among farmers has dropped dramatically—farm people constituted 19 percent of the total poverty

population in I960, but only 5 percent in 1976.

o But 15 percent of the farm population, as compared with 12

percent of the nonfarm population, were poor in 1976.

o Farm poverty has a distinct regional distribution. Over half of

the nation's poor farm people live in the South. Many of the

remaining poor are located in such marginal farming areas as the

Ozark Mountain region and the cutover areas of Michigan, Wisconsin, and Minnesota.

o Thirty-one percent of the farm households in poverty have a black

or female head of household. Nevertheless, although a strong link

remains between race and low income in farming, over time the

racial dimension is becoming less important in farm poverty.

o Farming operations of farmers in poverty are characterized by

very limited capital and land resources; most poor farmers do not

have any farm debt; and their low average crop yields suggest

that their managerial ability could be improved. 12/

Part-time Farms. In 1974, 961,000 farm operators (or, 39 percent of

all farmers responding to the Census of Agriculture) described their

ll/ In 1976, slightly more than 15 percent of all families and unrelated

individuals reporting a farm residence were poor. U.S. Bureau of the

Census, "Consumer Income," Current Population Reports, Series P-60,

No. 107, September 1977, p. 28.

12/ Richard J. Edwards and George W. Coffman, "Farm Poverty: A

Current Assessment and Research Focus," NEAD Working Paper, U.S.

Department of Agriculture, September, 1977.

17

33-046 O - 78 - 5
principal occupation as "other than farming." Defining a part-time farm as

a farm on which the operator is employed off-farm 200 days or more, parttime farms accounted for 28 percent of all farms and 20 percent of total

cash receipts in 1974. Not surprisingly, many small-scale farms—an

estimated 40 percent—are operated by part-timers who are highly dependent

on off-farm earnings. As noted in Table 1, off-farm income increases in

relative importance as farm size declines. In 1977, families living on the

smallest farms (those with annual sales of less than $2,500) received 91

percent of their average per farm income from off-farm sources. In fact,

the share of income from off-farm sources for all farms has been rising over

time and it now exceeds half (61 percent).

During the 1950s and 1960s, part-time farming was viewed as a

temporary condition, serving as either a means of transition from farming to

nonfarm employment or as a way of accumulating enough capital to enter

full-time farming. Increasingly, however, part-time farming seems to have

become an end in itself. For many of today's small- and medium-sized

farms, off-farm employment for the operator or his family members is a

feasible alternative to leaving farming altogether. Similarly, it is also an

option for those in nonfarm employment who wish to be involved in farming

without committing themselves full-time. If industries continue to decentralize and if the metropolitan population continues to migrate to

nonmetropolitan areas, the proportion of farm families earning a major part

of their income from off-farm employment is likely to rise. In fact, the

part-time farm may become the most viable type of farm, precisely because

it does not depend solely on farm income. 13/ Further, the existence of

part-time farms probably enhances the stability of agriculture and its

resiliency to changing economic circumstances. For example, part-time

farmers can shift family labor back and forth between farm and nonfarm

employment in response to changing farm prices more readily than can fulltime farmers. Off-farm earnings may also provide part-time farmers with a

supplementary source of capital, making them less dependent on short-term

conditions in both credit and commodity markets.

Corporate Farms. The corporate farm issue or debate is generally

held to be concerned with "nonfarm interests who have invested in farming

through a corporate structure for the purpose of profit, capital gain, tax

13/ Harold F. Breimyer, "The Changing American Farm," The Annals,

AAPSS, vol. 429 (January 1977), p. 22.

18
breaks, or further control within the food and fiber industry." 14/ Contrary

to popular opinion, however, corporate farms—any farm operated under a

certificate of incorporation, or charter, issued by a state—are not coterminous with either large-scale or nonfarm-owned farming. In fact, the term

"corporate farm" embraces many different sizes and types of farming

enterprises, including family farm corporations, incorporated landlords who

rent to tenants, and a much smaller number of nonfarm-owned corporations

engaged in farming.

Although the number of corporate farms has risen from about 8,200

in 1957 to 28,090 in 1974, it is estimated they now account for only slightly

more than 1 percent of all farms—but 15 percent of total cash receipts.

Over 90 percent of the 21,500 farm corporations operating in 1969 (and

accounting for about 80 percent of all corporate farm sales) were "closely

held," that is, each was owned by not more than 10 shareholders. 15/ Thus,

on the assumption that closely-held corporations are family-owned businesses, most corporate farms are family owned and operated.

Farm families generally incorporate to facilitate intergenerational

transfers, to obtain better financing, or for income tax reasons. In times of

high farm incomes, the opportunity to retain earnings and use corporate

income tax rates may offer an important advantage. For example, "a one

person farming operation netting $75,000 can alter sharply the federal

income tax liability by incorporating and paying a salary of $25,000. The

highest marginal rate would probably not exceed 24 percent, certainly not

more than 30 percent. This assumes, of course, that the family is willing to

leave $50,000 in the corporation for expansion." 16/ If the farm corporation

is small (15 or fewer shareholders), income gains or losses may be passed

directly to the shareholder, thus avoiding the "double taxation" that

characterizes an ordinary business corporation. And after incorporation,

fringe benefits, such as medical and life insurance, become deductible costs.

14/ Kevin F. Goss and Richard D. Rodefeld, Corporate Farming in the

United States; A Guide to Current Literature, 1967-1977, Rural

Sociology Report, Pennsylvania State University, (forthcoming 1978),

p. 7.

15/ George Coffman, "Agriculture Unincorporated," Farm Index, U.S.

Department of Agriculture, (July 1973), p. 10.

16/ Neil E. Harl, "Corporation Farms and 1977 Farm Legislation," Seminar

Paper, Library of Congress, (May 1977), p. 12.

19
One of the consequences of farm families' increasing use of the corporate

form of organization may be the preservation of family owned and operated

farms and hence maintenance of a heterogeneous farm structure.

In 1969, 1,797 corporations with more than 10 shareholders each were

engaged in farming; these corporations accounted for 2.9 percent of total

cash receipts. Most of these farms were in California, Texas, Hawaii, and

Florida. In general, large corporations become involved in farming in order

to provide a guaranteed market for the sale of feed, breeding stock, and

other farm inputs; in addition, some food processors move backward into

farming in order to obtain the stable supply of raw products needed to

coordinate processing and marketing.

The goal of such conglomerates—to obtain market power and play a

more active coordinating role—is perhaps best expressed by Tenneco's 1970

statement that "our goal in agriculture is integration from the seedling to

the supermarket". 17/ Their success in farming has been greatest where

product perishability created a need to link production directly with

processing and marketing, where there was a need for highly technical

management and equipment, and where opportunities existed to create a

distinct brand image for the final product. At this time, however, there is

no evidence that large corporations are taking over farming. In fact,

several highly publicized conglomerates—Ralston Purina, Gates Rubber, and

CBK, Inc.—have sold their farming operations, presumably because these

firms believe they can earn a higher rate of return in other investment

opportunities.

Nevertheless, several midwestern states have enacted statutes

restricting corporate ownership and operation of farms. In North Dakota, a

farm business cannot be incorporated. Most other states with anticorporate farm laws allow independent farmers to incorporate, subject to

certain rules. For example:

o In Kansas, farming corporations are limited to 10 shareholders,

are permitted to own or control no more than 5,000 acres, and all

incorporators must reside in the state.

o In Minnesota, at least one family member must reside on or

actively operate a corporate farm.

IT/ William Robbins, The American Food Scandal; Why You Can't Eat Well

on What You Earn (William Morrow, 1974), p. 64.

20
o In Oklahoma, there is a 10-shareholder limit and no more than ZO

percent of corporate gross receipts can come from a source other

than farming, ranching, or mineral rights.

o South Dakota applies the same rules and allows only a 20-percent

increase in acres in any five-year period.

A Typology of Farms. Although no single conceptual system adequately embraces all aspects of agriculture, modern-day farms may be

roughly divided into three mutually exclusive categories—family farms,

industrialized farms, and larger-than-family farms—according to their

degree of differentiation between labor, capital ownership, and management. At least one of the selected farm types discussed above, corporate

farms, may be found in all three categories; while other farm types, such as

small-scale farms, are found exclusively in a single category.

Figure 2 provides a summary of these major farm types as a percent

of all farms and total cash receipts. Available data suggest that family

farms (defined as any farm that uses less than 1.5 man-years of hired labor

and is not operated by a hired manager) currently account for at least 90

percent of all farms and 60 percent of total cash receipts. These farms play

a leading role in food and feed grain production, dairying, most livestock

enterprises, tobacco, and much of diversified farming. As noted, these

numbers would increase if the definition of family farm were to shift to

more than 1.5 man-years of hired labor. A small but growing number of

family farms are incorporated, and they represent 90 percent of all

corporate farms. Many family farms are relatively small businesses; in

fact, an estimated 70 percent of all farms have annual gross sales of less

than $20,000. Despite their large numbers, these small farms account for

only 11 percent of total cash receipts, and about 15 to 20 percent of all

small-farm families are poor. A substantial portion of family farms are

part-time operations. Part-time farms (defined as any farm on which the

operator is employed off-farm 200 days or more) now account for 28 percent

of all farms and 20 percent of total cash receipts.

The remaining farms can be classified as industrialized farms, that is,

farms that use assembly-line production techniques and have a high degree

of differentiation between capital ownership, management, and labor; or

larger-than-family farms—nonindustrialized farms that use more than 1.5

man-years of hired labor. Together, these two types of farms account for

slightly less than 10 percent of all farms but 40 percent of total cash

receipts.

It is estimated that only 2 percent or less of all farms today are

industrialized, but they produce 15 to 20 percent of total cash receipts.

21
Figure 2.

Estimated Current Share of Number of All Farms

and of Total Cash Receipts, by Major Farm Types8

PERCENT OF ALL FARMS

Family Farms (90% or more)

\

Small-Scale Farms (70%)

/ "\

/Part-Time \

Farms (28%)

[\

Industrialized Farms

(2% or less)

Larger- Than-Family

Farms (4 to 8%)

PERCENT OF TOTAL CASH RECEIPTS

Industrialized Farms

(15 to 20%)

Family Farms (60% or more)

Larger- Than-Family

Farms (20 to 25%)

x

Part-Time

Farms (20%)

Small-Scale

Farms (10%)

These estimates are extrapolated from several sources and limitations exist with respect to

both the data and the definitions. Revisions can therefore be expected as new data become

available and special tabulations are completed. All farms can be classified, though somewhat

arbitrarily, as either family, industrialized, or larger-than-family farms. Family farms are

farms that use less than 1.5 man-years of hired labor and are not operated by a hired manager;

industrialized farms use assembly-line production techniques and their capital ownership,

management, and labor are highly differentiated; larger-than-family farms are nonindustrialized farms that use more than 1.5 man-years of hired labor. Farms can also be classified and

defined according to their annual amount of sales or the annual number of days their operator

is employed off the farm. In particular, small-scale farms are farms with annual gross sales of

less than $20,000; part-time farms are farms whose operator is employed off-farm 200 or

more days per year. The precise overlap between these two types of farms and the other

types is not known.
Industrialized farms are found in broilers, sugar cane, citrus fruit, seed

production, and some processing fruits and vegetables, where highly specialized equipment and management is needed and where operations are

repetitive and standardized. Some experts believe that cattle feeding and

hog production will be the next activities that industrialized farms will

dominate.

Larger-than-family farms (4 to 8 percent of all farms) are more

numerous than industrialized farms, but contribute only a slightly greater

share of farm sales (20 to 25 percent of total cash receipts). They are often

found in the West, where large ranches had their origin in the Spanish

hacienda, and in the South, where they grew out of the plantation system. A

few larger-than-family farms exist simply because wealthy individuals, both

Americans and foreigners, are interested in farming. Some larger-thanfamily farms are managed by the landowner; in other cases, absentee

landlords or owners without farming experience rely on hired managers.

And a small number of these farms are operated by institutions (universities,

prisons, and hospitals).

Current Modes of Coordinating the Farm and Nonfarm Sectors

From an economic and social viewpoint, another important structural

dimension of agriculture is the nature of its linkage to other sectors of the

economy. In both the purchase of farm inputs and the sale of farm products,

farms interface with nonfarm business enterprises through either traditional

open markets; contractual agreements, which specify a buyer-seller relationship; or "vertically integrated systems," which link two or more related

functions in the food and fiber production chain by direct ownership.

When viewed in terms of total value of cash receipts from farming,

only about 22 percent of U.S. agricultural production in 1970 was produced

either under contract or through vertical integration. 18/ But their share of

total cash receipts varied widely among commodities. For livestock, the

estimate was 36 percent, while for crops it was only 14 percent. More

specifically, for sugar cane and sugar beets, the figure was 100 percent; for

processing vegetables, 95 percent; and for citrus fruits, 85 percent. Among

livestock products, 98 percent of milk for drinking was produced under

contract or in vertically integrated enterprises; 97 percent of all broilers; 54

18/ Ronald L. Mighell and William S. Hoofnagle, "Contract Production and

Vertical Integration in Farming, I960 and 1970," ERS-479, U.S.

Department of Agriculture (April 1972), p. 4.

23
percent of all turkeys; 40 percent of all eggs; 22 percent of fed cattle; but

only 2 percent of hogs.

Farmers and society at large derive many benefits from contracting

and vertical integration. In highly perishable commodities, such as processing fruits and vegetables, production contracts are entered into before

planting in order to control the quality and timing of production. The

elimination of expenses associated with intermediate storage, assembly, and

handling, as well as reduced uncertainty, are other possible benefits. When

forward contracts are used in cotton, they are frequently entered into after

planting, to reduce price risk and ensure a market outlet. And capital

requirements for the most efficient-size production units and technical

managerial skills sometimes exceed those which most farmers acting alone

can mobilize. Because of the demands of our urbanized, industrial society

and the characteristics of modern technology, there will be increasing

pressure for planning and close coordination in the use of agricultural

resources.

Nevertheless, contracting and vertical integration have both

attracted considerable criticism because they require that farmers relinquish some (or all) of their independent decision-making responsibility and

because, in purchasing inputs (such as land) and in selling, these two types of

linkage sometimes pit large nonfarm firms with substantial economic power

against much smaller family farms. Others have argued that a few huge

agribusiness firms may use these coordinating devices to dominate agricultural production and secure unnecessarily high food and fiber product prices

from the American public.

The degree of control over farm production exercised by inputsupplying or output-processing firms varies greatly with the nature of the

contractual arrangements. 19/ For example, production contracts place

broiler growers in a seemingly vulnerable position. Growers typically do not

own the broilers they feed, and they are usually obligated to buy feed

supplies from designated suppliers and to sell the broilers only to a specified

processor. Furthermore, broiler growers have few, if any, alternative uses

for their broiler houses, and producer bargaining associations and marketing

cooperatives are of little significance. In some types of field crops (canning

peas, canning corn, potatoes), growers are restricted by their production

contracts only during a given season; hence they have more bargaining

19/ Bruce W. Marion ed., Coordination and Exchange In Agricultural

Subsectors, North Central Regional Research Publication 228 (University of Wisconsin, January 1976), pp. 5-9.

24
power with their suppliers and processors because they usually have alternative uses for their land.

FUTURE PROSPECTS

The trends toward fewer, larger, and more specialized farms that are

increasingly dependent on the nonfarm sector are long-term in nature. Most

have been underway for three decades or more. Yet, in the past seven or

eight years, events have occurred which may ultimately cause some of these

trends to change. The dollar was twice devalued in relation to gold, grain

exports expanded rapidly, net farm income reached a very favorable level in

1973-1974, and there was a marked decline in outmigration from agriculture. More recently, however, a decline in farm productivity growth,

persistent price inflation, and good weather abroad have brought about a

painful cost-price squeeze for many U.S. farmers, and there is now talk that

our energy-intensive agriculture will soon be obsolete. At this time,

however, it is not clear whether the effects of these events are temporary

or if they signal a significant turning point in the structure of agriculture.

Such uncertainty emphasizes the importance of formulating some

general ideas about the future prospects for farming. First, the decline in

number of farms will continue, but at a slower pace than in the 1950s and

1960s. Census of Agriculture data show that farm numbers declined 15

percent between 1969 and 1974. More recent USDA estimates suggest,

however, that it may not be realistic to assume that the rate of decline in

farm numbers will continue to slow (see Figure 1).

Projecting historical trends, one USDA researcher has estimated that

there will be 2.5 million farms in 1980, and 2.0 millon farms in 1990. By

1990, about 20 percent of all farms will have annual gross sales exceeding

$100,000; and 50 percent will have annual gross sales of less than $20,000.

20/ About 1.6 million or fewer farms are estimated for the year 2000,

absent major policy changes, war, or other disruptions.

Second, there has been a notable increase in the number of younger

persons entering farming. Between 1970 and 1976, the number of persons

self-employed in agriculture and under 35 years of age rose from 265,000 to

20/ Letter and attached materials from William W. Lin, U.S. Department

of Agriculture, January 9, 1978.

25

33-046 O - 78 - 6
359,000—a gain of 35 percent. 21/ Although farmers under 35 years

represent only about one-fifth of all farmers in 1976, that percentage is

larger than it was in 1970, and this increase occurred during a period when

the total number of farm operators declined and the number of farmers age

60 and over fell by nearly one-quarter. This combination of more younger

farmers and fewer oldsters caused the median age of persons self-employed

in agriculture to reverse its historic pattern and fall from 53 years to 50

years between 1970 and 1976. Contrary to popular opinion, a substantial

number of young people have entered farming in recent years, and many of

the new entrants will probably attempt to expand the size of their farming

operations rapidly.

Third, the gradual trend toward greater specialization in farming is

likely to continue. In a recent analysis of 1959 and 1969 Census of

Agriculture data, Marion found a modest increase in the degree of specialization for all farm types and concluded that "smaller cash grain and dairy

farms (low specialization) are apparently better able to survive than smaller

vegetable, poultry, or fruit and nut farms (high specialization)". 22/ As

farms become larger and more specialized, most experts believe that the

resulting increased risk exposure (see Chapter HI) will give rise to greater

use of futures contracts, farm-processor contracts, and other risk-sharing

mechanisms. Because of increasing dependence on purchased inputs, net

farm income as a proportion of cash receipts has steadily declined, and price

variations may cause relatively large changes in farm income. In 1977, a 5-

percent variation in commodity prices caused an estimated 20- to 25-

percent variation in net farm income, depending on changes in production

plans.

Fourth, the combination of continued general price inflation and tax

rules that favor landholding over operatorship in the farm sector has led

some to argue that the traditional family owned and operated farm is

21/ Information supplied by Calvin Beale, U.S. Department of Agriculture,

January 15, 1978. Based on data from Employment and Earnings, U.S.

Department of Labor, January 1971 and January 1977.

22/ Bruce W. Marion, "Structural Changes in Agriculture," North Central

Regional Farm Management Workshop, Madison, Wisconsin, May 1976,

p. 11.

26
ultimately doomed. 23/ When money is pumped into the economy to finance

cost-induced inflation, highly fixed assets, such as farmland, tend to

appreciate in value relative to other investment opportunities. Thus, as

Raup has noted, "In the past decade, farm land values have tripled, but

there has been virtually no appreciation in the capital value of common

stocks...." 24/If this situation continues, many more nonfarm investors—

including foreigners—will actively seek to participate in the capital gains to

be found in investments in farmland. 25/ Furthermore, since existing laws

tax long-term capital gain at a lower effective rate than ordinary income, a

bias is created which favors landholding over farming. If these forces

continue unchecked, the likelihood that a farm operator will own at least

part of the land he farms can be expected to decline in the future.

Finally, the importance of agricultural exports in the U.S. trade

balance increases the vulnerability of farmers and the general economy to

unexpected shocks arising from the agricultural sectors and trade policies of

other countries. For example, good weather and bumper crops in the Soviet

Union may result in depressed incomes for U.S. grain farmers; heavy

taxpayer outlays, to acquire grain surpluses and withdraw farm land;

unemployment in farm machinery manufacturing; a reduction in foreign

exchange earnings; overexpansion of the domestic livestock industry; pressure to curb meat imports; and additional taxpayer outlays to support dairy

prices. If ignored, the uncertainties associated with greater reliance on

foreign markets may also slow the rate of adoption of new technology and

increase the real cost of food to U.S. consumers.

23 / Harold F. Breimyer, "Farm Policy, 1978: Recycled Old or Innovative

New?" Visiting Scholar Lecture, College of Agriculture, Oklahoma

State University, March 7, 1978, p. 14.

24/ Philip M. Raup, "Some Questions of Value and Scale in American

Agriculture," American Journal of Agricultural Economics, vol. 60

(May 1978), p. 307.

25_ Foreign investors have recently been attracted to the U.S. land market

by its rapidly appreciating land values, the devaluation of the dollar,

and by the political and economic stability found in this country.

Foreign ownership of U.S. farmland is now attracting considerable

attention, but unfortunately there are almost no reliable data on this

subject. In a recent study of 25 counties in five farm states, the

General Accounting Office found that only .3 percent of the farmland

surveyed was owned by foreigners. Real estate experts have estimated, however, that foreign buyers invested $.8 to $1 billion in farmlands in 1977, during which period the total value of U.S. farmland

sales was slightly more than $15 billion.

27

CHAPTER HI. DETERMINANTS OF STRUCTURE

The changing structure of American agriculture—in brief, the trend

towards larger, fewer, and more specialized farms and the growing economic dependency of the farm upon the nonfarm sector—is primarily a

function of five highly interactive factors: technology, resource mobility,

financing, risk and uncertainty, and public policy. Other equally pervasive

but less influential forces, such as market demand for farm as compared

with nonfarm products, physical and climatic conditions, property rights,

and a host of sociopolitical institutions, set the stage on which these

structural changes have been occurring.

In order to assess the opportunities for and consequences of using

public policy to shape the farm structure of the future, this chapter briefly

surveys the effects of each of these five structural determinants. Perhaps

the single most important lesson to be learned from such an exercise is that

the joint interaction of structural change factors may result in a net effect

quite different from—indeed, sometimes contrary to—the effect anticipated

when a single factor is considered in isolation.

Technology

The new technology embodied in modern farming techniques, production inputs, and managerial skills substantially increased efficiency in

converting resources into farm output. As a consequence, U.S. farm

productivity skyrocketed. Since 1950, crop and livestock production has

increased more than 40 percent, while the total bundle of inputs used by

farmers remained about constant (see Table 4). As a result of this increase

in efficiency, one measure of the real price of farm products, the parity

ratio (prices received by, divided by prices paid by, farmers), declined about

30 percent over the last 25 years.

Increases in farm output due to technological change tended to move

slightly ahead of market demand through the mid-1960s, resulting in a

problem of excess capacity and low returns to resources in farming. This

problem may, however, now be obsolete, since the rate of increase in farm

productivity has declined to a level approximately equal to the rate of

growth in the domestic population, and because of the development of

export markets. After increasing at an average annual rate of more than 2

percent from 1950 to 1966, beginning in 1967, the annual rate of increase in

29
farm productivity has dropped below 2 percent. And during the last five

years, as discussed in Chapter IE, agricultural exports (in particular, food and

feed grains) increased dramatically, by more than 10 percent a year.

TABLE 4. INDEXES OF FARM PRODUCTION, FARM INPUTS, AND

PARITY RATIO, 1950-1976 (1967=100)

Year

1950

1960

1970

1975

1976

Crop

Production

76

93

101

121

120

Livestock

Production

75

87

105

101

105

Total Farm

Inputs

104

101

99

100

101

Parity

Ratio a/

137

108

98

103

96

SOURCES: Donald D. Durost and Evelyn T. Black, Changes In Farm

Production and Efficiency, U.S. Department of Agriculture,

Statistical Bulletin No. 581, November 1977, p. 7.

U.S. Department of Agriculture, Agricultural

1976, pp. 453-6.

a/ Index of prices received by farmers divided by the index of prices paid

by farmers.

Statistics,

Irrespective of such industry-wide problems as excess capacity and

export market instability, individual farmers, acting as price takers, have a

strong incentive to adopt new technology rapidly. The early innovator

achieves lower per unit production costs and increased profits, at least for a

short time, before other farmers follow his example. Rodewald and Folwell

show that a Washington State winter wheat and pea farmer with 2,500 acres

can reduce his average cost of machinery per acre by 9 percent if he

replaces a conventional crawler tractor with a 4-wheel drive tractor; if he

30
also expands the size of his farm to 3,900 acres, he can reduce that cost by

an additional 18 percent. _!/ This nearly 60-percent increase in farm size can

be made without additional labor. Once innovation begins to be adopted,

other crop farmers generally have two options: purchase a 4-wheel drive

tractor and expand the size of their farm, or accept a lower net income as

market prices for their crops fall. In short, new technology plays an

important role in determining acreage and capital requirements; often that

role can be described as "labor saving and farm-size increasing."

Past, and somewhat dated, studies of the relationship between average

production costs and farm size support two major conclusions. First, most

economies of size are apparently captured by the modern one-, two-, or

three-man farm. Most of these farms are family-size operations. Second,

while the lowest average cost of production may be attainable on a two-man

farm, average cost tends to remain relatively constant over a wide range of

farm sizes. Figure 3 illustrates these conclusions for Texas irrigated cotton

farms.

Since average cost of production levels off, the point of minimum

average cost is realized at a smaller farm size than that at which profit is

maximized. Thus, farmers have a strong incentive to expand the size of

their farms in order to increase total profits. In the words of an Indiana

farmer, Eugene Smith: "The more I expand, the more that cost curve stays

flat out." 2J And research studies support Mr. Smith's argument that higher

total profits can be achieved through larger farm size. A USDA study using

data for 1970 found that the rate of return to equity capital ranged from

-6.1 percent for farms with sales of less than $2,500 to 6.9 percent for farms

with sales of $100,000 and more. 3_/ Adding in return from land appreciation

increased these rates to -3.2 percent and 10.8 percent, respectively.

It is worth noting that the earlier economies of size studies have

several limitations. External economies gained from buying and selling in

large volumes and access to credit have usually been ignored. Common

I/ Gordon E. Rodewald, Jr. and Raymond J. Folwell, "Farm Size and

Tractor Technology," Agricultural Economics Research, vol. 29 (July

1977), p. 89.

2/ "How the Family Farm Can Harvest Millions," Business Week (July 4,

1977), p. 69.

3_/ J. Bruce Hottel and Robert D. Reinsel, Returns to Equity Capital by

Economic Class of Farm, U.S. Department of Agriculture, ERS-347,

September 1976, p. 14.

31
Figure 3.

Average Cost Curves For Irrigated Cotton

Farms, Texas High Plains, 1967

Cost Per Dollar of Gross Income (in dollars)

.87

.83

.79

.75

.71

One-man Farm

4-row Equipment

Two-man Farm

6-row Equipment

Four-man Farm

6-row equipment

I I

One-man Farm

6-row Equipment

i I i I

Three-man Farm

6-row Equipment

i I i I I

Five-man Farm

6-row Equipment

i I l I i

0 20 40 60 80 100 120 140 160 180 200 220 240

Gross Income (in thousands of dollars)

Source: J. Patrick Madden, Economies of Size in Farming, U. S. Department of Agriculture,

AER No. 107 (February 1967), p. 44.

ownership of related farm and nonfarm activities has not been considered.

Nor have most studies included the possibility of hiring custom work and

off-farm employment. Further, relatively little attention has been directed

to livestock enterprises and specialty crops, where small-scale farms may

have an advantage.

In fact, perhaps one of the most unique aspects of resource use in

agriculture, and one that has a significant impact on structural organization, is the husbandry function performed by the individual farmer. Personal

experiences, endows a farmer with special farming knowledge and skills, which may significantly increase production efficiency. For example, he

may know that some parts of a field require more frequent irrigation, or

that the milking time for a certain dairy cow is very short. Where resources

lack uniformity and production conditions are not homogeneous, such special

skills and insights are very important, and it is often not economically

feasible to break the husbandry function down into smaller, more specialized

32
steps. 4/ Under these conditions, husbandry places an upper limit on farm

size, and large-scale, industrial-type production is not feasible. However, a

steady stream of new management technologies—CB radios, mini-computers, and closed circuit television—are now being developed, making it

possible for a single operator to coordinate a larger production unit. .

The mix and type of production inputs used in farming have substantially changed as a result of the adoption of modern technology (Table 5). In

general, farmers have substituted capital and energy-intensive inputs 5_/and

scientific knowledge for physical labor and land. Table 6 provides a general

notion of the farm product mix, physical size, capital and labor requirements, and annual cash receipts of a regional cross-section of farms that use

modern technology and management practices. The seven farms described

in Table 6 are "typical" in the sense that they fall into the size interval

containing the largest number of farms in the regions they represent. Of

course, profitability varies with product and input prices, operator equity,

management ability, weather, and many other factors.

4/ J. Patrick Madden and Earl J. Partenheimer, "Evidence of Economies

and Diseconomies of Farm Size," in A. Gordon Ball and Earl O.

Heady, eds., Size, Structure, and Future of Farms (Iowa State

University Press, 1972), pp. 100-104.

5/ Because of recent energy and environmental problems, some experts

have hypothesized that technology and resource use may shift in

favor of organic farming methods requiring little, or no, inorganic

fertilizer or chemical pesticides. A comparative study of 14 organic

and 14 conventional corn belt farms in 1974 and 1975 indicates that

organic farming merits further study. Net returns to crop production

were about the same for the two groups, with the organic farms using

considerably less energy input and slightly more labor input per acre

of cropland. Both the organic and conventional farms included in the

study were large-scale, mechanized, and well-managed. Since farm

output accounts for only about 2 to 3 percent of total U.S. energy

consumption, a shift to organic methods of farming would not,

however, result in large energy savings. Robert Klepper, et. al.,

"Economic Performance and Energy Intensiveness on Organic and

Conventional Farms in the Corn Belt: A Preliminary Comparison,"

American Journal of Agricultural Economics, vol. 59 (February 1977),

pp. 1-12.

33
TABLE 5. INDEXES OF USE OF SELECTED FARM INPUTS, 1950 TO

1976 (1967=100)

Fertilizer, Feed, Seed, Real Mechanical Lime, and and Livestock

Year Labor a/ Estate Power Pesticides Purchases

1950

1960

1970

1975

2976

217

145

90

80

78

105

100

98

93

94

84

97

100

112

113

29

49

115

127

141

63

84

104

100

107

SOURCE: Donald D. Durost and Evelyn T. Black, Changes In Farm

Production and Efficiency, U.S. Department of Agriculture, Statistical Bulletin No. 581, November 1977, p. 57.

a/ Includes hired, operator, and unpaid family labor.

Resource Mobility

Despite the strong pressures on farmers to increase their productivity

by adopting new technology and expanding their land base, the farm sector

today remains, as discussed in the preceding chapter, remarkably hetero- geneous with respect to size. A review of farm data reveals the persistence

of a surprisingly large number of smaller farms, which accounting analysis

would suggest cannot now exist. This anomaly can largely be explained by

two factors:

o The tendency of certain farm resources—such as operator labor, buildings, land improvements, and other specialized capital

assets—to become "trapped" or fixed in farming; and

o The availability of nonfarm employment to farm operators and

workers.

34
Technically, a resource is fixed in production when its use value is

less than its replacement cost and greater than its salvage value. Under

such circumstances, a farmer has no incentive to either expand or to

contract his use of such a resource. Take the case of a farm operator who is

strongly committed to farming as "a way of life." Because of life style

preferences, this individual views the salvage value of his labor (off-farm

employment) as very low, even zero. Thus when net income from farming

drops, he does not exit from farming, but simply reduces his payments to

himself and other fixed resources, and continues to produce.

More generally, the inability of resources committed to agricultural

production to shift easily out of farming results in an extremely inelastic

short-run supply of farm products (if farm prices fall 10 percent, market

supply declines only 1 or 2 percent). Cochrane and Ryan summarize the

situation as follows:

Farm labor is tied to family patterns of living, with increases

and decreases in response to family growth cycles, rather than

to price level changes except when the whole family decides

to move. Farm land cannot pick up and move to urban areas

when farm prices fall; it shifts into nonfarm uses only when

those uses come to it. Capital sunk into farm buildings,

irrigation and drainage works, tractors and combines does not

move easily or have ready uses in nonfarm industries. Most

resources employed in farming move only slowly, as equipment

and the like are worn out and not replaced, or as human

resources come of age and break away from the family.6/

Given sufficient time, however, resources used in farming do adjust

to changing economic conditions. As pointed out in Chapter I and shown in

Table 5, much of the adjustment burden has fallen on labor. In terms of

employment, American agriculture was a contracting industry from about

1920 to 1973. Many people who moved out of farming were attracted by

good job opportunities and have substantially improved their economic wellbeing. Those without the skills and talents required for nonfarm employment were less fortunate. One well-documented example of such farm labor

displacement is the postwar shift of cotton production from the Deep South

to the High Plains of Texas and the Southwest as a result of developments in

mechanization and irrigation. In the process, thousands of cotton workers

were left jobless.

Willard W. Cochrane and Mary E. Ryan, American Farm Policy, 1948-

1973 (University of Minnesota Press, Minneapolis, 1976, pp. 16-17.

35
TABLE 6. SEVEN TYPICAL FARMING OPERATIONS, BY TYPE OF FARM

PRODUCTS AND REGION, 1975

Farm Products

New York a/

Dairy

Central

Illinois b/

Corn and

soybeans

Mississippi

Delta b/

Cotton and

soybeans

Farm Size 71 cows and

304 acres

400 acres 900 acres

Crop Mix 117 acres of hay;

63 acres, corn

silage; 53 acres, grain corn

200 acres of corn;

180 acres, soybeans

360 acres of cotton;

370 acres, soybeans;

80 acres, wheat

Capital Requirements:

Land

Other

Total

Labor Requirement

$140,000

124,000

$264,000

2.5 man-year

equivalent d/

Annual Cash Receipts $103,000

$500,000

130,000

$630,000

Full-time operator,

family labor (120

hrs.), and hired

labor (100 hrs.)

$ 96,500

$514,000

280,000

$794,000

Full-time operator,

family labor (510

hrs.), 3 full-time

hired workers,

and seasonal labor

(310 hrs.)

$139,000

SOURCES: C.A. Bratton, Dairy Farm Management: Business Summary, New York, 1976, A.E.

Res. 77-9, Cornell University, June 1977. '

P. Leo Strickland and David Fawcett, "U.S. Typical Farming Operations, 1975,"

unpublished manuscript, U.S. Department of Agriculture, September 1977.

U.S. Department of Agriculture, The U.S. Department of the Interior's Proposed

Rules for Enforcement of the Reclamation Act of 1902; An Economic Impact Analysis, January 1978, pp. 17-23.

36
TABLE 6. (Continued)

Southwestern

Oklahoma b/

Texas

High Plains b/ Montana b/ California c/

Cotton, wheat, and

beef cattle

960 acres and 30

head of beef

Cotton and

sorghum

720 acres, including

450 irrigated

Wheat

2,720 acres, includ- ing 1,360 in fallow

land

Irrigated field

crops

640 acres

140 acres of cotton, 420 acres, winter

wheat; 50 acres,

alfalfa hay, 320

acres, pasture

300 acres of cotton

(200 irrigated

and 100 dryland acres);

340 acres,

grain sorghum (250

irrigated and 90

dryland)

940 acres of winter

wheat; 220 acres

barley; 200

acres, spring

wheat

111 acres of

processing tomatoes;

222 acres, cotton;

111 acres' alfalfa hay; 148

acres, barley

$432,000

139,000

$571,000

Full-time operator, family labor (260

hrs.), and hired

labor (40 hrs.)

$254,000

212,000

$466,000

Full-time operator,

family labor (290

hrs.), full-time hired

worker, and seasonal

labor (330 hrs.)

$594,000

159,000

$753,000

Full-time operator,

family labor (420

hrs.), and seasonal

labor (300 hrs.)

$960,000

171,000

$1,131,000

4.0 man-year

equivalent d/

$ 58,300 $ 95,500 $178,000 $391,000

a/ Average data for 615 farms participating in a Cornell University farm management project

in 1976. These farms were considered to "represent a good cross-section of better than

average commercial operators in the State."

b/ Derived from USDA's 1975 typical farm series.

c/ Based on cropping patterns, yields, production costs, and prices received in the Westlands

Water District in 1976.

d/ It is often assumed that the average farm family supplies 1.5 man-years of

labor annually.

37
For those who remain in farming, the outmigration of labor and

increase in labor productivity has been sufficient to increase the real wages

of farmworkers and the real net income of farm operators (Table 7).

Another general indicator shows the disposable income of farm people—farm

operators and their families who live on farms—increasing relative to that

of nonfarm people. These data indicate that farm families are sharing in

the fruits of economic growth. Nevertheless, their income is more unstable

and somewhat lower than the income of the nonfarm population.

Aggregate entry and exit data for farming hide some troublesome

social problems. For example, in spite of the risks of leaving the farm in

middle age, there is evidence that many farmers in this age bracket do,

indeed, leave. But many of those who leave fail to achieve their nonfarm

employment objectives; consequently, they soon return to farming. An

analysis of social security data for 1957 to 1963 indicated that a slight (less

than 2 percent) net off-farm mobility rate concealed a much larger gross

movement. During the period under study, a 14-percent gross off-farm rate

was largely offset by a 12 percent gross in-farm rate. 7_/ Most of those

moving to farms had previously been in agriculture. This return labor

migration suggests that the relatively slow rate of human resource adjustment in agriculture is not so much a problem of farm people being unwilling

to make occupational changes as it is their inability to make a successful

adjustment to nonfarm employment. In addition, entry into farming has

become more difficult because of higher capital costs, more demanding

managerial skills, and fewer opportunities to obtain a farm large enough to

provide a farm operator and his family a standard of living comparable to

that available in the nonfarm sector. There is little doubt that the number

of potential entrants far exceeds the number of opportunities to obtain an

adequate size farm.

Financing

Farm finance has also played a major role in determining the current

structure of agriculture. In order to adopt new technologies needed to

reduce per unit production costs and to expand output, farmers have

borrowed large amounts of capital. During the 1950s and 1960s, farm debts

grew slightly faster than assets (see Figure 4), farmers experienced rela7_/ Dale E. Hathaway and Brian B. Perkins, "Occupational Mobility and

Migration from Agriculture," Rural Poverty in the United States, a

report by the President's National Advisory Commission on Rural

Poverty, Washington, D.C., May 1968, pp. 185-237.

38
TABLE 7. REAL WAGES AND INCOME EARNED IN FARMING AND

DISPOSABLE INCOME OF FARM PEOPLE a/ RELATIVE TO

NONFARM PEOPLE, 1950-1976: IN DOLLARS

Farmworkers Realized Net Income Farm as a Percent of

Hourly Wage from Farming per Nonfarm per Capita

Year Rate b/ Farm Operator c/ Disposable Income

1950

I960

1970

1975

1976

SOURCES:

0.91

1.08

1.44

2.43

2.88

3,180

3,118

4,202

4,464

4,480

Council of Economic Advisers,

President, January 1977, p. 293.

U.S. Department of Agriculture,

58.1

53.9

74.0

88.0

81.4

Economic Report of the

Farm Income Statistics,

Statistical Bulletin No. 576, July 1977, pp. 36 and 56.

a/ All people living on farms.

b/ Average hourly wage rate for all hired farmworkers (without room or

board) deflated by the index of prices paid by farmers for family living

items (1967=100).

£/ Realized gross farm income minus farm production expenses deflated

by the index of prices paid by farmers for family living items (1967=100).

39
Figure 4.

Farm Debt/Asset Ratio

1950 1955 1960 1965

Calendar Years

1970 1975

Source: Emanuel Melichar and Marian Sayre, Agricultural Finance Data Book, Division of

Research and Statistics, Board of Governors of the Federal Reserve System, Washington,

D.C. (November 1977), p. 40.

Figure 5.

Net Return to Equity in Production Assets

Percent

1955 1960 1965 1970

Calendar Years

Source: U.S. Department of Agriculture, Balance Sheet of the Farming Sector, 1977

(October 1977), p.24.

1975

40
tively stable product prices and net incomes, and a very impressive farm

loan repayment record was achieved. Steady upward pressure on land prices

during that period can also be traced to farm expansion buyers and net

return to equity in production assets averaged around 3 percent (see Figure

5).

These conditions set the stage for an unprecedented boom in capital

expenditures and land prices, fed by rising net farm income in 1972 and

1973, and optimistic expectations. Since 1972, land values in the Corn Belt

increased by an average of 180 percent, more than tripling in Iowa. In fact,

most of the recent gains in the value of farm assets are the result of higher

land prices, as was indicated in Table 1. Sophisticated, managementoriented, independent farmers were able to use their income flows and

substantial equity in debt-free land to obtain the financing needed to

acquire more land and expand their output. Thus, rapidly rising land prices

and cooperative lending institutions contributed to what is now described as

"economic cannibalism from within agriculture." 8/

Although agriculture continues to show a high level of equity,

indicating a strong financial position, net return to equity in production

assets is now less than 2 percent, and, since 1974, there has been a very

rapid increase in debt financing relative to the net income stream. The

extent to which debt financing has replaced internal financing in farming

has been recently noted by Melichar:

The relative role of debt in financing capital formation during

1972-1975 (64%) is the highest since that found by Tostlebe for

1915-1919 (76%) and in particular far exceeds that during even

the final stages of the last boom (28% in 1950-1952). In short,

the current capital spending and land price boom has been debt

financed to an extent not experienced since 1920. Thus, some

apprehension about the near-term finances of the farming

sector appears justified.£/

8_/ See Business Week's description of how a 31-year-old Indiana farmer

turned 450 acres into an 8,000-acre farming operation and more than

doubled his net worth each year since 1968. "How the Family Farm

Can Harvest Millions," Business Week (July 4, 1977), p. 68.

9_/ Emanuel Melichar, "Some Current Aspects of Agricultural Finance

and Banking in the United States," American Journal of Agricultural

Economics, vol. 59 (December 1977), p. 970.

41
In a rapidly appreciating land market, it seems likely that the rise in

the price of land is explained less by its income-generating potential in

farming and more by anticipated capital gain. Furthermore, nonfarm

investors have recently been attracted because the rate of appreciation in

land prices in recent years has far exceeded the rate of inflation in the

general economy. Such forces place land acquisition out of the reach of

many farmers.

Current financial trends may have important implications for the

future structure of farming. The vulnerability of large, more highly levered

(indebted) farmers and young farmers who have just purchased land to a

downward fluctuation in net farm income is apparent. These farmers are

likely to turn to the federal government for production controls and income

subsidies, or mandatory parity prices, to ease their difficulty in meeting

their financial obligations. Failure to provide assistance might lead to farm

foreclosures, further concentration of land ownership, and a shifting of

adverse consequences through the grain and livestock sectors to consumers.

There is already evidence that the rate of appreciation in land values

is slowing down and some analysts believe that the full gain in current land

values will not be preserved. The ultimate outcome probably depends

largely on buyers' expectations of capital gain. But the rate at which

current landholdings can be levered into the ownership of additional land

may have slowed.

There is also evidence that heavy farm lending has placed some small

rural banks in a vulnerable position. About 2,100 of the nation's banks have

more than half of their loans in farming, and their liquidity has been

drastically reduced as a result of the adverse impact of falling farm income

on deposits and loan repayment. 10/ Although these institutions account for

less than 3 percent of total bank deposits, they are expected to play an

important role in the future financing of farms and rural communities.

Risk and Uncertainty

Farmers have always faced the hazards of weather, biological processes, and uncertain markets. But today there are several forces at work

which may increase the impact of instability on the structure of agriculture.

New technologies often lead to more highly specialized production, which

10/ Ibid., p. 971.

42
can mean greater instability. A specialized grain farmer is not able to

offset the effect of drastically low corn prices with a higher income earned

from selling hogs. And the impact of a single calamitous event—a

contagious disease in a beef feedlot, or a machine breakdown during a

tomato harvest—is greatly increased under specialization. Furthermore, the

steady growth in grain exports and the shift to a floating exchange rate now

rapidly transmits fluctuations in weather conditions and overseas trade

policy to the U.S. food and fiber sector. Although U.S. farmers today face

greater uncertainties, posed by a more open world economy, than in the

1950s and 1960s, they receive somewhat less price and income support

through commodity programs.

Dealing with risk and uncertainty is an important function of

entrepreneurship. Confronted with uncertain outcomes, the amount of risk

an entrepreneur perceives and is willing to tolerate is largely determined by

his knowledge, psychological make-up, spending plans, and the level and

liquidity of his financial reserves. Researchers have found that farmers,

like most individuals, tend to be risk-adverse. That is, other things

constant, perceived risk creates a state of psychological tension (disequilibrium), which the individual seeks to reduce. Risk-reducing strategies used

by farmers include:

o Collecting production and marketing information, including highly

technical knowledge provided by input suppliers, processors, and

management firms.

o Diversification into commodities with low, or inversely related,

net-income variability; investment in land, building and machinery

that allow enterprise flexibility; non-farm employment.

o Operating with less borrowed capital or increasing the share of

investment in the farm business held as a financial reserve.

o Use of one or more of the options provided by the government—

commodity programs, crop insurance, disaster payments, emergency loans, and marketing orders and agreements.

o Use of private sector risk-sharing arrangements—insurance,

futures contracts, farmer-processor contracts, and buying and

selling through cooperatives.

According to conventional reasoning, a reduction in uncertainty in

farming, through government programs or private sector arrangements,

tends to increase the level of investment and current input expenditure for

43
any given level of average price and income expectations, ll/ Thus,

reducing uncertainty promotes investment and the adoption of new technology, which yield lower average costs and tend to speed the rate of growth

in farm size and the resulting decline in farm numbers. In addition, small

farms may be especially responsive to such reductions, in that small-scale,

low-income farmers with no margin to absorb a downward fluctuation in

income may be more risk adverse than farmers with more favorable

operating margins. 12/ Irrespective of the distribution of benefits, most

economists believe that reduced uncertainty tends to free venture capital

for the pursuit of new activities, leading to an increase in net investment

and economic growth.

Although the empirical findings are far from conclusive, Robinson has

proposed "an alternative hypothesis linking capital investment positively

with price instability." 13/ He argues that much of the investment in

agriculture occurs in years of high prices when farmers have both the

capacity to invest and an incentive to avoid taxation by retaining earnings

for modernization and expansion. Robinson further reasons that low prices

have a positive effect on efficiency if they force farmers to modernize and

weed out inferior (high cost) producers. In short, he has proposed "a cyclical

theory of changes in investment and efficiency in agriculture. Investment

comes in lumpy forms and is facilitated by high prices; inefficiency is

squeezed out in periods of low prices. Stability can lead to complacency

rather than to efficiency although this certainly is not always the case."

Although it is not possible to obtain consensus, an argument can be

put forth that current trends toward enterprise specialization and greater

reliance on export markets imply increased risk exposure in agricultural

production. As farmers pursue risk-reducing strategies, the demand for

ll/ Frederick J. Nelson and Willard W. Cochrane, "Economic Consequences of Federal Farm Commodity Programs, 1953-1972" Agricultural Economics Research, vol. 28 (April 1976), p. 56.

12/ The link between risk perception and farm size is not well understood. One argument is that risk perception is greatest for farms

that are most vulnerable to price and income fluctuations. This could

include small-scale, low-income farmers; rapidly expanding farmers;

and large-scale, highly specialized farmers.

13/ K.L. Robinson, "Unstable Farm Prices: Economic Consequences and

Policy Options," American Journal of Agricultural Economics, vol.

57 (December 1975), p. 769-77.

44
government intervention and private sector risk-sharing arrangements is

likely to increase. To allow increases in net investment and economic

growth, new institutions need to be developed to spread the financial

commitment associated with hazardous undertakings. In considering the

impact of risk-reduction strategies on the structure of agriculture, it should

be noted that most private sector risk-sharing arrangements favor largescale producers because the cost of entering into such arrangements is

largely fixed and specialized knowledge is often required; and further risk

reduction through government intervention or a private sector arrangement

eliminates an inherent advantage of the family-size farm—its ability and

willingness to absorb losses in the short run.

Public Policy

Federal policy has affected the structure of farming in many ways

and it often creates forces pulling in opposite directions, making it

exceedingly difficult to measure any net effect. For example, although

most public programs for agriculture are allegedly designed to help family

owned and operated farms, benefits are nevertheless generally distributed in

direct proportion to volume of output, which encourages farm size growth.

In this section, six areas of public policy involvement that affect the

structure of farming are examined. A major conclusion is that federal

policy has on the whole discouraged small farm operations and led to greater

concentration in farming. Small farms have undoubtedly been helped by

certain programs, but most programs have facilitated the adjustment

processes initiated by technological change and the other determinants of

structure discussed above. Within the farm sector, the greatest benefits

have gone to farmers possessing the motivation and resources to use

commodity programs, tax laws, and low-cost credit to expand their landholdings and size of business.

Commodity Programs. Beginning with the Agricultural Adjustment

Act of 1933, a series of commodity programs have evolved to deal with

price and income problems in farming. These programs have covered such

commodities as wheat, feed grains, cotton, wool, sugar, rice, peanuts,

tobacco, and dairy products. They have used a variety of program tools—

price supports, direct payments, acreage allotments, set-asides, conservation reserves, surplus disposal, and stock accumulation—to stabilize and

increase farm prices and incomes.

When commodity programs are in effect, income gains accrue to

farmers through higher market prices, resulting from price support action,

45
and through government payments. Schultze found that higher market

prices and government payments each contributed about $3.7 billion to farm

income in 1969. 14/ Further, farms with sales over $20,000 (18 percent of

all farms) received 75 percent of the benefits due to higher market prices

and 53 percent of all government payments. The distribution of government

payments is somewhat less concentrated, because a relatively large proportion of the payments were distributed through wheat and feed grain

programs, where small farmers account for a larger share of production than

in other commodities. Wilcox's study of the size and distribution of

government payments for 1968 shows that "most farmers received small to

medium-size payments. Only a few farmers, less than 1 percent, received

payments of $15,000 or more. But, the great bulk of funds paid out as

payments to producers (some 67 percent) went to 33 percent of the

producers in payments ranging from $1,000 per year to $15,000 per year."

IS/

A general notion of the extent of government intervention in farming

during the past 20 years is provided in Table 8. Between 1961 and 1972,

supply-control activities idled about 15 percent of all U.S. cropland each

year. The value of government-held stocks peaked at slightly more than $80

billion in the mid-1960s, and direct payments to farmers climbed to about

$40 billion in 1972. Because of favorable market conditions, the need for

government intervention was largely eliminated from 1974 to 1976.

Evidence that commodity programs provide benefits in direct proportion to the amount sold is readily forthcoming—"they were designed to

benefit the fellow with something to sell, and obviously the more he had to

sell the more he benefited." 16/ This outcome is most apparent in the case

of income gains derived from higher market prices. Government program

payments per se do not necessarily cause farm size growth. Analysis of

direct government payments per farm by value of sales class for 1968, 1972,

and 1976 show that government payments are a smaller percentage of net

receipts on large farms than on small farms. 17/ Therefore, the net receipt

14/ Charles L. Schultze, The Distribution of Farm Subsidies; Who Gets

The Benefits? (Brookings Institution, 1971), p. 30.

15/ Willard W. Cochrane and Mary E. Ryan, American Farm Policy, 1948-

1973. p. 366.

16/ Ibid., p. 364.

17/ U.S. Department of Agriculture, Farm Income Statistics, Statistical

Bulletin No. 576, July 1977, pp. 54-57.

46
TABLE 8. CROPLAND IDLED BY GOVERNMENT PROGRAMS, COMMODITY

CREDIT CORPORATION STOCKS, AND GOVERNMENT PAYMENTS,

1955-1975

Government Payments

Year

1955

1960

1965

1970

1972

1973

1974

1975

Acres of Government

Cropland Commodity

Idled Stocks, Jan. la/

(millions) (billion $)

0

28.7

57.4

57.1

62.1

19.6

2.7

2.4

6.9

8.1

6.7

4.6

4.3

3.3

1.7

0.9

SOURCES: U.S. Department of Agriculture

Farms With Annual

Gross Sales $20,000 or More

All

Farms

(billions $)

O b /

0

2

3

4

2

0

0

Percent of

All Payments

N.A.

31

38

56

61

69

67

71

, Agricultural Statistics,

Department of Agriculture, Farm Income

Percent of

All Farms

N.A.

9

13

19

22

28

29

28

1972 and 1976, U.S,

Statistics, Statistical Bulletin No

609, July 1978, p. 61.

a/ Commodities owned by or under loan to the Commodity Credit Corporation,

b/ Payments to producers of sugar beets and sugar cane.

47
advantage of large farms over small farms increases slightly if direct

government payments are eliminated, other things constant.

Some commodity programs have contained provisions expressly

designed to provide smaller operators with proportionately higher benefits.

Acreage allotments for burley tobacco made it possible for many small

farmers to continue operating, and for many years they were used to shift

most of the burden of supply control to large farmers. In 1970, an annual

maximum limit on government payments of $55,000 per farmer was introduced. Subsequent farm legislation has maintained a payment limitation

provision, but studies by the General Accounting Office and USDA show

that aggregate budget outlays (income transfers to the farm sector) have

been reduced by only a small amount.

Over time, the level of price support provided through commodity

programs has been gradually adjusted downward toward the long-run market

equilibrium price. This reflects a compromise solution that reduces

government acquisition and storage costs and provides farmers with direct

payments to maintain their incomes in low price years and induce them to

participate in supply-control activities. The Agriculture and Consumer

Protection Act of 1973 initiated a target price-deficiency payment scheme,

18/ and under the 1977 Food and Agriculture Act, target prices are adjusted

annually for changes in the national average cost of production, excluding

changes in management and land costs. Note, however, that if economies of

size in farming tend to reach a minimum and flatten out, as suggested in

Figure 2, then target prices based on national average cost of production

guarantee a windfall subsidy to the more efficient farmers who operate

below the average cost of production. 19/ Thus, if the windfall subsidies are

capitalized into land values, the resulting higher capital requirements make

it more difficult for new producers to enter farming and the cost situation

of all producers deteriorates relative to target prices that are not adjusted

for rising land costs. Apparently, then, the current commodity program has

18/ If the market price of a commodity falls below its target price,

participating farmers receive a deficiency payment equal to the price

differential times normal production from a specified acreage.

Because of the introduction of deficiency payments, the effective

level of price support is greater than that implied by the loan rates.

19/ J.B. Penn and William T. Boehm, "Research Issues Re-emphasized by

1977 Food Policy Legislation," Agricultural Economics Research, vol.

30 (January 1978), p. 6.

48
a built-in provision which, over a period of time, may impede entry into

farming and hasten the exit of small-scale farmers.

As mentioned in the preceding section, it is widely believed that the

reduced price and income uncertainty associated with commodity programs

has significantly contributed to the increase in the size of farms. Society

has shared some of the risks inherent in farming and has facilitated the

movement of capital into the farm sector, thereby encouraging the adoption

of new technology and specialization among the larger and more efficient

farming operations. Price supports may also have sheltered some obsolete

technology and protected some smaller farms from failure; but, in recent

years, price supports have been too low to protect highly inefficient units.

The use of land diversion as a means of reducing production has similarly

encouraged consolidation and farm growth. Reduced acreage in farms

optimally organized before land diversion means underutilized labor and

machinery; expanded land holdings offer a ready solution.

It has been suggested that federal commodity programs could be used

to support farm prices at higher levels, which would increase average farm

income and thereby reduce the pressure on farmers to increase output.

Raising support prices is one means of providing income assistance. But it

would give the greatest absolute help to farmers who have the most to sell.

Program benefits are tied to the production of certain commodities or to

land ownership, they are not tied to farmers themselves. Furthermore, high

support prices would require strict production controls or large taxpayer

outlays to store and dispose of surplus commodities.

Nelson simulated the 1953-1972 farm economy and examined the

economic consequences of eliminating all major commodity programs.

_20/Some major findings of Nelson's study, which assumed a free market was

established in 1953, are:

o A larger supply of farm products would have caused farm prices

and incomes to fall at least 20 percent below actual historical

levels by 1957. But supply would ultimately lag, causing farm

prices and incomes to rise at least 6 percent above actual levels in

1968 to 1972.

o Lower incomes and increased farm price variability would substantially reduce capital investment. Land in farms relative to

20/ Frederick J. Nelson and Willard W. Cochrane, "Economic Consequences of Federal Farm Commodity Programs 1953-1972," pp. 52-

64.

49
other assets would increase as farmers substituted cropland and

labor for machinery, fertilizer, and other purchased inputs. Overall farm productivity would have declined about 11 percent below

actual levels by 1972.

o The number of farms would have declined at a slower rate, leaving

Z4 percent more farms with an average size 20 percent smaller

than actually occurred in 1972.

Commodity programs have significantly influenced the structure of

farming. The most dramatic consequences are-reflected in the behavior of

large-scale and expanding farm operators, who levered income gams and

reduced uncertainty into additional land, rapid adoption of new technology,

and highly specialized production processes, at the expense of smaller, less

aggressive farmers. Ultimately, the windfall subsidies generated by commodity programs are distributed in proportion to land ownership and

capitalized into land values.

Taxation. Federal tax laws have historically extended special treatment to individuals engaged in agricultural production. To simplify record

keeping, farmers are allowed to use the cash method of accounting, as

opposed to the more complicated accrual method used in other businesses.

And farm outlays for certain land improvements and conservation practices

can be deducted as current expenses, rather than being capitalized. Such

provisions encourage taxpayers to offset income fluctuations with current

production expenses and to convert ordinary income into capital gain,

taxable at a lower rate. As a result, individuals identified with farming may

have a lower tax burden than other individuals, and the difference between

farm and nonfarm tax burdens appears to widen with increasing income.

21/Since marginal tax rates increase as taxable income rises, special tax

preferences provide greater absolute benefits to individuals in high income

tax brackets. During the past decade, federal income tax legislation has

aimed at neutralizing tax-motivated resource shifts in farming.

Tax preferences associated with farming are generally believed to

create an incentive for the entry of capital from outside agriculture.

Individuals with nonfarm income seek farm tax preferences to reduce their

effective tax rate and postpone payment of taxes. This demand for "tax21/ Charles A. Sisson, "Tax Burdens and American Agriculture: A Micro

Study," (Ph.D. Dissertation, American University, Washington, D.C., 1977).

50
loss farming" opportunities appears to be a function of: the availability of

cash accounting and prepaid production expenses to generate annual farm

losses that can be deducted from nonfarm income; a low tax rate on capital

gain relative to ordinary income; and high nonfarm income. These tax

shelters have contributed to the rising demand for agricultural land and may

be viewed as generating unfair competition for individuals who depend on

farm income for a major portion of their livelihood. There is also evidence

indicating that tax shelter syndicates contributed to overcapacity and

depressed farm prices in cattle feeding, grapes, and other tree crops. 22/

The Tax Reform Act of 1976 is expected to curb some of these activities. Starting hi 1977, losses of partnership investors are generally limited to

amounts "at risk," deductions cannot be claimed for feed, seed, fertilizer

and other farm supplies until they are actually used, and farm corporations

with gross receipts of more than $10 million per year must use accrual

accounting.

Among individual farmers, tax considerations are only one of many

factors affecting the decision to expand or contract the size of a farm

operation. Although special tax provisions are open to virtually everyone in

agricultural production, ability to reap their benefits is directly related to a

farmer's marginal income tax rate. The example presented in Chapter n

(page 19)demonstrates that an individual with a high farm income can

realize a substantial tax saving by incorporating and expanding his farm

through retained earnings. In this process, current income is transferred

into additional real property and land ownership may tend to become more

concentrated in the hands of a few wealthy people. Other aspects of tax

law, such as investment tax credits and accelerated depreciation, encourage

rapid mechanization of farming by shifting a part of machinery costs to the

public. This amounts to a subsidy on capital inputs relative to labor inputs, and the subsidy is most readily available to large farmers who can afford

expensive equipment. Clearly, when these tax provisions are combined with

a graduated federal income tax schedule, high-income farmers receive much

greater benefits than do low-income farmers.

The 1976 Tax Reform Act also substantially changed the valuation

procedure for farm real estate in calculating federal estate taxes. The net

22/ Mathews and Rhodes have described the operation of a cattle feeding

fund, the relationship between federal income taxation and use of

limited partnerships, and some of their effects on agriculture. See

Stephan F. Mathews and James Rhodes, The Use of Public Limited

Partnerships Financing in Agriculture for Income Tax Shelter, North

Central Regional Research Publication 223, University of Wisconsin, July 1975, pp. 1-42.

51
result is a decline in farm estate values for tax purposes, which is expected

to lead individual farmers, as they grow older, to shift capital investment

into land and away from non-land assets. 23/ Benefits of this new provision

will probably be capitalized into farm land values, as farmers with family

heirs who plan to continue farming bid land away from other potential

buyers. In fact, the estate tax shelter may serve as an incentive for the

movement of more tax-motivated capital into farming.

Agricultural Credit. Public policy directly influences the supply of

capital to farmers through the USDA's Farmers Home Administration

(FmHA) and the Farm Credit System, which includes the Federal Land Bank,

Production Credit Association, and Bank for Cooperatives. The original

capital for the Farm Credit System was supplied by the federal government,

but the system is now wholly owned by its borrowers. On January 1, 1977,

the FmHA and Farm Credit System together accounted for slightly more

than one-third of total farm debt outstanding—6 percent and 30 percent,

respectively.

The FmHA makes low interest loans to family farmers who cannot

obtain credit elsewhere. Borrowers may obtain farm ownership loans

carrying a maximum limit of $200,000, financed over 40 years at 8H-percent

interest; and operating loans not exceeding $100,000, financed over 1 to 7

years at 8% percent interest. To the extent the FmHA clients would not be

served by other credit sources, the program reduces an entry barrier and

thereby results in a net increase in relatively small farms. Because of

steadily increasing capital requirements, however, the effectiveness of

FmHA in the future may depend on raising the maximum loan limits.

Lending institutions of the Farm Credit System are considered to be

highly competitive with commercial banks and insurance companies. Though

their impact on the structure of agriculture is not easily determined, it

seems reasonable to infer "that credit is more easily available and at

relatively lower interest rates to agricultural borrowers than it would have

been in the absence of the Farm Credit System." TAJ If this inference is

correct, the Farm Credit System has encouraged entry into farming and

23/ Neil E. Harl, "Corporation Farms and 1977 Farm Legislation," p. 7.

24/ Charles V. Moore, "Effects of Federal Programs and Policies on the

Structure of Agriculture," NEAD Working Paper, U.S. Department of

Agriculture (January 1977), p. 12.

52
promoted expansion of existing farms. Certainly, it has supported the

objectives of the more aggressive, expansion-oriented farmers and its net

effect on structure is probably to increase farm size.

Rural Development. There is growing recognition of a mutual

interdependence between the structure of farming and the viability of rural

communities, and a wide variety of federal programs have aimed at

encouraging rural development. Community planning, technical assistance,

business and industrial loans, public works grants, and highway construction

have been among the most important federal rural development activities.

The availability of rural nonfarm employment increases the options of

farm people and directly influences the structure of farming. In 1930, less

than one in six farms were part-time farms. 25/ In 1977, an estimated 61

percent of the total income of farm operator families came from nonfarm

sources, and 40 percent of the 1974 Census of Agriculture farm operators

reported their principal occupation to be "other than farming." Nonfarm

income helps some people remain in farming; others sell out to a neighbor in

order to work full time off the farm. In addition, the business activity

generated by farming has economic and social effects that spread out into

the community. Sociologists recently examined the relationship between

the control of major agricultural resources, namely land and water, and the

quality of community life in 130 San Joaquin Valley towns. 26/They

concluded that rural communities derive greater benefits from a large

number of relatively small, family-owned and operated farms than from a

few large-scale farms. Data are presented which show that the communities surrounded by small farms offer more diversified and stable employment, a larger volume of local business activity, more schools, parks, and

other public services, and more participation in social and civic organizations.

The initial argument that federal assistance was needed to stem the

long-time rural to urban migration was dampened when demographers

reported that population growth rates in nonmetropolitan counties began to

25/ D. Gale Johnson, Farm Commodity Programs: An Opportunity for

Change, p. 15.

26/ Community Services Task Force Report, The Family Farm in California, State of California, Sacramento, California (November 1977),

pp. 1-36.

53
exceed metropolitan counties in the early 1970s. 27 / But the critical

question remains: To what extent have federal rural development programs

shifted the distribution of economic activity in favor of rural areas and

delivered net benefits to farm families and other rural residents? Very few

studies address this difficult question in an objective and comprehensive

manner. A statistical analysis of 319 counties receiving assistance through

the Department of Commerce and 982 other counties in 13 southeastern

states from 1959 to 1969 shows that the assisted counties did not experience

significantly higher employment increases than the unassisted counties. Instead, changes in employment were significantly related to the amount of

previous industrialization in the counties, the rate of unemployment in I960, and the availability of TVA power. 28/

The recent trend toward rural industrialization in the South and

migration to the Sun Belt is probably more a consequence of low wage rates, "right to work" laws, rising external costs of operating in northern urban

centers, and the increased availability of retirement benefits than of federal

rural development programs. Federal programs have certainly influenced

the development of selected local communities and the resulting improve- ments in infrastructure (highways, sewer systems, and so forth) have clearly

enhanced the quality of rural life. But, at this time, there is no evidence of

a net increase in employment and population in rural America, nor of sub- sequent effects on the structure of farming, over what would have occurred

in the absence of special federal rural development activities.

Research, Extension, and Information. Publicly supported research, extension, and information activities have greatly increased agricultural

productivity. Research results and other types of agricultural information

share a characteristic of all public goods—if farmer A "consumes" a market

news report, its utility to other farmers is not destroyed—and they are more

widely distributed as a result of government involvement. Estimates of the

27 / Calvin L. Beale, "A Further Look at Nonmetropolitan Population

Growth Since 1970," American Journal of Agricultural Economics, vol. 58 (December 1976), p. 953.

28/ Thomas Till, Development in Counties of Thirteen Southern States

with Respect to EDA/ARA Program Effects, U.S. Department of

Commerce, September 1973.

54
social rate of return on public investment in agricultural research are very

favorable, ranging from 30 to 55 percent. 29/

Research, extension, and information activities have probably

promoted the trend toward fewer and larger farms. Research results are

put to work by innovative farmers through new machinery, seeds, breeding

techniques, and production practices. Some technologies, such as a 4-wheel

drive tractor, are clearly biased in favor of larger operating units. But most

scientific improvements can be used effectively regardless of farm size. One consequence is that early adopters—of, say, an improved variety of

corn—place downward pressure on prices and all farmers must expand then- output to maintain a given level of net income. Even technology that

appears to be "neutral" with respect to farm size causes some farmers to

expand and forces others to accept low returns until they retire or find

alternative employment.

In addition, the USDA and land grant colleges have been widely

criticized for ignoring the research needs of small farm operators, farm

workers, and others who fall outside the contemporary economic and

political power structure, of which they are themselves members. Accord- ing to Hightower:

Land grant policy is the product of a closed community. The administrators, academics, and scientists, along with the

USDA officials and corporate executives, have locked them- selves into an inbred and even incestuous complex, and they

are incapable of thinking beyond their self-interest and tradi- tional concepts of agricultural research. 30/

A closely related consequence is a failure to allocate public resources

to assess the economic and social impact of new farm technology on those

individuals adversely affected by such changes.

29/ Robert Evenson, "The Contribution of Agricultural Research to

Production," Journal of Farm Economics, vol. 49 (1967), pp. 1415- 1425. Zui Griliches, "Rearch Costs and Social Returns: Hybrid Corn

and Related Innovations," Journal of Political Economy, vol. 66

(1958), pp. 419-431.

30/ Jim Hightower, "A Summary of Hard Tomatoes, Hard Times," Agri- business Accountability Project, Washington, D.C., 1972, p. 15.

55
The Extension Service has played a vital role in transmitting scientific knowledge to farmers. And, today, there is ample reason to believe

that the level of knowledge and technical skill required to succeed in

farming may have a greater impact on structual organization than the

increase in capital requirements caused by the growth in farm size.

Dependent on the use of "change agents" as the most cost-effective conduits

for disseminating information, the Extension Service has focused most of its

resources on farms of medium to large size. In a few states, however, such

as Missouri and Texas, the Extension Service uses paraprofessionals and

other program techniques aimed specifically at small-scale farmers.

Working intensively with small farmers on a one-on-one basis, assistance in

improving their production practices, marketing, and knowledge of available

services is provided. Although only a small amount of funds have been

devoted to such programs, moderate increases in participants' income have

been reported.

Information on current market prices and shipments, crop planting

intentions, numbers of livestock on feed, exports, and many other factors

are supplied by the USDA to help farmers formulate their production and

marketing plans. Publicly supplied information has value to the extent it is

used to improve decisionmaking. Society as a whole benefits when any

farmer is assured of accurate, timely, and relevant information. Since the

cost of obtaining and using this information is fairly constant with respect

to output, large farms can spread the fixed cost over more output. Other

things constant, greater absolute value accrues to large farms relative to

small farms.

Environmental Protection. Federal environmental regulations affecting agricultural production are still evolving and their structural consequences are therefore unknown. The final outcome will depend largely on

the cost structure of pollution abatement technology and the administrative

rules used to enforce environmental standards. For example, if dairy farms

with fewer than 30 cows are exempt from water pollution regulations, they

may even gain an advantage relative to large dairy farms.

Most pollution abatement technology requires a relatively heavy

initial capital outlay and usually does not produce additional revenue.

Lagoons for cattle feedlots and the protective clothing and training required

in applying pesticides are good examples. To the extent that economies of

size exist in pollution abatement, the enforcement of environmental

standards will tend to increase concentration in farming.

Others. Many other government policies and programs influence the

structure of the farm sector. Federal irrigation projects distribute massive

56
subsidies to landowners in the western states. 31/ This program gives

farmers in federal project service areas a cost advantage over other farmers

and shifts the location of agricultural production in favor of the irrigated

West. Grazing fees for the use of public land are another kind of federal

subsidy, which are distributed to ranchers in direct proportion to the number

of animals grazed.

The federal government also helps farmers deal with natural hazards

through crop insurance, emergency loans, and disaster payments. These

programs have helped some farmers stay in operation and have encouraged

others to expand. But since the level of risk assumed by the government is

small relative to the total liability, the net effect of these programs on

farm structure has not been very significant.

In future years, public policy related to nutrition, diet, and consumer

attitudes may have an important impact on American agriculture. For

example, concern over increased consumption of meat and other sources of

saturated fat and cholesterol could mean greater emphasis on new grain

products for human consumption.

31/ The U.S. Department of the Interior estimates that the present value

of the water subsidy in California's Westlands Water District is

$1,540 per acre.

57

CHAPTER IV. CURRENT POLICY OPTIONS CONCERNING THE FUTURE

STRUCTURE OF AGRICULTURE

In designing a policy to influence the future structure of agriculture,

policymakers must deal with two difficult questions. First, what structure

is desired? And second, what policy tools are best for achieving it? To help

answer these questions, this chapter considers three alternative farm

structures, policy tools that could be used to achieve them, and some of the

economic implications of each of these three structures.

A few preliminary words of caution may, however, be appropriate.

The amount of hard, quantitative research on which to base conclusions

about the future structure and performance of the farm sector is quite

limited. This is a particularly serious limitation, because the current farm

sector is highly heterogeneous by size and type of farm, capital requirements, production practices, linkages with the nonfarm sector, and off-farm

employment. Further, although public policies certainly influence the

structure of agriculture, they must interact with structural determinants

arising out of the private sector (see Chapter in). While public and private

forces are often complementary, they are also sometimes conflicting; hence

the objectives of public policy may be completely negated. Conclusions

concerning the future of the U.S. farm sector and alternative policies that

seek to influence it therefore inevitably involve an element of "crystal ball

gazing."

Alternative Structures

The choice concerning the future structure of agriculture currently

available to policymakers is not really a choice between the two extremes

of many small family farms, on the one hand, or a few giant conglomerates,

on the other. Rather, the pertinent choice is between the different rates at

59
which our heterogeneous farm sector will continue to be transformed during

the next 20 to 30 years. _!/

The current trend in the pluralistic farm structure that has evolved is

toward fewer, larger, and more specialized farms, greater use of manufactured inputs, a smaller farm labor force, and closer ties to the rest of

society. Despite the strength of this trend, it seems likely that the farm

structure for many years into the future will continue to reflect the

heterogeneity that is so characteristic of the mold from which it must be

cast. It therefore seems reasonable to assume that there are today three

alternative farm structures from which policymakers may choose: a

continuation of the current trend toward fewer and larger farms, a

deceleration of the current trend, or an acceleration of this trend. ~Lj The

choice between these alternative structures will, in turn, be largely determined by the relative weights assigned to certain key objectives, namely:

production efficiency, the level of farm family income, consumer food

prices, the economic health of rural communities, and federal budget costs.

Because some of these objectives are nearly always in conflict, choice

among the alternative farm structures requires that some objectives be

traded off against others.

Continue Current Trend. Continuation of the current trend would

result in a wide range of farm sizes, with substantial variation by type of

agricultural product and region of the country. If this alternative were

_!/ Some analysts do not agree with this statement. Belden has proposed

a restructuring of agriculture that would involve decentralized production of most crops on small, multi-crop farms; labor-intensive methods

of production; public control of agricultural exports; and direct income

supplements. Joe Belden with Gregg Forte, Toward A National Food

Policy, Exploratory Project for Economic Alternatives, 2000 P Street

N.W., Suite 515, Washington, B.C., 1976.

2/ Of course, there are many other possible farm structures. Here it is

assumed that Congress may be interested in adopting public policies

that would influence the rate, but not completely alter the direction,

of change in the farm structure.

60
selected, there would probably be about 1.6 million farms in 2000. 3/

Approximately 50 percent of these farms would be small (that is, have

annual sales of less than $20,000 in 1976 dollars ), including many highly

successful part-time farms. An estimated 300,000 large farms (those with

annual sales greater than $100,000) would account for 80 percent or more of

total cash receipts from farming. A large proportion of all farm labor would

continue to be supplied by farm operators and family members. Most of the

land used in farming would be owned by independent landholders, although

leasing would probably become more prevalent.

Steadily increasing capital and management requirements would

greatly limit opportunities to enter farming on a full-time basis. Furthermore, pressure for better coordination of the food and fiber system would

probably reduce the managerial independence of individual farmers. In some

farming areas, traditional open markets would disappear and farmers would

have fewer alternatives for purchasing inputs and selling their products. For

some commodities, such as broilers, turkeys, sugarcane, sugarbeets, seed

production, citrus fruit, and processing fruits and vegetables, concentration

and control by large-scale integrators would need to be carefully watched

for signs of anticompetitive behavior. But, the production of most other

commodities would be dominated by large capital-intensive family farms.

Overall, food processors, distributors, and production input suppliers would

be in a. stronger position to gain market control than would farmers. These

firms would be likely to place high priority on market security and

controlled growth through product differentiation and advertising, with less

emphasis on price competition.

Decelerate Current Trend. Slowing down the current trend would

result in a larger number of small and medium-size farms, with more

management decisions in the hands of individual farmers. Under this

alternative, there would probably be about 1.9 to 2.0 million fa.rms in 2000;

3_/ This projection is extrapolated from a Markov Chain analysis conducted by William W. Lin, U.S. Department of Agriculture, January 9,

1978. In 1974, Sonka and Heady projected 1.8 million farms in 1980

under a "typical farm structure" consistent with current trends.

Steven T. Sonka and Earl O. Heady, American Farm-Size Structure In

Relation to Income and Employment Opportunities of Farms, Rural

Communities and Other Sectors, Center for Agricultural and Rural

Development, Iowa State University, Card Report 48, (June, 1974), p.

62.

61
10 percent or fewer would have annual gross sales greater than $100,000. 4/

In order to attain an acceptable standard of living, most of the families

living on smaller farms would be highly dependent on nonfarm income. But

medium-size farms would contribute somewhat more to total farm output

than under the current trend. There would also be fewer hired farmworkers,

no separate landholding class, and the role of professional farm managers

would be reduced. Some family labor would be substituted for purchased

inputs, open market trading would expand, and there would tend to be a

larger number of alternative markets.

Accelerate Current Trend. Accelerating the current trend means that

a greater share of agricultural production would be under the control of very

large family owned and operated farms and industrialized farms. Nevertheless, there would still be many farms—about 0.9 to 1.0 million farms in

2000. 5/ But this option would probably reduce the number of farms with

annuafgross sales of less than $100,000 by 50 percent or more, as compared

with continuing the current trend. Land ownership would tend to become

more concentrated and large-scale farmers would lease land from exfarmers, farm widows, and urban investors. The differentation between

those who work the land, manage it, and own it would increase. The open

market aspect of agriculture would disappear, farmers would receive more

management supervision from creditors and processors, and capital would be

increasingly transmitted to farming through stocks, bonds, and mutual funds.

Large farmers would engage in collective bargaining through their commodity organizations or cooperatives. In short, the structure of agriculture

would involve a relatively small number of very large production units

accounting for nearly all farm output and a substantial number of small and

part-time farms. The latter group would not represent an economically

strong or stable part of the farm structure.

4/ A USDA study projected 2.4 million farms in 1985 and 2.1 million

farms in 2010 under " a set of programs designed to preserve the

maximum feasible number of farms." U.S. Department of Agriculture,

Alternative Futures For U.S. Agriculture; A Progress Report, Printed

for the use of the Committee on Agriculture and Forestry, U.S.

Government Printing Office, (September 1975), p. viii.

5/ In 1975, the USDA projected 1.0 million farms in 1985 and 0.9 million

farms in 2010, assuming maximum efficiency through a free market.

A year earlier, Sonka and Heady projected 1.3 million farms in 1980

with a large farm structure composed entirely of farms with annual

gross sales over $40,000.

62
Policy Tools

Policy tools that could be used to achieve each of the alternative farm

structures are discussed below. These policy tools are neither exhaustive

nor representative of a major break with past policies. Instead, they are

selected to indicate the type of public policy that might emerge from the

Congress, if a particular farm structure were preferred. The policy tools

presented here are not analyzed in depth, but are proposed as representative

of the type of public policy needed to achieve a particular type of farm

structure.

The public policy tools needed to ensure continuation of the current

structural trend are now in place. Commodity programs would provide price

supports as a percentage of average production cost and would supplement

low incomes with deficiency payments. Uncertainty in the market place

would be reduced and program benefits would be distributed in proportion to

volume of output. Export market expansion would be pursued by negotiating

reduced trade barriers and more long-term trade agreements. The Farm

Credit System would be sufficiently expanded to satisfy the increasing

credit needs of larger farms. Tax provisions applying to farmers would be

similar to other businesses, but the lower tax rate on capital gain would be

maintained. Some additional attention would be directed to the research

and information needs of smaller farms. And existing anti-trust laws would

be used to maintain reasonably competitive checks and balances in the food

and fiber system. This might involve prohibiting further acquisitions and

mergers by the largest corporations and cooperatives.

Public policy strategies that would decelerate the current trend

require the most substantial revisions of traditional farm policy. Specific

changes would be needed to discourage the expansion of family-size farms

into larger-than-family-size farms, to encourage some large farms to

disaggregate, and to diffuse economic power. A set of policy tools to

achieve this structure might include the following:

o Commodity program benefits could be targeted to small, diversified farms. This could be accomplished by gearing program

payments to farm size or existing ownership patterns, and by

requiring two or three enterprises per farm for program eligibility. Transferability of program benefits should then be

prohibited, because large farmers would tend to bid land away

from small farmers.

o Another option would be simply to eliminate the commodity

programs and provide direct income subsidies to poor farm (and

nonfarm) people.

63
Public research and information could be aimed exclusively at

small and part-time farmers. Diversified farming, labor-intensive production practices, organic farming, and direct marketing

would be key research topics.

Liberal government credit could be used to reduce the cost of

debt capital to small farms relative to large farms. A new

program enabling the government to purchase land and lease at

favorable terms to small farm operators might be introduced.

Tax laws could be changed to prohibit the use of farm losses to

offset nonfarm income, to increase the capital gain tax, and to

eliminate the investment tax credit. To further retard farm

growth, a graduated property tax might be introduced and a

special tax levied on the manufacture or use of size-increasing

technology.

Agribusiness corporations could be prohibited from engaging in

farming and using contracts that severely impair the managerial

independence of the farmer, and a large proportion of farm

inputs and products could be required to move through open

markets.

Government subsidies could be used to promote dispersed rural

industrialization to ensure farm families employment opportunities without leaving their farms.

Moving in the opposite direction, policy tools to accelerate the current

trend would attempt to reduce steadily the cost of production on large

farms and encourage the development of a closely coordinated food and

fiber system. Modifications of existing policies and programs might include

the following:

o Commodity programs could be used to eliminate the risk of

decreases in farm prices and incomes, with no maximum limit on

government payments per farm. The level of price support could

be kept low enough to avoid encouraging small operators to stay

in farming.

o Public research and information would focus on the needs of

large-scale farms. FmHA programs would be phased out, as

would any special help for small farmers through the Extension

Service and other agencies.

64
Vertical coordination of food and fiber production would be

encouraged through contracting, direct ownership, and government regulation of business activity.

Higher minimum wages and unionization of farm workers would

promote mechanization and farm growth.

Industrialization and employment opportunities would be subsidized in "growth centers" away from prime farming areas.

Consequences

Some likely consequences of the alternative farm structures are

discussed by comparing the consequences of slowing down or accelerating

the current trend with the consequences of continuing the current trend

(Table 9). Using the alternative of continuing the current trend as a

benchmark serves to highlight the nature and relative magnitude of the

trade-offs among important objectives.

Under a continuation of the current trend (1.6 million farms in 2000),

aggressive and innovative farmers are likely to earn incomes comparable to

opportunities in the nonfarm sector. Reasonably efficient and competitive

conditions are expected to prevail, with consumers paying about 12 to 14

percent of their disposable personal income for food and fiber products.

Federal program costs would depend largely on supply and demand conditions, particularly in the major export markets. Other things constant,

increased exports would result in more farms and higher net income per

farm.

With respect to production efficiency and farm income, slowing down

the current trend (1.9 to 2.0 million farms in 2000) would result in slightly

higher average production costs and total cash receipts to the farm sector

would rise. As compared with continuing the current trend, average farm

prices might rise 8 to 10 percent, 6_/ and average net farm income would fall

6_/ Steven T. Sonka and Earl O. Heady, American Farm-Size Structure in

Relation to Income and Employment Opportunities of Farms, Rural

Communities and Other Sectors, p. 33.

65
TABLE 9. COMPARATIVE CONSEQUENCES OF ALTERNATIVE FARM

POLICIES

Consequences

Policy Options

Decelerating as

Compared with

Continuing the

Current Trend

Toward Larger and

Fewer Farms

Accelerating as

Compared with

Continuing the

Current Trend

Toward Larger and

Fewer Farms

Expected Change in:

Average Costs of

Farm Production

Total Cash Receipts

to Farming

Average Net Farm

Income

Retail Food

Prices

Economic Activity in

Rural Communities

Federal Budget

Costs

Slightly

Higher

Higher

Substantially

Lower

Higher a/

Increased

Higher

Slightly

Lower

Lower

Substantially

Higher

Lower a/

Decreased

Lower

a/ It is estimated that slowing the current trend would increase retail

food prices by 3 percent and that accelerating the current trend

would decrease retail food prices by 3 to 5 percent. These estimates

are based on the assumption that on-farm economies of size, discounts earned through volume buying of production inputs, and lower

costs of volume selling are not absorbed in higher processing and

marketing margins.

66
about 15 to 20 percent, due to higher costs and a larger number of farms.

7/ Labor requirements would be at least 10 percent higher.

Under the alternative of accelerating the current trend (0.9 to 1.0

million farms in 2000), lower per unit production costs might enable average

farm prices to be reduced by 10 to 15 percent. %J Total cash receipts to the

farm sector would fall as compared with continuing the current trend, but

average net farm income might rise 25 percent. In effect, average farm

income would be increased as a result of the elimination of some small- and

medium-sized farms, and the distribution of farm income would be skewed

in favor of a relatively small number of large farms. In addition, as the

price of land is bid up, fewer farm people would benefit.

These initial consequences reveal some of the important trade-offs

involved in deciding among alternative farm structures. Accelerating the

trend toward larger and fewer farms causes a sacrifice in total cash receipts

to the farm sector and in farm employment, but results in higher incomes to

farmers who operate the larger units. Society gains an efficiency-oriented

farm sector with the skills and resources required to adopt and use new

technology rapidly, but individual farmers may have to give up much of their

managerial independence and proprietary status.

Most experts believe that decelerating the current trend means higher

consumer prices and accelerating the current trend means lower prices. A

1-percent change in average farm prices is generally reflected as a 0.3 to

0.4 percent change in the food expenditure component of the Consumer

Price Index. Therefore, accelerating the current trend would probably

decrease retail food prices by 3 to 5 percent, while slowing the current

TJ In the USDA study, an additional 0.3 million farms in 1985 would cause

average net farm income to fall 28 percent. U.S. Department of

Agriculture, Alternative Future for U.S. Agriculture; A Progress

Report, p. viii.

&/ Steven T. Sonka and Earl O. Heady, American Farm-Size Structure in

Relation to Income and Employment Opportunities of Farms, Rural

Commuities and Other Sectors, p. 33.

67
trend might increase food prices by 3 percent. 9_/ If public policies are

adopted to accelerate the current trend, it seems likely that consumers

would obtain a larger supply of food and fiber products at slightly lower

prices. And with lower farm prices, more agricultural commodities would

be sold abroad, which might increase foreign exchange earnings and make it

easier for Americans to purchase imported goods. However, accelerating

the current trend would create a greater threat of interrupted food supplies.

With greater concentration of production and more farmworkers unionized,

consumers would be more likely to experience major interruptions in farm

work, input supplies, or processing at critical times. Dispersed ownership,

small farms, and heavy reliance on owner-operator labor rather than

borrowed capital and hired labor provides a cushion of fixed costs that can

be absorbed, or postponed, during times of adversity. This guarantees

continuity in food supply, even if the economy is in the midst of a severe

depression.

Policies to slow down the current trend would favorably affect

economic activity in rural communities because higher total cash receipts

flowing to the farm sector support more local service businesses, and more

farm families and workers purchase more consumer goods and services from

local merchants. Furthermore, greater industrialization of rural areas

would tend to increase the nonfarm income of many farm families,

offsetting, at least to a degree, the reduction in net income from, farming.

Larger farms result in lower production costs, fewer farms, and less labor

input, which tend to dampen local economic activity. Large-scale operators

often find it feasible and advantageous to go outside their rural community

to deal directly with machinery manufacturers, feed and seed companies,

and major city banks. In projecting to 1980, Sonka and Heady found that

secondary-income generation increased 16 percent with a small farm

structure and decreased 15 percent with a large farm structure. 10/ Although

9J Other experts do not believe that retail food prices would differ under

the alternative farm structures considered here. They argue that any

economies of size realized by a shift toward larger farms would be

offset as the processing and marketing of food is further transformed

toward promotional instead of price-based competition. Harold F.

Breimyer and Wallace Barr, "Issues In Concentration Versus Dispersion," Who Will Control U.S. Agriculture? North Central Regional

Extension Publication 32, (Urbana-Champaign: University of Illinois,

August 1972), pp. 13-22.

10/ Steven T. Sonka and Earl O. Heady, American Farm-Size Structure in

Relation to Income and Employment Opportunities of Farms, Rural

Communities and Other Sectors, p. 49.

68
there are differences in assumptions, similar consequences might be expected from slowing down the current trend (a small-farm structure) and

accelerating the current trend (a large-farm structure).

The federal budget costs of alternative farm structures depend on

market conditions and the policy tools adopted. Many factors influencing

supply and demand, such as weather and the foreign trade policy of other

countries, are not subject to control by the U.S. government. This makes it

very difficult to project budget costs reliably. Nevertheless, decelerating—

as opposed to continuing or accelerating—the current structural trend, using

policy tools such as those described in the preceding section, is likely to

require the most government intervention and the largest taxpayer outlay,

ll/ Budget costs would be incurred for deficiency payments (or some other

type of income maintenance), expanded research and extension activities to

help small farm families, and intensified rural development. USDA analysts

have concluded that 1985 federal budget costs would be at least twice as

high under a set of programs designed to preserve the maximum feasible

number of farms, as compared with either a maximum efficiency or a supply

management alternative. 12/ On the other hand, the federal budget costs of

implementing public policies to accelerate the current structural trend

would probably not be great. Commodity programs would be used only to

stabilize farm prices. With reduced market risk, large farmers would

expand rapidly by taking advantage of accelerated depreciation, investment

tax credit, preferential taxation of capital gain, and other institutional

factors that enhance their purchasing power. Government outlays would not

be used to provide the income supplements, research, or nonfarm jobs that

would strengthen the competitive position of smaller farms. Although

direct government outlays to farming would be reduced, substantial increases in federal spending might ultimately be needed to assist displaced

farm people and economically depressed rural communities.

One final consequence, relating to the reversibility of farm structures,

is noteworthy. If policymakers at this time do not strongly prefer any one

of the three farm structures presented here, they may want to consider

ll/ On the other hand, Paarlberg argues that ending existing programs

that contribute to continuing the current structural trend would

simultaneously slow the trend to fewer and larger farms and save

money.

12/ U.S. Department of Agriculture, Alternative Futures for U.S. Agriculture: A Progress Report, p. viii.

69
slowing down the current trend, since this option provides the greatest

degree of reversibility in farming. If, in future years, a particular farm

structure becomes highly preferred over all others, it is probably far easier

to consolidate small units than to break up large units. A decision to

decelerate the current trend in agriculture would provide policymakers with

more policy options in the future.

General Implications

Public policy can be used to influence the rate of change in farm

structure and the consequences that emerge from that change in structure. The different consequences of alternative farm structures reflect different

distributions of benefits and costs to consumers, farmers, and rural resi- dents. If policymakers decide to accelerate the current structural trend, benefits go to the relatively small number of individuals who own the largest

farms and to consumers, who pay lower food prices. Major costs are

imposed on rural communities as total cash receipts to the farm sector fall, farm employment declines, and local economic activity contracts. Deceler- ating the current trend, on the other hand, stimulates income generation in

local economies and rural communities, but results in a much lower average

net farm income, which would be a serious burden for many farm families. Further, this alternative of slowing down the current trend conflicts with

the efforts of farm families who seek to increase their income and improve

their standard of living by increasing the size of their farm.

Available research suggests, however, that the differences in retail

food and fiber costs under alternative farm structures would be quite

modest, relative to those between total cash receipts to farming, average

net farm income, farm employment, and the viability of rural communities. Perhaps public policy can be used to help achieve a farm structure

sufficiently diverse to absorb economic shocks and provide a reliable food

supply, without isolating farming from changes in the rest of the economy.

70

O