Status of the family farm

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Material Information

Title:
Status of the family farm
Distinctive title:
Farm organization and performance in the 1970's
Abbreviated Title:
Status fam. farm
Physical Description:
4 v. : ill. ; 24 cm.
Language:
English
Creator:
United States -- Congress. -- Senate. -- Committee on Agriculture, Nutrition, and Forestry
United States -- Dept. of Agriculture. -- Economic Research Service
United States -- Dept. of Agriculture
Publisher:
U.S. G.P.O.
Place of Publication:
Washington
Publication Date:
Frequency:
annual

Subjects

Subjects / Keywords:
Family farms -- Periodicals -- United States   ( lcsh )
Genre:
federal government publication   ( marcgt )

Notes

Dates or Sequential Designation:
-4th (Feb. 1982)
Dates or Sequential Designation:
Began with June 1979.
Issuing Body:
Vols. for <-1982> prepared by the Economic Research Service, U.S. Dept. of Agriculture for the Committee on Agriculture, Nutrition, and Forestry, United States Senate.
General Note:
Reuse of record except for individual research requires license from Congressional Information Service, Inc.
General Note:
MONTHLY CATALOG NUMBER: gp 82015015
General Note:
At head of title: 97th Congress, 1st session. Committee print.
General Note:
CIS Microfiche Accession Numbers: CIS 79 S162-14, CIS 79 S162-24, CIS 82 S162-2
General Note:
Reuse of record except for individual research requires license from LexisNexis Academic & Library Solutions.
General Note:
CIS Microfiche Accession Numbers: CIS 79 S162-14 (Y4.Ag8/3:F21), CIS 79 S162-24 (Y4.Ag8/3:F21/979), CIS 82 S162-2 (Y4.Ag8/3:F21/982)
General Note:
At head of title: Committee print.
General Note:
Description based on: 2nd, Oct. 31, 1979.
General Note:
Feb. 1982.
General Note:
Library is missing the third annual report.
Statement of Responsibility:
submitted by the United States Department of Agriculture in compliance with Title I, Sec. 102 of the Food and Agriculture Act of 1977 ; Committee on Agriculture, Nutrition, and Forestry, United States Senate.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 020677512
oclc - 05144712
lccn - 81644057
issn - 0270-1154
Classification:
lcc - HD1476.U5 S84
ddc - 338.1/6
System ID:
AA00023970:00002

Table of Contents
    Front Cover
        Page i
        Page ii
    Foreword
        Page iii
        Page iv
    Letter of transmittal
        Page v
        Page vi
    Preface
        Page vii
    Summary
        Page viii
    Table of Contents
        Page ix
        Page x
    Introduction
        Page 1
    Trends in selected structural characteristics
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
    Alternative marketing approaches for farmers
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
    Commodity program impacts on the farm sector
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
    Structural changes in the cattle feeding industry
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
    References
        Page 48
        Page 49
    Back Cover
        Page 50
Full Text



qo96th CongressCO ITEPRT
1st Session





STATUS OF THE FAILY FARM

(Second Annual Report to Congress)



Submitted by the United States Department of Agricultur6
in Compliance With Title I, Sec. 102 of the
Food and Agriculture Act of 1977




COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY

UNITED STATES SENATE










OCTOBER 31, 1979 Ct.'





Printed for the use of the Committee on Agriculture, Nutrition, and Forestry U.S. GOVERNMENT PRINTING OFFICE 51-102 WASHINGTON : 1979

































COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY HERMAN E. TALMAD GE, Georgia, Chairman GEORGE McGOVERN, South Dakota JESSE HELMS, North Carolina
WALTER D. HUDDLESTON, Kentucky MILTON R. YOUNG, North Dakota
RICHARD B. STONE, Florida BOB DOLE, Kansas
PATRICK J. LEAHY, Vermont S. I. HAYAKAWA, California
EDWARD ZORINSKY, Nebraska RICHARD G. LUGAR, Indiana
JOHN MELCHER, Montana THAD COCHRAN, Mississippi
DONALD W. STEWART, Alabama RUDY BOSCHWITZ, Minnesota
DAVID H. PRYOR, Arkansas ROGER W. JEPSEN, Iowa
DAVID L. BOREN, Oklahoma
HENRY J. CASSO, Staff Director
CARL P. ROSE, General Cou n8el
GEORGE S. DUNLOP, Minority Staff Director
(I)












FOREWORD


No question is receiving greater attention in agriculture today than that of farm structure andithe future of the family farm in America. In the Food and Agriculture Act of 1977, Congress provided for the development of facts about the family farm system by requiring the Secretary of Agriculture to prepare annual reports on the status of the family farm. The report contained in this print is the second annual report from the Secretary. It goes beyond the first report in that it includes special analyses of marketing and cattle feeding.
The information in the report should prove helpful in the debate on farm structure. However, annual reports on the status of the family farm are only one part of the effort being made to acquire additional information and knowledge on this subject. In the past few years, the Committee on Agriculture, Nutrition, and Forestry has initiated numerous investigations and studies with regard to such matters as the purchase of U.S. farmland by foreigners, the effect of limiting commodity program payments to corporations, and landownership in general. The Committee is presently undertaking a major stud of
American agriculture structure. We are calling on some of the best known experts in various fields to assess our current farm structure and its prospects for the future. The Secretary of Agriculture has also initiated a national dialog on the topic. I welcome his effort and the additional information that is being compiled.
However, I feel it important to point out that American agriculture has one basic objective-it must feed the people of the United States and assist in feeding the hungry of the world. At the same time, our farmers must receive reasonable rewards and be able to enjoy the quality of life that all Americans expect.
While our farm programs may not be perfect, they have been successful in helping American agriculture achieve its objectives. For this reason, I urge all who are interested in farm structure to look carefully at what we have before abandoning the programs for something that may not serve the Nation as well in the long run.
HERMAN E. TALMADGE,
Chairman.
(in)















LETTER OF TRANSMITTAL


DEPARTMENT OF AGRICULTURE,
OFFICE OF THE SECRETARY,
Washington, D.C., September 7, 1979.
Hon. HERMAN E. TALMADGE,
Chairman, Committee on~ Agriculture, N'utrition, and Forestry, U.S.
Senate, Washington, D.C.
DEAR MR. CHAIR-MAN: I am pleased to transmit this second annual report on the status of the family farm in the United States in fulfillment of title I, section 102, of the Food and Agriculture Act of 1977.
The information provided in this report augments that contained in the first report, further addressing what I consider as perhaps the most critical issue facing agriculture today-the structure of the farm sector of the future.
Much of the new information included in this second report comes from research initiated a year agro in recognition of the importance of the structure issue. The topics treated are relevant to many of the policy concerns we are hearing today.
The first section reports a further examination of trends in the farm sector focusing on the growing concentration, the rate of entry and exit of farm operators, and the existence and role of the various forms of farm business organization.
The second section focuses on the marketing of farm products, specifically two increasingly im port ant mnethods-forw ard contracting and direct farmer-to-consumer sales. It indicates the extent of present use of these marketing methods, the commodities for which they are most suited, and the extent of potential use of these methods in the future.
The third section contains a detailed report of the distribution of benefits of the 1978 commodity programs and assesses some of the likely impacts on the farm sector. Recent data, are used in the evaluation of how the benefits of these programs, including the $1.75 billion in direct payments, were distributed among producers by location, commodity, and size of farm.
The final section examines how structural change occurs and describes the dramatic organizational changes that have occurred in one subsector, beef cattle feeding. This subsector, long dominated by a large number of family farmer feeders, now consists primarily of large-scale enterprises that have located in a new geographic area. The analysis suggests that the interaction of many individual factors, including several Government programs, can lead to changes much more significant than could any one of the forces in isolation.
(V)





VT

We think this report will prove to be important additional information to facilitate discussion of the issues critical to the farm sector and to defining policies appropriate to deal with the present and emerging problems. Additional research is already underway in the Department. We will be reporting the results to the Congress as they become available in subsequent annual reports.
Sincerely,
JIM WILLIAMS,
Acting Secretary.











PREFACE


The Food and Agriculture Act of 1977 directs the Secretary of Agriculture to report annually on the current situation and trends for family and nonfamily farming operations. The reports are to analyze the effect of Federal policies on the farm sector and provide other information relevant to legislative and policy decisions directed toward promoting a family farm system of agriculture.
This is the second annual report. It does not repeat information in the first report, but presents new information and analysis augmenting it.
, The first report described the structural characteristics of the farm sector, including major trends and the underlying forces. It delineated the definitional and conceptual problems, and identified data and information deficiencies in treating family farms in a policy context. A comprehensive research agenda was suggested, including research viewed as essential to Congrress in considering future legislative and policy decisions relevant to family farms and the structure of the farm sector.
There has been a revival of interest in the structure of agriculture (and family farms) since the first report was prepared a year ago. There is a growing recognition of the dynamics of the farming system and increasing concern about whether many of the rapidly occurring changes are desirable. There is also a growing awareness that the current economic and social problems of the agricultural sector are different from those that have been the focus of public policy for many years. A general agreement on the nature of the problems, let alone the appropriate solutions, has yet to emerge.
The U.S. Department of Agriculture, over the past year, has been addressing the farm sector issues in several contexts. Secretary Bergland, in a major policy speech early in the year, elaborated his concerns about the future directions of agriculture. He encouraged a broad public dialog to examine the structure of agriculture and whether policy changes should be considered to influence that structure. He proposed that this national dialog attempt to delineate the problems and move toward solutions.
Events of the past year underscore the need for additional information on all aspects of the structure and organization of agriculture, including family farms. This report carries results of some research further treating these issues. Other research efforts are underway in the Department; some to be completed soon, while others are of longer duration.
This report was prepared under the direction of Alan Walter. Economists primarily responsible for preparing the material are George Coffman, Donn Rei.und, William Lin, and J. Rod Martin. Others who contributed as reviewers or consultants include J. B. Penn, John E. Lee, Jr., Jim Johnson, Hal Linstrom, R. Larry Deaton, Pete Henderson, Dick Benjamin, and Ben Blankenship. Secretarial assistance was provided by Glorida D. Robinson and Rhonda M. Coles.
(VIi)












SUMMARY


The structure of the U.S.. farm sector is chan ging. Farm numbers are declining farm sizes are increasing, and farm production and sales are becoming more concentrated; 125,000 farms accounted for half of all farm sales in 1974, which required 205,000 farms a decade earlier.
The average age of farm operators steadily increased from 48.7 years in 1945 to 51.7 yearsi 1974. Only slightly more than half the
olderpersons leain famgfor retirement or other reasons between 1964 and 1974 were replaced by young farmers. A net of 930,000 farmers who were 55 years of age or older in 1964 had left farmig by the time the 1974'Census of Agriculture was taken, while only 475,000 persons under 35 had begun farming.
Partnerships and corporations accounted for only 10 percent of farms in 1974, but being larger they sold nearly a third of all. farm products and farmed a fourth of the land. Corporations comprised a very small number of farms, but they accounted for 18 percent of the farm products sold, an expansion from their 14-percent share in 1969.
Changes in the structure and organization of both the farm and the marketing sectors since the fifties have altered the relationship between them. Both sectors have become larger and fewer in number. Country buying stations and assembly point markets have dwindled as both large farmers and buyers have chosen to bypass these traditional farm markets in favor of more direct-marketing methods.
The 1978 farm program increased net returns to participating farmers, but the benefits favored larger producers because payments were related to individual farm size and acreages planted. About $2 billion were disbursed in program payments, the largest amount since 1973. Almost half of the payments went to only 10 percent of the program participants, those with the largest farms. In contrast, 50 percent of the farms-those with the smaller units-received only 10 percent of the payments. Higher commodity prices as a result of acreage controls increased returns by about another $900 million.
The cattle-feedingr industry typifies the evolution that has taken place in U.S. agricuture. Over 61 percent of the fed cattle marketed in 1964 were from 223,000 feedlots with a capacity of less than 1,000 head. Small-feedlot numbers decreased to 130,000 and accounted for less than a third of the fed cattle marketed in 1977.














CONTENTS

ftgo
Foreword -------------------------------------------------------- III
Letter of transmittal ---------------------------------------------- V
Preface ----------------------------------------------------------- VII
Summary --------------------------------------------------------- VIII
Status of the family farm:
Introduction -------------------------------------------------- 1
Trends in selected structural characteristics ---------------------- 2
Farm numbers and sizes ------------------------------------ 2
Operator entry and exit ------------------------------------ 5
Form of organization -------------------------------------- 7
Alternative marketing approaches for farmers --------------------- 10
Forward contracting --------------------------------------- 11
Farmer-to-consumer direct marketing ------------------------ 20
Commodity program impacts on the farm sector ------------------- 24
Commodity programs -------------------------------------- 25
Participation ---------------------------------------------- 27
Distribution of program benefits ----------------------------- 33
Impacts of the payment limitation --------------------------- 3-3
Market-related impacts ------------------------------------ 35
Structural changes in the cattle feeding industry ------------------- 40
Characteristics of feedlot operations -------------------------- 41
Factors causing structural changes in cattle feeding ------------ 44
Growth of cattle feeding in the southern plains ---------------- 46
References ---------------------------------------------------- 48
UZ)


























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STATUS OF THE FAMILY FARM

(Second Annual Report to Congress)


INTRODUCTION
The structure of the U.S. farm sector continues to change. Farm numbers are declining tand farm sizes are increasing. Escalating capital requirements are presenting ever-g-reater barriers for new entries into farming. Fewer younger people are entering f arming than older oper'ators are leaving- for retirement or other reasons. Changes are requiring farmers-particularly small farmers-to consider alt ernative marketing approaches. Government farm programs are increasing net returns to participating farmers, but a large share of program benefits go to large producers because payments ar'e related to individual farm size and acreage planted.
This report describes the structural characteristics of the farm sector, analyzes major trends and underlying forces, and discusses why the clianges are occurring and where they may lead. Data used in this study were derived from a variety of private, university, and Government sources, including the Censuses of Agriculture and Population [31, 32, 33].'
1 Numbers in brackets refer to references listed at the end of this publication.
(1)











rn
I RENDS IN SELECTED STRUCTURAL CHARACTERISTICS
Forces that provide incentives for the moderate to larger size farms to grow further are bringing about structural changes in the farming sector. The number and size of farms, the form in which farm businesses are organized, and the changing patterns of entry into and exit from farming are among the more commonly quoted manifestations of structural change.
Farm structures have evolved over several decades, marked by declining numbers of farms. Farm size has increased, with production concentrated on few farms. The average age of farm operators has increased as fewer people under 35 have entered farming than older operators have left for retirement or other reasons. Many of those under 35 who take up farming do so as part-time operators of small farms, with their primary income from nonfarm sources.
These and other contluing structural changes in the farming sector are fundamentally altering the role, character, and problems confronting the family farm of today. These trends imply further concentration of agricultural production via continued growth of larger family farms. These farms will generally still be family units, but a farm sector where fewer than 100,000 farms produce over half the output is different from the farm sector of the thirties and forties. Thus, the objectives and needs for public policy for the farm sector may have to be reevaluated to ensure that the public interest is served.
FARM NUMBERS AND SIZES
Declining farm numbers and increasing farm sizes are commonly cited indicators of the structural change in the f arm sector.' These indicators merely reflect the myriad forces causing structural change. They have some limited value, but more important is the changing of farm sizes and an understanding of the forces behind it.
A new official definition of a farm was instituted in 1979 by the U.S. Department of Agriculture (USDA). That definition recognizes inflation and other changes that have occurred in farming. The new definition requires a place to have $1,000 minimum sales of farm products to be counted as a farm. The previous definition, used since 1959, required only $50 in f arm product sales on places of 10 acres or larger, or $250 on smaller places. The new 1978 definition would disqualify about 302,000 places-those with sales of less than $1,000. Farm numbers under the new and old definitions are shown below:
I Benchmark data on Am numbers and sizes come primarily from the Quinquennial Census of Agriculture. The next census is being taken in 1979 with the data being available for analysis in late 1980. In addition, Rtimates of farm numbers are made as of January 1 each year by the U.S. Department of Agriculture to bridge the gap between censuses.
(2)








Farms Ithousands]
1976 1977 1978 1979
Old definition --------------------------------------- 2,738 2,706 2,672 tNA
New definition -------------------------------------- 2,454 2,409 2,370 2,330
Difference ------------------------------------ 284 297 302 NA
Not available.
Farm numbers continued downward from the 1935 peak of 6.8
million under both definitions. Average farm sizes increased correspondingly, measured by both sales and acres. Using the old definition of a farm for consistency, average sales per farm increased from $9,715 in 1960, to $19,861 in 1970, and to $41,558 in 1978. Meanwhile, acres per f arm rose from an average of 278 in 1960 to 401 in 1978, a 44-percent increase.
Information on farms grouped by product sales value is provided by the Census of Agriculture. The sales classes are:
Under $2,500, $2,500 to $4,999, $5,000 to $9,999, $10,000 to
$19)999, $20,000 to $39,999, $40,000 to $99,999, $100,000 and
over.
The decline in farm numbers over the past several decades largely reflects the phaseout of smaller farms. The number of farms in the larger size classes has increased.
Agriculture censuses prior to 1974 revealed that farms with at least $20,000 in sales were increasing, while smaller farms were decreasing. Beginning with the 1974 census, the dividing point shifted to the sales classes of $40,000 or more. It is impossible to precisely determine the size below which farms are declining in number, because of the wide range of the $40,000 to $99,999 sales class. Nevertheless, if this sales class is viewed as an indication of adequacy for survival, some useful insight may be gained by examining the characteristics of such farms. Using the census sales classes to do this requires the study of averages of all farms in the $40,000 to $99,999 sales class. These statistical profiles are obtained by averaging many. dissimilar farms over a wide range of sales, and meaning ful'6-comp prisons are thus limited. A farm adequate for economic viability will vary greatly by farm type (commodity produced), geographic region, managerial and business acumen of the operator, family composition, tenure arrangement, and other factors. Even so, the profiles do provide useful information. They indicate that, on the average, farms and farmers in this sales class have the following characteristics:
Assets valued at nearly $500,000;
More than 80 percent equity in these assets;
Average 760 acres; and
Net cash farm income of about $18,500, nonfarm earnings of
$6,000, and unrealized appreciation in asset value of $34,600.
Thus, even for farms in this minimum adequate sale class, increased asset value is the major source of increased wealth.






4

Here is a statistical profile of farms with $40,000 -to $99,999 in -gross sales:
Characteristics (1977) Amnount
Proportion of all farms (pret------------------13
Proportion of total farm sales (pret---------------26
Acres (number) ----------------------------------------------- 760
Inc ome:
Sales of farm prdcs---------------- $77, 100
Expenses---------------------------------------------- $58, 600
Net cash icm-------------------$18,)500
Earnings from nonfarm sources------------------------------- $6,1000

Total inoe--------------------$24, 500

CapItal gains on farm real estate (unrealized)------------------ $34, 600

Assets:
Land -------------------------------------------------- $340,000
Other-------------------------------------------------- $121,900

Tota-----------------------------------$461,)900
Equiy--------------------------------------$373, 000
Percentage equity---------------------------------------------- 81
*1974 Census of Agriculture.

The trendl in farms growing in size and shrinking in number has paralleled an increasing concentration in assets and sales of farm products. Fewer farms account for the bulk of farm sales and the land in farms (table 1).

TABLE 1.-FARMS ACCOUNTING FOR SPECIFIED PROPORTIONS OF SALES AND LAND IN FARMS

Thousands of farms accounting forItem
50 percent 75 percent 90 percent

Sales:
1964 ------------------------------------------------ 205 675 1,280
1974 ---------------------------------------------------- 125 475 825
Land in farms:
1~6----------------------------------125 525 1, 400
194--------------------------------97 395 970

Source: (31),

This concentration reflects growth and consolidation of firms within the farming sector, rather than the entry of large outside firms.
The concentration of land in farms is not necessary synonymous with concentration of land ownership. Today, many farming operations are combinations of rented units or of owned and rented units. It is not uncommon in the Midwest, for example, to find farmland OVrtff by retired farmers and widows and heirs of farmers, but consolidated through rental into larger' farming operations. As table 1 indicates, 125,000 farms in 1974 accounted for one-half of all farm sales that had required 205,000 farms a decade before. Today, there are probably fewer than 100,000 such farms. Relative to some other sectors of the economy,, this may not appear to be a high degree of consent ration. It does reflect a reality far difrorent from the common perception ofan ag)ricultui'e with most of the production coming'
from many Inodlrato-size units.






5

Furthermore, these estimates encompass all farm production; they mask even higher degrees of concentration in the production of some commodities, such as eggs,' certain fruits, vegetables, and tree nuts (table 2). Cotton production is also concentrated. Production of the major grains, oilseeds, and livestock tends to be less concentrated,
-although increasingly so.
TABLE 2.-FARMS ACCOUNTING FOR SPECIFIED PROPORTIONS OF SELECTED LIVESTOCK INVENTORIES AND COMMODITY PRODUCTION, 1974
Thousands of farms accounting forI tern 50 percent 75 percent 90 percent
Livestock~:
Beef cows------------------------------------------------ 135 325 560
Cairy cows------------------------------------------------ 57 115 175
Sows farrowed--------------------------------------------- 35 65 150
,Commodity:
Corn for gr9-----------------------5 235 395
Cotton --------------------------------------------------- 6 19 35
Soyb.emns------------------------------------------------- 75 178 300
Toaccoe-s ------------------------------------------------ 2 1 908
What-------------------------------55 135 245
Source: (31).
Variations in concentration stem from many factors, including size of the market, size of firm needed for efficient operation, technology and cultural practices which affect the size of operation that can be farmed by one person or one family, and the differential influences of tax, credit, and commodity policies and programs.
Technological chance remains important in increasing f arm sizes and ,concentrating, production. For example, the recent introduction of the large four-wheel-drive tractor disturbed the longstanding mix. of farm sizes and numbers in several maj or regions by greatly increasing the acreage one person could efficiently farm. Once purchased, the tractor becomes a fixed cost to be spread over as many acres as possible. Another example is the breeding of tomato plants to obtain simultaneous ripening of the tomatoes. This increases the feasibility of mechanical harvesting and, in turn, the attraction of controlling enough acreage by one firm or person to fully utilize the capacity of the expensive mechanical harvester.
The capital investments associated with modern farming operations are substantial and growing. Farmers working with assets valued at considerably more than $1 million are common Land still contributes a high proportion of total asset value, although modern technology is increasingly expensive. Individual strategies influence the capital requirements for individual farms, so these asset values are not necessarily synonymous with capital requirements for individuals entering or staving in farming. They clearly indicate, however, the high level of management skill necessary for a successful modern farming operation.

OPERATOR ENTRY AND EXIT
Farm numbers and sizes adjust as individuals choose to enter or leave f arming and as existing operators focus decisions on changes in size. These decisions are importantly related to the agringr of existing, operators. Historically, most people have begun farming before their






6

35th birthday, expanded the size of their operations over time, and then, af ter age 55 begun to decrease the size, or at least grow no further. They quit farming at some later point either through retirement or death.
The average age of farm operators steadily increased from 48.7 years in 1945 to 51.7 years in 1974. (The shift in the age distribution of farm operators for selected censuses is shown in figure 1.) The ch ange was significant for this three-decade period, since many people spend over 50 years in the same occupation and the turnover rate is slow. The age distribution shifts because fewer young persons enter farming than older operators leave. Also, many of the older operators continue to farm past the usual retirement age, so they are not being replaced by a younger generation.
Age cohorts (people ith common birthdays) can be traced through successive agricultural censuses to determine net changes in the number in each age cohort by size of farm Historically, the number of operators in each age cohort group increases as that particular group grows older, peaks at age 50, and then declines until all operators leave farming presumably at age 75.
Figure 1

Farm Operator Age Distribution, 1920-74.
Thousands
1920
1400 -00 0100.00wo

194
100
i000 *1954 *e~a1.0:01:
800,9000 1964

400 /'00~ .00 .00 1974

00 0&*
0 1 1 I I
Under 25 25-34 '35-44 45-54 55-64 65 or
Age Group
Source: (31).

Only slightly more than half of the older persons leaving farming between 1964 and 1974 were replaced by young farmers. A net of 930000 (72 percent) of the operators who were 55 years of age or older in 1964 had left farming by the time the 1974 Census of Agriculture was taken, while only 475,000 persons under 35 had begun farming.
Only one small-farm operator with sales of less than $40,000 was replaced for every three who left.
still, 80 percent of the young people who entered farming during 1964-74 started on farms with sales of less than $40,000. Many of





7

those were part-time farmers with their primary income from nonfarm sources. Beginning farmers in the previous decade on small farms expanded to more than $40,000 in sales.
The replacement rate on farms with sales of $40,000 or more was higher. Entry rates of young people exceeded exit rates of older operators. This happened because some entrants combined two or more small farms and entered in the larger size classes. Also, some of the smaller farms of entrants in the previous decade were enlarged and moved into these classes.
Some older operators on smaller farms progress toward retirement in a series of steps-by renting out some land, or selling owned land, or relinquishing land they rent. This is frequently accompanied by conversion to less labor-intensive enterprises, such as changing from dairy to beef cows.
The number of farms is expected to continue to decline, primarily from nonreplacement of existing older operators by younger operators. Fewer total entrants are expected in the next decade, and a higher percentage of entrants will be on large farms.
The trend of fewer and larger farms means fewer replacements will be needed for operators on viable full-time farms. Many of the smaller farms of retiring operators will be combined with existing farms to form larger units. Their formation will require high levels of equity or risk capital. Young people hoping to enter farming are typically short on capital. Therefore, farming opportunities will be limited to a few entries on larger farms, with young people more often beginning on established farms as partners or shareholders with other family members in partnership and corporate operations.
FORM1 OF ORGANIZATION
Multiownership faims (partnerships and corporations) accounted for only 10 percent of farms in 1974, but being larger they sold nearly a third of all farm products and farmed one-fourth of the land. Corporations comprised a very small number of farms, but they accounted for 18 percent of the farm products sold, an expansion from their 14-percent share in 1969. Farms organized as corporations tend to specialize in land and capital-intensive production, while the sole proprietorship farms typically produce grains, tobacco, beef cattle, hogs, and dairy cattle (fig. 2).
Partnerships
Most multiownership farms are multifamily operations. The 81,738 farm partnerships enumerated in a 1976 survey were largely composed of a few, related partners per farm. Ninety-two percent of all partnerships had three or fewer partners, the partnerships often were two generations of the same family, and 70 percent operated with oral agreements.
Forty-two percent of all partnerships had at least one older family member and one or two partners of a younger generation, indicating a frequent use of the partnership form of organization to bring a younger person into the farm business.



51-102-79-3






8
Figure 2

Crop Sales and Livestock Numbers and Sales of Farms with Sales of $2,500 or More
Crop sales* Form of Livestock numbers and sales*
Percent"77.-. Busnes Percent'~ -- Organization
80 80Corporations ..
60 -60

40 -Partnerships 40

20 -Sole 20
Proprietorships
0------------ M 0 -- ---
Grains Cotton / Fruits Laying Fed- Beef Dairy Hog
Vegetables and nuts hens cattle cows sales sales
and melons (No.) sales (No.)
MWay not add to 100 percent because smaller farms are excluded. Source: (32).

Corporations
Farming corporations, like partnerships, tend to be closely held by a few family shareholders. Eighty percent of privately held farming corporations had five or fewer shareholders, and 79 percent were family owned, with family members directly involved in daily operations. Ninety percent of the closely held corporations had most of their management provided by shareholders. Farming is the primary, and often the only, business for these corporations. Corporations are frequently operated similar to partnerships and often formed to preserve the family farming operation by facilitating the transfer of assets between generations.
Most of the farm corporations in 1974 with 10 or more shareholders, including those whose shares are publicly traded, were in California, Florida, Trexas, Hawaii, and Louisiana. Those States had two-fifths of the farms operated by publicly owned corporations and one-third of the farms operated by corporations with 11 or more shareholders. The 1974 census counted 358 publicly traded corporations operating 947 farms.
Publicly held corporations sold only 3 percent of the total farm production in 1974; the primary business receipts in 82 percent of the Corporate ions were from nonfarm sources. Their major commodities were fed cattle, poultry, sugarcane, potatoes, fruits, vegetables, and nursery products which accounted for nearly 90 percent of their 1974 farm sales. Only 6 percent of their sales were from grain and cotton.
The characteristics of markets, the size of operations needed to exploit j roduction andl market economies, alnd the opportunities to (IXploit linkages with subsequent stages of the marketing system are factors influencing the commodities p~rodluced by the diversely owned (:-orl ~or at ions. Th~j1ese (0orpora tions do not produced land-extensive comnmnodities (such ,Is grakins, cotton, and beef cows) to any great degree. Gener-ally, t hey find no part icular'ad vantage in producing the undifferenit iat ed, IV 1(1ely produced comnmodlities. They have v-ery fewN incentives






9

for vertical integration in land-extensive commodities, since most processors can purchase by standard grade the quantities they need more cheaply than they produce it given their costs and alternative uses for capital.
The trends point toward more corporations in farming and a continual decline in partnerships. Overall, the output of multiownership farms could account for about half of farm sales before the end of the century. Most of these multiownership farms will likely continue to be multifamily farms. Two decades will probably not bring much dispersion of ownership of present farming corporations. Addition of new corporations will likely result from incorporation of existing farms rather than entry of corporations not now farming. Few nonfarm corporations are likely to be attracted into farming, barring a significant rise in the profitability of farming. The rate of incorporation of existing farms could well exceed the present trend because of changes in income tax laws, more rapid rise in asset values, and new technology encouraging larger farms.












ALTERNATIVE 'MARKETINGAPPROACHES FOR FARMERS
Markets for farm commodities were f ormerly organized to serve the needs of small, independent farmers who produced the bulk of the agricultural output. Two important functions of these markets were to serve as assembly points and price discovery points for farm commodities. The marketing sector then served as a vehicle to move farm ,output to the final consumer. Farm markets were generally accessible to all farmers, and farm market coordination was accomplished through open market transactions in which the pricing mechanism was the primary coordinating device.
Changes in the structure and organization of both the farm and -the marketing sectors over the past 20 to 25 years have altered relationships between them. Farms have become larger, fewer, and more specialized, largely as a result of technological innovations introduced over the last three decades, although other factors also contributed. Marketing firms have also become larger and fewer in number during this period. The most significant structural change in the marketing sector, however, has been the growth of large regional and national
food marketing organizations, and the decline of smaller firms serving localized markets.
Structural changes in these two sectors have been associated with the growth of direct linkages between farmers and the processors and marketers of farm-produced commodities. Country buying stations and assembly point markets, have dwindled as both large f armers and buyers have chosen to bypass these traditional farm markets in favor of more direct marketing methods, including the use of production and marketing contracts. Significant amounts of some commodi-. ties are produced by firms with off-farm businesses that have integrated farm production with nonf arm stages of the food system.
There are advantages both to farmers and to marketing firms from the use of contracting and other direct farmer-market links, but many
contend that these marketing techniques favor the larger producers. Some minimum volume of product is needed to encourage a marketing firm to enter into a contract with a farmer or to attract buyers to the farm. Small farmers apparently do not produce those minimum vol-. umes of most commodities. As a result, they may have serious problems finding market outlets if traditional markets decline in f avor of contractual arrangements. This reduced market access has been cited by some as a major factor in the decline in the number of small farms.
The decline of traditional farm markets and their replacement by marketing methods more suitable to large f arms has generated interest in developn alternative market outlets that will serve the needs of small farmers. Several approaches have been proposed to accomplish this end. Two of these are forward contracting and farmerto-consumer direct marketing.
(10)






11

FORWARD CONTRACTING
Agricultural production under some form of contractual arrangement has been gradually increasing since 1960, the first year the Bureau of the Census attempted to gather data on the use of contracts in ag-riculture. About 4.5 percent (147,000) of all farmi operators reported having contracts relating to the production or marketing of farm commodities in that year. The 1969 Census of Agriculture reported 156,000 contracts by farms with sales of $2,500 and over. Some farmers had multiple contracts, so the contracts outnumbered farms reporting contracts. However, the number of farms with contracts was not tabulated. The 197 4 census counted about 156,000 farms with sales of $2,500 or more having nearly 190,000 production or marketing contracts. That was over 9 percent of farms with sales of $2,500 or more in 1974.
Extent of contracting
.Mighell and Hoofnaglle estimated that about 17 percent of total farm output was produced or marketed under some form of contractual arriangement in 1970 (16). Less than 10 percent of all crops and nearly a third of livestock and poultry products were under contract. Contracts were widely used ini the production and marketing of fruits, vegetables, sugar crops, seed crops, dairy products, and poultry products. There was very limited use of contracts for most other commodities.
The major change in contract farming since 1970 has been a sharp increase in the use of forward sales contracts in marketing cash g~rams' oilseeds, and cotton. Census of agriculture data indicate that farmers marketed about 7 percent of corn production, 8 percent of wheat, 11 percent of soybeans, and 20 percent of cotton under contractual arrangements i11 1974 (table 3). Other significant changes were a growth in feeder pig contracting and a decline in fed cattle contracting due to a temporary decrease in custom feeding of cattle. Contracts were used in producing or marketing an estimated 21 percent of all agricultural commodities in 1974.
TABLE 3.-PRODUCTION OR MARKETING UNDER CONTRACTURAL ARRANGEMENT, 1974 fin percent]
Amount under Amount under
Item contract Item contract
All cash grains-------------------------- 9 Hogs ---------------------------------- I
Corn ---------------------------------- 7 Poultry and poultry products------- 38
Cotton --------------------------------- 20 Sobas---------------11
Dairy products I --------------------------------82 Sugar beets I ----------------------------------98
Fed cattle ------------------------- 5 Vegetables_---------------48
Feeder pigs----------------------------- 3 Wheat --------------------------------- 8
Fruit---------------------------------- 32 All commodities------------------------- 21
1 Estimates from (16). Weighted average of fluid-grade and manufacturing-grade milk used to calculate percentage of dairy products under contract.
Source: (31).





12

Contracting and farm sales class
The average farm using contracts in the production or marketing of its output, bad product sales of nearly $123,000 in 1974. This greatly surpassed the $48,000 volume of the typical commercial farm. Farms with sales of $100,000 or more, while only about 9 percent of the farms with sales of $2,500 or more, accounted for nearly a third of the reported contracts (table 4). At the other end of the scale, farms with sales between $2,500 and $19,999 accounted for 53 percent of the farms, but only 17 percent of reported contracts. This disparity between small and large farms in the use of contracting, however, may be accentuated by the use of multiple contracts by large farms.
TABLE 4.-DISTRIBUTION OF FARMS AND CONTRACTS AND FARMS REPORTING CONTRACTS, BY SALES CLASS, 1974
[In percent]
Distribution by sales class Farms in sales
classes reportSales class Farms Contracts ing contracts
$2,500 to $4,999 --------------------------------------------- 17 2 l.6
$5,000 to $9,999 -------------------------------------------------- 18 5 3.0
$10,000 to $19,999 ------------------------------------------------ 18 10 5 9
$20,000 to $39,999 ------------------------------------------------ 19 18 8. 5
$40,000 to $99,999 ------------------------------------------------ 19 35 16. 1
$100,000 to $199,999 ------------------------------------------- 6 18 26.5
$200,0C0 to $499,999 ---------------------------------------------- 2 9 34. 5
$500,000 and over ------------------------------------------------ 1 3 39.2
All sales classes ---------------------------------------- 100 100 9. 4
Source: (31).
Another indication of the concentration of contracting in the larger farms can be obtained by examining the proportion of farms in each sales class using contracts (table 4). Less than 4 percent of farms with total sales under $20,000 reported using contracts in 1974, while about 30 percent of farms with sales of $100,000 and over reported using contracts.
A final comparison is provided in table 5 which indicates that about a fourth of the farms reporting the amount received from the contractor for commodities under contract in 1974 had contract receipts of $30,000 or more. These farms, though, had over four-fifths of total reported contract receipts. Twenty-eight percent of the farms reportingr contract receipts received under $5,000 and accounted for less than
2 percent of the total reported contract receipts. Cuo/ract terms
Contract farming has often been critlicizedl on the grounds that it is a device used by large food processing and marketing firms to gain control over the farmer and in effect make him an employee of the
roce s~soI or inarketing iirm. Contracting in tile traditional belief and value system that surrounds much of U.S. agriculture, is seen as an inc rsion on the fawmner's freedom and independence, imposing
exterin al1 obigat ions and I nmit in2) the choice of management decisions. T'he (tegree to whicil a lurmers managemient decisions are limited 'varies greatly and depends on the terms of the contract. Contracts between farners and narketin' firms fall into two basic categories:
pro(fuiction and narlketing contracts.






13

Production contracts are generally made before production beginR. They contain provisions regulating, specifying, or controlling the cultural or husbandry practices employed in producing the commodity. By their nature, production contracts entail some degree of contractor involvement in the farming operation. Such involvement ranges from simple contract requirements with only periodic contractor monitoring to detailed cultural specifications with strict supervision by the contractor. Contract terms often obligate the contractor to provide productions inputs and commonly give ownership of commodities under contract to the contraeto drin-g the production period. Production contracts also contain marketing provisions relating to pricing and payment procedures and product delivery.
Marketing contracts, in contrast, may be entered into at any time during the production or marketing- period. They do not involve the contractor in the production process.' A marketing contract in its simplest form is an agreement, written oi- oral, for future delivery of a commodity. The terms normally specify the quantity, type, variety, and grade or quality of the commodity, as wel as price and delivery provisions.
Price terms
Terms relating to product price and the bases for price determination are among the most important provisions of agricultural production and marketing contracts; these provisions are where contractors exercise the most control. Accordingly, negotiation of price terms is the most prominent form of involvement by producer bargaining organizations in contract development.
In the 1977 joint Census-USDA survey of contract production, price terms were under the exclusive control of the contractor more than any other type of contract provisions. Two-thirds of the respondents indicated that the contractor alone set the price terms. Nine percent of those responding said price terms were set by the producer, 19 percent said price terms were arrived at jointly by the producer and contractor, and 6 percent indicated that price terms were set by a producer organization.
Nonprice terms
The nonprice terms of agricultural contracts are concerned primarily with product specification, cultural or husbandry practices, delivery of the product to the contractor, and specification of which party provides certain production inputs. In particular, nonprice terms relating to cultural or husbandry practices and provision of inputs are what distinguish production contracts from marketing contracts. They are also the means by which the processing and marketing sectors are able to attain direct management control over farming operations without acquiring ownership of agricultural resources. Consequently, nonprice contract terms can play a major role in shifting control over the Nation's agricultural output from the farm sector to the nonfarm sectors. The 1977 Census-USDA survey of contract production collected extensive data on nonprice contract terms. This information was obtained from contract producers to measure the extent to which contractors controlled the actual production process in the commodities included in the survey.
'To be considered a contract, an agreement or obligation to sell must be entered into 30 days or more prior to the actual delivery of the commodity.






14

Contractor control was most pervasive in broiler and egg contracts and control over production extended well into the day-to-day husbandry practices. In nearly all instances, the contractor provided the production and marketing inputs other than labor, housing, and equipment. Broiler and egg contracts basically are devices used by the contractor to lease production facilities and hire labor owned by the contract producer's labor force. Contractor control over the production process and ownership of other production inputs is so complete as to make the contractor rather than the farmer the real producer.
At the opposite extreme, contractors for feeder cattle and feeder pigs exert little or no control over the production process with nearly all contracts being nothing more than contracts for future delivery. The contractor's major interests are to specify quantity, breed, and ending weights, but even in these areas, the producers specify the terms in most contracts.
Slaughter-hog contracts are about equally divided between production contracts similar to those for broilers and eggs and forward delivery marketing contracts. Contract hog production is a fairly recent development, accounting for only about 1 percent of all output. Although contracting for hogs is expected to increase, it is not clear which type of contract-production or marketing-will be prevalent.
Production contracts are generally entered into for processing tomatoes and potatoes. However, they differ markedly from broiler and egg contracts in that the contractors exert little influence over cultural practices. Contractor involvement in the tomato and potato production processes is largely restricted to commodity specification, quantity of production and product delivery. Contract terms relating to these areas are frequently determined jointly by the contractor and producer. Cultural practices are generally left up to the producer, and input items provided by the contractor are limited to plants, seeds, technical assistance, and marketing services. Reasons for contracting
The criticism that contract farming makes the farmer a mere emp loyee of the processing or marketing firm fails to consider the interdependence between the farm and nonfarm parts of the food and fiber system. Farming is only one stage in bringing food and fiber products to the consumer. The orderly functioning of the system requires that the activities of each stage be coordinated with the other stages. Contract farming* i oe* of several institutional arrangements to achieve this coord(finlation. It provides both the farmer and the marketing firms a means of dealing with the many risks inherent in producing and marketing agricultural commodities. Contracting from the buyer standpoi*nt
The processor or marketer of perishable agricultural commodities faces a number of risks with respect to raw product supplies. These include raw product availability, price and quality. Contracting for f arm production provides the processing-mairketing sector with. a means of managing these risks.
There are two important aspects of raw product availability to the buyer of farm commodities. One is the total volume or farm output of a commodity. The other is the rate at which the commodity is delivered to the buyer. Contr-acting with f armers for future delivery enables marketing, firms to rationalize production with expected market demand. This allows the marketing sector to develop longer range




15

marketing programs, and consequently serves as an aid to orderly marketing. Processors and marketers must schedule their labor, transportation, and other inputs in advance to ensure an efficient operation. Contracts allow marketing firms to schedule their receipts of raw commodities more precisely than would be possible if they relied on open market purchases of farm commodities.
Modern mass marketing techniques require a uniform product,
which in turn requires that farm commodities be standardized with respect to variety, grade, size, and other characteristics. Contract specification of these characteristics and contractor specification and supervision of production practices in some commodities are means of achieving this standardization. The need for raw product uniformity is the major reason many contracts specify that the buyer provide such inputs as plants, seed, chicks, and feed. It would be difficult and costly for the processing-marketing sector to attain the product quality and uniformity needed to sustain its marketing programs without the use of contracts.
(Co tract ing from the prod ycer standpoint
Producers, like buyers, enter into contractual agreements primarily as a means of risk management. Producer risks related to market access, price, and access to capital are major types conducive to contracting.
Market access, especially for highly perishable commodities and commodities that have limited market outlets, is a major concern of producers. Simply producing such commodities with the hope of finding a market at the end of the production period is highly speculative. Farmers with such commodities to sell are vulnerable with respect to obtaining a reasonable price, if they can find a buyer at all. They are in a much stronger position to deal with prospective buyers prior to making production commitments. Consequently, producers of perishable and specialty commodities have a strong incentive to sell prior to committing resources to production, and so a high proportion of such commodities are produced under contract.
By the same token, traditional lending agencies hesitate to finance open production of high-risk commodities, but readily advance production capital when they are produced under contract. Contractors themselves provide significant financing of these commodities, usually by advancing key production inputs.
Price variability for storable, nonperishable commodities is the major factor leading producers into contractural arrangements. Most contracts for commodities of this type are agreements to deliver a fixed volume sometime in the future at a set contract price. These contracts are initiated by the producer as a means of pricing his production at a known acceptable level, thereby reducing exposure to price risk.
Collective action by farmers to improve market power
Farmers have effectively used group action to improve their market power relative to contract buyers. Farmers, through processingmarketing cooperatives, may compete with entrepreneurial marketing firms. Alternatively, farmers may use bargaining associations to negotiate contract terms with marketing firms.
Cooperatives, in effect, are arrangements established by groups of farmers to process and/or market their production. Cooperatives compete with other processing-marketing firms for final product
51-102-79-----4







16

markets. They are generally smaller than noncooperative firms, but a few have achieved a size sufficient to be counted among the largest fims in the Nation. Thus cooperatives provide farmers with a means of sharing in the returns from processing and marketing their commodities.
Cooperatives were listed as the contractor in over a third of all contracts reported in the 1974 Census of Agriculture (table 6). The percentage of comm dity contracts in which the contractor was a cooperative ranged from three-fourths for milk to 5 percent or less for fed, feeder, and breeding cattle.
Producer bargaining associations are groups of farmers organized to negotiate contract terms for their members. Unlike cooperatives, they do not handle, process, or market their member's produce. The 1977 survey of contract production found that, of the seven commodities covered in the survey, in table 6, bargaining associations were most active in processing tomatoes and potatoes, where they represented 40 and 60 percent &f the contracts, and least active in broiler and egg contracts (table 5).

Federal policies and contract farming
Federal policies and programs influence contract farming mainly through their impacts on risk, both as it affects the producer and the buyer. Policies or programs that are risk reducing discourage contracting, while policies that increase risk encourage contracting. Influencing the level of contracting are commodity stabilization programs, farm credit policies, and food quality and safety policies.

TABLE 5.-DISTRIBUTION OF FARMS WITH CONTRACTS, BY AMOUNT RECEIVED FROM CONTRACTOR [In percent]

Contract receipts
Amount received from contractor Farms reporting reported

Under $5,000 ----------------------------------------------------------- 27.6 1.8
$5, 000 to $14,999 ------------------------------------------------------- 31.3 7.7
$15,000 to $29,999 ------------------------------------------------------- 16.6 9.3
$30,000 and over -------------------------------------------------------- 24.5 81.2

Source: (31).

TABLE 6.-CONTRACTS INVOLVING COOPERATIVES AND BARGAINING ASSOCIATIONS

Percentage of Percentage of
contracts with contracts with
Commodity cooperatives Commodity cooperatives

Livestock and poultry: Crops-Continued
Breeding cattle --------------------- 5.1 Soybeans -------------------------- 40.9
Breeding hogs ---------------------- 6.1 Su ar beets ------------------------ 16.0
Broilers --------------------------- 10.1 Wheat ----------------------------- 44.3
Chicken eggs ----------------------- 11.5 Other ----------------------------- 20.3
Fattened cattle --------------------- 4.8 All commodities ------------------------ 35.9
Feeder cattle ----------------------- 4.0
Feeder pigs ------------------------ 52.5 Percentage of
Slaughter hogs --------------------- 18.5 contracts with
Started pullets --------------------- 8.0 bargaining
Turkeys --------------------------- 8.0 associations
Other ----------------------------- 18.3
Milk ---------------------------------- 77.4 Broilers ------------------------------- 2.9
Crops: Eggs ---------------------------------- 2.3
Cotton ----------------------------- 22.8 Feeder cattle --------------------------- 10.0
Field corn -------------------------- 40.5 Feeder pigs ---------------------------- 7.6
Fresh 61.5 Potatoes ------------------------------- 59.1
Fresh 15.5 Processing tomatoes --------------------- 40.4
Processing fruit --------------------- 50.2 Slaughter hogs -------------------------- 16.1
Processing vegetables --------------- 5.5

Sources: (31, 33).






17

The relatively recent changes in the economic environment for agriculture and provisions of the commodity programs have been factors partly responsible for' the increase in contract selling of grains and cotton between 1970 and 1974. Earlier programs relied on hko-h support prices, which in effect became the market prices at which the commodities were traded. Large commodity stocks, built up in the operation of the programs, prevented prices from rising above the support levels, while the support prices set a floor' below which market prices could not fall. Thus, prices were very stable and were known in advance with a high degree of accuracy by both farmers and buyers. Facing very little price or supply risk, they had no incentive to enter into contractual arrangements.
The decade of the 1970's brought a significant increase in the importance of foreign markets to domestic agriculture. Accompanying the expansion in foreign markets was an increase in potential economic instability, arising from world weather, political, and economic conditions. This new economic environment for agriculture also implies a changed role for the commodity programs. Government price supports no longer determine market prices to the extent they formerly did. Income support is now provided as direct payments through the target price program, rather than through price supports. The result is that commodity prices are now able to fluctuate in response to market conlditions. This acids some degree of price risk, providing farmers with an incentive to initiate forward delivery contracts as a means of fixing a, price for their production. This type of contracting has emerged as a, part of the marketing strategy of grain and cotton producers.
Federal credit prog-rams probably limit contra cting, as they serve to shift financial risks from farmers to the taxpayers. A large portion of the credit granted under these programs is to borrowers and projects that have a risk level unacceptable to commercial lenders. In the absence of such programs, farmers unable to obtain credit from traditional sources would have an incentive to turn so the marketing sector for production capital (mainly in the form of physical inputs) through production contracts. A large part of' the financial risks would be absorbed by the contractors.
Sirutctural implications of con Ira ctfarming
The obvious structural impacts of contract farming relate to the relationships between the farm andi nonfarm parts of the food and fiber system. There are in addition, however, impacts on the structure of the farm sector. These concern both the number and size structure of the farm sector, and the manner in which the output of individual farms is coordinated. rrhis is ref erred to as horizontal coordination. Hor izo ntal coord inatio n arnongfarm firms
Plant or firm size in the agricultural processing and marketing seetoi's is very large relative to firm size in the farm sector', and the output of many farms is required to supply the raw product input for a sing( le processing plant. If this processing plant were to enter into individual contracts for the output of each of these farms, the immediate effect would be to link each farm individually to the processor. Through the terms of the individual contracts, however, the processor will have eff ectively coordinated the production of many farms in a horizontal sense. Individual farms will be functioning, sasniefr ne the direction of the contractor.





18

Farmers as well as marketing firms may be the instigators of horizontal coordination in contractual relationships. Farmer bargaining associations are groups of farmers who have integrated horizontally for the purpose of negotiatig contract terms with marketing firms. Farmers coordinate their production and marketing functions in a horizontal sense through their processing and marketing cooperatives.
One effect of contracting on the horizontal structure of the farm sector is to transform the sector into a number of horizontally coordinated market blocks. For those commodities in which contracting is the prevalent market arrangement (including dairy products, broilers, and a number of fruits and vegetables), both farmers and marketing firms who do not have contracts may be effectively locked out. Noncontracting producers may have difficulty finding a market or receiving reasonable prices, and noncontracting buyers may have difficulty finding noncommitted supplies to buy [17]. Impacts of contracting on farm size
As noted earlier, farms using contracts have much larger sales volumes than others. This indicates a correlation between farm size and the incidence of contracting. Both census data on the size distribution of farms with contracts and other studies support this statement [18]. The cause and effect relationships between farm size and contracting, however, have not been adequately addressed. Consequently, it is not clear whether contracting is a result of large farms or large farms are a result of contracting. It is probable that the relationship goes both ways.
Large specialized farms generally are more susceptible to risk, uncertainty, and instability than are their smaller, less specialized counterparts. Consequently, they have a greater incentive to seek ways to reduce or transfer risk, such as through the use contracts. In this respect, the growth in contract farming is an inevitable result of size-increasing technological innovations and increased specialization in farming.
On the other hand, contract buyers prefer to deal with larger producers. This preference is cost related. Both administrative and assembly costs per unit purchased are lower when large lots are involved. In addition, small producers often have difficulty meeting the quality specifications of contract buyers. In their analysis of feeder-cattle contracts in the Texas Rolling Plains, Moore and Martin [18] concluded that:
There are several reasons why one would expect the use of
beef cattle contracts to be associated only with the larger beef cattle producers. Contractors prefer to deal with large producers that can sell truck load lots because it is costly to visit small producers, who may be scattered over a wide area, to inspect cattle and collect them when ready for market.
Also, buyers who are willing to contract their purchases in advance of their needs are usually looking for certain grades, weiglts, and types of cattle for delivery at a specified date.
Small beef cattle producers with limited quantities and types
of cattle usually cannot fulfill these specific requirements. Irmlications and conclusions about contracting
The institution of contracting itself may not be the primary factor






19

causingY increased farm size, and in fact may be a result of increased farm size, but it nevertheless plays a significant role in the changing structure of agrriculture. Risk and uncertainty have been cited by some researchers as factors limiting the size of farms. To the extent that contracting is an effective means of reducing some of the risks inherent in farming, it increases the comparative advantages of large f arms relative to smaller farms. Also, the economics of contracting favor large farms. Consequently, a situation develops in which the growth of large farms leads to contract production, which encourages the further growth of large farms.
Contracting, however, cannot be viewed as a panacea for risk that affects the individual farmer. Price and market access risks are often reduced by means of contracting, but output and default risks remain real problems for the farmer who enters into a contractual arrangement [22].
Traditional open markets for a commodity may (lie out, when contracting becomes the prevalent market arrangement for that commodlity. The result is that producers without contracts find themselves with no outlets for their production. Large producers are more readily able to obtain contracts than are small ones, so the brunt of the decline of traditional market outlets falls on small farmers. Consequently, the growth of contracting has major implications to the continued survival of small farms. In effect, small farms must grow to a size sufficient to attract contract buyers, develop alternative
marktsband too-ether with other small producers in cooperatives, or cease production of that commodity. Rhodes lists three possible alternatives for small farmers whose traditional markets are in a state of erosion [231: (1) attempt to preserve an open market system by active development of such market mechanisms, (2) build their own marketing agencies through cooperative action, and (3) drop production of the commodity, depend on other crops, and seek relief through the political process via hig'h price supports for the other crops. Rhodes fears that, the third alternative may win out by default.
The use of contracts in the production andl marketing of ag-ricultural commodities is a permanent fixture of the structure of the farm sector, and is the prevalent arrangement for such commodlities as milk, broilers, sugar beets, processing vegetables, and several fruit and nut crops. The major commodities that seem likely candidates for increased usage of contracts are hogs andl crops produced under commodity programs, assuming the current type of programs remain in effect.
The growth of large-scale, specialized hog enterprises is the main factor that will lead to increased use of hogY contracts. Only about 1 percent of all hogs are currently marketed under contract, a recent study estimated that about 15 percent of the hogs sold by producers selling 5,000 or more hogs per year were under contract in 1978 [24]. Both the number of large hog operations and the proport ion of hog-s marketed by them have been increasing in recent years.
Increased use of contracts in crops covered by commodity programs depends on the types of programs in effect. If prcgrams that allow for free play of market prices remain in effect, a g-rowth in contract marketing of these commodlities can be expected because farmers will increase their use of forward sales contracts as a means of dealing with price risks. A return to the previous high support price programs wIold result in a virtual cessation of contract sales for commodities affected.






20

FARMER-TO-CONSUMER DIRECT MARKETING
Farmer-to-consumer direct marketing has received considerable attention in the past few years as a possible method to serve the needs of small farmers. The Farmer-to-Consumer Direct Marketing Act, Public Law 94-463 was enacted in 1976 to promote direct-marketing activities that might lower prices to consumers, provide higher returns to farmers, and improve producer-consumer understanding. Under the provisions of this act, the Economics, Statistics, and Cooperatives Service (ESCS) initiated several research activities to determine the extent of direct marketing and its potential for enhancing the economic viability of small farmers.
TFarmer-to-consumer direct marketing is a form of vertical integration in that both production and marketing functions are combined in the same firm. However, unlike the vertical integration characteristic of large-scale agricultural firms, it does not rely on the established distribution network to reach the consumer and does not require large-scale production units to support its marketing function, Extent of farmer-to-consumer direct marketing
The most recent national survey for which data are available indicates there were about 13,000 direct-marketing outlets operating in all 50 States in 1976 [1]. The heaviest concentration was in the Northeast and Lake States. Roadside stands, pick-your-own operations, and farmers' markets were the most common types. Others included trucks parked at shopping centers, door-to-door routes, small on-farm dairy outlets, cooperatives dealing directly with consumer groups, and informal arrangements between friends and neighbors [15].
There are no reliable estimates of the total value of products sold through farmer-to-consumer direct-marketing outlets. The American Vegetable Grower estimates that gross sales of roadside stands in 17 of the States which responded to its survey, was about $208.8 million in 1976 (table 7). This estimate does not include sales through farmers' markets, pick-your-own operations, and sales of roadside stands in 33 States. The National Commission of Food Marketing estimated that in 1963 about 0.4 percent of all food sales nationwide were through direct-marketing outlets [19].
Fresh fruits and vegetables are the commodities most commonly old through direct-marketing outlets. Other commodities include eggs, dairy products, tree nuts, honey, bedding plants, and shrubbery. Commodities that can be successfully marketed through direct-marketing outlets are generally limited to those not requiring processing beyond sorting and packing.
TABLE 7.-ESTIMATED GROSS SALES OF ROADSIDE STANDS, 17 STATES, 1976 1 (Dollar amounts in thousands)
State Gross sales State Gross sales
New Jersey --------------------------- $50,000 Arizona-----------------------------$2, 875
Pennsylvania -------------------------- 40, 000 Tennessee ---------------------------- 2, 500
New York ----------------------------- 35,000 Texas -------------------------------- 2, 500
Ohio------- .......................30,000 Georgia ......--------------------------- 750
Massachusetts-------------------------24,750 Rhode Island ------------------------- -750
Indiana ------------------------------- 6,000 North Carolina ------------------------- 50
Maryland ----------------------------- 5,000 South Dakota --------------------------- 375
Michian.. ..---------------------------- 4, 500 North Dakota -------------------------- 20
New ampshire ------------------------ 3,230 Total --------------------------- 208,830

Estimates not available for all States.
Source: (1).






21

Structural impacts of farmer-to-consumer direct mark-eting
The potential impacts of farmer-to-consumer direct marketing on the structure of agriculture are quite limited. Both the kinds of commodities suitable for this type of marketing and the locational requirements for successful direct marketing are factors limiting its potential for improving the economic position of small farmers and affectin the structure of agriculture and agricultural markets.
Commodities suitable for farmer-to-consumer transactions are those that can be consumed fresh or can readily be processed by household preservation methods, such as home canning and freezing. This requirement limits the potential for direct marketing to vegetables, fruits, eggs, and a few specialty commodities. Commodities falling' into this category account for less than 10 percent of the value of agricultural products sold; 90 percent or more of the products, in terms of value, sold by farmers, including grains, cotton, sugar crops, forage and hay, tobacco, oilseeds, and most livestock and poultry, cannot be marketed through direct farmer-to-consumer outlets because of the extensive processing required to convert farm commodities into consumer food and fiber products.'
About 12 percent of the commodities suitable for direct-market sales are produced on farms with cross sales under $40,000, the size classes that could benefit most from direct marketing (table 8). About three-fourths of these commodities are produced on farms grossing $100,000 or more. Assuming that no shifts occur in the distribution of production among farm sales classes and that the total output of suitable commodities produced on smaller farms could be sold directly to consumers, the potential for farmer-to-consumer sales by smaller growers is just slightly over 1 percent of the total value of all farm sales.
TABLE 8.-PERCENTAGE OF VALUE OF OUTPUT OF COMMODITIES SUITABLE FOR FARMER-TOCONSUMER DIRECT MARKETING, BY FARM SALES CLASS, 1974
[in percent]
Farm sales class
Under $10, 000 to $40, 000 to $100,000
Commodity $10, 000 $39, 000 $99, 999 and over
Fruit ----------------------------------------- 3.4 13.8 17.8 65.0
Vegetables -------------------------------------- 1.8 7.0 9.2 82.0
Other---2.0 7.8 12.0 78.2
Total ------------------------------------- 2.5 10.0 13.5 74.0
Source: (31).
The second major limitation of farmer-to-consumer direct marketing is location of production. Farmers and consumers must be accessible to each other for direct marketing to succeed. For producers, this means a location near a major population center. For consumers, it means sufficient nearby production of commodities suitable for direct purchase from farmers to attract their interest. As one observer noted, a direct-marketing outlet must have "enough goods to make the trip worthwhile for customers, enough customers to make the trip worthwhile for farmers [15]." The potential, then, for farmer-to-consumer
2 There is a very small market for farm slaughtered livestock and poultry that is met primarily by direct farmer-to-consumer sales. This is also true for some dairy products.







22

direct marketing is greatest in areas that have both high population density and a reasonably high density of fruit or vegetable production. Fruits and vegetables account for about 75 percent of the value of commodities that can be marketed through direct market outlets. The Northeast comes closest to meeting these requirements (table 9). Not surprisingly, the Northeastern States also have the highest concentrations of direct marketing outlets.
TABLE 9.-RELATIONSHIPS AMONG STATE POPULATION, FRUIT PRODUCTION, VEGETABLE PRODUCTION, AND DIRECT MARKETING
Population I Vegetable proRanking Fruit production/ duction/ square Direct-marketing
Per square mile Total square mile 2 mile2 outlets
I-------New Jersey ------ California -------- Florida ---------- Newi ersey------- New York
2 --------------- Rhode Island---New York-------- California -------- California -------- New Jersey
3 --------------- Massachusetts. --- Pennsylvania.--Washington------- Florida--------- Ohio
4 ------------ Connecticut ------ Texas---------- New Jersey------- New York-------- Michigan
5 --------------- Maryland -------- Illinois ---------- New York-------- Delaware------- -Pennsylvania
6-----------New York--------------Massachusetts.- --- Massachusetts.---- California
7-------Delaware --------Michigan--------Michigan --------Michigan------Connecticut
8 --------------- Pennsylvania--New Jersey --- -- -Pennsylvania- ---Connecticut ------ North Carolina
9--------------- Ohio----------- Florida---------- Connecticut ------ South Carolina.---.. Indiana
10 -------------- Illinois ---------- Massachusetts.. Virginia--------- Maryland -------- Texas
I From (34).
2 From (27, 1975).
Source: (15).
Implic~ations and conclusions
The potential impact of policies to increase farmer-to-consumer direct marketing on the structure of the farm production and marketing sectors is very small overall, primarily because of limitations on
th idso omoiisthat are suitable for direct sales and because
of locational requirements. Farms that can benefit the most from direct marketing programs are those with gross sales under $40,000. Although about three-fourths of all farms reporting sales of $2,500 or more fall into this category, only 8 percent of them produce commodities likely to be sold directly to the consumer. The locational limitations further reduce this number so that only about 3 percent of farms with sales over $2,500 could benefit from direct-marketing programs. The value of production from these potential beneficiaries is estimated at about 0.5 percent of the total value of all agricultural production. Nevertheless, the improvement of opportunities for direct marketing could improve the well-being of some moderate-size farms and permit consumers in those locations to shop in a more competitive environment.
A recent analysis of the potential impacts of direct marketing on small fruit and vegetable farms in California concluded that direct marketing policies will have an almost imperceptible impact on the overall distribution of sales and net income between large and small farms in that State [14]. That is so mainly because direct marketing does not provide market access to enough small farmers. The author-s of the report state:
In short, direct-marketing policies can be no general panacea for the vast majority of small fruit and vegetable farms let alone the even larger number of smfall farmers wNho produce other kinds of crops which are not amenable to direct marketing.






23

The results of the California study are likely to be valid for most other areas of the Nation as well. So, although direct marketing may be a valuable market outlet for properly situated individual t5 small farmers, it is far from being a solution for most farms with eroding markets, small-scale operations, or low returns. The findings of the California direct-marketing study suggest that small farms might be served better by devoting more attention to policies and programs designed to increase the small producer's access to the conventional marketing system.












COMMODITY PROGRAM IMPACTS ON THE FARM SECTOR
Agricultural commodity programs clearly rank among the more imnportant public programs that affect the farm economy and the structure of that economy. They also significantly affect many factors in the national economy-the allocation of resources, the location of population and industry, exports and the balance of trade, the budget deficit, consumer food prices and expenditures, the rate of inflation, and so on. The major impact of these prog rams is determined by the distribution of benefits, raising the questions of "who gets the subsidies?" and "what effect does this have on the structure of farming?"
The aim of major commodity programs has been primarily to increase and stabilize farm incomes, although there are other objectives. Consumers benefit by having adequate supplies and more stable
prices. Program benefits accrue to the participants directly through payments and supported prices, and indirectly through higher market prices. Nonparticipants also benefit indirectly from the higher prices. Previous studies, however, have shown program benefits to be distributed unevenly, with most going to the largest farmers [2, 24]. Those studies are now outdated, Since programs have been significantly changed by subsequent legislation and the farm sector has further evolved. This study updates and expands upon the previous studies.
The following are summarized conclusions about the major impacts of the distribution of commodity program benefits in 1978:
The 1978 farm program increased net returns to participating
f armers, but the benefits favored larger producers because payments were related to individual farm size and acreages Panted.
About one-third of all farmers (750,000) participated in the
1978 programs; the rate of participation was higher for larger
farms.
Trhe average farm size was larger for program participants than
for nonparticipants.
Less than 10 percent of the total acreage in the 1978 farm program was controlled by corporations. Only 0.2 percent of the
enrolled acreage was on widely held corporate farms.
$2 billion were disbursed in program payments, the largest
amount since 1973.
Almost half the payments went to only 10 percent of the participants, those with the largest farms. By contr-ast, 50 percent of the farms-the smaller units-received only 10 percent of the
payments.
The proportion of payments received by the largest farms differ-ed by conunodity. The~~ cotton program had the highest degree
of concentration; feed grain wats the most evenly disper-sed.
About I1,200 participants (0.2 percent of the 750,000 p rticip arts) were affected by payment limitations. Payments Iororone because of thie limits amounted to $24 million, 1.4 percent of the
total payments.
(24)






25

Higher commodity prices as a result of acreage controls increased returns to participants by about $900 million, almost
half the direct program payments.
Net benefits averaged $267 for the smallest program participants, those who have a normal crop acreage (NCA) less than 70 acres. Net benefits were more than $44,000 for the largest participants, those who have 2,500 acres.
These findings reinforce those of earlier studies.
It is likely that the 1978 program benefits brought higher farmland values that benefited existing landowners and further contributed to the escalating capital requirements for beginning farmers-a barrier to entry. Over time, the programs probably increase capital requirements and tend to put renters at a disadvantage and further impede the entry of young farmers.

COMMODITY PROGRAMS
The Food and Agriculture Act of 1977 continued, with modification, programs that provide price and income supports to producers of the major crops-wheat, feed grains, cotton, rice, and soybeans.' Price support is effected through nonrecourse loan programs. Farmers may secure loans from the Government by pledging the commodity as collateral. The Government takes title to the commodity if the loan is not repaid, with no further recourse to the borrower. Income support is provided through the target price, deficiency payment concept. Farmers receive direct payments from the U.S. Treasury when market prices fall below the established target level. Producers prevented from planting, or experiencing low yields due to natural hazards, may also receive payments computed as a fraction of the target price. The price support (loans rates), income support (target prices), and the payment rates per unit for 1978 are shown in table 10.
TABLE 10.-MARKET AND PROGRAM ELEMENTS USED TO CALCULATE COMMODITY DEFICIENCY PAYMENTS, 1978
Deficiency Allocation
Commodity Unit Target price Loan rate Average price I payment rate factor2
Dollars per unit Percent
Barley. -Bushel --------- 2.25 1.63 1.90 0.35 82.4
Corn ----------------do 2.10 2.00 2.07 .03 97.1
Cotton ------------ Pound --------- .52 .43 .55 0 3 NA
Rice ------------- Hundred weight. 8.53 6.40 7.75 .78 NA
Sorghum._.- Bushel --------- 2.28 1.S10 1.95 .33 95.8
Wheat -------------- do. 3.40 2.35 2.88 .52 100.0
I The national weighted average price in the first 5 months of the marketing year for each commodity, except cotton, for which the calendar year average price is used.
2 The program allocation factor is the ratio of the national program acreage (the estimated acreage needed to meet domestic consumption and export sales plus adjustments in domestic stocks) to the estimate of harvested acreage. Z Not applicable.
Source: Agricultural Stabilization and Conservation Service, U.S. Department of Agriculture.
Producers become eligible for the commodity program benefits by complying with acreage set-aside requirements, if any, and by limiting their total plantings of specified crops-the planted acres plus the
I See (13) for a description of the provisions of the 1977 act.






26

acreage set aside may not exceed the farm's normal crop acreage
(NCA).2 A further restriction is the cross-compliance provision which requires a farmer to comply with the set-aside for all crops to be eligible for commodity program benefits for any crop. An added provision of the 1978 programs allowed producers of some crops to divert acreage voluntarily from these crops to conservation practices in return for
payment (table 11).
TABLE 11.-ACREAGE SET-ASIDE REQUIREMENT AND ALLOWABLE VOLUNTARY DIVERSION, BY CROP, 1978 [In percent]
Proportion of acreage planted for harvest.
Required Voluntary'
Commodity set-aside diversion,
Barley ---------------------------------------------------------------- 1 0 10
Corn ----------------------------------------------------------------- 10 10
Cotton ---------------------------------------------------------------- 0 10
Rice ------------------------------------------------------------------ 0 0
Sorghum --------------------------------------------------------- 10 10
Wheat ---------------------------------------------------------------- 20 0

A major change in the 1977 act was replacement of the longstandingacreage allotments, derived fiom production patterns several decades. old, with a current plantings concept. This, in effect, updated the base for computing program benefits and set aside acreage requirements. for all commodities except rice (where old acreage allotments wereretained). The total payment a faimer receives is based upon the
production from eligible acreage. That acreage is determined by multiplying the acreage planted for harvest by the allocation factor for that crop (the program allocation factor is the ratio of the national
program acreage--the estimated acreage needed to meet domestic consumption and export sales plus adjustments in domestic stocksto the estimate of harvested acreage). The allocation factors in 1978 ranged from 82.4 percent for barley to 100 percent for wheat. However, feed grains producers could gain eligibility for deficiency payments on all their planted acreage of corn, sorghum, and barley by voluntarily reducing their 1978 plantings of corn and sorghum by 5.
percent and barley by 20 percent from the 1977 planted acreage, in addition to the required set-aside.3
Payments to ricegrowers continued to be based on production from the allotted acreages, but there was no limitation on the total acreage that could be planted. However, production on acreage in excess of the allotment (and on farms without allotments) was not eligible for pricesupport loans or deficiency payments.
2 Crops subject to the total acreage restriction are barley, corn, dry edible beans, flax, oats, rice, rye, sorghbm, soybeans, sugar beets, sugarcane, sunflowers, upland cotton, wheat, and any other crops recommended by the State agricultural stabilization and conservation committees, and approved. The normal crop acreage (NCA) of a farm refers to the acreage normally planted to the crops specified above. In a State like Nebraska, the NCA accounted for 62 percent of the total cropland and 43 percent of the total farmland in 1974. States in the Corn Belt generally have NCA's that account for a much larger percentage of the total cropland. California, with its diverse agriculture, has an NCA that accounts for a smaller percentage of thetotal cropland and farmland.
3 Another major provision of the 1978 commodity programs, not treated in this report, was the farmer. owned grain reserve program. Farmers who complied with the set-aside requirements in 1978 were also, eligible to place their grain in'this program. The grain was first put under loan. Then a contract was made in which the farmer agreed to hold the grain until the market price reached a specified percentage of the loan rate. In return, farmers received a payment for storing the grain, and interest on the kane is waived after the' first year of the contract. Over 400 million bushels of wheat and nearly 900 million bushels of feed grains were. in the farmer-owned reserve on Sept. 30, 1978. Most of this grain was from crops prior to the 1978 harvest.





27

The 1977 act continued the payment limitation, in effect since 1971, but changed the limit. The new limit of 840,000 applied to the combined deficiency and diversion payments a person may receive from the wheat, feed grain, and upland cotton programs in 1978. Payments from the rice program were not included in this limit, and a separate maximum of 852,250 per person was established for that program.
There were 2.4 million farms in 1978, as estimated by ESCS's Crop Reporting Boards. The Agricultural Stabilization and Conservation Service (ASCS), the USDA a-ency responsible for administering the commodity programs, also defines farms for program administration purposes. There were 2.3 million ASCS farms in i978.' Each ASCS farm may have more than one producer associated with it, resulting from leasing arrangements, partnerships, and the like. Conversely, one producer may have shares of commodity production in more than one ASCS farm. To gain information on the complete farming operation associated with the producer and to facilitate an analysis of the impacts of the payment limitation, the size of farm is expressed in terms of the producer's normal crop acreaLe. This includes any proportional share of the acreage on farms for which more than one producer has an interest.
PARTICIPATION
There were about 750,000 farmers (about on-third of the total number of farms, including both farm operaois an( land(lowners), who participated in the major commodity p-ograms m 1i.S. Tnese partiCIpatinr farms _crew nearly 100 million acres of the six program crops, and produced 36 percent of the total output of the e crops ( table 12).
Participation was concentrated in the Plains and North-Central regions; 80 percent of a! participants were in tese regions (fig 3). The Plains region not only hal ti e most participants an, enrolled acreage, it also had the highest proportion of all farms ennolling in the progr! ms (fig 4). Farmers in the Plains States have traditionally participated heavily in the programs. The major crop in h is r e on is wheat. Producers generally expected the target price (83.40 per bushel) to be higher than mai:ket prices and thius receive a substantial payment from the program. Further, the provisions of the harley and sorgtum programs. crops also grown by many wheat prodi ucers, were relatively attractive. Participation in the wheat program was ne essary to ol)in benefits from the barley and sorghum programs because of the cross-compliance requirement previously mentioned.
Participation in the North-Central region was relatively low because the potential benefits from the corn program were lower than for other crops. The maximum payment rate could be only 10 cents-the
differential between the 82.10 target price and the S2 loan rate. Participation in the cotton program was large because there was no set-aside requirement. Hence, producers only had to meet any applicable cross-compliance requirements to be in compliance.
4 ESCS izenerally uses the Census Bureau concept of a farm as a pIae whi-h has sales receipts of more than $1,000. This definition was adopted in 19S. The former def itio: used .,0 as t'e sales lim which would result in a total of 2.7 million farms.
An ASCS farm consists of :rae s of land that re being operated by one person with cropping practice, equipmer:e. labor. acco ning systn. ad management subs 1 aaiy separate from that of any other farming u --i -hat may be operated by the same person.











28



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29

Figure 3

Regional. Breakdown of 1978 Farm Program Participants (P) and Enrolled Acreage (A)


NNortheast
A .%Plains North Central P 2.3%







Fiur 4854 16 J .11




FSo.3uPlinwNothas

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on widely hedPoro ains (1Noomrrsochldrs astngiil
0. percent (table 14).al







30


The participation rates between corporate and noncorporate farms were not drastically different. The exception was the cotton program in which corporate farm participation was relatively low. This is not
-surprising, since most of the large corporate cotton farms are in the Southwest. The extensive use of irrigation there substantially reduced production risks, making program benefits less attractive. in fact, the rate of participation in the cotton program in this region (61 percent of all ASOS farms) was relatively low (figure 5).

TABLE 13.-CORPORATE AND NONCORPORATE FARM PARTICIPATION IN COMMODITY PROGRAMS [Farms in thousand acres; participation in percent]

All farms Noncorporate farms Corporate farms
Rate of Rate of Rate of
Planted Enrolled partici- Planted Enrolled partici- Planted Enrolled particiCommodity acreage acreage pation acreage acreage pation 1 acreage acreage pation I

Barley ----------- 9, 297 5, 969 64.2 8, 212 5, 297 64. 5 1, 079 672 62.3
Corn ------------ 69, 793 32, 733 46.9 75, 982 30, 545 40.2 4,:022 2, 188 54.4
,Cotton----------- 12, 289 lop,372 84. 4 10, 581 9, 470 89. 5 1, 692 902 53.3
Sorghum --------- 14, 252 10, 532 73.9 13, 476 9, 959 73.9 781 573 73. 4
Wheat----------- 59, 022 41, 965 71. 1 54, 766 38, 829 70.9 4, 295 3, 135 73.0
Total-------- 164,653 101,571 61.7 163,017 94,100 57.7 11,869 7,470 62.9

1 The percentage of enrolled acreage relative to the total acreage planted by both participating and nonparticipating farmers.
Source: (28).

TABLE 14.--CLOSELY HELD AND WIDELY HELD CORPORATE FARM PARTICIPATION IN COMMODITY PROGRAMS IFarms in thousand acres; participation in percent]

All corporate farms Closely held corporations Widely held corporations
Rate of Rate of Rate of
Planted Enrolled partici- Planted Enrolled partici- Planted ,Enrolled particiCommodity acreage acreage pation I acreage acreage pation I acreage acreage pation t

Barley ----------- 1, 079 672 62.3 1, 029 634 61.6 50 38 76.7
Corn------------- 4,022 2,188 54.4 3, 893 2,116 54.4 129 72 56.0
Cotton ----------- 1,692 902 53.3 1,637 879 53.7 55 23 42.2
Sorghum---------- 781 573 73.4 756 557 73.7 25 16 64.9
Wheat ----------- 4, 295 3, 135 73. 0 4,199 3, 075 73.2 96 60 62.7
Total------- 11,869 7,470 62.9 11,514 7,261 63.1 355 209 58.9

IPercentage of enrolled acreage relative to the total acreage planted by both participating and nonparticipating farmers. Source: (28).






31

Figure 5
Percentage of Regional Crop Acreage Enrolled in 1978 Farm Programs



Wheat 46.0% Plains Northeast
/ Corn 14.2 %' North Central I
-. "I W heat 818 % W h a ,,.1' W heat 20.1 % Corn 67.6 0/cWheat 40.2% Corn 24.5%
patuon generllty Cotton 95.5is Cottonr n of.pr78.9 ro d
Wheat 5."o





prprio fte am ccutCorna 1.rge protiofteerle
acreage and Ctetota prdcto (tbl 15).o
Wheat 28.01,o
Corn 31.0'1
Cotton 76.1%





Program data indicate that the size distribution of program participation generally follows the distribution of production-a small proportion of' the farms accounts for a large proportion of the enrolled acreage and the total production (table 15).
The programs were apparently more attractive to the large farms. Only 35 percent of the total ASCS farms participated, but they accounted for 53 percent of the total normal crop acreage. This indicates that the average farm size (in terms of the NCA) was about twice as large for participants as for nonparticipants. Further, the data imply a larger proportion of all large farms participating than all small farms.











32



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DISTRIBUTION OF PROGRAM BENEFITS
There are several ways to view the distribution of the commodity program benefits: Number of recipients, size of farm of recipients, commodity produced, and geographic region. Number of recipients
Program part icip ants totaled 750,000, approximately one-Ithird of all farmers. Program benefits are generally based on production volume (bushels or pounds), so it would not be expected that payments would be distributed equally among paJrticipanlts. Rather, the benefit distribution logically would correspond to the size distribution of the acres enrolled. The larger farms have more acreage, hence a hig-her volume of production, and thus receive more benefits.
[Dollars in millions]
Payments as ofFebruary
Type of payment (this study) June 28, 1979
Deficiency payments ----------------------------------------------------- 990 1,021
Voluntary diversion payments --------------------------------------------- 590 633
Disaster payments ------------------------------------------------------ 162 356
haying and grazing pamns----------------------12 15
Total-----------------------------1,754 2,025

Volume of production (and payments) is skewed toward the larger farms, while the number of part icipating, farms is skewed toward the smaller farms. Almost three-f ourths of all p roogram participants had an ,\CA of less than 220 acres. Th'e nextu largest size group, those with an .NCA of 220 to 1,499 acres, comprised just over one-fourth of the participants. The very largest famthose with an NCA of 1,500 acres and more, made up only 1 percent of all recipients. However, the share of the total payments going to these groups is inveirse to the numbers in each group. 7t*
While payments are based on volume, participation requirement.' are generally in acreage terms. So the proportion of payments received by each group corresponds closely to the acreage enrolled in the program. The distribution of participants, acreage enirolled, and payments received among the farm grouLps are summarized below:
The smallest producers, 72 percent of the participants (533,000),
enrolled 25.4 percent of the acreage and received 25.8 percent of
the total payments, or 8,454 million.
Midsize producers, 27 percent of the participants (198,000)
enrolled 61.2 percent of the acreage and received 62 percent of the
total payments, or $1.09 billion.
The largest producers, 1 percent of the participants (8,200),
enrolled 1:3.4 percent of the acreage and received 12.2 percent of
total payments, or $214 -million.
6 This analysis is based upon the disbursement of 1978 program payments through February of 1979. Disbursed payments to that date totaled $1.75 billion for the various programs (below). Since that date, further disbursements have increased the total to $2 billion (through Julie of 1979J). The additional payments were largely for the disaster programs.
Most of the additional disbursements were not to farms recorded as already receiving payments, but to farms not previously on file. Thus, the general pattern of distributon of payments as reported in this section would remain unchanged, even though the absolute payment levels are understated.






34

These data reaffirm what is widely known about the programs-that benefits are closely proportional to production volume acreagere). that the larger farms, although few in number, have the highest production volume (acreage) and thus receive a disproportionate share of the program benefits.
Distribution by size of farm
The distribution of payments by participants' NCA acreage -Size, by region, is shown in table 16. The participating farms are grouped by percentiles, ascending from the smallest farms to the largest farms.. These data reveal the following information:
The 50 percent of the participants (375,000) with the smallest.
farms received less than 10 percent of the total payments, an
average payment per participant of $460;
The 50 percent of the participants with the largest farms
received over 90 percent of the payments, an average per partici-pant of $4,280.
The largest 10 percent (75,000) received nearly half the total
payments, an average per participant of $10,900.
The average payment per participant ranges from $365 for farms
that have an NCA of less than 70 acres to $36,000 for the farms that have an NCA of at least 2,500 acres. Participants with an NCA of less. than 220 acres received an average payment of $852, while those with an NCA of over 1,000 acres received $18,790.
TABLE 16.-DISTRIBUTION OF 1978 PROGRAM PAYMENTS, BY REGION
Percentile of producers I
Smallest indicated percentage Largest indicated precentage Payments
receive&
Region 10 20 30 50 50 30 20 10 (millions)
Northeast ----------1.0 2.2 4.5 12.2 87.8 74.5 62.8 43.0 $24.2
North Central--- .9 2.0 4.9 13.5 86.5 71.5 58.7 40.8 496.4
South--------- .2 .4 1.3 7.0 93.0 82.0 71.5 51.5 140.0,
Plains------------ .5 1.2 2.8 10.5 89.5 76.0 63.8 45.8 1,200.3
Southwest ----- .9 1.1 2.0 8.0 92.0 79.1 67.0 47.5 83.9
Northwest ----- .8 1. 2 2.5 7.7 92.3 80. 4 67. 7 47.5b 79.9
United States --- .9 1.9 3.7 9.7 90.3 77.5 65.4 46.0 2,024.7
1The percentiles are ranked by size of recipients' NCA. For example, the smallest 10 percent of producers simply refers to 10 percent of participants who had the smallest NCA.
These data again confirm the findings of previous studies-that thelargest proportion of the payments are received by a relatively small number of the largest producers.
Distribution by commodity
About 95 percent of total program payments were for the 'wheat (42 percent) and feed grain (55 percent) programs. The pattern of wheat program payments among producer sizes was very similar to that for the total program payments. The feed grain program p~ay-ments were somewhat. more evenly distributed (fig. 6). Cotton showed the greatest concentration of payments among the largest producers. (table 17).





9

Distribution by region
The North-Central and Plains regions received about 85 percent of the total program payments reflecting their dominance in wheat and feed grain production. The concentration of program payments to larger producers was the highest in the South and the lowest in the North-Central reg~ion. This is consistent with tLhe pattern of payment distribution among commodities, since the South is a primary cottAon area while the North Central is the primary feed grain area.

IMPACTS OF THE PAYMENT LIMITATION
There were 1,184 producers (0.2 percent) of the 750,000 participants affected by the payment limitation of $40,000 for the wheat, feed grains, and cotton programs combined, and the limit of $52,250 for rice. Payments forgone because of the limits amounted to $24 million, 1.4 percent of the total disbursement and an average of about $20,000 for each of the affected producers.
TABLE 17.-DSTRIBUTION OF 1978 PROGRAM PAYMENTS, BY COMM1ODITY [Percentage of payments]
Percentile of producers'
Smallest indicated percentage Largest indicated percentage Commodity 10 20 30 50 50 30 20 10
Wheat--------------------- 0.8 1.8 3.4 10.9 89.1 76.6 66.6 50.0
Cotton--------------------- .2 .9 1.4 6.20 93.8 83.3 72.5 53.3
Rice----------------------- .8 1.5 1.8 7.0 93.0 77.4 63.2 393.8
Feed grain----------------- .5 2.5 4.1 13.3 86.7 70.0 57.1 39.5
UJ.S. total------------- .9 1.9 3.7 9.7 90.3 77.5 65.4 46.0
The percentiles are ranked by size of recipients' NCA. For example, the smallest 10 percent of producers simply .refers to 10 percent of participants who had tile smallest NCA.

The $24 million payment reduction likely understates the total impact of the limitation. Its mere existence is no doubt a factor causing some large farming units not to participate in the programs.
Most of those affected by the limitation were wheatgrowers; one.half of those affected were located in the Plains region andi one-fourthin the Northwest. The limitation had virtually no impact on participants with an NCA of less than 1,000 acres.

MARKET-RELATED IMPACTS
Benefits of commodity prog-rams to producers are of two typesthose direct to the farmer in cash payments andi those that accrue
-through the collective supply-restricting action that increases market prices. The 1978 programs improved commodity market conditions through the acreage reduction (set-aside and diversion) provisions. The benefits from higher market prices accrue, of course, both to program participants and nonparticipants. Supply controls increased prices an estimated 3 percent for cotton, 4 percent for sorghum, ~6 percent for corn, 8 percent for barley, anti 14 percent for wheat.








36

In addition, there were cross-price effects on some nonprogram commodities. As the prices of program commodities rose, the demand for substitute commodities increased. For instance, soybean prices were an estimated 2 percent higher as a result of the supply controls on the other crops.

FigUre 6


Distribution of 1978 Wheat and Feed Grain Payments by Size of Normal Crop Acreage Wheat
Percentage of Program Payments


50


40


30


20


10




0 Lower 10-20% 20-30% 30-40% 40-50% Upper 40-30% 30-200%0 20-10% 10%
10% 50-40%
Acreage Size Class FedGrain
Percentage of Program Payments


50


40


30


20


10


0
Lower 10-20% 20-30% 30-40% 40-50% Upper 40-30% 30-20% 20-10% 10%
10% 50-40%
Acreage Size Class


These estimates of market-price benefits from the programs were comnputedI or farms of the various sizes by combining the information about participants (farm-size distribution) with the price impacts note( 1 above. The income forgone on acreage set aside or dliverted w-as also taken into ac .count in order to derive net benefits. The results






37

suggest the indirect price benefits for participants amounted to about one-half as much as the direct program payments (table 18). Indirect benefits to nonparticipants who did not forgo income on set-aside or diverted acres would be additional.
The impacts on net returns by size of farm were similar to the distribution of payments. Participants with an NCA of less than 70 acres had average net benefits of $267. The relatively small amount reflects their small volume of production. At the other end of the scale, participants with an NCA 2,500 acres or more received average net benefit of about $44,000. Overall, the 1978 commodity programs resulted in an estimated net increase in returns (after de(ucting the income forgone on set-aside acres) of $1.5 billion for participants. That was equivalent to about 5 percent of net farm income in 1978 and 85 percent of total direct payments.
On a per-acre basis, the payments and indirect price benefits were approximately the same for large and small farms. However, benefits tended to be small for participants in the feed grain programs who had a higher forgone income for each set-aside acre. In addition, setaside was not required for cotton for which the average farm size is higher. The average net benefit derived from the commodity programs amounted to an estimated $13 per enrolled acre for the smallest participants (less than 70 acres NCA) and $17 per acre for the largest participants 2,500 acres NCA and over.











38




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39

In general, distribution of net program benefits closely follows thepattern of production distribution. The lowest 10 percentiles of the participants, for example, received about 1 percent of the program net benefits and accounted for the same percentage of the commodity production. The ratio of the share of net benefits to the share of production ascends along the size of farm (NCA), as shown in table 19. This suggests that the distribution of net benefits is skewed toward large producers, not only because of the associated large sales volume, but also commodity composition and the higher rates of participation.

TABLE 19.-DISTRIBUJTION OF 1978 FARM PROGRAM NET BENEFITS AND PARTICIPANTS' PRODUCTION [Percentage of net benefits]

Percentile of producers
Smallest indicated percentage Largest indicated percentage Item 10 30 50 50 30 10

Programs net benefits ------------------------ 0.80 3. 40 8. 50 91.50 82. 00 55. 50
Commodity production ------------------------ 1.00 4. 00 9. 50 90. 50 76. 50 47. 00
Ratio=share of net benefits to share of production- .80 .85 .89 1. 01 1. 07 1. 18

IThe percentiles are ranked by size of recipients' NCA. For example, the smallest 10 percent of producers simply refersto 10 percent of participants who had the smallest NCA.












STRUCTURAL CHANGES. IN THE CATTLE FEEDING INDUSTRY
ThelU.S. cattle feeding industry has undergone structural changes that'are consistent with changes in other agricultural sectors in some
wasbut unique in others. These changestyiyhevouonha
has taken place in U.S. agriculture and help explain the status of today's family farm.
The cattle feeding industry of 30 years ago could be characterized as follows:
Having large numbers of small feedlots (under 1,000-head
capacity, with many much smaller);
Being located primarily in the Corn Belt as supplementary
enterprises on grain farms;
Using. unpaid and otherwise underutilized family labor in
off-season;
Feeding corn produced on the farm;
Producing most of the Nation's grain-fattened beef by feeding
one-fifth to one-fourth of the calf crop (the rest being sold as
nonfed beef); and
Selling primarily through local and terminal auctions in largely
uncoordinated markets.
A very much changed industry exists today:
Having declining numbers of feedlots feeding many more
cattle, with very large commercial feedlots predominant;
Being located primarily in the Southern and Central Plains;
Employing highly specialized skills and technology;
Using an industrial approach to management, financing, and
marketing; and
Having increased coordination between feeding and input
markets, slaughter, and distribution.
Half the cattle fed now are in about 400 feedlots; one-third are fed in fewer than 171 feedlots [30]. In contrast, the small farmer-feeder operations produced most of the fed beef prior to 1960. Several feedlot firms have a one-time capacity in excess of 100,000 feeder cattle. Since cattle are generally fed for less than 6 months before being moved to market, a 100,000-head feedlot can produce more than 200,000 head per year.
There was a substantial increase in the aggregate annual feedlot capacity in the sixties and early seventies. The number of fed cattle marketed increased almost 80 percent between 1962 and 1972 while the number of feedlots decreased by 33 percent [10, 30]. On the averatge, more than 1 million additional cattle were fed each year during this period, while feedlots decreased by more than 7,500 each year. Small feedlots of less than 1,000-head capacity declined in number each year while large commercial feedlots increased by about 60 lots aln i ally.
TVhe increase in feeding caJvacity has been associatted with lar ge lots. Over 61 percent of the fed cattle marketed in 1964 were from 223,000 feedlots with a capacity of less than 1,000 head. Small feedlot numbers
(40)







41


decreased to 130,000 and accounted for less than one-third of the fed cattle marketed in 1977. On the other end of the size spectrum 38 percent of the cattle were fed by the 200 largest feedlots in 1977 (table 20). Although small feedlots are still important in teims of total beef produced, the production of fed cattle is rapidly becoming more concentrated.

TABLE 20.-FED CATTLE MARKETED, FEEDLOTS, AND CATTLE MARKETED PER FEEDLOT, BY FEEDLOT CAPACITY GROUPS

Fed cattle marketed Feedlots
Fed cattle
Head Percentage of marketed
Feedlot capacity (head) (thousands) Percentage Number total feedlots per feedlot

1977:
Under 1,000 ...................---------------------- 7,927 31.9 130, 049 98.60 61
1.009 to 1,99 ---------------------... 1 175 4.7 819 .60 1, 435
2,000 to 3,999 .................... --------------------- 1, 186 4.8 401 30 2, 953
4,000 to 7,999 ..... --------------------- 1, 633 6.6 238 .20 6,945
8,000 to 15,999 .. ....--------------------... 3, 5E3 14.4 221 .20 16, 213
16,000 to 3i,999 ......------------------- 4, 86 19.5 140 10 34, 614
32,000 and over_ 4------------------- 40 18.1 61 .05 73, 607
Tota!, average-------------------................... 24, 861 100.0 131,929 100. CO0 183
1974:
Under 1,00 .................---------------------- 8, 261 35.4 135, 810 98.60 61
1,000 to 1,999 --------------------- 981 4.2 747 .50 1,313
2,000 to 3,999 --------------------- 1 0E5 4.6 484 40 2, 200
4,000 to 7,999 .......--------------------- 1,541 6.6 258 .20 5,973
8,o000 to 15,399.................-------------------- 2,854 12.2 212 .20 13,462
16,000 to 31,S99 .........-------------------.. 4,174 17.9 148 .10 28, 203
32,000 and over_. ------------------- 4, 453 19.1 73 .05 61, 068
Total/average ------------------- 23,334 100.0 137,732 100.00 169
1964:
Under 1,000...................... --------------------- 11,094 61.1 223,071 99.30 50
1,000 to 1,999..................... --------------------- 1,043 5.7 826 .40 1,263
2,000 to 3,999 ---------------------..................... 1, 147 6.3 435 .20 2,637
4,000 to 7,999 .....--------------------- 1,377 7.6 244 10 5, 543
8,000 to 15,99.................... -------------------- 1, 772 9.8 119 (1) 14, 891
16,000 to 31,999-------------------................... 1,153 6.4 36 () 32,028
32,000 and over -------------------................... 558 3.1 8 (1) 69,750
Totaljaverage-------------------................... 18,144 100.0 224,739 100.00 81

1 Less than 0.05 percent.
Source: (30).

The Southern Plains accounted for nearly all the growth in cattle
feeding since 1955. It was the major cattle-feeding area in 1977 (fig. 7), accounting for 44 percent of all fed cattle marketed. The Corn Belt accounted for about 20 percent of marketings that year. In
terms of absolute numbers, more cattle were fed in the Corn Belt in 1977 than in 1955, but the region has not shown major growth and
development.

CHARACTERISTICS OF FEEDLOT OPERATIONS

Cattle feedlot operations may be divided into two basic typesthe traditional farmer-feeder andl the large commercial feedlot operation [10]. The size that delineates the two is somewhat arbitrary, but most farmer-feedlers operate with a capacity of less than 1,000 head.
Many farmer-feeders feed less than 200 cattle, usually during the
noncropping season, and raise most of their own feed. Feed and labor costs make up a high proportion of the total cost of feeding cattle.
Consequently, the utilization of ol'-season labor, nonsalable roughage,





42

and other low-cost cattle feeding inputs makes cattle feeding an attractive supplementary enterprise for many grain farmers. C
The volume fed by f armer-feeders depends upon the price relationships between their alternative farm enterprises, off-season labor availability, and off-farm employment alternatives. The large f armerfeeders tend to operate on a year-round basis with more specialized feeding facilities.
Figure 7
Fed Cattle Marketed, by Region, 1955-77
Percent
90-Ote


70
60 Southern Plains
50
40NotenPan
30
20ConBl
.10rI I I I
1951960 1965 1970 1975 1980
Southern Plains: Texas, Oklahoma, Kansas, Colorado, New Mexico. Northern Plains: Nebraska, South Dakota, North Dakota,
Corn Belt: Iowa, Missouri, Illinois, Indiana, Ohio.
Source: (29).

Farmer-feeders are typically in the older cattle feeding areas (Corn Belt, Northern Plains, and Lake States), but are rapidly declining in numbers and in terms of their relative production. This is particularly true in the Northern Plains where large commercial feedlots are being established.
Large commercial feedlots represent a new technology in cattle feeding, being highly mechanized and efficient. Labor is specialized and professional nutritionists, veterinarians, and accountants are retained. Managers are well informed on national and local grain, cattle, and beef markets and can receive information on demanTy con: cerning specific buyer activities; many subscribe to commercial information services andl prices. The large feedlot managers, or their buyers, are continuously in the market for feeder cattle on a broad geographic basis. They have current information on prices, sources of inputs, and the availability and feeding quality of cattle coming from different geographical areas during (Nifferent seasons. They vary their feeding programs to take into account the age and weight of cattle placed on feed, kindIs of feed available, and the finish or grade of beef desired. Feed milling equipment and feed formulation technology are capital intensive. Management is aided by a detailed set of records kept for each lot of cattle.
Most of the largest conunercia feedlots are incorporated, but a number of the moderate-size ones, are not. Estimates developed from







43


USDA and Census data indicate 54 percent of all feedlots with 2,000head capacity or more in 1974 were incorporated [30, 32]. However, these incorporated feedlots accounted for 87 percent of all fed cattle marketed by all feedlots with 2,000 head or more capacity.
About 94 percent of all incorporated feedlots are closely held firms; 68 percent are owned by fewer than 6 shareholders, and 90 percent are owned by fewer than 11 shareholders. One or two shareholders constitute a majority of the ownership in 70 percent of these feedlots. More than three-fourths of all closely held incorporated feedlots involve related shareholders. Thus, most incorporated feedlots are closely held or family corporations. The widely held corporations accounted for about 7 percent of the cattle marketed in 1974, with most of these by lots having at least a 50,000-head capacity.
There were 23 feedlot firms with a one-time capacity of over 50,000 head in 1974. These firms fed 14 percent of all fed cattle that year. Analysis of limited information reported by the Census of Agriculture reveals that these large feedlot firms, when compared to smaller firms, had multiple feedlot operations, depended relatively little upon custom feeding, were more integrated with other agricultural operations, and frequently were more involved in activitiest!)not related to agriculture (table 21). More than 60 percent of the firms with 50,000-head capacity feedlot operations had nonfarm activities, two-thirds of them outside agriculture.

Custom feeding
The incorporated feedlots with a capacity of 12,000 to 49,999 head were heavily involved in custom feeding.' These feedlots, which marketed 26 percent of the fed cattle in 1974, were generally closely held corporations (table 21).

TABLE 21.-CHARACTERISTICS OF LARGE CORPORATE U.S. CATTLE FEEDLOT FIRMS, 1974

1-time capacity of feedlot firm (head)(
12,000 to 20,000 to 30,000 to 50,000
Item Unit 19,999 29,999 49,999 and over

Firms ------------------------------------------------ Number ------ 89.0 48.0 49.0 23.0
Fed cattle marketed (head) ----------------------------- Million ------- 1.9 1.6 2.4 3.1
Proportion of all marketing ------------------------ Percent ------ 8.0 7.0 11.0 14.0
Parent corporations ---------------------------------------- do ------- 19.0 19.0 19.0 57.0
Public corporations ----------------------------------------- do ------- 7.0 10.0 8.0 44.0
Multiple-feedlot operations:
More than I feedlot ------------------------------------ do ------- 16.0 21.0 27.0 87.0
More than 3 feedlots ----------------------------------- do ------- 3.0 10.0 2.0 48.0
More than 5 feedlots ----------------------------------- do ------- 2.0 6.0 (2) 30.0
Nonfarm business activities --------------------------------- do ------- 17.0 25.0 17.0 61.0
Related to agriculture ----------------------------------- do ------- 73.0 92.0 75.0 93.0
With farm input ------------------------------------ do ------- 46.0 36.0 33.0 54.0
With processing ------------------------------------ do ------- 64.0 27.0 17.0 62.0
With wholesaling or retailing ------------------------ do ------- 27.0 6.0 67.0 46.0
With services and other ----------------------------- do ------- 18.0 27.0 (2) (2)
Not related to agriculture ------------------------------- do ------- 60.0 33.0 38.0 64.0
Custom-feeding activities ----------------------------------- do ------- 81.0 85.0 88.0 61.0
Proportion of cattle custom fed -------------------------- do ------- 65.0 68.0 70.0 41.0

1 Combined capacity presented for firms with more than 1 feedloL
2 Less than 0.5 percent.
Source: (32).

1 Custom cattle feeding is where a feedlot performs the service of feeding cattle under agreement with Individuals or other types of clients who own the cattle. The custom arrangements vary, but one typical arrangement is where the feedlot bills the cattle owner a basic charge, including a markup for each ton of feed plus a per-bead charge for medication, dehorning, and other services [6]. Few lots if any, specialize solely in custom feeding.






44

Development of custom feeding activities closely paralleled the growth and development of large feedlot operations [6]. Capital requirements and risks associated with the operation oi large feedlotss, are so high that traditional means of financing agricultural production have been inadequate to support the new system. At current price levels) the total financing of 30,000 cattle on feed can exceed $16 million. Custom feeding is a means of providing the large-scale financincr needed for the new feedlots.
About 53 percent of the cattle marketed from incorporated feedlots, with a capacity of 2,000 or more head were custom fed in 1974 [32]. This proportion was equal to about a fourth of all fed cattle marketed in 1974. Taking iuto account custom feeding at unincorporated feed-lots would raise the share to 30 to 35 perc-Ont, largely unchanged from a decade earlier [20]. Since fed-cattle marketing in 1974 were 41 percent greater than in 1964, the number custom fed increased by about
2 million during, the decade.
Clients who have cattle custom fed must, of course, assume th& financial risks involved, which are high compared to other agricultural enterprises. Financial institutions will loan as much as 70 to 80 percent of the total costs, which at current prices is as much as $550 per head. The client may need to provide only $125, with the remainder provided by a commercial bank or other lender.
A 1974 study identified the legal form of organization of custom feeding clients in the Southern Plains as 38 percent sole proprietors, 31 percent partnerships, 21 percent corporations, and. 10 percent cattle-feeding clubs and limited partnerships [7]. The primary occu.F ations of custom-feeding clients, in terms of the proportion of cattle ed, were identified as 30 percent professional feeders, 28 percent farmers and ranchers, 16 percent livestock dealers, and 26 percent such other occupations as bankers, retailers, doctors, lawyers, teachers, and meatpackers [7].
Vertical integration
Many of the large feedlots (2,000 head and over) are involved in parts of the beef industry other than feeding. It is doubtful that any one feedlot operation is involved in every stage of production and distribution, but it is fairly common to be in at least two different stages. The other functions include cattle production, transportation, packing, retailing, and food service.
Many large feedlots have vertically integrated with grain elevators and feed manufacturers to achieve feed economics. This is a logical development because feed accounts for a high proportion of the total cost of producing fat cattle and for which any savings would offer a significant competitive advant,,ige. Most large commercial feedlots have not undertaken ownership of land or other resources required to raise cattle or produce the grain for feed because of the large capital requirements.
FACTORS CAUSING STRUCTURAL CHANGES IN CATTLE FEEDING
A number of factors have influenced the changes in cattle feedintgn These include the Govemment farm commodity programs, strong demand for beef coupled with rising consumer incomes, technical developments in grain production, and the exploitation of economic p.portunity by a new breed of agricultural entrepreneur.






455

Strong demand for beef
When assessing the forces behind structural changes, it is important to understand that a strong increase in the demand for fed beef occurred during the time that large commercial feedlot operations developed. The strong demand was partly responsible for relatively high fed-beef prices. Per capita consumption of beef increased by about 51 pounds in only two decades, from 63 pounds in 1950 to 114 pounds in 1970. This can be attributed to an increase in nominal per' capita disposable income from $1,400 to about $:3,300 in the early seventies. Consumers have historically increased the prop~ortion of beef in their diet as income levels increased. In addition, population increased from about 151 million in 195-0 to more than 200 million in 1970 [34]. The increase in consumption of beef between 1950 and 1970 was equal to about 140 percent of the total production in 1950. This increase in beef production was facilitated by the growth and development of cattle feeding.
Feed grain supplies
The strong demand for' beef influenced cattle feeders to utilize the farmers' tremendous capacity to produce feed grTains. Feed grain production increased from I13 million tons in 1950 to more than 200 million tons in 1974. Government feed crrain pr'ograms were in effect during much of this time, and large O quantity es ofl feed grains, were under loan or owned by the Government, with production exceeding the needs of livestock producers. The resulting low and stable feed grain prices encouraged tile growth of cattle feeding. Utilization of corn and sorghum in cattle feeding increased from 11 million tons in 19630 to about 37 million tons in 1972.
Feeder cattle supply
The increase in feeding could not have occurred so rapidly without an adequate supply of feeder cattle. The cattle herd, and thus the calf supply, increased by one-third during the sixties. But the large proportion of calves formerly slaughtered as nonfed beef piovided the major source of new feeder stock for the feedlots. The piroportion of the calf cropD slaughtered as nonfed beef decreased from 21 percent in 1960 to 5 percent in the early seventies.
Forage supplies for cattle also increased as acreage for'mer'ly devoted to cotton and grain shifted into foraoge. MXuch of this adjustment was due to the movement of cotton production out of the Southeast. More than 50 million acres of cropland slhfted to conservation practices, much in forage, as a result of the Government cropland diversion and conservation programs in the fif ties and sixties. The productivity of the acreage diverted from crops to forage was high compared to other land in fore. Even though there were reg-ulations limiting the use of diverted acres, grazing was allowed except during a 5-month growing period. As a result, f armers and ranchers planted their diverted acreage in crops for winter and early spring grazing.
A different situation exists today. The reservoir of cattle available for feeding but slaughtered as nonfeci beef was virtually depleted by 1973. The acreage arnd conservation reserve programs were not in effect from the early seventies through 1977, and high grain prices caused many farmers to shift acreage from forage to grain production. Later, a sharp drop in feeder cattle prices led to a liquidation of cattle herds which are only now beginning to be rebuilt.






46

Advan tages of large-scale feeding
The development of new technology-the large commercial feedlotwas another important factor influencing structural changes in cattle feeding. There are efficiencies in feeding cattle in large feedlots, at least up to 40,000-head capacity [5, 9, 121. In addition to these technical efficiencies, economies of size in buying inputs and selling fat stock, in the acquisition of information. and capital, and in developing, risk diversion strategies may offer additional competitive edges to large units. The existence of substantial scale economies permitting commercial feedlots to produce at a lower average cost per unit than smaller producers has contributed to the decline in the number of feedlots and may lead to even further concentration.
Large feedlot owners and their custom feeding clients may also be able to prosper with relatively low feeding margins per head because of the large volume of operation. Their use of highly leveraged capital may mean that a net margin of $4 to $5 a head will provide a 8- to 10-percent annualized return on their invested capital.
Custom feeding has helped the large feedlots achieve economies of size without assuming unacceptable levels of risk. Most of the risks are shifted from the feedlot owners to the custom feeding client. The feedlots remain able to feed their own cattle efficiently, even if limited in number, since custom feeding gives them the necessary volume to spread costs. Small feedlots cannot justify the additional recordkeeping, the expense of dealing with the custom feeding clients, or their banks, and- other matters.
Large feedlots have also been able to cooperate, or informally integrate, with packing plants located adjacent to their feeding areas.
-Such arrangements with meatpackers apparently have reduced the cattle assembly costs and production scheduling problems of beef processing plants. Thus, decentralization of the meatpacking industry, allowing new and more efficient plants to be located near concentrations of feedlots, has played an important role in the relocation of cattle feeding.
Growth of large feedlots has also been abetted by provisions in the tax laws which make feeding attractive. Recent changes in the tax laws limit former tax advantages for agricultural limited partnerships and syndicated custom feeding operations, but there are still income tax management strategies that can be followed when feeding cattle that ,can benefit custom feeding clients. Tax regulations permitting farmers to use cash accounting (rather than capital accounting) for tax comp~ut ation are used to advantage by cattle feeders, including~ custom feeders, many of whom are seeking tax shifts for high nonf arm incomes.

GROWTH OF CATTLE FEEDING IN THE SOUTHERN PLAINS
Commercial cattle feeding in the Southern Plains grew ra idly as at result of several influences during the fifties and sixties. These ineluded: (1) rapid increases in feed-gri rdcina euto
technologica developments and the Government's production control programs, (2) development of new ways to finance agricultural lproduiction and spread the risks Involved with large operations, inchiding utilizing the equity of a second party (custom feedings); and
(3) importation of new types of management abilities to operate the large industrialized feedlots. These influences were also felt in areas other than the Southern Plains, but to a lesser extent.





47

Feed grain production in the Southern Plains increased significantlyas a result of a shift from cotton and wheat production to hybird grain.. sorghum. Grain sorghum was considered a minor feed grain crop in, the midfifties and the acreage controls did not apply to it. The Government feed grain program did, however, provide an indirect price support which encouraged sorghum production. The planted acreageof sorghum in 1954 increased by about 2 million acres in Texas alone,a result of decreased cotton production caused by acrewe restrictions. Grain sorghum, with similar climatic, cultivation, and mechanization requirements as cotton, was a natural alternative to cotton; in manycases it was the only one.
The introduction of hybrid grain sorghum shortly after the cotton acreage program was initiated further accelerated the shift (t -able 22). The hybrid development made it economical to develop new irrigation systems solely for sorghum production. Farmers also intensified use of such inputs as fertilizer and adapted other yield-increasing prac-tices. The result was a substantial increase in the production of sorghum in a period in which there was a concentrated effort through the feed grain program to curb production. Texas sorghum production increased by 287 million bushels in 1953-68.
A second important factor in the development of large feedlots in the Southern Plains was the emergence of entrepreneurs skilled in the utilization of outside equity capital to operate the feedlots and spread the large financial risks. This was done mainly through custom feeding in the large feedlots for many types of clients. The custom feeders brought capital from people who otherwise would not have invested in agriculture. Commercial banks, particularly the large metropolitan banks in the Southern Plains, worked diligently with feedlot managers to develop procedures to finance both the feedlots and their customfeeding clients. The shortrun nature of the production of f at cattle and the increasing value of cattle used as loan collateral made cattle feeding loans an attractive alternative for bank loans. Later, new types of capital raising activities evolved, including debentures, public stock offerings, banker acceptances, and limited partnership arranaements for financing cattle feeding and custom-feeding clients.
TABLE 22.-GRAIN SORGHUM PRODUCTION AND CATTLE MARKETED FROM FEEDLOTS IN TEXAS, 1951-73, [in thousands]
Grain Marketings Grain Marketings
P= f rom sorghum f rom
feedlots production feedlots
Year (bushels) (head) Year (bushels) (head)
74,193 'NA 1963 ------------------------ 242,660 896
1952 ------------------------ 54,264 NA 1964 ------------------------ 215 648 971
1953 ------------------------ 56,837 NA 1965 ------------------------ 294:056 1 094
1954 ------------------------ 2 135,630 NA 1966 ------------------------ 311,696 1: 412
1955 ------------------------ 148,309 227 1967 ------------------------ 343,485 1,669
1956 ------------------------ 124,202 307 1968 ........................ 340,780 1,970
1957 ------------------------ 3244,075 291 1969 ------------------------ 309,800 2,706
1958 ------------------------ 251,427 296 1970 ------------------------ 329,616 3,138
1959 ------------------------ 257,832 403
1960 ------------------------ 258,552 477 1971 ------------------------ 303,004 3,663
1961 ------------------------ 229,635 548 1972 ------------------------ 391,780 4,308
1962 ------------------------ 201,006 756 1973 ------------------------ 417,000 4,412
1 Not available.
2 Sorghum plantings increased by 2,029,000 acres in 1954 as cotton acreage decreased 2,400,000 acres because of acreage allotments.
3 The Ist sorghum hybrids were available to farmers in 1957. Source: (27).





48

The third important factor involved in the structural change, the importation of management, is difficult to measure. Many feedlot managers were brought into the High Plains from California, the
Corn Belt, and other areas. Many of these managers had previous cattle feeding experience. However, the management of these large feedlots represents much more than just the feeding of cattle and goes far beyond the usual type of management in traditional farming. This management involves organization and direction of people, capital, machines and equipment, feed formulas, recordkeepmg, the analysis of these records and other data, time and motion studies, experimentation, and working with consultants. Managerial abilities required to operate these large feedlots more nearly approximate those found in the industrial sector than the traditional agricultural sector.
Additional factors likely contributed to the development of the large feedlot industry in the Southern Plains, but simply delineating these factors misses the most important point. What is important to understand is that it was the convergence of several seemingly unrelated phenomena-including Government commodity programs, development of hybrid sorghums (growing out of tax-supported research), strong demand for beef and high consumer incomes, Federal tax policies, and new approaches to management and finance-that brought about major structural change. This observation suggests that if the potential costs and benefits of public policies and programs are to be fully understood, a much better job must be done of tracing through the secondary and tertiary impacts of those programs and their interactions with other phenomena.
The story of structural change in the Southern Plains cattle-feeding industry may not end here. Water tables are declining in the Southern and Central Plains, reducing the acreage where irrigation is feasible and increasing energy requirements to pump water. Energy costs are rising rapidly, impacting heavily on energy-intensive irrigated crops such as grain sorghum. If the declining water supplies and rapidly rising energy costs curtail crop production in the Southern Plains, what will be the impact on the feedlot industry located there? Will it relocate? Will shipments of grain from the Corn Belt increase? Answers are not available, but the questions are important and will be the subject of further research.
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