• TABLE OF CONTENTS
HIDE
 Front Cover
 Title Page
 Foreword
 Preface
 Map
 Acknowledgement
 Table of Contents
 Summary
 A dramatic transformation (Lyle...
 The major forces (Lyle P....
 A preview of the future (Lyle P....
 Beef (J. Rod Martin)
 Dairy ( Robert H. Forste and George...
 Poultry and eggs (George B....
 Pork (Roy N. Van Arsdall and Henry...
 The northeast (Lyle P. Schertz...
 The north central (Lyle P....
 The south (W. C. McArthur)
 The great plains (William Franklin...
 The southwest (Stanley S. Johnson...
 The northwest ( Donn A. Reimun...






Title: Another revolution in U.S. farming?
CITATION PAGE IMAGE ZOOMABLE PAGE TEXT
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00053785/00001
 Material Information
Title: Another revolution in U.S. farming?
Series Title: Agricultural economic report
Physical Description: xi, 445 p. : ill., maps ; 23 cm.
Language: English
Creator: Schertz, Lyle P
United States -- Dept. of Agriculture
United States -- Dept. of Agriculture. -- Economics and Statistics Service
Publisher: U.S. Dept. of Agriculture :
For sale by the Supt. of Docs., U.S. G.P.O.
Place of Publication: Washington D.C
Publication Date: 1979 i.e. 1980
Edition: Slightly rev. Nov. 1980.
 Subjects
Subject: Agriculture -- United States   ( lcsh )
Farm life -- United States   ( lcsh )
Farm mechanization -- United States   ( lcsh )
Genre: federal government publication   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references.
Statement of Responsibility: Lyle P. Schertz and others.
General Note: "U.S. Department of Agriculture, Economics and Statistics Service"--Verso of t.p.
 Record Information
Bibliographic ID: UF00053785
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: aleph - 001231340
notis - AFY1742
lccn - 79600208

Table of Contents
    Front Cover
        Page i
    Title Page
        Page ii
        Page iii
    Foreword
        Page iv
    Preface
        Page v
        Page vi
    Map
        Page vii
        Page viii
    Acknowledgement
        Page ix
        Page x
    Table of Contents
        Page xi
    Summary
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
    A dramatic transformation (Lyle P. Schertz)
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
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        Page 40
        Page 41
    The major forces (Lyle P. Schertz)
        Page 42
        Page 43
        Page 44
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        Page 75
    A preview of the future (Lyle P. Schertz)
        Page 76
        Page 77
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
    Beef (J. Rod Martin)
        Page 83
        Page 84
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    Dairy ( Robert H. Forste and George E. Frick)
        Page 119
        Page 120
        Page 121
        Page 122
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    Poultry and eggs (George B. Rogers)
        Page 148
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    Pork (Roy N. Van Arsdall and Henry C. Gilliam)
        Page 190
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        Page 192
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    The northeast (Lyle P. Schertz)
        Page 255
        Page 256
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        Page 276
    The north central (Lyle P. Schertz)
        Page 277
        Page 278
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    The south (W. C. McArthur)
        Page 303
        Page 304
        Page 305
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    The great plains (William Franklin Lagrone)
        Page 335
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    The southwest (Stanley S. Johnson and Edward V. Jesse)
        Page 362
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    The northwest ( Donn A. Reimund)
        Page 404
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Full Text














/

M\ ^








Another

Revolution
in

U.S. Farming?

Lyle P. Schertz and Others










U.S. Department of Agriculture
Washington, D.C.
1979
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402




























Schertz, Lyle P
Another revolution in U.S. farming? / Lyle P. Shcertz and
others. Washington, D.C. : U.S. Dept of Agriculture, 1979
i.e. 1980.
xi, 445 p.: ill. ; 24 cm. (Agricultural economic report; no. 441)
Includes bibliographies.

1. Agriculture-Economic aspects-United States-Addresses, essays, lec-
tures. 2. Agriculture-United States-Addresses, essays, lectures. 3. Agricul-
ture and state-United States-Addresses, essays, lectures. I. Title. II.
Series.
HD1751.A91854 no. 441 79-600208
338.1 s--dcl9
rHD1761i r338.1'09731 MARC
Library of Congress 80






U.S. Department of Agriculture
Economics and Statistics Service
Agricultural Economic Report No. 441
Issued, December 1979 Slightly revised, November 1980







FOREWORD


A principal purpose of the Economics and Statistics Service is to
provide objective information on important economic and social
issues confronting our society. This was also true of its predecessor
agencies. This book is in that tradition. It focuses on the structure
of U.S. farming, a topic that gives rise to many issues and related
policy questions. The issues, often complex, are sensitive because
their resolution affects people's incomes and wealth.

I commend this book to you as a highly readable, objective
presentation of many facets of the complex set of issues associated
with this sensitive topic. It describes the changes in U.S. farming over
the recent decades, points up the forces that have contributed to
these changes, and anticipates the future.

Properly, we think, the authors do not offer policy prescriptions.
These are correctly the responsibilities of private, as well as public,
decisionmakers in our society.




KENNETH R. FARRELL
Administrator
Economics and Statistics Service







PREFACE


Farming in the United States is undergoing dramatic changes.
These changes are reflected in headline topics such as: farm corpora-
tions, family farms, small farmers, control of agriculture, special
valuations of farmland for tax purposes, tractorcades, foreign land-
ownership, millionaires, and landed aristocracies.
The changes are associated with many developments and govern-
ment policies in our society-and in some cases, developments in
other countries. Inflation, decisions in other countries, tax regula-
tions, nonfarm employment opportunities, new technologies, sup-
port of farm prices, and availability of credit are involved.
U.S. farming has undergone dramatic changes in the past. In fact,
the changes in two different periods have been called revolutions. In
the first revolution, horses were substituted rapidly for hand power.
In the second revolution, tractors were substituted for horses.'
The changes underway today in U.S. farming may be as far-reach-
ing as the earlier revolutions. Principally involved is a transformation
in the organization and management of U.S. farming. Changes in size
of farms, form of ownership, use of capital goods, carrying risks, and
using credit are of major importance in the dramatic adjustments
taking place.
This book is based on two concepts: first, that the transformation
underway in U.S. farming is giving rise to many issues generated by a
variety of forces and, second, that the materials contained in this
book can contribute to an enlightened dialog about the related
issues. Additionally, it is based on the premise that increased public
awareness of the changes and related issues will lead to more serious
consideration and review of current and possible public policies
which affect or could affect the way U.S. resources are organized and
managed to produce food and fiber.
How Americans deal with these issues is important to wealthy, as
well as poor, farm and ranch operators. The issues also have
important implications for other Americans, including: (1) those
who do not operate farms but own and supply land, labor, and
capital for farming; (2) those who participate in the input and the
product marketing, processing, and distribution subsectors of agricul-
ture; and (3) those whose association with U.S. farming is limited to
consumption. The issues are important to all these groups because
the eventual social, economic, and political responses will impact
income and wealth distributions among households and the eco-
nomic growth of our Nation.
The specific purposes of this book are to assemble, refine,
synthesize, and present available knowledge about:
'Wayne D. Rasmussen, "The Impact of Technological Change on American Agriculture,
1862-1962," Journal of Economic History, Volume 22, pages 578-591, December 1962.







vi / Another Revolution in U.S. Farming?


How U.S. production of livestock and crops is organized and
managed.
Why it is this way.
How resources are likely to be organized and managed in the
future, why, and with what results.
Research on the second and third of these purposes is extremely
limited. We decided, however, we would express our best judgments
despite the dearth of research information. Thus, the related discus-
sions should be considered as a set of hypotheses to be discussed,
criticized, revised, and researched.
The emphasis here is on the production subsector of agriculture.
Changes in this subsector are influenced by many forces outside the
subsector and have impacts beyond the subsector as well. Thus,
information and knowledge about the input and the marketing and
distribution subsectors of agriculture are encompassed, but only to
the extent that they were considered by the individual authors to be
important to accomplish the stated objectives. The same is true with
respect to considerations such as communities, people, jobs, employ-
ment, and economic growth.
The Summary is followed by Part I, which focuses on develop-
ments in the United States as a whole. Part II contains four chapters
on livestock: one each for beef, dairy, poultry and eggs, and pork.
Part III includes chapters on six regions of the country to enhance
readers' understanding of the great heterogeneity of U.S. farming.
Data presented in the text largely correspond to the regions shown
in figure 1. Subregions of these regions are utilized in some cases.
Also, in some instances, it was helpful to use data for other regional
configurations such as the farm production regions utilized by ESCS
for compilation of many data series. Data only for the continental
United States are utilized.
The overwhelming majority of the data are taken from USDA and
Census of Agriculture statistical series. Other sources are used
occasionally, as indicated in the text.
The terms farms and ranches are used interchangeably in the text.







Preface / vii








FIGURE 1
FARMING REGIONS


Northwest








ACKNOWLEDGMENT


Many people contributed to the completion of this book. The
authors, of course, are central to its realization and bear the final
responsibility for the contents.
George Coffman made a special contribution by directing the
compilation of a data base available to each of the authors.
Numerous suggestions for improvement of the information pre-
sented, its logical consistency, and accuracy were made by reviewers
of individual chapters as well as other people with special knowledge
about developments in U.S. farming. They include:


Phillip Allen
Mark Bailey
S.J. Brannen
Harold Breimyer
Charles Brooks
Neil Cook
Fred Cooke, Jr.
John Crecink
Charles Davenport
Raymond Dietrich
Don Durost
Duane Erickson
Merlin Erickson
Carson Evans
Richard Fallert
Anthony Grano
Steve Guebert
David Harrington
William Henson
Jim Hildreth
David Holland
John Hostetler
Eileen Hyland
Bruce Johnson
Jim Johnson
Harold Jones
Kenneth Krause
Norman Landgren
John Lee
William Lin


Tom Long
Alden Manchester
Dean McKee
Stan Miles
Charles Moore
Fred Nelson
Robert Otte
J.B. Penn
Robert Rathjen
Robert Reinsel
Gordon Rodewald
Lee Schrader
Jim Shaffer
Keith Sheets
Charles Sisson
Jerry Skees
Gordon Sloggett
Julie Smendzuik
Lauren Soth
B.F. Stanton
Howard Thomas
Winston Ullman
Stanley Voelker
Lernard Voss
Alan Walter
Dorwin Williams
Eldon Weeks
Bill Wood
Karl Wright
Jean Wyckoff
Glenn Zepp


Jim Madison edited the manuscripts and Dick Benjamin had the
principal responsibility in the ESCS Information Staff for preparing








x / Another Revolution in U.S. Farming?


the materials for publication. Many technical support people made
important contributions. They include:


Kathy Augustine
Joyce Bailey
Barbara Barnes
Jean Barnes
Mary Bell
Debbie Cooper
Paul Flaim
Phil Friend
Bill Fruend
Jim Frye
Phyllis Herbsleb
Arlene Howell
Gene Ingalsbe
Lillie Jones
Jim Kelly
Ken King


Patti Kwiatkowski
John Latimer
Peter Manzelli
Helen Massuci
Betty Meyers
Virginia Minter
Ruth Ann Moore
James Morrison
Marie Neathery
Larry Otto
Regina Reid
Gloria Robinson
Debbie Ruggles
James Sayre
Sandra Swingle
Dave Weisblat


Appreciation also is due several USDA officials, for they encour-
aged and supported the writing of the book and were insistent that
the authors be free to express their judgment, even though policy
issues are clearly involved.








CONTENTS

Page

Sum m ary ................................... 1

Part I-A National Overview

A dramatic transformation-Lyle P. Schertz ............. 13

The major forces-Lyle P. Schertz .................... 42

A preview of the future-Lyle P. Schertz ............... 76

Part II-Livestock Production

Beef-J. Rod Martin ............................. 85

Dairy-Robert H. Forste and George E. Frick ............ 119

Poultry and Eggs-George B. Rogers .................. 148

Pork-Roy N. Van Arsdall and Henry C. Gilliam .......... 190

Part III-Regional Contrasts in Farming

The Northeast-Lyle P. Schertz ......................257

The North Central-Lyle P. Schertz ................... 277

The South-W. C. McArthur ........................ 303

The Great Plains-William Franklin Lagrone ............. 335

The Southwest-Stanley S. Johnson and Edward V. Jesse .... 362

The Northwest-Donn A. Reimund ................... 404






Another

Revolution

in

U.S. Farming?




SUMMARY

PART I-A NATIONAL OVERVIEW
U.S. farming is changing dramatically and rapidly. Farms are fewer
and larger, and production is concentrated among large operators.
The largest 50,000 farms are fewer than 2 percent of the
total... but they account for more than one-third of all farm sales.
Great heterogeneity in terms of size, ownership, and products
continues, with owner-operated farms still the dominant tenure
arrangement. However, the relative importance of the number of
arrangements in which some land is owned and some is rented has
increased significantly. And the corporate form of ownership has
become more common.
Dramatic shifts in the mix and productivity of resources used in
farming have been key aspects of the transformation. The substitu-
tion of capital goods incorporating new and different technologies
for labor and land has been a prominent feature of this change.
However, incentives to substitute capital inputs for labor have been
lessened in recent years as price increases for land and capital goods
have been greater than price increases for labor.
Significant changes in the distribution of income and wealth
among farm people and substantial adjustments in the distribution of
wealth among Americans have accompanied the increasing concentra-
tion of farming into larger units. Increases in farm income and wealth
of landowners have given rise to higher returns on investments in
farming over time in relation to returns on common stock of U.S.
industry.







2 /Another Revolution in U.S. Farming?


Many forces have affected the way U.S. farms are organized and
managed. Seven, however, are especially important. They are:
Inflation.
Increases in farm product exports.
Availability of capital-intensive new technologies.
Nonfarm employment opportunities.
Availability of institutional credit for the purchase of land and
capital goods.
Commodity programs supporting farm product prices.
Tax rules applicable to incomes and estates.
Inflation increases: (1) the wealth of those who own land, (2)
demand for land, and (3) input prices. And it strengthens the relative
economic position of the wealthier and higher income people in
buying land. Through these effects, inflation-compared with stable
prices-leads to fewer farms and greater concentration of production,
incomes, and wealth among those associated with the larger farms.
Exports were important to the: (1) sharp increase in farm earnings
in the 1970's, (2) opportunity to realize politically acceptable prices
and farm income with only modest restraints on production, and (3)
relatively strong markets for soybeans and corn. Aside from the
substantial effects of the higher incomes and wealth on the organiza-
tion of U.S. farming, these developments led to greater specialization
in the production of grain and soybeans in the Corn Belt.
One of the major results of new technologies used in farming has
been to facilitate efforts by some individuals to control larger
amounts of production resources. It is this control over a large
amount of production resources (on large farms and ranches) that
affords the opportunity to realize increased incomes and wealth. In
crop production, the adoption of modern machinery means produc-
tion systems that have extremely high unit costs at small volumes of
production and low costs at large volumes. Similar production
functions are associated with large-scale poultry, beef, drylot dairy,
and confinement hog feeding units. The increased use of capital-
intensive technologies in U.S. farming has meant decreased labor
requirements.
The substitution of capital goods and land for labor has been
facilitated greatly by the opportunity for farm people to migrate to
the cities of our country and be better off than if they had stayed in
rural areas.
A prominent feature of the transformation of U.S. farming has
been the increased availability of institutional credit for purchases of
farm real estate and capital goods. The rules applied by lenders in
responding to demands for credit and for servicing loans have a
substantial influence on who survives in farming. But probably of
greater importance is the way economic forces associated with







Summary / 3


inflation affect potential borrowers differently, and thereby deter-
mine who obtains credit to buy land. People with sources of money
other than the land being purchased have a clear competitive edge
over people without such alternate sources.
U.S. commodity programs have accelerated the shift to large farms
by supporting commodity prices and increasing the chances of
significant price increases. In this way, commodity programs have
enhanced the: (1) confidence of people aggressively willing to
accumulate land and/or invest in capital goods that facilitate large-
scale production of commodities, and (2) willingness of lenders to
extend credit to these kinds of people. Modifications of commodity
programs so there are greater risks of commodity price declines
would discourage increased farm size and product specialization, and
make farm resources less attractive as investment opportunities.
Several rules for income and estate taxes have a significant effect
on farming. In total, they increase the attractiveness of owning farm
assets and lead to: (1) larger investments by nonfarm people in farm
assets, (2) larger farms owned and/or operated by those farmers who
are able to exploit tax opportunities, and (3) more corporate farms.
The effects of any of these forces are influenced by the presence
of other forces. For example, the full effects of increased farm
exports on U.S. farming would have been significantly different if
U.S. income tax rules had not allowed cash accounting by farmers
and tax credits for investments. And the effect of inflation combined
with increased availability of credit is significantly different than if
either of these forces had acted without the other.
The sustained synergistic effects of the seven major forces suggest
that in the future the United States will experience:
Further declines in the number of farms, but at rates sub-
stantially less than in the 1950's and 1960's.
Increasing concentration of production among the largest pro-
ducers.
Strong pressures for increased separation of ownership and use
of resources.
Inflation, energy prices, and changes in tax rules have changed the
prospective character and degree of influence of the major forces
affecting farming. Both inflation and the changes in tax rules
reinforce the trends toward fewer and larger farms and are likely to
accelerate the separation of ownership and use of resources.
Prospective higher energy prices inject substantial uncertainties for
the future organization of U.S. farming. The higher energy prices are
bound to affect the mix of resources used in farming. There will be
increased economic incentives to use energy-efficient systems of
production, but the eventual effect on how U.S. production of
livestock and crops is organized and managed is highly uncertain.







4/ Another Revolution in U.S. Farming?


Regardless of the eventual scenario and whether the changes are
described realistically as developments, transformation, or a "revolu-
tion," government policies and programs will influence and be
challenged by the events.
In rare cases, new programs may be developed; in a few other
situations, old programs may be discarded. The more likely outcome
is that the objectives of individual programs and related policies
which guide their implementation will be challenged and may be
found wanting.
Policies and programs will be under increasing pressure to discrimi-
nate among recipients to dampen the potential regressiveness of their
benefits. Consideration may be given to focusing on income prob-
lems of farmers on an individual need basis-an approach similar to
the way our society relates to income problems of people who are
not farmers. In this context, incomes from both farm and nonfarm
activities would be considered. In turn, criteria used in deciding upon
implementation of traditional farm-related programs, such as credit
programs, would give central emphasis to general economic and
social objectives of the country, such as price stability, employment,
and balance of trade.
Thus, changes in the way programs are implemented may be as
dramatic as changes in farming-and equally revolutionary.


PART II-LIVESTOCK PRODUCTION

Some of the most important aspects of and extensive changes
related to the transformation of U.S. farming involve livestock
production-especially cattle feeding, poultry and egg production,
and hog raising. Changes in cattle raising, as distinct from cattle
feeding, are considerably less. Changes in dairying are somewhat less,
but an important question is whether the large dairy operations of up
to 10,000 cows will be replicated in other parts of the country.
Cattle feeding and poultry and egg production have experienced
phenomenal adjustments in the United States. Today, one-half of the
cattle fed in this country are fed in 422 feedlots averaging over
30,000 head per year. In 1974, slightly more than 5,000 farms, each
with 20,000 birds or more, accounted for nearly 70 percent of U.S.
egg production. Sixteen to 17,000 farms, each selling 60,000 or more
broilers, accounted for 90 percent of production.
The hog industry also has been experiencing significant changes,
but the adjustments have not advanced as far as they have for beef
feeding and poultry and eggs. The changes have accelerated, however.
In 1974, 10,000 farms accounted for one-fourth of all hog sales.
There are now at least 15 to 20 firms with annual marketing of







Summary / 5


50,000 to 200,000 head. If these are successful, the number of such
firms will increase.
Two-thirds of U.S. beef production come from cattle raising
activities and dairy cattle. There is some concentration of cattle
raising, but the changes have been much more limited than for hogs,
poultry, or eggs. In 1974, farms and ranches with 200 and more beef
cows accounted for 3 percent of farms and ranches with beef cows
and 28 percent of the beef cows in the United States. Future changes
are expected to occur slowly.
Dairying has become a specialized farm activity of commercial
farming. The number of commercial dairy farms now is about
200,000, one-third the number in 1950. While adjustments in
dairying have been much more limited than in some of the other
livestock areas, large-scale production units are being operated
successfully in California and Arizona-and a big question is whether
their number will increase.

Beef

Cattle feeding has shifted away from small feedlots to very large
commercial feedlot operations which utilize industrialized ap-
proaches to management, financing, and marketing. As a result, half
the cattle fed in this country are fed in 422 feedlots averaging over
30,000 head per year. The other half are fed in more than 130,000
feedlots averaging 90 head per year.
Cattle feeding has increased in importance. But fed beef is still
only one-third of all beef produced in the United States. The rest
comes from cattle raising activities and dairy cattle.
The South has led all regions in growth of cattle raising since 1950
and has more cows than any other region. The average size of beef
cow herds is small-40 head. And there is a large number of farms
with beef cows-in 1974, over 1 million. At the same time, there is
some concentration of production. In 1964, farms and ranches with
200 and more beef cows accounted for 1 percent of farms and
ranches with beef cows and 24 percent of the beef cows in the
United States. The respective percentages were 3 percent and 28
percent in 1974.
Further changes are expected in cattle feeding. However, the size
of the larger feedlots may not increase much. The more dramatic
changes in the coming years likely will involve changes in ownership
and organizational arrangements which could facilitate higher utiliza-
tion rates, lower production costs, and better production control.
Depletion of irrigation water in the Southern Plains and higher
energy costs create great uncertainty about the continual concentra-
tion of beef feeding lots in this area.







6 / Another Revolution in U.S. Farming?


In contrast to beef feeding, changes in cattle raising will occur
slowly.

Dairy

Changes in dairying also have been substantial. Milk production,
which once was almost universal on farms in the United States, has
become a specialized form of commercial farming. Dairying to
produce milk for home use has disappeared.
The number of commercial dairy farms today is about 200,000,
one-third the number in 1950. They average over 50 cows per dairy
farm. U.S. production continues to be concentrated in the Northeast
(20 percent) and the North-Central (40 percent) regions. The South
and the Southwest each account for about 13 percent.
Technological advances have been paramount in causing changes in
dairy farming. These advances have been the principal reason why
total farm labor requirements for dairying are now no more than
one-fifth of the requirements in 1960. The most dramatic changes in
dairying are illustrated by the large-scale drylot dairy operations in
California, Arizona, and Florida-with herds of as many as 10,000
cows. The size question is closely related to technology and mechani-
zation. But it also involves attitudes of operators and availability of
credit. Obvious questions are: Why have producers in California,
Arizona, and Florida found it profitable to organize dairying into
drylot enterprises involving as many as 10,000 cows, while producers
in the Northeast and Lake States have not developed enterprises of
comparable size? Will entrepreneurs develop 5,000- to 10,000-cow
dairies in the Northeast and Lake States? Or might such dairies
develop in other regions in association with acceptance of newer
techniques of product handling, such as reconstitution and steriliza-
tion?

Poultry and Eggs

Commercial poultry farms are large. Relatively few of these very
large farms produce the bulk of poultry and egg supplies. In 1974,
slightly more than 5,000 farms, each with 20,000 birds or more,
accounted for nearly 70 percent of U.S. egg production. Sixteen to
17,000 farms, each selling 60,000 or more broilers, accounted for 90
percent of production. Slightly more than 5,000 farms, each raising
3,200 or more turkeys, accounted for 90 percent of production.
Today's poultry and egg industries involve an extensive network of
linkages among production units and input-supplying and marketing
functions. Coordinating systems cover virtually all commercial
broiler production and four-fifths or more of all egg and turkey







Summary / 7


production. In these systems, much production is under contract to
marketing firms or is only one phase within vertically integrated
firms.
Extensive coordination of production, input-supplying, and mar-
keting are likely to continue in the future. Further growth of typical
production unit sizes is expected. The number of farms producing
eggs may decline the most. Little change is expected in numbers of
farms producing broilers and turkeys.
Pork
Changes in the hog industry have been especially rapid in the last
10 to 15 years. Total annual production of pork has varied between
12 billion and 15 billion pounds since 1950, when pork provided half
the national supply of red meat. Now it provides only a third.
Hog production remains farm-based. Investment opportunities and
the importance of corn for feed have kept it that way, but the tie of
hog production to land is no longer essential. Advances in technology
have permitted hogs to be produced successfully without pasture.
Hogs now are produced year-round in low-labor, capital-intensive
systems conducive to large-scale production.
The number of hog producers has decreased rapidly. In 1950,
there were over 2 million-in 1974, less than 500,000. Size of enter-
prise has increased accordingly. In 1974, 10,000 farms accounted for
one-fourth of hog sales. Producers selling 1,000 or more hogs annually
now account for about 40 percent of total production, compared with
only 7 percent in 1964. Producers selling 5,000 head or more have at
least a sixth of the market. And their operations are growing rapidly.
Lack of necessary managerial abilities and skilled labor and risks of
disease have thwarted the successful establishment of extremely large
hog production units in years past. But there are at least 15 to 20
firms now in the United States with annual marketing of 50,000 to
200,000 head. Their experience will largely determine the prolifera-
tion of other operations of similar size.
Technological changes, credit availabilities, public policies, econo-
mies of size, and inflation have been important forces stimulating
changes in recent years. These same forces are expected to continue
to influence the hog industry in the future and likely will lead to
continuation of trends, unless strong countervailing forces develop.

PART III-REGIONAL CONTRASTS
IN FARMING
There are similarities and significant differences in the transforma-
tion of farming among the U.S. regions. All regions have experienced
declines in farm numbers and corresponding increases in farm size.
Several forces have been pervasive in influencing farming and how







8 / Another Revolution in U.S. Farming?


farms are organized and managed. Technology, nonfarm employment
opportunities, credit availability, tax rules, and inflation have had
impacts, albeit somewhat differently in each of the regions. Other
forces have been important in different regions.
Forces important in the Northeast are: (1) limited amounts of
highly productive land and a general division of most land into small
parcels hampering the aggregation of large tracts for farm purposes,
(2) government dairy programs and cooperative activities influencing
the profitability of dairying and the way products are marketed, and
(3) low transportation costs enabling producers in other regions to
compete with Northeast producers.
Significant forces in the North-Central region are: (1) increased
exports stimulating demands for corn and soybeans and thereby
sharply higher farm earnings, (2) commodity programs mitigating the
risks of lower commodity prices and increasing the chances of
significant price increases, and (3) the original approach in settling
the Northwest Territory combined with the contiguous nature of
highly productive soils facilitating consolidation of land resources.
Major forces in the South, in addition to those common to each of
the regions, are: (1) the flat terrain of the Delta facilitating farm
enlargement, and (2) hilly terrain such as in the Piedmont retarding
consolidation of resources into larger farms.
In the Great Plains, important forces are: (1) inadequate rainfall
and, in turn, irrigation in some areas and extensive areas of grassland
in others affecting types of farming and related investment require-
ments, (2) increased exports, especially of wheat, making it possible
to relax acreage limitations, and (3) abundant supplies of feed grains
and feeder cattle facilitating the development of large feedlots. These
forces have combined with others, especially capital goods incorpo-
rated in new technologies and commodity programs, to influence
farmer decisions in organizing and managing farm resources.
In the Southwest, numerous forces, many of them associated with
the generally arid climate of the region and the prevalence of
irrigation, have given rise to large-scale and diverse farming.
Forces especially important in the Northwest are: (1) -water
resource policies, (2) Federal policies related to labor, (3) distances
to major markets, and (4) urbanization with population growth.
These forces have interacted with others, especially availability of
new technologies and Federal commodity programs, to give rise to
farming involving (1) significant increases in irrigation, (2) decreases
in farm numbers, (3) consolidation of resources into larger farms,
and (4) linking of production of individual farms to a growing food
processing industry.







Summary / 9


In coming years, decisions by farm operators and other owners of
resources employed in farming will be affected by continuation of
the many forces determining these trends of the past. However, some
of the forces may be changing in significant ways, and there are new
uncertainties. Changes in energy prices create great uncertainty. The
terms of trade among factors of production are changing and will
encourage farmers to conserve land and capital goods (including
associated energy) relative to labor. Uncertainty is especially great
among farmers depending on irrigation. Energy is important to
irrigation. Areas, such as the Texas High Plains, which depend on
ground water for irrigation may confront pervasive adjustments from
irrigation to dryland farming as available water becomes more
limited. The possible application of size limitations on farms receiv-
ing water from federally funded projects and possible modification
of the amount of public subsidy to agricultural users of water by
market pricing of water, create other uncertainties in the West.
Unionization of labor and possible restraints on publicly sup-
ported mechanization research, stimulated by public concerns about
effects of technological change on labor displacement, also may be
important to farming, especially in the Southwest.
While there is great uncertainty, trends indicate a slowing of the
decline in the number of small farms, a further decrease in the
number of middle-size farms, and an increase in the number of large
farms. Public debate in the 1980's likely will focus on the increased
concentration of production among larger farms and the ever-
decreasing marketing opportunities for small farmers. But these
issues may be of secondary importance to another related issue-the
separation of ownership and use of resources. This separation may
increase, especially with respect to land. The substantial value of
even moderate-size farms makes intergenerational transfer of re-
sources to a single child extremely difficult, even if tax rules permit
avoidance of large tax liabilities at the time of such transfers.
Thus, ownership of individual land parcels in the next two decades
will involve multiple ownership by descendants of those who experi-
enced the capital gains of the 1970's. This, in itself, may involve
separation of ownership and use of land. Some children not farming
will want to sell their interests, but family people may not be able to
buy and potential buyers may .not be farm operators. In fact, those
family members farming likely will prefer that sales be made to
people willing to rent the land to them.
The magnitude of these developments probably will be much
greater than likely sales to non-Americans. However, the character-
istics of the operators and the resulting organization and manage-
ment of farms may not be greatly different.






Part I.


A National
Overview











I IA Dramatic

Transformation

Lyle P. Schertz









FARMS ARE FEWER AND LARGER

Changes in the number of farms and size of farms are two
important indicators of the transformation underway in U.S. farm-
ing. The number of farms has decreased since reaching a peak of near
7 million in the mid-1930's (14).1 By 1950, the number had declined
to 5.6 million. In the following 25 years, the number dropped more
than 50 percent to less than 2.7 million (figure 1).
However, the rate of decrease in number of farms has slowed from


2.7 percent per year in the
indicated below:


1950's to 1.1 percent in the 1970's, as


Farm numbers Decline

Time Per
Year Number Number interval year

Thou. Thou. Pct.
1950 5,648 1,693 -30 -3.5
1960 3,955 1,041 -26 -2.9
1970 2,944 216 -9 -1.0
1978 2,668

' Italicized numbers in parentheses refer to items listed in Literature Cited.








14 / Another Revolution in U.S. Farming?


A large proportion of the households associated with the 2.7
million farms remaining have nonfarm sources of income. In many
cases, it is equal to or greater than their income from farming. Also,
close to a third of these 2.7 million farms have annual sales of farm
products of less than $2,500.2,3
Practically all of the land resources associated with the farms that
"disappeared" were incorporated into other farms. Some land went
out of production, especially in the Northeast and South. New
land-especially in the Southeast and along the Mississippi River-also
came into production. So. total cropland used for crops in recent
years has been almost identical to the total of the mid-1930's-370
million to 380 million acres (figure 2).
As a consequence, the increase in farm size measured by acreage is
as dramatic as the decrease in number of farms. Average farm size in
acres in the mid-1970's was almost twice that of the early 1950's
(figure 3).
A decrease of 60 percent in the number of farms of less than 500
acres combined with an increase of 20 percent in the number of
farms with more than 500 acres accounts for a major portion of the
increase in average size of farm in the United States, as measured by
acres.
The increase in size has been even greater, when measured in
actual dollars of cash receipts (figure 4). When these data are
adjusted for changes in prices received by farmers, however, the
relative changes in average receipts per farm (expressed in 1978
dollars) have been roughly comparable to the changes measured in
acres.

INCREASES IN CONCENTRATION
AND PRODUCTION
National averages can be severely misleading as indicators of the
way individual farms are organized. They mask great differences
among farms. For example, in 1974, there were more than 225,000

'Time periods used for the analysis vary throughout this manuscript. To the extent
possible, data for 1950 to date were utilized. In a limited number of cases, the data previous
to 1950 were included to put changes since 1950 in perspective. On the other hand,
limitations on availability of data made it necessary to utilize information for even shorter
time periods.
SA new definition of a farm was introduced with the 1974 Census of Agriculture.
However, to facilitate use of time series data, the 1959 definition of a farm is used in this
publication: "A farm is any place from which $250 or more of agricultural products were
sold, or normally would have been sold, during the census year or any place of 10 acres or
more from which $50 or more of agricultural products were sold, or normally would have
been sold, during the census year." (19) The 1974 definition involves a cutoff of $1,000 in
sales receipts. The difference between the two definitions, in terms of the number of farms,
was 152,000 in 1974.









A Dramatic Transformation / Lyle P. Schertz / 15


FIGURE 1
NUMBER OF FARMS
MILLION
6 --




4


FIGURE 2
CROPLAND USED FOR CROPS
MIL. ACRES
400 .


0 1960 1970 1980 1910 1930 1950 1970
0 1960 1970 1980 1910 1930 1950 1970


FIGURE 3
AVERAGE FARM SIZE
ACRES


FIGURE
CASH RECEIPTS PER FARM
$ THOUS.


0 1 I I 0 .
1950 1960 1970 1980 1950 1960 1970
INCLUDES "OTHER FARM INCOME "


1980


farms with less than 50 acres of land (18). Conversely, there were
150,000 farms with 1,000 acres or more of land (figure 5).
These distributions indicate substantial concentrations of land in
large units (figure 6). The concentration is greater for total land in
farms than it is for either cropland or harvested land. For example,
only 42 percent of the land on farms and ranches comprised of 1,000
to 2,000 acres was harvested in 1974. On farms and ranches with
more than 2,000 acres, 12 percent of the land was harvested that
year. Range is an important component of land not harvested.
The concentration of land harvested by larger farms has increased
over time. For example, on all farms with 1,000 or more acres of
land, about 70 million acres were harvested in 1964. Ten years later,
the total harvested by farms in the same size class was 100 million


300


200










16 /Another Revolution in U.S. Farming?


acres. Thus, in 1974, slightly less than 10 percent of the farms
accounted for one-third of the land harvested in the United States.
Data on the number of farms categorized according to sales of
farm products also indicate great diversity among farms (figure 7).
Almost 1.8 million farms in 1978 had sales of less than $20,000.
Conversely, 187,000 farms had sales of $100,000 or over; one-third
of these farms had sales of over $200,000.
Comparisons over time of the number of farms in different sales
classes are difficult to make because of the increases in farm product
prices. For example, during 1960-78, prices received by farmers


FIGURE 5
FARM DISTRIBUTION
BY SIZE CLASS, 1974
FARMS THOUS.
400



300



200



100



0
50- 100- 260-
100 180 500
SIZE (ACRES OF LAND)
NOTE: FARMS WITH MORE THAN $2.500 SALES
FIGURE 7
FARM DISTRIBUTION
BY SALES CLASS, 1978
FARMS MIL.
4.0


FIGURE 6
LAND DISTRIBUTION BY
SIZE CLASS,1974
MIL. ACRES
200 .


150 I-


1,000-
2,000


0-20 20-40 40-100 100+
SALES CLASS ($ THOUS.)


Total
Crop
Harvested


0- 100- 260-
50 180 500
FARM SIZE (ACRES)
NOTE'FARMS WITH MORE THAN $2.500 SALES.
FIGURE 8
FARM DISTRIBUTION
BY SALES CLASS, 1960
FARMS MIL.
4.0



3.0



2.0



1.0


408


0 I l m I I =--
1960$-0-10 10-20 20-40 40-100 100+
1978$-0-18 18-38 36-72 72-221 221+
SALES CLASS ($ THOUS.)


1


I







A Dramatic Transformation / Lyle P. Schertz / 17


increased 121 percent. During 1966-78, they doubled (up 98 per-
cent). One way to make a rough comparison, however, is to adjust
the sales class "boundaries" by changes in farm prices. Figure 8
reflects this adjustment for 1960. For instance, farm product sales of
$20,000 in 1960 would have been worth $44,000 at 1978 price
levels, and $40,000 of products in 1960 would have been worth
$88,000 at 1978 price levels.
Data for 1960, 1966, and 1978 with sales classes adjusted for
changes in product prices reinforce the conclusion that the transfor-
mation of U.S. farming is leading to greater concentration of farming
in large units, as shown below:


Number of farms
by sales classes 1960 1966 1978


Current dollars 1978 dollars
(Thousands)


Millions of farms


Thousands of farms


20- 40
20- 40
40-100
40-100
40-100
100-200


100 & over
100 & over
200 & over


22- 44
20- 40
20- 40
44- 88
40- 79
40-100
88-221
79-198
100-200


221 & over
198 & over
200 & over


Totals


23
43
63
3,963 3,257 2,672


Even though the number of farms with sales of less than $20,000
(1978 dollars) dropped by 40 percent, this group of farms in 1978
still represented two-thirds of all units considered to be farms.
Members of households associated with many of these farms have








18 / Another Revolution in U.S. Farming?


nonfarm jobs as well. The requirements of farming, the increasing
number of people per household involved in the labor force, and the
amount and timing of hours required for nonfarm work make it
increasingly possible for members of households to spend part of
their available time farming and the other part engaged in a nonfarm
activity.
Concomitant with the drop of nearly 40 percent in the number of
farms with sales of less than $20,000 (1978 dollars), the drop of 50
percent in the number of farms with sales of $20,000 to $40,000 and
the increase in the number of farms with sales of over
$200,000/$220,000 is increased concentration of sales among the
larger farms. The percentage of farms in the $200,000-and-over sales
class (1978 dollars) almost tripled during 1960-78, and the per-
centage of sales of this group doubled as shown below:


Percent of farms Percent of sales

1960 0.9 19
1966 1.3 28
1978 2.4 39


An indicator of concentration that is not influenced by inflation is
the share of total farm receipts received by the 50,000 largest farms.
Sales of these farms accounted for 23 percent of farm receipts in
1960; 30 percent in 1967; and 36 percent in 1977.
These same farms constituted 1.3 percent of total farm numbers in
1960, 1.6 percent in 1967, and 1.9 percent in 1977 (21).
Ranking of all farms by volume of sales and noting the proportion
of sales contributed by the largest 25 percent (4th quartile) is
another useful indicator of changes in the concentration of U.S.
farming among larger units, as indicated below:


Sales of 4th-quartile farms
Sales

Gross Value added

Percent
1960 77 61
1970 82 70
1977 85 73








A Dramatic Transformation / Lyle P. Schertz / 19


The largest one-fourth of farms accounted for over three-fourths
of all farm sales in 1960. By 1977, it was 85 percent. Breimyer's
estimates indicate that the concentration is somewhat less when net
sales are used as the measurement (1). However, the increase in
concentration during the 1960's is greater when measured this way.
The current levels of concentration of resources and production in
the larger farms and ranches are high, compared with historic levels
of concentration in farming. In contrast, these current levels of
concentration are extremely low, compared with many industries in
the United States-including some that provide inputs to U.S.
farming and others that assemble, process, and/or distribute farm
products.
Other indicators of the heterogeneity of U.S. farming are the
contrasts in average farm size among regions, measured by acreage as
well as by sales (figures 9 and 10). Some of the differences, of
course, are attributable to differences in the productivity of land.
Many other factors also are important in explaining the hetero-
geneity of farms. Some of these are the original land settlement
patterns, availability of labor, irrigation investments, and implemen-
tation of rules associated with available water.
Proximity of off-farm job opportunities also is important in
understanding the heterogeneity of farms. Close proximity facilitates
combining farm activities with nonfarm employment. Off-farm in-
come is highest among families with small farm incomes (11). In fact,
the "average" family farm operator with farm sales of less than
$20,000 in 1978 had more off-farm income than net farm income.
Of these farm operator families, those with $10,000 to $20,000 in
sales had the lowest per-family income-farm and nonfarm-of any
group of farms (figure 11).
FIGURE 9 FIGURE 10
AVERAGE FARM SIZE BY ACRES AVERAGE FARM SIZE BY SALES
ACRES STHOU.
1,500 120

1978 1977
1950 1959
1,000 80



500 40 0



0


NE NC S GP SW NW
REGIONS


NE NC S GP
REGIONS


SW NW








20 / Another Revolution in U.S. Farming?


At the same time, we do not know very much about the
distribution of off-farm income. The reporting of data does not
indicate the proportion of farm operator families in different farm
sales classes with off-farm income or the range of this off-farm
income among these operators. Thus, significantly different eco-
nomic situations are reflected in the averages reported. For example,
a family with farm income of $7,000 and off-farm income of $2,000
earned by a member of the family working as a part-time carpenter
would be included in the numbers for the sales class of $5,000 to
$10,000. So would a family with the same amount of farm income
but with $75,000 of off-farm income earned by one member of the
family as a university professor or as a real estate salesman.
A report by Wilcox (22) indicates that a significant proportion of
families with low farm income also have low off-farm income. Wilcox
estimated, for 1973, the percentage of families living on farms with
sales of $2,500 to $20,000 and with sales of $20,000 to $40,000
that had off-farm income of less than $1,000. For the first group of
farm families, the percentage for the United States was 16. The range
among farm production regions was a low of 5 percent for the
Northeast and a high of 26 percent for the Lake States. For the sec-
ond group of farm families, the percentage for the United States was
39. The range among farm production regions was a low of 23 percent
in the Pacific region and a high of 51 percent in the Northern Plains.

PART-OWNER FARMS MORE DOMINANT

Land tenure issues have been enmeshed in many of the major
political struggles in the history of our country. They were inter-
twined with the political philosophies of the framers of the Constitu-
FIGURE 11
NUMBER OF FARMS, BY TENURE
OF OPERATOR
MIL. FARMS
4


3


2 -Full Owners



.**.. **.*. k ............. Part Owners
Fu Tenants.......
Full Tenants _


196 190 I


1960 1970


1980








A Dramatic Transformation / Lyle P. Schertz / 21


tion, who had been influenced by earlier European attitudes toward
labor and tenancy. They related significantly to issues of slavery in
the South and to the settlement of the Northwest Territory and the
West. Through the years, political ideologies expressed in speeches
and legislation have emphasized owner-operated farms.
Relevant facts related to land tenure on a national basis for the
last 30 years are depicted in figures 11, 12, and 13. Note that:
The number of farms in each tenure category is declining.
However, part-owners (those who both own and rent part of the
land farmed) are declining less rapidly; thus, as a percentage of
the total number of farms, they have increased. In 1974, they
accounted for 27 percent of all farms. Full-tenants have de-
clined rapidly in both number and percentage. Full-owners have
increased slightly in percentage.
Part-owners and full-tenants have larger farms, and the size of
their farms has increased faster than the average size of
full-owner farms.
The amount of land operated by full-owners and full-tenants
has declined dramatically. Land farmed by part-owners now
accounts for more than one-half of all land in farms. The
decline of land in part-owner farms during 1969-74 was in three
western regions: the Plains, Southwest, and Northwest. Even
with the decline in actual acreage of part-owner farms during
1969-74, the percentage of land in those farms increased
slightly.
One estimate (15) indicates that of the more than 900 million
acres in farmland, almost 60 percent is operated by the owners
(including land of full-owners and the owned portion of part-owner
farms). However, these statistics are not fully adequate and are
FIGURE 12 FIGURE 13
FARM SIZE, BY TENURE OF LAND IN FARMS, BY TENURE
OPERATOR OF OPERATOR
ACRES MIL. ACRES
900 600
Part Owners t ..---at O s


600 ...ar 400 -ne
..** Full Owners


300 200 -...


0 Li-
1950 1960


-i0 o
1970 1980 1950


1960 1970 1980


run Tenants
--F-ull Owners


"" Full Tenants







22 / Another Revolution in U.S. Farming?


complicated by changes in the way farms operated by managers were
shown in tabulations for the 1964 and 1969 censuses. On the basis of
these census data, Lewis and Boxley showed that the percentage of
land owned by farm operators declined from 62.3 percent in 1954 to
58.0 percent in 1964 (6). The change during 1964-69 was con-
founded by the change in census tabulations. However, there ap-
parently was a slight further drop in the percentage during 1969-74.

CORPORATE FARMS LARGE
IN RELATION TO OTHERS
Over time, three primary forms of business organization have
characterized farming and ranching operations:
Sole proprietorships (individuals)
Partnerships
Corporations
Individual ownership historically has been the dominant form and
in 1974 accounted for nearly 90 percent of farms with sales of
$2,500 and over. That year, individually owned farms generally were
smaller than partnerships or corporations, measured both by farm
acreage and farm sales, as shown below:

Farms by type Percentage distribution

Thousands' Number Acreage Sales
Individuals 1,518 89 75 67
Partnerships 145 9 14 14
Corporations 28 2 11 18
Others 4 2 2 2

'With sales $2,500 and over.
2 Less than 1 percent.


These percentages correspond
farm in 1974, as follows:


to average acreages and sales per


Average Average sales
Farm size acreage per farm

Dollars
Individuals 447 36,000
Partnerships 859 77,000
Corporations 3,380 417,000







A Dramatic Transformation / Lyle P. Schertz / 23


The 28,000 corporations engaged in farming and ranching in 1974
can be classified by: (1) the proportion of corporate receipts from
farming versus nonfarm business activities, and (2) whether the
corporation was privately or publicly owned. Almost 97 percent of
the corporations were privately held and three-fourths were classified
as family corporations, as indicated below:

Farm corporations Publicly held
Privately held and other
Type Family Nonfamily
Number
Primarily farm 20,300 4,500 162
Business-associated 1,500 1,200 785

Some of thewords used in the above tabulation have special
meaning (20). They are:
Primarily farm: Fifty percent or more of corporate receipts
from farming.
Business-associated: Less than 50 percent of corporate receipts
from farming.
Family: Fifty-one percent or more of stock owned by persons
related by blood or marriage.
Other: Held by religious orders and incorporated charitable and
nonprofit organizations.
Over one-fifth of all farming corporations in the mid-1970's were
located in California, Florida, and Texas. One-half of these were in
California. These corporations were involved primarily in feeding
cattle, producing fruits and vegetables, growing nursery and green-
house plants, and producing sugarcane.
By most measurements, farm corporations are large relative to
other farms (with sales of $2,500 or more).
Family corporations in 1974 had: 1.3 percent of the farms, 7.8
percent of the land in farms, and 9.1 percent of the farm
product sales.
Publicly held corporations were even larger in terms of farm
assets and farm production than family corporations and in the
same year had: .06 percent of the farms, .6 percent of the land
in farms, and 3.4 percent of the farm product sales.
These data further reveal that:
Family farm corporations, in total, are a substantial part of
farming, accounting for nearly one-tenth of farm sales in 1974.
They are substantially larger than most farms in that they
account for slightly more than 1 percent of the farms.








24 / Another Revolution in U.S. Farming?


The number of publicly held corporations is much smaller than
the number of family corporations. However, the publicly held
corporations are larger-in 1974, they accounted for more than
3 percent of farm product sales, but they represented only
6/100 of 1 percent of farms with less than 1 percent of the land
in farms.
The involvement of corporations in farming attracted a great deal
of attention in the last decade. Nationally, corporations are domi-
nant in fruits and nuts, vegetables, nursery and forest products,
poultry and cattle production, and sell 28 percent or more of each of
these commodities in the United States. In 1974, corporations
accounted for a total of 18 percent of "all sales" of farm commodi-
ties, as follows:


Sales of all farm corporations, 1974

Share of total Distribution of
U.S. corporation sales
Commodities marketing among commodities

Percent

Grain 5 8
Cotton 16 2
Tobacco 3 2
Other field crops1 25 10
Vegetables 37 6
Fruits and nuts 32 6
Nursery and forest products 60 7
Poultry 28 12
Dairy 6 4
Cattle 33 41
Other livestock 8 3
All sales 18 100.0


Including peanuts, potatoes, sugar beets, sugar cane, popcorn, and mint.
SLess than 1 percent.


The farming activities of corporations are large; each averaged
almost 3,400 acres and over $500,000 of sales in 1974 (16).
However, they vary greatly, as indicated below, by average acreages
and sales for different types of corporate farms:







A Dramatic Transformation / Lyle P. Schertz / 25


Size of farm corporations, 1974

Privately held Publicly held
and other
Type Family Nonfamily

Acres
Primarily farm 3,300 2,900 3,800
Business-associated 1,900 5,300 6,500

Sales in thousand dollars

Primarily farm 347 855 4,864
Business-associated 200 578 2,475


There is substantial concentration among corporate farms. For
example, family farm corporations comprise 77 percent of all farm
corporations and hold 74 percent of the land operated by corpora-
tions. But they account for only one-half of the sales by farm
corporations, as shown below:


Mix of farm corporations

Privately held Publicly held
and other
Type Family Nonfamily

Percent of total
Farm numbers 77 20 3
Acreage in farms 74 20 6
Sales 50 31 19



CAPITAL GOODS SUBSTITUTED
FOR LABOR
Dramatic shifts in the mix and productivity of resources used have
been key aspects in the transformation of farming. For farming as a
whole, there has been:
A sharp, long-term decline in the use of labor.








26 / Another Revolution in U.S. Farming?


Relative stability in the amount of land farmed.
Expanded use of water.
A large increase in the use of capital goods incorporating new
technologies such as chemicals and machinery.
These trends have been associated with:
A substantial increase in farm production, with increases in crop
production relatively greater than increases in livestock produc-
tion.
Increased production per unit of labor input.
Decreased production per unit of capital input.
Increased productivity of all measured inputs as a whole.

Labor

During 1918, 24 billion man-hours were used in farm work. By
1950, the figure had dropped to 15 billion hours. And by the
mid-1970's, less than 5 billion hours were used per year. About 40
percent of farm labor is devoted to the production of livestock and
livestock products and 60 percent to crop production (2).4
While the number of family (operator and family members) and
hired workers has declined since the 1930's, the family group has
declined more rapidly than the other group-in absolute and relative
terms. Family workers in 1977, however, still outnumbered hired
workers by a ratio of 2 to 1 (figure 14).

Land and Water

Farms and ranches comprise almost 60 percent of the land surface
of the United States. Two-thirds of this is utilized as pasture and
rangeland. The remainder is cropland (about 460 million acres).
Some of this cropland is used only for pasture, and each year some is
left idle. In recent years, 370 to 380 million acres of cropland have
been used for crops (figure 15). Of the major resources used in
farming, the quantity of land is the most stable.
However, regional shifts have occurred over time. The Northeast
has experienced a long-term decline in cropland acreage. In other
regions, cropland acreage declined into the 1960's, but has increased
since.
Farming not only is the major user of water in the United States,
but its use of water also has been increasing. Total consumption of
water withdrawn from streams and ground water sources in 1977 for
""Changes in Farm Production and Efficiency, 1977" by Durost was especially helpful
in the preparation of this part of the paper. It was the source for most of the data presented
in the figures.








A Dramatic Transformation / Lyle P. Schertz / 27


FIGURE 14. FIGURE 15
NUMBER OF FARMWORKERS CROPLAND USED FOR CROPS
MILLION MIL. ACRES
8 -400


6
300 -
Family Labor
4

200 -

Hired Labor
0 O
o I I o I_ __
1950 1960 1970 1980 1910 1930 1950 1970

all purposes was close to 110 million acre-feet.5 Agriculture used
80 percent of this total to irrigate more than 40 million acres of
farmland, which was an increase from about 25 million acres in the
late 1940's. Most of the irrigation in the United States occurs in
the 17 Western States, and they have accounted for most of the
expansion in the amount of water used in farming and ranching.

Capital

In the transformation of farming, the decline in labor inputs has
been offset by increases in the use of capital goods such as fertilizer,
machinery and associated fossil fuels, increased public capital, and
higher yielding crops and livestock. The availability and effective use
of these inputs reflect the increasing productivity of people providing
labor and management.
Fertilizer use has increased more than fivefold since 1950. While
the number of tractors has increased less than 30 percent in this same
period, the horsepower incorporated in these tractors has increased
almost 150 percent (figure 16).
The contrasting changes in the amounts of resources used in
agriculture are reflected in the shifting mix of resources. A typical
example is the relationship between labor and capital (figure 17).
In 1950, labor accounted for almost 40 percent of the value of all
resources used in farming; by 1977, it had declined to 14 percent. In
1950, capital (machinery and chemicals) accounted for 25 percent of

SAn acre-foot is equal to the volume that would cover 1 acre to a depth of 1 foot, or
325,848 gallons.








28 / Another Revolution in U.S. Farming?


FIGURE 16 FIGURE 17
TRACTOR HORSEPOWER RESOURCES USED IN FARMING
MILLION PERCENT
300 60



200 40
"'. Capital


100 / 20 __ "-. ~
,-'" -- Labor*-..



o II o I I
1950 1960 1970 1980 1950 1960 1970 1980

all resources used in farming; by 1977, it had increased to 43
percent.
The shift in resource mix, showing a substantial substitution of
capital goods for labor, reflects changes in the characteristics of
inputs, as well as their productivities and changes in the prices of the
inputs. The characteristics of each of the three general types of
resources have changed dramatically. Land has been influenced by its
tillage, cropping, and treatments (9). Today, laborers as a whole are
better educated than they were 25 years ago. The mix of capital
goods has changed substantially. In fact, an overwhelming majority
of the capital goods used on farms in the 1950's would be considered
obsolete today by commercial farm operators. Until the 1970's,
there was a strong price incentive for farmers to substitute capital
goods for labor. Figure 18 shows changes in prices by time periods-
the decade of the 1940's and so forth. For example, the price of
labor went up 229 percent during 1940-50. In contrast, land prices
increased 103 percent.
Note that the relative increases in prices paid for labor (wages)
exceeded price changes in other categories of inputs during each of
the three decades-the 1940's, 1950's, and 1960's. During 1970-77,
however, the price increases for fertilizer and land exceeded wage
increases. These changes are lessening incentives to substitute capital
inputs for labor.
The total quantity of inputs in U.S. farming has been remarkably
stable since World War II (figure 19). In contrast, the total quantity
of farm output has increased over 60 percent since 1950. As a result,
the index of productivity (output per unit of input) has increased
approximately 70 percent since 1950 while in the preceding three
decades it increased only 40 percent (figure 20).









A Dramatic Transformation / Lyle P. Schertz / 29


While overall productivity has increased since 1950, there are
significant contrasts in the way productivities of different inputs
have changed during the period (figure 21). The ratios illustrating
these changes must be carefully interpreted (5). For instance, the
ratio of crop production to land reflects several things. It reflects
both the productivity of land itself and the changing productivities
and amounts of other inputs used in combination with land to
grow crops. Examples of these other inputs are: capital items such
as drainage associated with land, technology associated with seeds
and other inputs such as fertilizers and their associated tech-
nologies, and human capital embodied in labor and management.
Similar reasoning is important in thinking about the productivity


FIGURE 18
CHANGES IN PRICES PAID
BY FARMERS
% CHANGE


1940 1950 1960 1970
TIME PERIODS
CHANGES OVERTIME PERIODS 194s. 1950(s, 19SUs, AND 1970-77


FIGURE 20
FARM PRODUCTIVITY
%OF 1967
125 i


75 I


25 h


FIGURE 19
FARM INPUT AND OUTPUT
%OF 1967
125 j I


f
Input *I

Io


a Output




0 11


I I
0 1930 1950 1970


FIGURE 21
RATIOS OF FARM PRODUCTION
TO SELECTED INPUTS
%OF 1967
300 i


1960 1970 1980







30 / Another Revolution in U.S. Farming?


of labor employed in farm production. Thus, the ratio of crop and
livestock production to labor reflects the productivity of labor in
farming and the productivities and amounts of other inputs used in
combination with labor to produce crops and livestock. Further,
nonfarm labor is important to the manufacture and availability of
many of these other inputs, such as machinery and fertilizers.
Additional resources, especially capital goods and labor, are impor-
tant to the marketing, processing, and distribution of farm products.
Consequently, many types of work done on farms in earlier years are
now done away from the farm.
The shift in location of different types of work is an important
aspect of the transformation of U.S. farming. Farmers have become
more specialized in production activities. More inputs are manu-
factured and prepared off of farms than previously. Marketing,
processing, and distribution also have been shifted increasingly off
of farms.
Labor productivity comparisons between the farm and nonfarm
sectors often are made. Output per man-hour in farming has
increased more rapidly than in nonfarm industry for many years.
Problems of interpretation of these kinds of ratios are analogous to
those cited above for land productivity. Estimates of the propor-
tion of production specifically attributable to each factor of pro-
duction (such as labor) are not available, either in terms of an
average for U.S. production or how production would change if
small changes were made in the amount of the individual factors of
production.
In conclusion, the transformation underway in U.S. agriculture
has, in the last 20 to 30 years, involved dramatic shifts in the mix
of resources used in production. Farmers and ranchers, as a group,
have increased the use of capital (such as fertilizer and machinery)
and water. Their use of land has been relatively stable and their use
of labor has declined greatly. While all prices have increased, there
have been significant shifts in the relative prices of land, labor, and
capital used in farming. The price of labor increased relative to land
and capital items into the late 1960's. While all prices increased in
the 1970's, prices of land and capital items increased more than the
price of labor.


SUBSTANTIAL CHANGES IN DISTRIBUTION
OF INCOMES AND WEALTH

Significant changes in the distribution of income among farm
people and substantial adjustments in the distribution of wealth
among Americans have accompanied the increasing concentration of







A Dramatic Transformation / Lyle P. Schertz / 31


farming into larger units. More specifically, financial data for farming
reveal:
Increased farm income.
Large increases in the wealth of landowners.
Increased returns to resources in farming.
Greater concentration of income and wealth.

Increased Farm Income

The changes in distribution of income and wealth in farming are
occurring in the context of significant changes in total income and
wealth (13). Farm income of the farm population as a whole was
relatively stagnant from the mid-1950's into the early 1970's (figure
22).6 Farm income and export sales rose dramatically in 1973, and
inflation influenced the level of practically all commodity prices.
Throughout the last 20 years, income of farm people from
off-farm sources has increased steadily, as an increasing proportion of
the farm population undertook nonfarm work while continuing to
live on a farm. Since the late 1960's, the nonfarm income of farm
people has been greater than their farm income-except in 1973 and
1974. The relative increases in per capital income of farm people were
larger than the relative changes in total incomes shown in figure 22.
For example, the farm population has dropped from 23 million in
1950-15 percent of the U.S. pppulation-to less than 8 million in
recent years, which is not quite 4 percent of the U.S. population.
The per capital income of farm people has increased substantially
in the last 25 years7 (figure 23). However, this increase has been so
eroded by inflation that 1978 average income in terms of purchasing
power was roughly equal to what it was in 1962-64.
Measures of income to farming as an industry also show sub-
stantial increases over the years (figure 24). For example, average
1976-78 earnings of farm production assets, "farm earnings," were
$20.3 billion. This was more than three times the average for
1960-62. Adjusting for inflation, the 1976-78 average was slightly
more than 50 percent above the 1960-62 average.
Farm income of farm families does not include: (1) farm-related
incomes of farmers who do not live on farms, (2) farm-related
incomes of nonfarm landlords, or (3) farm wages of hired labor.
"Farm earnings" are the total of: (1) net income of farm operators

6The farm population consists of people living in rural territory or places of 10 or more
acres (if $50 worth of agricultural products were sold from the place in a year). People on
places under 10 acres also are included if sales from their places are as much as $250.
'Per capital income expressed in 1978 dollars takes into account both the change in
population discussed earlier and inflation of prices of products purchased with incomes.
These calculations used the index of prices paid by farmers for items used in family living.










32 / Another Revolution in U.S. Farming?

FIGURE 22
TOTAL INCOME OF THE FARM
POPULATION
SBIL.
30





20


Farm Sources /-

10

_^s '
Nonfarm Sources


0 II
1950 1960 1970 1980
FARM SOURCES INCLUDE GOVERNMENT PAYMENTS: AFTER INVENTORY
ADJUSTMENT.


FIGURE 23
PER CAPITAL INCOME OF THE FARM
POPULATION
$ THOUS.
6


01 I I I
1950 1960 1970 1980
NOMINAL INCOMES FROM ALL SOURCES DEFLATED WITH INDEX OF PRICES
PAID BY FARMERS FOR FAMILY LIVING. 1978 =100


living on farms; (2) farm income of farm operators living off farms;
(3) cash wages and perquisites of hired labor; (4) interest on real
estate and nonreal estate debt; and (5) net rent received by nonfarm
landlords-less: the imputed interest portion of the rental value of
farm dwellings and imputed returns to labor and management-as
published in (3).


The Wealth of Landowners

Farm people have experienced a dramatic increase in wealth as a
result of increases in farm earnings (8, 10). Farm physical assets (land


FIGURE 24
FARM EARNINGS
$ BIL.
40 r


FIGURE 25
FARM PHYSICAL ASSETS, JAN.1
$ BIL.
800



600 -
1978 Dollars *


400

/

..**...Current Dollars
200 -..-*


8 0 160
1980 1960


1970 1980


1960 1970








A Dramatic Transformation / Lyle P. Schertz / 33


and buildings, machinery, livestock, and crops stored on and off
farms) more than tripled in value during 1960-78 (figure 25). When
adjustments are made for inflation in the same 18 years, value
increases from $400 billion to $660 billion, a rise of 65 percent.
Real estate is the largest component of assets (almost 80 percent)
and accounts for a slightly larger proportion of capital gains-84
percent of the change in value of all farm physical assets minus net
investment for the 1960-78 period as a whole.
The increase in value of farm assets, especially farm real estate
(land and buildings), has had a strong influence on the wealth and,
perhaps, income of those owning the assets. Further, it has had
important implications for the entry of people into farming, the exit
of others, and ownership of the physical resources devoted to
farming.
The magnitude of increases in farm wealth may be understood
better when related to changes in farm wealth (capital gains) as well
as farm income over time (figure 26). For example, asset value
changes in recent years have been much greater than in the 1960's.
Increases in farm wealth also have been large compared with farm
earnings and income of farm people, as indicated below:


Value of farm physical assets: Billion dollars
January 1, 1960 180
January 1, 1972 315
Increase from-
1960-71 1401
1972-78 433
Farm earnings-
1960-71 98
1972-78 157

Farm-related income of farm population-
1934-59 288
1960-71 141
1972-78 150

'Capital gains during 1960-71 were slightly greater than the change
in asset values because of the small net disinvestment in farm real
estate.


In the 7 years during 1972-78, the value of U.S. farm assets more
than doubled. This increase of over $400 billion in wealth was nearly








34 / Another Revolution in U.S. Farming?


3 times total farm earnings in the same period and equivalent to the
total of farm income of all the farm population during 1934-71.8
It is useful to conceptualize the capital gains of farm physical
assets in two components:
The inflation offset-an amount of capital gains on assets that
would retain the purchasing power of the value of the assets.
Annually, this would be based on the rate of inflation and the
value of the assets at the beginning of the year.
Other capital gains-the remaining portion of the capital gains
on the assets.
These capital gains on farm physical assets follow:


Inflation Other capital
Period offset gains Total

Billion dollars
1960-64 10 26 36
1965-69 36 33 69
1970-74 112 90 192
1975-78 158 128 286
Total 316 267 583


In only 2 years have capital gains failed to be equivalent to
inflation (figure 27). Conversely, the "inflation offset" accounts
for slightly over one-half of the capital gains. Thus, the increase in
farm-related wealth of farm asset-holders has surpassed the effects
of inflation by a wide margin, and their "real" wealth has in-
creased substantially. Farm wealth as a proportion of total national
wealth increased from 7.7 percent in 1970 to 8.7 percent in 1978
(7).
One perspective of the distribution of these capital gains is
provided with the recognition that of all possible owners such as
people, partnerships, and corporations, there are only 6.2 million
owners of farmland in the country (17).
A further notion of the distribution of these capital gains is
provided by estimates on the distributions of landowners and their
land in 1978 (17). For example, in the Northeast, two-thirds of the
landowners each owned less than 50 acres of farmland. Together,

sFour publications (3, 4, 12, 13) were especially helpful in the preparation of this sec-
tion. These publications are the sources of all data related to wealth and income used in this
part of the paper, unless indicated differently.








A Dramatic Transformation / Lyle P. Schertz / 35


FIGURE 26
CAPITAL GAINS, FARM PHYSICAL
ASSETS
$ BIL.
120


100


80 1978 Dollars


60


40 -


20 Current Dollars


0 "-
1960 1970


FIGURE 27
INFLATION OFFSET OF CAPITAL
GAINS, FARM PHYSICAL ASSETS
$ BIL.
120 -


-I 0o
1980 1960


1970


these owners possessed 15 percent of the farmland of the region
(figure 28). In contrast, two-tenths of 1 percent of the owners owned
more than 1,000 or more acres of farmland. Together, they possessed
21 percent of the farmland of the region.
Comparable percentages for the six regions are:


Distribution of farmland owners and acreage owned

Owners with less Owners with more
than 50 acres than 1,000 acres

Percent of- Percent of-
Owners Land Owners Land

Northeast 66.4 14.9 .2 20.7
North Central 43.5 6.8 .3 23.5
South 69.3 14.3 .4 26.3
Great Plains 35.0 1.8 3.3 233
Southwest 77.6 6.3 4.7 67.5
Northwest 72.7 6.3 5.9 60.9



Distributions according to value of land (estimated by owners)
avoid problems associated with variations in quality of land and


1980










36 / Another Revolution in U.S. Farming?

FIGURE 28
DISTRIBUTIONS OF OWNERS AND LAND (ACRES)
PERCENT PERCENT
100 100
Northeast North Cei


Owners
Acres



50 50 -




/ \
/ \/ -/



0 0


PERCENT PERCENT
100 100
South Great Pla








50 -50









0 I 0

PERCENT PERCENT
100 100
Southwest Northwer








50 / 50


01 i 0
0-50 50-199 200-499 500-999 1,000+ 0-50 50-199 200-499 500-999 1,000+
ACRES (THOUSANDS)


lins


r











A Dramatic Transformation / Lyle P. Schertz / 37


FIGURE 29
DISTRIBUTIONS OF OWNERS AND LAND (VALUE)
PERCENT PERCENT
100 100
Northeast North Central


Owners
--Value




50 \ 50 -











50 50 -
/ --
/

-I


0 0

PERCENT PERCENT
100 100
South Great Plains























Southwest Northwest








50 50


0 I 1 1 0 11
0-50 50-199 200-499 500-999 1,000+ 0-50 50-199 200-499 500-999 1,000+
VALUE ($ THOU.)








38 / Another Revolution in U.S. Farming?


reinforce the conclusion that the capital gains associated with farm
assets are highly concentrated (figure 29). Comparisons of distribu-
tions follow:


Distribution of farmland owners and value of land owned

Owners with farmland Owners with farmland
valued less than valued more than
$50,000 $1 million

Percent of- Percent of-
Value of Value of
Owners land Owners land

Northeast 69.0 11.2 .4 40.8
North Central 40.0 5.4 1.2 13.7
South 79.3 20.0 .4 21.3
Great Plains 49.4 6.1 1.1 28.9
Southwest 62.2 7.9 2.1 44.1
Northwest 64.5 7.0 3.4 55.6


Thus, owners of land worth $1 million or more constitute .4 of 1
percent to 3.4 percent of all owners of farmland in the six different
regions. Together in the individual regions, these owners possess 13.7
percent to over 50 percent of all land, in terms of value.


Increased Returns to Resources
in Farming

Returns to investments in farming have increased over time and
relative to investments in common stock of U.S. industry (figures 30
and 31). These returns have affected expected future returns to
farming and, in turn, the demand for farm assets, particularly land.
The attractiveness of returns to farm assets relative to returns on
common stock helps explain why some farm people are interested in
expanding their holdings of farm real estate. This also is why
nonfarm Americans and investors from other countries seriously
consider farm opportunities.
A comparison of averages of these returns in the 1960's and the
1970's illustrates the increased financial attractiveness of farming
relative to common stock, as shown below:









A Dramatic Transformation / Lyle P. Schertz / 39


Returns: farming and common stocks

Farming Common stocks

Annual Capital Annual Capital
earnings earnings earnings gains

Percent

1960-69 avg. 3.46 4.53 3.19 6.99
1970-78 avg. 4.69 11.59 3.92 0.72



For example, the .27 annual earnings spread between farming and
common stock in the 1960's widened to .77 in the 1970's. In the
1960's, the capital gain return from farming was one-third less than
from common stock. In the 1970's the capital gain return from
farming was over 11 percent per year, while the comparable common
stock return was less than 1 percent (7).
Income and capital gains differ, but they both affect the economic
welfare of people. Income is available immediately; capital gains are
not, unless the assets are transferred. Conversely, capital gains are
associated with asset values, and asset values often are the basis for
borrowing money. Therefore, capital gains can be monetized even in
the short run.
Income is taxable for the year in which it is received. Capital gains
are not taxable until "realized"-and then only 40 percent of the


FIGURE 30
FARM RETURNS
PERCENT

+20 -
Capital Gains

+10


0


-10


-20


-30
1960 1970


FIGURE 31
COMMON STOCK RETURNS
PERCENT


-I -30 1
1980 1960


1970 1980








40 / Another Revolution in U.S. Farming?


gain is subject to income taxes. Most people prefer to receive a
portion of returns immediately as income or realized capital gains,
while delaying the realization of a portion of the capital gains or
perhaps some income (e.g., as with annuities). The balance varies
among people and over time. Those without assets, of course, have
no choice with respect to capital gains.


LITERATURE CITED

(1) Breimyer, Harold F., "The Problems and the Issues" in Can the Family Farm
Survive?, Special Report 219, Agricultural Experiment Station, University of
Missouri-Columbia, 1978.
(2) Durost, Donald D., and Evelyn T. Black, Changes in Farm Production and Efficiency,
1977, Statistical Bulletin 612, Economics, Statistics, and Cooperatives Service, U.S.
Department of Agriculture, November 1978.
(3) Evans, Carson D., Balance Sheet of the Farming Sector, 1979, Agriculture Informa-
tion Bulletin 430, Economics, Statistics, and Cooperatives Service, U.S. Department
of Agriculture, 1979.
(4) Evans, Carson D., and Richard W. Simunek, Balance Sheet of the Farming Sector,
1978, Supplement Number 1, Agriculture Information Bulletin 416, Economics,
Statistics, and Cooperatives Service, U.S. Department of Agriculture, October 1978.
(5) Howe, Eric C., Gerald E. Schluter, and Charles R. Handy, "Measuring Labor
Productivity in Production of Food for Personal Consumption," Agricultural Eco-
nomics Research, Volume 28, Number 4, October 1976.
(6) Lewis, Douglas, and Robert L. Boxley, "Ownership, Tenure and Control of
Agricultural Land, 1974," Economics, Statistics, and Cooperatives Service, U.S.
Department of Agriculture (unpublished manuscript).
(7) Lins, David, The Financial Condition of U.S. Agriculture: Past, Present, Implications
for the Future, ESCS Staff Report, Economics, Statistics, and Cooperatives Service,
U.S. Department of Agriculture, June 1979.
(8) Melichar, Emanuel, "Capital Gains Versus Current Income in the Farming Sector,"
American Journal of Agricultural Economics, (forthcoming).
(9) Pavelis, George, Natural Resource Capital in U.S. Agriculture: Irrigation, Drainage
and Conservation Investments Since 1900, ESCS Staff Paper, Economics, Statistics,
and Cooperatives Service, U.S. Department of Agriculture, March 1979.
(10) Reinsel, Robert D., and Edward I. Reinsel, "The Economics of Asset Values and
Current Income in Farming," American Journal of Agricultural Economics (forth-
coming).
(11) Stanton, B.F., "Perspective on Farm Size," American Journal of Agricultural
Economics, Volume 60, Number 5, December 1978.
(12) U.S. Department of Agriculture, Farm Income Statistics, Statistical Bulletin 609,
Economics, Statistics, and Cooperatives Service, July 1978.
(13) Farm Income Statistics, Statistical Bulletin 627, October 1979.
(14) Agricultural Statistics, various issues, 1950-78.
(15) "The Food and Fiber System-How It Works," Agriculture Informa-
tion Bulletin 383, Economic Research Service, March 1975.
(16) Status of the Family Farm, Second Annual Report to the Congress,
Agricultural Economic Report 434, Economics, Statistics, and Cooperatives Service,
September 1979.
(17) "Who Owns the Land? A Preliminary Report of a U.S. Landownership
Survey," ESCS 70 and related data, Economics, Statistics, and Cooperatives Service,
September 1979.
(18) U.S. Department of Commerce, Bureau of the Census, Census of Agriculture, various
issues, 1950-74.
(19) Bureau of the Census, Census of Agriculture, Volume II, Part 2, 1974.








A Dramatic Transformation / Lyle P. Schertz / 41

(20) "Corporations in Agricultural Production," 1974 Census of Agricul-
ture, Special Reports, Volume IV, Part 5, 1978.
(21) U.S. Senate, Status of the Family Farm, Committee on Agriculture, Nutrition, and
Forestry, prepared by the Economics, Statistics, and Cooperatives Service, U.S.
Department of Agriculture, 1979.
(22) Wilcox, Walter W., "State Distribution of Farms With Sales of $2,500 to $39,999 and
Less than $1,000 Off-Farm Income," Congressional Research Service, mimeo, May
31,1979.











The Major

SForces

Lyle P. Schertz







.' INTRODUCTION

Many forces have influenced the decisions of individual farm
operators and providers of resources used in farming (4, 8). The
combined effect of these forces has influenced the way individual
farms are organized and managed and thus has influenced the total
transformation of U.S. farming, as described in the previous chapter.
Of the many forces that have affected U.S. farming, seven have
had an overriding influence on the way that individual farms are
organized and managed. They are:
Inflation.
Increases in farm product exports.
Availability of capital-intensive new technologies.
Nonfarm employment opportunities.
Availability of institutional credit for the purchase of land and
capital goods.
Commodity programs supporting farm product prices.
Tax rules applicable to incomes and estates.
The effects of any one of these forces are influenced by the
presence of other forces. For example, the full effects of increased
farm exports on U.S. farm organization and management would have
been significantly different if U.S. income tax rules had not allowed
cash accounting by farmers and tax credits for investments.
Few professional research efforts have been dedicated to measur-
ing the way different forces affect the size and number of farms and







The Major Forces / Lyle P. Schertz / 43


the concentration of production among farms. Neither the direction
of the impacts of various forces nor the quantification of the rela-
tionships has been effectively studied. The consequent dearth of re-
search information has led some people to be extremely cautious
about ascribing any cause-and-effect relationship among variables-
such as the forces listed above and characteristics of farming such as
numbers and sizes of farms (7).
But such a posture is not sufficient for this effort. Instead, it was
decided that, despite the dearth of research information, it would be
useful to:
Identify those forces the author believes have major effects on
the way U.S. farming is organized and managed.
Describe the characteristics of these forces.
Postulate relationships among these forces and U.S. farming.
Thus, the following should be considered as a set of hypotheses to
be discussed, criticized, revised, and researched.
There are problems in discussing the effects of forces on U.S.
farming. Is the relevant standard and, therefore, basis for comparison
of a socioeconomic system devoid of all aspects of the force being
considered? This approach is not used in this chapter. Instead,
attention is given to selective variations of the present. The contrast
is illustrated by the following: there is uncertainty that the elimina-
tion of all income and estate taxes in the present system would
contribute to a smaller or a larger number of farms. Conversely,
selective changes in parts of the tax system would have a high
probability of leading to a smaller number of farms. For other
selected changes, a similar or opposite effect might be anticipated.

EFFECTS OF INFLATION
Inflation has a primary impact on four aspects of U.S. farming:
It increases the wealth of those who own land.
It increases the demand for land.
It strengthens the relative economic position of the wealthier
and higher income people in buying land.
It increases input prices and stimulates farmer purchases of
these inputs.
Through these effects, inflation (compared with stable prices)
leads to fewer farms, larger farms, and greater concentration of
production, income, and wealth among those associated with the
larger farms.

Increased Wealth
The historic relationship since World War II between inflation and
farmland prices is clear and unmistakable (figure 32). As previously








44 / Another Revolution in U.S. Farming?


FIGURE 32
FARMLAND VALUE
$/ACRE



I
500 I


1978
Dollars / i
300


'Current
.- Dollars
100 -

0
1950 1960 1970 1980

described, the wealth of U.S. farmland owners has increased sharply
during the last few years as prices of land and other assets have
increased in response to increased returns-income and capital
gains-from farming. Along with this increase, a greater concentra-
tion of the wealth (associated with land) among fewer landowners
has occurred. Thus, the distribution of wealth among people in
farming, as well as between the farm and nonfarm groups of people
outside of farming, is affected by inflation.

Demand for Land

Inflation also leads to increased demand for farmland. An increase
in wealth of those holding land is an important component of this
demand. In inflationary periods, successful bidding to purchase land
is heavily influenced by a combination of the policies of lending
institutions and the cash flows available to bidders who are not
dependent on the land being purchased. Thus, those with assets and
related income streams can bid more successfully for land than can
those without other assets.
The relationship between inflation and land prices has led to the
expectation that, in the future, increases in land prices will be
associated with inflation. For this reason, people seriously consider
landownership as a way to accumulate wealth and hedge against
inflation.
There are other opportunities for taking advantage of inflation and
coping with its effects. For example, the availability of credit has
increased opportunities to purchase houses. The prices of houses also
have had a close relationship to inflation. At times in the past,
industrial stocks also have been important options. Recently, foreign







The Major Forces / Lyle P. Schertz / 45


currencies and precious gems have been utilized more extensively
than in the past, but credit for these activities is limited.
Farmland still represents a significant portion of the wealth of the
United States, and its price has been especially attractive in relation
to recent inflation. The pervasiveness of the presence of farmland
and the record of its upward price changes have affected the desire of
both rural and urban people to own land. It also is important to
remember that inflation encourages present owners to retain their
land, which limits the availability of land for sale.

Economic Position of Wealthy

Whether as protection from inflation or for other reasons, not
everyone who wants to own land is able to do so, especially in the
amounts that may be desired. Cash flows that are not dependent on
the land being purchased, the availability of credit, and prices
determine who can purchase farmland.
Purchasers of farmland today must have access to monies that are
not dependent on the land being purchased. While the arithmetic is
relatively simple, its effect is very selective in determining who is able
to outbid others for the purchase of land. Interest rates for
borrowing money from, say, the Federal Land Banks to purchase
farmland are 9 to 10 percent. Estimates (27) indicate that in the
1970's returns to land based on land prices and land rentals have
been about 5 percent.9 Historic price changes suggest a long-term
price increase in land of an additional 6 to 7 percent per year,
yielding a combined eventual return of 11 to 12 percent annually to
owners, based on current land prices. But the cash flow is negative if
a significant proportion of the purchased price is borrowed. Only the
current returns, such as land rentals (5 percent in this example), are
available in the short run to pay interest charges and payments on
principal associated with the purchase of land (23).
Thus, potential purchasers of land can be divided into two
groups-those with income or monies in addition to the farm income
attributable to the land purchased and those without such income or
monies. The first group can outbid the second group for land. In
some cases, the first group includes landowners who have income
from land that previously was purchased or inherited. In other cases,
they have other income or assets that can be sold to generate money
with which to service the debt on the farmland to be purchased.
Thus, people with sources of money other than the land being

'These estimates are based on the value of farmland and gross cash rent adjusted for
property taxes, management, maintenance, and an allowance for buildings. The specific
annual estimates ranged from 3.9 to 5.8 percent for this particular calculation of the rent.







46 / Another Revolution in U.S. Farming?


purchased have a clear competitive edge over people without such
alternate sources.
Intrinsic to this grouping of potential purchasers of land are the
policies of lending institutions. Availability of money to prospective
land purchasers (other than the potential earnings associated with the
land purchased) influences the willingness of these institutions to
extend credit. This is particularly true in inflationary periods when
prices of the land and, in turn, the loan amounts, exceed levels
consistent with the potential earnings of the land in farming. But
such loan amounts may not be inconsistent with expected earnings
that reflect annual incomes, as well as capital gains. The net result in
terms of who buys land and, therefore, landownership and size
patterns can be affected by lending policies. These relationships
suggest that the effects of similar lending practices are different in
periods of continuing inflation from those in periods of stable or
falling prices. In turn, an important issue is raised-should lending
practices change as the economy shifts from stable prices to inflation
and vice versa?
Commodity programs and tax policies also reinforce the economic
strength of those farm and nonfarm individuals who have cash flows
other than those associated with land purchased. Because the risk of
commodity prices falling below support levels is minimized, potential
buyers and credit institutions are willing to extend themselves
further than they might otherwise. Income tax regulations permit
interest payments to be deducted from incomes associated with land
purchased as well as other farm and nonfarm earnings; and only 40
percent of any capital gains is taxed when gains are realized. Thus,
the trend toward increasing farm size and investments in farms for
reasons other than farming are encouraged by inflation and re-
inforced by agricultural commodity programs and tax policies.


Input Prices and Farmer Purchases
The primary effect of inflated farm input prices on the organiza-
tion of U.S. farming is twofold: (1) production costs rise in the short
run; and (2) individual farmers accelerate purchases of capital goods
(such as machinery) that have capacities greater than needed for their
present farm.
Costs of farm inputs respond quickly to inflation. In comparing
potential 1980 income conditions to 1974, Tweeten and Griffin (24)
estimated that ". .. each percentage point increase in the inflation
rate reduces net farm income ." $.7 billion to over $2 billion
(current dollars). The range of estimates was related to the level of
price elasticity of aggregate demand used to make the estimate.







The Major Forces / Lyle P. Schertz / 47


Unfortunately, they did not deal directly with the effect of inflation
on the value of assets in farming and, in turn, on the wealth of those
who hold these assets. The nonfarm inputs used in farming are
produced largely by firms that operate within a system of adminis-
tered prices. Negotiated wages, advertising to influence prices, re-
straints of production to levels less than plant capacities to maintain
or increase prices, and regulatory setting of prices such as utility and
transportation rates are involved. These kinds of changes respond
quickly to inflationary forces and developments.
Inflation also affects the attitudes of farm operators toward the
size of equipment and buildings purchased and influences the timing
of the purchase of these and other farm inputs. One effect is that
individual producers and the industry as a whole tend to overinvest
in capital goods, when considered from society's viewpoint. But the
actions are quite rational for individual entrepreneurs, whether they
are farm operators or people engaged in doing custom work for farm
operators. Their reasoning is that prices are likely to increase further;
such increases could mean a speculative gain or at least mitigate
potential erosion of the market price of the assets being purchased.
This rationale also encourages lenders to make credit available for
equipment, even if the capital goods will not be fully utilized
immediately.
Thus, the effects of accelerating the purchase of these inputs are
twofold. First, in the short run, the investments add to the cost
structure of U.S. agriculture and are reflected in lower profits of the
industry. This effect is translated into pressures for higher price
supports and other government actions which would increase farm
receipts. Second, in periods of inflation, people tend to purchase
equipment with capacity greater than necessary for land under their
control. They then seek more land, which contributes to the
consolidation of land into larger operating units.

EFFECTS OF EXPORTS
There are three characteristics of changes in exports of U.S. farm
products that have had a pronounced effect upon the organization of
U.S. farming. They are:
Large export sales of cereals and oilseeds to the Soviet Union
and other countries in 1972-74. These led to sharp increases in
farm product prices and domestic farm incomes.
Sustained export demand for U.S. farm products. As a result of
the export demand, there have been only modest restraints on
production to realize politically acceptable prices and farm
incomes.
Increases in feed grain and soybean exports. These increases and







48 / Another Revolution in U.S. Farming?


the resulting product prices have encouraged Corn Belt pro-
ducers to specialize in the production of grain and soybeans.
In 1972, the Soviets purchased 28 million tons of cereals; 18
million tons came from the United States. Wheat purchases from the
United States were one-fifth of the total U.S. wheat supply (1972
production plus stocks carried over from preceding years). U.S. farm
prices and incomes increased in response. By 1974, prices received by
farmers were 70 percent above 1971 levels. Prices of feed grains had
more than doubled, and prices of food grains, wheat, and rice tripled.
Realized net farm income of farm operators increased correspond-
ingly, reaching $30 billion in 1973, compared with $13 billion in
1971. These dramatic developments led Carter and Johnson (3) to
state that ". after the introduction of the tractor, the most
important shock affecting the structure of American agriculture in
this century has come from abroad in the form of increased market
interdependence."
Many farmers received incomes never imagined before. In the
short run, farmers were challenged to find ways to reduce their
taxable income. Deferral of farm product sales and purchase of
inputs for future production seasons were important options. In
addition, tax regulations encouraged the purchase of capital items
such as tractors, combines, and pickup trucks. Depreciation could be
used to lower calculated taxable income, and investment tax credits
allowed by tax regulations directly lowered any tax obligations.
These purchases in many cases enhanced the capacities of owners to
farm areas larger than they had previously operated. These capacities,
combined with higher farm prices and incomes encouraged aggressive
bidding for available cropland. Consequently, real estate prices and
rents increased.
Expanding markets also have had a very important effect on
commodity programs. For example, large increases in exports in
1972 and 1973 practically depleted the large stocks of grain held in
the United States. In turn, farmland was no longer held out of
production via commodity programs. Since the 1972-73 increases in
exports, the volume of shipments has been sustained at high levels.
These high export levels have resulted in commodity programs with
only limited constraints on production. Some notion of the impor-
tance of these higher export levels is indicated by changes in the
proportion of corn, soybean, and wheat production exported, as
shown on top of page 49.
These exports have affected the organization of U.S. farming in
another way. Increases were concentrated heavily in feed grains
and soybeans. This put price pressures on the commodities. In
turn, farrhers in the North-Central region increasingly specialized in







The Major Forces / Lyle P. Schertz / 49


1968-70 1976-78
Crop average average

Percent
Corn 12 29
Soybeans 43 55
Wheat 41 53


the production of grains and soybeans. Livestock became relatively
less important in this region, as indicated by the following per-
centage distributions of cash receipts:

Cash receipts, North-Central States

Period Livestock Crops Corn Soybeans

Percent
1959-61 70 30 10 8
1969-71 63 37 15 13
1975-77 51 49 20 17


EFFECTS OF NEW TECHNOLOGIES

Capital goods incorporating new technologies have had a vital
role in the transformation of U.S. farming to larger and more
specialized units. Four-wheel-drive tractors, electronically con-
trolled harvesters, pesticides, fertilizers, hybrids, livestock disease-
controlling drugs, and high-energy feeds are examples of new tech-
nologies for producing crops and livestock. These new technologies
have been generated by public and private research endeavors. In
recent years, there has been an increasing amount of new tech-
nology available for adoption and utilization in U.S. farm produc-
tion, promoted by publicly supported educational endeavors and
private business.
When adopted, the capital goods that incorporate new tech-
nologies lower costs of production and facilitate growth in the size of
individual farms. In some cases, such growth is required for the
capital goods to be economical. Most emphasize increased output per
worker.
While technology has been important in the adjustments of







50 / Another Revolution in U.S. Farming?


farmers, it is not clear that it is more important than many other
forces. It is a necessary but not a sufficient factor for the changes
underway. For example, adoption among farmers and ranchers of
new technologies has been stimulated by the competitive nature of
farming and the drive by individuals to maximize incomes. Decisions
to utilize new technologies and increase the size of farm activities
have, over a period of time, been stimulated by increases in labor
prices relative to increases in prices of capital goods. Other forces
such as inflation and tax rules have encouraged these decisions as
well. Thus, the net result has been the adoption of capital-intensive
new technologies, and these have facilitated increases in the size of
farms operated by the adopters.


Discovery and Communication of New Technologies

Both public and private monies are spent to discover and com-
municate new technologies that can be incorporated into capital
goods useful in farming. Substantial amounts of money support
public research and education aimed at maintaining and improving
the efficiency of farm production. In addition, private U.S. busi-
nesses devote considerable resources to research that will enhance
their profits. Further, in marketing their products, these businesses
attempt to influence prospective customers' understanding of and
attitudes toward the technologies incorporated in the products. The
communication media also have been important in informing farmers
of these new technologies.
Some new technologies discovered through research involve rela-
tively simple adjustments to contemporary farm production meth-
ods. These findings often are directly communicated to producers.
Increasingly, however, new technologies require incorporation into
capital goods manufactured by industry. Capital goods such as drugs,
pesticides, computers, machinery, and equipment constitute a sub-
stantial portion of the $80 billion to $100 billion total cash
expenditures made annually by U.S. farmers. Some examples (1978
data) include:


Farm inputs, 1978
Billion dollars
Seed 3
Fertilizer 6
Machinery and equipment 6
Tractors 3
Livestock 10








The Major Forces / Lyle P. Schertz / 51


In addition, there are several categories of expenditures (also in
1978), which are closely related to those identified above, such as:


Other inputs, 1978
Billion dollars
Fuels and oil 5
Repairs, etc., of farm capital
items 6
Purchased feed 14


Demand for New Technologies
A primary effect of the new technologies is lower unit costs of
production for adopters. Successful new technologies enable the
adopters to expand production without incurring substantial in-
creases in average costs of products produced; in some cases, the
technologies lower the costs of production substantially. Further,
especially with respect to mechanization (such as four-wheel-drive
tractors), the new forms of technology are capable of being used in
combination with large amounts of other resources such as land.
Some technologies can be used on small as well as large production
units; hybrid seeds and fertilizers are examples. However, for many
technologies, large-scale production units are intrinsic to availability
and adoption. In contrast, efficiencies associated with technologies
that are discovered, developed, and distributed seldom are limited to
small-scale units.
'Even scale-neutral technologies often are biased toward large-scale
production units. Such technologies facilitate control over larger
quantities of farm resources and production. Production processes
are more predictable and more stable because of them. Thus, the
need for intense managerial attention to small quantities of resources
used in production is reduced; this is especially important in dealing
with crop pests and livestock diseases.
Studies of technical economies of scale (input and product prices
not affected by farm size) for alternative levels of production on
individual farms and ranches are limited in number and generally
dated. These studies reflect the technologies of the late 1950's and,
with one notable exception, assume that size of farm does not affect
prices paid for inputs or prices received for products.
Studies of the technical economies of size generally indicate that
average production costs decline until a farm size utilizing 3 man-
years of labor is reached. In 1976 dollars, this would imply
approximately $1 million in assets (25).








52 /Another Revolution in U.S. Farming?


Most of the limited number of studies indicate, as does Martin
(15), that "... economies of size exist in farming, and ... these
economies, whether technical or pecuniary, have been a driving force
toward larger and fewer farming units in the United States, especially
in the irrigated West."
Significantly, four-wheel tractors, electronic harvesting equipment,
and computerized systems for monitoring crop conditions have
become available since the period for which most studies apply.
These technologies probably have lowered the potential average costs
of production on larger farms.
The concept of the smallest size at which lowest average costs are
realized is important, but of equal and perhaps greater importance is
the characteristic of costs beyond the point where the lowest costs
are first realized. Available studies do not show significant dis-
economies for farms substantially larger than those associated with
the lowest cost estimates. On the other hand, the gradualness of the
increase of farm size for most farm products suggests that either the
risks of increasing size at a faster rate are very high or that
diseconomies are significant.
In addition, pecuniary economies are available and can have
substantial effects on costs and incomes. For example, Krause and
Kyle (11) in 1971 estimated the differences between input and
output prices among different size corn farms ranging from 500 to
5,000 acres. Input prices for the largest farms were estimated in some
cases to be as much as 25 percent below the prices paid on 500-acre
farms for the same inputs, amounting to savings of slightly over $13
per acre. And the return received for corn was $.05 a bushel more.
Thus, the pecuniary economies associated with larger farm size
reinforce the economies resulting from the adoption of technologies.
As Paarlberg (18) points out, farms of a size beyond the point that
efficiencies are realized can make more money because of larger
volume-not because of lower per unit costs of production. Most
farmers prefer more rather than less income and, in fact, will make
substantial efforts to realize larger incomes. Thus, an appreciation of
the "lack of diseconomies" and pecuniary economies can be of
substantial importance to an understanding of the increases in farm
size.
In some cases, the new technologies have involved costs that are
not internalized in the costs to the individual farmer, but nonetheless
must be borne by society. For example, some people argue that
certain additives fed to livestock and pesticides used on crops have
detrimental effects on the health of people because of concentrations
of chemicals in the food chain. Economy-of-size calculations do not
reflect costs of this nature. In addition, some economic entities find
it economical to acquire and manage additional resources (including







The Major Forces / Lyle P. Schertz / 53


farm resources) to spread overhead-type costs over a larger volume of
business. Legal, accounting, and computer costs are examples. Such
costs typically are not included in economy-of-size studies.

Dynamics of Adoption
The adoption of capital goods incorporating new technologies is
influenced by several considerations, aside from effects on manage-
ment control and economies of size. They include:
Nature of competition among farmers.
Drive for increasing incomes.
Changes in the relationship of labor and other input prices.
Pecuniary economies of size.
Conditions of the other major forces discussed in this chapter.
The nature of competition among U.S. farmers and ranchers and
the drive to maintain and increase income and wealth by some farm
operators and people who provide services and resources to farmers
are two factors which explain why technologies are adopted.
For most products, the vast majority of the producers are small in
the sense that changes in the quantity of their production will not
significantly affect the prices of their products. Therefore, individual
producers focus on ways to lower costs and expand production.
Early adopters of new cost-reducing techniques realize the benefits in
terms of higher profits. But as adoption becomes more prevalent, the
production of many producers increases, and the effect on market
prices becomes significant. Those who have not yet adopted the new
techniques find themselves on a "treadmill." They must consider
using these techniques to avoid a squeeze on income or discontinue
farming or ranching.
Those techniques that lower costs significantly can mean sub-
stantial rewards for the early adopters. The income of the entire
industry may be smaller due to the inelasticity of demand, but so
long as individual producers cannot influence price, they do not
consider such overall effects in making their decisions to adopt new
technologies.
Coupled with the treadmill phenomena is the "drive" of some
farm operators, as well as providers of goods and services to farm
producers, to increase income and wealth. Profits of businesses
serving agriculture are closely related to the volume of their sales.
Thus, they encourage the adoption of their capital goods by
producers. Other suppliers of resources to farming also strive to
increase their income and wealth. Included among these people are
the entrepreneurs who are amassing substantial amounts of land,
accumulating production assets such as feedlots, acquiring large-scale
equipment, and/or assuming product and price risks associated with







54 / Another Revolution in U.S. Farming?


large-scale production such as beef feeding. The human capabilities
involved in these aspects of the transformation of U.S. farming
include not only technical knowledge but also organizational and
profit-maximizing interests and abilities. Therefore, these human
abilities are being associated increasingly with capital-intensive tech-
nologies.
Sometimes, single individuals are the key input to the decisions. In
many others, however (e.g., the larger beef-feeding lots, poultry
production farms, and fruit and vegetable farms), the management
skills of large industrial firms such as the multinational grain trading
firms and the international fruit producing firms are involved.
Further, it is possible that the purchase of some capital goods also
is stimulated by pecuniary economies of scale. The Krause and Kyle
study of corn farms showed that large farms have an advantage in
purchasing inputs and selling products. We also know that buying
and selling activities of large farms are spread over larger volumes.
Therefore, when there are advantages to doing so, large farms devote
increased attention to shopping for inputs and products, staying
abreast of such markets, bargaining for price advantages, and
considering adjustments in quality, quantity, and timing of products
produced to realize price gains.
In addition, commodity programs mitigate the financial risks of
such decisions; prospective inflation encourages early commitments
to acquire the related resources; tax rules encourage expenditures to
obtain investment tax credits and "move" current income to "po-
tential" capital gains; availability of credit makes it possible for
many, especially those with assets, to implement their decisions.

Entry and Exit Easy for Some
In combination, these conditions have meant that entry into
farming and enlargement of farm activities was relatively easy for
those who had initial assets-farm and/or nonfarm-and the drive to
expand. The expansion of large-scale beef feedlots in recent years is a
good example. Those with money, some nonfarm and farm investors,
were looking for alternatives and larger income streams and were
willing to invest in cattle-feeding operations. Organizational innova-
tors saw an opportunity to feed cattle on a large scale because
technologies that facilitated the confinement of large numbers of
cattle together became available, and production of feed grains in the
Texas and Oklahoma Panhandles increased.
The technical capability of confining large numbers of poultry
and a dramatic expansion in demand for poultry meat made it
possible for some operators to expand rapidly and others to enter
poultry production on a large scale. Resources formerly used in







The Major Forces / Lyle P. Schertz / 55


poultry production were transferred to other activities, rather than
accepting the unit returns acceptable to the new competition. This
willingness to leave was influenced by possible returns in other
agricultural pursuits and in nonagricultural activities.
Implicit in these aspects of the transformation of U.S. farming is
product specialization. The farmers who gave up poultry production
while continuing to farm used their resources on a smaller number of
products. At the same time, adopters of the new technologies found
it advantageous to emphasize production which exploited these
technologies. Pecuniary economies reinforced this orientation.
One of the major results of the new technologies is to facilitate
efforts by some individuals to control large amounts of production
resources. It is this control over a large amount of resources (large
farms and ranches) that affords the opportunity to realize increased
income and wealth. In crop production, the adoption of modern
machinery has led to production systems that have extremely high
unit costs at small volumes of production and low costs at large
volumes. Similar production functions are associated with large-scale
poultry, beef, drylot dairy, and confinement hog-feeding units.

EFFECTS OF NONFARM EMPLOYMENT
OPPORTUNITIES
Over many years, the opportunity for farm people to migrate to
cities for better economic opportunities has facilitated the consolida-
tion of land into larger farms.
The migration out of farming has been extensive. Higher urban
wages and salaries, more attractive jobs, and better educational
opportunities in contrast to lower relative farm wages, limited
employment opportunities, and low returns in agriculture combined
to produce a large exodus of people from rural agricultural communi-
ties to urban centers. By 1977, the U.S. farm population was less
than 8 million, compared with a high of over 32 million in the post-
World War I period and again at the height of the subsequent depres-
sion. The changes in farm population during the decade of the 1960's
illustrate the differences among certain regions, as shown below:

Farm population
1960 1970 Percent decline

Million
Northeast 1.0 .6 39
North Central 4.4 3.3 25
South 4.8 23 52







56 / Another Revolution in U.S. Farming?


EFFECTS OF CREDIT EXPANSION

There has been a rapid expansion in the use of credit for purchases
of real estate and capital goods to be used in agricultural production.
The productivity of land and other inputs such as buildings and
machinery in agricultural production affects the demand for credit.
But demand for credit is affected significantly by inflation as well
because (as indicated in the discussion of inflation) speculation based
on farm assets recently has yielded very attractive returns.
Credit for agricultural activities is obtained from many sources-
including the national and foreign money markets, insurance com-
panies, local banks, sellers of inputs, the farm credit system, Farmers
Home Administration (FmHA), Commodity Credit Corporation
(CCC), and owners/sellers of farm real estate. Some of this credit is
based on savings of agricultural income and increases in the value of
farm assets; much of it, however, is based on savings of nonagricul-
tural income and, to some extent, on taxes.
It follows from the discussions in the section on inflation that the
effects on U.S. farming of the availability of institutional credit in
periods of stable prices are different from the effects in periods of
inflation. In periods of stable prices, availability of institutional
credit strengthens the economic position of those with limited
resources who want to farm relative to wealthier and higher income
people. In contrast, in inflationary periods, availability of credit
strengthens the economic position of the wealthier and higher
income people relative to those with limited resources.
Thus, in inflationary periods, contraction of institutional credit
would restrain price increases of farmland, land price earnings ratios
would be lower, and the gap between earnings and payments to
service farm loans would be narrower.

Expansion

The use of credit in farming has expanded rapidly since World War
II. In 1950, farm debt was only $12 billion. By 1978, it was $120
billion (figure 33). This increase has been related to increases in the
prices of land and capital goods, as well as large increases in the
quantity of capital goods (figure 34). In addition, farmers and those
who lend to them have been more willing in recent years than in the
past to arrange greater amounts of debt for given levels of assets.
This means that debt-to-assets ratios have increased substantially
since the 1950's, even though they are still less than representative
averages for nonfarm industries.
There are wide differences in the use of credit among farmers and
regions. Farm debts as a percent of total farm assets are highest in







The Major Forces / Lyle P. Schertz / 57


the Southwest and lowest in the Northeast, as shown below:

Debt-to-asset ratio

Region Average 1975-77

Pet.
Southwest 20
Northwest 19
Plains 16
South 16
North Central 14
Northeast 13

Farmers with large operations utilize more credit than do those
with smaller farms-both in terms of quantity of debts and debts
relative to assets. Estimates of average per-farm debt and total debt
in the farming sector by class of farms as of January 1, 1977, were as
follows:


Agricultural debt, 1977

Average Total, Debt-to-
Sales class per farm all farms asset ratio

Thou. dol. Thou. dol. Bil. dol. Pet.
Less than 2.5 4 4 4
2.5 to 5 7 2 6
5 to 10 10 3 8
10 to 20 17 5 9
20 to 40 47 15 17
40to100 89 31 19
100 and over 264 43 24
38 103 16


Demand

Historically, farming activities have been financed primarily from
savings out of incomes earned in farming. These savings frequently
have been supplemented by inheritances and other gifts, but the
relationship between farm income flows and asset values of typical









58 / Another Revolution in U.S. Farming?


FIGURE 33
FARM DEBT
$ BIL
125


100 -


75 -


50 -


25


0
1950


FIGURE 34
CAPITAL GOODS USED IN FARMING,
UNITED STATES. QUANTITY INDEX
% OF 1967
125


100 -


75


0 '


1980 1950


1960 1970


farms has been such that internal savings could pay for a farm in a
lifetime ... a more difficult accomplishment now. This shift is
illustrated by the following comparison of U.S. estimates of proprie-
tors' farm income and farm assets:


Proprietors' Farm physical Assets-to-
farm income assets, Jan. 1 income ratios

Billion dollars Percent
1950 15 119 8
1960 13 191 15
1970 16 292 18
1977 24 621 26



The dynamics of inflation can enable proprietors to escape the
restraints implicit in these asset-income ratios. The challenge is to
price the assets before inflation but pay for them in later years with
higher commodity prices. In summary:
Farm-related incomes are increasingly inadequate to pay for a
farm in a lifetime.

Potential capital gains, however, make asset ownership ex-
tremely attractive. Thus, there is increased demand for credit to
provide an opportunity to receive the associated income and
increase in value of assets, such as land. In contrast, if prices
began to decline and deflation, rather than inflation, ruled,


1960 1970


50


25








The Major Forces / Lyle P. Schertz / 59


assets would be revalued. Debt-equity ratios would change
dramatically, and demand for credit would diminish.

Supply

Credit for agricultural pursuits is made possible by the savings of
American farm and nonfarm people, as well as people and govern-
ments of other countries. In addition to savings, U.S. taxes provide a
base for a limited amount of credit available through CCC loans and
FmHA loan programs. The supply of credit available to the agricul-
tural community is related to:
Nonfarm lending opportunities perceived by those who control
the savings.
Attitudes of lenders toward risks in agriculture.
Institutional arrangements for tapping money markets, such as
the Federal Land Bank selling securities in New York and, in
some cases, Europe.
Government programs which make it possible to use taxes
either directly to make loans, such as the CCC price-support
loans, or indirectly by guaranteeing loans from nongovern-
mental institutions.
There have been substantial changes in the relative roles of the
various suppliers of credit (figures 35 and 36). The Federal Land
Bank currently supplies one-third of the credit secured by farm real
estate. Individuals-often sellers-provide almost the same amount.
While the relative role of life insurance companies has declined, the
total value of farm real estate mortgages held by insurance companies
has tripled since 1960. The proportion of insurance company


FIGURE 35 FIGURE 36
FARM DEBT BY LENDER FARM DEBT BY LENDER
$ BIL $ BIL
50 50
*-*- Commercial Savings Bank
---- Life Insurance Companies
40 40 -- Commodity Credit
Corporation

30 / 30 -


20 Individuals 20 -
and /
Others
,Farm Credit
10 System 10 -


99 0 19960 197 1980
1950 1960 1970 1980 1950 1960 1970 1980







60 / Another Revolution in U.S. Farming?


mortgage portfolios that are farm mortgages has stayed about the
same during the period.
Thus, a prominent feature of the transformation of U.S. farming
has been the increased availability of institutional credit for pur-
chases of farm real estate and capital goods. There is general
agreement that this increased availability of credit has contributed to
the increase in farm real estate prices, but the extent to which those
price changes are related to this increase in credit is uncertain.
The rules applied by lenders in responding to demands for credit
and for servicing loans have a substantial influence on who survives in
farming. Such rules influence the income and wealth positions of
both the survivors and the nonsurvivors. Farmers who own land that
can be pledged as security for a new mortgage have a special
advantage in obtaining credit and buying more land. Nonfarm
income is considered in appraising ability to repay loans and setting
down payment requirements. But probably of greater importance is
the way that the economic forces associated with inflation affect
potential borrowers differently, and thereby determine who obtains
credit to buy land.
U.S. commodity programs have accelerated the shift to large farms
by supporting commodity prices and increasing the chances of
significant price increases. In this way, commodity programs have
enhanced the: (1) confidence of people aggressively willing to
accumulate land and/or invest in capital goods that facilitate large-
scale production of commodities, and (2) willingness of lenders to
extend credit to these kinds of people.
Modification of commodity programs so that there were greater
risks of commodity price declines would discourage increased farm
size and product specialization, and make farm resources less attrac-
tive as an investment opportunity. The risk of price declines would
diminish the confidence of people who otherwise would aggressively
accumulate farm resources. It also would cause lenders to be more
cautious in extending credit. The increased risk of price declines also
could lead some producers to be more willing to enter into contrac-
tual arrangements with processors.


EFFECTS OF COMMODITY PROGRAMS

U.S. commodity programs have included support prices and
arrangements for diverting acreage from production. Both incomes
and prices have been supported with government purchases of
commodities, loans to producers, the withholding of supplies from
markets through marketing orders, diversion of cropland from
production, and direct payments. Direct payments have increased in








The Major Forces / Lyle P. Schertz / 61


relative importance, compared with loans, in the last 10 to 15 years.
Thus, the risk of low commodity prices has been reduced.
At one time, the loan storage programs tended to limit potential
price increases. During the 1950's and 1960's, government stocks of
grain were large. Legislation provided that these stocks could be sold
domestically when market prices reached 110 percent of support
prices, including carrying charges. These provisions, in combination
with the relatively large stocks held by the government, severely
limited the possibilities of substantial increases in related commodity
prices. Provisions now, however, allow sales of government stocks
only at much higher prices relative to support prices, thus increasing
the likelihood of price increases, compared with earlier programs.
These possibilities are reinforced by increased instability of the
international markets combined with a closer interface between the
international and U.S. markets. These possibilities of sharp increases
in prices and corresponding shortrun increases in farm income as a
result of unexpected expansion in demand or contraction of produc-
tion reinforce the incentive for people to accumulate assets such as
land.
At the same time that government programs, adjustments, and
supply and demand conditions have increased the possibilities of
substantial increases in commodity prices, the risk of low prices to
producers for their products and consequent low incomes are
mitigated. This results from the availability of commodity loans to
farmers and by transferring income directly to those farmers who
voluntarily agree to make production adjustments deemed necessary
by the Secretary of Agriculture. These loans and payments enhance
both the ability and willingness of many producers to increase
investment in capital and accumulate more acres of farmland.
Because of government support prices with an effective "floor" and
supplementing incomes with payments, reduced risk and uncertainty
enhance the willingness of farmers to invest, adopt new technology,
and increase output. Income supplements through payments, support
prices, and CCC loans facilitate increased output and farm size
adjustments by affecting the: (1) actual annual cash flow of farmers
and (2) longer run expectations of the average profitability of
investment in farming on the part of farmers and farm creditors.
The above remarks as to how support prices and income payments
affect farm size are reflected in an analysis by Nelson and Cochrane
(17) of the economic effects of the programs during 1953-72. They
concluded that the actual programs, compared with what would have
occurred with no programs and a free market policy:
Increased the quantity of assets, value of annual capital ex-
penditures, and farmland prices.








62 / Another Revolution in U.S. Farming?


Reduced the level of land and labor inputs relative to other
inputs used in farming.
Increased the annual average rate of decline in farm numbers
and agricultural employment, and increased the average size of
farms over time. (With a free-market policy sustained from
1953-72, there would have been 24 percent more farms than
there were in 1972, and average farm size would have been 19
percent smaller.)
Increased crop resource productivity (output-input ratio) in all
years after 1958.
Increased net farm income in the short run and intermediate
run (1953-65), with net farm income lower than 1965-72 net
farm income. (Without the programs for 1953-72, residual
returns to landowners would have been negative for 1954-62,
similar to the low-income depression years, 1930-33.)
The mitigation of risks of commodity prices falling below price-
support levels also enhances the willingness of lenders to provide
loans for the accumulation of farmland and for purchases of capital
goods that facilitate large-scale production of commodities. Two
effects of the commodity programs, therefore, are to: (1) stimulate
the demand for credit by a group of aggressive borrowers and (2)
encourage lenders to be more willing to arrange for loans that allow
large-scale accumulation of land and capital goods.
Admittedly, the support of commodity prices probably dis-
courages some people from selling their land. However, land prices,
potential tax liabilities, and family circumstances probably are much
more important in these decisions.
Those who want to increase their income and wealth find that
commodity programs-along with credit programs, tax rules, and the
effects of inflation-facilitate the accomplishment of their objectives.
It is in this context that commodity programs accelerate the
consolidation of farmland resources into larger farms. An analysis of
the impacts of price-support programs by Boehlje and Griffin (1)
concluded that "the great majority of the benefits of such a program
(that guarantees cash flows) goes to larger, high-equity producers."
There are limitations on the amount of commodity program
payments to individual producers. However, these limitations are so
high that they have little relevance in terms of significantly stifling
the growth objectives of those seeking to expand. For example, the
aggregate limitations included in the 1977 Act on payments for
wheat, feed grains, and upland cotton together were $40,000 in
1978, $45,000 in 1979, and will be $50,000 in 1980 and 1981.
Payments are based on the difference between the market prices and
the target prices for the respective crops, yields, and acreages. In
1978, only 1,184 producers out of 750,000 participants in the








The Major Forces / Lyle P. Schertz / 63


wheat, feed grains, cotton, and rice programs were affected by the
limitations. On the average, these 1,184 producers would have
received $20,000 in additional payments if the limitations had not
been in effect.
The difference between the loan rates and the target prices is an
appropriate method for measuring possible effects of the payment
limitations, because market prices are not likely to fall significantly
below the loan rate. The differences for 1978 and 1979 were:


Commodity Loan rate Target price Difference

Cotton (lb.) Dollars
1978 0.48 0.52 0.04
1979 .48 .577 .097
Wheat (bu.)
1978 2.35 3.40 1.05
1979 2.35 3.40 1.05
Corn (bu.)
1978 2.00 2.10 .10
1979 2.00 2.20 .20


Using 1978 average yields, these differences result in the following
maximum acreages before a payment limitation of $40,000 would be
initiated in 1978 and a limitation of $45,000 would be initiated in
1979:


Calculated maximum acreage
Commodity without payment limitation

Cotton
1978 1,919
1979 890
Wheat
1978 1,270
1979 1,429
Corn
1978 4,255
1979 2,394


In addition, it is important to recognize that the distribution of
payments under the target price system is skewed heavily toward








64 / Another Revolution in U.S. Farming?


large producers. Any commodity price-raising effect of the programs
is similarly skewed. One report (26) estimated that 10 percent of
U.S. farm producers received about 50 percent of the total com-
modity program payments made to all U.S. producers in 1978.
In summary, U.S. commodity programs have accelerated the shift
to large farms by supporting commodity prices and increasing the
chances of significant price increases. In this way, commodity
programs have enhanced the: (1) confidence of people aggressively
willing to accumulate farmland and/or invest in capital goods that
facilitate large-scale production of commodities, and (2) willingness
of lenders to extend credit to this group of people.10

EFFECTS OF TAX RULES

Several rules for income and estate taxes have a significant effect
on farming. In total, they increase the attractiveness of owning farm
assets and lead to: (1) larger investments by nonfarm people in farm
assets, (2) larger farms owned and/or operated by those farmers who
are able to exploit tax opportunities, and (3) more corporate farms.
There are several features of U.S. income and estate tax rules that
are relevant to how farms are organized and managed. Some of these
rules are particularly applicable to farming; others are more generally
applicable, but because of the nature of the rules and farming the
effects on farm activities are significant."
The adoption of numerous rules relating to U.S. income and estate
taxes was motivated by a combination of factors-growth, efficiency,
greed, and equity. One effect of these rules is that the taxes actually
paid by many people differ significantly from the amount indicated
by a quick glance at tax tables specifying income levels and tax rates.
The deviations are especially related to the rules for calculating
"income" that is taxed.
The rules particularly applicable to farming relate to:
Methods of accounting for income and expenses.
Designation of expenses as current expenses or capital invest-
ments.
Designation of receipts as ordinary income or capital gains.

'"See Moore (16) for a detailed listing of Federal policies and programs which affect the
organization and management of U.S. agriculture. Commodity programs are included in
Moore's list. In addition, many other programs such as construction of irrigation dams and
market news are included. This conclusion also is generally in accord with Kyle, Sundquist,
and Guither (12), who concluded, "Overall, however, with the exception of tobacco farms
and perhaps other limited situations, the impact of government payments has been to help
finance the growth to large operators for many farmers. At the same time, programs have
provided income stability and adjustment assistance to some farmers who have chosen not
to increase the size of their farm operations or who were unable to do so."
"This section relies heavily on papers by Sisson and Krause (22, 10).







The Major Forces / Lyle P. Schertz / 65


Rules more generally applicable but important to farming relate
to:
Calculation of estate taxes and when they are payable.
Differences between corporate and individual tax rates.
These rules:
Lower the incidence of taxes on farm-related activities.
Generate greater demand (and therefore higher prices) for
farmland and capital goods used in farming than would be the
case without these tax rules.
Lead to larger farms.

Rules Applicable to Farming

There are three Federal income tax rules that apply particularly to
the calculation of taxable income from farming and substantially
influence how farms are organized and managed. The same rules
cannot be utilized by taxpayers in calculating income from nonfarm
activities. The rules, therefore, affect the economic decisions of
people as they attempt to maximize their after-tax income.12 They
are:
A taxpayer may choose either a cash or an accrual accounting
system for determining income taxes for farm activities.
Expenditures for the development of orchards, vineyards,
ranches, and breeding livestock may be considered as current
expenses in the tax period in which the expenditures are made.
Gains from sales of purchased and breeding livestock are treated
as capital gains. They must have been held for specific time
periods-24 months for cattle and horses and 12 months for all
other qualifying livestock.
First, the choice of accounting system permits the selection of
cash accounting and therefore enables people with farming activities
to more easily choose the years in which to make sales and
purchases. For example, after the large increases in farm income in
1973 and 1974, it was reported widely that farmers postponed the
sale of commodities and accelerated the purchase of inputs such as
fertilizer to even out taxable income from year to year. An accrual
system of accounting, required for other businesses in determining
income taxes, would have necessitated taking account of changes in
inventories. With an accrual system, therefore, it would not have
been as easy to "even out" the receipts and the expenses for years
involved.

"See (1, 2) for discussions of the origins of these "rules" and how they apply to farm-
ing. These are important techniques for lowering the amount of income subject to Federal
income taxes in any given time period.







66 /Another Revolution in U.S. Farming?


Second, the rule that permits "current expensing" for orchards,
ranches, and breeding livestock development costs is straightforward.
This rule makes it possible to claim larger expenses in the tax period
in which the "development" expenditures are made. Incomes in later
tax periods are larger, but not necessarily by a corresponding
amount. In contrast, most capital expenditures-whether incurred in
farming or in other businesses-cannot be considered as current
expenses.
A related concept is that capital expenditures are made to generate
income in future years. Therefore, depreciation schedules are de-
veloped to "schedule" the depreciation "expense" across the time
periods during which the capital gives rise to income. For example, a
farmer purchasing a tractor for $70,000 in 1979 cannot consider the
entire $70,000 as farm expenses in 1979. Instead, a depreciation
schedule is developed. If the "straight-line" method of depreciation
is used and the tractor is expected to last 10 years, $7,000 of
depreciation would be considered as an expense in determining 1979
costs for tax purposes. In contrast, a farmer spending $70,000 in
1979 to develop an orchard that will begin to generate income in
1983 can consider the entire $70,000 as expense in determining
1979 costs for tax purposes.
Third, capital gains are taxed at a lower rate than ordinary income.
Thus, the more income that qualifies as capital gains the lower the
tax liability. That is why the third rule is important. For capital gains
received by individuals, only 40 percent of the difference between
the "cost" of property and its sales price is taxed as ordinary income.
The remainder is not taxed. Suppose, for example, a young heifer is
bought for $200 and sold as a mature cow for $600 at least 24
months later. In the year of sale, $160 (40 percent of the $400
increase) would be taxed. In keeping with the second rule, the feed
and other costs associated with the care and development of the
animal are considered as current expenses in the tax period in which
the expenditures were made.
These three rules have been criticized as giving advantages to many
farmers that are not available to other citizens who do not have farm
activities. In some cases, the rules also have been criticized as being
unfair to certain farmers. For example, in the 1970's, there was a
great deal of publicity and criticism concerning "syndicates" using
the cash accounting system in combination with prepayment of feeds
and other current expenses for beef feeding. This approach enabled
the owners of the syndicates to "defer" income (for income tax
purposes) to later years. In turn, the 1976 Act prohibited syndicated
custom cattle feeders from taking income tax deductions for prepay-
ment of feed expenses. But nonsyndicated custom cattle feeders can
still prepay these expenses, as can other "farmers" and "ranchers."







The Major Forces / Lyle P. Schertz / 67


[See Dietrich and others (6)]. As another example, the rules induced
investments in almond groves. These investments expanded the
supply of almonds and depressed farm returns, which led to pressures
to modify the rules. As illustrated by the cattle feeding and almond
growing experiences, the tax rules affect investments and, in turn,
the size of farms, their ownership, and patterns of farm production.
To a large extent, activities that result from these rules are
considered as abuses only if people who have not been farming
utilize them to become farmers. This is a misplaced emphasis. Those
who have been in farming can influence income and wealth distribu-
tions among all Americans as much as, and in some cases more than,
those who become farmers because of the rules.

Other Rules Important to Farming

Estate Taxes
Special advantages under the tax rules are allowed to those estates
that involve small businesses. These advantages seem to be the
greatest, however, when farming and farmland are involved. The
regulations mean substantially lower estate taxes for estates with
farmland that qualify than for other estates for comparable market
value but that do not involve qualifying farmland. These conditions
should lead to greater demand for land and thus higher prices for
such resources.
There are two key provisions. First, in valuing assets for estate tax
purposes, "use-value" rather than "fair market value" may be used.
Because of the particular way that use-value of farmland may be
calculated, this provision is likely to be more advantageous to estates
that involve farmland than to those estates which do not. For
qualifying land, the estate tax value likely will be determined by
dividing the net cash rentals (equal to gross rent less State and local
real estate taxes) by the Federal Land Bank interest rates for new
loans. Thus, the numerator will reflect the economic returns that are
consonant with farming. The denominator-the interest rate-will
reflect not only the economic productivity of capital but also the
effects of inflation. In this way, the valuation of the farmland will be
lowered and estate taxes lowered accordingly.
Second, estate taxes on closely held farm properties can be
deferred. For qualifying property, estate tax payments are not
required during the first 5 years. Payments can be made during the
10 years following the death of the owner. Interest is charged on the
unpaid estate taxes at 4 percent. This can be an important economic
advantage to those estates that qualify relative to those that do not.
For every 1 percentage point that interest rates for commercial loans








68 / Another Revolution in U.S. Farming?


are above 4 percent, the undiscounted advantage to holders of $1
million estates accumulates to $33,000 over a 15-year period (10).
These provisions make holding farm assets increasingly attractive,
relative to other kinds of wealth. Because of this attractiveness and
undoubtedly to limit the number and type of people who can take
advantage of these rules, several restrictive conditions must be met to
qualify for the use-value provision. These relate to the proportion
that the farm and/or other closely held business assets is of the total
estate, length of ownership, type of heirs, and so forth (10).
The special rules for valuing farm assets in an estate will not
benefit people with limited amounts of property. Assume (1) an
estate in 1981 when the "unified tax credit" is to be $47,000, (2) a
surviving spouse, (3) utilization of the minimum marital deduction of
$250,000, (4) administrative expenses of 3 percent, and (5) zero
State inheritance taxes. In such a situation, taxes on estates up to
$438,000 would be zero (14).

Incentive to Incorporate

Except at relatively low levels of income, the tax rates for
corporations are less than the rates for individuals (figure 37). The
corporate tax rates were lowered by the Revenue Act of 1978.
Therefore, farmers have an increased incentive to incorporate and
not to elect use of Subchapter S of the Internal Revenue Code.
Subchapter S allows a farm corporation to not pay Federal income
taxes by having the corporate income tax paid by the shareholders
(9).



FIGURE 37
FEDERAL INCOME TAX RATES,
JANUARY 1, 1979
PERCENT
100


75

Joint Returns
50 -
.. Corporate

I------
25 -


0


100 150
TAXABLE INCOME (THOUSANDS)


0 50


200 250







The Major Forces / Lyle P. Schertz / 69


Advantages of Small Businesses

Families associated with small businesses enjoy other tax advan-
tages. In some cases, expenditures can be counted as business
expenses while the same kind of expenditure by a wage earner
cannot be used to lower taxable income. For example, there is no
way the use of gasoline can be precisely separated for tax purposes
when the fuel comes from the same tank and trips to town involve
farm and family activities. In urban settings, similar opportunities
arise where materials and equipment can be used by the family and in
the business. The same is true with respect to products. While these
practices are widely recognized, studies documenting the magnitudes
involved are not available.

Implications

No one knows the net effects of the interaction of the many rules
for tax computation with other incentives that impinge on economic
decisions in society. It is highly probable, however, that the structure
of agriculture would be different if the incidence of taxation on
farmers had been different. Further, changes in the rules could have
substantial effects on purchases of capital goods, investment rates,
and timing of expenditures and sales in the future. Some of these
effects are especially conditioned by the ease with which resources
can enter or leave farming. For example, new rules which would lead
to high taxes on farming investments and related activities likely
would diminish the attractiveness of ownership of farm assets as
investments. Thus, land prices would be affected, and individuals
wishing to enter farming would find it easier to do so. And the
opposite likely would be the case if taxes related to farming were
lowered relative to other investment alternatives.
While the evidence is not conclusive, the limited research findings
available suggest that our present income tax system, compared with
a system that does not have the preferences applicable to farming,
has:
Lowered the incidence of taxes on farm-related activities.
Increased demand (and therefore prices) for farmland and
capital goods used in farming more than would be the case
without these tax rules.
Promoted larger farms.
On the basis of 1969 tax returns, Sisson (21) concluded that
"farmers do enjoy lower tax burdens than nonfarmers." He esti-
mated that families with more than half of their income from farm
sources "would have paid nearly $1.1 billion more in taxes if their







70 / Another Revolution in U.S. Farming?


tax burdens had been commensurate with the tax burden the general
public pays." In 1969, taxes paid by these farmers totaled $6.9
billion. Of special importance to the possible attraction of farm
investments for "nonfarm" people is Sisson's conclusion that the gap
in "tax burden seems to widen as income increases." Sisson's work
dealt with property and income taxes but did not encompass estate
taxes.
The burden of property taxes on the farm and nonfarm sectors
was examined by Stam and Sibold (22). One of their approaches-
using net income-suggests that farms have a higher tax burden
than the nonfarm sector. But another of their approaches using
wealth suggests the opposite condition. They estimated that, since
the mid-1930's, property taxes have taken 7.9 percent of farm
income-in contrast to 4 percent of income of the nonfarm income
sector. On the other hand, they note, "... the agricultural sector
traditionally has paid proportionately fewer property taxes than has
the nonagricultural sector. ." when measured by the ratio of
property taxes to wealth. For example, since the mid-1930's, taxes
on agricultural property have been equivalent to 0.6 to 1.0 percent
of wealth in the agricultural sector. In contrast, comparable per-
centages for the nonfarm sector have been 1 to 1.5 percent.
Many issues and unanswered questions underlie consideration of
the effects of taxes on demand for land and size of farms. They
relate especially to farm product prices and profits, and tax shelters.
There are two extreme lines of reasoning about the effect of taxes
on farm product prices and profits. Both have implications for the
distribution of income and wealth among sectors of our economy.
One theory is that taxes paid by farmers are no different than any
other costs and, further, the prices of farm products are directly
related to the costs of farming. Thus, if the rules decrease taxes paid
by farmers by calling certain income capital gains rather than
ordinary income, this line of reasoning says that farm prices will be
lower by a corresponding amount. This would be the case, however,
only if the quantity of farm products was not affected by prices, a
condition that simply does not exist. Further, if this condition
existed, it would have important international distributional effects,
since a substantial portion of U.S. farm production is exported.
Prices on those exports would be lower by the amount of the lower
taxes, and foreign consumers would benefit from the lower tax
burdens. In short, foreign consumption would be subsidized. But
these conditions are not likely. Farm prices are affected by costs, but
they also are affected by both domestic and international demand.
The second line of reasoning is that taxes paid by farmers merely
affect their profits and have no effect on production in the short run
or long run. But this is not likely either. Farmers reinvest some of







The Major Forces / Lyle P. Schertz / 71


their profits in farm activities. And some who have not been farmers
use savings from other economic activities to make investments in
farming to realize the tax savings and other benefits of farm
activities.
Thus, it is likely that tax advantages for farming activity probably
lead to somewhat lower farm prices, lower before-tax profits, and
somewhat higher farm after-tax profits. But aside from Sisson's
estimate, our information on the extent of either is very limited. In
addition, studies of the effects of these changes in prices and profits
are limited.
Lin and Carmen (13) estimated that if tax rules required develop-
ment costs to be capitalized rather than treated as operating costs,
two of three farms studied would reduce tree plantings. The
reduction would be 10 percent of total acreage on the three farms. In
another report, Carmen (2) concluded that ". .. the increased acre-
age of California orchards and vine crops due to tax incentives is a
comparatively small percentage ... for most crops it will range from
zero to five percent of the acreage."
Another study by Dean and Carter (5) suggested the following
hypotheses and cited tentative estimates of the "aggregate effects of
income taxes:"
The income tax system for "current expensing" of development
costs leads to greater amounts of risk capital in agriculture.
Dean and Carter demonstrated that unprofitable activities, on
the basis of zero taxes, can be profitable, given the income tax
rules.
The income tax structure may lead to higher land prices because
it reinforces demand for land. Potential investors can pay more
for land than if there were no income taxes, and those in the
highest tax brackets, farm and nonfarm, can pay the most.
Further, the provisions for exchange of property tend to
"spread the effect of localized urban and industrialized de-
mand."
Observers of U.S. tax rules and the effects of these rules have noted
that some people who combine nonfarm activities (income) with
farming activities deliberately generate a loss (calculated on the basis
of tax rules) in farming. This accounting loss is then combined with
income from nonfarm income to lower the amount of tax paid. In
many cases, a shift of current income to capital gains is involved. For
example, depreciation allowances for farm assets and current ex-
penses for tending cattle are used to show losses or lower farm
income while the major product is breeding stock that can be kept 2
years and then sold. The sales are considered capital gains and
therefore only 40 percent of the increase in value is considered in
calculating taxable income.







72 / Another Revolution in U.S. Farming?


The usual concept of these tax shelters is related to individuals
who traditionally have not been in farming making investments in
farming (28). In addition, individuals who traditionally have been in
farming are making investments increasingly in nonfarm activities
and combining farm and nonfarm incomes for tax purposes. These
developments may tend to alter the attitudes of farm people toward
tax shelters.
It is important to recognize that this common concept of tax
shelters relates to individuals "outside of farming." However, the
same tax provisions are used regularly by farmers to lower their
taxable income. For example, a lawyer may utilize a farm operation
to generate $50,000 of accounting losses to place against his $75,000
income from practicing law, or a farmer may utilize a similar set of
farm resources to generate $50,000 of accounting losses to place
against $75,000 of income from other farm operations. Should the
two situations be viewed differently?
This gives rise to issues common to the behavior of special groups
in our society. The objectives of many special-interest groups are to
gain special advantages by arranging special tax rules, administrative
pricing, and special demands for their products while at the same
time limiting the ability of outsiders to make investments and other
adjustments in their economic activities to take advantage of these
conditions.
The recent legislation applicable to valuing estates involving farm
assets illustrates these kinds of considerations. For example, to be
able to utilize the use-value approach in estimating the value of an
estate for tax purposes, the assets must be closely held, and the
immediate family must be active in its management. Many people
will find the potential "tax returns" worth less than the costs of
transferring their assets into such an arrangement. However, some
will shift their assets into farming because of the tax rules and
thereby increase the demand for farm assets, especially land.
At the same time, there are other ways, such as via gifts and trusts,
to minimize taxes on intergenerational transfers of wealth. People
with farm assets increasingly will use these techniques.
This discussion has been focused primarily on rules that guide
calculations related to farm income and wealth. We have not
reviewed rules that apply to calculations of income related to other
businesses. But there are many rules that specify exceptions and
create opportunities for economic gain by different people and
businesses in our society. For example, taxes paid to foreign
governments by U.S. corporations are credited against taxes that the
corporations would otherwise have to pay to the U.S. Government,
rather than considering them as a cost and using them merely to
lower the amount of income on which taxes are based. Banks can








The Major Forces / Lyle P. Schertz / 73


deduct as an expense a "bad-debt loss" of 5 percent of loans,
regardless of the level of their bad-debt losses. Any judgment as to
the fairness of tax rules, especially those related to farming, would
involve the consideration of tax rules that are advantageous to other
groups in our society.

CONCLUSIONS

Interactions of the seven forces discussed above have contributed
separately and jointly to the transformation of U.S. farming in major
ways. In many cases, the presence of one of the seven forces without
some of the others would have meant quite different outcomes in
how the resources used in U.S. farming have been organized and
managed.
Further, there are other forces that have interacted with these
seven, and certain observers would have included some of the others
as most important. One such force, human capital, transcends the
forces discussed above. Throughout American history, individuals
and society have foregone some consumption to obtain better health
care, on-the-job training, formal education, adult training, and better
knowledge of economic opportunities ... and they have pursued
other activities that enhance the capability of humans (19). In other
words, the capabilities of humans to work in farming, organize
resources, and manage these resources have improved. This has
resulted in a significant number of people from both the farm and
nonfarm sectors aggressively applying their talents to farming to
increase their income and wealth. Regardless of their origins, they
have the ability, aggressiveness, and ambition to cope with the
disequilibria resulting from the interaction of the seven forces (20).
It is these people who will transform the management and organiza-
tion of U.S. farming even further.13

LITERATURE CITED

(1) Boehlje, Michael, and Steve Griffin, "Financial Impacts of Government Support Price
Programs," American Journal of Agricultural Economics, Volume 61, Number 2,
May 1979.
(2) Carmen, Hoy F., "Consequences of Income Tax Law and Regulations: Orchard
Development," Income Tax Rules and Agriculture, Special Report 172, Agricultural
Experiment Station, University of Missouri, 1975.

"It is important to remember that improved human capital is associated with agricul-
tural labor, as well as management. Further, the way that farms are organized and managed
is indirectly affected in two ways by the capabilities of those who enter nonfarm-related
activities. Since entering the farm labor force'is relatively easy, people who obtain nonfarm
employment help to prevent depressing farm wages. They also are more likely to make avail-
able to others whatever farm resources, such as land, they may possess.









74 / Another Revolution in U.S. Farming?


(3) Carter, Harold O., and Warren E. Johnson, "Some Forces Affecting the Changing
Structure, Organization, and Control of American Agriculture," American Journal of
Agricultural Economics, Volume 60, December 1978.
(4) Congress of the United States, Public Policy and the Changing Structure of American
Agriculture, Congressional Budget Office, September 1978.
(5) Dean, Gerald W., and Harold O. Carter, "Some Effects of Income Taxes on Large-
Scale Agriculture," Journal of Farm Economics, Volume 44, Number 3, August 1962.
(6) Dietrich, Raymond A., Donald A. Levi, and J. R. Martin, "Texas Cattle Feedlots,"
Agricultural Finance Review, Volume 38, Economics, Statistics, and Cooperatives
Service, U.S. Department of Agriculture, May 1978.
(7) Gardner, Bruce L., "Public Policy and the Control of Agricultural Production,"
American Journal of Agricultural Economics, Volume 60, Number 5, December
1978.
(8) General Accounting Office, Changing Character and Structure of American Agricul-
ture: An Overview, CED 78-178, September 26, 1978.
(9) Harl, Neil E., Farm Estate and Business Planning, Century Communications Inc.,
Skokie, Ill., 1979.
(10) Krause, Kenneth, "Federal Tax Policy and Farm Structure," Economics, Statistics,
and Cooperatives Service, U.S. Department of Agriculture (unpublished manuscript).
(11) Krause, Kenneth R., and Leonard R. Kyle, Midwestern Corn Farms: Economic Status
and the Potential for Large and Family-Sized Units, Agricultural Economic Report
216, Economic Research Service, U.S. Department of Agriculture, November 1971.
(12) Kyle, Leonard R., W. B. Sundquist, and Harold D. Guither, "Who Controls
Agriculture Now? The Trends Underway," Who Will Control U.S. Agriculture?
Special Publication 27, University of Illinois, Urbana, August 1972.
(13) Lin, William, and others, "Producer Response to Income Taxes: An Empirical Test
Within a Risk Framework," National Tax Journal, Volume XXVII, Number 2, June
1974.
(14) Long, Tom, personal correspondence with author, 1979.
(15) Martin, William E., "Economics of Size and the 160-Acre Limitation: Fact and
Fancy," American Journal of Agricultural Economics, Volume 60, December 1978.
(16) Moore, Charles V., Effects of Federal Farm Programs and Policies on the Structure of
Agriculture, NEAD Working Paper, Economic Research Service, U.S. Department of
Agriculture, January 1975.
(17) Nelson, Frederick J., and Willard W. Cochrane, "Economic Consequences of Federal
Farm Commodity Programs, 1953-72," Agricultural Economic Research, Volume 28,
Number 2, April 1976.
(18) Paarlberg, Don, "Providing Capital to Tomorrow's Farms," Presentation to Presi-
dent's Council Conference, Federal Land Bank, Federal Intermediate Credit Bank,
and Bank for Cooperatives, Springfield, Mass., December 18, 1974.
(19) Schultz, Theodore W., "Investment in Human Capital," Agricultural Economic
Review, Volume LI, March 1961.
(20) "The Value of the Ability to Deal with Disequilibria," Journal of
Economic Literature, 13, 1975.
(21) Sisson, Charles A., "Tax System and Structure of American Agriculture," Tax Notes,
Volume 9, Numbers 12, 13, and 14, September 17, 24, October 1, 1979.
(22) Stam, Jerome M., and Ann G. Sibold, "Agriculture and the Property Tax,"
Agricultural Economic Report 392, Economic Research Service, U.S. Department of
Agriculture, 1977.
(23) Tweeten, Luther, "Structural Characteristics of the U.S. Farm Sector" (unpublished
manuscript), 1978.
(24) Tweeten, Luther, and Steve Griffin, General Inflation and the Family Sector,
Research Report P-732, Oklahoma State University, March 1976.
(25) U.S. Department of Agriculture, Status of the Family Farm, Second Annual Report
to the Congress, Agriculture Economic Report 434, Economics, Statistics, and
Cooperatives Service, September 1979.
(26) U.S. Senate, Status of the Family Farm, Committee on Agriculture, Nutrition, and
Forestry, prepared by the Economics, Statistics, and Cooperatives Service, U.S.
Department of Agriculture, 1979.











MA Preview of

Sthe Future

Lyle P. Schertz









PROSPECTIVE NUMBERS

The prospective number and size of farms are difficult to estimate.
Trends indicate that the total number of all farms will continue to
decline. However, if trends continue into the future, the number of
larger farm units will increase, and their average size measured by
acres or sales will increase. An increased concentration of production
would be associated with a decline in the number of farms.
An indication of possible changes in the mix of farm size is
conveyed in figures 38 and 39. These figures show, historically,
numbers of farms by size, as measured by acres and sales; the
estimates shown for the year 2000 are trend values reported by Lin
(3).
These estimates suggest that, if past trends continue, the number
of farms with 500 acres or more and those with sales greater than
$40,000 will increase. Projections included in two other research
reports suggest that there will be between 1 million and 2 million
farms in 2000 (4, 5). This, of course, is still a large number of farm
units, compared with the amount of concentration in many U.S.
industries.
Other indicators of change in farm size are estimates of the
number of farmers who account for selected percentages of total
farm sales and land in farms (figure 40). For example, Coffman (1)
estimated that 125,000 farms out of a total of 2.8 million accounted
for one-half of total farm sales in 1974. Should this trend continue








A Preview of the Future / Lyle P. Schertz / 77


FIGURE 38
FARM NUMBERS BY SIZE
MILLION
4
All

3


2 -


S100-500 Acres--

> 500O Acres
o I I I I
1959 1969 1980 1990 2000

to 2000, the number will halve and
one-half of total farm sales.


FIGURE 39
NUMBER OF FARMS BY SIZE
(SALES CLASS)
MILLION


1959 1969 1980 1990 2000

70,000 farms are likely to make


The reliability of trends for anticipating the future is suspect when
new technology cannot be predicted ... especially when the econ-
omy is experiencing many shocks and may experience others in the
future. And, of course, many of the forces discussed in the previous
chapter will continue to influence decisions of people interested and
involved in farming.


CHANGES IN MAJOR FORCES

The character and degree of influence of the seven forces have
changed in ways of great significance for the future transformation
of U.S. farming. The three most important changes have been:
Increased rates of inflation in the economy.
Higher energy costs influencing the economics of using capital
goods and the costs of transporting farm products.
Changes in tax rules increasing the attractiveness of farm-related
incomes and farm assets.

Higher Rate of Inflation

The recent higher rates of inflation reinforce the trend toward
increased farm size and could contribute to much greater separation
of ownership and use of farmland and equipment. Most farm and
nonfarm people are searching for ways to enhance their economic
welfare. As indicated earlier, capital gains associated with changes in
land prices make land an attractive alternative-especially in infla-


All Sales

3

<$20,000
Sales e



1 $20 $100.000 Sales

o 1 000- SalesI
0 L:2 I-I-I- I








78 / Another Revolution in U.S. Farming?


FIGURE 40
NUMBER OF LARGEST FARMS
WITH 50 PERCENT OF TOTAL SALES
AND LAND IN FARMS
THOUSAND
300



200 -


.o 0Sales
100 -

Lan


0
1964 1974 2000
tionary periods when land prices rise faster than other prices.
Nonfarm investors as well as farmers are thus encouraged to invest in
farmland. However, as discussed in an earlier chapter, interest rates
during inflationary periods are substantially greater than rates of
earnings from farming. This difference makes it impossible to service
loans from farm resources acquired by loans. Other monies are
required. Among farm people, those who already own assets have a
competitive advantage to make down payments, obtain credit, and
service loans necessary to acquire land. Such financial transactions
lead to a consolidation of resources by those who already have
resources and thereby encourage fewer but larger farms. And land
acquired and owned by nonfarm people usually is available to rent
for farming. Increasingly, this land is rented to those who already
own and rent some land elsewhere, further contributing to larger and
fewer farms.

Higher Energy Costs

The prospect of higher energy costs injects substantial uncertainty
into the future of U.S. farming, particularly the way in which it will
be organized and managed. The eventual effects, however, will
influence: (1) where production will be located in the United States,
and (2) the kind of mix of resources that will be used in farming and
ranching.
In considering location of production, one thing seems obvious.
The relative competitive position of that segment of farming depen-
dent on irrigation water will diminish to the extent that higher
energy costs of society are paid by agricultural users. This might







A Preview of the Future / Lyle P. Schertz / 79


happen in the following way: Over the past 20 years, there has been
an increasing concentration of fruit and vegetable production reliant
upon irrigated agriculture. In many cases, this concentration has
involved a shift of production among regions of the country-
especially to the irrigated areas of the Southwest and Pacific
Northwest. With this shift, transportation distances from producers to
consumers have increased. Higher energy costs will continue to
inflate these transportation costs, as well as irrigation costs, and
thereby likely will encourage a shift of production from these areas
to producers closer to the more metropolitan, consumer centers of
the North. Because farms in the North have been smaller tradi-
tionally than those in the Southwest, the shift in production likely
will be to farms in the North that are smaller than those in the
irrigated West. At the same time, new methods of irrigation that
reduce water usage will be adopted to mitigate the effects of higher
energy costs and, in some cases, limited supplies of water.
Higher relative energy costs also will stimulate individual farmers
throughout the country to adjust the mix of resources they employ
in farm production. The extent of the cost changes and the energy
efficiencies of various available technologies will influence choices
regarding their use. This, in turn, will affect farm size. In an extreme
case, energy could be so expensive that the resource mix would
involve increasing relative proportions of labor and land to capital.
This would reverse present trends toward larger and fewer farms, as
measured by gross sales and by land area.

Changes in Tax Rules

Modifications in Federal tax provisions have made ownership of
farm assets increasingly more attractive. The effects on farmland
prices are predictable-they are higher than otherwise. Additionally,
these tax provisions, if continued, will accelerate the decrease in farm
numbers and increase the size of remaining farms.
Nonfarm investors, as well as farmers, are encouraged by these tax
provisions to seek farm investments. Farmers and ranchers and their
heirs also are encouraged by these provisions to continue to farm and
retain ownership of their assets. This incentive will be especially
strong among those families whose assets qualify for use valuation
and deferral of the payment of estate taxes under provisions which
"allow 15-year installment payments at 4 percent interest on as
much as $345,800 ." of estate taxes (6). Reasoning similar to that
included above in the discussion of the effects of inflation suggests
that nonfarm investors, possessing other assets and realizing nonfarm
income, and farmers with substantial equity will be the ones able to
obtain assets and take advantage of the tax provisions. Such benefits








80 / Another Revolution in U.S. Farming?


are simply worth more to them than they are to people of lesser
means. Therefore, they will be the successful bidders for assets when
they are sold.

OTHER FACTORS

It also is useful to consider other factors that might impinge on
the transformation of U.S. farming. For example, the income and
wealth positions of some of the farm population have improved
substantially in recent years. And these people are giving increased
attention to how to retain and perhaps enhance their new economic
positions. Accordingly, attention is being directed increasingly to
estate planning and financial management by people with farm
assets. These activities have included pressing for changes in estate
tax rules to make it easier to accomplish intergenerational transfers.
Even if these efforts are successful, it is obvious that the assets of
even moderate-size farms cannot easily be aggregated into the hands
of one or two children when other children are involved. The
earnings from farming do not support such an approach today. And
the natural inclinations of "other" children are not likely to lead
them to give up their inheritance. So it seems highly likely that
landownership will, in the next 20 years, increasingly involve mul-
tiple ownership by descendants of those who experienced capital
gains in the 1970's. It also is quite possible that farmers with
substantial capital will invest some of their wealth in nonfarm
investments to spread their risks and provide liquidity.
Dispersion of ownership is likely to add to the impetus for
corporate ownership. The corporate form is a useful technique for
clarifying rights and responsibilities among people, as well as for
making intergenerational transfers. However, it will be increasingly
difficult to keep such corporations closely held. Even if sales are not
made outside of family descendants, in-laws, rather than sons and
daughters, will soon be involved. They may or may not embrace the
economic objectives of the farm. Regardless, they will confront other
nonfarm economic needs and opportunities. Therefore, some will
want cash from their inheritance to undertake these other activities.
Obviously, current owners can forestall these kinds of developments
through use of wills and other legal instruments. However, not all
landowners leaving their estates will want to place these prohibitions
on their:heirs. Even if they did, such actions might not survive a legal
challenge.
Therefore, it seems likely that ownership of land would go first to
descendants who sell their interests. Buyers will be available, and
they may or may not be involved with farming. In turn, the
transactions would lead to adjustments in asset prices whereby







A Preview of the Future / Lyle P. Schertz / 81


returns on farmland and other investments were roughly equivalent.
In addition, this likely would encourage a system of farming with
considerable further separation of ownership and use of land.14 A
possible extreme configuration would be land operators (private or
corporate) who rent land from land corporations.
Other scenarios also could develop. For example, farm returns
could be depressed for any number of reasons. In turn, farm asset
values might drop, and people interested in farming might find it
possible to pay for a farm from farm earnings in a lifetime. Energy
developments could lead to increased dependence on organic farming
and a return to mixed farming and systematic crop rotations. With
high product prices and changed diseconomies of size, the require-
ments for intensive management might increase and size of farm
would change accordingly.

CHANGES IN WAY POLICIES
ARE IMPLEMENTED?
Regardless of the eventual scenario and whether the changes are
realistically described as developments, a transformation, or a "revo-
lution," government policies and programs will both influence and be
challenged by the events.
In rare cases, new programs may be developed; in a few other
situations, old programs may be discarded. The more likely outcome
is that the objectives of individual programs and related policies
which guide their implementation will be challenged and may be
found wanting. For example, many of the policies and programs
intensively involved with the seven forces previously described are
oriented to farmers as a group, and there is only limited recognition
of the great differences among farmers. Yet it is commonly known
that the benefits of government programs-even welfare programs-
are regressively distributed among those affected. This issue becomes
especially important for two reasons. One is that income and wealth
of some farm operators and nonfarm landowners has increased. The
second reason is that people with wealth may be increasingly
attracted to investments in farmland to benefit from the returns
associated with farming-including the tax advantages.
In turn, policies and programs will be under increasing pressure to
discriminate among recipients to dampen the potential regressiveness
of their benefits. Consideration might be given to focusing on income
problems of farmers on an individual basis-an approach similar to
the ways our society relates to income problems of people who are

"See Lee's perceptive paper (2) prepared more than 10 years ago for a discussion of the
potential for widespread separation of ownership and use of resources in farming.








82 / Another Revolution in U.S. Farming?


not farmers. In this context, incomes from both farm and nonfarm
activities would be considered. And criteria used in deciding upon
implementation of programs, such as credit programs, would give
central emphasis to general economic and social objectives of the
country, such as price stability, employment, and balance of trade.
Thus, the changes in the way that programs are implemented may
be as dramatic as the changes in farming-and equally revolutionary.

LITERATURE CITED

(1) Coffman, George C., Current Structural Topics, Economics, Statistics, and Coopera-
tives Service, U.S. Department of Agriculture, mimeo, June 1979.
(2) Lee, John E., Resource Ownership and Use-Rights in Agriculture, Speech, Conference
on the Structure of Southern Farms of the Future, Montgomery, Ala., May 1968.
(3) Lin, William, Farm Structure in the United States: Number and Size Projections to
2000, Economics, Statistics, and Cooperatives Service, U.S. Department of Agricul-
ture (unpublished manuscript).
(4) Sonka, Steven, and Earl O. Heady, American Farm-Size Structure in Relation to
Income and Employment Opportunities of Farms, Rural Communities and Other
Sectors, Center for Agricultural and Rural Development Report 48, Iowa State
University, June 1974.
(5) U.S. Senate, Alternative Futures for U.S. Agriculture: A Progress Report, Committee
Print, Committee on Agriculture and Forestry, prepared by Office of Planning and
Evaluation, U.S. Department of Agriculture, September 1975.
(6) Woods, W. Fred, and Thomas A. Carlin, Utilization of Special Farm Tax Rules,
Income Tax Rules and Agriculture, Special Report 172, Agricultural Experiment
Station, University of Missouri, 1975.





Part II.


Livestock
Production














I Beef

SJ. Rod Martin












SUMMARY

Significant structural changes in beef production have occurred in
the United States in a relatively short period of time. These changes
can be characterized as follows:

Beef production doubled in a period of only 20 years.

The most dramatic increases in production have resulted from
structural changes in cattle feeding rather than cattle raising.

The number of cattle fed more than doubled during the
1960's-from 12.4 million head in 1959 to 25.3 million head in
1971.

Cattle feeding has shifted away from large numbers of small
feedlots with: (1) seasonal cattle feeding enterprises on grain
farms, (2) use of feed produced on the farm, and (3) employ-
ment of unpaid and otherwise underutilized family labor.

At the same time, cattle feeding has shifted to very large com-
mercial feedlot operations using: (1) highly specialized skills
and technology and (2) industrialized approaches to manage-
ment, financing, and marketing.







86 / Another Revolution in U.S. Farming?


* Large commercial feedlots have developed so rapidly that: (1)
more than half of all fed cattle are now fed in 422 feedlots,
each of which averages over 30, 000 head marketed a year, and
(2) half of the cattle are fed in 131,500 smaller feedlots, each of
which averages only 90 head marketed annually.

* Increases in cattle raising on many farms and ranches have made
a significant contribution to increases in beef production since
1950.

* Increases in beef cattle numbers have been greatest in the
eastern half of the United States, particularly in the Southeast
and higher rainfall areas of the Southwest and Great Plains.

* The eastern half of the United States now produces more beef
from cattle raising than the traditional western range areas.

* A combination of a number of factors has increased beef pro-
duction through cattle raising. Individually, these factors would
have small impacts, but collectively they have led to a steady
increase in cattle raising.

* Factors encouraging expansion in cattle raising include: (1)
relatively high beef prices resulting from increasing demand for
beef in the U.S.; (2) farm consolidation, which has increased
acreage enough to support cattle raising; (3) shifting of land
resources formerly used in dairying, feed for workstock, and
crop production to cattle raising; (4) government commodity
programs and tax policies; (5) new production technology,
particularly forage production technology; and (6) increasing
part-time farming, which is compatible with cattle raising.

* Factors that have caused significant structural changes and in-
creases in cattle feeding include: (1) government farm com-
modity programs, mainly feed grain price supports which have
encouraged large supplies and low and stable feed grain prices;
(2) new technology in feed grain production; (3) increasing U.S.
demand for fed beef in connection with rising consumer
incomes; and (4) economies and incentives associated with
operating large commercial feedlots (new production and or-
ganization technology) in cattle feeding.

* Structural changes will continue to occur in cattle feeding at a
rapid rate. The technology of feeding cattle in large commercial
feedlots is proven and will remain, however. Feedlots may not







Beef / J. Rod Martin / 87


continue to grow in size because ownership, marketing, process-
ing, and other vertical stage linkages have more influence on
economies than size-once a large capacity (40,000 to 50,000
head) has been achieved There is significant potential for
change in the ownership and vertical stage organization struc-
ture of large commercial feedlots.

Structural changes in cattle raising will occur slowly. The
ownership and location of resources used in cattle raising are
widely scattered and cannot be easily concentrated. This condi-
tion, along with limited new technology in cattle raising, is not
conducive to changes in production methods or organization.
However, due to the important relationships between cattle
feeding and cattle raising, structural changes in cattle feeding
will influence changes and may act as a catalyst for innovations
in cattle raising.

INTRODUCTION

The U.S. beef production industry has undergone dramatic
changes in the last 30 years. Many of these changes have been
associated with increases in cattle feeding and the development of
large commercial feedlots. However, regional shifts in the location of
cattle raising or the production of calves for feeding also have had
important impacts on the characteristics of many farms throughout
our country.
Changes in beef production have a widespread effect on U.S.
farming because they involve large amounts of resources and a major
component of U.S. farm cash receipts. Sales of cattle and calves in
1977 totaled about $20 billion more than one-fifth of total U.S.
farm commodity cash receipts. This is more than twice the cash
receipts from corn, the most important crop commodity, which
totaled about $9 billion in 1977 (7).' Consumers spend 2 to 2.5
percent of their disposable income on beef, and per capital consump-
tion of beef has nearly doubled in only two decades (18).
The changes that are occurring in the structure of beef production
relate to both cattle raising and cattle feeding, which are mainly
separate operations that involve different types of firms and entre-
preneurs. Structural changes in beef production are an important
part of the transformation of farming underway in the United States
because of the magnitude of beef production and many of the cattle
raising activities are located throughout the United States. This
chapter focuses on:

SItalicized numbers in parentheses indicate references listed at the end of this chapter.







88 / Another Revolution in U.S. Farming?


Changes that have occurred in both cattle raising and cattle
feeding.
Factors that have caused these changes to occur.
Future adjustments that may occur in beef production.
Emphasis is placed on beef production through cattle raising and
cattle feeding. Availability of inputs and marketing, processing, and
distribution are considered only to the extent that they have had
important effects on cattle raising and cattle feeding.
The two beef production stages or activities, cattle raising and
cattle feeding, utilize different mixes of resources, and involve
different farm organizational arrangements and types of firms and
entrepreneurs. Further, responses to economic conditions differ
between the two production stages.
Cattle raising utilizes large amounts of forage and, therefore,
depends heavily on land. The high fixed cost requirements (primarily
in terms of land investments), instability of forage supplies influ-
enced greatly by weather conditions, and biological restraints per-
mitting only slow expansion of brood cow herds influence cattle
raising and give rise to slow production responses to price changes
and production cycles.
In contrast, cattle feeding is a specialized operation where feeder
cattle are fed grain in confinement to condition and fatten them for
the fed beef market. The utilization of large quantities of feed,
feeder cattle, and other variable input items results in high variable
costs relative to fixed production costs and tends to make cattle
feeding responsive to price changes and economic conditions. Al-
though cattle raising and cattle feeding are different, they have
strong functional relationships, since the major product of cattle
raising is the production of feeder cattle for cattle feeding.
Total beef production has more than doubled in the United States
since the early 1950's. The supply of beef increased from 10.8 billion
pounds in 1950 to more than 26 billion pounds in 1978. It is
important to recognize that much of the increase in beef supplies
since the early 1950's has resulted from dairy-to-beef shifts and
increases in grain feeding of young beef animals or, in other words,
structural changes in cattle feeding (20). A significant adjustment has
occurred in the United States in terms of increasing numbers of beef
cows, an increase of more than 130 percent since 1950. However,
dairy animals also provide a source of beef, and the number of milk
cows has decreased rapidly since 1950. Consequently, the net
increase in all cow numbers is less than the increase in beef cows. In
terms of all cow numbers, the change between 1950 and 1978 was an
increase of only 22 percent. The following tabulation indicates








Beef / J. Rod Martin / 89


changes in cattle raising during 1950-78:


Cattle raising'

Change

1950 1978 Amount Percent

-------- Thousand head----------
Beef cows 16,743 38,664 21,921 131
Milk cows 23,853 10,916 -12,937 -54
All cows 40,596 49,580 8,984 22

'Includes 48 States.
Source: Derived from (5)

Nevertheless, the increase in beef production through cattle raising
has been much greater than indicated by the increase in all cows
because milk cows do not produce as much beef as beef cows. Beef
production has increased significantly as beef cows have taken the
place of dairy cows.
No comparative figures are available concerning the proportion of
beef produced from cattle raising and cattle feeding. This may be
estimated by using information available concerning the number of
fed cattle marketed by assuming a certain amount of weight gain in
the feedlot (5). Based upon these estimates, 68 to more than 75
percent of U.S. beef production comes directly from cattle raising
FIGURE 1
TOTAL AND NONFED
BEEF PRODUCTION
BIL. LBS.
30 I


0 ',
1960 1970 1980
SOURCE DATA FROM (8) AND ESTIMATES DEVELOPED IN THIS ANALYSIS


Total



/ Nonfed
/\^-




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