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Technology, public policy, and the changing structure of American agriculture

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Technology, public policy, and the changing structure of American agriculture a special report for the 1985 Farm Bill
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Special report for the 1985 Farm Bill
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United States -- Congress. -- Office of Technology Assessment
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vii, 90 p. : ill. ; 26 cm.

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Agriculture -- Economic aspects -- United States ( lcsh )
Agriculture and state -- United States ( lcsh )
Agricultural innovations -- United States ( lcsh )
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federal government publication ( marcgt )
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Full Text
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Contents
Chapter Pg
1. Overview.....................................................3
2. The New Technologies........................................................... 7
Survey of Emerging Technologies.................................... 7
Biotechnology................................................. 8
Information Technology........................................ 10
Impact of Emerging Technologies on Production....................... 12
Projections of Agricultural Yield ................................. 13
Projections of Food Production .................................. 14
3. The Changing Character of the'U.S. Agricultural Sector ................19
The Present Structure of Agriculture................................. 19
Changes in Farm Size and Numbers .............................. 20
Changes in Distribution of Sales and Income ........................ 20
Changes in Sources of Income................................... 21
Changes in the Structure of Debt in the Farm Sector .................22
Defining Structural Change in Agriculture ............................ 23
The Economic Perspective...................................... 23
The Sociological Perspective .................................... 25
Causes of Structural Change........................................ 26
Technological Forces .......................................... 26
Institutional Forces............................................ 28
Economic and Political Forces................................... 31
The Dynamics of Structural Change ................................. 31
4. Economic Impacts of Emerging Technologies and
Selected Farm Policies for Various Size Crop Farms ...................35
The Crop Farms Analyzed......................................... 36
Corn-Soybean Farms in the Corn Belt............................. 36
Wheat Farms in the Southern Plains.............................. 37
General Crop Farms in the Delta Region of Mississippi ...............38
Cotton Farms in the Texas Southern High Plains ..................... 39
Policy and Technology Scenarios.................................... 39
Farm Policy Scenarios ......................................... 40
Tax Policy Scenarios........................................... 45
Technology Scenarios.......................................... 46
Implications for the 1985 Farm Bill ............................... 46
Financial Stress and New Entrants Scenarios.......................... 47
Financial Stress Scenarios .......................47
New Entrants Into Farming Scenario ............................. 48
Implications for the 1985 Farm Bill............................... 49
5. Economic Impacts of Emerging Technologies and
Selected Farm Policies for Various Size Dairy Farms ..................53
Background..................................................... 53
Technologies and Practices......................................... 55
Policy and Technology Scenarios.................................... 56
Farm Policy Scenarios ......................................... 57
Tax Policy Scenarios........................................... 59
Technology Scenarios.......................................... 60
Financial Stress Scenarios .......................................*''*61
Implications for the 1985 Farm Bill .................................. 61




Conteamk -conutinuod
Chapter Page
4 6. Agricultural Research and Extension Policy ..........................865
Who Profits From Technology Change ............................... 66
The Effect of Agricultural Research and Extension on Farm Structure ...... 66 Research, Private Sector, and Extension Roles......................... 68
Private Sector Involvement...................................... 69
Research Involvement.......................................... 70
Extension Roles .............................................. 72
Impictinsfor the 1985 Farm Bill.................................. 74
Appendix A.-Summary Analysis Tables for Crop Farms ................... 77
Appendix B.-Summary Analysis Tables for Dairy Farms ................... 84
References........................................................ 89
Tables
Table No. age
2-1. Emerging Agricultural Production Technology Areas.................... 7
2-2. Estimates of Crop Yields and Animal Production Efficiency .............14
2-3. Projection .of Major Crop Production ............................... 15
3-1. Sales Classes of Farms........................................... 20
3-2. Distribution of Farms, Percent of Cash Receipts, Percent of Farm Income,
and Farm and Off-Farm Income per Farm by Sales Class, 1982 ........... 21
3-3. The Distribution of Farms With High Debt-to-Asset Ratios, by Sales Class
for January 1984................................................ 22
3-4. Historical and Projected Percentages of Cropland Harvested by Farms
With Sales in Excess of $200,000 ..................... e............ 24
4-1. Financial Characteristics of Three Representative Corn-Soyben Farms in
East Central Illinois ............................................. 36
4-2. Financial Characteristics of Three Representative Irrigated Corn Farms in
South Central Nebraska .......................................... 37
4-3. Financial Characteristics of Three Representative Wheat Farms by Size in
the Southern Plains ...............................38
4-4. Financial and Resource Characteristics for Three Representative *Genera'l
Crops Farms in the Delta of Mississippi, 1983........................ 38
4-5. Financial Characteristics of Three Representative Cotton Farms by Size in
the Texas Southern High Plains ................................... 39
5-1. Total Producers and Size Distribution of Herds Selling Milk to
Plants Regulated by Federal Milk Marketing Orders, May 1983 ........... 54
5-2. Representative Dairies by Region and Herd Size ....................... 55
5-3. Financial Characteristics Assumed for Eight Dairy Operations in
Four States.................................................... 56
Figures
Figure No. Page
3-.Factors Influencing the Structure of Agriculture ....................... 27
5-.How the Dairying Picture Has Changed ............................. 54
Vii




Chapter 1
Overview
Continuing, rapid advances in biotechnology and disease control has made it possible to use
and information technology promise to revo- large-scale confinement feeding. Public policy lutionize agricultural production and to alter has provided further incentives, such as price dramatically the structure of the U.S. agricul- supports and tax incentives, for farmers to extural sector. In the next 15 years, 1.5 of the esti- pand operations.
mated 1.8 percent annual growth in produc- The technologies a farmer now needs to retion needed to balance world agricultural main competitive are costly and complex.
supply and demand must come from increases Farmers who lack the capital and expertise to
in agricultural yields-yields that will be pos- aotnwtcnlg al nuht an
sible largely through the development and taadopt etenlg early mutseouhptomainadoption of emerging technologies. While it tary affcompetitive, dgems see spilemen-e seems clear that these technologies must be forytoff-farmoincom, fridsoe pecarinaltch used if this Nation is to compete in the inter- forther produts, oltrnagive ups farm altonational marketplace, it is also clear that the gether. Tistualtratve hoeatsicoe fa-m potential impacts of adopting these technol- miia t icturerin he m modea-ieltfam ogies have important policy implications for wche is fat diospern from the agriculoftufral
Cogesas it begins debate on the reauthoriza- see si rp rmtemdl ftefr
Ciongr e 8 ar il spectrum, it leaves small and part-time farms
tionof te 181 frm bll.(whose owners earn their primary income
One impact will be technology's role, under elsewhere) clustered at one end and the large
the current policy environment, in creating a farms (whose owners can take advantage of
surplus of certain commodities in the imme- economies of scale) clustered at the other.
diate future. Overall, the agricultural commu- This trend has several implications for pubnity is expected to experience unpredictable lic policy. First, if a decision is made to slow
fluctuations in the balance of agricultural tedcieo h oeaesz am oiy
supply and demand. For certain commodities, ther eclin ove oeatsi frmkpolicyhowever-notably, dairy products-a substan- meroos mrie wiayse for th)s fmakin nw tial potential for further U.S. surpluses exists. techodnolg mreailabi te tsof these armhan The adoption of new technologies coupled wth 2)opoidin traiing inte suseor o the tehcurrnt armpoliy wll xacrbat tht pob- ators of such farms would also be an effective
lem. The implication for policymakers is the policy component, although even this measure
need for a farm program that more easily manohepdiyfrrsnsmeegn.
allows for adjustments in periods of shortages manohepdiyfrrsnsmeegn.
and surpluses rather than remaining fixed. Second, despite the apparent advantages of
Another impact of technology will be its con- operators of very large farms, such operators
tinuing role in changing the structure of the may need a loan safety net to help them weather agricultural sector from a system dominated price instabilities and the rigors of the world by the moderate-size farm to one dominated by marketplace. Unlike most of their moderatelarge and very large industrialized farms., size counterparts, such farms can survive withmTechnology has provided the technical means out income supports.
for structural change: mechanization has made Third, agricultural policy may have to in* it possible for farmers to operate larger farms, clude ways to help particular groups and repurose o ths sud wehav dfind amoerae-sze gions make the transition to different endeavors.
'For havingfti tuyw av eiedamdraesz For example, programs to retrain agricultural
farm ahaiggross sales of $100,000 to $199,000; a large farm, workers for jobs in other sectors of the econ$200,000 to $499,000; and a very large farm, $500,000 and over. omy may be necessary, or farm operators in
3




4 A Special Report for the 1985 Farm Bill
a region may need help changing to alterna- Dairy, Title III-Wheat, Title IV-Feed Grains, tive kinds of farming. The Lake States region, Title V-Cotton, Title VI-Rice, Title VIIIfor instance, shows some comparative advan- Soybeans, Title X-Grain Reserves, Title XItages for switching from dairy production to Payment Limitations, Title XIV-Research and corn. Extension, and Title XVI-Credit, Rural DevelFinally, and perhaps most significantly, farm opment, and Family Farms. programs must be considered in the context of Chapters 2 and 3 of this report provide backthese strong technological, economic, and in- ground information on technology and strucstitutional forces. Farm programs can merely tural change and on the procedures followed speed up or slow down these forces of change in the conduct of this study. The remainder of
-they cannot reverse the trends. the chapters present the results of OTA's analWhile the forces influencing change in the ysis. The long-run impacts of technology, pubagricultural structure have been identified, they lic policy, and structural changes on rural comhave not primarily been studied in the overall environment l res se insdeta n the
contxt f frm oliy deisins.Thi reort environment will be addressed in detail in the context of farm policy decisions. This report later full report from this study.
attempts to do just that. It focuses on the following sections of the 1981 farm bill: Title I-




Chapter 2
The Now Technologies
Technology has made U.S. agriculture one nologies encompass both products and processes,
of the most productive in the world. Some of and, like their predecessors, promise to reshape
that technology has taken the form of new the practice of agriculture.
products-chemicals to control pests, drugs to This chapter provides a brief survey of the
control disease, or sensors and computers that emerging agricultural production technologies automatically measure moisture conditions that could have such an impact and analyzes
and irrigate the field. Other technology has the effect of various technology development
been embodied in new processes-such as the and adoption environments on agricultural
ability to use a computer, to make better eco- fodpdutnovrheex15yas nomic decisions, or to apply the best combina- fodpdutnovrheex15yas
tion of cultural practices. The emerging techSURVEY OF EMERGING TECHNOLODGIES
Before the turn of the pentury, cattle ranchers electronics will be used to increase managein Texas may be able to raise cattle as big as ment efficiency. These are only a few of about elephants. California dairy farmers may be able 150 emerging technologies in the 28 technologito control the sex of calves and to increase milk cal areas that have been identified and evalproduction by more than 10 percent without uated for this study (table 2-1). While it may
increasing feed intake. Major crops may be sound like science fiction, advances in biotechgenetically altered to resist pests and disease, nology and information technology will make grow in salty soil and harsh climate, and pro- these technologies a reality in the next 10 to
vide their own fertilizer. And computers and 20 years.
Table 2-1.-Emerging Agricultural Production Technology Areas
Animal Plant, soil, and water
Genetic engineering Genetic engineering
Animal reproduction Enhancement of photosynthetic efficiency
Regulation of growth and development Plant growth regulators
Animal nutrition Plant disease and nematode control
Disease control Management of insects and mites
Pest control Weed control
Environment of animal behavior Biological nitrogen fixation
Crop residues and animal wastes use Chemical fertilizers
Monitoring and controlling Water and soil-water-plant relations
Communication and Information Soil erosion, productivity, and tillage
Telecommunication Multiple cropping
Labor-saving technologies Organic farming
Communication 'and information management Monitoring and controlling
Telecommunications
Labor-saving technologies
Engine and fuels
Land management
S~u~E: ffic ofTchnlog Assssmnt.Crop separation, cleaning, and processing
7




8 *A Special Report for the 1985 Farm Bill
3I~t~h~oogyIn this technique, genes for a desired trait, such as disease resistance and growth, are injected
Animal Agrkeuhtuu' directly into either of the two pronuclei of a
one of the major thrusts of genetic engineer- fertilized ovum (egg). Upon fusion of the proing in animals is the mass production in micro- nuclei, the guest genes become a part of all of organisms of proteinaceous pharmaceuticals,' the cells of the developing animal, and the traits including a number of hormones, enzymes, ac- they determine are transmitted to succeeding tivating factors, amino acids, and feed supple- generations. ments. Previously obtained only from animal In 1983, scientists at the University of Pennand human organs, these biologicals were ei- sylvania and University of Washington sucther unavailable in practical amounts or in cessfully inserted a human growth hormone short supply and costly. gene, a gene that produces growth hormone in
Some of these biologicals can be used for human beings, into the embryo of a mouse to detection, prevention, and treatment of infec- produce a supermouse that was more than tious and genetic diseases; some can be used twice the size of a normal mouse (Palmiter, to increase production efficiency. One of the 1983). In another experiment, scientists at Ohio applications of these new pharmaceuticals is University inserted rabbit genes into the emthe injection of growth hormones into animals bryos of mice. The genetically engineered to increase productivity. Several firms, in- mice, which were 2.5 times larger than normal, cluding Monsanto and Eli Lilly, are develop- ate as much as normal mice (Mintz, 1984). ing genetically engineered bovine growth hor- Encouraged by the success of the supermone to stimulate lactation in cows. In trials mouse experiments, USDA scientists at the at Cornell University, daily doses of recombi- Beltsville Agricultural Research Center are nant bovine growth hormone were adminis- now conducting a new experiment to produce tered to dairy cows. The hormone, produced super sheep and pigs by injecting human naturally by a cow's pituitary gland, was syn- got omn eeit h emlnso
thesized by Genentech for Monsanto. The sheep and pigs (Russell, 1984). In this experiresults showed that each cow treated with the ment, USDA scientists provide Ralph Brinster hormone increased milk production by at least of the University of Pennsylvania with fer12 percent without increasing feed intake. tilized eggs from sheep and pigs at their BeltsCommercial introduction of the new hormone ville farms. After injecting the eggs with the now awaits approval by the Food and Drug human growth hormone genes, Brinster reAdministration (FDA) (Bachrach, 1984; Hansel, turns the embryos to Beltsville to be inserted 1984). into the surrogate mother animals.
Another new technique arising from the con- The experiments of crossing the genetic vergnceof eneandembro mniplatons materials of different species in general and of promises to permit genes for new traits to be using the human growth hormone in particuinserted into the germ lines of livestock and lar have prompted lawsuits from two scientific poultry, opening a new world of improvement watchdog groups: the Foundation of Economic in animal health and productivity. Unlike Trends, headed by Jeremy Rifkin, and the genetically engineered growth hormone, which Humane Society of the United States. Both increases an animal's milk production or body charged that such experiments are a violation weight but does not affect future generations, of "the moral and ethical canons of civilizathis technique will allow future animals to be tion," and they sought to halt the experiment. permanently endowed with traits of other ani- The researchers argued that they are continumals and humans, and probably also of plants. ing the experiment cautiously and countered that the potential scientific and practical benefits far outweigh the theoretical problems
iPharmaceuticals that are proteins,.asdb teciis
sReproductive cells.




Ch. 2-The New Technologies 9
The success of the mice experiments in- tle may be those for growth hormones, prolacdicates that analogous insertion into bovine tins (lactation stimulator), digestive enzymes, germ lines of additional bovine growth hor- and interferons, thereby providing both growth
mone genes, or of growth hormone genes from and enhanced resistance to diseases.
larger mammals such as sperm whales or While less than 1 percent of U.S. cattle are
elephants, could yield larger productivity gains involved in embryo transfers, the obvious benthan would somatic injections3 of growth hor- efits will push this percentage upward rapidly, mones. Moreover, the change in growth would particularly as the costs of the procedure deremain a permanently inheritable characteris- crease (Brotman, 1983). One company, Genetic tic. The expression "a whale of an animal" Engineering Inc. (GEI), already markets frozen would no longer be just a figure of speech. cattle embryos domestically and abroad and Probably, however, the growth hormone gene provides an embryo sexing service for cattle
from any animal may be used (not just hor- breeders (Genetic Engineering News, 1983).
mones from very large animals) as long as
enough of that hormone is injected to do the Plant Agkwoe
job.
Although some scientists may be too op- The application of biotechnologies in plant
timistic when they predict in 2 years the de- agriculture could modify crops so that they development of a 10,000-pound cow and the would make more nutritious protein, resist ingrow t of a pig 12 ft long and 5 ft high (Mintz, sects and disease, grow in harsh environments, growth develong are cet ithin and provide their own nitrogen fertilizer. While
1984), these developments are certainly within the immediate impacts of biotechnology will
the realm of possibility in the next 10 to 20 be greater for animal agriculture, the long-term years. However, some of these changes may or impacts may be substantially greater for plant may not be desirable due to economic, envi- agricture.yThe potntial apiatin of bioronmental, anatomical, institutional, and ethi- agriculture. The potential applications of biocal reasons technology on plant agriculture include microbial inoculums, plant propagation, and genetic
Another technique, embryo transfer in cows, modification.
involves artificially inseminating a super- Microbial Inoculums.-Rhizobium seed inovulated donor animal4 and removing the re- oculums are widely used to improve nitrogen suiting embryos nonsurgically for implantation fixation by certain legumes. Extensive study of in and carrying to term by surrogate mothers. the structure and regulation of the genes inPrior to implantation, the embryos can be volved in bacterial nitrogen fixation will likely treated in a number of ways. They can be lead to the development of more efficient insexed, split (generally to make twins), fused oculums. Research on other plant colonizing with embryos of other animal species (to make microbes has led to a much clearer understandchimeric animals or to permit the heterologous ing of their role in plant nutrition, growth species to carry the embryo to term), or frozen stimulation, and disease prevention, and the in liquid nitrogen. Freezing is of great practical possibility exists for their modification and use
importance because it allows embryos to be as seed inoculums.
stored until the estrus of the intended recipient on the farm is in synchrony with that of Recently, Monsanto announced plans to the donor. For gene insertions, the embryo field-test genetically engineered soil bacteria must be in the single-cell stage, having pro- that produce naturally occurring insecticide canuclei that can be injected with cloned foreign pable of protecting plant roots against soilgenes. The genes likely to be inserted into cat- dwelling insects (Journal of Commerce, Dec.
'Injections into body cells rather than into reproductive cells. 12, 1984). The company developed a genetic 'An animal that has been injected with a hormone to stimu. engineering technique that inserts into soil baclate the production of more than the normal number of eggs per teria a gene from a micro-organism known as ovulation. Bacillus thuringiensis, which has been regis38-857 0 85 3 : QL 3




10 A Special Report for the 1985 Farm Bill
tered as an insecticide for more than two dec- genes encoding photosynthetic proteins from ades. Plant seeds can be coated with these bac- pea plants into petunia plants (Broglie, et al., teria before planting. As the plants from these 1984). buds grow, the bacteria remain in the soil near Transformation technology also allows introthe plant roots, generating insecticide that pro- duction of DNA coding sequences from virtect th plats.tually any source into plants, providing they
Plant Propagation.-Cell culture methods are engineered with the appropriate plant gene for regeneration of intact plants from single regulatory signals. Several bacterial genes have cells or tissue explants have been developed now been modified and shown to function in and are used routinely for the propagation of plants (Fraley, et al., 1983; Herrera-Estrella, et several vegetable, ornamental, and tree species al., 1983). By eliminating sexual barriers to (Murashige, 1974; Vasil, et al., 1979). These gene transfer, genetic engineering will greatly methods have been used to provide large num- increase the genetic diversity of plants. bers of genetically identical, disease-free plants
that often exhibit superior growth and more Informaton To.hnoUogy
uniformity over plants conventionally seed- Aia giutr grown. Such technology holds promise for im- ~ Aukku portant forest species whose long sexual cycles The most significant changes in future livereduce the impact of traditional breeding ap- stock production due to information technolproaches. Somatic embryos produced in large ogy will come from the integration of comquantities by cell culture methods can be en- puters and electronics into a modern livestock capsulated to create artificial seeds that may production system that will make the farmer enhance propagation of certain crop species. a better manager. Genetic Modification.-Three major bio- Computers and electronic devices can be
technological approaches-cell culture selec- used efficiently in animal feeding, reproduction, plant breeding, and genetic engineering- tion, disease control, and environmental conare likely to have a major impact on the pro- trol. The first step toward efficient management duction of new plant varieties. The targets of will be with electronic animal identification crop improvement via biotechnology manipu- (Muehling and Jones, 1983). Positive identificalations are essentially the same as those of tion of animals is necessary in all facets of mantraditional breeding approaches: increased agement, including recordkeeping, individualyield, improved qualitative traits, and reduced ized feed control, genetic improvement, and labor and production costs. However, the disease control. All animals could be identified newer technology offers the potential to accel- soon after birth with a device that would last erate the rate and type of improvements be- the life of the animal. The device would be yond that possible by traditional breeding. readable with accuracy and speed from 5 to 10
Of the various biotechnological methods that ft for animals in confinement and at much are being used in crop improvement, plant greater distances for animals in feedlots or on genetic engineering is the least established but pasture. Research on identification systems for the most likely to have a major impact. Using animals has been in progress for some years, gene transfer techniques, it is possible to in- especially for dairy cows. For example, an electroduce deoxyribonucleic acid (DNA) from one tronic device now used on dairy cows is a plant into another plant, regardless of normal transponder that is worn in the ear or on a neck
seisand sexual barriers. For example, it has chain. A feed-dispensing device identifies the seepssbetinrdcstrgpoen animal by its transponder and feeds the anigenes from French bean plants into tobacco mlfrmxmmefcecacrigt
plans (ura, e al, 193) nd o itrouce stage of production. It also permits animals in plans (ura, e al, 193) nd o itrouce different stages of production to be penned to'Embryos reproduced asexually from body cells. gether yet still be fed properly.




Ch. 2- The New Technologies 0 11
Feeding systems with sensing devices also of diseases, and costs of medicants for treatdetect outdoor temperature so that animals can ment or prevention of disease. A review of be fed accordingly. Since the amount of feed- printouts will allow the manager or veterinarenergy an animal needs under various weather ian to analyze quickly a health profile for each situations and at each stage of growth is known, animal. Bringing all of this information tothe ability to sense weather information could gether will allow the veterinarian and manager I fine-tune diet preparation. of the livestock enterprise to plan for more costA rapid analysis of the feedstuff going into effective disease control programs and to desthe ration will be available at the farm. In for- ignate the duties, such as vaccinations and mulating a ration, it will be very helpful to get pregnancy examinations, that are to be carried
an nstntand accurate reading on the calcium, out. These programs are being applied and
anspors instantcntns fth ato refined on a few farms. By 1990 many of the
phosphorussandhiysinelcontentsaofethearation- more progressive livestock producers will be inret dnt this will per mite aueedacacon using these systems, and by 2000 these systems tro trovd adjustt m and.xratoaial will be widely applied to nearly all of the costto povid anoptium fed.efficient livestock production units.
The largest potential use of electronic devices Environmental control of livestock facilities
in livestock production will be in the area of is another area where electronic devices can reproduction and genetic improvement. An in- be used. Microprocessors will be used to alleexpensive estrus detection device, for example, viate odorous gases and airborne dust in yenwould prove profitable in several ways: tilation systems.
* Animals could be rebred faster after weaning and increase the number of litters per
year. Plas grkulture
* Animals that did not breed could be culled One of the applications of information techfrom the herd, saving on feeding and nology in plant agriculture is in the managebreeding space. ment of insects and mites (Kennedy, 1984). Im* Time would be saved because breeding provements in the design and availability of
* mrotslnswould be easie be-er computer hardware and software will produce
caEbrof btrstruns wdeeon. be tremendous changes in insect and mite mancaus ofbeter stru deecton.agement at all levels (research, extension, pest
Another use of information technology is in management, personnel, and farmer). To be
disease control and prevention (Osburn, 1984). implemented efficiently, as measured by its Computers and computer programs are being contribution to crop profitability, insect and used at many dairies and swine production mite management requires the processing of units and in the poultry industry. Herd record- voluminous quantities of information, includkeeping systems for animal health are being de- ing: 1) condition and phenological stage of the veloped and refined for various production crop, 2) status of the various insect and mite units. Examples of these programs now in pests and their natural enemies present in the operation include FARMHX in Michigan and crop, 3) production inputs into the crop, 4) insimilar systems in New York and California cidence of plant diseases and weed pests and (Mather, 1983). These recordkeeping systems the measures used in their control, 5) weather may be linked with animal identification sys. conditions, and 6) insect and mite management Items, including radiotransmitters, as indicated options. Further, this information must be upearlier. Examples of the types of information dated and reviewed at regular intervals. Cointhat can be recorded for each animal include puters can help superbly in the effective and production records, feed consumption, vacci- efficient processing of this information as well nation Profiles, breeding records, conception as in the design, direction, and analysis. of pest
dates, number of offspring, listing and dates management-related research.




12 e A Special Report for the 1985 Farm Bill
The availability at the farm level of micro- For example, it is used as a part of the broader computers equipped with appropriate software biological monitoring scheduling system and having access to larger centralized data (BIOSHED) developed in Michigan by Gage bases will greatly speed the transfer of infor- and others (1982) for a large number of pests mation and facilitate pest management deci- on a wide variety of crops (Croft and Knight, sionmaking.-The advantages, simply in terms 1983). of information storage and retrieval, will be Exeinswthhseadoerofae tremendous. The ready storage of and access Exeinswthhseadoerofae to current and historical information on pest systems have demonstrated their great value biology, incidence, and abundance; pesticide and identified areas where improvements are use; cropping histories; weather; and the like needed. It has also pointed out that the data at the regional, farm, and even field level will base from which biological models are develfacilitate the selection of the appropriate man- oped is limited. Since all biological models are agement unit and the design and implementa- only as good as the biological information upon tion of pest management strategies for that which they are based, the continued developunit. ment and improvement of such models for use
in integrated pest management (IPM) is conCentralized, computer-based, data manage- tingent on continued high-quality research on ment systems for crop, pest, and environmental the appropriate aspects of plant and pest bimonitoring information have been developed ology and ecology. and are being evaluated for use on a regional
scale by a USDA/Animal and Plant Health In- The advantages provided by computer softspection Service regional program. Such sys- ware are tremendous, in terms of improved tems will provide rapid analysis, summariza- efficiency and accuracy with which pest mantion and access to general crop summaries, agement decisions can be made and impleobserver reports, pesticide and field manage- mented. There is a great deal of effort currently ment information, reports of new or unknown being devoted to the development of new softpests, general pest survey information, and ware and the improvement of existing softspecified field locations with pest severities, ware. This, in conjunction with the rapid ad, Ohersofwae sstes esinedtofaclitte vances being made in computer hardware, Oieter sotwe sytemsdsin to fetaiiate- provides a powerful force that will lead to ment programs are in use and are continually drPmant ceaes in the levettof sos being improved. The Prediction Extension IcMand oPwesc increases areelee f ohs
Timing Estimator (PETE) model (Welch, et al., diable. IM heeschiceae r
1978) is a generalized model for the prediction dsrbe of arthropod phenological events. PETE is suf- A detailed description of all technologies exficiently flexible to be used for management in amined in this study will be presented in OTA's many agricultural and nonagricultural systems. full report later this year.
IMPACT OF EMEROING TECHNOLOGIES ON PRODUCTION
To help analyze the impact of emerging tech- technologies. Participants in the workshopsnologies on agricultural productivity, OTA on animal and plant agriculture-provided data commissioned leading scientists in each of the on: 1) the timing of commercial introduction 28 technology areas studied to prepare papers of each technology area, 2) the number of years on the state of the art. The papers were valu- needed to adopt the technology (by commodable resources for workshops conducted to ity), and 3) yield increases (by commodity) assess the impacts of emerging production expected from the technology. Workshop par-




Ch. 2-The New Technologies 13
ticipants included physical and biological tion by 1990, and the other 40 technologies bescientists, engineers, commodity extension tween 1990 and 2000.
specialists, economists, agribusiness represent- Historical trend lines of efficiency measureatives, and experienced farmers. ments of crop and livestock production were
Since the impact of a new technology on agri- provided to the participants as a starting point
culture at a given time depends in part on when for their assessment of impact on productivity.
the technology is available for commercial in- Through the Delphi process, participants coltroduction, workshop participants were asked lectively projected the primary impacts of the to estimate the probable year of commercial in- technologies on each of the nine commodities troduction of each technology under four alter- for 1990 and 2000 under the different environnative environments: ments. Based on the information obtained from
1. Baseline environment-assumes to 2000: the workshops on the year of commercial ina) a real rate of growth in research and ex- production, the adoption profile, and the pritension expenditures of 2 percent per year, mary impacts, OTA computed crop yields and and b) the continuation of all other forces production efficiencies for the nine commodthat have shaped past development and cities for 1990 and 2000 (table 2-2).
adoption of technology.
2. No-new-technology environment-assumes Prolectloms of Agricultural Yield
that none of the technologies identified in
the study will be available for commercial Under the baseline environment, major crop introduction by 2000. yields are estimated to increase from now un3. Less-new-technology environment-as- til 2000 at a rate ranging from 0.8 percent per
sumes to 2000: a) no real rate of growth year, for soybeans and cotton, to 1.3 percent in research and extension expenditures, per year, for wheat. Wheat yield, for example, and b) all other factors less favorable than is projected to increase from 35.6 bushels per those of the baseline scenario, acre in 1982 to 44.8 bushels per acre in 2000
4. More-new-technology environment-as- at the rate of 1.3 percent per year under the
sumes to 2000: a) a real rate of growth in baseline environment. However, under the noresearch and extension expenditures of 4 new-technology environment, wheat yield percent, and b) all other factors more fa- would increase to 40.8 bushels per acre in 2000 vorable than those of the baseline scenario, at the rate of 0.8 percent a year. The difference
The year of commercial introduction ranged in wheat yield between the two environments,
from now-for genetically engineered pharma- 4 bushels per acre, represents the impact of
ceutical products; control of infectious disease new technologies.
in animals; superovulation, embryo transfer, Under the baseline environment, feed effiand embryo manipulation of cows; and con- ciency in animal agriculture would increase at trolling plant growth and development-to a rate of from 0.4 percent per year for beef to 2000 and beyond-for genetic engineering 0.8 percent for poultry. In addition, the reprotechniques for farm animals and cereal crops. duction efficiency would also increase, at an Of the 57 potentially available animal technol- annual rate ranging from 0.5 percent, for beef ogies, it was estimated that 27 would be avail- cattle, to 0.9 percent, for swine. Milk producable for commercial introduction before 1990, tion per cow per year would increase from and the other 30 between 1990 and 2000, under 12,300 pounds {lbs) to 17,563 lbs per cow in the the baseline environment. In plant agriculture, period 1982-2000. Without new technologies, 50 out of 90 technologies examined were pro- milk' production per cow per year would injected to be available for commercial introduc- crease to only 13,700 lbs in 2000; under the




14 A Special Report for the 1985 Farm Bill
Table 2.2.-Estimates of Crop Yields and Animal Production Efficiency
No-new. More-new.
technology Baseline technology
environment environment environment 1982 1990 2000 1990 2000 1990 2000 Corn bu per acre 115 117 124 119 139 121 150
Cotton lb per acre 481 502 511 514 554 518 571
Rice bu per acre 105 105 109 111 124 115 134
Soybean bu per acre 30 32 35 32 37 33 37
Wheat bu per acre 36 38 41 39 45 40 46
Beef
Pounds meat per lb feed 0.070 0.071 0.066 0.072 0.072 0.072 0.073 Calves per cow 0.90 0.94 0.96 0.95 1.0 0.95 1.04
Dairy
Pounds milk per lb feed 0.94 0.94 0.95 0.95 1.03 0.96 1.11
Milk per cow per year
(thousand Ib) 12.3 13.7 15.7 14.0 17.6 14.2 19.3
Poultry
Pounds meat per lb feed 0.44 0.52 0.53 0.53 0.57 0.53 0.58 Eggs per layer per year 245 255 260 258 275 257 281
Swine
Pounds meat per lb feed 0.165 0.167 0.17 0.17 0.176 0.17 0.18 Pigs per sow per year 14.4 14.8 15.7 15.2 17.4 15.5 17.8
aThe value shown for swine feed efficiency for 1982 is the average of national feed efficiencies for the 10 years prior to 1982.
The national aggregate linear trend of swine feed efficiency is slightly negative and gives a value of .157 In 1982.
SOURCE: Office of Technology Assessment.
more-new-technology environment, produc- at 1.8 percent per year from 1981 to 2000 under
tion could reach 19,300 lbs. the baseline environment. Under the no-newtechnology environment, wheat production Proj4etioms of Food Prodution would increase at only 1 percent per year.
The data obtained from the two technology A more drastic increase in soybean producworkshops were used in an econometric model tion is projected from now until 2000 regarddeveloped by the Center for Agricultural and less of the environment considered. The annual
Rural Development at Iowa State University to production of soybeans is projected to increase assess the collective impact of the 28 areas of under the baseline environment at an annual
asestecletv matoih 8aeso rate of 2.8 percent from 1981 to 2000. Without
emerging technologies on the production of va- ratechnologiercet pro duto is Without
riou crp an liestck poduts.new technologies, the production is still exrious crop and livestock products. pected to increase at 2.4 percent a year. Under
Table 2-3 shows projections to 2000 of in- the more-new-technology environment, soycreased production for three major U.S. export bean production would increase at 2.9 percent commodities (which comprise 60 percent of per year.
U.S. agricultural food production exports). In the world marketplace available informaUnder the baseline environment, corn produc- tion points to a series of periodic surpluses and
tion is projected to increase at the rate of 1.8 deficits in agriculture over the next two decpercent per year from 1981 to 2000. However, ades Mellor, 1983 Resources for the Future,
without the new technologies examined in this 1983). A Resources for the Future (RFF) study
study, the rate of growth would be only 1.2 per- indicates that global balance between cereal cent. Under the more-new-technology environ- production and population will remain quite
ment, corn production would increase at a close to 2000, indicating vulnerability to annual
much faster rate-2.2 percent per year. shortfalls resulting from weather, wars, or
About the same growth rates were obtained mistakes in policy. Over the next 20 years the
for wheat production, which would increase world will become even more dependent on




Ch. 2-The New Technologies *15
Table 2.3.-Projection of Major Crop Production
2000
No-new- More-newtechnology Baseline technology
Crop Unit 1981 environment environment environment
Corn
Production Million bushels 8,136 10,289.0 11,499.0 12,394.0 Growth rate Percent 1.2 1.8 2.2
Prodtio ilo uhl ,0 ,7. ,2. ,6.
Growthute Miercent 1uhl ,0,7.0 1,2.8 2,6.2
S owte a te Pretn. ..
Prutoyen Milobuhl 1,5 3,6. 3,1. 3310
Growth rate Percent 2.4 2.8 2.9
SOURCE: Office of Technology Assessment.
trade. There will be increasing competition for from an increased quantity of land used in proU.S. farmers in international markets. Much duction (RFF, 1983). The other 1.5 percent will of this increased competition will come from have to come from increases in yields-mainly developing countries selling farm commodities from new technology. Thus, to a very large exas a source of exchange to pay for imports such tent, research that produces new technologies as oil. Despite this increased competition, ex- will determine the future world supply-deports of grain from North America are pro- mand balance and the amount of pressure
jected to nearly double by 2000. placed on the world's limited resources.
On the other hand, there is another school The OTA results indicate that with continuof thought that believes current studies such ous inflow of new technologies into the agrias that by RFF have not properly assessed the cultural production system, U.S. agriculture magnitude and impact of emerging technol- will be able not only to meet domestic demand ogies on farm'production. Technologies such but also to contribute significantly to meeting as genetic engineering and electronic informa- world demand in the next 20 years. This does tion technology that are available in various not necessarily mean that the United States will forms could mean rapid increases in yields and be competitive or have the economic incentive productivity. While such changes may improve to produce. It means only that the United States the competitive position of American agricul- will have the technology available to provide ture, they have the potential for creating sur- the production increases needed to export for
pluses and'major structural change-favoring, the rest of this century.
for example, larger more industrialized farms.
Any conclusion regarding the balance of Under the baseline environment, growth
globl sppl anddemnd equies anyas- rates in production, which include additional
sumptions regarding the quantity and quality ln eore n e ehooy ilb
of resources available to agriculture in the adequate to meet the 1.8 percent needed to balfuture, Land, water, and technology are likely ance world supply and demand in 2000. Under to be the limiting factors as far as agriculture's the more-new-technology environment, proU future productivity is concerned. duction could increase at 2.2 percent per year,
Agricuturalworld demad. Thi nreaedoutone
Agrcutualland that does not require irriga- which would. be i mo reae enough tione
tion is becoming an increasingly limited re- could, however, point to a future of surplus source. In the next 20 years, out of a predicted production. On the other hand, under the less1.8 percent annual increase in production to new-technology environment the production meet world demand, only 0.3 percent will come of major crops in 2000 would drop to 1.6 per-




16 e A Special Report for the 1985 Farm Bill
cent per year, a growth rate that would not be rent administration proposal to reduce the agriable to meet the demand. Under the no-new- cultural research budget is accepted by Contechnology environment, the annual rate of gress, the rate of production growth would be production growth would be reduced further somewhere between 1.1 to 1.6 percent. to 1.1 percent. It should be noted that if the cur-




Chapter 3
The Changing Character of
the U.Se Agricultural Sector
Who will use a new technology is as impor- able change in the last 50 years and that protant a consideration as which technology will mises to continue to change throughout the be adopted, for the distribution of technology remainder of this century. This chapter prohas a considerable impact both on agricultural vides a perspective for analyzing technology's production and on the structure of the agricul- distributional impacts on agricultural structure tural sector. by surveying the characteristics of that strucThe emerging technologies examined for this ture and noting the past and present factors study will be introduced within a socioeco- that define it. nomic structure that has undergone considerTHE PRESENT STRUCTURE OF AGRICULTURE
The heart of agriculture, the farm, is officially The replacement of draft animals by the tracdefined as a place that produces and sells, or tor began in the 1930s and was virtually comnormally would have sold, at least 1,000 dol- plete by 1960, releasing about 20 percent of the lars' worth of agricultural products per year. cropland, which had been used to grow feed So defined, there were about 2.2 million farms for draft animals. in 1982. Farms in that year had an average net
income from farming of $9,976 and an aver- The increased mechanization of farming perage off-farm income of $17,601, for a total of mitted the amount of land cultivated per farm $27,577. worker to increase fivefold from 1930 to 1980.
The amount of capital in nominal terms used
Perhaps the best known characteristic of U.S. per worker increased more than 15 times in agriculture is the trend toward larger but fewer this period. Total productivity (production per farms. Currently, about 1 billion acres of land unit of total inputs) more than doubled because are in farms, resulting in an average farm size of the adoption of new technologies such as hyof about 400 acres. However, this average size brid seeds and improved livestock feeding and has little meaning, since fewer than 25 percent disease prevention. The use of both agricultural of all farms fall within the range of 180 to 500 chemicals and fuel also grew very rapidly in acres. Almost 30 percent of all U.S. farms have the postwar period. Agricultural production less than 50 acres, while 7 percent have more now relies heavily on the nonfarm sector for than 1,000 acres. machinery, fuel, fertilizer, and other chemicals.
The number of farms reached a peak of about These, not more land or labor, produced the 6.8 million in 1935 and is now approximately growth in farm production. The resultant 2.2 million. The rate of decline has slowed changes have also greatly increased the capi. since the late 1960s, with a loss of about 100,00o tal investment necessary to enter farming and farms since 1974. have generated new requirements for operat.
Employment in farming began a pronounced ing credit during the growing cycle. decline after World War 11, when a major tech- One of the best ways to look at changes in nological revolution occurred in agriculture. the economic structure of U.S. agriculture is
19




20 A Special Report for the 1965 Farm Bill
in terms of value of production as measured Changes In form Size and Numbers by gross sales per year. Farms can be usefully
classified into the five categories of gross sales Major changes in the structure of U.S. agrishown in table 3-1. culture can be seen in the changes in the number of farms in these classes since the 1969
small farms generally do not provide a sig- Census of Agriculture. Inflation in commodity nificant source of income to their operators. prices has tended to move large numbers of This class of farms is operated by people liv- farms from lower sales classes into higher sales ing in poverty and by people who use the farm classes. Even after the number of farms is as a source of recreation. redistributed to counteract these nominal
Part-time farms may produce significant net changes, the real number of small farms has income but in general are operated by people declined by about 22 percent-a dramatic dewho depend on off-farm employment for their cline. (Recent reports that the number of small primary source of income, farms has actually increased since 1978 refer
to farms that are small in acreage, not small
Moderate-size commercial farms cover the in sales.) The number of part-time farms has lower end of the range in which the farm is also declined by about 18 percent. The numlarge enough to be the primary source of in- ber of moderate farms has increased substancome for an individual or family. Most fami- tially, by about 39 percent, and the number of lies with farms in this range also rely on off- large and very large commercial farms has infarm income. In general, farms in this range creased even more dramatically, by about 43 require labor and management from at least percent and 53 percent, respectively. Even one operator on more than a part-time basis. though the number of moderate farms has inLarge and very large commercial farms in- creased, the loss of these farms in share of sales clude a diverse range of farms. The great ma- and net income to large and very large farms, jority of these are family owned and operated. as shown in the next section, more accurately Most farms in these classes require one or indicates the changing character of American more full-time operators, and many depend on agriculture. hired labor on a full-time basis. Five percent
of these farms are owned by nonfamily cor- Changes In Dlstrlbwtlon of
porations, a much higher percentage than in Sales and Income
the other three classes. In general, the degree
of contracting and vertical integration is much Changes in the number of farms do not alone higher in these classes, give the whole picture. Changes in the distribution of sales and income are more important
and clearly show the direction in which U.S.
Table 3..-Sales Classes of Farms agriculture is heading. In the sections that folAmount of gross low, sales and income data presented reflect Class sales per year redistributions calculated to adjust for the imSmall.................... Less than $20,000 pact of inflation.
Part-time .................. $20,000 to $99,999Been199ad98,slsbsmlfrs
ModerateBewe199ad18,slsbsmlfrs
commercial .......... ...$100,000 to $199,000 declined from 9 to 6 percent. Sales from partLargetime farms declined from 43 to 22 percent. The
commercial.............. $200,000 to $4ake9hreo9odrtfrsinraedfo
Very largemaktsaeomoeaefrsiceedrm
commercial ........$500,000 and over 13 percent of total sales to 19 percent. In the
SOURCE: Office of Technology Assessment. same period the market share of large and very




Ch. 3-The Changing Character of the U.S. Agricultural Sector 21
A large farms increased greatly-from 36 to 57 Moderate farms comprise most of the farms
percent. that depend on agriculture for the majority of
their income. Traditionally, the moderate farm
The most telling changes of all have occurred has been viewed as the backbone of American
in the distribution of net farm income. The agriculture. These farms appear to be failing
large and very large farms have not only cap- in their efforts to compete for their historical
tured the majority of the market but also con- share of farm income.
trolled or reduced their cost of production. In
1974 these commercial farms had a 47-percent Cbamles Im fturcos of Inome
market share and 35 percent of net farm income after adjustment for inflation. In 1982, Employment and the sources of income of
just 8 years later, with their market share at 54 U.S. farmers have changed greatly in the 20th percent, these farms had 84 percent of net farm century. These changes occurred at a rapid rate income (table 3-2). Very large farms have been in the 1970s. The largest single source of responsible for the majority of this growth. This change was the tremendous increase in labor class, which accounts for only 1.2 percent of productivity made possible by technological all farms, increased its real share of net farm changes, resulting in a sharp drop in the deincome fourfold-from 16 to 64 percent. By mand for agricultural labor. During the 1930s
comparison, small farms in 1982 had a nega- the disposable farm income per capita was less
tive net farm income, and part-time farms had than 40 percent of disposable nonfarm income.
declined from 39 percent in 1974 to 5 percent This income differential resulted in the large of total net farm income. Moderate farms have migration of the farm labor force out of agriseen a substantial decrease in net farm income, culture and rural areas. This out-migration acfrom 21 percent in 1974 to 11 percent in 1982. celerated after the Great Depression of the
It is clear that if these trends continue, small 1930s because employment and per capita inand part-time farms are likely to disappear, to come opportunities increased considerably the extent that the operators of these farms de- outside of agriculture. In general, the marginal pend on them for income. The number of small productivity of labor was higher outside the
recreational, or "hobby," farms may increase, agricultural sector from the 1930s to the early Large and very large farms will completely 1970s. Therefore, migration of labor from
dominate agriculture. The number of moderate farming to the nonfarm sector contributed to
farms may continue to increase, but they will national economic growth.
have a small share of the market and a declin- In the 1970s, the average income differential
ing share of net farm income, between farm and nonfarm households narTable 3-2.-Distribution of Farms, Percent of Cash Receipts, Percent of Farm Income, and Farm and Off-Farm Income per Farm by Sales Class, 1982 Sales Class
Percent of Percent of Average Average Average
Value of farm Number Percent of total cash net farm net farm off-farm total products sold of farms all farms receipts income income income income Less than $5,000 814,535 36.4 1.2 -2.0 ($550) $20,396 $19,846
Small......$5,0009999 281,802 12.6 1.5 -0.9 (700) 22,498 21,798
$10,000-$19,999 259,007 11.6 2.8 -0.9 (780) 18,648 17,868
Part-time .... $20,000-$39,999 248,825 11.1 5.4 0.2 154 14,134 14,288
$40,000-$99,999 332,751 14.9 18.4 5.2 3,451 12,529 15,980
Moderate .... s100,000-s199,999 180,689 8.1 19.1 14.6 17,810 11,428 29,238
Large.......$200,000-$499,99 93,891 4.2 21.0 20.4 48,095 12,834 60,929
Very Large...$500,000 and over 27,800 1.2 32.5 63.5 504,832 24,317 529,149
All farms 2,239,300 100.0 100.0 100.0 $9,976 $17,601 $27,578
SOURCES: Adapted from Economic Indicators ot the Farm Sector; Income end B lance Sheet Statistics. 1983. USDA Economic Research Service, 1984. Table 59. us.
ing farm number and cash receipts distribution data from the 1982 Census of Agriculture, Dept. of Commerce, Bureau of the Census, 1984.




22 A Special Report for the 1985 Farm Bill
rowed to about 88 percent, owing to rapid in- production costs and the continuing likelihood creases in farm prices and a substantial in- of low commodity prices, have led to a great crease in the number of farm jobs available deal of concern about the financial condition
from growth in rural industries. These two fac- of the farm sector. A substantial proportion of tors resulted in a slowing of the rate of out- the U.S. farm sector is under severe financial migration. stress. Financial stress is defined as the perceived inability of the firm or individual to
In 1982 the average income of farm and non- metcsflw omiensnthfrm f
farm households was quite close, $27,577 and cash farm expenses, debt repayment require$28,638, respectively. However, two-thirds of ments, tax payments, or family living needs. the income of farm households came from off- This stress can be measured indirectly by use farm sources. The majority of farm operators of the debt-to-asset ratio. In general, the distritoday have some off-farm employment. bution of high debt-to-asset ratios is more imThe average income statistics mask eco- portant than the average debt-to-asset ratio of
nomic problems that exist in the middle of the all farms. The percentage of farms with debtscale of sales classes of farm operations (table to-asset ratios greater than 40 percent and 3-2). Farms in the part-time class, with sales in greater than 70 percent in January 1984 by the range of $20,000 to $99,999, are in serious gross sales class is shown in table 3-3. trouble. About 580,000 farms in this class in Clearly, debt use is closely related to farm
1982 had an average total income of about size. To the extent that debt-to-asset ratios show
$15,000. Their average net income from farm- potential financial problems, beginning farmers ing was only $2,033. These farms are not large and operators of larger farms are likely to be enough to generate much net farm income and in more difficulty than are other farmers.
have lower-than-average off-farm incomes. In
contrast, farmers with sales of less than $20,000 An important aspect of outstanding debt is have substantial off-farm incomes and low or the risk of default from the lender's standpoint. negative net farm income. The average off-farm If those with the largest proportion of debts to income of these individuals enables them to assets are more likely to suffer losses, then
maintain this way of life. there are important risk elements facing agricultural lenders. In January 1984, 24 percent
Those owning moderate farms have suffi- of the total agricultural debt was owed by
cient off-farm income to maintain a household. farmers with over a 70-percent debt-to-asset However, this group may be under the most ratio. Another 32 percent was owed by farmers
stress. To provide an adequate total income, with debt-to-asset ratios in the range of 40 to moderate farm owners must earn almost as
much off-farm as on-farm income. Farmers
with sales in excess of $200,000 have moder- Table 3-3.-Distribution of Farms With High
ate off-farm incomes and moderate-to-very Debt.to-Asset (dia) Ratios, by Sales Class, January 1984
large net farm incomes. As a group, these
farmers are well-off. Highly Very highly
leveraged leveraged
(d/a ratios: (d/a ratios:
Changes In the Structure of Debt 40 to 70%) over 70%)
In the Fr Sector % of No. of % of No. of
Sales class class farms class farms
At a time when agricultural production has Less than $50,000 ..... 8.3 123,200 5.0 74,800 $50,000 to $99,999 ..... 14.7 44,000 8.7 26,400
become more concentrated, the structure of $100,000 to $249,999... 18.1 52,800 9.2 26,400
debt in the farm sector has also become more $250,000 to $499,999... 19.0 17,600 12.6 11,000 concentrated. This process accelerated during $500,000 and over ..... 17.4 5,200 15.3 4,500 the boom years of the 1970s. The size and con- All farms ........... 11.1 242,800 6.6 143,100
SOURCE: U.S. Department of Agriculture, 1983 Farm Production Expenditure
centration of farm debt, combined with high Survey,




Ch. 3-The Changing Character of the U.S. Agricultural Sector 0 23
70 percent. Thus, over one-half of outstanding pay for the operator's labor, for the owner's debt was owed by operators with debts greater equity in the business, for purchases of capithan 40 percent of their assets. This is a mat- tal durable goods, and for payments of interter of great concern for lenders, since poor est and principal.
farm incomes or decreases in asset values will The consequences of increasing financial more quickly erode the equity of highly lever- stress can be seen in increasing rates of payaged operators than of high-equity operators ment delinquency and foreclosure. For exam* (Brake, 1985). ple, Production Credit Association loan chargeAnother useful way to illustrate increasing offs were under 0.1 percent in 1978 and 1979.
financial stress is through the recent increases By 1983 these charge-offs had risen to 1.2 perin debt service burdens. This increase can be cent of outstanding loans-an elevenfold inmeasured by the amount of interest expense crease in 4 years. Similarly, the number of as a percentage of cash receipts after payment loans in process of liquidation was negligible of intermediate production expenses, business in the late 1970s. Data on these loans were not taxes, wages, and rents. By this measure, the even kept in the Farm Credit System. By 1982, debt burden of U.S. farms was 17 percent in loans in process of liquidation approached 1 1975. By 1981 it had reached 35 percent and percent of outstanding loans, and as of March has been in the range of 34 to 38 percent ever 1984, Production Credit Association loans in since. This has resulted in substantial reduc- the process of liquidation were over 2.5 pertions in the amount of receipts remaining to cent of all outstanding loans.
DEFINING STRUCTURAL CHANGE IN AGRICULTURE
Traditionally, American agriculture has been Tb. KEomic Pmspelvo
dominated by farms in which the operators and
their families provided most of the labor, made An economic perspective encompasses conthe management decisions, owned part of the centration and vertical integration in agriresources, accepted most of the production and culture.
price risks, bought and sold in the open market, and depended on the farm as their major Comoentatiou
source of family income. Such farms have been
revered since the days when Thomas Jefferson Concentration refers to the proportion of proargued for national policies of public land dis- duction controlled by the largest firms. It is imtribution that favored small, independent land- portant to consider because the more highly holders. In recent years, the dispersed, inde- concentrated the market, the greater the potenpendent farm, open market system has become tial impact of a firm or group of firms on price.
less dominant in American agriculture. Major Concentration of total production in agriculquestions are whether this system can compete ture compared to that in many of the other ecofor world markets and whether society should nomic sectors is generally low. As shown in take steps to halt present trends that are grad- chapter 2, concentration has occurred to the ually diminishing this system's prominence, point where in 1982 about 28,000 very large Answering these questions entails viewing the commercial farms-1.2 percent of all farmscauses of structural change-that is, how farm produced one-third of the total value of U.S.
resources are organized and controlled-through farm products and accounted for over 60 pereconomic and noneconomic perspectives, cent of U.S. farm net income.




24 A Special Report for the 1985 Farm Bill
Howe 'ver, concentration in land resources is about 50 percent of the production (Brooke, also occurring., Trends in the distribution of 1980). In vegetable crops, such as lettuce and harvested cropland according to sales class celery, concentration is comparably high
show that these productive acres are rapidly (Brooke, 1980). becoming concentrated in the farms in the On the other hand, concentration is still very
large commercial and very large commercial low for most crop agriculture. Relative to other
sales classes. Table 3-4 shows the percentage American industries, where the market share of total cropland harvested by the top two sales of the four largest manufacturers frequently exclasses of farms for the census years 1969 and ced50prntco etainingiul
1982 and projects them linearly to 1990 and cee5pen to coetattefd ibonins legrcl2000. If present trends continue, almost half tue-vnd c attyislew feedin roieso leiue
of ll ropan wil b hrvetedbyfarms in an celrisulow.e Hoevuer atentionist these sales classes by 2000. with which certain industries, such as broilers
The degree of concentration varies from and fed cattle, have gone from a diffused to a
commodity to commodity. For example, beef concentrated and integrated agriculture (Knutcattle operators with sales over $500,000 per son, et al., 1983). year in 1982 represented only 0.5 percent of Concern exists that if extended over a period
all beef cattle operations and accounted for 55 of time, the increasing concentration of agripercent of the total value of cattle sales. The cultural production could lead to higher food 69 largest of these feedlots produced 21 per- pie Beme n ar 92.Ti ol
centof he ed atte i 190 (SDA 191).The result from increased merchandising and marlargest cattle feeders were also some of the keting costs, the potential unionization of agrilargest.edmnfcuer nlgancm cultural workers, and lack of effective competipanies.tion (Rhodes and Kyle, 1973).
Higher levels of concentration exist for
broilers (chickens). In 1977 the 16 largest eia 0gaw
broiler producers and contractors controlled VIkIItg't@
'Land resources in the agricultural sector can be viewed in Firms are vertically integrated when they the general category of "land in farms,"' as defined by the Bu- control two or more levels of the productionreuof the Census, or in the "harvested cropland" category. The marketing system for a product. Such control acreage of cropland harvested is a more accurate measure of may be exercised by contract or by ownership. productive agricultural resources than is the general category
of land in farms. Contract integration exists when a firm
establishes a legal commitment that binds a
Table 3.4.-Historical and Projected Percentages of producer to certain production or marketing Cropland Harvested by Farms With Sales in Excess practices. At a minimum, contract integration of $200,000 requires that the producer sell the product to
Year the buyer. Additional commitments may bind
Sales class 1969 1982 1990 2000 the farmer to specified production practices
$200,000-$499,000 ........12.0 25.3 27.0 32.0 and sources of inputs. While all forms of con$5001,000 .................6.0 11.2 12.0 14.0 tract integration have created concern, the
Total ..........18.0 36.5 39.0 46.0 greatest controversy exists with contracts that
Proection Asupin:control bohproduction marketing dei GOwt i total harvested acres is linear, resulting In anl Increase of 2.4 million b t n e i ac:res per year. sions of farmers. In addition, from a legal
rowth follows the linear trend for the two sales classes and results In an In--h a crease of 2.7 million acres per year for the farms in the $2000$9,0 perspective, producer mynot even own class and of 1 million acres per year for the M,00000 + class,.h rdc en Kusn ta,18) 3The linear projections are based on the acres harvested by sales classes, ad- th rdcen grown (ntoe l,18) ousted for inflation. Inflation in commodity prices tends to move acres from
lower to upper sales classes. since Inflation in commodity prices is likely to The extent of contract integration is not well continue, nominal growth in acreage harvested by these sales classes may be ouetd onl nto stmtsta l greater than projected. ouetd oadKusnetmtsta l
SOURCE: Office of Technology Assessment, forms of contract integration represented 32




Ch. 3-The Changing Character of the U.S. Agricultural Sector 25
percent of farm sales in 1981 (Knutson, et al., On the other hand, there are potentially 1983). He makes the following observations on adverse consequences of vertical integration. the extent of contracting: Contract integration with corporations, and
1. Contracting used to be limited to perish- sometimes cooperatives, radically changes the
able products; now it has expanded to vir- role of the traditional independent farmer.
tually all commodities. More often than not, the farmer loses control
2. Production contracting appears to be asso- of, if not legal title to, the commodities grown
ciated with commodities where breeding under a production-integrated arrangement.
and control of genetic factors play an im- Payment to the grower is largely on a per-unit portant role in either productivity deter- or piece-wage basis, and not necessarily related
mination or quality control. to product value.
Ownership integration is a single ownership It has been argued that in the long run, marinterest extended to two or more levels of the ket power in integrated agriculture will become production-marketing system. It may involve sufficiently highly concentrated that the coneither cooperatives or proprietary agribusiness sumer will pay higher prices for food. Howfirms. Knutson estimates that proprietary ever, no definitive conclusion can be made. ownership integration accounts for about 6 The above argument fails to take into account percent of farm sales. Some proprietary agri- efficiency gains from integration. The extent business firms such as Cargill (beef), Superior to which these gains could be realized without Oil (fruits, vegetables, and nuts), Coca-Cola the development of a vertically integrated sys(oranges and grapefruit), Tysons (broilers and tem is open to question. hogs), Tenneco (fruits, vegetables, and nuts),
and Ralston Purina (mushrooms) have made TIbe Sociological Porspectivo
substantial investments in agricultural production. In products such as broilers, eggs, cotton, Many concerns relating to structural change vegetables, and citrus fruits, ownership integra- are of a sociological nature. They revolve tion is over 10 percent of total U.S. production around the impact of concentration and in(Knutson, et al., 1983). tegration on the institution of the family farm,
on rural communities, and on rural institutions.
Cooperative ownership integration is much Concern has been expressed that continumore prevalent than proprietary ownership in- ously increasing the concentration and integrategration, accounting overall for 34 percent of tion will lead to the demise of the family farm farm sales. However, in only 13 percent of co- as an institution. The term family farm has operative integration is there a legal commit- been associated with the existence of an indement by farmers to market their commodities pendent business and social entity that shares or purchase inputs from the cooperative. responsibilities of ownership, management, laThe economic implications and concern for bor, and financing. The family farm system structural change of vertical integration are leads to dispersion of economic power and has debated. A principal problem in agriculture has been associated with the perpetuation of basic been the difficulty of coordinating production American values and of the family as an instiwith market needs. Vertical integration can tution. Increased concentration and integration make a substantial contribution to satisfying tend to destroy the family farm institution. this need. For example, in broilers and turkeys, Very large farms lose many of the characterisvertical integration has contributed to the uni- tics of the traditional family farm because their form size and quality of poultry sold. It has also business and hired labor aspects clearly precontributed to increased efficiency and re- dominate. Most of the management functions duced costs (Schrader and Rogers, 1978). traditionally associated with the family farm
38-857 0 85 5 QL 3




26 e A Special Report for the 1985 Farm Bill
institution are removed by integration. With in- where every individual had the opportunity for tegration the farmer takes on more of the char- input to public decisions. His philosophy acteristics of a businessman, placed a high value on independent farmers
Another concern is that concentration and and landowners as a means of maintaining a ownership integration reduce the number of democratic system of government. farms and make the integrator less dependent Already there has been a marked departure on the local community. As a consequence, from the decentralized power structure ideal small rural towns and their social institutions visualized by Jefferson. The question is whether decline or vanish. Recent research conducted agriculture is basically unique and different in California provides some evidence to sub- from other sectors of U.S. society, as has long stantiate such a relationship. Dean MacCan- been maintained-that is, are there unique nell (1983) has found that rural communities social, cultural, and traditional values in haywhere a few large and integrated farms domi- ing land ownership widely dispersed, or should nate are associated with few services, lower agriculture join the mainstream where the quality education, and less community spirit, other economic sectors have long been? As
Concerns are also expressed about the im- U.S. agriculture continues along the trends laid patof structural change on the nature of the out in this report, it will increasingly take on U.pa tiasytmThmsJfeonv- characteristics of the nonfarm sector. Some
ualized the merits of a decentralized political wl nepe hsteda rges teswl system where power was highly diffused and interpret it as a step backward.
CAUSES OF STRUCTURAL CHAN01
A number of factors have been identified by 2,500 acres can reduce average machinery researchers as causes of structural change. costs by 9 percent per acre by replacing a conHowever, there has been no delineation of the ventional crawler tractor with a four-wheelrelative importance of each factor. One of the drive tractor. If he also expands the size of his objectives of this study is such a delineation, farm to 3,900 acres, he can reduce costs by an Before moving to that analysis in the follow- additional 18 percent (Rodewald and FolwelI, ing chapters, however, it is important to un- 1977). This nearly 60-percent increase in farm derstand why each of these factors is consid- size can be made without additional labor. ered important to structural change. Once the innovative wheat farmer adopts the
Mostobsever of trutura chnge ite technology, other crop farmers generally have three main determinants: 1) technology and to apnd : pandhase a othefar v r ac-p associated economies of size, specialization, o n xadtesz fterfr racp
and capital requirements; 2) institutional forces: a lower net income as market prices for their and 3) economic and political forces (fig. 3-) crops fall. In short, new technology can play This section briefly defines these forces. ~~ an important role in determining acreage and capital requirements. Different farmers have
different costs because they use different comToh@IogicuI Foaces binations of inputs, have different management
Certain farmers have a strong incentive to skills, or have different scales of operation. adopt new technology rapidly. The early in- knw oNz
novator achieves lower per-unit costs and in- @ 1 ofSX creased profits, at least for a short time, before The relationship of scale of operation to cost other farmers follow his lead. For example, in is of particular significance to structure. If Washington State a winter wheat farmer with costs are relatively the same for all farm sizes,




Ch. 3-The Changing Character of the U.S. Agricultural Sector 1 7
Figure 3-.-Factors Influencing the Structure of Agriculture
SOURCE: ~ ~ ~ Vlu Ofic ofTehnloyAseamet
tively~~~~~~~ liteicnie oices n sze tane ad prou ctincssadfrmszsupr w dition, ith relatively n cstsutonsumectrs majcltre spconicluin.Frt)oteooiso
farm~~~~~~~ size. fothotehadcOrdeciains am.Scnwieth oetaeaecs
sharply~~~~~~~ asfamsieinressn t nyituwold ofblcn prductioea)eatanbeonamdr
there e strng incntivefor Aribssims tocowate am, avperyottnstormi)ea in siz, utconsumrs woldRpo enti all r eeale en tivel c osant orver) ierneo amszs
tance~~~~~~~~a topocraesi ot eliesrl padteszsoteifaminreroichangeTfromioccurring-forfexampleftompre
serve the family~~ far-wul n tenoloedfgarirsuie neooies ofvszelavesev
* ficult but could be~ cutr Rutie ofromptriliiainsoxenancnmisgie
consumr persectiveSmale farbto operasts ofromduingadslignlrevousad
.1 only f they ere willng to aceptuloer rie ored omnonrhpsfrltdfr n
turns~~~~~~ tcotiuelarCapitl nd man-gmn nesonmatvtesa ntbeosdrd
agement, and/or had anOofffarm job. ymethrisomevdnetaiclinofuh
" xen fteac




28 A Specital Report for the 1985 Farm Bill
pecuniary economies would lower the average Technology has made barriers to entry more production costs for large farm units and formidable. The cost of machinery raises capwould shift the conclusion about the size of the ital requirements for beginning farmers. Techmost competitive farm (Smith, et al., 1984). nologies that allow individuals to farm increasingly larger acreages have added to the
SPOedelizati.. competition for land, resulting in high land
Techoloy hs alo ifluncedspeialza- prices, the single greatest expense in farming technology hasnaloucinu eed spCotiza today. The average investment in 1980 in a toaneinlproduction p e etatrns. Cottonple farming operation with gross sales between
into areas of broad, flat fields where larger ma- fruit0 and ut 00 f rms, e torove $800,000, fore chinery can be used to optimum advantage, srtc anchet as. ooe 8000 o ie Specialization in crop production is also due sokrnhs in part to technology. Farmers who once reliedIntuioa oe
on crop rotation and diversification to con- mtI,3Fre
serve soil fertility, prevent soil erosion, and Institutional factors have their primary incontrol pests have replaced these practices by fluence on the costs of inputs used in producchemical fertilizers, insecticides, and her- tion, the prices of products, and the generation bicides, with questionable long-run effects. of new technology for agriculture. These instiThey can thus grow one crop exclusively year tutions may be either in the private or the pubafter year, specializing in commodities that are lic sector. the most profitable. Similarly, the development
of new disease control techniques has given The costs of inputs are primarily a function poultry and livestock farmers unprecedented of competition between private sector agriopportunities to specialize. The vertically in- business firms. Input costs do not have to be tegrated broiler industry of today would have the same for all farmers. Input suppliers may been impossible without scientific advances in offer farmers discounts for larger volume purbreeding, feeding, housing, and medicine, chases of fertilizer or chemicals. Likewise, which have reduced the real cost of broilers larger scale farmers may receive higher prices by as much as 50 percent over the past 30 years. for products marketed through the use of crop
These scientific breakthroughs have gener- cotasorfuesmkt.
ally enabled both small and large farmers to Emuighb ad Extomilo. Sorvke specialize more. However, improvements in
farm machinery have perhaps been most im- 'New technologies are generated in both the portant in fostering large-scale, specialized public and private sector. Basic agricultural reoperations. A decision to invest in a special- search is primarily a public sector function perized piece of equipment means that an opera- formed by the U.S. Department of Agriculture tor will emphasize production of the com- (USDA) and the land grant universities. Apmodity for which the machine is intended, plied research functions are shared between quite likely at the expense of some other com- the public and private sector, with the private modity. And, insofar as a machine is most sector dominating development activities. Execonomical on a particular size of operation, tension activities assist in evaluating and transexpansion to that size is encouraged. Thus, ferring technological innovations into practice. specialization and farm growth occur simul- An integral part of agricultural research and taneously. extension policies is the generation of higher
levels of training and expertise embodied in
Capital Requluem.fts human capital. The result is more skilled
Agrculureis one of the most capital-inten- farmers, agribusinessmen, scientists, and agrisive industries in the American economy. The cutrlpiynaes result is high requirements for credit to finance Research and extension have had differennew capital investments, production, or storage. tial impacts on farms, farm workers, rural com-




Ch, 3-The Changing Character of the U.S. Agricultural Sector *29
munities, and even entire regions, depending and consumers. However, no special programs
on their characteristics and the type of tech- were developed for moderate farms.
nology developed. Some technological innova- ThBegaditaivonrsrcws
tions, particularly mechanical innovations, deemphasized with the change in administrahave favored and hence fostered larger farms. toni19.Ithshwerbnrkndd
Other technological innovations that could be
applied on farms of any size are often first by the announcement of joint initiatives in bioadotedby argr frms(Parlbrg,198; Pr- technology research between private sector adopted byilargernfarms6).aarlbergg 1981;iPer companies and universities. Questions have rin nd inkeman 197). y beng he frst arisen as to whether the primary beneficiaries to adopt new technologies, larger farms receive of the initiatives will be the private sector firms greaer enefts han hos notadotingthe or the initial farmer adopters of the resulting
*technologies (typically, smaller farms). new technology.
A major effort of the extension service is to
disseminate timely information through pub- Pubic Policy
lic meetings. The topics covered in publica- Mn ulcplce fettesrcueo
tions and public meetings are heavily influ- agriculture by influencing resource use, capienced by current research results. Any bias tlrqieettcnlg eeomn n
toward larger farms that is embodied in re- adoption, freedom of decisionmaking, exchange
search results would most likely be carried over arngm tsrisndctsndpot.
intomeetngsand ublcatins.Some policies are oriented specifically to the Even though extension personnel make in- farm sector, such as price and income policy
formation available to all farmers, those (commodity programs). Others affect agriculfarmers that make the most use of the research ture directly but are more broadly oriented, results and extension information can gener- such as tax policy. Still others are generalally be characterized as more innovative, more national macroeconomic policy, for exampleaggressive, and better managers, usually of and affect agriculture indirectly.
larger farms (Paarlberg, 1981). Such farmers Public policies offer viable ways to maintain are also generally more vocal, providing feed- or alter the structure of the agricultural sector.
back to research and extension personnel on In this section, areas of public policy involvethe, usefulness of the information received. mn htafc h tutr farclueae
Even though no overt effort is made to exclude mrenty thamafettesrctrdfariutr.r
particular groups, such as operators of small brelexmnd
farms, the net result is that many research and Commodity Programs.-Beginning with the extension programs become more oriented Agricultural Adjustment Act of 1933, a series toward those select groups that generally avail of commodity programs have evolved to deal themselves of the information (Paarlberg, with price and income problems in farming.
1981). These programs have covered such commodities as wheat, feed grains, cotton, wool, sugar,
This lack of structural neutrality was recog- rice, peanuts, tobacco, and dairy products. To
nized in 1979 by Secretary of Agriculture stblzanicrsefmpiesndnoe,
erafnds forn reearctpojecthavn he ob e- a variety of program tools have been used:
eral roducn lorsargpoesa g laborsavin price supports, direct payments, acreage
jective of pouiglresaelar-vng allotments, set-asides, conservation reserves,
technology and set up a special task force to surplus disposal, and stock accumulation.
investigate the impact of research and extension on structure. At the same time, Congress There is widespread agreement that these earmarked research and extension funds for programs, in the short run, held farm incomes increased work with small farms and for proj- above what they would otherwise have been; ects involving direct marketing from farmers there is much less agreement about their long-




30 o A Special Report for the 1985 Farm Bill
term effects on income. Price stability from innovative farmers causes the price of land to these programs has, however, enabled farmers rise. The cost of production will thus rise unto adopt new and improved technologies. til a new equilibrium is reached in which the
Commodity programs along with technologi- expanded, innovative farmers are back in a nocal advances influence structural change in profit situation while the laggard adopters end agriculture through the following mechanisms. up with a loss. In this case. the equilibrium is since farmers are price takers, no one farmer reached by an increase in land values rather can significantly influence the aggregate sup- than a fall in product prices. ply of a commodity and hence the price that Tax Policy.-Tax laws and provisions are he receives. However, the individual farmer widely recognized as being a determinant of can do something about his operating costs. By agricultural structure. There is not agreement, adopting a new technology an innovative however, about the relative importance of tax
farmer increases productivity and lowers his policy because of tax policy's interactions with firm's cost structure. Since price is not affected other structural determinants. Some tax laws at the early stage of technology adoption, he and provisions can be directly related to strucreaps a profit. As his cost structure falls, the ture (i.e., estate and corporate tax law), while farmer increases his output at the given price. others (i.e., investment tax credits, depreciaIt is possible that innovative farmers used some tion provisions, capital gains, and cash acof their profits to buy up assets of less efficient counting) are indirectly related and often inneighbors, thus starting the change in the struc- teract with credit and commodity policies. ture of farming. As more farmers realize the In animal agriculture, tax factors such as benefit of new technology and follow this in- cash accounting, current deductibility of costs novator, the adoption of the new technology of raising livestock, and capital gains treatment becomes widespread. As they do this, aggre- for sales of breeding livestock, together with gate supply increases, and the price of the investment tax credits and accelerated depreproduct declines. After a period of adjustment ciation, influence livestock investments and a new equilibrium is reached at a lower price, can affect structure. Tax policy issues in ania situation in which the innovator no longer mal agriculture include tax shelter and nonreceives a profit and in which the laggard adop- farm investments, tax provisions as a factor in tors of new technology suffer an economic loss. economies of size, and the legal structure of This dynamic interaction has been referred to agriculture. The cattle sector provides one as the "agricultural treadmill" (Cochrane, example. 1958).
Under a commodity program in which the For mechanical technology, current tax laws
price of the commodity is supported, the same favor the substitution of capital for labor and treadmill concept applies. However, under such may speed the adoption of mechanical systems. a commodity program the price does not fall Two tax factors are at work: payroll taxes, when the aggregate supply increases, because which increase the cost of labor, and provithe product price is supported by Government sions for investment tax credit and accelerated action. Instead, each early adopter continues depreciation, which decrease the cost of mato reap a profit and seeks to expand output by chinery (Carman, 1983). acquiring the land of his less innovative neigh- The income tax advantages of cattle feeding bors. Thus, farm technological advances coupled were packaged as limited partnership synwith Government-supported product prices re- dicates in the late 1960s and early 1970s and sult in structural change in which productive sold to nonfarm investors. The growth of nonassests in farming are concentrated in the farm investment in cattle feeding was closely hands of aggressive, innovative farmers. How- associated with the movement of cattle feeding ever, since the total amount of arable land is out of the Midwest and with the growth of limited, competition for this land between the large-scale feedlots in the High Plains area.




Ch. 3-The Changing Character of the U.S. Agricultural Sector 51
Other factors also played a role, but limited em- wholly owned by its borrowers. However, the pirical evidence suggests that tax-induced in- Farm Credit System is still accorded agency vestment in cattle feeding through limited part- status, whereby interest costs on its bonds and nerships was related to structural change discount notes are lowered. The FmHA is a (Carman, 1983). Government agency that has a mandate from
It is conventional wisdom that tax provisions Congress to make low-interest loans to family are an important consideration in the adoption farmers who cannot obtain credit elsewhere. of capital-intensive innovations, since invest- The FmHA and the Farm Credit System toment tax credit and accelerated depreciation gether account for approximately 40 percent do have a significant impact on after-tax costs. of the total farm debt outstanding (8 and 33 perSuch innovations include the large, four-wheel- cent, respectively) (Barry, 1983). drive tractors, circle irrigation systems, mini- The general intent of farm credit policies has mum tillage systems, and large-scale and im- been to ensure appropriate capital availability proved harvesters. for agriculture. Policies established by these
An important implication can be drawn agencies and their attendant programs are
about structural change from the above discus- thought to have influenced the structure of the farm sector, although the extent of their impact
sion. Small farms and very large farms have has not been studied thoroughly. more off-farm interests against which to offset farm losses than do moderate farms. This
could be a significant factor in accounting for Economic and Pelftleal IFCWCOS the decline of the moderate farm. Agriculture operates in a broader overall ecoAgricultural Credit Policy.-Public policy nomic and political environment. This environdirectly influences the supply of capital to ment determines the rate of interest, the rate farmers through the Farmers Home Adminis- of inflation, and the value of the dollar-all of tration (FmHA) of the USDA and the Farm which influence the costs and prices of farm
Credit System, which includes the Federal products. The increased importance of these Land Bank, Production Credit Association, and effects has made macroeconomic policies that Bank for Cooperatives. The original capital for influence the overall economic environment the Farm Credit System was supplied by the within which agriculture operates more imporFederal Government, but the system is now tant to farmers.
THE DYNAMICS OF STRUCTURAL CHANGE
A study of this type cannot possibly analyze The factors interact in a dynamic fashion to all of the technical, economic, and institutional influence the structure of farming. New techfactors that influence the structure of agricul- nology continuously infused into agriculture ture. This study therefore concentrates on is adopted by the most progressive farmers. those factors that appear to be the most criti- While the initial adopters assume increased cal in affecting structure and that also relate risk in applying a new technology, they gento current farm policy decisions. These factors erally also gain substantially higher returns. include: Farm programs that reduce price risk help
" The technical factors influencing the costs assure higher returns.
of production as related to farm size. As more farmers realize the advantages of e The major farm program elements. new technology, the adoption process becomes
" The institutions that lead to the develop- more general. As this happens, supplies inment and assimilation of new technology. crease, with the tendency to force down mar-




32 A Special Report for the 1985 Farm Bill
ket prices. If Government policies prevent mar- output by acquiring more land. Given the fixed ket prices from falling, surpluses build up, as land base, however, innovative farmers can they have in the dairy industry or did before only grow in size by acquirifig the land of their the payment-in-kind (PIK) program. If market neighbors. Thus, growth and prosperity of prices fall, Government payments rise. large, progressive farmers can only take place
Wider adoption of technologies also changes by the failure of those who are slow to adopt
the nature of costs as farm size increases. If technology. larger farms are the first adopters, their costs These consequences often lead to suggesare substantially lower. The laggers in adop- tions of turning off the technological wheels tion realize much higher costs. By not adopt- of progress. Such a strategy, however, would ing, they become, in effect, left behind-even- have a devastating effect on the competitivetually being either forced off the farm altogether ness of American farmers in world markets. or forced to take an off-farm job. Moreover, the Instead of just some people being left behind, higher returns gained by early adopters of tech- the whole American farm system would be left nology encourage them to seek expansion of behind.




Chapter 4
Economic Impacts of
Emerging Technologies and
Selected Farm Policies for
Various Size Crop Farms
The impacts of emerging technologies will adoption conditions in existence would be spur many adjustments at the farm level. Pol- those of the baseline environment outlined in icymakers must thus consider several questions chapter 2. as they debate the 1981 farm bill: Who will Two techniques were used to analyze the efadopt these technologies and benefit the most fects of selected policy provisions and technolfrom them-the moderate farms, large farms, ogy on farms within each region. Information or very large farms? What set of farm policies was obtained on resource characteristics, in conjunction with technology advance will acreages devoted to specific crops, and historic benefit each size of farm the most? What com- projected yields of crops eligible for farm probination of emerging technologies and farm gram provisions. These data were used to depolicies encourages each size of farm to grow velop resource characteristics of the three difor remain at its present size? How important ferent farm sizes. Then a simulation model was is technology compared to farm policy in deter- used to analyze the economic viability and mining farm growth? What is the likelihood of growth potential of each representative farm a new entrant in agriculture remaining solvent? for selected policy and technology advance To help answer these questions, this chapter scenarios. and the next will present the findings of an The following sections present the representanalysis of selected regions in the United States ative farms and major findings for the producthat represent significant agricultural produc- tion areas analyzed. Obviously, more areas tion in the commodities considered in farm pol- could have been analyzed, but neither time nor icy: dairy, corn, cotton, soybeans, rice, and the resources allocated to this study would perwheat. Within each production region ana- mit their inclusion. It is expected that the lyzed, representative commercial farms were results will apply in broad principle to the maidentified for each of the three size categories: jor production region of which each area is a moderate, large, and very large." It was as- part. It is important to remember that the sumed that the technology development and results of this analysis are mainly illustrative.
Thus, the relative results for the several farm
sizes and for the several alternative policy and
'Small and part-time farms were not included because these technology scenarios are probably more imporfarm operators in general depend on off-farm employment for tant than any specific numbers generated by their primary source of income. the analysis.
35




36 A Special Report for the 1985 Farm Bill
THE CROP FARMS ANALYZED
Cor.&'. bob. Formns In tI.e Coro Betl Table 4-1.-Financial Characteristics of Three
Representative Com.-Soybean Farms
The North Central Region of the United In East Central Illinoise
States produces approximately 50 percent of Farm size
the total production of corn and soybeans. Rep- Moderate Large Very large
resentative farms for this region are the three Cropland acres ......... 640 982 1,630 farms from the corn-soybean cash grain area Acres owned............ 260 429 458
of east central Illinois and the three farms from Acres leased ............3W0 553 1,172
*the irrigated row crop area of south central Value of owned
real estate ($1,00)b ...900.5 1,480.6 1,538.4
Nebraska. Value of machinery ($1,000) 92.2 104.8 129.0
Long-term debt ($1,000) ..126.1 557.4 579.2 The representative farm situations developed Intermediate-term
and used in this analysis were constructed debt ($1,000) ............55.3 62.9 83.8
from two basic data sources: 1) national cost- Initial net worth ($1,000)c. 855.4 1,027.6 1,106.4
Leverage ratio (fraction) .. 0.21 0.61 0.60
of-production surveys by the U.S. Department Long-term debt/asset
of Agriculture (USDA) in 1978 and 1983, and (fraction) ..............0.14 0.38 0.38
2) farm record data collected and analyzed by Intermediate-term
debt/asset (fraction). .... 0.60 0.60 0.65
the Universities of Illinois and Nebraska. The Equity ratio (fraction) .... 0.82 0.62 0.63
size of representative farms and acreages of Off-farm income ($1 ,000).. 8.2 -7.4 7.6
owned and rented cropland were developed Minimum family living
expenses ($1,000) ........18.0 20.0 24.0
from the size distributions in the USDA cost- Maximum family living
of-production surveys. The very large farms ap- expenses ($1,000) .......36.0 40.0 48.0
proximate the largest 10 percent of farms in Marginal propensity
the urvysthelare fams he 0thto 0th to consume (fraction) .. 0.20 0.20 0.20 th suves theil large farm ther 70thon tos 90the fo hupssosiaigfml percentiles, and the moderate farms the 40th labor supply and determining appropriate Income tax rates.
includes land and buildings.
to 70h pecentles.C May include assets other than land, buildings, and machinery. Financial status, as measured by net worth, SOURCE. Office of Technology Assessment.
debt load (both intermediate-term and longterm), and leverage ratio, differs dramatically linois farms have all of their cropland devoted from farmer to farmer. Data from the most re- to cash crop production of corn and soybeans.
cent Agricultural Finance Survey were used to The Nebraska farms are cash crop operations
depict the beginning financial characteristics that combine both gravity and sprinkler techfor the six representative farms (tables 4-1 and nologies to irrigate corn and a small acreage 4-2). of soybeans. In addition, they produce a subAll f te rpresntaivefarms are well- stantial acreage of grain sorghum under
mechanized production units ranging from 640 thi ryland areagend s togi e. somewhat
to 2,085 acres of cropland, and all farms in- hsdyadaraetnst esmwa
clude a combination of owned and rented land. riskier than for the irrigated component of their
Of he ix eprsetatve arm, olythe very farming operations, but irrigated farming still
Ofate us i rereseaefm s olyie ok has some year-to-year yield variability, owing
ers. The other farms operate with a combina- t ete.Atog ubro hs r
tion of family and part-time workers. The 11- rigated corn farms also produce some wheat
and/or corn silage, those enterprises have not
2These representative farms were developed and analyzed in be nlddi h nlss
the paper "Economic Impacts of Selected Farm Policies. Income The crop mix for the Nebraska farms is idenTax Provisions, and Production Technology on the Economic tical for all three farm sizes: irrigated corn (58.3
Viability of Corn-Soybean Farms in East Central Illinois and Irrigated Row Crop Farms in South Central Nebraska," prepared percent of cropland acres), irrigated soybeans for the Office of Technology Assessment by W. B. Sundquist. (6 percent), and dryland sorghum (35.7 per-




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms 37
Table 4.2.-Financial Characteristics of Three Wbeat Fums In the Soathern Plains"'
Representative irrigated Corn Farms
In South Central Nebraska2 Approximately 65 percent of the U.S. wheat
__Farm size production is produced in the Great Plains. For
mo Farm se the analysis of representative wheat farms,
Moderate Large Very large farms were selected from the Southern Plains Cropland acres .......... 672 920 2,085
Acres owned ............ 302 530 1,042 region and are representative of wheat farms
Acres leased ............ 370 390 1,043 in western Kansas, eastern Colorado, and the
Value of owned Oklahoma and Texas Panhandle.
real estate ($1,000)b .... 477.7 838.4 1,648.3
Value of machinery ($1,000) 102.7 112.1 183.9 The three farms selected for the analysis are
Long-term debt ($1,000) .. 123.2 102.0 291.1 the typical moderate farm in the region (1,280
Intermediate-term
debt ($1,000) .......... 40.1 53.7 98.0 acres), a large farm (1,900 acres), and a very
Initial net worth ($1,000)c 448.3 839.0 1,463.1 large farm (3,200 acres). The initial financial Leverage ratio (fraction) 0.39 0.20 0.27 characteristics for the three representative
Long-term debt/asset
(fraction) ............. 0.26 0.12 0.18 farms are summarized in table 4-3. The proporIntermediate-term tion of cropland owned by each farm was obdebtlasset (fraction) .... 0.39 0.48 0.53
Equity ratio (fraction) .... 0.72 0.84 0.79 tamed from the most recent Agricultural FiOff-farm income ($1,000).. 8.2 8.2 9.7 nance Survey summarized for wheat farmers
Minimum family living in western Kansas, eastern Colorado, the Oklaexpenses ($1,000) ...... 18.0 18.0 24.0 homa Panhandle, and the Northern High
Maximum family living
expenses ($1,000)...... 36.0 36.0 48.0 Plains of Texas who had real estate debt.
Marginal propensity
to consume (fraction) 0.20 0.20 0.20 Average long- and intermediate-term debt-to8 A family size of four persons was assumed for the purposes of estimating family asset ratios from the Agricultural Finance
labor supply and determining appropriate income tax rates. Survey were used to estimate initial values for bIncludes land and buildings, andve deeue t siaets.l thuefr
0 May include assets other than land, buildings, and machinery long- and intermediate-term debts. All three SOURCE: Office of Technology Assessment. wheat farms had about the same beginning
equity levels (75 percent) (table 4-3). Minimum
cent). On the Illinois farms, the proportion of family living expenses were based on values corn to soybeans varies only slightly for the obtained from a Texas A&M survey that asked
three representative farms, with corn planted for the minimum annual cash expenditure for
on 52 to 55 percent of the cropland acreage and family living. The Agricultural Finance Survey soybeans on the balance. was used to obtain values of off-farm income
For the Illinois farms, all cropland has the for the three representative farm operators.
same per-acre value, while the price of crop- A typical cropping pattern in the Southern
land on the Nebraska farms reflects the dif- Plains is to irrigate 50 percent of all cropland
ferentials for four categories of land: 1) gray- and to raise wheat on one-half of this irrigated ity irrigated, 2) sprinkler irrigated, 3) dryland land. Grain sorghum is typically raised on the
with irrigation potential, and 4) dryland without irrigation potential. Each of the three 'These representative farms were developed and analyzed in
Nebraska farms do, however, have the same the paper "Economic Impacts of Selected Policies and Techproportions of gravity irrigation, sprinkler ir- nology on the Economic Viability of Three Representative Wheat Farms in the Southern Plains," prepared for the Office of Techrigation, and dryland acres. nology Assessment by James W. Richardson.
.1




38 A Special Report for the 1985 Farm Bill
Table 4.3.-Financial Characteristics of Three this area can produce a variety of crops not
Representative Wheat Farms by Size possible in other parts of the United States. The
In the Southern Plains representative farms in this region produce cotFarm size (acres) ton, rice, soybeans, and wheat (or other small
Characteristics Moderate Large Very large grains).
Cropland acres owned ... 640 840 1,400 The three representative farms developed for
Cropland acres leased ... 640 1,080 1,800 Acres of pastureland owned 120 220 360 this study are a moderate farm (1,443 acres),
Value of owned a large farm (3,119 acres), and a very large farm
cropland ($1,000) ...... 296.0 388.5 647.5 (6,184 acres). Table 4-4 provides a summary of
Value of owned pastureland 29.4 53.9 88.2
Value of machinery ($1,000) 241.9 352.2 477.2 the financial and resource characteristics for
Value of off-farm the three representative farms. The long- and
investments ($1,000) ... 37.3 49.0 53.5 intermediate-term debt-to-asset ratios for the
Beginning cash reserve
($1,000) .............. 10.0 12.0 20.0 1,443-acre farm and the 3,119-acre farm were
Long-term debt ($1,000) .. 60.2 86.3 143.5 obtained from USDA's Agricultural Finance
Intermediate-term debt Survey and adjusted to reflect the equity levels
(1,000) ................ 83.2 126.5 171.3
Initial net worth ($1,000) .. 470.3 642.3 970.7 as reported from a 1983 mail survey of farms
Equity ratio (fraction) .... 0.77 0.75 0.75 Leverage ratio (fraction) .. 0.31 0.33 0.33 Table 4-4.-Financial and Resource Characteristics
Long-term debt/asset for Three Representative General Crops Farms
(fraction) ............. 0.19 0.20 0.20 in the Deita of Mississippi, 1983
Intermediate term
debt/asset (fraction) .... 0.34 0.36 0.36
Off-farm income ($1,000).. 12.4 9.8 9.0 Farm size
Minimum family living Characteristics Moderate Large Very large
expenses ($1,000) ...... 18.0 20.0 23.0 Age of farm operators .... 44 44 44
Maximum family living Family size ............ 4 4 4
expenses ($1,000) ...... 40.0 50.0 50.0 Cropland acres owned ... 533 1,419 3,064
Marginal propensity Cropland acres leased ... 910 1,700 3,120
to consume (traction) .. 0.25 0.25 0.25 Acreage of principal crops
SOURCE: Office of Technology Assessment. in 1983:
Cotton ............... 395 1,088 2,250
Rice ............... 305 574 871
other half of the irrigated cropland. Wheat is Soybeans............ 640 1,190 2,539
generally also raised on the portion of the Wheat (or other
that is not irrigated. This cropping small grains) ........ 82 247 180
cropland tValue of owned cropland pattern was assumed for all three farms. ($1,000) ............... 799.5 2,128.5 4,596.0
Value of farm machinery
Numerous crop share arrangements prevail ($1,000) ............... 378.9 786.7 1,209.8
in the region for leased land. However, these Value of off-farm
the producer investments ($1,000) ... 129.1 210.3 358.7
arrangements generally involve tBeginning cash reserve paying the landlord about 25 percent of the ($1,ooo) .............. 31.9 71.1 141.6
crop and the landlord paying none of the Long-term debt ($1,000) .. 331.4 840.8 1,640.8
Intermediate-term debt
production and harvesting costs. This crop ($1,000) ............... 243.8 413.0 574.7
share arrangement was assumed for all leased Net worth ($1,000) ....... 748.6 1,921.5 4,047.5
cropland. Total equity to assets
(fraction) ............. 0.56 0.60 0.64
Long-term debt/asset
general Crop Farms In tlje (fraction) ............. 0.41 0.40 0.36
Delta Region of Missisippi4 Intermediate-term
debt/asset (fraction) .... 0.64 0.52 0.48
Off-farm income ($1,000),. 18.3 18.2 36.0 The Mississippi Delta is an excellent region Minimum family living
for analysis of general crop farms. Farms in expenses ($1,000) ...... 18.0 24.0 30.0
Maximum family living
expenses ($1,000) ...... 27,0 36.0 45.0
4These representative farms were developed and analyzed in Marginal propensity the paper "Economic Effects of Selected Policies and Technol- to consume (fraction) 0.25 0.25 0.25 ogy on the Economic Viability of General Crops Farms in the a Values for the a and family size varables assumed for simulating the effects Delta Region of Mississippi," prepared for the Office of Tech- of alternative farm program provisions for the representative farms. nology Assessment by B. R. Eddleman. SOURCE: Office of Technology AsSessment.




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms a 39
in the Delta. These debt ratios are the average 62 percent of the cotton lint produced in the for part-owner general crops farms in the Texas Southern High Plains.
Mississippi Delta region that had debt on real Tal4-prvdsaum ryothde
estate in 1979. Financial ratios for the largest Trablc and provisa sumaryeitc ofo theo farm were developed by extending the ratios gheraphicsandtianial cho arerstise for the on a per-acre basis for a 3,457-acre farm, as re- thresen restTie cton atrmuediter
portd i th mos reentAgrcultralFinnce debt-to-asset ratios for the moderate farm were Survey, and were adjusted by the equity levels obtained from USDA's Agricultural Finance
reported for the largest farm size group. Survey. These debt ratios are the average for
The mix of acreages planted in each crop part-owner cotton farmers in the Texas High
changes by farm size. In general, the acreage Plains who had debt on real estate in 1979.
planted in cotton and soybeans increased relative to the acreage planted in rice and wheat Table 4.5.-Financial Characteristics of Three
as farm size increased. The moderate farm Representative Cotton Farms by Size In the
planted 73 percent of tillable cropland in cot- Texas Southern High Plains
ton and soybeans, while the large and the very Farm size
large farm planted 89 and 82 percent, respec- Characteristics Moderate Large Very large
tively, of tillable cropland in cotton and soy- Age of operator........ 42 45 51
beans. In the analysis, as the farm was allowed Acres owned ............ 381 1,048 3,453
to grow in size to the next largest farm size, Acres leased ............ 707 2,335. 2,117
the proportion of cropland planted to each crop Value of owned cropland ($1,000) ...222.4 611.7 2,015.4
was changed to reflect these relative differ- Value of machinery
ences in crop mix. ($1,000) ............... 144.5 420.8 713.9
Value of off-farm
investments ($1,000) ... 59.0 110.0 213.7
Cotton Iforums In the Texais Beginning cash reserve
SoteuPam'($1,000)............... 16.7 52.0 85.5
Sote nHigh Pan"Long-term debt ($1,00)0) .. 61.1 120.9 488.7
Intermediate-term
Cotton is an important commodity in the debt ($1,000) ............98.3 203.6 475.4
United States, and over one-half of the cotton Initial net worth ($1,000) 275.0 85A.8 2,032.3
proucd an e oud i te outer Hgh Equity ratio (fraction) .... 0.62 0.72 0.67
prduedca b fun n heSothrnHih Leverage ratio (fraction) . 0.61 0.40 0.49
Plains of Texas. The three farms selected for Long-term debt/asset
analysis are a typical moderate farm in the re- (fraction)--------------- 0.27 0.20 0.24
larg fam (,383acrs), Intermediate-term
gion (1,088 acres), a lrefm(383aes, debtasset).... 0.68 0.48 0.67
and a very large farm (5,570 acres). These size Off-farm income ($1,000).. 16.0 0.0 0.0
farms account for 31 percent of the farms and Minimum family living
____expenses ($1,000)--------15.2 29.1 38.0
'These representative farms were developed and analyzed in Maximum family living the paper "Economic Impacts of Selected Policies and Tech- expenses ($1,000)--------50.0 50.0 60.0
nology on the Economic Viability of Three Representative Cot- Marginal propensity ton Farms in the Texas Southern High Plains." prepared for the to consume (fraction) 0.25 0.25 0.25 Office of Technology Assessment by James W. Richardson. SOURCE: Office of Tecnologyv Assessmnent.
POLICY AND TECHNOLOGY SCENARIOS
The three representative farms for each pro- farm policy scenarios (including a continuation
duction region were analyzed for the period of the 1981 farm bill), an income tax provision
1983-92 under alternative policy scenarios.6 Six scenario, two financial stress scenarios, a tech______, nology option, and a new-entrant -scenario
'The current version of the Firm Level income Tax and Farm were analyzed for each farm. All assumptions Policy Simulator (FLIPSIM V), developed by James W. Richard- an poiyvleascatdwhechcson and Clair 1. Nixon. was used to simulate the three repre- n oiyvle soitdwt ahse
sentative farms in each region. nario were held constant across farm sizes to




40 o A Special Report for the 1985 Farm Bill
allow direct comparison of their impacts on of Agriculture Block. Loan rates and target different size farms. Appendix A contains sum- prices for 1985 are held constant through 1992.
mary tables of the analysis for each farm size No acreage reduction program was assumed
by region. to be in effect after 1985.
It was assumed that the following options for
Farm Policy Scenarios depreciating machinery and calculating inCurrut Policy come taxes are used for the current policy
scenario:
The current policy scenario involves con- 0Mciey ietcadbidnspae
tinuation through 1992 of current income tax *Min eryrlivtock,8 and bupredinpaedn
provisions and of the price supports, income inhue poruo 8lae deciigbleetd.in support, and supply control programs of the t hery ldlinitck ng bance gsmethod
1981 farm bill. In addition, it is assumed that in Machiner, livek adpbuiltd ing ae
annual mean crop yields for the three repre- i s fe 90aedpeitduiga
sentative farms will increase as new technol- accelerated cost recovery method.
ogies are introduced and adopted by farmers 9 The operator elects to claim first-year exin the baseline technology environment. For pensing for all depreciable items placed
this policy scenario it is assumed that the fol- into use after 1980.
lowing farm policies are in effect: The operator elects to take maximum investment tax credit (ITC) and thus reduce
" The Commodity Credit Corporation (CCC) the basis for all depreciable assets placed
loan program is available to producers for into service after 1980.
corn, cotton, rice, sorghum, soybeans, and o The operator adjusts crop sales across tax
wheat. years to reduce current-year taxes.
* A 3-year, indirect, farmer-owned reserve The operator may use either the regular
(FOR) is available for feed grains and income tax computation or income averwheat.' aging to calculate Federal income tax
" An acreage diversion/set-aside program is liabilities.
in effect for 1983-85, using the actual acre- 0 There is no maximum interest deduction
age reduction levels and diversion pay- for calculating taxable income.
ment rates specified for these years. e The actual self-employment tax rates and
" A target price-deficiency payment pro- maximum income levels subject to this tax
gram is available for corn, cotton, rice, for 1983 and, 1984 are used. Announced sorghum, and wheat in all years. values for these variables in 1985-86 were
" The $50,000-payment limitation for defi- used, and the 1986 values were held conciency and diversion payments is in effect stant through 1992.
and is effective on the farm as specified. *The operator elects to trade in old machin*Farms of all sizes are eligible to participate ery on new replacements at the end of
in these farm program provisions, each item's economic life.
Values for loan rates, target prices, diversion Results Expected.-Since this policy inrates, and diversion payment rates for 1983 and cludes price supports, income supports, and
*1984 are set at their actual values, expressed supply control programs to maintain and stain 1982 dollars. Values for these variables for bilize prices and farm income at a reasonable 1985 are set at their respective levels announced level and reduce the price and income risks, on or before September 14, 1984, by Secretary it is anticipated that all farms under this program~ will have a higher probability of remain'The 1977 farm bill established FOR as a 3-year extension of ing'solvent over the 10-year planning horizon,
* ~~the ccc loan after grain had been in the regular loan for 9 ae ntfr noeadhv
months. Stocks remain in the farm operator's control until the av higher ne amicms n stronger
Secret -ary of Agriculture authorizes release. financial positions.




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms 0 41
Results Obtained: the commodity and repay his loan, CCC aceExcept for Texas cotton farms, all farms cepts the commodity in full payment of the
in the other four regions had a 100-percent loan.
probability of remaining solvent over the CCC releases its stock to the market when
U10-year period. For Texas cotton farms, the prices are high and withdraws stocks from the
probability of survival ranged from 92 per- market when prices are low. Thus, the program
cent for the moderate farms to 94 percent also stabilizes prices.
for very large farms.ReutEx ced
* All farms in four of the five regions in- ReutExced
creased their absolute net worth by the end e Since price supports stabilize prices and of the period with very large farms increas- prevent prices from falling below the loan ing more than the moderate farms. The rate, this program should increase farm
two smaller farms in Illinois experienced income and reduce the price risk for
a loss in net worth over the period, while farmers.
the largest farm experienced a 14.5 percent *All farms should have a higher probabilincrease in real net worth. ity of survival, greater net present value,"
* On the average, all three farms were able and higher net farm incomes than they
to grow by purchasing and leasing crop- would have had without the program.
land. Moderate farms grew in size at a Results Obtained:
faster rate than the very large farms. The
moderate and large grain farms grew at ap- 0 Price supports increased the probability of proximately the same rate of growth. survival for all three representative farms
* Average annual net farm incomes for all in all regions.
farms substantially benefited by the pres- e Net farm incomes for these farms also inence of price and income supports in the creased with the price supports program.
current policy. Removal of these program In all regions, the larger the farms, the
provisions resulted in negative average an- greater the increase in net farm incomes.
nual net farm incomes for farms in all re- With increased farm incomes and reduced gions except Illinois. (Illinois net farm in- price risk, all three farms in all regions excomes did not fall below zero because a perienced increases in real net worth with
large portion of cropland is devoted to soy- the price supports program.
beans, and this crop does not receive a Average ending farm sizes were not sigdeficiency payment.) nificantly different as a result of the price
*Ratios of net farm income to total Govern- support program.
ment payments reveal that, across all regions, the moderate farms are more depen- Inam Sprts
dent on Government payments to maintain Income supports are accomplished through
their incomes than are the very large deficiency payments and the target price. Defifarms.ciency payments are paid to farmers to make
Prk Sppemts up the difference between a price determined
The price supports program is designed to Mre concept of present value is used to help measure the profit
prevent prices from falling below a certain potential of an investment decision. Simply put, a dollar today
leve an tostailie prcesthrughtheccc is worth more than a dollar in the future because today's dollar leve an tostailie prcesthrughtheCCC can be invested and can accrue interest. Thus, the present value
nonrecourse loans at established loan rates to of e specified amount of money payable at a specified future
famr.Such loans, plus interest and storage date is the amount of money that one would have to invest now
cost, can be repaid within 9 to 12 months when in order to have that future amount by that future date. In analyzthe ommdit sod o thecas maket If ing an investment over several periods, a positive present value the ommdityis old n te cah mrket If would indicate an economically attractive decision; a negative
the market is not favorable for a farmer to sell present value would not.
38-857 0 85 7 :QL 3




42 o A Special Report for the 1985 Farm Bill
to achieve a politically acceptable income level *With reduced income risk and greater (target price) and the average market price, farm incomes under the income support Deficiency payments are made on each farm's program, all farms improved real wealth,
base acres and farm program yield. The farm and average after-tax net present value inprogram yield is based on each farm's yield his- creased for all farms. tory. Target prices were set initially to reflect *Income supports increased the average an average cost of production. ending farm size for all farms. Average
Defiieny pamens wre iitited o riseending farm size increased at a faster rate and stabilize farmer incomes to the level of the o eae farmsta o vr ag
nonf arm population while allowing farm prices frmovlosh.5000lmttino ei
to be competitive in the export market. Total Rmvlo h 5,0 iiaino ei
annual Government payments (deficiency and ciency payments benefited larger farms
divesio) wee lmite to$50,00.more than smaller farms. Big winners of divesio) wee lmite to$50,00.this program were big farms in Texas and Results Expected: Mississippi. In Texas, for example, when
" Th maor mpat o defciecy aymntsthe $50,000-payment limitation was reTheul majo ipath deiincymentse o moved, average annual net farm income
shoud b toinceas theincme eve increased $3,600, $50,000, and $104,000
producers who participate in the farm pro- for moderate, large, and very large farms,
gram. Since the payments are based on the respectively.
quantity of eligible production, large-scale *Increased farm income strengthened the producers benefit more than small-scale financial positions of larger farms, increasproducers, up to the $50,000-payment ing their ability to obtain more financing.
limitation. All three representative farms, especially
" Deficiency payments also reduce income the very large farms, had increased net
risk for producers, increase their ability to worth at the end of the 10-year period. For obtain financing, and thus increase the example, removal of the $50,000 limitation
probability of all farms remaining solvent, increased the ending net worth of the modResults Obtained: erate Texas cotton farm by $37,000, of the
large Texas farm by $441,000, and of the
* The deficiency payment program increased very large Texas farm by $1,019,000. the probability of survival more for moderate Texas cotton farms than for the very Sopply Centml Polky
large farm. For farms of other regions, the (Aenego e dvOtl "runra)
probability of survival was 100 percent, The objective of acreage reduction programs
with or without income support.istreueteqaiypodcdndhste
* Income supports increased net farm in- isupl tof euc thequnty prmodu.cae duch comes substantially for all farms, often supplynis of a vn omdiyacreage eductovn postive, icme ro egtv acreage diversion that is generally voluntary.
to Inomiie.pot nacdntfr n Acreage set-aside programs require that par*Icomesualpfrms mehan t prisu- ticipating farmers idle a percentage of their port falfrs oeta h program.p crop base acres so that they are eligible for
prt presncgfrhe$0,00pymn other program benefits. Acreage diversion prolimitation causes the income support pro- grmpapodcsagieaouterce
gramto eneit odeate arm reatiely to idle a percentage of their base acres. A
grm toa beefi modrte farms Increatl farmer's base acres are determined by the prothe price support program results in a dcinhsoyo h rp
greater relative advantage for large and For this analysis the provisions of the curvery large farms. rent policy were modified by adding a 15-




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms @ 43
percent set-aside with a 5-percent diversion for Imposing additional supply controls to excorn, cotton, rice, sorghum, and wheat in 1986- isting farm programs does not substan92. Normal slippage (30 percent for corn and tially change the rate of growth or ending 70 percent for all other crops) and program par- farm size of all farms. Moderate farms conticipation rates were used to estimate the re- tinued to grow at a faster rate than larger suiting real increase in mean prices for these farms. crops in 1986-92. All other provisions of the Eliminating slippage reduced the rate of current policy were used without change. growth relative to that in the current policy for all three farm sizes.
The less slippage in an acreage reduction
" To the extent that acreage reduction pro- program, the smaller the increase in avergrams reduce production, they reduce age net present value for all three farm
supply and stocks and increase prices do- sizes.
mestically for those commodities. Higher
prices will result in higher total and net Me Farm Pregram
incomes for all farm sizes. Farms that par- In the no-farm-program scenario, all farm
ticipate in diversion payments also bene- nten-ampormseaialfr
fitrome pdiversoramt h i easned programs outlined for the current policy were eliminated for all 10 years of the planning
cash receipts, up to the $50,000 limit, horizon. In this essentially free market envi* Slippage in the programs reduces the programs' effectiveness, increases the farms' rnet ampie n noeaevr
net present value, and increases farm size. unstable because: 1) production varies, owing ner incmet valeand tonmreisosfa ze. to weather and biological factors; and 2) de* Higher incomes lead to more disposable mand for farm products changes. The inelastic
income for debt repayment and retained nature of supply and demand for farm prodearnings for accelerating farm growth. ntr fspl n eadfrfr rd
e Farm operators' average net present value ucts makes farm prices particularly unstable.
shoud icerarse. aThe variability in prices and incomes has both should increased favorable and unfavorable aspects. From a
enced byte ofarowth beca of increased favorable perspective, the movement in prices enced by the farms because cased reflects changes in supply and demand condicash accumulation, repayment capacity, tions and is a signal for production regarding and equity in existing land assets. market needs. However, when prices become
Results Obtained: highly unstable, the signals may be misinter* Imposing a 20-percent acreage reduction preted and mistakes may be made in producprogram increased the average net present tion and marketing decisions. The result frevalue and ending net worth for all three quently is misallocation of resources. In farms in all regions except for the large addition, variability in price and income infarm in Illinois. creases the risk and uncertainty to the farm
* Imposing a 20-percent acreage reduction business.
to existing farm programs resulted in a 20- Results Expected:
to 300-percent increase in net farm income Average farm incomes will be less with no
for almost all farms.
* Average ending farm size for all three farm loans or price supports because the floor
sizes increased relative to the initial farm on prices received for these commodities size. has been removed, allowing prices to fluctuate freely.
* Net present value will be lower and more
Slippage is the difference between the percent of production unstable than with price and income decrease and the percent of acreage reduced. These two per- supports. centages are different because farmers tend to set aside marginal lands in Government programs or intensify the cultiva. Net worth of farms will decline because tion of remaining land. the market value of cropland will be less,




44 A Special Report for the 1985 Farm Bill
since there are no benefits from the pro- farms declined the least of all regions begrams to be capitalized into the land. cause a significant portion of crop acre*Farms will have less probability of survival age was devoted to soybeans.
because of increased instability in prices *In the absence of farm programs, all three for crops. The impact will be more pro- farm sizes continued to grow in all regions,
*nounced for highly leveraged farms that but at a m 'uch slower rate than under the
*cannot survive without price and/or in- current policy. For example, farms in the
come support and for smaller farms that Southern Plains declined from the current
cannot survive with high price risk, policy on average about 20 percent in endResults Obtained: ing farm size.
* Removing all farm programs reduced the
probability of survival for all three farm Target Form Proram Beneft
sizes in cotton and wheat regions, relative Fothtagtfrpormbefiscto the base policy. The probability of sur- Faro thare farm program b noenefts sovvival fell more for the moderate farms in nsios alfar phcrramt anlincomee tadxepi these regions than for the very large farms. sions ofate urswrent liyiwee use exrtcpt For example, in cotton the moderate tha armgam wereoigible. torm prticiat
farm's chance of remaining solvent for 10 inofrm prgamnprovisionslFarmsotho proucin years decreased from 92 to 42 percent; the como tn 300,0tdollare worhuproa chance for the solvency of very large farms commoadie vcorn, cottre sorghumd soydecreased from 94 to 78 percent. baeea ant riceivaled to pthicaleiela
* The probability of having a positive after- rate weregnot prmviiteo particiate diRectlytax net present value declined significantly inetprg prprovisfi ions(CCCntloan, FOtar-d for all farm sizes in each of the four re- giersice/d.efiinc payes, and etaideil gions except the Mississippi Delta. For ex- ivesionen prices ad reative aisbiample, in the Southern Plains the probabil- itycinnpricesber not sadjufarste becaue asuf-d ity of a positive net present value for the fopricite umbe famll"gfarm were ssume
* moderate farm declined to about 10 per- toppartcate in the arm proam for the pric
cent. In most cases the very large farms supptot acnofheCCalaladyORt
had a higher probability of positive net fnto omly present value than the moderate farms. ReutExced The probability of a positive net present ReutExced
value was 100 percent in the Mississippi a Findings for moderate farms will be the Delta without the farm program, owing same as the findings for the current policy.
primarily to diversification of crop produc- 0 Large and very large farms exempted from tion and the reduced relative yield vari- the programs will receive indirect benefits ability in the Delta compared with that of from other farms participating in the
the other regions. programs.
* Ending net worth declined for all three 0 Compared with the no-farm-program scefarm sizes in all regions. In most regions nario, the following should be observed for
the absolute decline in net worth was large and very large farms:
greater for the large and very large farms -Net present value will be higher and
than for the moderate farms. For example, more stable.
the large and very large Texas cotton farms -Net worth of these farms will be greater.
experienced a $743,000 and $1,100,800 de- -Farmis will have a greater probability of cline in net worth, respectively, from that survival because of the increased staof the current policy, while the moderate bility in prices.
farms' net worth declined $396,800. The -Farms will be larger because of increased
ending net worth of the Mississippi Delta income and large repayment capacity.




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms @ 45
Results Obtained: 9 The maximum annual interest expense
" Moderate farms consistently producing less that could be used to reduce taxable inthan $300,000 in program crops exhibit the come was $15,600.
samegroth ate, nt fam icoms, nd The operator was required to sell obsolete
ending financial positions as they do under machinery upon disposition rather than the current policy. trading it in on new replacements, thus
" Farms that grow beyond or are initially forcing recapture of excess depreciation
larger than the $300,000 threshold level of deductions.
sales experience lower average Government Results Expected:
payments, net farm incomes, average net *Making Federal income tax policies less
present values, and net worths than under fvrbetnst nraeicm a
the current policy, owing to targeting pro- pyet yrdcn a eutos e
gram benefits.cahfrinoeinoafetdietl
" The larger the farm, the greater the reduc-cahfminoesntafcedirtl
tionin verge edin aces fom he ur-in the first 4 to 6 years. After that, interrent policy for farms in the Southern Plains, eticm sal eoe atr n
Nebraska, and Illinois. Moderate grain farmshiertxpy nstefrt4yasrduce cash available for interest income in in these regions experienced no real change later years.
in average ending farm size because of their Thfamoetrwilavlwrtx
level of total sales being less than $300,000.
" Growth rates for the very large farms indeutosadaxcdisw nmchTexa an th Deta ere imiar o toseery is replaced. The length of time machinexperienced under the no-farm-program op-eriskpwllntieybehoeedfm tion. The moderate and large farms in the tecretplc eas ahnr a
Delta experienced reduced rates of growth replaced based on its normal economic
relative to the very large farms. A similar life, not its depreciation life.
relationship was observed between the large e Reducing tax deductions and tax credits and very large cotton farms in Texas. The will mean greater annual income tax reason for these different rates of growth is payments, resulting in greater cash flow
that the very large farms in these regions are rqieet n eue nigcs e
lessdepeden on armprogamsthanareserves. Net present value will likely be resmaler sze frms.duced because of lower retained earnings and the slower accumulation of wealth.
Tax Policy Scenarios Results Obtained:
The Federal income tax provisions in place *Aoto famr etitv e fFd
for the current policy were made more restric-ealicm txprvsoshditeitive in the reduced income tax benefits and pc nfr uvvl
base farm program scenario. All farm policy e Increasing the Federal tax burden on provisions of the current policy were left un- farmers reduced the average annual rate changed. The more restrictive Federal income of growth in farm size about the same for
tax provisions included the following: alszso am nec ein vrg
ending farm size was about. 8 percent less
* Machinery, livestock, and buildings were than that for the current policy for large
depreciated using the straight-line cost and very large farms and about 4 percent
recovery method. less for moderate farms.
j First-year expensing provisions were elim- e The more restrictive income tax provisions
inated for all depreciable items. reduced the propensity to grow through
* Maximum ITC provisions were eliminated, purchasing cropland and increased the




46 A Special Report for the IW5 Farm Bill
propensity to lease cropland for growth. farm income than it would in the absence
For example, in the Mississippi Delta the of these programs.
growth rate in owned cropland for the Results Obtained:
moderate farm was reduced to 4 percent,
and its rate of growth in leased cropland Farm commodity policies had more effect increased by 49 percent. on the final amount of acres controlled
The changes in the tax provisions resulted than did technology advance, across all
in reduced annual net farm incomes on all sizes of farms in all regions.
sizes of farms in all regions. The reduction Technology advance had little impact on in net farm income was greater for the the final amount of acres controlled in all
very large farm relative to the moderate regions. Yield-enhancing benefits from
farm because the very large farm had more emerging technologies increased average depreciable items affected by changes in final farm size from 0 to 2 percent in the depreciation rules, investment tax credit, Delta, Illinois, and Texas and from 6 to 10 and capital gains treatment of sales of used percent in the Southern Plains. The greatmachinery. est increase in farm size occurred on very
large farms in the Southern Plains under
Technology Sconarlos the current policy scenario because these
farms are principally wheat producers,
To determine the impact of technology on and the greatest increases in yields were
structure, selectedfarm policy scenarios were predicted by OTA to occur for wheat. simulated, assuming increases in mean yields Small increases in final farm size for the of crops only from the use of existing technol- other regions can be explained by the relaogies. A comparison of these simulated results tively smaller increases in yields (based on with the previous farm policy scenarios, which the results of OTA workshops for corn, included increases in mean yields from emerg- soybeans, cotton, and rice). ing technologies, indicates the impact of new Farms did not exhibit any appreciably technology on structure. Three policy alterna- larger rates of growth in real wealth and tives were analyzed under these conditions. farm size under price and income support
They were the base farm policy, which con- programs than under open market conditinues all provisions of the 1981 farm bill, the tions. But in the presence of technology adelimination of income support provisions, and vance, annual net farm income increased the elimination of all farm program provisions. relatively more under the price and inResults Expected: come support program than under open
market conditions.
" Technology advance would have the great- Flows of new technology for all commodest impacts on wealth accumulation, net ities in all regions were found to increase
farm income, and rate of growth in acres annual net farm incomes relatively more
controlled for very large farms that adopted than real wealth and ending farm acreage the technology first and had it in use over across all sizes of farms. Net farm income a longer period of time. was increased relatively more for the very
" The greater the increase in productivity large farms than for the moderate and through technology advance the greater large farms, across all farm policies
should be the rate of increase in wealth, evaluated.
net farm income, and rate of growth in
acres controlled. Implications for tbo 1985 Farm Bill
" Technology advance in the presence of
price and income support programs would Farm programs have major impacts on rates have greater impacts on growth in real of growth in farm size, wealth, and incomes
wealth, farm acres controlled, and net of commercial farmers.




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms & 47
" Most farm program benefits are capitalized large farms. (In contrast price supports prointo land values and net worth. Very large vide more wealth and growth benefits to farms increase their net worth significantly very large farms than to moderate farms.) more than moderate farms under current Targeting of income supports to moderate
farm programs. farms is an effective policy to prolong their
"*Moderate farms are much more dependent survival.
* on farm programs to maintain their incomes *Very large farms can survive without income
* than are very large farms. supports. A loan safety net may be needed
e Income supports provide significantly greater to deal with instability and world competibenefits to moderate farms than to very tienvrmn.
FINANCIAL STRESS AND NEW ENTRANTS SCENARIOS
Fl~ina Stress Scemuries and intermediate-term debt were set at 8 perThe financial position of many farmers is cent annually for the two years.
under severe stress. As discussed in chapter The results expected are:
3, the situation is serious and may not improve o Higher probability of survival.
for some time. Policymakers are considering Higher land values, net worth, and avervarious solutions to this problem. Two of the age net present value.
most discussed alternatives are interest subsidy An increase in the equity ratio because and debt restructuring. To analyze the effects current debts are paid and longer term of these two financial bail-out policies, the fi- debts are reduced, allowing greater oppornancial position of the three representativetuiyfrheamtogwinszbcue
farms in each of the four regions was modified tuyfo the arm ail to rowenrsie ecasen
to depict highly leveraged farms. The long-term ofequincesdailtyolvraeeitn
debt-to-asset ratio for each farm was increasedeqiy
to 55 percent, the intermediate-term debt-toasset ratios were set equal to 60 percent, and Debt estucturing
annual interest rates on old loans were in- Debt restructuring refers to the rescheduling creased to their average values for 1980-83. of loan commitments. Debt may be restrucInterest Sebeldy tured by rewriting short- or intermediate-term
debt to a long-term basis if the collateral jusAn interest subsidy is a loan at below-market tifies such change. The amount paid per year
interest rates. For example, if the Government's is then reduced. Without sufficient additional cost of money is 11 percent and the Farmer's long-term collateral, debt restructuring is Home Administration makes loans at 5 per- limited to rescheduling each class of loanscent, there is a 6-percent direct interest rate short-, intermediate-, and long-term-over a subsidy. The object of an interest rate subsidy longer repayment period. Also, if the debt is is to reduce the cash expenses for interest costs, on a fixed interest rate basis and interest rates thus increasing total net cash farm income. The have declined, the debt might be rescheduled total cash requirements are reduced, thereby in part to take advantage of lower interest rates benefiting all farms. The total saving is greater to obtain a longer repayment period. For the for larger farms because of the total debt be- highly leveraged farms, debt restructuring was ing larger on these farms. An interest subsidy provided through increasing the length of for the first 2 years of the 10-year simulation intermediate-term loans by 1 year and by conwas provided. Interest charges on both long- verting a portion of the intermediate-term debt




48 *A Special Report for the 1985 Farm Bill
to long-term debt as long as the long-term debt do not provide information on the survivability to asset ratio did not exceed 65 percent. and economic viability of potentially new enhas he sme tpe o ex- trants into farming. To obtain some general noRestructuring debt ha h aetp fe- tions of the effects of selected farm commodity
pected effects as interest rate subsidy; however, plce nnwyetbihdfrigoea they differ in their methods. Debt restructur- poliis one nelyestfablihec frin opeaing does not reduce the annual interest pay- tionse ude the mllstfamitin aheo asm ments in the initial period unless long-term in- simuated ua ne te ntinthahefr terest rates are less than intermediate-term oprtrwsanwern. interest rates. Annual principal payments are In this scenario the entering farm operator reduced, thus reducing cash flow needs of the was allowed to have only minimum equity in farm operator. owned farmland (30 percent) and farm machinery (35 percent). All farm m 'achinery was
Result Experienced From Financial considered to have a new machinery cost, and
stress Seuurlos annual interest rates on long- and intermediate* Restructuring initial debt for highly lever- term loans were equal to the 1980-83 averages.
agdfarms failed to increase appreciably the The operator was not allowed to have any offprobability of survival for each size of farm famivsen.Bcuethfrmortr
in ay rgionexcpt or mderte ad lrge was paying the full cost of all inputs (land, capine fan s rein xce forumoerat Pandlrg ital, machinery, and labor), these simulations
whea fams i th Souher Plans.provide an indication of long-run survivability
" in all regions, the interest rate subsidy strat- and profitability of the representative farms.
egy substantially increased the survival rate Three policy alternatives were analyzed under and average net farm income more than did these conditions for the new entrant. They the restructuring of farms' debts. were the base farm policy, which continues all
" Both debt restructuring and interest subsidy provisions of the 1981 farm bill, the eliminapolicies resulted in increased growth in real tion of the target price/deficiency payments wealth (i.e., ending net worth) on the very provision of the program (no income support
larg fars i allregins.provisions), and the elimination of all farm prolarg fars i allregins.gram provisions. Except for Texas cotton farms, the very large
farms with high debts in each region are not Results Expected:
as dependent upon financial bail out strate- *New entrants would be expected to face gies for survival as the moderate and large lower probabilities of survival, slower rates farms. of real wealth accumulation, and slower
* Debt restructuring resulted in less rapid rates rates of growth in farm size than would
of growth in real wealth than interest rate current operators on the representative subsidies on moderate and large farms in farms in each region under existing farm the Corn Belt and High Plains regions. legislation. Because both depreciation adjustments on machinery and annual cash
requirements for debt repayment on real
Now Entrants Into Farming Senario estate and machinery loans are based on
new 1982 costs and current (1980-83) inAll previous simulations of the effects from terest rates, annual net farm incomes will the farm commodity policy alternatives were be lower for new entrants than for current based on representative farms operated by operators, under existing policy.
established farm producers. These simulations *Elimination of income support provisions provide indications of the short-run effects of of the 1981 farm bill will be expected to the alternative farm commodity policy provi- reduce the probability of survival, rate of sions on economic survival and growth char- growth in real net worth and farm size, acteristics of established farm operations. They and annual net farm incomes of new en-




Ch. 4-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Crop Farms @ 49
trants in each region. The greatest impacts *Under the policy alternative of no farm would be expected for specialized crop programs, none of the farms exhibited reafarms producing commodities eligible for sonable potentials for remaining solvent target prices and deficiency payments. over the 10 years. Farms in the Texas High
Elimination of all farm program provisions Plains, Southern Plains, and Corn Belt had would be expected to reduce further the less than a 10-percent probability of surrate of growth in real wealth and farm size. vival. Mississippi Delta farms had only a Annual net farm incomes for new entrants 60-pervent chance for remaining solvent
wudbe expected to be even lower, par- over the 10 years.
ticularly on representative farms produc- e Under the current farm program only the ing commodities eligible for set-aside and Nebraska and Mississippi Delta crop farms paid diversion provision, had sufficient returns for new farmers to
Results Obtained: enter agriculture with a reasonable chance
of remaining solvent and making a reason* New entrants exhibited considerably lower able return on their investment.
probabilities of survival under the base *Elimination of income support, price supfarm policy than did current operators for port, and supply control provisions of curall specialized crop farms. Only the diver- rent farm policy resulted in new entrant sified crop farms in Nebraska and the farmers in all four regions facing little
Mississippi Delta exhibited relatively high chance of surviving and becoming ecoprobabilities of survival for new entrants nomically viable farming operations.
under current farm commodity policy. *Other sources of income, economic assist* New entrants experienced much lower ance, or wealth accumulation will be rerates of real wealth accumulation than did quired for these new entrants to survive current operators under current policy. In economically in an open market farm polthree of the regions-High Plains wheat icy environment.
farm and Nebraska and Illinois crop farms
-real net worth after 10 years was lower Implications for the 1985 Form Bill
than initial net worth on the farms, indicating that the new entrant operator had e Restructuring of debt for highly leveraged to sell owned cropland to remain solvent, farms does not -appreciably increase their
Net farm incomes were negative for all probability of survival.
farms, with the High Plains wheat farm ex- 9 Interest rate subsidy substantially increases periencing the largest relative decline in average net farm income more than debt annual net income, restructuring. It is, therefore, a more effec* New entrant farm operators in the High tive strategy to ease financial stress.
Plains wheat and Nebraska and Illinois
crop regions were unable to increase farm *Very large farms with high debts are not as size over the 10-year period under current dependent on these programs for survival as farm policy. The Texas cotton farm and moderate farms. Under either of these proMississippi Delta crop farms experienced grams, very large farms grow significantly
considerable growth, 20 and 27 percent, in farm size and real wealth.
respectively. *New entrants into agriculture will not likely
a Eliminating the target price/deficiency survive even with current farm programs.
payments provision of current legislation Other sources of income, economic assistsbstantially decreased the probability of ance, or wealth accumulation will be resrvival and ending net worth on all farms. quired.
Onythe Texas cotton farms exhibited any
appreciable growth in farm acreage (about
6 percent).




Chapter 5
Economic Impacts of
Emerging Technologies and
Selected Farm Policies for
Various Size Dairy Farms
One of the most controversial policy areas most likely to be considered in the 1985 farm in the 1985 farm bill debate is expected to be bill, and analyzes the effects of these options in dairy policy-in 1983 a large amount of on moderate, large, and very large dairy farms surplus milk production cost taxpayers approx- in major U.S. dairy production regions., imately $2.6 billion. For that reason, there will
be many alternatives proposed to the current
dairy program. This chapter examines the cur- 'The representative farms were developed and analyzed in the rent state of the dairy industry, identifies the paper "Economic, Policy, and Technology Factors Affecting Herd Size and Regional Location of U.S. Milk Production,"
technologies most likely to affect the industry prepared for the Office of Technology Assessment by Boyd M. from 1983 to 1992, identifies policy options Buxton.
BACKGROUND
During the 1970s, milk production increased The variation in herd size within each State 41 percent in the Southwest region of the was even more dramatic. Although the averUnited States and 33 percent in the Northwest, age herd size in Florida was 532 cows, the averwhile total milk production increased only 11 age herd size for the largest 10 percent of the percent (fig. 1). Much of the increased produc- herds in that State was 1,861 cows (table 5-1). tion came from dairies with more than 500 Similarly, the average herd size for the largest cows, with herds of 1,500 to 2,000 cows being 10 percent of herds regionally was about 1,700 common. Although 303,710 farms in the cows in the Southwest, but only 125 cows in
United States reported having milk cows in the Lake States region. Generally, dairy herds 1983, less than 5,000 well-managed dairies with are much larger in the Southwest, Southeast, 1,500 cows each could have produced all the and Northwest regions than in the Lake States milk sold commercially that year. and Northeast regions.
Herd size, technologies employed, and prac- From the herd size information in table 5-1, tices used in milk production vary considerably 22 dairies were selected to represent existing throughout the United States. In May 1983 the herd sizes in five major dairy areas (table 5-2). average herd size for 120,655 producers sell- The 200-cow Pennsylvania and 600-cow New ing milk to plants regulated by Federal milk York dairies exceed the average size of the marketing orders was 63 cows per farm (table largest 10 percent of dairies in those States. 5-1). However, the average herd size in each However, such larger sized dairies exist in State varied from 49 cows in Pennsylvania to these States and will become more prevalent 532 cows in Florida. in the near future.
53




54 A Special Report for the 1985 Farm Bill
Figure 5-1.-How the Dairying Picture Has Changed (percent change In milk production in various regions from 1970-71 to 1980-81)
SOURCE. U.S. Department of Agriculture.
Table 5.1.-Total Producers and Size Distribution of Herds Soiling Milk to Plants Regulated by Federal Milk Marketing Orders, May 1983a
Average herd size (milk cows) for:
Total producers Largest Smallest
Region (State) (number) All farms 10 percent 70-89 percent 40-69 percent 40 percent
Lake States:
Minnesota............ 9,968 53 116 74 49 30
Wisconsin .............24,400 54 133 88 52 28
Northeast:
Pennsylvania ...........12,928 49 127 86 44 25
New York............. 13,374 59 162 81 53 27
Southeast:
Georgia............... 962 127 343 181 117 54
Florida................ 352 532 1,881 931 355 133
Southwest:
New Mexico........... 176 333 1,832 433 169 32
Arizona................ 160 510 1,733 714 433 160
California.............. 13 400 1,640 580 253 110
Northwest:
Idaho................. 574 135 607 169 90 34
Washington ............1,647 127 418 171 108 46
United States ...........120,855 63 202 82 54 26
The 1206855 farms accounted for about 69 percent of all milk produced In May 1963, but excluded most fais in California and other States where there is no Federal milk order.
sOURCE: Boyd M. Buxton and John P. Rourke, "Size Distrbution of Deity Farms Marketing Milk Under Federal Milk Orders," unpublished report, Economic Research
Service, U.S. Department of Agrculture Aprl 1984.




Ch. 5-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Dairy Farms @ 55
Table 5-2.- Representative Dairies by Region and Herd Size
Herd size Cropland Housing facilities" Silage storage Total labor
Region/State (cows) (acres) (type) Sun shades Feed produced (type) (W/e)b
Lake States:
Minnesota ... 52 188 Stanchion No Most Upright 2.03
Minnesota ... 125 449 Free stall No Most Upright 3.30
Northeast:
Pennsylvania 52 156 Stanchion No Forage Trench 2.2
Pennsylvania .. 125 375 Free stall No Forage Trench 3.8
Pennsylvania .. 200 600 Free stall No Forage Trench 5.54
New York ... 52 156 Stanchion No Forage Trench 2.21
New York ... 200 600 Free stall No Forage Trench 5.54
* New York ... 600 1,800 Free stall No Forage Trench 14.36
Southeast:
* Georgia .........200 400 Free stall Yes Forage Trench 4.5
Georgia .........350 700 Free stall Yes Forage Trench 7.84
Florida .........350 0 Open field Yes None NA 7
Florida .........600 0 Open field Yes None NA 11
Florida ........1,436 0 Open field Yes None NA 18
Southwest'.
New Mexico. 900 0 Corral Yes None NA 13
Arizona .........359 0 Corral Yes None NA 7
Arizona .........834 0 Corral Yes None NA 12
Arizona ........1,436 0 Corral Yes None NA 16
California ... 550 0 Corral Yes None NA 9
California..1,436 0 Corral Yes None NA .16
Northwest:
Washington .. 140 51 Free stall No Silage Trench 2.96
Idaho ...........200 400 Corral No Most Trench 5.0
Idaho ...........550 0 Corral No None NA 10.5
aHousing types are:
*Stanchion: A conventional barn with locking stanchions in which cows are milked and fed.
Free stall: A covered barn with individual stalls inl which cows freely enter and exit.
*Open field: A field where cows are kept that is iarge enough to maintain plant cover.
*Corral: A drvlot open pen where cows are kept and fed at a tenceline feeder.
b Labor in worker equivalents of 2,500 hours annually.
NA-not applicable.
SOURCE: Office of Technology Assessment.
TECHNOLOGIES AND PRACTICES
The technologies and practices assumed for the Northeast, Washington, and Georgia, freeeach of the 22 dairy operations were based on stall housing and milking parlors are assumed.
discussions with dairy producers, university
and Government employees, and equipment Cows are kept in open corrals throughout the
representatives. The objective of these discus- Southwest and on larger Idaho dairies. Sun
sions was to describe efficiently organized shades in the corrals are assumed in New Mexdairy operations that use proven technologies ico, Arizona, and California (Southwest), but
and practices for each specified herd size. not in Idaho. Cows are milked twice a day in
* Therefore, the dairy operations in this analy- milking parlors and fed at fenceline bunks from
sis are not the average of what exists, but rather a feed wagon or truck.
approximate modern sizes and types of oper- Open fields with sun shades are assumed in
ations. Florida. One-half acre per cow is provided,
The 52-cow dairies in Minnesota, Pennsyl- allowing fields to remain grass-covered to minvania, and New York use the conventional imize mud problems. Cows are milked twice
stanchion barns for housing and milking cows a day in a milking parlor. After leaving the
(table 5-2). For larger herds in the Lakes States, milking parlor, they are fed concentrates in a




56 A Special Report for the 1985 Farm Bill
feed barn. before being released back to the dairy. Dairy operations in Pennsylvania, New
field. Roughage is fed loose in the open fields. York, and Georgia purchase most of the concentrates but produce most of the forage used
The source of feed follows the common prac- byterdiyedsAl edsasu dtoe
tice existing in the various States. For New by their dairy herds. All feed is assumed to be
Mexico, Arizona, California, and Florida, most produced on-farm for the Minnesota and the
feed is purchased from off the dairy operation.
The same is assumed for the 550-cow Idaho
POLICY AND TECHNOLOGY SCENARIOS
Eight representative dairy operations of the The eight dairy operations in three regions
22 presented in table 5-2 were selected to simu- were simulated for 10 years under the alternalate selected policy and technology scenarios.2 tive scenarios described below. Seven policy
The likelihood of a particular dairy remaining scenarios (including the 1983 base described
solvent under alternative policies is directly af- in a previous section) and two technology fected by its financial characteristics. A pol- scenarios were simulated for each dairy. The
icy change can have quite different implica- assumptions and policy values associated with
tions for the operator of a dairy with a high each scenario were held constant across all
level of debt than one with a low level of debt. dairies to allow direct comparison of their imThe average financial situation that exists on pacts on different size dairies in different
the eight dairies of the size and location se- regions.
lected are shown in table 5-3. The averages Two financial stress scenarios (interest subwere approximated from the U.S. Department sidy and debt restructuring) were evaluated for
of Agriculture (USDA) farm financial survey, the Minnesota 52-cow and 125-cow, Arizona
359-cow, and Florida 350-cow dairies, assum'The current version of the Firm Level Income Tax and Farm
Policy Simulator (FLIPSIM V), developed by James W. Richard- ing an initial high debt position and assuming son and Clair J. Nixon, was used to simulate the representative a new entrant with high debt position. Each farms in each region. scenario is described below, along with the exTable 5-3.-Financial Characteristics Assumed for Eight Dairy Operations In Four States
Herd size In:
Minnesota Arizona California Florida
Financial characteristics 52 125 359 550 1,436 350 600 1,436
Value of:
Cropland and farmstead ($1,000) ...... 293.4 679.1 39.4 160.0 312.0 262.5 450.0 1,074.0
Buildings ($1,000) .................. 92.7 176.7 192.8 284.4 512.6 87.9 108.9 211.7
Farm machinery ($1,000) ............. 104.1 159.0 120.3 183.1 303.0 114.6 180.0 260.7
All livestock ($1,000) ................ 77.9 181.4 599.6 960.7 2,505.0 525.5 981.4 2,344.3
Off-farm Investments ($1,000) ........ 5.5 13.1 0 0 0 0 0 0
Beginning cash reserves ($1,000) ....... 12.0 62.5 89.8 137.5 35.9 70.0 212.0 505.5
Debt:
Long-term ($1,000) ................ 111.2 213.9 67.3 155.5 288.6 143.7 218.0 475.7
Intermediate-term ($1,000) ........... 57.1 88.5 230.4 308.8 842.4 160.0 243.9 468.9
Initial net worth ($1,000) ............... 417.1 969.4 744.2 1,261.3 2,537.5 756.9 1,464.7 3,343.0
Equity ratio (fraction) ................. 0.71 0.76 0.71 0.73 0.69 0.71 0.76 0.76
Family living:
Minimum ($1,000) ................... 20.0 25.0 25 27 30 25 27 30
Maximum ($1,000) .................. 32.0 35.0 30 38 40 30 38 40
Marginal propensity (fraction) ........ 0.3 0.4 0.3 0.4 0.4 0.35 0.4 0.4
Off-farm income ($1,000) .............. 0 0 0 0 0 0 0 0
SOURCE: Office of Technology Assessment.




Ch. 5-Economic Impacts of Emerging Technologies and Selected Farm Policies for Various Size Dairy Farms v 57
pected results and the observed results from the highest unit cost of production. It lost the analysis. Appendix B contains summary an average of $27,000 annually in net farm
tables of the analysis for each farm size by income. region.
A Crop Aceage Rodluftlo Program
lFam Policy ScOmeios The present feed grain program was asCarroWu Policy sumed through 1985. From 1986 to 1992 a 15of Te crret poicyassmesthe ontnuaion percent set-aside with a 5-percent diversion for othe Dairy and Tobacco Production Stabiliza- assumed. This program results in dairy feed tion Act of 1983 through September 30, 1985. prices being 9 percent higher than those under The Government stocks of dairy products are current policy. assumed to be high enough through 1985 and
1986 to trigger a 50-cent drop in support price Results Expected.-Feed cost represents on April 1, 1985, and again on July 1, 1985. as about 50 to 60 percent of total costs per cow. specified in the 1983 act. A crop program that results in a 9 percent
higher feed cost is roughly equal to a 5-percent
All features of the 1983 act are scheduled to reduction in the price of milk. This would have expire on September 30, 1985. It is assumed an adverse impact on a dairy's ability to inthat the support price will remain at the 1985 crease net worth, reduce debts, and achieve as level through 1986, then rise to $13.11 for man- high an internal rate of return as under curufacturing milk through the end of the 10-year rent policy. In the short run, dairies that raise simulation period. most of their feed would be less directly afResults Expected.-Under current policy, it fected. The probability of survival would most is expected that a well-managed dairy of aver- likely be reduced for dairies operating at or age size would about break even after paying below the break-even point under the current expenses and farm overhead and making with- policy because they would be unable to absorb drawals for family living. It is also expected the higher feed costs. that well-managed dairies in all regions should Results Obtained: be able to survive under a continuation of theThasoitdigefedpcshdte current program. Farms that are not in a posi- grTeats asosfnaciate hihrmedprices hnadithes tion to realize most of the economies of size grates pucaese finacia impactonediriesof in dairying would be gradually forced out of theam purchaemst, ofmeafed from offt business. In other words, an extension of cur- ofthe ar.Frexmpol, comavret ata rth basisy ouoslad effiie cometo net farm income of the 1,436-cow Califorthe asi ofcos andeffciecy.nia dairy declined 64 percent from $375,000 Results Obtained: to $136,000.
*All dairies except the 52-cow Minnesota *The probability of survival was reduced
operation were able to increase their real for all dairies except the 1,436-cow Florida net worth over the 10-year planning hori- dairy and the 125-cow Minnesota dairy.
zon. The 52-cow dairy experienced a 54- There was relatively little impact on Minpercent reduction in net worth. nesota dairies, where most feed is raised
*The larger the dairy, the greater its finan- on the dairies.
cial success. Dairies in Florida and the W rpPorm Southwest were more profitable than CwP~rm
3 dairies in Minnesota. The Florida dairy There is much discussion of a desire to move
benefited greatly from higher milk prices, to more market-oriented crop programs. Re* *The 52-cow dairy had the lowest probabil- moving all price supports and income supports
ity of survival (70 percent) due to having would increase the variability of feed prices,




58 e A Special Report for the 19M Farm Bill
sub jecting the dairyman who purchases feed Results Expected.-Lower support prices to greater risk. For this scenario the Commod- would be expected to affect adversely the ity Credit Corporation (CCC) loan, farmer- dairies' net incomes as well as their survival owned reserve (FOR), and target price provi- and growth. The dairies most adversely afsions were eliminated for all years in the plan- fected would be those that are already in finanning horizon (1983-92). This increased the vari- cial difficulties under the base policy. ability in feed costs facing dairy operations. Results Obtained:' The impact of this variability was evaluated.
RslsExpected.-Feed prices paid by All farms were more negatively affected
dariesul ehgeri oe er u by this policy than by current policy. All
dareo wubehger in some years buttme ih n o farms experienced more losses under this
price years would be expected to balance out, uolic an net wrth.omnt rsntvl leaving a surviving dairy about as prosperous uTe arget dairetnh ahreinexei as under the current policy. However, the cost ce litget dreto in tahe rgoabeio associated with possible borrowing to tide a survd ival euto ntepoaiiyo dairy over periods of high feed costs might be suTe ratetavreipatwso.h expected to affect somewhat adversely its smhegallest innes dair wre theb
ability to retire debt and increase net worth.smletMnsoadiywhrtepob Dairies under tight financial conditions under ability of survival declined from 70 to 38 current policy would be expected to have a percent and the probability of a positive
lower probability of survival without crop pro- net present value declined from 24 to 14 grams because they would be less able to ab- percent. Other dairies that were adversely
sorbtheeffcts f prios o reltivly ighaffected included the smaller Florida and feed prices. This would be less a problem for suppfortsa would. Trfore, anyce smlparie dairies in a relatively strong financial position sots f ul business.mllaiie under current policy because they would be oto uies
better able to absorb these shocks. If Dar a
Results Obtained: With no dairy program, the price of milk
9 The increased variability in feed prices, would drop about 8 percent across the regions associated with eliminating all crop pro- (about $llcwt) to the variable cost of producgrams, had little financial impact on all tion in Minnesota and California as excess dairies compared with the results under stocks and production are eliminated. It was the current policy. Average net present assumed that this would take 4 years. After value declined less than 2 percent for all that, prices were expected to increase 6.6 perdairies, cent ($0.BO/cwt), equal to the average total cost
e Increased price risk did not reduce the of production for large-scale dairies in Minprobability of survival for any of the farms. nesota and California.3 Historical price relationships were maintained.
Fifty Coaft Lower Puk*
All the assumptions of the current policy
were retained except that the mean milk prices 'The variation of milk prices without a dairy price support were reduced 50 cents per hundredweight program was developed from the following study: Cameron S.
(cwt) and the variability of milk price is in- Threen and Jerome W. Hammond, Price Supports, Risk Avercreased. This scenario was included in the sion and U.S. Dairy: An Alternative Perspective of the Longanaysi beaue o th crrent high level of Term Impacts, Economic Report ER83-9, Department of Agrianalsisbecase f th cucultural and Applied Economics, University of Minnesota, June Government stocks and program costs. 1983.




Ch. 5-Economic impacts of Emerging Technologies and Selected Farm Policies for Various Size Dairy Farms 59
Results Expected.-Without a dairy price the program is implemented. However, this
support pro gram there would be no guaranteed economic advantage could be capitalized into price floor. In some years milk prices would the quota value, thereby eroding the advantage be higher, while in other years they would be for new entrants or producers who would have lower than under current policy. However, to purchase quotas to expand milk production.
they would still fluctuate about the long-term Results Obtained:
equilibrium price. Over time, favorable and unfavorable prices should balance out, meaning *Probability of survival was increased for that the ability of a dairy to increase net worth, all farms of all regions. The 52-cow Minrepay debt, and achieve a favorable internal nesota dairy experienced the largest inrate ofreturn would not be seriously affected, crease in the probability of survival from However, the probability of survival for dairies 70 percent under the base scenario to 92
in tight financial situations would be adversely percent.
affected. Average net present value increased for al
Results Obtained: dIairy farms. The 52-cow Minnesota dairy
increased from negative $77,000 to $22,000.
"The probability of survival fell for all 9 Ending net worth was increased for all
farms, with the greatest reduction experi- dairies due to retained earnings and repayenced by the moderate and large farms ment of debt.
analyzed. The lowest probability of sur- Net farm income for Minnesota dairies vival was 34 percent for the 52-cow Min- was increased by $15,000. These dairies
nesota dairy. previously had the lowest income.
* Net present value declined significantly
for all farms. For example, the very large Tax Policy Scenrios
California dairy experienced a 43-percent Alasmtoso h urn oiywr
decline in net present value and a 27- realle assumptfons orte cretoicy weeren percent decrease in net worth. roetae eporore restrdicgtve fedlloin-:
" However, the very large farms were still coetxpvionnlungheflwn:
able to survive in all regions. 0 Machinery, livestock, and buildings were
depreciated using the straight-line cost
Swpl Conro recovery method.
*First-year expensing provisions were elimAll assumptions of the base current policy inated for all depreciable items.
were retained, except that mandatory quotas 9 Maximum investment tax credit proviwere imposed on dairies. Quotas equal to 96.5 sions were eliminated. percent of a producer's normal production 9 The maximum annual interest expense
would, over time, be expected to maintain milk that could be used to reduce taxable inprices $1 above those under current policy, come was $15,600. Herd size would be reduced about 4 percent e The operator must sell obsolete machinin order to reduce milk production 3.5 percent, ery upon disposition rather than trading assuming that poorer-than-average cows would it in on new replacements, thus forcing be culled in complying with the quota. recapture of excess depreciation deductions.
Results Expected.-The financial perform- Results Expected.-These tax policy changes Fiance of all dairies would likely be improved as would have an adverse impact on the ability a result of permanently higher milk prices, de- of a dairy to reduce debt, increase net worth, spite those dairies having to reduce total milk and, if in a tight financial situation, reduce the produced within the designated quota. The probability of survival. All tax changes increase probability of survival would increase along the tax liability, reducing the net income of the with a greater ability to reduce debt and in- operation and leaving less for debt retirement crease net worth for dairies existing at the time and increases in net worth.




60 v A Special Report for the 1985 Farm Bill
Results Obtained: Growth Mormn.
Eliminating the tax benefits increased tax A technology not yet in commercial use but liabilities and reduced the net present demonstrated in experimental work is bovine value and net worth for all farms. These growth hormone. Injecting milk cows with this reductions, however, were relatively small hormone every other day would result in in-in the range of 1 to 10 percent. creased milk production. Preliminary results
The increased tax liabilities were not large are that with this technology, milk production enough to reduce significantly the prob- per cow during the last two-thirds of the lacability of survival. tation period is increased 30 to 40 percent without additional feed (about 23 percent annually).
The cost for the hormone can be expected to
Technology Scenarios decline since it can probably be produced
Comnputer-Controlled ]Feeding cheaply.
Injections given every other day and costing
A technology now available but not widely $1 each are assumed in this analysis. Combinadopted is individual cow feeding by using ing this cost with increased hauling and other computer-controlled feed stalls. With this tech- costs of added milk results in about a $185nology concentrates fed to individual cows can increase in cost per cow per year. Once again, be controlled in total and over time. One ex- it was assumed that only the largest farms periment suggests that average daily milk pro- would adopt, and allowances were made for duction per cow can be increased 2 pounds added cost and yields. with a 0.1 percent higher butterfat content
without increasing total feed fed to the herd Results Expected (Wildhaber, et al., 1984). The estimated added
investment costs for computer feeding for the The expected impact of adopting these techthree largest dairies were: nologies is to improve greatly the financial perMinnsot 12-co hed ..........$18750 formance of the larger adopting dairies. The
Florida 1,436-cow herd .............$157,960 probability of survival and all measures of fiCalifornia 1,436-cow herd ...........$157,900 nancial performance would be improved for
Investment included a neck rsodrfr the adopting dairies. The disparity in costs and
eac co, federstll ithstraeponderufor returns for moderate and very large dairies feeder, and a computer. It was assumed that colbesgicatynraed this technology would be adopted only by the Results Obtained: largest dairies in each region; thus, only three
dairies were analyzed. *Large increases in net farm income, net presAll other assumptions of the current policy ent value, and net worth were experienced were retained except that allowances were by the adopting dairies. These increases made for added investment and operating costs were significantly larger for the bovine and for higher average milk production per growth hormones. cow. The gain in milk production was expected *Any lag in the adoption of new cost-reducto exceed the added cost, giving dairy pro- ing technologies seriously adversely affected ducers a more favorable financial position. the ability of dairies to compete.




Ch. 5-Economic Impacts of Emerging Technologies and Selected Fan" Policies for Various Size Dairy Farms 61
FINANCIAL STRESS SCENARIOS
The assumed beginning financial conditions The impact of higher feed costs and elimifor four of the eight dairies were changed to nating the dairy price support program was reflect high-debt operators and new entrants. evaluated for new entrants with a high-debt Debt load was doubled to reflect high-debt sit- position. The results obtained included the foluations. For new entrants all equipment was lowing: assumed to be new, which increased both the The probability of survival for any dairy
initial value of the machinery and the total debt depends greatly on its initial financial posiload. tion. Dairies and new entrants with high
Two policies were considered for high-debt debt had significantly lower probabilities
dairies. One was to subsidize interest rates on of surviving than dairies with initial finanall debt so that the effective rate for all loans cial situations assumed in current policy. paid would be 8 percent rather than the higher Neither interest subsidies nor opportunirates used in the current policy. The second ties for debt restructuring greatly imwas to restructure the debt by converting a por- proved the chances of high-debt dairy tion of intermediate debt into long-term loans farms remaining solvent. and/or to extend the length of intermediate- The probability of survival for both Minterm loans. In the second case, interest rates, nesota dairies was zero for all policy total debt loads, and other assumptions of the scenarios. The implication is that highhigh-debt dairies remained the same as under debt producers in this region cannot surcurrent policy. vive under even the current dairy policy.
IMPLICATIONS FOR THE 1985 FARM BILL
* Policies and technologies that are favorable from larger scale, more efficient producers
for the dairy industry provide greater finan- in other parts of the United States. Substancial opportunities for large rather than small tial restructuring of dairies in the Lake States dairies. and Northeast will be required for them to
* Policies that adversely affect the dairy indus- compete.
try such as higher feed costs, fewer income Dairy price supports must be sufficiently tax benefits, and no dairy price support pro- flexible to adjust to the increased production gram will negatively affect small dairies and lower costs spurred by technological more than larger dairies. change. This could be accomplished either
* The major advantage enjoyed by larger by adjusting the price support level to
changes in production costs per unit of outdairies is more related to the efficiency of put or by adjusting the level of CCC puroperation than to specific dairy policies. chases.
e There will be a continued trend to fewer and Current geographic price alignment systems
larger dairies in all regions. Milk production in Federal milk marketing orders are becomcan be expected to continue to increase in ing increasingly outdated. A comprehensive the lower cost regions of the Southeast and study is needed of changes required to modSouthwest. ernize the Federal order system in light of
* Traditional dairy regions will continue to ex- technological changes.
perience increased competitive pressure




Chapter 6
Agricultural Research
and Extension Policy'
Much of the success of American agriculture eral questions about the impact of technical adis attributable to the creation of its agricultural vances on the performance of the research and research and extension system (Ruttan, 1982; extension system and about how that performCochrane, 1958). For well over a century, the ance will ultimately affect the structure of agripublic has invested substantial sums of money culture. For example: (currently about $3 billion annually) in agricul- Who gains and who loses from the proctural research and extension at Federal andesoftcnlgalhneingrutr? State levels. This investment has been no ac- esIs ofgtechnlogcal sch an e xgiteo cident. Several important evnshv epdstructurally neutral or does it favor the make the agricultural research and extensiongrwholaeinutaizdfms system an integral and longstanding part of e gh row the e of largendustralizedfarms U.S. agricultural policy-the first Federal ap- Whts are the aroles ra oft ear compo propriations tagiutrlrsacin15,extension system as they relate to technothe establishment of the land grant university logical change in the biotechnology and insystem in 1862, and the creation of the Federal- formation technology era? State-local extension partnership in 1914 (Knut- What are the implications of increased prison, et al., 1983). vate sector involvement in agricultural reThe agricultural research and extension sys- search? tem continues to be an important contributor What are the implications of patents beto a plentiful and low-cost food and fiber ing conferred on biotechnology and inforsupply, as well as to the positive U.S. balance mation technology discoveries for the of agricultural trade. For the period 1945-79, social contract under which the agricultechnological innovations brought about by the tural research system was created? system increased agricultural output 85 per- *How is a proper balance to be struck becent, with no change in the level of agricultural tween public and private sector compoinputs (USDA, 1980). nents of the agricultural research and exAgriculture's entrance into the era of biotech- tension system? nology and information technology raises sev- These are the major issues that will be addressed in this chapter. The answers are based
on previous OTA studies, on an extensive body
of literature regarding the impact of technol'Agricultural research and extension policy issues were iden- ogy on agriculture, and on papers commistif led and analyzed in papers prepared by the OTA research and sioned by OTA regarding the status of the agriextension policy workgroup. Authors of the papers were Ronald cultural research and extension system as it Knutson, Roy Lovvorn, George Hyatt. and Fred White. This
chapter is based on an integration prepared by Ronald Knut- relates to developments in biotechnology and son, of the workgroup's findings, information technology.
65




66 *AS Secial Report for the 1985 Farm Bl
WHO PROFITS FROM TECHNOLOGY CHANGE
The point that technology is one of the driv- tive advantage of U.S. agriculture in intering forces behind structural change in agricul- national trade. Competition in export ture has perhaps been most clearly argued by markets is becoming increasingly keen as Willard Cochrane (1983), who notes that the countries strive to expand output and exfirst adopters of new technology are also the port to earn foreign exchange. Throughimmediate beneficiaries in that their costs per out the 1970s, exports were the driving unit of production are lowered and their pro- force behind farm prices and incomes. A fits are thus increased. The profits of those return to agricultural prosperity awaits a firms supplying the products of new technol- resurgence of exports. Growth in export ogy also increase. In addition, higher profits markets cannot be maintained without the for the farmers encourage the adopting farmers benefits of continuous adoption of costto expand output--even to the extent of increas- reducing technologies. ing the scale of their farm operation. However, *The ultimate beneficiary of agricultural reas output expands, prices decline; later tech- search and extension is the consumernology adopters thus realize less profit. Those domestic and foreign. Larger supplies, farmers who are the last to adopt new technol- lower food prices, and better quality have ogies may actually be forced either to adopt or almost invariably been the main results of to get out of agriculture, agricultural research. This does not mean
that research operates contrary to the inThree important lessons arise from this terest of all farmers; rather, research
description of the process of technological directly benefits the more progressive
change: farmers. Research is also critical for ex*Those farmers who are most aggressive in panding markets for farm products and for
effectively adopting and applying new overcoming the constant threat of disease
technologies are the most likely to survive, and other vagaries of nature.
Their size or scale of operation thereby in- The result of these gains and losses has been fluences the structure of agriculture. Like- a handsome rate of return from public investwise, structure is affected to the extent that ment in agriculture. Rates of return on public research discoveries or extension pro- investment in agricultural research typically grams favor farm operations of a certain fall in the 30 to 60 percent range (Ruttan, 1982).
scale. The significance of technology's role Rates of return for extension have been estiin fostering structural change makes it an mated to run even higher-particularly in the important factor to consider when design- case of specific extension activities (White, ing research and extension programs. 1984). The high rate of return indicates that
*Research and extension are vital to main- agricultural research and extension services
taming the competitiveness and compara- have been highly productive.
THE EFFECT OF AGRICULTURAL RESEARCH AND EXTENSION ON FARM STRUCTURE
The impacts of research and extension on innovations, favor and hence foster larger farms, farm workers, agribusiness, and rural farms. Other innovations could be applied on communities depend on the type of technology farms of any size, but are often first adopted developed and the rate of adoption. Some tech- by larger farms (Paarlberg, 1981;.Perrin and nological innovations, particularly mechanical Winkelman, 1976; White, 1984).




Ch. 6-Agricultural Research and Extension Policy a 67
The extent to which agricultural research Dissemination that is structurally neutral enand extension affect farm structure has become tails dissemination of research results by rean item of increasing debate and concern. Jim search and extension staff to all farmers. AlHightower (1973) focused and fueled the con- though the extension service disseminates troversy by concluding that "Agriculture's pre- research results through a wide range of pub* occupation with scientific and business effi- lications, public meetings, and result demonU ciency has produced a radical restructuring of strations, these means are more readily acU rural America and consequently urban Amer- cessed by the more knowledgeable and better
ica .... America's land grant college complex educated farmers, who more often are the operhas wedded itself to an agribusiness vision of ators of larger, more progressive farms. Since automated, vertically integrated and corpora- the topics covered in publications and public tized agriculture." Hightower's perspective ap- meetings are heavily influenced by current repears to be that agricultural research and ex- search results, any bias toward larger farms in tension should be structurally neutral (i.e., not these results would be carried over into those favor one farm size over another), but if it publications and meetings. On the other hand, favors anything, it should favor moderate and one of the criticisms of extension has also been smaller farms. that operators of the larger, more progressive
The impact of agricultural research and ex- farms are more knowledgeable about the state
tenson n fam sructre an bst e uner- of the art than are extension staff. This claim
stood by considering the separate impacts of the Stae sliseytru fcut-ee stafftano
research, extension, and technological adop- thSaespclittf.
tion on farm structure. Adoption that is structurally neutral involves
A research program that is structurally neu- the equal willingness and ability of operators
tral would develop technologies that can be of all farm sizes to adopt new technology.
used by any size farm. There is limited evi- Adoption neutrality would be hampered if redence about whether the type of agricultural search and/or dissemination were not strucresearch being conducted by public institutions turally neutral. But even when research and exis structurally neutral (White, 1984). Biological- tension activities are structurally neutral, chemical technologies, the focus of most land adoption may not be neutral because adoption grant research, are more likely to be structur- of new technology is dependent on many facally neutral than is mechanical research, which tors, including the potential profitability of is primarily done in the private sector. Mechan- technology, the capital investment required, ical innovations such as the cotton picker, com- the natural resources controlled by farmers, the bine, and mechanical tomato harvester have fa- economic environment within which farmers vored large farms by reducing labor require- operate, and the technical skills of the farmer.
ments and lowering costs on large farms (Schmitz
and Seckler, 1970). The biological-chemical The structural trend in agriculture is quite technologies over the past 50 years have ac- clearly toward a bimodal distribution-small counted for about a doubling of output in most and large farms surviving, with moderate farm commodities-Le., wheat, corn, rice, and farms struggling to exist. Small farms are surcotton. However, mechanization and econo- viving and even increasing in number because Imies of size have accounted for a tenfold to they have off-farm income against which to offtwentyfold increase in output, and this has not set farm losses. Large farms are increasing in been structurally neutral. In general, there has number because their operators are more effibeen no widespread public recognition of the cient and can purchase inputs at lower prices, consequences of such technological develop- sell their products at higher prices, obtain more ments before their release and widespread farm program benefits, and therefore *have
adoption (White, 1984). higher incomes (Smith, at al., 1984).




66 & A Special Report for the 1985 Farm Bill
Considering the number and complexity of Increase emphasis on the use of modern
these factors, it would be difficult to achieve marketing and management tools by opera farm structure that maintains the moderate ators of moderate farms. An understandfarm simply by focusing more research and ex- ing of contracting, futures markets, optension resources on producing and dissemi- tions markets, and committed cooperatives
nating technologies specifically oriented toward will be critical to the future survival of the the moderate farm segment. Instead, research moderate farm system. In addition, modand extension activities would have to be in- erate farms will have to use state-of-the-art tegrated into other targeted policy tools to computer information and financial sysachieve the desired structural goals, tems. Public research and extension will
Since dissemination and adoption would ap- play the major role in seeing that this
pear to be more important than research to knowledge base is developed and reaches
structural change, the emphasis in a program farmers.
to achieve greater neutrality would logically fall Reorienting the research and extension syson highly applied research and extension func- tem in this manner carries some risk. The comtions targeted toward the competitiveness and petitive position of American agriculture in an survival of moderate farms. Such a program open world economy could be jeopardized if, would have to: while concentrating on improving the competiIncrease public research efforts aimed at tive position of moderate farms, technological developing farming and management sys- advances for larger farms stagnated. Therefore, tems that allow moderate farms to achieve while directing more efforts toward moderate the same technical or production efficien- farms, research and extension must continue cies as their larger scale counterparts. to foster improvements in production, marketProvide higher levels of support for farmer ing, and management systems for all farm cooperative research and educational sizes. Accomplishing such changes would reactivities aimed at serving family farm quire additional staff, retraining of existing agriculture. With proper orientation, staff, more resources, and a reorientation of exfarmer cooperatives should be able to isting resources.
allow moderate farms the same input
economies as larger farms.
RESEARCH, PRIVATE SECTOR,, AND EXTENSION ROLES
One of the most important contemporary gently released joint Council Needs Assessissues that the agricultural research and exten- ment for Food and Agricultural Sciences. sion system has had to deal with is that of establishing both the broad priorities for research The primary question regarding the roles and extension and the roles of the components issue involves the line of demarcation between of the research and extension system. Since the the U.S. Department of Agriculture (USDA) passage of the 1977 farm bill, considerable pro- and the land grant programs. This issue has gress has been made in establishing roles and been treated quite differently by research and priorities in the various components of the agri- extension. OTA's agricultural research system cultural research system. The joint Council and study concluded that USDA research should the Users Advisory Board, given sufficient time concentrate on those agricultural problems that and encouragement to perform, have the po- are important to the Nation and for which no tential for dealing effectively with the priorities one State or private group has the resources, issue. Positive progress is indicated by the re- facilities, or incentive to solve (OTA, 1981).




Ch. 6-Agricultural Research and Extension Policy 69
Such a role can logically be assigned to the The current magnitude of private sector comUSDA Agricultural Research Service and the mitment to agricultural research is largely unUSDA Economic Research Service. Concen-. known. Studies suggest that it may approach
treating only on national and regional problems $3 billion (National Agricultural Research and would represent a marked shift by the Agricul- Extension Users Advisory Board, 1983). Aptural Research Service from its past decentral- proximately half of the amount is spent on ization policies involving increasing emphasis production agriculture and half on food proon research having a State or local focus. duction or postharvest technology research.
Private sector research resources are obviously
Mvat* S*ctor Invelvem*M devoted to those areas having the highest shortrun profit potential. Also, despite recent large
The land grant university system was estab- increases in private sector agricultural relished largely because it was concluded that in search, questions remain about the long-term a decentralized competitive structure, the pri- willingness of private sector firms to invest vate sector would not have the economic in- large sums of money in agricultural research centive to provide the level of funding needed and about the breadth of such research. As to maintain an efficient, viable agriculture. De- noted previously, private firms have tended to spite many changes in the structure of agricul- cut back on research first in times of adversity. ture since the founding of the land grant system, this premise w6nt largely unchallenged The private sector also plays a role in eduuntil the 1970s. cation. For most agribusiness firms, this role
is pursued in conjunction with their efforts to
As a result, private sector grants for agricul- promote the products and services that they tural research have historically come primar- market. The educational value of these promoily from foundations such as Ford or Rocke- tional activities relates more to alerting farmers feller and from a small number of grants for to the availability of new products than to university developmental research associated evaluating objectively the performance of those with the introduction of new products. With products. the advent of biotechnology, the interest of private firms in agricultural research increased The burden of new product evaluation then sharply. While much of this interest appears falls either on the farmer (through trial and erto be a spinoff of biomedical human research, ror) or on the extension service (through result substantially expanded resources have also demonstration); extension involvement is more been committed to plant and animal reproduc- efficient. However, the biotechnology era holds tion designed to produce new varieties or to potential for increased antagonism between expand the rate of genetic improvement. In ad- private sector firms and extension because the dition, increased interest is being shown in extension service evaluates the comparative developing disease- and insect-resistant plants performance of new biotechnological products, as well as in more organic methods of pest a role not always appreciated by firms produccontrol. ing products that have relatively lower levels
One of the major reasons for this expanded, of performance. private sector interest in agricultural research With a few important exceptions, such as inhas been the extension of patent rights to plant tegrated pest management (IPM) checkoff provarieties and other biological discoveries. grams, the private sector's direct financial supThese rights, in turn, gave rise to increased pri- port for agricultural extension programs has vate sector interest in supporting university re- been limited, but appears to be growing. It search that could result in profitable, patented might be argued that limited private sector discoveries. funding is essential for keeping extension edu-




70 # A Special Report for the 1985 Farm Bill
cation programs objective. Greater dangers Of possibly greater significance was the 1980 may lie more in increased private sector fund- landmark U.S. Supreme Court decision, Diaing of extension than of research. In the fund- mond v. Chakrabarty, which held that the ining of both, it is critical to maintain the objec- ventor of a new micro-organism, whose inventivity and availability of information flows. tion otherwise met the legal requirements for obtaining a patent, could not be denied a patResearch Involvement ent solely because the innovation was alive.
This decision opened the door for patenting poLand grant universities were created to serve tentially all new products of the biotechnology the public. The agricultural component of the era. land grant universities has unique responsibilities to conduct and extend the results of Since the passage of the Plant Variety Proresearch for the public benefit. Traditionally, tection Act and the Chakrabarty decision, prithose research results have been readily and vate sector interest in agricultural research has freely available to the public, since they have mushroomed. OTA, for example, found that in no private property or exclusivity rights at- 1983 there were 61 companies pursuing aptached to them. Research results that were to plications of biotechnology in animal agriculbe held in confidence or had proprietary rights hure and 52 companies applying biotechnology attached to them were frowned upon. Policy to plants. Most of these firms have developed changes that have occurred over the past 15 their own in-house research capability, employyears hold the potential for substantially chang- ing molecular biologists, biochemists, geneting this traditional concept of ready and free icists, plant breeders, and veterinarians. access to land grant university research. Some Relationships are also developing between changes have already occurred; others may oc- universities and many of these firms. For excur very rapidly. In other words, changes in ample, Monsanto has a 5-year, $23.5 million property rights and exclusivity rules may have contract with Washington University under also changed the very concept of the land grant which individual research projects are consystem. ducted. At Stanford University, five corporate
Questions of how the land grant universities sponsors (General Foods; Koopers Co., Inc.; might adjust to the new concept of research Bendix Corp.; Mead Corp.; and McLoren Power property rights and the related opportunities and Paper Co.) contributed $2.5 million to form for increased private sector funding have been the for-profit Engenics and the not-for-profit the subject of extensive study. However, the Center for Biotechnology Research. impact of these factors on the unique nature Such relationships are not limited to private or "social contract" of the land grant system universities. Michigan State University (a land has received little attention. grant college) created the entity Neogen to seek
Policy changes regarding property rights in venture capital for limited partnerships to deagricultural research had their origin in the velop and market innovations arising out of reenactment of the Plant Variety Protection Act search. The formation of Neogen points up a of 1970. Previously, patent protection in plants significant problem being encountered by was limited to asexually reproduced material- universities in the biotechnology era. Neogen mainly orchard fruits and ornamental flowers, was formed, in part, for the purpose of retainThe Plant Variety Protection Act provided that ing faculty members who are getting offers a breeder of a new, stable, and uniform vari- from biotechnology companies. In Neogen, ety of sexually reproduced plants could prevent faculty members are allowed to develop their other seedsmen from reproducing and selling entrepreneurial talent and gain financial rethat variety for 17 years. wards while remaining at the university.




Ch. 6-Agricultural Research and Extension Policy 71
The formation of Neogen reflects the reality able-even if information on the discovery
that biotechnology development is resulting in itself is freely available.
or might result in a substantial drain on univer- 9 Certain individuals and firms are consity basic and applied research talent. If leading ferred the benefits of specific land grant faculty members are not overtly hired away research, to the potential detriment of
from universities, they may form their own others. Prior to the transfer of discovery
companies or become consultants. The estab- rights, the benefits were available to anylishment of biotechnology property rights has one who adapted a land grant discovery
substantially heightened scientists' interest in to commercial usage.
private sector employment opportunities. In *The costs of the resulting discoveries are the process, questions have arisen over who internalized in the price of the resulting should maintain the property right-the univer- product. The price the public pays for the sity, the private firm, or the scientist. product also includes any monopoly rents
In te Wshigto Uniersty-onsntoassociated with the conferral of the rights.
Inse the Wahngouniversity -Moin heptnsantoht Society thus pays twice: once for the cost caewhie uonisty rasetaluiste ptent rights. of the research and again for its benefits.
whil Mosano ha exlusve iceningrigts.Without the conferral of property rights,
* In Engenics, Stanford likewise gets the patent rents are minimized by competition.
rights while Engenics and its five corporate *Private sector-public sector inequities are sponsors receive the royalty-bearing licenses, virtually assured in any granting of reNeogen will buy patent rights from Michigan search property rights to an individual State University, while the inventor will get a firm. This occurs because a relatively 15-percent royalty or a stock option in Neogen. small private sector investment brings acIt does not take much imagination to recog- cess to a much broader range of current
nize the potentially profound implications of and prior research.
such developments on the land grant univer- *The existence of patent rights, trade secrets, sity system. While public sector-private sector and confidential information has many poarrangements were kept previously at arms tentially adverse implications for extenlength, private sector arrangements now in- sion in terms of the increased burden for tegrate business into the university fabric, product testing, the potential lags in inforQuestions develop over who controls the mation, and the absence of research inforuniversity research agenda, the allegiance of mation that previously would have been
scientists to their university employer, the will- readily available.
ingness of scientists to discuss research discoveries related to potentially patentable products, The argument does not, however, flow exand potential favoritism shown particular com- clusively against the conferral of private secpanies by the university because of its research tor property rights by the land grants. There ties. are three main counterbalancing arguments:
*The advent of patent rights, exclusive licen- *With the conferral of private property
sing, and private sector investment in public rights and the associated private sector insector research may change the distribution of vestment, the quantity of research discovbenefits from land grant research discoveries. eismyices.Rbr vno 18)
These changes warrant direct public discus- forexamye increas hobrt acveleson 193)
* sion and consideration by policymakers. They forivexamplane n a rosharp acceertei ocu o tlas ieraos 1970 Plant Variety Protection Act was
*By exclusive licensing or transferring of enacted into law. Over 1,088 patent-like
patent rights to private firms, the right to certificates were granted by February 1,
use discoveries is no longer freely avail- 1983.




72 *A Special Report for the 1985 Farm Bill
*Without land grant university involvement the need for setting national plans and priorin private sector-funded research, the ities. One major congressionally mandated exuniversities may not be able to retain the tension evaluation project culminated in a top-quality scientists needed to conduct series of reports that concentrated more on agricultural research on the frontiers of past benefits than on future needs, priorities,
knowledge. In the process, the agricultural and required adjustments (Extension Service, research, extension, and teaching pro- 1983). There is also relatively little reference grams would all suffer. to the functions or programs of extension in
*Patent monopoly rights may be necessary the reports of either the joint Council or the
to attract the capital investment needed to Users Advisory Board.
translate the scientific advances of land Feraexnsohsalodmtilydgrant universities into commercial reality, ea empnsonhasie itieteuation droleial the-s Without such proprietary protection, new yeparsiz(Hyatt, 1984.ethg Fednrl tetandiscoveries may not be able to compete for sio seaisats were) geAllyug viewedras hayeresources to develop marketable products inspcaitweegnrlyvwdashor technologies. The public availability of ig a vast subject matter base in their own right suchprodctscoul threbybe ffeced. and were frequently called upon to engage in suchprodctscoul threbybe ffeced. staff training and to conduct educational proIf policymakers want land grant universities grams, these specialists are viewed today more
to refrain from conferring property rights, it as program leaders, coordinators, and faciliwill be necessary for policymnakers to provide tators. The education function is thus left to the level of funding whereby land grant univer- State specialists and agents. These changes sities can compete with non-land grant univer- were at least partially forced by reductions in sities that confer such rights. This basic deci- personnel ceilings and limited appropriations.
sion may be the most important related public Regardless of the cause, this change in stratpolicy decision since the land grant system was egy has not been beneficial to the overall nacreated. Once the land grant system starts ac- tional extension education program, which is tively competing for private sector grants and left to cope with a lack of progress in national conferring licensing rights, there will be no planning and needs assessment and a deteriorturning back. ation in the quality of educational service to
the States.
As in research, there are issues of national
Extenslon ROleS significance that the USDA Extension Service
Avaiabl evdene sggess tat he rogess is better able to deal with educationally than
of the agricultural research community in stare the tates Wilexuteniael teduStioate must establishing priorities is more advanced than still t a rs the lead inexedigecaiona perothat of the extension community. The agricul- greas toa famsnt SDA Extnsmaing terv
tural research community has been widely iecnpa nipratrl nmkn h
studied and critically evaluated within and information and related educational materials without the system in a series of projects ex- available on a timely basis. (For another pertending back to the mid-1960s. In light of these spective see Hyatt, 1984.) Currently, this role
analses th agrculura reearc sytemhas is being played on, at best, a spotty basis. A key
adjusted the distribution of its resources in rec- msino h eea xeso evc
ogito of potential advances evolving from should be to facilitate technology transfer beboentooyadifrato ehooy tween USDA research agencies and the State
biotchnlog an inormaiontecnolgy, extension services as well as between States.
Similar progress is not apparent in extension. If this function is not adequately performed,
*Extension administrators suggest that this is research agencies become motivated to develop
the case because most of the extension plan- their own outreach programs. The need then ning occurs at the local level through advisory is for increased integration of the research and committees. Yet such a system does not obviate extension function-not greater fragmentation.




Ch. 6-Agricultural Research and Extension Policy 73
To add Federal extension national program ern scientific training. Some States may be inleaders who are knowledgeable about the state dlined to forego the responsibility of getting inof the art of technology would be substantially volved in conflict-oriented product evaluation 4 more expensive. Such staff would have to be programs. To the extent that this occurs, the
recognized as national extension coordinators usefulness of extension to the farmer will
and be provided compensation consistent with decline.
that role. Finally, they would have to have ac- Mayothtenlgisntehrznae
reseatresors ordiaey toaeeo state-of-the-n exceedingly complex and foreign to many exrarheducatoalimateil tha ceeoulp used inh tension staff. In the foreseeable future embryo all edtata aeiasta oldb sdi transplant technology may be as important to
all Sates.the dairy industry as artificial insemination has
The biotechnology era presents some very been over the past three decades. Growth regimportant challenges to the extension com- ulators will increasingly be applied in minute munity-challenges that could determine ex- quantities to plants to increase productivity.
tension's future usefulness as an educational New strains of genetically engineered plants aid to farmers. With renewed emphasis on and animals will be entering commercial probasic agricultural research, substantial concern duction channels. Extensive staff training and arises about whether a gap in applied research development will be required at both the spewill develop. This could occur as applied scien- cialist and county levels for extension to play tists are attracted into basic research that of- an effective role in technology transfer during fers higher rewards, leaving open the jobs in the biotechnology era. Without such training, applied research. The potential for such a gap extension will play an increasingly less imporis reduced by increased private sector interest tant role in production agriculture. Technoland involvement in biotechnology research ogy transfer will occur less efficiently with and development (R&D). However, as the pri- more structural impacts-larger farms will benvate sector performs a larger share of the ap- efit at the expense of smaller farms.
plied research, extension may become even At current funding levels, the most difficult more involved in the evaluation of technologies issue facing extension is whether to limit its and products flowing out of the private sector. role and coverage to those functions for which Without such evaluation individual farmers it has the greatest expertise. Without criteria and ranchers will incur the costs of experimen- for limiting the role of extension, extension ting to determine which combinations are op- activities might become so dispersed and out timum for use in production. These costs will of focus that their effectiveness would be imbe converted into a decline in the number of paired. Regardless of whether the problem is farms (for those who used the wrong input related to agriculture or not, extension may be combinations), higher food costs, and reduced called upon to solve it. It is not possible for excompetitiveness in international commodity tension to be everything to everybody, particumarkets. larly in times of limited resources.
Substantial challenge is involved in exten- The joint Council has not given sufficient atsion's adjusting to this new role. While in some tention to the role of extension. As a starting States technology and extension are already point for defining that role, it must be rememdeeply involved in the evaluation of new prod- bered that the root of extension is research.
ucts, in other States product evaluation has Similarly, extension is a primary outlet for rebeen primarily a function of experiment sta- search, after an appropriate level of product
tions. In the future, experiment stations will development. Extension is, therefore, delimited likely be doing less of this work, and exten- by the scientific endeavors of the research comsion's responsibilities will correspondingly in- ponents of the agricultural research system, increase. Meeting this increased responsibility cluding both the public and private sector comwill entail a larger specialist staff with mod- ponents.




74 A Special Report for the 19M Farm Bill
The core mission of extension is, therefore, lic recognition and support. Considerable care one of developing, extending, and bringing must be taken not to foster such duplication about the use of research-based knowledge. of efforts. The core source of that knowledge is the agri- The 1890 land grant universities have evolved cultural experiment station. Viewing extension into institutions that have a comparative advanin a broader context than this runs the serious tage in studying problems that are unique to risk of reducing its overall effectiveness. This small farmers-particularly those that depend is particularly the case when it is recognized on agriculture for a majority of their income. that extension is likely to play an increasing Satisfactory performance of this function rerole in filling a portion of the gap between basic quires a recognition of this role and a closer research and extension, i.e., applied research. working relationship with the 1862 land grant Another dimension of this role problem involves the tendency for the experiment station university in both research and extension proto become more involved in extension-type grams (Lovvorn, 1984). educational programs as a way of gaining pubIMPLICATIONS FOR THE 1985 FARM BILL
* Granting of property rights and exclusive There is a need to address the following exlicensing of technological discoveries have tension issues:
brought the unique nature or "social con- -clientele and mission of extension,
tract" of land grant universities into ques- -organizational structure of the extension
tion. These new rules may change the dis- system,
tribution of benefits from land grant research -role of Federal extension service, and
discoveries. These changes warrant direct -need for extension to conduct applied republic discussion and consideration by pol- search.
icymakers. Research and extension policy is a critical
o Progress of the agricultural research com- component of agricultural structure policy.
munity in establishing priorities is more ad- For moderate farms to be able to compete, vanced than that of extension. for example, ways must be developed for
making new technologies more available to
* The agricultural research system has ad-. moderate farms and for providing training
ousted the allocation of resources in recog- in the use of these technologies.
nition of potential advances evolving from biotechnology and information technology.
Similar progress is not apparent in extension.




Appendix A.-Summary Analysis Tables
for Crop Farms
4
Table A-i.-Comparison of Selected Farm Commodity and Income Tax Policy Scenarios on Representative Corn-Soybean Farms in East Central Illinois
Alternative Scenariosa
Criteria I II III IV V VI VII VIII
Moderate size (640 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 703.0 743.0 703.0 568.0 593.0 669.0 563.0 719.0
Ending farm size (acres) ..................... 902.0 904.0 902.0 824.0 837.0 907.0 834.0 893.0
Annual net farm income ($1,000) .............. 23.2 29.9 23.2 10.2 11.8 19.1 11.1 19.0
Annual government payment ($1,000) .......... 11.6 9.8 11.6 0.7 0.7 8.6 0.0 11.7
Large size (982 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 975.0 970.0 991.0 645.0 693.0 801.0 622.0 852.0
Ending farm size (acres) ..................... 1,374.0 1,364.0 1,388.0 1,139.0 1,180.0 1,355.0 1,134.0 1,217.0
Annual net farm income ($1,000) .............. 24.3 22.9 26.4 14.3 5.2 8.0 1.1 24.9
Annual government payment ($1,000) .......... 22.6 16.6 24.3 1.0 1.0 7.8 0.0 21.9
Very large size (1,630 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 1,267.0 1,348.0 1,266.0 991.0 1,033.0 1,056.0 1;036.0 1,044.0
Ending farm size (acres) ..................... 1,945.0 1,932.0 1,942.0 1,856.0 1,859.0 1,908.0 1,876.0 1,784.0
Annual net farm income ($1,000) .............. 51.8 62.2 52.4 31.1 35.1 34.7 34.8 54.4
Annual government payment ($1,000) .......... 23.6 19.3 25.3 1.7 1.7 0.0 0.0 23.3
Table A-2.-Comparison of Selected Farm Commodity and Income Tax Policy Scenarios on Representative Irrigated Row Crop Farms in South Central Nebraska
Alternative Scenarios a
Criteria I II II IV V VI VII VIII
Moderate size (672 acres):
Probability of survival ........... ............100.0 100.0 100.0 92.0 100.0 100.0 90.0 100.0
Present value of ending net worth ($1,000)......670.0 736.0 670.0 260.0 476.0 670.0 264.0 628.0
Ending farm size (acres) ..................... 921.0 909.0 921.0 882.0 870.0 921.0 808.0 917.0
Annual net farm income ($1,000) ..............26.8 31.0 26.8 -9.8 10.6 26.8 -11.4 26.8
Annual government payment ($1,000) 17.3 14.5 17.3 1.0 1.0 17.3 0.0 17.9
Large size (920 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 1,349.0 1,377.0 1,369.0 739.0 1,084.0 1,180.0 750.0 1,269.0
Ending farm size (acres) ..................... 1,257.0 1,253.0 1,257.0 1,242.0 1,240.0 1,257.0 1,243.0 1,234.0
Annual net farm income ($1,000) .............. 58.4 60.9 57.4 0.1 35.7 37.4 -0.5 58.9
Annual government payment ($1,000) .......... 24.1 19.3 23.9 1.3 1.3 15.3 0.0 24.4
Very large size (2,085 acres):
Probability of survival .................. .....100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 2,259.0 2,374.0 2,407.0 1,013.0 1,863.0 1,270.0 1,007.0 2,072.0
Ending farm size (acres) ..................... 2,375.0 2,383.0 2,384.0 2,167.0 2,280.0 2,197.0 2,128.0 2,330.0
Annual net farm income ($1,000) .............. 118.6 127.3 134.6 1.3 88.0 10.8 -0.1 112.8
Annual government payment ($1,000) .......... 35.9 31.5 49.6 3.0 3.0 0.0 0.0 35.9
aThe Scenarios are:
(-Continuation of the 1981 Farm Bill and 1983 Federal Income tax provisions.
It,-A 20% Acreage Reduction in 19861992.
IlI -No Farm Program Payment Limitation in 1983-1992.
IV-No Prtce Support and No Deficiency Payment in 1983-1992.
V-No Target Price/Deficiency Payment in 1983-1992.
VI-Tsrget Farm Program Benefits to farms that produce less than $300,000 in program crops.
Vii-No Farm Program in 1983-1992.
Vill-Reduced Income Tax Benefits and the Base Farm Program.
The impact of Price Supports can be derived by subtracting Scenario 5 from Scenario 6.
The impact of Income Supports can be derived by subtracting Scenario 6 from Scenario 1.
The impact of Income Supports with a $50,000 Payment Limitation can be found by subtracting Scenario 6 from Scenario 4.
77




78 A Special Report for the 1985 Farm Bill
Table A.3.-Comparlson of Selected Farm Commodity and Income Tax Policy Scenarios on
Representative Southern Plains Wheat Farms
Alternative Scenarios
Criteria I II I1 IV V VI VII VIII
Moderate size (1,280 acres):
Probability of survival ........................ 100.0 100.0 100.0 76.0 100.0 100.0 48.0 100.0
Present value of ending net worth ($1,000) ..... 803.0 1,032.0 811.0 283.0 426.0 761.0 189.0 710.0
Ending farm size (acres) ..................... 1,901.0 1,955.0 1,901.0 1,565.0 1,648.0 1,910.0 1,478.0 1,757.0
Annual net farm income ($1,000) .............. 2.6 18.3 3.1 -33.6 -21.4 -0.9 -41.6 -8.3
Annual government payment ($1,000) .......... 30.9 31.5 31.6 2.5 2.5 27.7 0.0 29.4
Largo size (1,920 scres):
Probability of survival ........................ 100.0 100.0 100.0 50.0 90.0 96.0 32.0 100.0
Present value of ending net worth ($1,000) ..... 1,028.0 1,359.0 1,117.0 294.0 475.0 696.0 179.0 833.0
Ending farm size (acres) ..................... 2,765.0 2,890.0 2,755.0 2,234.0 2,339.0 2,618.0 2,093.0 2,499.0
Annual net farm income ($1,000) .............. 9.0 28.5 17.3 -52.5 -34.9 -17.6 -67.9 -21.8
Annual government payment ($1,000) .......... 39.0 39.1 44.7 4.2 3.7 16.2 0.0 37.3
Very large size (3,4 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 92.0 100.0
Present value of ending net worth ($1,000) ..... 1,936.0 2,204.0 2,231.0 1,096.0 1,412.0 1,087.0 925.0 1,657.0
Ending farm size (acres) .................... 4,218.0 4,365.0 4,483.0 3,552.0 3,64.0 3,494.0 3,472.0 3,805.0
Annual net farm income ($1,000) .............. 48.9 59.5 78.4 -7.8 15.6 -13.6 -25.1 28.1
Annual government payment ($1,000) .......... 44.2 45.0 76.9 5.8 5.9 0.0 0.0 44.1
Table A-4.-Compsdlson of Selected Farm Commodity and Income Tax Policy Scenarios on Representative General Crop Farms In the Delta of Mississippi
Alternative Scenarios a
Criteria 1 1I 111 IV V VI Vii Vill
Moderate size (1,443 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 1,651.0 1,757.0 1,881.0 1,106.0 1,134.0 1,059.0 1,070.0 1,533.0
Ending farm size (acres) ..................... 2,009.0 2,057.0 2,093.0 1,625.0 1,645.0 1,581.0 1,590.0 1,913.0
Annual net farm income ($1,000) .............. 38.9 92.6 64.6 -14.2 -6.9 -16.3 -17.6 29.9
Annual government payment ($1,000) .......... 48.2 45.2 75.4 1.9 1.9 0.0 0.0 47.9
Large size (3,119 acres):
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 2,940.0 3,280.0 4,418.0 2,482.0 2,537.0 2,433.0 2,454.0 3,139.0
Ending farm size (acres) ..................... 3,327.0 3,340.0 3,877.0 3,119.0 3,135.0 3,119.0 3,119.0 3,135.0
Annual net farm income ($1,000) .............. 38.3 65.1 147.9 -20.6 -8.2 -28.9 -25.1 21.8
Annual government payment ($1,000) .......... 49.9 49.1 160.6 4.7 4.8 0.0 0.0 49.9
Very large sl (6,184 acrare
Probability of survival ........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth ($1,000) ..... 5,450.0 6,117.0 7,728.0 5,135.0 5,175.0 4,964.0 5,079.0 5,902.0
Ending farm size (acres) ............ 6,248.0 6,254.0 6,530.0 6,270.0 6,245.0 6,242.0 6,267.0 6,203.0
Annual net farm Income ($1,000)*....... 41.8 118.2 277.1 -19.7 -0.6 -42.9 -32.4 5.9
Annual government payment ($1,000) .......... 49.9 49.8 277.9 7.9 7.9 0.0 0.0 49.9
=TeScenarios are:
I-continuation of the 1981 Farm Bill and 1963 Federal Income tax provisions.
i-A 20% Acreage Reduction In 1986-1992.
Ill-No Farm Program Payment Limitation in 1983-1992.
V-No Price Support and No Deficiency Payment In 1983-1992.
V-No Target Price/Deficiency Payment In 1983-1992.
VI-Target Farm Program Benefits to farms that produce less than $300,000 In program crops.
VII-No Farm Program In 1963.1992.
Vill-Reduced Income Tax Benefits and the Base Farm Program.
The Impact of Price Supports can be derived by subtracting Scenario 5 from Scenario 6. The Impact of Income Supports can be derived by subtracting Scenario 6 from Scenario 1. The Impact of Income Supports with a $50,000 Payment Limitation can be found by subtracting Scenario 6 from Scenario 4.




App. A-Summary Analysis Tables for Crop Farms 79
Table A-5.-Compardson of Selected Farm Commodity and Income Tax Policy Scenarios on Representative Texas Southern High Plains Cotton Farms
Alternative Scenarios a
Criteria I II III IV V VI VII VIII
Moderate Wi" (1,089 acres):
Probability of survival ........................ 92.0 94.0 94.0 56.0 68.0 92.0 42.0 88.0
Present value of ending net worth ($1,000) ..... 564.0 648.0 601.0 242.0 301.0 564.0 167.0 516.0
Ending farm size (acres) ..................... 1,558.0 1,635.0 1,648.0 1,216.0 1,274.0 1,558.0 1,213.0 1,565.0
Annual net farm income ($1,000) .............. 8.3 13.3 11.9 -28.9 -21.7 8.2 -40.6 -6.0
Annual government payment ($1,000) .......... 26.0 22.2 29.5 1.3 1.1 25.9 0.0 25.8
Large size (3,383 acres):
Probability of survival ........................ 90.0 94.0 94.0 72.0 82.0 86.0 62.0 88.0
Present value of ending net worth ($1,000) ..... 1,412.0 1,697.0 1,853.0 931.0 1,055.0 1,191.0 801.0 1,226.0
Ending farm size (acres) ..................... 4,289.0 4,455.0 4,577.0 3,748.0 3,857,0 3,985.0 3,649.0 3,965.0
Annual net farm income ($1,000) .............. 33.4 53.6 83.3 -14.8 3.6 12.9 -39.7 -7.2
Annual government payment ($1,000) .......... 38.0 35.1 83.3 3.2 3.0 16.8 0.0 37.9
Very large size (5,570 acres):
Probability of survival 94.0 96.0 98.0 92.0 96.0 88.0 78.0 94.0
Present value of ending net worth ($1,000) ..... 3,027.0 3,489.0 4,047.0 2,367.0 2,645.0 2,287.0 2,066.0 2,583.0
Ending farm size (acres) ..................... 6,002.0 6,047.0 6,514.0 5,781.0 5,848.0 5,727.0 5,736.0 5,746.0
Annual net farm income ($1,000) .............. 66.6 100.6 170.6 -3.2 31.0 -13.9 -40.5 -15.6
Annual government payment ($1,000) .......... 40.2 39.1 135.8 4.8 4.6 0.0 0.0 40.4
5iThe Scenarios are:
I-Continuation of the 1981 Farm Bill and 1963 Federal income tax provisions.
II:-A 20% Acreage Reduction In 1986-1992.
Itt-No Farm Program Payment Limitation in 19s.1992.
IV-No Price Support and No Deficiency Payment in 19631992.
V-No Target Price/Deficiency Payment In 19B31992.
Vt-Target Farm Program Benefits to farms that produce less than $300,000 In program crops.
VII-No Farm Program In 1963.1992.
Vltt-Reduced income Tax Benefits and the Base Farm Program.
The impact of Price Supports can be derived by subtracting Scenario 5 from Scenario 6.
The impact of Income Supports can be derived by subtracting Scenario 6 from Scenario 1.
The Impact of Income Supports with a 150,000 Payment Limitation can be found by subtracting Scenario 6 from Scenario 4.
I




80 A Special Report for the 1985 Farm Bill
Table A-6.-Comparison of Selected Financial Bailout Scenarios for Three Representative Corn-Soybean Farms In East Central IllinoisO
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 640-acre Farm 982-acre Farm 1,630-acre Farm
S Probability of survival .......... ,..... 80.0 72.0 84.0 88.0 80.0 90.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) .......................... 271.0 291.0 299.0 579.0 588.0 654.0 822.0 872.0 831.0
Ending farm size (acres) ............. 653.0 689.0 662.0 1,046.0 1,062.0 1,073.0 1,795.0 1,740.0 1,712.0
Annual net farm income ($1,000) ...... -0.9 -3.3 3.8 2.0 -3.5 7.8 30.6 27.9 36.9
Annual government payment ($1,000) .. 8.9 8.9 9.1 19.2 18.9 19.0 23.0 22.8 22.8
Table A-7.-Comparison of Selected Financial Bailout Scenarios for Three Representative Irrigated Row Crop Farms in South Central Nebraska"
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 672-acre Farm 920-acre Farm 2,083-acre Farm
Criteria IX X Xl IX X XI IX X Xi
Probability of survival ............... 96.0 86.0 98.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) .......................... 353.0 334.0 387.0 871.0 876.0 893.0 1685.0 1820.0 1714.0
Ending farm size (acres) ............. 822.0 822.0 854.0 1,195.0 1,146.0 1,205.0 2,399.0 2,392.0 2,421.0
Annual net farm income ($1,000) ...... 5.9 2.9 11.3 22.6 16.7 28.2 58.9 77.2 72.1
Annual government payment ($1,000) .. 16.7 16.8 17.0 23.0 22.6 22.9 36.0 36.0 36.1
Table A-.-Comparison of Selected Financial Bailout Scenarios for Three Representative Southern Plains Wheat Farmsa
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 1,280-acre Farm 1,920-acre Farm 3,200-acre Farm
Criteria IX X X1 IX X Xl IX X Xi
Probability of survival ............... 86.0 98.0 100.0 40.0 70.0 80.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) .......................... 289.0 408.0 383.0 258.0 399.0 406.0 1,248.0 1,373.0 1,348.0
Ending farm size (acres) ............. 1,434.0 1,549.0 1,552.0 1,994.0 2,058.0 2,118.0 3,779.0 3,978.0 3,891.0
Annual net farm income ($1,000) ...... -22.5 -21.2 -14.3 -37.9 -35.1 -24.1 17.1 12.4 27.5
Annual government payment ($1,000) 25.2 26.4 26.8 34.8 35.2 35.6 43.9 44.1 44.0
Table A-9.-Comparison of Selected Financial Bailout Scenarios for Three Representative General Crop Farms in the Delta of Mississippi.
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 1,443-acre Farm 3,119-acre Farm 6,184-acre Farm
Criteria IX X Xl IX X X1 IX X Xl
Probability of survival ............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth
($1,000)........................ 1,563.0 1,656.0 1,545.0 3,237.0 3,431.0 2,968.0 5,259.0 5,840.0 4,990.0
Ending farmsize (acres) ............. 2109.0 2,115.0 2,025.0 3,845.0 4,719.0 3,685.0 6,606.0 7,656.0 6,453.0
Annual net farm income ($1,000) ...... 35.5 29.4 37.7 30.1 20.4 33.8 3.7 -14.8 5.4
Annual government payment ($1,000) 48.4 48.4 48.3 49.9 49.9 49.9 49.9 49.9 49.9
a-rhe Scenarios are:
IX-Continuation of the 1981 Farm Bill and the 1983 Federal tax provisions for a highly leveraged farm.
X-Restructure of debt for a highly leveraged farm.
Xil-Interest rate subsidy (buy-down) in the first two years for a highly leveraged farm.




App. A-Summary Analysis Tables for Crop Farms a 81
Table A-1O-Compartson of Selected Financial Bailout Scenarios for Three Representative Texas Southern High Plains Cotton Farms"
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 1,088-acre Farm 3,383-acre Farm 5,570-acre Farm
Criteria IX X XI IX X Xl IX X XI
Probability of survival ............... 64.0 66.0 72.0 56.0 50.0 60.0 66.0 64.0 66.0
Present value of ending net worth
($1,000) .......................... 304.0 314.0 343.0 604.0 600.0 733.0 1,310.0 1,356.0 1,619.0
Ending farm size (acres) ............. 1,414.0 1,434.0 1,443.0 3,770.0 3,841.0 3,821.0 5,733.0 5,976.0 5,772.0
Annual net farm income ($1,000) ...... -5.4 -6.4 1.3 -9.1 -21.2 6.9 -41.8 -57.3 -6.3
Annual government payment ($1,000) 24.4 24.8 24.7 36.8 36.4 37.2 41.1 41.3 41.6
aThe scenarios are:
tX-Continuation of the 1981 Farm Bill and the 1983 Federal tax provisions for a highly leveraged farm.
X-Restructure of debt for a highly leveraged farm.
XI-lnterest rate subsidy (buy.down in the first two years for a highly leveraged farm.
Table A-11.- Comparison of Selected Policy Scenarios Assuming No New Technology for Three Representative Corn-Soybean Farms In East Central Illinois'
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 640-acre Farm 982-acre Farm 1,630-acre Farm
Criteria XII XIII XIV XII Xll XIV XII XIII XIV
Probability of survival ............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 98.
Present value of ending net worth
($1,000) ......................... 699.0 589.0 561.0 862.0 604.0 540.0 915.0 694.0 672.0
Ending farm size (acres) ............. 902.0 837.0 850.0 1,392.0 1,190.0 1,116.0 1,899.0 1,801.0 1,796.0
Annual net farm income ($1,000) ...... 23.0 11.7 10.8 23.9 3.3 -0.8 25.3 9.8 6.1
Annual government payment ($1,000) .. 11.6 0.7 0.0 22.9 1.0 0.0 22.9 1.7 0.0
Table A-12. -Comparison of Selected Policy Scenarios Assuming No New Technology for Three Representative Irrigated Row Crop Farms in South Central Nebraska'
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 672-acre Farm 920-acre Farm 2,085-acre Farm
Criteria XII XIII XIV XII XII XIV XII XIII XIV
Probability of survival .............. 100.0 100.0 90.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) .......................... 670.0 475.0 263.0 1,230.0 985.0 671.0 1,812.0 1,388.0 680.0
Ending farm size (acres' ............. 921.0 870.0 808.0 1,257.0 1,221.0 1,226.0 2,402.0 2,240.0 2,107.0
Annual net farm income ($1,000) ...... 26.7 10.6 -11.4 53.9 30.3 -2.6 77.5 51.0 -10.9
Annual government payment ($1,000) .. 17.3 0.9 0.0 23.9 1.3 0.0 35.7 3.0 0.0
Table A-13. -Comparison of Selected Policy Scenarios Assuming No New Technology for Three Representative Southern Plains Wheat Farms'
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 1,280-acre Farm 1,920-acre Farm 3,200-acre Farm
Criteria XII XIII XIV XII XIII XIV XII Xlii XIV
Probability of survival ............... 100.0 90.0 32.0 100.0 44.0 10.0 100.0 82.0 28.0
Present value of ending net worth
($1,000) .......................... 726.0 325.0 134.0 780.0 229.0 81.0 1,131.0 562.0 220.0
Ending farm size (acres) ............. 1,859.0 1,632.0 1,430.0 2,605.0 2,304.0 2,048.0 3,699.0 3,542.0 3,322.0
Annual net farm income ($1,000) ...... -1.3 -28.9 -46.8 -10.9 -52.9 -77.1 -2.1 -45.4 -85.8
Annual government payment ($1,000) 30.7 2.5 0.0 38.1 3.9 0.0 43.7 5.9 0.0
'The Scenarios are:
Xll-Continuation of the 1981 Farm Bill and the 1983 Federal tax provisions, assuming no new technology scenario.
XII-No Target Price/Deficiency Payment Program, assuming no new technology scenario.
XlV-Deficiency plus diversion payments and any other government payments received for government loans and storage costs.




82 A Special Report for the 1985 Farm Bill
Table A-14.-Comparlson of Selected Policy Scenarios Assuming No New Technology for Three Representative General Crop Farms in the Delta of Mississippi@
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 1,443-acre Farm 3,119-acre Farm 6,184-acre Farm
Criteria XII XIII XIV XII XIll XIV XII XIII XIV
Probability of survival ............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) .......................... 1,613.0 1,104.0 1,043.0 2,786.0 2,451.0 2,354.0 5,286.0 4,915.0 4,714.0
Ending farm size (acres) ............. 2,006.0 1,638.0 1,587.0 3,343.0 3,148.0 3,119.0 6,322.0 6,277.0 6,261.0
Annual net farm income ($1,000) ...... 38.6 -7.3 -18.3 34.0 -11.9 -29.9 15.1 -27.5 -57.7
Annual government payment ($1,000) .. 48.2 1.9 0.0 49.9 4.8 0.0 49.9 7.9 0.0
Table A.15.- Comparison of Selected Policy Scenarios Assuming No New Technology for Three Representative Texas Southern High Plains Cotton Farmss
Alternative Scenarios for Alternative Scenarios for Alternative Scenarios for 1,088-acre Farm 3,383-acre Farm 5,570-acre Farm
Criteria XII XIII XIV XII XIII XIV XII XIII XIV
Probability of survival ............... 92.0 68.0 42.0 88.0 78.0 60.0 94.0 90.0 76.0
Present value of ending net worth
($1,000) .......................... 552.0 290.0 161.0 1,325.0 966.0 738.0 2,807.0 2,322.0 1,843.0
Ending farm size (acres) ............. 1,590.0 1,280.0 1,206.0 4,273.0 3,818.0 3,633.0 5,960.0 5,816.0 5,724.0
Annual net farm income ($1,000) ...... 7.0 -22.2 -41.0 25.4 -3.6 -45.5 47.0 0.2 -65.9
Annual government payment ($1,000) 26.3 1.1 0.0 37.9 3.0 0.0 40.5 4.8 0.0
aThe Scenarios are:
XII-continuation of the 1981 Farm Bill and the 1983 Federal tax provisions, assuming no new technology scenario.
XlII-No Target Price/Deficiency Payment Program, assuming no new technology scenario.
XIV-Deficiency plus diversion payments and any other government payments received for government loans and storage costs.




App. A-Summary Analysis Tables for Crop Farms o 83
Table A.16.-Comparlson of Selected Policy Table A.18.-Comparson of Selected Policy
Scenarios for a New Entrant on a Representative Scenarios for a New Entrant on a Representative
640 Acre Corn-Soybean Farm In Southern Plains Wheat Farm,
East Central Illinois"
Alternative Scenarios for
Alternative Scenarios for 1,280-acre Farm
640-acre Farm Criteria XV XVI XVII
Criteria XV XVI XVII Probability of survival ....... 2.0 0.0 0.0
Probability of survival ....... 2.0 0.0 4.0 Present value of ending net
Present value of ending net worth ($1,000) ............. 39.0 26.0 45.0
worth ($1,000) ............. 221.0 202.0 197.0 Ending farm size (acres) ..... 1,280.0 1,280.0 1,280.0
Ending farm size (acres) ..... 640.0 640.0 640.0 Annual net farm income Annual net farm income ($1,000) .................. -94.2 -103.2 -121.9
($1,000) .................. -56.9 -61.1 -62.8 Annual government payment
Annual government payment ($1,000) .................. 18.1 7.4 0.0
($1,000) .................. 9.6 6.1 0.0
Table A.1 7.-Comparison of Selected Policy Table A.19.-Comparlson of Selected Policy
Scenarios for a New Entrant on a Representative Scenarios for a New Entrant on a Representative
672 Acre Irrigated Row Crop Farm in 1443 Acre General Crop Farm in
South Central Nebraska" the Delta of Mississippi8
Alternative Scenarios for Alternative Scenarios for
672-acre Farm 1,443-acre Farm
Criteria XV XVI XVII Criteria XV XVI XVIl
Probability of survival ....... 84.0 42.0 6.0 Probability of survival ....... 100.0 76.0 62.0
Present value of ending net Present value of ending net
worth ($1,000) ............. 187.0 106.0 356.0 worth ($1,000) ............. 985.0 395.0 319.0
Ending farm size (acres) ..... 674.0 666.0 672.0 Ending farm size (acres) ..... 1,830.0 1,459.0 1,443.0
Annual net farm income Annual net farm income
($1,000) .................. -19.2 -35.8 -56.6 ($1,000) .................. -18.8 -76.8 -91.3
Annual government payment Annual government payment
($1,000) .................. 14.5 1.2 0.0 ($1,000) .................. 47.3 2.3 0.0
Table A-20.-Compardson of Selected Policy Scenarios for a New Entrant on a Representative Texas Southern High Plains Cotton Farms
Alternative Scenarios for
1,088-acre Farm
Criteria XV XVI XVII
Probability of survival ....... 50.0 16.0 10.0 Present value of ending net
worth ($1,000) ............. 235.0 53.0 41.0
Ending farm size (acres) ..... 1,306.0 1,155.0 1,126.0 Annual net farm income
($1,000) .................. -35.7 -66.5 -84.9
Annual government payment
($1,000) .................. 21.7 2.0 0.0
aThe Scenarios are:
XV-Continuation of the 1981 Farm Bill and the 1983 Federal tax provisions.
XVI-No Target Price/oeficlency Payment Program in 1981-1992. XVII-No Farm Program in 1963-1992.




Appendix 3. Summary Analysis Tables
for Dairy Farms
Table B-1.-Comparison of Selected Commodity Policy, Tax and Technology Scenarios on Representative Dairy Farms in Minnesota'
Alternative Scenarios
Initial
Criteria situation Base I II I1 IV V VI VII VIII
52 cow Minnesota dairy:
Probability of survival ............ NA 70.0 68.0 68.0 38 34.0 70.0 92.0
Present value of ending net worth
($1,000).................. 417.0 224.0 222.0 223.0 157.0 149.0 221.0 314.0
Ending equity ratio (traction) ...... 0.71 0.41 0.41 0.41 0.30 0.29 0.41 0.57
Annual net farm income ($1,000)... NA -27.0 -27 -27.0 -35.0 -36.0 -27.0 -15.0
125 cow Minnesota dairy:
Probability of survival ............ NA 100.0 100.0 100.0 100.0 98.0 100.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) ..................... 969.0 1,012.0 1,019.0 1,012.0 888.0 872.0 965.0 1,111.0 116.0 1,140.0
Ending equity ratio (fraction) ...... 0.76 0.83 0.83 0.82 0.72 0.71 0.79 0.89 0.92 0.91
Annual net farm income ($1,000)... NA 0.0 0.0 0.0 -18.0 -19.0 -9.0 15.0 21.0 44.0
Table B.2.-Comparison of Selected Commodity Policy, Tax and Technology Scenarios on Representative Dairy Farms in the Southwest'
Alternative Scenarios
Initial
Criteria situation Base I II III IV V VI VII VIII
359 cow Arizona dairy:
Probability of survival ............ NA 96.0 86.0 96.0 96.0 92.0 96.0 100.0
Present value of ending net worth
($1,000) ..................... 744.0 1,404.0 1,018.0 1,399.0 1,334.0 1,098.0 1,325.0 1,719.0
Ending equity ratio (fraction) ...... 0.71 0.94 0.84 0194 0.94 0.88 0.94 0.95
Annual net farm income ($1,000)... NA 28.0 -32.0 27.0 13.0 -22.0 31.0 93.0
550 cow California dairy:
Probability of survival ............ NA 96.0 76.0 96.0 84.0 76.0 96.0 98.0
Present value of ending net worth
($1,000) ..................... 1,261.0 1,824.0 1,107.0 1,813.0 1,368.0 1,074.0 1,716.0 2,312.0 -,
Ending equity ratio (fraction) ...... 0.71 0.90 0.68 0.90 0.79 0.67 0.90 0.94
Annual net farm income ($1,000)... NA -29.0 -142.0 -30.0 -101.0 -147.0 -30.0 65.0
1,436 cow California dairy:
Probability of survival ............ NA 96.0 92.0 96.0 94.0 92.0 96.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) ..................... 2,538.0 6,507.0 4,968.0 6,496.0 5,448.0 4,774.0 6,278.0 9,553.0 8,750.0 11,084.0
Ending equity ratio (fraction) ...... 0.69 0.92 0.89 0.92 0.89 0.88 0.92 0.95 .96 0.94
Annual net farm income ($1,000)... NA 375.0 136.0 373.0 211.0 99.0 371.0 798.0 614.0 1,154.0
"The Scenarios are:
Base-Continuation of present policy
I-A 20 percent acreage reduction in 1986-1992-9 percent higher teed costs.
I-No crop program.
I-Fifty cent per cwl. lower milk price.
IV-No dairy price support program
V-Reduce income tax benefit program
VI-Milk supply control program vii-Computer feeding technology.
vili-Bovine growth hormone technology.
84




App. -Summary Analysis Tables for Dairy Farms 85
Table B3.-Comparison of Selected Commodity Policy, Tax and Technology Scenarios on Representative Dairy Farms In Flodda'
Alternative Scenarios
Initial
Criteria situation Base I II III IV V VI VII VIII
350 cow Floda dairy:
Probability of survival ............ NA 98.0 70.0 96.0 82 68.0 92.0 100.0
Present value of ending net worth
($1,000) ..................... 757.0 1,009.0 578.0 1,005.0 933.0 648.0 911.0 1,327.0
Ending equity ratio (fraction) ...... 0.71 0.85 0.57 0.85 0.74 0.59 0.80 0.93
Annual net farm income ($1,000)... NA -8.0 -71.0 -8.0 -17.0 -66.0 -3.0 28.0
600 cow Florida dairy:
Probability of survival ............ NA 100.0 88.0 100.0 98.0 84.0 100.0 100.0
Present value of ending net worth
($1,000) ..................... 1,465.0 2,170.0 1,547,0 2,169.0 2,130,0 1,630.0 1,996.0 2,326.0
Ending equity ratio (fraction) ...... 0.76 0.94 0.81 0.94 0.91 0.78 0.92 0.94
Annual net farm income ($1,000)... NA 33.0 -62.0 32.0 30.0 -46.0 33.0 63.0
1,436 cow Florida dairy:
Probability of survival ............ NA 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Present value of ending net worth
($1,000) ..................... 3,343.0 8,691.0 7,338.0 8,670.0 7,942.0 7,766.0 8,396.0 9,954.0 10,576.0 12,358.0
Ending equity ratio (fraction) ...... 0.76 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95
Annual net farm income ($1,000)... NA 586.0 411.0 585.0 504.0 463.0 582.0 749.0 782.0 1,286.0
aThe Scenarios are:
Base-Continuation of present policy.
I -A 20 percent acreage reductio in i19861992-9 percent higher teed costs.
Il-No crop program.
Ill-Fifty cent per cwt. lower milk price.
IV-No dairy price support program,
V-Reduce income tax benefit program.
VI-Milk supply control program.
VII-computer feeding technology
vIlI-Bovine growth hormone technology




86 A Special Report for the 1985 Farm Bill
Table B.4.--Comparlson of Selected Policy Scenarios on Representative Minnesota Dairy Farms That Have High Debt or Are New Entrants With High Debt
Financial Stress Scenarios8 New Entrant Scenariosb
Initial Initial
Criteria situation IX X Xl situation XII XIII XIV
52 cow Minnesota dairy:
Probability of survival ..................... NA 0.0 0.0 0.0 NA 0.0 0.0 0.0
Present value of ending net worth ($1,000)... 246.0 97.0 93.0 101.0 264.0 138.0 122.0 138.0
Ending equity ratio (fraction) ............... 0.42 0.19 0.19 0.20 0.36 0.21 0.19 0.22
Annual net farm income ($1,000) ............ NA -57.0 -46 -57.0 NA -98.0 -105.0 -98.0
125 cow Minnesota dairy:
Probability of survival ..................... NA 0.0 0.0 0.0 NA 0.0 0.0 0.0
Present value of ending net worth ($1,000)... 554.0 238.0 235.0 235.0 575.0 304.0 298.0 303.0
Ending equity ratio (fraction) ............... 0.44 0.23 0.22 0.22 0.37 0.23 0.22 0.23
Annual net farm income ($1,000) ............ NA -92.0 -73.0 -94.0 NA -147.0 -163.0 -147.0
Table B.5.-Comparison of Selected Policy Scenarios on Representative Florida and Arizona Dairy Farms That Have High Debt or Are New Entrants With High Debt
Financial Stress Scenarios" New Entrant Scenariosb
Initial Initial
Criteria situation IX X XI situation XII XIlII XIV
350 cow Florida dairy:
Probability of survival ..................... NA 26.0 42.0 26.0 NA 22.0 12.0 2.0
Present value of ending net worth ($1,000)... 466.0 334.0 391.0 337.0 527.0 345.0 165.0 180.0
Ending equity ratio (fraction) ............... 0.44 0.35 0.40 0.35 0.41 0.32 0.15 0.17
Annual net farm income ($1,000) ............ NA -101.0 -78.00 -101.0 NA -174.0 -245.0 -230.0
359 cow Arizona dairy.
Probability of survivalS NA 66.0 70.0 66.0 NA 60.0 38.0 24,0
Present value of ending net worth ($1,000)... 471.0 760.0 840.0 763.0 528.0 717.0 372.0 262.0
Ending equity ratio (fraction) ............... 0.45 0.64 0.68 0.63 0.42 0.58 0.33 0.27
Annual net farm income ($1,000) ............ NA -59.0 -35.0 -60.0 NA -102.0 -182.0 -194.0
aThe financial scenarios are:
IX-continuation of present dairy policy and assuming high debt.
X-Subsidize interest rate so effective rate on all loans is 8 percent.
XI-Restructure debt.
bThe new entrant scenarios are:
Xi-Base Policy and new entrant.
XII-New entrant and no price support for dairy products.
XIV-New entrant and a 9-percent increase In feed costs.




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Office of Technology Assessment
The Office of Technology Assessment (OTA) was created in 1972 as an analytical arm of Congress. OTA's basic function is to help legislative policymakers anticipate and plan for the consequences of technological changes and to examine the many ways, expected and unexpected, in which technology affects people's lives. The assessment of technology calls for exploration of the physical, biological, economic.
social, and political impacts that can result from applications of scientific knowledge. OTA provides Congress with independent and timely information about the potential effects-both beneficial and harmful-of
technological applications.
Requests for studies are made by chairmen of standing committees of the House of Representatives or Senate; by the Technology Assessment Board, the governing body of OTA; or by the Director of OTA
in consultation with the Board.
The Technology Assessment Board is composed of six members of the House, six members of the Senate, and the OTA Director, who is
a nonvoting member.
OTA has studies under way in nine program areas: energy and materials; industry, technology, and employment: international security and commerce; biological applications; food and renewable resources: health; communication and information technologies; oceans and
environment; and science, transportation, and innovation.
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