Another Revolution in U.S. Farming?
A Summary Analysis of the Structure of U.S. Farming
U.S. Department of Agriculture Economics, Statistics, and Cooperatives Service Agriculture Information Bulletin No. 433
ANOTHER REVOLUTION IN U.S. FARMING? A SUMMARY ANALYSIS OF THE STRUCTURE OF U.S. FARMING. National Economics Division; Economics, Statistics, and Cooperatives Service; U.S. Department of Agriculture. Agriculture Information Bulletin No. 433
Farming in the United States is undergoing dramatic changes. There is a transformation in the ownership, organization, management, and size of farms, use of capital goods, and risks in farming.
These changes relate closely to inflation, nonfarm employment opportunities, new technologies, the availability of credit, tax regulations, and support of farm prices--and in some cases, decisions made in other countries.
How Americans deal with these changes is important to the wealthy, the poor, farm and ranch operators, food processors and distributors, and consumers. The eventual social, economic, and political responses to these issues will affect the distribution of income and wealth and the economic growth of the Nation.
This summary analysis of the structure of U.S. farming previews the new 450-page book titled: Another Revolution in U.S. Farming? The book describes how U.S. production of livestock and crops is organized and managed; why it is that way; and how resources are likely to be organized and managed in the future, why, and with what results.
To get your copy, send the coupon on the inside back cover to: ESCS Publications, Room 0054-S, U.S. Department of Agriculture, Washington, D.C. 20250.
Washington, D.C. 20250 January 1980
Another Revolution in U.S. Farming?
A Summary Analysis of the Structure
of U.S. Farming
A NATIONAL OVERVIEW
U.S. farming is changing dramatically and rapidly. Farms are fewer and larger, and production is concentrated among large operators. The largest 50,000 farms are fewer than 2 percent of the total ... but they account for more than one-third of all farm sales.
Great heterogeneity in terms of size, ownership, and products continues, with owner-operated farms still the dominant tenure arrangement. However, the relative importance of the number of arrangements in which some land is owned and some is rented has increased significantly. And the corporate form of ownership has become more common.
Dramatic shifts in the mix and productivity of resources used in farming have been key aspects of the transformation. The substitution of capital goods incorporating new and different technologies for labor and land has been a prominent feature of this change. However, incentives to substitute capital inputs for labor have been lessened in recent years as price increases for land and capital goods have been greater than price increases for labor.
Significant changes in the distribution of income and wealth among farm people and substantial adjustments in the distribution of wealth among Americans have accompanied the increasing concentration of farming into larger units. Increases in farm income and wealth of landowners have given rise to higher returns on investments in farming over time in relation to returns on common stock of U.S. industry.
Many forces have affected the way U.S. farms are organized and managed. Seven, however, are especially important. They are:
" Increases in farm product exports.
" Availability of capital-intensive new technologies.
" Nonfarm employment opportunities.
" Availability of institutional credit for the purchase of land and
" Commodity programs supporting farm product prices.
" Tax rules applicable to incomes and estates.
Inflation increases: (1) the wealth of those who own land, (2) demand for land, and (3) input prices. And it strengthens the relative economic position of the wealthier and higher income people in buying land. Through these effects, inflation -compared with stable prices-leads to fewer farms and greater concentration of production, incomes, and wealth among those associated with the larger farms.
Exports were important to the: (1) sharp increase in farm earnings in the 1970's, (2) opportunity to realize politically acceptable prices and farm income with only modest restraints on production, and (3) relatively strong markets for soybeans and corn. Aside from the substantial effects of the higher incomes and wealth on the organization of U.S. farming, these developments led to greater specialization in the production of grain and soybeans in the Corn Belt.
One of the major results of new technologies used in farming has been to facilitate efforts by some individuals to control larger amounts of production resources. It is this control over a large amount of production resources (on large farms and ranches) that affords the opportunity to realize increased incomes and wealth. In crop production, the adoption of modern machinery means production systems that have extremely high unit costs at small volumes of production and low costs at large volumes. Similar production functions are associated with large-scale poultry, beef, drylot dairy, and confinement hog feeding units. The increased use of capitalintensive technologies in U.S. farming has meant decreased labor requirements.
The substitution of capital goods and land for labor has been facilitated greatly by the opportunity for farm people to migrate to the cities of our country and be better off than if they had stayed in rural areas.
A prominent feature of the transformation of U.S. farming has been the increased availability of institutional credit for purchases of farm real estate and capital goods. The rules applied by lenders in responding to demands for credit and for servicing loans have a substantial influence on who survives in farming. But probably of greater importance is the way economic forces associated with inflation affect potential borrowers differently, and thereby determine who obtains credit to buy land. People with sources of money other than the land being purchased have a clear competitive edge over people w without such alternate sources.
U.S. commodity programs have accelerated the shift to large farms by supporting commodity prices and increasing the chances of significant price increases. In this way, commodity programs have enhanced the: (1) confidence of people aggressively willing to accumulate land and/or invest in capital goods that facilitate largescale production of commodities, and (2) willingness of lenders to extend credit to these kinds of people. Modifications of commodity
programs so there are greater risks of commodity price declines would discourage increased farm size and product specialization, and make farm resources less attractive as investment opportunities.
Several rules for income and estate taxes have a significant effect on farming. In total, they increase the attractiveness of owning farm assets and lead to: (1) larger investments by nonfarm people in farm assets, (2) larger farms owned and/or operated by those farmers who are able to exploit tax opportunities, and (3) more corporate farms.
The effects of any of these forces are influenced by the presence of other forces. For example, the full effects of increased farm exports on U.S. farming would have been significantly different if U.S. income tax rules had not allowed cash accounting by farmers and tax credits for investments. And the effect of inflation combined with increased availability of credit is significantly different than if either of these forces had acted without the other.
The sustained synergistic effects of the seven major forces suggest that in the future the United States will experience:
" Further declines in the number of farms, but at rates substantially less than in the 1950's and 1960's.
" Increasing concentration of production among the largest producers.
" Strong pressures for increased separation of ownership and use
Inflation, energy prices, and changes in tax rules have changed the prospective character and degree of influence of the major forces affecting farming. Both inflation and the changes in tax rules reinforce the trends toward fewer and larger farms and are likely to accelerate the separation of ownership and use of resources.
Prospective higher energy prices inject substantial uncertainties for the future organization of U.S. farming. The higher energy prices are bound to affect the mix of resources used in farming. There will be increased economic incentives to use energy-efficient systems of production, but the eventual effect on how U.S. production of livestock and crops is organized and managed is highly uncertain.
Regardless of the eventual scenario and whether the changes are described realistically as developments, transformation, or a "revolution," government policies and programs will influence and be challenged by the events.
In rare cases, new programs may be developed; in a few other situations, old programs may be discarded. The more likely outcome is that the objectives of individual programs and related policies which guide their implementation will be challenged and may be found wanting.
Policies and programs will be under increasing pressure to discriminate among recipients to dampen the potential regressiveness of their benefits. Consideration may be given to focusing on income prob3
lems of farmers on an individual need basis-an approach similar to the way our society relates to income problems of people who are not farmers. In this context, incomes from both farm and nonfarm activities would be considered. In turn, criteria used in deciding upon implementation of traditional farm-related programs, such as credit programs, would give central emphasis to general economic and social objectives of the country, such as price stability, employment, and balance of trade.
Thus, changes in the way programs are implemented may be as dramatic as changes in farming-and equally revolutionary.
Some of the most important aspects of and extensive changes related to the transformation of U.S. farming involve livestock production -especially cattle feeding, poultry and egg production, and hog raising. Changes in cattle raising, as distinct from cattle feeding, are considerably less. Changes in dairying are somewhat less, but an important question is whether the large dairy operations of up to 10,000 cows will be replicated in other parts of the country.
Cattle feeding and poultry and egg production have experienced phenomenal adjustments in the United States. Today, one-half of the cattle fed in this country are fed in 422 feedlots averaging over 30,000 head per year. In 1974, slightly more than 5,000 farms, each with 20,000 birds or more, accounted for nearly 70 percent of U.S. egg production. Sixteen to 17,000 farms, each selling 60,000 or more broilers, accounted for 90 percent of production.
The hog industry also has been experiencing significant changes, but the adjustments have not advanced as far as they have for beef feeding and poultry and eggs. The changes have accelerated, however. In 1974, 10,000 farms accounted for one-fourth of all hog sales. There are now at least 15 to 20 firms with annual marketing of 50,000 to 200,000 head. If these are successful, the number of such firms will increase.
Two-thirds of U.S. beef production come from cattle raising activities and dairy cattle. There is some concentration of cattle raising, but the changes have been much more limited than for hogs, poultry, or eggs. In 1974, farms and ranches with 200 and more beef cows accounted for 3 percent of farms and ranches with beef cows and 28 percent of the beef cows in the United States. Future changes are expected to occur slowly.
Dairying has become a specialized farm activity of commercial farming. The number of commercial dairy farms now is about 200,000, one-third the number in 1950. While adjustments in dairying have been much more limited than in some of the other
livestock areas, large-scale production units are being operated successfully in California and Arizona-and a big question is whether their number will increase.
Cattle feeding has shifted away from small feedlots to very large commercial feedlot operations which utilize industrialized approaches to management, financing, and marketing. As a result, half the cattle fed in this country are fed in 422 feedlots averaging over 30,000 head per year. The other half are fed in more than 130,000 feedlots averaging 90 head per year.
Cattle feeding has increased in importance. But fed beef is still only one-third of all beef produced in the United States. The rest comes from cattle raising activities and dairy cattle.
The South has led all regions in growth of cattle raising since 1950 and has more cows than any other region. The average size of beef cow herds is small-40 head. And there is a large number of farms with beef cows-in 1974, over I million. At the same time, there is some concentration of production. In 1964, farms and ranches with 200 and more beef cows accounted for I percent of farms and ranches with beef cows and 24 percent of the beef cows in the United States. The respective percentages were 3 percent and 28 percent in 1974.
Further changes are expected in cattle feeding. However, the size of the larger feedlots may not increase much. The more dramatic changes in the coming years likely will involve changes in ownership and organizational arrangements which could facilitate higher utilization rates, lower production costs, and better production control.
Depletion of irrigation water in the Southern Plains and higher energy costs create great uncertainty about the continual concentration of beef feeding lots in this area.
In contrast to beef feeding, changes in cattle raising will occur slowly.
Changes in dairying also have been substantial. Milk production, which once was almost universal on farms in the United States, has become a specialized form of commercial farming. Dairying to produce milk for home use has disappeared.
The number of commercial dairy farms today is about 200,000, one-third the number in 1950. They average over 50 cows per dairy farm. U.S. production continues to be concentrated in the Northeast (20 percent) and the North-Central (40 percent) regions. The South and the Southwest each account for about 13 percent.
Technological advances have been paramount in causing changes in dairy farming. These advances have been the principal reason why total farm labor requirements for dairying are now no more than one-fifth of the requirements in 1960. The most dramatic changes in dairying are illustrated by the large-scale drylot dairy operations in California, Arizona, and Florida-with herds of as many as 10,000 cows. The size question is closely related to technology and mechanization. But it also involves attitudes of operators and availability of credit. Obvious questions are: Why have producers in California, Arizona, and Florida found it profitable to organize dairying into drylot enterprises involving as many as 10,000 cows, while producers in the Northeast and Lake States have not developed enterprises of comparable size? Will entrepreneurs develop 5,000- to 10,000-cow dairies in the Northeast and Lake States? Or might such dairies develop in other regions in association with acceptance of newer techniques of product handling, such as reconstitution and sterilization?
Poultry and Eggs
Commercial poultry farms are large. Relatively few of these very large farms produce the bulk of poultry and egg supplies. In 1974, slightly more than 5,000 farms, each with 20,000 birds or more, accounted for nearly 70 percent of U.S. egg production. Sixteen to 17,000 farms, each selling 60,000 or more broilers, accounted for 90 percent of production. Slightly more than 5,000 farms, each raising 3,200 or more turkeys, accounted for 90 percent of production.
Today's poultry and egg industries involve an extensive network of linkages among production units and input-supplying and marketing functions. Coordinating systems cover virtually all commercial broiler production and four-fifths or more of all egg and turkey production. In these systems, much production is under contract to marketing firms or is only one phase within vertically integrated firms.
Extensive coordination of production, input-supplying, and marketing are likely to continue in the future. Further growth of typical production unit sizes is expected. The number of farms producing eggs may decline the most. Little change is expected in numbers of farms producing broilers and turkeys.
Changes in the hog industry have been especially rapid in the last 10 to 15 years. Total annual production of pork has varied between 12 billion and 15 billion pounds since 1950, when pork provided half the national supply of red meat. Now it provides only a third.
Hog production remains farm-based. Investment opportunities and the importance of corn for feed have kept it that way, but the tie of hog production to land is no longer essential. Advances in technology have permitted hogs to be produced successfully without pasture. Hogs now are produced year-round in low-labor, capital-intensive systems conducive to large-scale production.
The number of hog producers has decreased rapidly. In 1950, there weie over 2 million-in 1974, less than 500,000. Size of enterprise has increased accordingly. In 1974, 10,000 farms accounted for one-fourth of hog sales. Producers selling 1,000 or more hogs annually now account for about 40 percent of total production, compared with only 7 percent in 1964. Producers selling 5,000 head or more have at least a sixth of the market. And their operations are growing rapidly.
Lack of necessary managerial abilities and skilled labor and risks of .-disease have thwarted the successful establishment of extremely large hog production units in years past. But there are at least 15 to 20 firms now in the United States with annual marketing of 50,000 to 200,000 head. Their experience will largely determine the proliferation of other operations of similar size.
Technological changes, credit availabilities, public policies, economies of size, and inflation have been important forces stimulating changes in recent years. These same forces are expected to continue to influence the hog industry in the future and likely will lead to continuation of trends, unless strong countervailing forces develop.
REGIONAL CONTRASTS IN FARMING
There are similarities and significant differences in the transformation of farming among the U.S. regions. All regions have experienced declines in farm numbers and corresponding increases in farm size.
Several forces have been pervasive in influencing farming and how farms are organized and managed. Technology, nonfarm employment opportunities, credit availability, tax rules, and inflation have had impacts, albeit somewhat differently in each of the regions. Other forces have been important in different regions.
Forces important in the Northeast are: (1) limited amounts of highly productive land and a general division of most land into small parcels hampering the aggregation of large tracts for farm purposes,
(2) government dairy programs and cooperative activities influencing the profitability of dairying and the way products are marketed, and
(3) low transportation costs enabling producers in other regions to compete with Northeast producers.
Significant forces in the North-Central region are: (1) increased exports stimulating demands for corn and soybeans and thereby sharply higher farm earnings, (2) commodity programs mitigating the risks of lower commodity prices and increasing the chances of
significant price increases, and (3) the original approach in settling the Northwest Territory combined with the contiguous nature of highly productive soils facilitating consolidation of land resources.
Major forces in the South, in addition to those common to each of the regions, are: (1) the flat terrain of the Delta facilitating farm enlargement, and (2) hilly terrain such as in the Piedmont retarding consolidation of resources into larger farms.
In the Great Plains, important forces are: (1) inadequate rainfall and, in turn, irrigation in some areas and extensive areas of grassland in others affecting types of farming and related investment requirements, (2) increased exports, especially of wheat, making it possible to relax acreage limitations, and (3) abundant supplies of feed grains and feeder cattle facilitating the development of large feedlots. These forces have combined with others, especially capital goods incorporated in new technologies and commodity programs, to influence farmer decisions in organizing and managing farm resources.
In the Southwest, numerous forces, many of them associated with the generally and climate of the region and the prevalence of irrigation, have given rise to large-scale and diverse farming.
Forces especially important in the Northwest are: (1) water resource policies, (2) Federal policies related to labor, (3) distances to major markets, and (4) urbanization with population growth. These forces have interacted with others, especially availability of new technologies and Federal commodity programs, to give rise to farming involving (1) significant increases in irrigation, (2) decreases in farm numbers, (3) consolidation of resources into larger farms, and (4) linking of production of individual farms to a growing food processing industry.
In coming years, decisions by farm operators and other owners of resources employed in farming will be affected by continuation of the many forces determining these trends of the past. However, some of the forces may be changing in significant ways, and there are new uncertainties. Changes in energy prices create great uncertainty. The terms of trade among factors of production are changing and will encourage farmers to conserve land and capital goods (including associated energy) relative to labor. Uncertainty is especially great among farmers depending on irrigation. Energy is important to irrigation. Areas, such as the Texas High Plains, which depend on ground water for irrigation may confront pervasive adjustments from irrigation to dryland farming as available water becomes more limited. The possible application of size limitations on farms receiving water from federally funded projects and possible modification of the amount of public subsidy'to agricultural users of water by market pricing of water, create other uncertainties in the West.
Unionization of labor and possible restraints on publicly supported mechanization research, stimulated by public concerns about
effects of technological change on labor displacement, also may be important to farming, especially in the Southwest.
While there is great uncertainty, trends indicate a slowing of the decline in the number of small farms, a further decrease in the number of middle-size farms, and an increase in the number of large farms. Public debate in the 1980's likely will focus on the increased concentration of production among larger farms and the everdecreasing marketing opportunities for small farmers. But these issues may be of secondary importance to another related issue-the separation of ownership and use of resources. This separation may increase, especially with respect to land. The substantial value of even moderate-size farms makes intergenerational transfer of resources to a single child extremely difficult, even if tax rules permit avoidance of large tax liabilities at the time of such transfers.
Thus, ownership of individual land parcels in the next two decades will involve multiple ownership by descendants of those who experienced the capital gains of the 1970's. This, in itself, may involve separation of ownership and use of land. Some children not farming will want to sell their interests, but family people may not be able to buy and potential buyers may not be farm operators. In fact, those family members farming likely will prefer that sales be made to people willing to rent the land to them.
The magnitude of these developments probably will be much greater than likely sales to non-Americans. However, the characteristics of the operators and the resulting organization and management of farms may not be greatly different.
UNITED STATES DEPARTMENT OF AGRICULTURE POSTAGE AND FEES PAID WASHINGTON,. D.C. 20250 U.S. DEPARTMENT OF
AGRICULTURE AGR 101