• TABLE OF CONTENTS
HIDE
 Front Cover
 Abstract
 Foreword
 Table of Contents
 Summary
 Introduction
 Trends in selected structural...
 Alternative marketing approaches...
 Commodity program impacts on the...
 Structural changes in the cattle-feeding...
 Reference






Group Title: Second annual report to the Congress
Title: Status of the family farm
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Permanent Link: http://ufdc.ufl.edu/UF00056214/00001
 Material Information
Title: Status of the family farm annual report to the Congress
Series Title: Agricultural economic report no. 434
Physical Description: : ill. ; 26 cm.
Language: English
Creator: United States -- Dept. of Agriculture. -- National Economics Division
Publisher: Dept. of Agriculture, Economics, Statistics, and Cooperatives Service for sale by the Supt. of Docs., U.S. Govt. Print. Off.
Place of Publication: Washington
Frequency: annual
regular
Edition: [Dept. ed.]
 Subjects
Subject: Family farms -- Periodicals -- United States   ( lcsh )
Genre: federal government publication   ( marcgt )
 Notes
Dates or Sequential Designation: 1978-
General Note: 2d, 1979.
General Note: Issued also as a Committee Print.
Funding: Electronic resources created as part of a prototype UF Institutional Repository and Faculty Papers project by the University of Florida.
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Bibliographic ID: UF00056214
Volume ID: VID00001
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Holding Location: University of Florida
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Resource Identifier: aleph - 001213745
oclc - 05919143
notis - AFW4027

Table of Contents
    Front Cover
        Front Cover
    Abstract
        Abstract
    Foreword
        Page i
    Table of Contents
        Page ii
    Summary
        Page iii
    Introduction
        Page 1
    Trends in selected structural characteristics
        Page 1
        Farm numbers and sizes
            Page 2
            Page 3
            Page 4
            Page 5
        Operator entry and exit
            Page 6
        Form of organization
            Page 7
            Page 8
    Alternative marketing approaches for farmers
        Page 9
        Forward contracting
            Page 10
            Page 11
            Page 12
            Page 13
            Page 14
            Page 15
            Page 16
            Page 17
            Page 18
        Farmer-to-consumer direct marketing
            Page 19
            Page 20
            Page 21
            Page 22
    Commodity program impacts on the farm sector
        Page 23
        Commodity programs
            Page 24
            Page 25
        Participation
            Page 26
            Page 27
            Page 28
            Page 29
            Page 30
            Page 31
        Distribution of program benefits
            Page 32
            Page 33
            Page 34
            Page 35
            Page 36
        Impacts of the payment limitation - Market-related impacts
            Page 37
    Structural changes in the cattle-feeding industry
        Page 38
        Page 39
        Page 40
        Characteristics of feedlot operations
            Page 41
            Page 42
            Page 43
            Page 44
        Factors causing structural changes in cattle feeding
            Page 45
            Page 46
        Growth of cattle feeding in the southern plains
            Page 47
            Page 48
            Page 49
    Reference
        Page 50
        Page 51
Full Text

Status of the
Family Farm
Second Annual Report
to the Congress









STATUS OF THE FAMILY FARM: Second Annual Report to the Congress. National Economics
Division; Economics, Statistics, and Cooperatives Service; U.S. Department of
Agriculture. Agricultural Economic Report No. 434.






ABSTRACT


Farm production and sales are becoming more concentrated; 125,000 farms accounted
for half of all farms sales in 1974, which required 205,000 farms a decade before.
The average age of farm operators steadily increased from 48.7 years in 1945 to 51.7
years in 1974, as fewer younger farmers entered farming than older operators retired
or sold out. Changes in the relationship between the farm and marketing sectors
forced farmers to consider forward contracting and farmer-to-consumer direct
marketing. About $2 billion were disbursed in the 1978 farm programs, but most of the
benefits went to the larger farms.

Keywords: Family farm, Farm structure, Farm programs, Agricultural markets, Forward
marketing, Direct marketing, Cattle feeding.


Washington, D.C. 20250


September 1979







FOREWORD


The Food and Agriculture Act of 1977 directs the Secretary of Agriculture to
report annually on the current situation and trends for family and nonfamily farming
operations. The reports are to analyze the effect of Federal policies on the farm
sector and provide other information relevant to legislative and policy decisions
directed toward promoting a family-farm system of agriculture.

This is the second annual report. It does not repeat information in the first
report, but presents new information and analysis augmenting it.

The first report described the structural characteristics of the farm sector,
including major trends and the underlying forces. It delineated the definitional and
conceptual problems and identified data and information deficiencies in treating
family farms in a policy context. A comprehensive research agenda was suggested,
including research viewed as essential to Congress in considering future legislative
and policy decisions relevant to family farms and the structure of the farm sector.

There has been a revival of interest in the structure of agriculture (and family
farms) since the first report was prepared a year ago. There is a growing recognition
of the dynamics of the farming system and increasing concern about whether many of the
rapidly occurring changes are desirable. There is also a growing awareness that the
current economic and social problems of the agricultural sector are different from
those that have been the focus of public policy for many years. A general agreement
on the nature of the problems, let alone the appropriate solutions, has yet to emerge.

The U.S. Department of Agriculture, over the past year, has been addressing the
farm-sector issues in several contexts. Secretary Bergland, in a major policy speech
early in the year, elaborated his concerns about the future directions of agriculture.
He encouraged a broad public dialogue to examine the structure of agriculture and
whether policy changes should be considered to influence that structure. He proposed
that this national dialogue attempt to delineate the problems and move toward
solutions.

Events of the past year underscore the need for additional information on all
aspects of the structure and organization of agriculture, including family farms.
This report carries results of some research further treating these issues. Other
research efforts are underway in the Department; some to be completed soon, while
others are of longer duration.

This report was prepared under the direction of Alan Walter. Economists
primarily responsible for preparing the material are George Coffman, Donn Reimund,
William Lin, and J. Rod Martin. Others who contributed as reviewers or consultants
include J. B. Penn, John E. Lee, Jr., Jim Johnson, Hal Linstrom, R. Larry Deaton, Pete
Henderson, Dick Benjamin, and Ben Blankenship. Secretarial assistance was provided by
Gloria D. Robinson and Rhonda M. Coles.










KENNETH R. FARRELL
Administrator











CONTENTS

Page

Summary ........................................................................ iii

Introduction ................................................................... 1

Trends in Selected Structural Characteristics .................................. 1
Farm Numbers and Sizes ....................................................... 2
Operator Entry and Exit ...................................................... 6
Form of Organization ......................................................... 7

Alternative Marketing Approaches for Farmers ................................... 9
Forward Contracting ..................................................... ... 10
Farmer-to-Consumer Direct Marketing .......................................... 19

Commodity Program Impacts on the Farm Sector ................................... 23
Commodity Programs ................................................ ....... 24
Participation ............................ ........ ...... .. .. ......... 26
Distribution of Program Benefits ............................................. 32
Impacts of the Payment Limitation ............................................ 37
Market-Related Impacts ....................................................... 37

Structural Changes in the Cattle-Feeding Industry .............................. 38
Characteristics of Feedlot Operations ........................................ 41
Factors Causing Structural Changes in Cattle Feeding ......................... 45
Growth of Cattle Feeding in the Southern Plains .............................. 47

References ................................... ......... ........ ..... ....... 50














SUMMARY


The structure of the U.S. farm sector is changing. Farm numbers are declining,
farm sizes are increasing, and farm production and sales are becoming more concen-
trated; 125,000 farms accounted for half of all farm sales in 1974, which required
205,000 farms a decade earlier.

The average age of farm operators steadily increased from 48.7 years in 1945 to
51.7 years in 1974. Only slightly more than half the older persons leaving farming
for retirement or other reasons between 1964 and 1974 were replaced by young farmers.
A net of 930,000 farmers who were 55 years of age or older in 1964 had left farming by
the time the 1974 Census of Agriculture was taken, while only 475,000 persons under 35
had begun farming.

Partnerships and corporations accounted for only 10 percent of farms in 1974, but
being larger they sold nearly a third of all farm products and farmed a fourth of the
land. Corporations comprised a very small number of farms, but they accounted for 18
percent of the farm products sold, an expansion from their 14-percent share in 1969.

Changes in the structure and organization of both the farm and the marketing
sectors since the fifties have altered the relationship between them. Both sectors
have become larger and fewer in number. Country buying stations and assembly point
markets have dwindled as both large farmers and buyers have chosen to bypass these
traditional farm markets in favor of more direct-marketing methods.

The 1978 farm program increased net returns to participating farmers, but the
benefits favored larger producers because payments were related to individual farm
size and acreages planted. About $2 billion were disbursed in program payments, the
largest amount since 1973. Almost half of the payments went to only 10 percent of the
program participants, those with the largest farms. In contrast, 50 percent of the
farms--those with the smaller units--received only 10 percent of the payments. Higher
commodity prices as a result of acreage controls increased returns by about another
$900 million.

The cattle-feeding industry typifies the evolution that has taken place in U.S.
agriculture. Over 61 percent of the fed cattle marketed in 1964 were from 223,000
feedlots with a capacity of less than 1,000 head. Small-feedlot numbers decreased to
130,000 and accounted for less than a third of the fed cattle marketed in 1977.










Status of the Family Farm:


Second Annual Report to the Congress




INTRODUCTION


The structure of the U.S. farm sector continues to change. Farm numbers are
declining and farm sizes are increasing. Escalating capital requirements are pre-
senting ever greater barriers to new entries into farming. Fewer younger people are
entering farming than older operators are leaving for retirement or other reasons.
Changes are requiring farmers--particularly small farmers--to consider alternative
marketing approaches. Government farm programs are increasing net returns to partici-
pating farmers, but a large share of program benefits go to large producers because
payments are related to individual farm size and acreages planted.

This report describes the structural characteristics of the farm sector, analyzes
major trends and underlying forces, and discusses why the changes are occurring and
where they may lead. Data used in this study were derived from a variety of private,
university, and Government sources, including the Censuses of Agriculture and Popula-
tion (31, 32, 33). 1/



TRENDS IN SELECTED STRUCTURAL CHARACTERISTICS


Forces that provide incentives for the moderate to larger size farms to grow
further are bringing about structural changes in the farming sector. The number and
size of farms, the form in which farm businesses are organized, and the changing pat-
terns of entry into and exit from farming are among the more commonly quoted manifes-
tations of structural change.

Farm structures have evolved over several decades, marked by declining numbers of
farms. Farm size has increased, with production concentrated on fewer farms. The
average age of farm operators has increased as fewer people under 35 have entered
farming than older operators have left for retirement or other reasons. Many of those
under 35 who take up farming do so as part-time operators of small farms, with their
primary income from nonfarm sources.

These and other continuing structural changes in the farming sector are fundamen-
tally altering the role, character, and problems confronting the family farm of today.
These trends imply further concentration of agricultural production via continued


1/ Underscored numbers in parentheses refer to references listed at the end of this
publication.










Status of the Family Farm:


Second Annual Report to the Congress




INTRODUCTION


The structure of the U.S. farm sector continues to change. Farm numbers are
declining and farm sizes are increasing. Escalating capital requirements are pre-
senting ever greater barriers to new entries into farming. Fewer younger people are
entering farming than older operators are leaving for retirement or other reasons.
Changes are requiring farmers--particularly small farmers--to consider alternative
marketing approaches. Government farm programs are increasing net returns to partici-
pating farmers, but a large share of program benefits go to large producers because
payments are related to individual farm size and acreages planted.

This report describes the structural characteristics of the farm sector, analyzes
major trends and underlying forces, and discusses why the changes are occurring and
where they may lead. Data used in this study were derived from a variety of private,
university, and Government sources, including the Censuses of Agriculture and Popula-
tion (31, 32, 33). 1/



TRENDS IN SELECTED STRUCTURAL CHARACTERISTICS


Forces that provide incentives for the moderate to larger size farms to grow
further are bringing about structural changes in the farming sector. The number and
size of farms, the form in which farm businesses are organized, and the changing pat-
terns of entry into and exit from farming are among the more commonly quoted manifes-
tations of structural change.

Farm structures have evolved over several decades, marked by declining numbers of
farms. Farm size has increased, with production concentrated on fewer farms. The
average age of farm operators has increased as fewer people under 35 have entered
farming than older operators have left for retirement or other reasons. Many of those
under 35 who take up farming do so as part-time operators of small farms, with their
primary income from nonfarm sources.

These and other continuing structural changes in the farming sector are fundamen-
tally altering the role, character, and problems confronting the family farm of today.
These trends imply further concentration of agricultural production via continued


1/ Underscored numbers in parentheses refer to references listed at the end of this
publication.






growth of larger family farms. These farms will generally still be family units, but
a farm sector where fewer than 100,000 farms produce over half the-output is different
from the farm sector of the thirties and forties. Thus, the objectives and needs for
public policy for the farm sector may have to be reevaluated to ensure that the public
interest is served.


Farm Numbers and Sizes

Declining farm numbers and increasing farm sizes are commonly cited indicators of
the structural change in the farm sector. 2/ These indicators merely reflect the
myriad forces causing structural change. They have some limited value, but more
important are the changing of farm sizes and an understanding of the forces behind it.

A new official definition of a farm was instituted in 1979 by the U.S. Department
of Agriculture (USDA). That definition recognizes inflation and other changes that
have occurred in farming. The new definition requires a place to have $1,000 minimum
sales of farm products to be counted as a farm. The previous definition, used since
1959, required only $50 in farm product sales on places of 10 acres or larger or $250
on smaller places. The new 1978 definition would disqualify about 302,000 places--
those with sales of less than $1,000. Farm numbers under the new and old definitions
are shown below:



1976 1977 1978 1979
1,000 farms

Old definition 2,738 2,706 2,672 NA
New definition 2,454 2,409 2,370 2,330
Difference 284 297 302 NA
NA = not available



Farm numbers continued downward from the 1935 peak of 6.8 million under both def-
initions. Average farm sizes increased correspondingly, measured by both sales and
acres. Using the old definition of a farm for consistency, average sales per farm
increased from $9,715 in 1960, to $19,861 in 1970, and to $41,558 in 1978. Meanwhile,
acres per farm rose from an average of 278 in 1960 to 401 in 1978, a 44-percent
increase.














2/ Benchmark data on farm numbers and sizes come primarily from the quinquennial
Census of Agriculture. The next census is being taken in 1979, with the data being
available for analysis in late 1980. In addition, estimates of farm numbers are made
as of January 1 of each year by the U.S. Department of Agriculture to bridge the gap
between censuses.







Information on farms grouped by product sales value is provided by the Census of
Agriculture. The sales classes are:



Under $ 2,500
$ 2,500 to $ 4,999
$ 5,000 to $ 9,999
$ 10,000 to $19,999
$ 20,000 to $39,999
$ 40,000 to $99,999
$100,000 and over .



The decline in farm numbers over the past several decades largely reflects the
phaseout of smaller farms. The number of farms in the larger size classes has
increased.

Agriculture censuses prior to 1974 revealed that farms with at least $20,000 in
sales were increasing, while smaller farms were decreasing. Beginning with the 1974
census, the dividing point shifted to the sales classes of $40,000 or more. It is
impossible to precisely determine the size below which farms are declining in number
because of the wide range of the $40,000 to $99,999 sales class. Nevertheless, if
this sales class is viewed as an indication of adequacy for survival, some useful
insight may be gained by examining the characteristics of such farms. Using the
census sales classes to do this requires the study of averages of all farms in the
$40,000 to $99,999 sales class. These statistical profiles are obtained by averaging
many dissimilar farms over a wide range of sales, and meaningful comparisons are thus
limited. A farm adequate for economic viability will vary greatly by farm type
(commodity produced), geographic region, managerial and business acumen of the opera-
tor, family composition, tenure arrangement, and other factors. Even so, the profiles
do provide useful information. They indicate that, on the average, farms and farmers
in this sales class have the following characteristics:

Assets valued at nearly $500,000;

more than 80 percent equity in these assets;

average 760 acres; and

net cash farm income of about $18,500, nonfarm earnings of $6,000, and unreal-
ized appreciation in asset value of $34,600.

Thus, even for farms in this minimum adequate sale class, increased asset value
is the major source of increased wealth.







Here is a statistical profile of farms with $40,000 to $99,999 in gross sales:


Characteristics (1977)


Proportion of all farms (percent)
Proportion of total farm sales (percent)

Acres* (number)

Income:
Sales of farm products
Expenses
Net cash income
Earnings from nonfarm sources
Total income
Capital gains on farm real estate
(unrealized)

Assets:
Land
Other
Total

Equity
Percentage equity

* 1974 Census of Agriculture


The trend in farms growing in
increasing concentration in assets
for the bulk of farm sales and the


size and shrinking in number has paralleled an
and sales of farm products. Fewer farms account
land in farms (table 1). This concentration


Table 1--Farms accounting for specified proportions of sales and land in farms

: Number of farms accounting for--
Item
tem 50 percent : 75 percent : 90 percent


Thousands

Sales:
1964 :205 675 1,280
1974 :125 475 825

Land in farms:
1964 :125 525 1,400
1974 :97 395 970


Source: (31).


Amount


$77,100
58,600
$18,500
6,000
$24,500

34,600


$340,000
121,900
$461,900

$373,000
81







reflects growth and consolidation of firms within the farming sector, rather than the
entry of large outside firms.

The concentration of land in farms is not necessarily synonymous with concentra-
tion of landownership. Today, many farming operations are combinations of rented
units or of owned and rented units. It is not uncommon in the Midwest, tor example,
to find farmland owned by retired farmers and widows and heirs of farmers, but
consolidated through rental into larger farming operations. As table 1 indicates,
125,000 farms in 1974 accounted for one-half of all farm sales that had required
205,000 farms a decade before. Today, there are probably fewer than 100,000 such
farms. Relative to some other sectors of the economy, this may not appear to be a
high degree of concentration. It does reflect a reality far different from the common
perception of an agriculture with most of the production coming from many moderate-
size units.

Furthermore, these estimates encompass all farm production; they mask even higher
degrees of concentration in the production of some commodities, such as eggs, certain
fruits, vegetables, and tree nuts (table 2). Cotton production is also concentrated.
Production of the major grains, oilseeds, and livestock tends to be less concentrated,
although increasingly so.

Variations in concentration stem from many factors, including size of the market,
size of firm needed for efficient operation, technology and cultural practices which
affect the size of operation that can be farmed by one person or one family, and the
differential influences of tax, credit, and commodity policies and programs.

Technological change remains important in increasing farm sizes and concentrating
production. For example, the recent introduction of the large four-wheel-drive
tractor disturbed the long-standing mix of farm sizes and numbers in several major
regions by greatly increasing the acreage one person could efficiently farm. Once
purchased, the tractor becomes a fixed cost to be spread over as many acres as


Table 2--Farms


accounting for specified proportions of selected livestock
inventories and commodity production, 1974


: Number of farms accounting for--
Item
em 50 percent : 75 percent : 90 percent


Thousands

Livestock:
Beef cows 135 325 560
Dairy cows 57 115 175
Sows farrowed 35 95 150

Commodity:
Corn for grain :95 235 395
Cotton 6 19 35
Soybeans 75 178 300
Table eggs 1 4 8
Tobacco 20 50 90
Wheat 55 135 245


Source: (31).







possible. Another example is the breeding of tomato plants to obtain simultaneous
ripening of the tomatoes. This increases the feasibility of mechanical harvesting
and, in turn, the attraction of controlling enough acreage by one firm or person to
fully utilize the capacity of the expensive mechanical harvester.

The capital investments associated with modern farming operations are substantial
and growing. Farmers working with assets valued at considerably more than $1 million
are common. Land still contributes a high proportion of total asset value, although
modern technology is increasingly expensive. Individual strategies influence the
capital requirements for individual farms, so these asset values are not necessarily
synonymous with capital requirements for individuals entering or staying in farming.
They clearly indicate, however, the high level of management skill necessary for a
successful modern farming operation.


Operator Entry and Exit

Farm numbers and sizes adjust as individuals choose to enter or leave farming and
as existing operators focus decisions on changes in size. These decisions are impor-
tantly related to the aging of existing operators. Historically, most people have
begun farming before their 35th birthday, expanded the size of their operations over
time, and then after age 55 begun to decrease the size, or at least stopped growth.
They quit farming at some later point either through retirement or death.

The average age of farm operators steadily increased from 48.7 years in 1945 to
51.7 years in 1974. (The shift in the age distribution of farm operators for selected
censuses is shown in fig. 1.) The change was significant for this three-decade
period, since many people spend over 50 years in the same occupation and the turnover
rate is slow. The age distribution shifts because fewer young persons enter farming
than older operators leave. Also, many of the older operators continue to farm past
the usual retirement age, so they are not being replaced by a younger generation.

Age cohorts (people with common birthdays) can be traced through successive
agricultural censuses to determine net changes in the number in each age cohort by
size of farm. Historically, the number of operators in each age cohort group
increases as that particular group grows older, peaks at age 50, and then declines
until all operators leave farming presumably by age 75.

Only slightly more than half of the older persons leaving farming between 1964
and 1974 were replaced by young farmers. A net of 930,000 (72 percent) of the
operators who were 55 years of age or older in 1964 had left farming by the time the
1974 Census of Agriculture was taken, while only 475,000 persons under 35 had begun
farming.

Only one small-farm operator with sales of less than $40,000 was replaced for
every three who left. Still, 80 percent of the young people who entered farming
during 1964-74 started on farms with sales of less than $40,000. Many of those were
part-time farmers with their primary income from nonfarm sources. Beginning farmers
in the previous decade on small farms expanded to more than $40,000 in sales.

The replacement rate on farms with sales of $40,000 or more was higher. Entry
rates of young people exceeded exit rates of older operators. This happened because
some entrants combined two or more small farms and entered inthe larger size classes.
Also, some of the smaller farms of entrants in the previous decade were enlarged and
moved into these classes.

Some older operators on smaller farms progress towards retirement in a series of
steps--by renting out some land, or selling owned land, or relinquishing land they






Figure 1


Farm Operator Age Distribution, 1920-74.


0 r I I I I
Under 25 25-34 35-44 45-54 55-64
Age Group


65 or
over


Source: (1).



rent. This is frequently accompanied by conversion to less labor intensive
enterprises, such as changing from dairy to beef cows.

The number of farms is expected to continue to decline, primarily from nonreplace-
ment of exiting older operators by younger operators. Fewer total entrants are expected
in the next decade, and a higher percentage of entrants will be on large farms.

The trend of fewer and larger farms means fewer replacements will be needed for
operators on viable fulltime farms. Many of the smaller farms of retiring operators
will be combined with existing farms to form larger units. Their formation will
require high levels of equity or risk capital. Young people hoping to enter farming
are typically short on capital. Therefore, farming opportunities will be limited to a
few entries on larger farms, with young people more often beginning on established
farms as partners or shareholders with other family members in partnership and
corporate operations.


Form of Organization

Multiownership farms (partnerships and corporations) accounted for only 10
percent of farms in 1974, but being larger they sold nearly a third of all farm
products and farmed one-fourth of the land. Corporations comprised a very small
number of farms, but they accounted for 18 percent of the farm products sold, an
expansion from their 14-percent share in 1969. Farms organized as corporations tend
to specialize in land and capital intensive production, while the sole proprietorship
farms typically produce grains, tobacco, beef cattle, hogs, and dairy cattle (fig. 2).






Figure 2


Crop Sales and Livestock Numbers and Sales of Farms
with Sales of $2,500 or More

Crop sales* Livestock numbers and sales*
Form of
Percent :-: Business Percent :'-:... - :-
:Organization :::
80 80 -
S :: Corporations
60 60-

40- Partnerships
40 40 -

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



Partnerships

Most multiownership farms are multifamily operations. The 81,738 farm
partnerships enumerated in a 1976 survey were largely composed of a few related
partners per farm. Ninety-two percent of all partnerships had three or fewer
partners, the partnerships often were two generations of the same family, and 70
percent operated with oral agreements. Forty-two percent of all partnerships had at
least one older family member and one or two partners of a younger generation,
indicating a frequent use of the partnership form of organization to bring a younger
person into the farm business.

Corporations

Farming corporations, like partnerships, tend to be closely held by a few family
shareholders. Eighty percent of privately held farming corporations had five or fewer
shareholders, and 79 percent were family owned, with family members directly involved
in daily operations. Ninety percent of the closely held corporations had most of
their management provided by shareholders. Farming is the primary, and often the
only, business for these corporations. Corporations are frequently operated similar
to partnerships and often formed to preserve the family farming operation by
facilitating the transfer of assets between generations.

Most of the farm corporations in 1974 with 10 or more shareholders, including
those whose shares were publicly traded, were in California, Florida, Texas, Hawaii,
and Louisiana. Those States had two-fifths of the farms operated by publicly owned
corporations and one-third of the farms operated by corporations with 11 or more







shareholders. The 1974 census counted 358 publicly traded corporations operating 947
farms.

Publicly held corporations sold only 3 percent of the total farm production in
1974; the primary business receipts in 82 percent of the corporations were from
nonfarm sources. Their major commodities were fed cattle, poultry, sugarcane,
potatoes, fruits, vegetables, and nursery products which accounted for nearly 90
percent of their 1974 farm sales. Only 6 percent of their sales were from grain and
cotton.

The characteristics of markets, the size of operations needed to exploit produc-
tion and market economies, and the opportunities to exploit linkages with subsequent
stages of the marketing system are factors influencing the commodities produced by the
diversely owned corporations. These corporations do not produce land-extensive
commodities (such as grains, cotton, and beef cows) to any great degree. Generally,
they find no particular advantage in producing the undifferentiated, widely produced
commodities. They have very few incentives for vertical integration in land-extensive
commodities, since most processors can purchase by standard grade the quantities they
need more cheaply than they produce it, given their costs and alternative uses for
capital.

The trends point toward more corporations in farming and a continual decline in
partnerships. Overall, the output of multiownership farms could account for about
half of farm sales before the end of the century. Most of these multiownership farms
will likely continue to be multifamily farms. Two decades will probably not bring
much dispersion of ownership of present farming corporations. Addition of new corpo-
rations will likely result from incorporation of existing farms rather than entry of
corporations not now farming. Few nonfarm corporations are likely to be attracted
into farming, barring a significant rise in the profitability of farming. The rate of
incorporation of existing farms could well exceed the present trend because of changes
in income tax laws, more rapid rise in asset values, and new technology encouraging
larger farms.



ALTERNATIVE MARKETING APPROACHES FOR FARMERS


Markets for farm commodities were formerly organized to serve the needs of small,
independent farmers who produced the bulk of the agricultural output. Two important
functions of these markets were to serve as assembly points and price discovery points
for farm commodities. The marketing sector then served as a vehicle to move farm
output to the final consumer. Farm markets were generally accessible to all farmers,
and farm market coordination was accomplished through open market transactions in
which the pricing mechanism was the primary coordinating device.

Changes in the structure and organization of both the farm and the marketing
sectors over the past 20 to 25 years have altered relationships between them. Farms
have become larger, fewer, and more specialized, largely as a result of technological
innovations introduced over the last three decades, although other factors also
contributed. Marketing firms have also become larger and fewer in number during this
period. The most significant structural change in the marketing sector, however, has
been the growth of large regional and national food-marketing organizations and the
decline of smaller firms serving localized markets.

Structural changes in these two sectors have been associated with the growth of
direct linkages between farmers and the processors and marketers of farm-produced
commodities. Country buying stations and assembly point markets have dwindled as both







large farmers and buyers have chosen to bypass these traditional farm markets in favor
of more direct-marketing methods, including the use of production and marketing
contracts. Significant amounts of some commodities are produced by firms with off-
farm businesses that have integrated farm production with nonfarm stages of the food
system.

There are advantages both to farmers and to marketing firms from the use of
contracting and other direct farmer-market links, but many contend that these
marketing techniques favor the larger producers. Some minimum volume of product is
needed to encourage a marketing firm to enter into a contract with a farmer or to
attract buyers to the farm. Small farmers apparently do not produce those minimum
volumes of most commodities. As a result, they may have serious problems finding
market outlets if traditional markets decline in favor of contractual arrangements.
This reduced market access has been cited by some as a major factor in the decline in
the number of small farms.

The decline of traditional farm markets and their replacement by marketing
methods more suitable to large farms has generated interest in developing alternative
market outlets that will serve the needs of small farmers. Several approaches have
been proposed to accomplish this end. Two of these are forward contracting and
farmer-to-consumer direct marketing.


Forward Contracting

Agricultural production under some form of contractual arrangement has been
gradually increasing since 1960, the first year the Bureau of the Census attempted to
gather data on the use of contracts in agriculture. About 4.5 percent (147,000) of
all farm operators reported having contracts relating to the production or marketing
of farm commodities in that year. The 1969 Census of Agriculture reported 156,000
contracts by farms with sales of $2,500 and over. Some farmers had multiple
contracts, so the contracts outnumbered farms reporting contracts. However, the
number of farms with contracts was not tabulated. The 1974 census counted about
156,000 farms with sales of $2,500 or more having nearly 190,000 production or
marketing contracts. That was over 9 percent of farms with sales of $2,500 or more in
1974.

Extent of Contracting

Mighell and Hoofnagle estimated that about 17 percent of total farm output was
produced or marketed under some form of contractual arrangement in 1970 (16). Less
than 10 percent of all crops and nearly a third of livestock and poultry products were
under contract. Contracts were widely used in the production and marketing of fruits,
vegetables, sugar crops, seed crops, dairy products, and poultry products. There was
very limited use of contracts for most other commodities.

The major change in contract farming since 1970 has Been a sharp increase in the
use of forward sales contracts in marketing cash grains, oilseeds, and cotton. Census
of Agriculture data indicate that farmers marketed about 7 percent of corn production,
8 percent of wheat, 11 percent of soybeans, and 20 percent of cotton under contractual
arrangements in 1974 (table 3). Other significant changes were a growth in feeder-pig
contracting and a decline in fed-cattle contracting due to a temporary decrease in
custom feeding of cattle. Contracts were used in producing or marketing an estimated
21 percent of all agricultural commodities in 1974.






Table 3--Production or marketing under contractural arrangement, 1974


Amount under Amount under
Item ::: Item
contract contract

Percent :: : Percent

All cash grains :9 :: Poultry and
Corn 7 :: poultry products: 38
Cotton 20 :: Soybeans 11
Dairy products : / 82 :: Sugar beets : / 98
Fed cattle 5 :: Vegetables 48
Feeder pigs 3 :: Wheat 8
Fruit 32
Hogs 1 :: All commodities 21



1/ Estimates from (16). Weighted average of fluid-grade and manufacturing-grade
milk used to calculate percentage of dairy products under contract.

Source: (31).


Contracting and Farm Sales Class

The average farm using contracts in the production or marketing of its output
had product sales of nearly $123,000 in 1974. This greatly surpassed the $48,000
volume of the typical commercial farm. Farms with sales of $100,000 or more, while
only about 9 percent of the farms with sales of $2,500 or more, accounted for nearly a
third of the reported contracts (table 4). At the other end of the scale, farms with
sales between $2,500 and $19,999 accounted for 53 percent of the farms but only 17
percent of reported contracts. This disparity between small and large farms in the
use of contracting, however, may be accentuated by the use of multiple contracts by
large farms.

Another indication of the concentration of contracting in the larger farms can be
obtained by examining the proportion of farms in each sales class using contracts
(table 4). Less than 4 percent of farms with total sales under $20,000 reported using
contracts in 1974, while about 30 percent of farms with sales of $100,000 and over
reported using contracts.

A final comparison is provided in table 5 which indicates that about a fourth of
the farms reporting the amount received from the contractor for commodities under
contract in 1974 had contract receipts of $30,000 or more. These farms, though, had
over four-fifths of total reported contract receipts. Twenty-eight percent of the
farms reporting contract receipts received under $5,000 and accounted for less than 2
percent of the total reported contract receipts.

Contract Terms

Contract farming has often been criticized on the grounds that it is a device
used by large food-processing and marketing firms to gain control over the farmer and
in effect make him an employee of the processing or marketing firm. Contracting in
the traditional belief and value system that surrounds much of U.S. agriculture is
seen as an incursion on the farmer's freedom and independence, imposing external
obligations, and limiting the choice of management decisions. The degree to which a





Table 4--Distribution


of farms and contracts and farms reporting contracts,
by sales class, 1974


Distribution by sales class : Farms in sales classes
Sales class : Farms Contracts reporting contracts


Percent

$2,500-$4,999 17 2 1.6
$5,000-$9,999 18 5 3.0
$10,000-$19,999 : 18 10 5.9
$20,000-$39,999 :19 18 8.5
$40,000-$99,999 19 35 16.1
$100,000-$199,999 :6 18 26.5
$200,000-$499,999 :2 9 34.5
$500,000 and over : 1 3 39.2
All sales classes : 100 100 9.4


Source: (31).



Table 5--Distribution of farms with contracts, by amount received from contractor

Amount received :Farms : Contract receipts
from contractor reporting : reported

Percent

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


Source: (31).



farmer's management decisions are limited varies greatly and depends on the terms of
the contract. Contracts between farmers and marketing firms fall into two basic
categories: production and marketing contracts.

Production contracts are generally made before production begins. They contain
provisions regulating, specifying, or controlling the cultural or husbandry practices
employed in producing the commodity. By their nature, production contracts entail
some degree of contractor involvement in the farming operation. Such involvement
ranges from simple contract requirements with only periodic contractor monitoring to
detailed cultural specifications with strict supervision by the contractor. Contract
terms often obligate the contractor to provide production inputs and commonly give
ownership of commodities under contract to the contractor during the production period.
Production contracts also contain marketing provisions relating to pricing and payment
procedures and product delivery.

Marketing contracts, in contrast, may be entered into at any time during the
production or marketing period. They do not involve the contractor in the production






process. 3/ A marketing contract in its simplest form is an agreement, written or
oral, for future delivery of a commodity. The terms normally specify the quantity,
type, variety, and grade or quality of the commodity, as well as price and delivery
provisions.

Price Terms

Terms relating to product price and the bases for price determination are among
the most important provisions of agricultural production and marketing contracts;
these provisions are where contractors exercise the most control. Accordingly,
negotiation of price terms is the most prominent form of involvement by producer
bargaining organizations in contract development.

In the 1977 joint Census-USDA survey of contract production, price terms were
under the exclusive control of the contractor more than any other type of contract
provisions. Two-thirds of the respondents indicated that the contractor alone set the
price terms. Nine percent of those responding said price terms were set by the
producer, 19 percent said price terms were arrived at jointly by the producer and con-
tractor, and 6 percent indicated that price terms were set by a producer organization.

Nonprice Terms

The nonprice terms of agricultural contracts are concerned primarily with product
specification, cultural or husbandry practices, delivery of the product to the
contractor, and specification of which party provides certain production inputs. In
particular, nonprice terms relating to cultural or husbandry practices and provision
of inputs are what distinguish production contracts from marketing contracts. They
are also the means by which the processing and marketing sectors are able to attain
direct management control over farming operations without acquiring ownership of
agricultural resources. Consequently, nonprice contract terms can play a major role
in shifting control over the Nation's agricultural output from the farm sector to the
nonfarm sectors. The 1977 Census-USDA survey of contract production collected
extensive data on nonprice contract terms. This information was obtained from
contract producers to measure the extent to which contractors controlled the actual
production process in the commodities included in the survey.

Contractor control was most pervasive in broiler and egg contracts and control
over production extended well into the day-to-day husbandry practices. In nearly all
instances, the contractor provided the production and marketing inputs other than
labor, housing, and equipment. Broiler and egg contracts basically are devices used
by the contractor to lease production facilities and hire labor owned by the contract
producer's labor force. Contractor control over the production process and ownership
of other production inputs is so complete as to make the contractor rather than the
farmer the real producer.

At the opposite extreme, contractors for feeder cattle and feeder pigs exert
little or no control over the production process with nearly all contracts being
nothing more than contracts for future delivery. The contractor's major interests are
to specify quantity, breed, and ending weights, but even in these areas, the producers
specify the terms in most contracts.

Slaughter-hog contracts are about equally divided between production contracts
similar to those for broilers and eggs and forward delivery marketing contracts.


3/ To be considered a contract, an agreement or obligation to sell must be entered
into 30 days or more prior to the actual delivery of the commodity.





Contract hog production is a fairly recent development, accounting for only about 1
percent of all output. Although contracting for hogs is expected to increase, it is
not clear which type of contract--production or marketing--will be prevalent.

Production contracts are generally entered into for processing tomatoes and
potatoes. However, they differ markedly from broiler and egg contracts in that the
contractors exert little influence over cultural practices. Contractor involvement in
the tomato and potato production processes is largely restricted to commodity
specification, quantity of production,and product delivery. Contract terms relating
to these areas are frequently determined jointly by the contractor and producer.
Cultural practices are generally left up to the producer, and input items provided by
the contractor are limited to plants, seeds, technical assistance, and marketing
services.

Reasons for Contracting

The criticism that contract farming makes the farmer a mere employee of the
processing or marketing firm fails to consider the interdependence between the farm
and nonfarm parts of the food and fiber system. Farming is only one stage in bringing
food and fiber products to the consumer. The orderly functioning of the system
requires that the activities of each stage be coordinated with the other stages.
Contract farming is one of several institutional arrangements to achieve this
coordination. It provides both the farmer and the marketing firms a means of dealing
with the many risks inherent in producing and marketing agricultural commodities.

Contracting from the Buyer Standpoint

The processor or marketer of perishable agricultural commodities faces a number
of risks with respect to raw product supplies. These include raw product
availability, price,and quality. Contracting for farm production provides the
processing-marketing sector with a means of managing these risks.

There are two important aspects of raw product availability to the buyer of farm
commodities. One is the total volume of farm output of a commodity. The other is the
rate at which the commodity is delivered to the buyer. Contracting with farmers for
future delivery enables marketing firms to rationalize production with expected market
demand. This allows the marketing sector to develop longer range marketing programs,
and consequently serves as an aid to orderly marketing. Processors and marketers must
schedule their labor, transportation, and other inputs in advance to ensure an
efficient operation. Contracts allow marketing firms to schedule their receipts of
raw commodities more precisely than would be possible if they relied on open-market
purchases of farm commodities.

Modern mass marketing techniques require a uniform product, which in turn
requires that farm commodities be standardized with respect to variety, grade, size,
and other characteristics. Contract specification of these characteristics and
contractor specification and supervision of production practices in some commodities
are means of achieving this standardization. The need for raw product uniformity is
the major reason many contracts specify that the buyer provide such inputs as plants,
seed, chicks, and feed. It would be difficult and costly for the processing-marketing
sector to attain the product quality and uniformity needed to sustain its marketing
programs without the use of contracts.

Contracting from the Producer Standpoint

Producers, like buyers, enter into contractual agreements primarily as a means of
risk management. Producer risks related to market access, price, and access to
capital are major types conducive to contracting.







Market access, especially for highly perishable commodities and commodities that
have limited market outlets, is a major concern of producers. Simply producing such
commodities with the hope of finding a market at the end of the production period is
highly speculative. Farmers with such commodities to sell are vulnerable with respect
to obtaining a reasonable price, if they can find a buyer at all. They are in a much
stronger position to deal with prospective buyers prior to making production
commitments. Consequently, producers of perishable and specialty commodities have a
strong incentive to sell prior to committing resources to production, and so a high
proportion of such commodities are produced under contract.

By the same token, traditional lending agencies hesitate to finance open
production of high-risk commodities, but readily advance production capital when they
are produced under contract. Contractors themselves provide significant financing of
these commodities, usually by advancing key production inputs.

Price variability for storable, nonperishable commodities is the major factor
leading producers into contractual arrangements. Most contracts for commodities of
this type are agreements to deliver a fixed volume sometime in the future at a set
contract price. These contracts are initiated by the producer as a means of pricing
his production at a known acceptable level, thereby reducing exposure to price risk.

Collective Action by Farmers to Improve Market Power

Farmers have effectively used group action to improve their market power relative
to contract buyers. Farmers, through processing-marketing cooperatives, may compete
with entrepreneurial marketing firms. Alternatively, farmers may use bargaining
associations to negotiate contract terms with marketing firms.

Cooperatives, in effect, are joint arrangements established by groups of farmers
to process and/or market their production. Cooperatives compete with other
processing-marketing firms for final product markets. They are generally smaller than
noncooperative firms, but a few have achieved a size sufficient to be counted among
the largest firms in the Nation. Thus, cooperatives provide farmers with a means of
sharing in the returns from processing and marketing their commodities.

Cooperatives were listed as the contractor in over a third of all contracts
reported in the 1974 Census of Agriculture (table 6). The percentage of commodity
contracts in which the contractor was a cooperative ranged from three-fourths for milk
to 5 percent or less for fed, feeder, and breeding cattle.

Producer bargaining associations are groups of farmers organized to negotiate
contract terms for their members. Unlike cooperatives, they do not handle, process,
or market their members' produce. The 1977 survey of contract production found that,
of the seven commodities covered in the survey, bargaining associations were most
active in processing tomatoes and potatoes, where they represented 40 and 60 percent
of the contracts, and least active in broiler and egg contracts (table 6).

Federal Policies and Contract Farming

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

The relatively recent changes in the economic environment for agriculture and
provisions of the commodity programs have been factors partly responsible for the
increase in contract selling of grains and cotton between 1970 and 1974. Earlier







Table 6--Contracts involving cooperatives and bargaining associations


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

Percent :: Percent

Livestock and poultry: :: Crops:--continued
Breeding cattle :5.1 : Soybeans 40.9
Breeding hogs 6.1 :: Sugar beets 16.0
Broilers 1 0.1 : Wheat 44.3
Chicken eggs 11.5 :: Other 20.3
Fattened cattle 4.8
Feeder cattle 4.0 :: All commodities :35.9
Feeder pigs : 52.5 ::_
Slaughter hogs : 18.5 :: : Percentage of
Started pullets :8.0 :: contracts with
Turkeys 8.0 :: bargaining
Other 18.3 :: : associations

Milk 77.4 :: Percent

Crops: :Broilers 2.9
Cotton 22.8 :: Eggs 2.3
Field corn 40.5 :: Feeder cattle 1 0.0
Fresh fruit 61.5 :Feeder pigs 7.6
Fresh vegetables : 15.5 :: Potatoes 59.1
Processing fruit : 50.2 :: Processing tomatoes :40.4
Processing vegetables :5.5 :Slaughter hogs :16.1


Sources: (31, 33).



programs relied on high support prices, which in effect became the market prices at
which the commodities were traded. Large commodity stocks, built up in the operation
of the programs, prevented prices from rising above the support levels, while the
support prices set a floor below which market prices could not fall. Thus, prices
were very stable and were known in advance with a high degree of accuracy by both
farmers and buyers. Facing very little price or supply risk, they had no incentive to
enter into contractual arrangements.

The decade of the seventies brought a significant increase in the importance of
foreign markets to domestic agriculture. Accompanying the expansion in foreign
markets was an increase in potential economic instability, arising from world weather,
political, and economic conditions. This new economic environment for agriculture
also implies a changed role for the commodity programs. Government price supports no
longer determine market prices to the extent they formerly did. Income support is now
provided as direct payments through the target price program, rather than through
price supports. The result is that commodity prices are now able to fluctuate in
response to market conditions. This adds some degree of price risk, providing farmers
with an incentive to initiate forward delivery contracts as a means of fixing a price
for their production. This type of contracting has emerged as a part of the marketing
strategy of grain and cotton producers.






Federal credit programs probably limit contracting, as they serve to shift
financial risks from farmers to the taxpayers. A large portion of the credit granted
under these programs is to borrowers and projects that have a risk level unacceptable
to commercial lenders. In the absence of such programs, farmers unable to obtain
credit from traditional sources would have an incentive to turn to the marketing
sector for production capital (mainly in the form of physical inputs) through
production contracts. A large part of the financial risks would be absorbed by the
contractors.

Food safety and quality programs may serve as an inducement to contracting by
increasing the raw product quality risks of processors. Restrictions on contaminants
and adulterants in consumer food products provide processors with a motive to control
the application of pesticides and other agricultural chemicals to ensure that any
residues on raw commodities will not contaminate the end product. One means of
achieving this control is through production contracts.

Structural Implications of Contract Farming

The obvious structural impacts of contract farming relate to the relationships
between the farm and nonfarm parts of the food and fiber system. There are in
addition, however, impacts on the structure of the farm sector. These concern both
the number and size structure of the farm sector and the manner in which the output of
individual farms is coordinated. This is referred to as horizontal coordination.

Horizontal Coordination Among Farm Firms

Plant or firm size in the agricultural processing and marketing sectors is very
large relative to firm size in the farm sector, and the output of many farms is
required to supply the raw product input for a single processing plant. If this
processing plant were to enter into individual contracts for the output of each of
these farms, the immediate effect would be to link each farm individually to the
processor. Through the terms of the individual contracts, however, the processor will
have effectively coordinated the production of many farms in a horizontal sense.
Individual farms will be functioning as a single firm under the direction of the
contractor.

Farmers as well as marketing firms may be the instigators of horizontal
coordination in contractual relationships. Farmer bargaining associations are groups
of farmers who have integrated horizontally for the purpose of negotiating contract
terms with marketing firms. Farmers coordinate their production and marketing
functions in a horizontal sense through their processing and marketing cooperatives.

One effect of contracting on the horizontal structure of the farm sector is to
transform the sector into a number of horizontally coordinated market blocks. For
those commodities in which contracting is the prevalent market arrangement (including
dairy products, broilers, and a number of fruits and vegetables), both farmers and
marketing firms who do not have contracts may be effectively locked out. Noncon-
tracting producers may have difficulty finding a market or receiving reasonable
prices, and noncontracting buyers may have difficulty finding noncommitted supplies to
buy (17).

Impacts of Contracting on Farm Size

As noted earlier, farms using contracts have much larger sales volumes than
others. This indicates a correlation between farm size and the incidence of
contracting. Both census data on the size distribution of farms with contracts and
other studies support this statement (18). The cause and effect relationships between
farm size and contracting, however, have not been adequately addressed. Consequently,





it is not clear whether contracting is a result of large farms or large farms are a
result of contracting. It is probable that the relationship goes both ways.

Large specialized farms generally are more susceptible to risk, uncertainty, and
instability than are their smaller, less specialized counterparts. Consequently, they
have a greater incentive to seek ways to reduce or transfer risk, such as through the
use of contracts. In this respect, the growth in contract farming is an inevitable
result of size-increasing technological innovations and increased specialization in
farming.

On the other hand, contract buyers prefer to deal with larger producers. This
preference is cost related. Both administrative and assembly costs per unit purchased
are lower when large lots are involved. In addition, small producers often have
difficulty meeting the quality specifications of contract buyers. In their analysis
of feeder-cattle contracts in the Texas Rolling Plains, Moore and Martin (18)
concluded that:

There are several reasons why one would expect the use of beef cattle
contracts to be associated only with the larger beef cattle producers.
Contractors prefer to deal with large producers that can sell truck-load
lots because it is costly to visit small producers, who may be scattered
over a wide area, to inspect cattle and collect them when ready for market.
Also, buyers who are willing to contract their purchases in advance of
their needs are usually looking for certain grades, weights, and types of
cattle for delivery at a specified date. Small beef cattle producers with
limited quantities and types of cattle usually cannot fulfill these
specific requirements.

Implications and Conclusions about Contracting

The institution of contracting itself may not be the primary factor causing
increased farm size, and in fact may be a result of increased farm size, but it
nevertheless plays a significant role in the changing structure of agriculture. Risk
and uncertainty have been cited by some researchers as factors limiting the size of
farms. To the extent that contracting is an effective means of reducing some of the
risks inherent in farming, it increases the comparative advantages of large farms
relative to smaller farms. Also, the economics of contracting favor large farms.
Consequently, a situation develops in which the growth of large farms leads to
contract production, which encourages the further growth of large farms.

Contracting, however, cannot be viewed as a panacea for risk that affects the
individual farmer. Price and market access risks are often reduced by means of
contracting, but output and default risks remain real problems for the farmer who
enters into a contractual arrangement (22).

Traditional open markets for a commodity may die out when contracting becomes
the prevalent market arrangement for that commodity. The result is that producers
without contracts find themselves with no outlets for their production. Large
producers are more readily able to obtain contracts than are small ones, so the brunt
of the decline of traditional market outlets falls on small farmers. Consequently,
the growth of contracting has major implications to the continued survival of small
farms. In effect, small farms must grow to a size sufficient to attract contract
buyers, develop alternative markets, band together with other small producers in
cooperatives, or cease production of that commodity. Rhodes lists three possible
alternatives for small farmers whose traditional markets are in a state of erosion
(23): (1) attempt to preserve an open market system by active development of such
market mechanisms, (2) build their own marketing agencies through cooperative action,
and (3) drop production of the commodity, depend on other crops, and seek relief







through the political process via high price supports for the other crops. Rhodes
fears that the third alternative may win out by default.

The use of contracts in the production and marketing of agricultural commodities
is a permanent fixture of the structure of the farm sector, and is the prevalent
arrangement for such commodities as milk, broilers, sugar beets, processing
vegetables, and several fruit and nut crops. The major commodities that seem likely
candidates for increased usage of contracts are hogs and crops produced under
commodity programs, assuming the current type of programs remains in effect.

The growth of large-scale, specialized hog enterprises is the main factor that
will lead to increased use of hog contracts. Only 1 percent of all hogs are current-
ly marketed under contract, but a recent study estimated that about 15 percent of
the hogs sold by producers selling 5,000 or more hogs per year were under contract in
1978 (24). Both the number of large hog operations and the proportion of hogs
marketed by them have been increasing in recent years.

Increased use of contracts in crops covered by commodity programs depends on the
types of programs in effect. If programs that allow for free play of market prices
remain in effect, a growth in contract marketing of these commodities can be expected
because farmers will increase their use of forward sales contracts as a means of
dealing with price risks. A return to the previous high support price programs would
result in a virtual cessation of contract sales for commodities affected.


Farmer-to-Consumer Direct Marketing

Farmer-to-consumer direct marketing has received considerable attention in the
past few years as a possible method to serve the needs of small farmers. The Farmer-
to-Consumer Direct Marketing Act, Public Law 94-463,was enacted in 1976 to promote
direct-marketing activities that might lower prices to consumers, provide higher
returns to farmers, and improve producer-consumer understanding. Under the provisions
of this act, the Economics, Statistics, and Cooperatives Service (ESCS) initiated
several research activities to determine the extent of direct marketing and its
potential for enhancing the economic viability of small farmers.

Farmer-to-consumer direct marketing is a form of vertical integration in that
both production and marketing functions are combined in the same firm. However,
unlike the vertical integration characteristic of large-scale agricultural firms, it
does not rely on the established distribution network to reach the consumer and does
not require large-scale production units to support its marketing function.

Extent of Farmer-to-Consumer Direct Marketing

The most recent national survey for which data are available indicates there were
about 13,000 direct marketing outlets operating in all 50 States in 1976 (1). The
heaviest concentration was in the Northeast and Lake States. Roadside stands, pick-
your-own-operations, and farmers' markets were the most common types. Others included
trucks parked at shopping centers, door-to-door routes, small on-farm dairy outlets,
cooperatives dealing directly with consumer groups, and informal arrangements between
friends and neighbors (15).

There are no reliable estimates of the total value of products sold through
farmer-to-consumer direct-marketing outlets. The American Vegetable Grower estimates
that gross sales of roadside stands in 17 of the States which responded to its survey
were about $208.8 million in 1976 (table 7). This estimate does not include sales
through farmers' markets, pick-your-own operations, and sales of roadside stands in 33







Table 7--Estimated gross sales of roadside stands, 17 states, 1976 1/


State Gross sales :State : Gross sales


1,000 dollars :: : 1,000 dollars

New Jersey 50,000 :Arizona 2,875

Pennsylvania 40,000 :: Tennessee 2,500

New York 35,000 :: Texas 2,500

Ohio 30,000 :: Georgia 750

Massachusetts 24,750 :: Rhode Island 750

Indiana : 6,000 :: North Carolina 580

Maryland 5,000 :South Dakota 375

Michigan 4,500 :: North Dakota 20

New Hampshire 3,230 :: Total 208,830


1/ Estimates not available for all States.

Source: (1).



States. The National Commission of Food Marketing estimated that in 1963 about 0.4
percent of all food sales nationwide were through direct-marketing outlets (19).

Fresh fruits and vegetables are the commodities most commonly sold through
direct-marketing outlets. Other commodities include eggs, dairy products, tree nuts,
honey, bedding plants, and shrubbery. Commodities that can be successfully marketed
through direct-marketing outlets are generally limited to those not requiring
processing beyond sorting and packing.

Structural Impacts of Farmer-to-Consumer Direct Marketing

The potential impacts of farmer-to-consumer direct marketing on the structure of
agriculture are quite limited. Both the kinds of commodities suitable for this type
of marketing and the locational requirements for successful direct marketing are
factors limiting its potential for improving the economic position of small farmers
and affecting the structure of agriculture and agricultural markets.

Commodities suitable for farmer-to-consumer transactions are those that can be
consumed fresh or can readily be processed by household preservation methods, such as
home canning and freezing. This requirement limits the potential for direct marketing
to vegetables, fruits, eggs, and a few specialty commodities. Commodities falling
into this category account for less than 10 percent of the value of agricultural
products sold. Ninety percent or more of the products (in terms of value) sold by
farmers, including grains, cotton, sugar crops, forage and hay, tobacco, oilseeds, and
most livestock and poultry, cannot be marketed through direct farmer-to-consumer







outlets because of the extensive processing required to convert farm commodities into
consumer food and fiber products. 4/

About 12 percent of the commodities suitable for direct-market sales are produced
on farms with gross sales under $40,000, the size classes that could benefit most from
direct marketing (table 8). About three-fourths of these commodities are produced on
farms grossing $100,000 or more. Assuming that no shifts occur in the distribution of
production among farm sales classes and that the total output of suitable commodities
produced on smaller farms could be sold directly to consumers, the potential for
farmer-to-consumer sales by smaller growers is just slightly over 1 percent of the
total value of all farm sales.

The second major limitation of farmer-to-consumer direct marketing is location of
production. Farmers and consumers must be accessible to each other for direct
marketing to succeed. For producers, this means a location near a major population
center. For consumers, it means sufficient nearby production of commodities suitable
for direct purchase from farmers to attract their interest. As one observer noted, a
direct-marketing outlet must have "enough goods to make the trip worthwhile for
customers, enough customers to make the trip worthwhile for farmers (15)." The
potential, then, for farmer-to-consumer direct marketing is greatest in areas that
have both high population density and a reasonably high density of fruit or vegetable
production. Fruits and vegetables account for about 75 percent of the value of
commodities that can be marketed through direct market outlets. The Northeast comes
closest to meeting these requirements (table-9). Not surprisingly, the Northeastern
States also have the highest concentrations of direct marketing outlets.

Implications and Conclusions

The potential impact of policies to increase farmer-to-consumer direct marketing
on the structure of the farm production and marketing sectors is very small overall,
primarily because of limitations on the kinds of commodities that are suitable for
direct sales and because of locational requirements. Farms that can benefit the most
from direct marketing programs are those with gross sales under $40,000. Although


Table 8--Percentage of value of output of commodities suitable for farmer-to-
consumer direct marketing, by farm sales class, 1974

: Farm sales class
Commodity Under : $10,000- : $40,000- : $100,000
: $10,000 : $39,999 : $99,999 : and over

Percent

Fruit 3.4 13.8 17.8 65.0
Vegetables 1.8 7.0 9.2 82.0
Other 2.0 7.8 12.0 78.2

Total 2.5 10.0 13.5 74.0


Source: (31).



4/ There is a very small market for farm slaughtered livestock and poultry that is
met primarily by direct farmer-to-consumer sales. This is also true for some dairy
products.






Table 9--Relationships among State population, fruit production, vegetable
production, and direct marketing

Population 1/ Fruit : Vegetable Direct-
Ranking : : production/ : production/ : marketing
: Per square : Total square mile : square mile : outlets
: mile :: 2/ 2/

States

1 : N.J. Calif. Fla. N.J. N.Y.
2 R.I. N.Y. Calif. Calif. N.J.
3 : Mass. Pa. Wash. Fla. Ohio
4 Conn. Tex. N.J. N.Y. Mich.
5 Md. Ill. N.Y. Del. Pa.
6 N.Y. Ohio Mass. Mass. Calif.
7 Del. Mich. Mich. Mich. Conn.
8 Pa. N.J. Pa. Conn. N.C.
9 Ohio Fla. Conn. S.C. Ind.
10 : Ill. Mass. Va. Md. Tex.


1/ From (34).
2/ From (27, 1975).

Source: (15).



about three-fourths of all farms reporting sales of $2,500 or more fall into this
category, only 8 percent of them produce commodities likely to be sold directly to the
consumer. The locational limitations further reduce this number so that only about 3
percent of farms with sales over $2,500 could benefit from direct marketing programs.
The value of production from these potential beneficiaries is estimated at about 0.5
percent of the total value of all agricultural production. Nevertheless, the
improvement of opportunities for direct marketing could improve the well-being of some
moderate-size farms and permit consumers in those locations to shop in a more
competitive environment.

A recent analysis of the potential impacts of direct marketing on small fruit and
vegetable farms in California concluded that direct-marketing policies will have an
almost imperceptible impact on the overall distribution of sales and net income
between large and small farms in that State (14). That is so mainly because direct
marketing does not provide market access to enough small farmers. The authors of the
report state: "In short, direct-marketing policies can be no general panacea for the
vast majority of small fruit and vegetable farms let alone the even larger number of
small farmers who produce other kinds of crops which are not amenable to direct
marketing."

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





COMMODITY PROGRAM IMPACTS ON THE FARM SECTOR


Agricultural commodity programs clearly rank among the more important public
programs that affect the farm economy and the structure of that economy. They also
significantly affect many factors in the national economy--the allocation of
resources, the location of population and industry, exports and the balance of trade,
the budget deficit, consumer food prices and expenditures, the rate of inflation, and
so on. The major impact of these programs is determined by the distribution of
benefits, raising the questions of "who gets the subsidies?" and "what effect does
this have on the structure of farming?"

The aim of major commodity programs has been primarily to increase and stabilize
farm incomes, although there are other objectives. Consumers benefit by having
adequate supplies and more stable prices. Program benefits accrue to the participants
directly through payments and supported prices, and indirectly through higher market
prices. Nonparticipants also benefit indirectly from the higher prices. Previous
studies, however, have shown program benefits to be distributed unevenly, with most
going to the largest farmers (2, 25). Those studies are now outdated, since programs
have been significantly changed by subsequent legislation and the farm sector has
further evolved. This study updates and expands upon the previous studies.

The following are summarized conclusions about the major impacts of the
distribution of commodity program benefits in 1978.

The 1978 farm program increased net returns to participating farmers, but the
benefits favored larger producers because payments were related to individual
farm size and acreages planted.

About one-third of all farmers (750,000) participated in the 1978 programs;
the rate of participation was higher for larger farms.

The average farm size was larger for program participants than for
nonparticipants.

Less than 10 percent of the total acreage in the 1978 farm program was
controlled by corporations. Only 0.2 percent of the enrolled acreage was on
widely held corporate farms.

S$2 billion were disbursed in program payments, the largest amount since 1973.

Almost half the payments went to only 10 percent of the participants, those
with the largest farms. By contrast, 50 percent of the farms--the smaller
units--received only 10 percent of the payments.

The proportion of payments received by the largest farms differed by commodity.
The cotton program had the highest degree of concentration; feed grain was the
most evenly dispersed.

About 1,200 participants (0.2 percent of the 750,000 participants) were
affected by payment limitations. Payments foregone because of the limits
amounted to $24 million, 1.4 percent of the total payments.

Higher commodity prices as a result of acreage controls increased returns to
participants by about $900 million, almost half the direct program payments.





Net benefits averaged $267 for the smallest program participants, those who
have a normal crop acreage (NCA) less than 70 acres. Net benefits were more
than $44,000 for the largest participants, those who have 2,500 acres.

These findings reinforce those of earlier studies. It is likely that the 1978
program benefits brought higher farmland values that benefited existing landowners and
further contributed to the escalating capital requirements for beginning farmers--a
barrier to entry. Over time, the programs probably increase capital requirements and
tend to put renters at a disadvantage and further impede the entry of young farmers.


Commodity Programs

The Food and Agriculture Act of 1977 continued, with modification, programs that
provide price and income supports to producers of the major crops--wheat, feed grains,
cotton, and rice. 5/ Price support is affected through nonrecourse loan
programs. Farmers may secure loans from the Government by pledging the commodity as
collateral. The Government takes title to the commodity if the loan is not repaid,
with no further recourse to the borrower. Income support is provided through the
target price, deficiency payment concept. Farmers receive direct payments from the
U.S. Treasury when market prices fall below the established target level. Producers
prevented from planting, or experiencing low yields due to natural hazards, may also
receive payments computed as a fraction of the target price. The price support (loans
rates), income support (target prices), and the payment rates per unit for 1978 are
shown in table 10.

Producers become eligible for the commodity program benefits by complying with
acreage set-aside requirements, if any, and by limiting their total plantings of
specified crops--the planted acres plus the acreage set aside may not exceed the
farm's normal crop acreage (NCA). 6/ A further restriction is the cross-compliance
provision which requires a farmer to comply with the set-aside for all crops to be
eligible for commodity program benefits for any crop. An added provision of the 1978
programs allowed producers of some crops to divert acreage voluntarily from these
crops to conservation practices in return for payment (table 11).

A major change in the 1977 act was replacement of the long standing acreage
allotments, derived from production patterns several decades old, with a current
plantings concept. This, in effect, updated the base for computing program benefits
and set-aside acreage requirements for all commodities except rice (where old acreage
allotments were retained). The total payment a farmer receives is based upon the
production from an eligible acreage. That acreage is determined by multiplying the
acreage planted for harvest by the allocation factor for that crop (the program
allocation factor is the ratio of the national program acreage--the estimated acreage
needed to meet domestic consumption and export sales plus adjustments in domestic
stocks--to the estimate of harvested acreage). The allocation factors in 1978 ranged


5/ See (13) for a description of the provisions of the 1977 act.
6/ Crops subject to the total acreage restriction are barley, corn, dry edible
beans, flax, oats, rice, rye, sorghum, soybeans, sugarbeets, sugarcane, sunflowers,
upland cotton, wheat and any other crops recommended by the State agricultural
stabilization and conservation committees and approved. The normal crop acreage
of a farm refers to the acreage normally planted to the crops specified above. In a
State like Nebraska, the NCA accounted for 62 percent of the total cropland and 43
percent of the total farmland in 1974. States in the Corn Belt generally have NCAs
that account for a much larger percentage of the total cropland. California, with its
diverse agriculture, has an NCA that accounts for a smaller percentage of the total
cropland and farmland.






Table 10--Market and program


elements used to calculate commodity deficiency
payments, 1978


Commodity Unit Target : Loan : Average : Deficiency : Allocation
S price : rate :price 1/ : payment rate : factor 2/


-- Dollars per:unit- - Percent

Barley : Bu. 2.25 1.63 1.90 0.35 82.4

Corn : do. 2.10 2.00 2.07 .03 97.1

Cotton : Lb. : .52 .48 .55 0

Rice :Cwt. : 8.53 6.40 7.75 .78

Sorghum : Bu. : 2.28 1.90 1.95 .33 95.8

Wheat : do. 3.40 2.35 2.88 .52 100.0


-- = Not applicable.
_/ The national weighted average price in the first 5 months of the marketing year
for each commodity, except cotton, for which the calendar year average price is used.
2/ The program allocation factor is the ratio of the national program acreage (the
estimated acreage needed to meet domestic consumption and export sales plus adjustments
in domestic stocks) to the estimate of harvested acreage.

Source: Agr. Stab. Conserv. Serv., U.S. Dept. Agr.











Table 11--Acreage set-aside requirement and allowable voluntary diversion,
by crop, 1978

Proportion of acreage planted for harvest
Commodity
Required set-aside Voluntary diversion


Percent

Barley 1 0 10
Corn 1 0 10
Cotton 0 10
Rice 0 0
Sorghum 1 0 10
Wheat :20 0





from 82.4 percent for barley to 100 percent for wheat. However, feed grain producers
could gain eligibility for deficiency payments on all their planted acreage of corn,
sorghum, and barley by voluntarily reducing their 1978 plantings of corn and sorghum
by 5 percent and barley by 20 percent from the 1977 planted acreage, in addition to
the required set-aside. 7/

Payments to rice growers continued to be based on production from the allotted
acreages, but there was no limitation on the total acreage that could be planted.
However, production on acreage in excess of the allotment (and on farms without
allotments) was not eligible for price-support loans or deficiency payments.

The 1977 act continued the payment limitation, in effect since 1971, but changed
the limit. The new limit of $40,000 applied to the combined deficiency and diversion
payments a person may receive from the wheat, feed grain, and upland cotton programs
in 1978. Payments from the rice program were not included in this limit, and a
separate maximum of $52,250 per person was established for that program.

There'were 2.4 million farms in 1978, as estimated by ESCS' Crop Reporting
Board. 8/ The Agricultural Stabilization and Conservation Service (ASCS), the USDA
agency responsible for administering the commodity programs, also defines farms for
program administration purposes. There were 2.3 million ASCS farms in 1978. 9/ Each
ASCS farm may have more than one producer associated with it, resulting from leasing
arrangements, partnerships, and the like. Conversely, one producer may have shares of
commodity production in more than one ASCS farm. To gain information on the complete
farming operation associated with the producer and to facilitate an analysis of the
impacts of the payment limitation, the size of farm is expressed in terms of the
producer's normal crop acreage. This includes any proportional share of the acreage
on farms for which more than one producer has an interest.


Participation

There were about 750,000 farmers (about one-third of the total number of farms,
including both farm operators and landowners), who participated in the major commodity
programs in 1978. These participating farms grew nearly 100 million acres of the six
program crops, and produced 36 percent of the total output of these crops (table 12).


7/ Another maior provision of the 1978 commodity programs, not treated in this
report, was the farmer-owned grain reserve program. Farmers who complied with the
set-aside requirements in 1978 were also eligible to place their grain in this
program. The grain was first put under loan. Then a contract was made in which the
farmer agreed to hold the grain until the market price reached a specified percentage
of the loan rate. In return, farmers received a payment for storing the grain, and
interest on the loans is waived after the first year of the contract. Over 400
million bushels of wheat and nearly 900 million bushels of feed grains were in the
farmer-owned reserve on Sept. 30, 1978. Most of this grain was from crops prior to
the 1978 harvest.
8/ ESCS generally uses the Census Bureau concept of a farm as a place which has
sales receipts of more than $1,000. This definition was adopted in 1978. The former
definition used $250 as the sales limit, which would result in a total of 2.7 million
farms.
9/ An ASCS farm consists of tracts of land that are being operated by one person
with cropping practices, equipment, labor, accounting system, and management
substantially separate from that of any other farming unit that may be operated by the
same person.

















Table 12--Participation in 1978 farm commodity programs, by commodity and region

U.S. Northeast North Central South Plains Southwest Northwest
Commodity : Partic- : Partic-: : Partic-' : Partic-: : Partic-' Partic-: : Partic-'
ipants : :Acreage: pants AcAcr eage : ipants :Acreage pants :Acreage: pants :Acreage: pants :Acreage
:1,000 1,000 1,000 1,000 1,000 1,000 1,000
Number acres Number acres Number acres Number acres Number acres Number acres Number acres

Barley. 78,467 6,077.8 1,949 47.0 1,056 779.6 2,279 96.8 49,565 3,720.9 4,827 273.4 10,928 1,160.10

Corn 401,349 32,891.0 16,450 952.2 207,858 19,099.1 67,463 2,815.6 107,046 9,805.1 1,803 167.3 910 57.70

Cotton : 50,445 6,385.3 -- 2,955 160.8 16,622 1,346.8 26,604 4,179.2 4,238 698.5


21,597 925.1

16,577 1,375.5

140,550 9,660.6

387,341 41,818.3

739,105 99,133.7


71 .5 708

70


76

4,440

16,974


1.5

90.0

1,091.4


13,669

71,574

233,357


22.4

6.1

499.9

3,302.0

23,870.0


1,183

16,505

5,344

11,081

99,372


20.4

1,369.2

175.2

353.6

6,178.1


18,959

2

118,742

272,275

356,288


843.6 439 28.2


.1

8,639.4

33,072.0

60,260.5


2,697

4,791

11,174


344.5

1,324.9

2,566.8


229 9.70


2

17,180

19,940


.05

3,675.0

5,166.80


-- = Not applicable.


-J


Hay,
grazing

Rice

Sorghum

Wheat

Total








Participation was concentrated in the Plains and North Central regions; 80
percent of all participants were in these regions (fig. 3). The Plains region not
only had the most participants and enrolled acreage, it also had the highest
proportion of all farms enrolled in the programs (fig. 4). Farmers in the Plains
States have traditionally participated heavily in the programs. The major crop in
this region is wheat. Producers generally expected the target price ($3.40 per
bushel) to be higher than market prices and thus receive a substantial payment from
the program. Further, the provisions of the barley and sorghum programs, crops also
grown by many wheat producers, were relatively attractive. Participation in the wheat
program was necessary to obtain benefits from the barley and sorghum programs because
of the cross-compliance requirement previously mentioned.

Participation in the North Central region was relatively low because the
potential benefits from the corn program were lower than for other crops. The maximum
payment rate could be only 10 cents--the differential between the $2.10 target price
and the $2 loan rate. Participation in the cotton program was large because there was
no set-aside requirement. Hence, producers only had to meet any applicable cross-
compliance requirements to be in compliance.

Participants are predominantly sole proprietorships and partnerships. For all
six program crops, less than 10 percent of the enrolled acreage was on farms operated
by corporations (table 13). And the majority of this acreage belonged to closely held
(predominantly family) corporations (fewer than 16 stockholders). The enrolled
acreage on widely held corporations (16 or more stockholders) was a negligible 0.2
percent (table 14).

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

Program data indicate that the size distribution of program participation
generally follows the distribution of production--a small proportion of the farms
accounts for a large proportion of the enrolled acreage and the total production
(table 15).

The programs were apparently more attractive to the large farms. Only 35 percent
of the total ASCS farms participated, but they accounted for 53 percent of the total
normal crop acreage. This indicates that the average farm size (in terms of the NCA)
was about twice as large for participants as for nonparticipants. Further, the data
imply a larger proportion of all large farms participating than all small farms.






Figure 3

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


Figure 4

Percentage of Regional ASCS Farms (F)
and NCA Acreage (A) Enrolled in 1978 Farm Programs















Table 13-Corporate and noncorporate farm participation in commodity programs

All farms Noncorporate farms Corporate farms
Commodity : Planted :Enrolled : Rate of :Planted :Enrolled : Rate of : Planted :Enrolled : Rate of
: : partici- : : : partici- : : partici-
acreage acreage nation / acreage acreage tion acreage acreage action /


--1,000 acres-- Percent --1,000 acres -- Percent --1,000 acres -- Percent

Barley 9,297 5,969 64.2 8,212 5,297 64.5 1,079 672 62.3

Corn : 69,793 32,733 46.9 75,982 30,545 40.2 4,022 2,188 54.4

Cotton : 12,289 10,372 84.4 10,581 9,470 89.5 1,692 902 53.3

Sorghum 14,252 10,532 73.9 13,476 9,959 73.9 781 573 73.4

Wheat 59,022 41,965 71.1 54,766 38,829 70.9 4,295 3,135 73.0

Total 164,653 101,571 61.7 163,017 94,100 57.7 11,869 7,470 62.9


1/ The percentage of enrolled acreage relative to the total acreage planted
pating farmers.

Source: (28).


by both participating and nonpartici-















Table 14--Closely held and widely held corporate farm participation in commodity programs


Commodity





Barley

Corn
S Cotton

Sorghum

Wheat

Total


All corporate farms

Planted : Enrolled : Rate of
acreage : acreage : partici-
:: nation V

--1,000 acres-- Percent

1,079 672 62.3

4,022 2,188 54.4

1,692 902 53.3

781 573 73.4

4,295 3,135 73.0

11,869 7,470 62.9


Closely held corporations

Planted Enrolled Rate of
acreage acreage partici-
S: nation /

--1,000 acres-- Percent

1,029 634 61.6

3,893 2,116 54.4

1,637 879 53.7

756 557 73.7

4,199 3,075 73.2

11,514 7,261 63.1


Widely held corporations

Planted : Enrolled : Rate of
acreage acreage : partici-.
: : nation /

--1,000 acres-- Percent

50 38 76.7

129 72 56.0

55 23 42.2

25 16 64.9

96 60 62.7

355 209 58.9


1/ Percentage of enrolled acreage relative to the total acreage planted by both participating and nonparticipating
farmers.

Source: (28).






Figure 5


Percentage of Regional Crop Acreage Enrolled in 1978 Farm Programs




Northwest
Wheat 46.0% Plains Northeast
Corn 14.2% North Central
Wheat 81.8% ..0 W Wheat 20.1%
Corn 67.6% Wheat 40.2% Corn 24.5%


Distribution of Program Benefits 10/

There are several ways to view the distribution of the commodity program
benefits: number of recipients, size of farm of recipients, commodity produced, and
geographic region.

Number of Recipients

Program participants totaled 750,000, approximately one-third of all farmers.
Program benefits are generally based on production volume (bushels or pounds), so it
would not be expected that payments would be distributed equally among participants.
Rather, the benefit distribution logically would correspond to the size distribution
of the acres enrolled. The larger farms have more acreage, hence a higher volume of
production and more benefits.


10/ This analysis is based upon the disbursement of 1978 program payments through
February of 1979. Disbursed payments to that date totaled $1.75 billion for the
various programs (below). Since that date, further disbursements have increased the
total to $2.0 billion (through June of 1979). The additional payments were largely
for the disaster programs.
Most of the additional disbursements were not to farms recorded as already receiving
payments, but to farms not previously on file. Thus, the general pattern of
distribution of payments as reported in this section would remain unchanged, even
though the absolute payment levels are understated.















Table 15-Participation in 1978 farm commodity programs by size of producer (based on normal crop acreages-NCA)

:Less than 70 NCA : 70-219 NCA 220-499 NCA 500-1,499 NCA : 1,500-2,499 NCA :2,500 NCA & over All sizes
CommoditUnit Acres Acres Acres Acres Acres A Acres : Acres
Cmmdity:Unt :Producers:(ducer Producers :Produces::Producers: :Producers :Producers Ac
Pre(1,000):Producers: 1,000)Producers:(1,000) :Produceis: (1,000) (,000) :Producers(1000) (,000)
(100) :,0) 1,00 : :


Barley :No. : 17,037
:Pct.: 1/21.7

Corn :No. : 144,771
:Pct.: 36.0

Cotton :No. : 20,224
:Pct.: 40.1

Hay and :
S grazing :No. : 6,108
:Pct.: 28.2

Rice :No. : 7,736
:Pct.: 46.7

Sorghum :No. : 52,503
:Pct.: 37.4

Wheat :No. : 134,379
:Pct.: 34.7

Total :No. : 291.932
:Pct.: 39.5


212.6 22,789
2/3.5 29.0

2,429.5 146,830
7.4 36.6

306.4 12,938
4.8 25.6


72.6 6,542
7.8 30.2

74.1 3,645
5.4 21.9

730.1 44,371
7.6 31.6

2,330.0 120,321
5.6 31.1

6,155.2 240,830
6.2 32.6


791.3 20,707
13.0 26.4

8,697.7 76,515
26.5 19.1

757.0 8,346
11.8 16.6


171.2 4,988
18.5 23.0

206.1 2,953
15.0 17.8

1,851.6 26,978
19.2 21.2

6,533.1 80,071
15.6 20.6

19,007.1 132,708
19.2 18.0


1,501.3
24.7

10,589.5
32.2

1,176.5
18.4


227.8
24.6

379.9
27.6

2,441.0
25.3

10,834.3
25.9

27,150.3
27.4


15,728
20.1

30,158
7.6

7,271
14.4


3,441
15.9

1,894
11.5

14,291
10.2

46,594
12.1

65,462
8.9


2,517.4
41.4

8,813.2
26.7

2,494.6
39.1


309.8
33.5

501.6
36.5

3,014.8
31.3

15,888.9
38.0

33,540.1
33.8


1,596 570.7


2.0

2,254
.5

1,146
2.3


393
1.8

240
1.4

1,653
1.1

4,364
1.1

5,975
.8


9.4

1,502.4
4.6

858.7
13.5


80.2
8.7

109.9
7.9

816.9
8.5

3,628.5
8.7

7,567.0
7.6


610 484.4 78.467 6,077.8


.8

812
.2

520
1.0


173
.8

111
.7

754
.5

1,612
.4

2,198
.3


8.0

858.8
2.6

792.2
12.4


63.4
6.9

104.0
7.6

806.4
8.4

2,603.6
6.2

5,712.7
5.8


401,349


50,445



21,645


16,577


140,550


387,341


739,105


100.0

32,891.0
100.0

6,385.3
100.0


925.0
100.0

1,375.5
100.0

9,660.6
100.0

41,818.3
100.0

99,133.7
100.0


-- = Not applicable.
1/ Proportion of all producers in size group participating in the 1978 farm commodity program.
2/ Proportion of total acreage enrolled in the 1978 farm commodity program.







Type of Payment: Payments as of:
February (this study) June 28, 1979

Million dollars

Deficiency payments 990 1,021
Voluntary diversion payments 590 633
Disaster payments 162 356
Haying and grazing payments 12 15
1,754 2,025



Volume of production (and payments) is skewed toward the larger farms, while the
number of participating farms is skewed toward the smaller farms. Almost three-
fourths of all program participants had an NCA of less than 220 acres. The next
largest size group, those with an NCA of 220 to 1,499 acres, comprised just over one-
fourth of the participants. The very largest farms, those with an NCA of 1,500 acres
and more, made up only 1 percent of all recipients. However, the share of the total
payments going to these groups is inverse to the numbers in each group.

While payments are based on volume, participation requirements are generally in
acreage terms. So the proportion of payments received by each group corresponds
'closely to the acreage enrolled in the program. The distribution of participants,
acreage enrolled, and payments received among the farm groups are summarized below.

The smallest producers, 72 percent of the participants (533,000), enrolled 25.4
percent of the acreage and received 25.8 percent of the total payments, or $454
million.

Midsize producers, 27 percent of the participants (198,000), enrolled 61.2
percent of the acreage and received 62 percent of the total payments, or $1.09
billion.

The largest producers, 1 percent of the participants (8,200), enrolled 13.4
percent of the acreage and received 12.2 percent of the total payments, or $214
million.

These data reaffirm what is widely known about the programs--that benefits are
closely proportional to production volume (acreage); that the larger farms, although
few in number, have the highest production volume (acreage) and thus receive a
disproportionate share of the program benefits.

Distribution by Size of Farm

The distribution of payments by participants' NCA acreage size, by region, is
shown in table 16. The participating farms are grouped by percentiles, ascending from
the smallest farms to the largest farms. These data reveal the following information.

The 50 percent of the participants (375,000) with the smallest farms received
less than 10 percent of the total payments, an average payment per participant
of $460.

The 50 percent of the participants with the largest farms received over 90
percent of the payments, an average per participant of $4,280.

The largest 10 percent (75,000) received nearly half the total payments, an
average per participant of $10,900.






Table 16--Distribution of 1978 program payments, by region

Percentile of producers I/Pay
Region :Smallest indicated percentage:Largest indicated percentage: received
: 10 : 20 : 30 : 50 : 50 : 30 : 20 : 10

- - Percentage of payments-?--- - Mil. dollars

Northeast :1.0 2.2 4.5 12.2 87.8 74.5 62.8 43.0 24.2

North Central : .9 2.0 4.9 13.5 86.5 71.5 58.7 40.8 496.4

South .2 .4 1.3 7.0 93.0 82 71.5 51.5 140.0

Plains : .5 1.2 2.8 10.5 89.5 76 63.8 45.8 1,200.3

Southwest : .9 1.1 2.0 8.0 92.0 79.1 67.0 47.5 83.9

Northwest .8 1.2 2.5 7.7 92.3 80.4 67.7 47.5 79.9

United States .9 1.9 3.7 9.7 90.3 77.5 65.4 46.0 2,024.7


1/ The percentiles are ranked by size of recipients' NCA. For example, the smallest
10 percent of producers simply refers to 10 percent of participants who had the
smallest NCA.



The average payment per participant ranges from $365 for farms that have an NCA
of less than 70 acres to $36,000 for the farms that have an NCA of at least 2,500
acres. Participants with an NCA of less than 220 acres received an average payment of
$852, while those with an NCA of over 1,000 acres received $18,790.

These data again confirm the findings of previous studies--that the largest
proportion of the payments are received by a relatively small number of the largest
producers.

Distribution by Commodity

About 95 percent of total program payments were for the wheat (42 percent) and
feed grain (55 percent) programs. The pattern of wheat program payments among
producer sizes was very similar to that for the total program payments. The feed-
grain program payments were somewhat more evenly distributed (fig. 6). Cotton showed
the greatest concentration of payments among the largest producers (table 17).

Distribution by Region

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





Figure 6

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

Wheat
Percentage of Program Payments


50


30 -


Lower 10-20% 20-30% 30-40%
10%


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


Feed Grain
Percentage of Program Payments

50


Lower 10-20% 20-30% 30-40%
10%


40-50% Upper 40-30%
50-40%
Acreage Size Class


30-20% 20-10% 10%


10%


40


30


20 -


10 -


7


/I / -


r-1= r77771


77


rsI n / I /= FIIII /M r r .. .. .. .. ... .. .... ...


- r?7771 C~%1


..... y l l fJf If f f I f ..


----~ ----I






Table 17--Distribution of 1978 program payments, by commodity


Percentile of producers 1/
Commodity Smallest indicated percentage :Largest indicated percentage
1: 0 : 20 : 30 : 50 : 50 : 30 : 20 : 10

Percentage of payments

Wheat 0.8 1.8 3.4 10.9 89.1 76.6 66.6 50,0

Cotton .2 .9 1.4 6.20 93.8 83.3 72.5 53.3

Rice .8 1.5 1.8 7.0 93.0 77.4 63.2 39.8

Feed grain .5 2.5 4.1 13.3 86.7 70.0 57.1 39.5

U.S. total .9 1.9 3.7 9.7 90.3 77.5 65.4 46.0



1/ The percentiles are ranked by size of recipients' NCA. For example, the smallest
10 percent of producers simply refers to 10 percent of participants who had the
smallest NCA.




Impacts of the Payment Limitation

There were 1,184 producers (0.2 percent) of the 750,000 participants affected by
the payment limitation of $40,000 for the wheat, feed grains, and cotton programs
combined, and the limit of $52,250 for rice. Payments foregone because of the limits
amounted to $24 million, 1.4 percent of the total disbursement and an average of about
$20,000 for each of the affected producers.

The $24-million payment reduction likely understates the total impact of the
limitation. Its mere existence is no doubt a factor causing some large farming units
not to participate in the programs.

Most of those affected by the limitation were wheat growers; one-half of those
affected were located in the Plains region and one-fourth in the Northwest. The
limitation had virtually no impact on participants with an NCA of less than 1,000
acres.


Market-Related Impacts

Benefits of commodity programs to producers are of two types--those direct to the
farmer in cash payments and those that accrue through the collective supply-
restricting action that increases market prices. The 1978 programs improved commodity
market conditions through the acreage reduction (set-aside and diversion) provisions.
The benefits from higher market prices accrue, of course, both to program participants
and nonparticipants. Supply controls increased prices an estimated 3 percent for
cotton, 4 percent for sorghum, 6 percent for corn, 8 percent for barley, and 14
percent for wheat. In addition, there were cross-price effects on some nonprogram
commodities. As the prices of program commodities rose, the demand for substitute
commodities increased. For instance, soybean prices were an estimated 2 percent
higher as a result of the supply controls on the other crops.






These estimates of market-price benefits from the programs were computed for
farms of the various sizes by combining the information about participants (farm-size
distribution) with the price impacts noted above. The income foregone on acreage set-
aside or diverted was also taken into account in order to derive net benefits. The
results suggest the indirect price benefits for participants amounted to about one-
half as much as the direct program payments (table 18). Indirect benefits to
nonparticipants who did not forego income on set-aside or diverted acres would be
additional.

The impacts on net returns by size of farm were similar to the distribution of
payments. Participants with an NCA of less than 70 acres had average net benefits of
$267. The relatively small amount reflects their small volume of production. At the
other end of the scale, participants with an NCA of 2,500 acres or more received
average net benefit of about $44,000. Overall, the 1978 commodity programs resulted in
an estimated net increase in returns (after deducting the income foregone on set-aside
acres) of $1.5 billion for participants. That was equivalent to about 5 percent of
net farm income in 1978 and 85 percent of total direct payments.

On a per-acre basis, the payments and indirect price benefits were approximately
the same for large and small farms. However, benefits tended to be small for partici-
pants in the feed-grain programs who had a higher foregone income for each set-aside
acre. In addition, set-aside was not required for cotton for which the average farm
size is higher. The average net benefit derived from the commodity programs amounted
to an estimated $13 per enrolled acre for the smallest participants (less than 70
acres NCA) and $17 per acre for the largest participants (2,500 acres NCA and over).

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


STRUCTURAL CHANGES IN THE CATTLE-FEEDING INDUSTRY


The U.S. cattle feeding industry has undergone structural changes that are
consistent with changes in other agricultural sectors in some ways but unique in
others. These changes typify the evolution that has taken place in U.S. agriculture
and help explain the status of today's family farm.

The cattle feeding industry of 30 years ago could be characterized as follows.

Having large numbers of small feedlots (under 1,000-head capacity, with many
much smaller).

Being located primarily in the Corn Belt as supplementary enterprises on grain
farms.

Using unpaid and otherwise underutilized family labor in off-season.

Feeding corn produced on the farm.

Producing most of the Nation's grain-fattened beef by feeding one-fifth to one-
fourth of the calf crop (the rest being sold as nonfed beef).







Table 18--Impact of 1978 farm program on participant's cash flow, by size of farm


NCA acres Total/
I: : average
Impact
:Less than: 70- : 140- : 220- : 260- : 500- : 1,000- : 1,500- : 2,000- : 2,500 : all
: 70 : 139 : 219 : 259 : 499 : 999 : 1,499 : 1,999 : 2,499 : & over : producers

Million dollars


Changes in receipts,
all participants:

Payments 1/

Plus indirect
price benefits

Minus income
foregone on set-
aside acres

Net increase 2/:



Changes in receipts,
per participant:


105.9 163.0 185.0 85.9 408.6 414.4 1


56.8 85.0 94.4 44.0 210.7 216.1



85.5 144.8 162.2 71.8 301.2 231.7


88.2 46.3 79.1 1,753.5


90.0 44.0 23.0 48.4 912.4



77.6 35.9 17.4 30.1 1,158.2


77.2 103.2 117.2 58.1 318.1 398.8 189.5 96.3 51.9 97.4 1,507.7


Dollars


Payments


Plus indirect
price benefits

Minus income
foregone on set-
aside acres

Net increase


365 1,109 1,972 2,684 4,058 7,819 14,282 21,000


195 578 1,012 1,375 2,092 4,077 7,258 10,476
Or'


293 985 1,729 2,244 2,991 4,370


267 702 1,255


1,815 3,159 7,526


27,235 35,955


13,529 22,000


6,235 8,743 10,012 13,694 1,567


15,305 22,733


30,752 44,261


2,372


1,235


1/ Based upon February 1979 data. The total level has since increased to $2 billion due to additional farm receiv-
ing payments. The pattern of distribution remains valid although the absolute amounts are understated.
2/ Understated by a total of about $250 million, as indicated in above footnote.


2,040






Table 19--Distribution of 1978 farm program net benefits and participants' production


Item


: Percentile of producers /_
:Smallest indicated percentage: Largest indicated percentage


: 10 30 : 50 : 50 : 30 : 10

Percentage of net benefits

Programs net benefits 0.80 3.40 8.50 91.50 82.00 55.50

Commodity production 1.00 4.00 9.50 90.50 76.50 47.00

Ratio = share of net
benefits to share of
production .80 .85 .89 1.01 1.07 1.18


1/ The percentiles are ranked by size of recipients' NCA. For example, the smallest
10 percent of producers simply refers to 10 percent of participants who had the
smallest NCA. e



Selling primarily through local and terminal auctions in largely uncoordinated
markets.

A very much changed industry exists today:

Having declining numbers of feedlots feeding many more cattle, with very large
commercial feedlots predominant.

Being located primarily in the Southern and Central Plains.

Employing highly specialized skills and technology.

Using an industrial approach to management, financing, and marketing.

Having increased coordination between feeding and input markets, slaughter, and
distribution.

Half the cattle fed now are in about 400 feedlots; one-third are fed in fewer
than 171 feedlots (30). In contrast, the small farmer-feeder operations produced most
of the fed beef prior to 1960. Several feedlot firms have a one-time capacity in
excess of 100,000 feeder cattle. Since cattle are generally fed for less than 6
months before being moved to market, a 100,000-head feedlot can produce more than
200,000 head per year.

There was a substantial increase in the aggregate annual feedlot capacity in the
sixties and early seventies. The number of fed cattle marketed increased almost 80
percent between 1962 and 1972 while the number of feedlots decreased by 33 percent
(10, 30). On the average, more than 1 million additional cattle were fed each year
during this period, while feedlots decreased by more than 7,500 each year. Small
feedlots of less than 1,000-head capacity declined in number each year while large
commercial feedlots increased by about 60 lots annually.

The increase in feeding capacity has been associated with large lots. Over 61
percent of the fed cattle marketed in 1964 were from 223,000 feedlots with a capacity
of less than 1,000 head. Small feedlot numbers decreased to 130,000 and accounted






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

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


Characteristics of Feedlot Operations

Cattle feedlot operations may be divided into two basic types--the traditional
farmer-feeder and the large commercial feedlot operation (10). The size that
delineates the two is somewhat arbitrary, but most farmer-feeders operate with a
capacity of less than 1,000 head. Many farmer-feeders feed less than 200 cattle,
usually during the noncropping season, and raise most of their own feed. Feed and
labor costs make up a high proportion of the total cost of feeding cattle.
Consequently, the utilization of off-season labor, nonsalable roughage, and other low-
cost cattle feeding inputs makes cattle feeding an attractive supplementary enterprise
for many grain farmers.

The volume fed by farmer-feeders depends upon the price relationships between
their alternative farm enterprises, off-season labor availability, and off-farm
employment alternatives. The large farmer-feeders tend to operate on a year-round
basis with more specialized feeding facilities.

Farmer-feeders are typically in the older cattle feeding areas (Corn Belt,
Northern Plains, and Lake States), but are rapidly declining in numbers and in terms
of their relative production. This is particularly true in the Northern Plains where
large commercial feedlots are being established.

Large commercial feedlots represent a new technology in cattle feeding, being
highly mechanized and efficient. Labor is specialized and professional nutritionists,
veterinarians, and accountants are retained. Managers are well informed on national
and local grain, cattle, and beef markets and can receive information on demand
concerning specific buyer activities; many subscribe to commercial information
services and prices. The large feedlot managers, or their buyers, are continuously in
the market for feeder cattle on a broad geographic basis. They have current
information on prices, sources of inputs, and the availability and feeding quality of
cattle coming from different geographical areas during different seasons. They vary
their feeding programs to take into account the age and weight of cattle placed on
feed, kinds of feed available, and the finish or grade of beef desired. Feed milling
equipment and feed formulation technology are capital intensive. Management is aided
by a detailed set of records kept for each lot of cattle.

Most of the largest commercial feedlots are incorporated, but a number of the
moderate-size ones are not. Estimates developed from USDA and census data indicate
54 percent of all feedlots with 2,000-head capacity or more in 1974 were incorporated
(30, 32). However, these incorporated feedlots accounted for 87 percent of all fed
cattle marketed by all feedlots with 2,000 head or more capacity.

About 94 percent of all incorporated feedlots are closely held firms; 68 percent
are owned by fewer than 6 shareholders, and 90 percent are owned by fewer than 11
shareholders. One or two shareholders constitute a majority of the ownership in 70
percent of these feedlots. More than three-fourths of all closely held incorporated








Table 20--Fed cattle marketed, feedlots, and cattle marketed per feedlot, by feedlot capacity groups

S: Fed cattle
Fed cattle marketed Feedlots tte
Feedlot capacity__: marketed
(head) Head Percentage Number :Percentage of :per
: ;: : total feedlots : feedlot

1,000 Percent Number Percent Number

1977:
Under 1,000 : 7,927 31.9 130,049 98.60 61
1,000-1,999 : 1,176 4.7 819 .60 1,436
2,000-3,999 1,186 4.8 401 .30 2,958
4,000-7,999 : 1,653 6.6 238 .20 6,945
8,000-15,999 3,583 14.4 221 .20 16,213
16.000-31,999 : 4,846 19.5 140 .10 34,614
32,000 and over : 4,490 18.1 61 .05 73,607

Total/average : 24,861 100.0 131,929 100.00 188

1974:
Under 1,000 : 8,261 35.4 135,810 98.60 61
c. 1,000-1,999 :981 4.2 747 .50 1,313
2,000-3,999 : 1,065 4.6 484 .40 2,200
4,000-7,999 : 1,541 6.6 258 .20 5,973
8,000-15,999 : 2,854 12.2 212 .20 13,462
16,000-31.999 : 4,174 17.9 148 .10 28,203
32,000 and over: 4,458 19.1 73 .05 61,068

Total/,average: 23,334 100.0 137,732 100.00 169

1964:
Under 1,000 : 11,094 61.1 223,071 99.30 50
1,000-1,999 : 1,043 5.7 826 .40 1,263
2,000-3,999 : 1,147 6.3 435 .20 2,637
4,000-7,999 : 1,377 7.6 244 .10 5,643
8,000-15,999 : 1,772 9.8 119 1/ 14,891
16,000-31,999 : 1,153 6.4 36 1/ 32,028
32,000 and over: 558 3.1 8 1/ 69,750

Total/average : 18,144 100.0 224,739 100.00 81



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






Figure 7

Fed Cattle Marketed, by Region, 1955-77
Percent

90 Other

80 California

70

60 Southern Plains

50 --

Northern Plains
40

30 -

20 _Corn Belt -

10 I I I
1955 1960 1965 1970 1975 1980
Southern Plains: Texas, Oklahoma, Kansas, Colorado, New Mexico.
Northern Plains: Nebraska, South Dakota, North Dakota.
Corn Belt: Iowa, Missouri, Illinois, Indiana, Ohio.
Source: (30).



feedlots involve related shareholders. Thus, most incorporated feedlots are closely
held or family corporations. The widely held corporations accounted for about 7
percent of the cattle marketed in 1974, with most of these by lots having at least a
50,000-head capacity.

There were 23 feedlot firms with a one-time capacity of over 50,000 head in 1974.
These firms fed 14 percent of all fed cattle that year. Analysis of limited
information reported by the Census of Agriculture reveals that these large feedlot
firms, when compared to smaller firms, had multiple feedlot operations, depended
relatively little upon custom feeding, were more integrated with other agricultural
operations, and frequently were more involved in activities not related to agriculture
(table 21). More then 60 percent of the firms with 50,000 head capacity feedlot
operations had nonfarm activities, two-thirds of them outside agriculture.

Custom Feeding

The incorporated feedlots with a capacity of 12,000 to 49,999 head were heavily
involved in custom feeding. 11/ These feedlots, which marketed 26 percent of the fed
cattle in 1974, were generally closely held corporations (table 21).


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










Table 21--Characteristics of large corporate U.S. cattle feedlot firms, 1974


SOne-time capacity of feedlot firm (head) 1/
Item Unit
m : 12,000- : 20.000- : 30,000- : 50,000
: 19,999 : 29.999: 49,999 : and over


Firms

Fed cattle marketed (head)
Proportion of all marketing

Parent corporations

Public corporations

Multiple-feedlot operations:
More than one feedlot
More than three feedlots
More than five feedlots

Nonfarm business activities
Related to agriculture
With farm input
With processing
With wholesaling or retailing
With services and other
Not related to agriculture

Custom-feeding activities
Proportion of cattle custom fed


:Number

:Million
Percent

do.

do.


do.
do.
do.

do.
do.
do.
do.
do.
do.
do.

do.
do.


89.0


19.0


16.0
3.0
2.0

17.0
73.0
46.0
64.0
27.0
18.0
60.0

81.0
65.0


48.0


19,0

10.0


21.0
10.0
6.0

25.0
92.0
36.0
27.0
6.0
27.0
33.0

85.0
68.0


48.0

2.4
11.0

19.0

8.0


27.0
2.0


17.0
75.0
33.0
17.0
67.0

38.0

88.0
70.0


-- = Less than 0.5 percent.
1/ Combined capacity presented for


firms with more than one feedlot.


Source: (32).


23.0

3.1
14.0

57.0

44.0


87-0
48.0
30.0

61.0
93.0
54.0
62.0
46.0

64.0

61.0
41.0







Development of custom feeding activities closely paralleled the growth and
development of large feedlot operations (6). Capital requirements and risks
associated with the operation of large feedlots are so high that traditional means of
financing agricultural production have been inadequate to support the new system. At
current price levels, the total financing of 30,000 cattle on feed can exceed $15
million. Custom feeding is a means of providing the large-scale financing needed for
the new feedlots.

About 53 percent of the cattle marketed from incorporated feedlots with a
capacity of 2,000 or more head were custom fed in 1974 (32). This proportion was
equal to about a fourth of all fed cattle marketed in 1974. Taking into account
custom feeding at nonincorporated feedlots would raise the share to 30 to 35 percent,
largely unchanged from a decade earlier (20). Since fed-cattle marketing in 19-74
were 41 percent greater than in 1964, the number custom fed increased by about 2
million during the decade.

Clients who have cattle custom fed must, of course, assume the financial risks
involved, which are high compared to other agricultural enterprises. Financial
institutions will loan as much as 70 to 80 percent of the total costs, which at
current prices is as much as $550 per head. The client may need to provide only $125,
with the remainder provided by a commercial bank or other lender.

A 1974 study identified the legal form of organization of custom feeding clients
in the Southern Plains as 38 percent sole proprietors, 31 percent partnerships, 21
percent corporations, and 10 percent cattle-feeding clubs and limited partnerships
(7). The primary occupations of custom feeding clients, in terms of the proportion of
cattle fed, were identified as 30 percent professional feeders, 28 percent farmers and
ranchers, 16 percent livestock dealers, and 26 percent such other occupations as
bankers, retailers, doctors, lawyers, teachers, and meat packers (7).

Vertical Integration

Many of the large feedlots (2,000 head and over) are involved in parts of the
beef industry other than feeding. It is doubtful that any one feedlot operation is
involved in every stage of production and distribution, but it is fairly common to be
in at least two different stages. The other functions include cattle production,
transportation, packing, retailing, and food service.

Many large feedlots have vertically integrated with grain elevators and feed
manufacturers to achieve feed economies. This is a logical development because feed
accounts for a high proportion of the total cost of producing fat cattle and for which
any savings would offer a significant competitive advantage. Most large commercial
feedlots have not undertaken ownership of land or other resources required to raise
cattle or produce the grain for feed because of the large capital requirements.


Factors Causing Structural Changes in Cattle Feeding

A number of factors have influenced the changes in cattle feeding. These include
the Government farm commodity programs, strong demand for beef coupled with rising
consumer incomes, technical developments in grain production, and the exploitation of
economic opportunity by a new breed of agricultural entrepreneur.

Strong Demand for Beef

When assessing the forces behind structural changes, it is important to
understand that a strong increase in the demand for fed beef occurred during the time
that large commercial feedlot operations developed. The strong demand was partly






responsible for relatively high fed-beef prices. Per capital consumption of beef
increased by about 51 pounds in only two decades-, from 63 pounds in 1950 to 114 pounds
in 1970. This can be attributed to an increase in nominal per capital disposable
income from $1,400 to about $3,300 in the early seventies. Consumers have
historically increased the proportion of beef in their diet as income levels increase.
In addition, population increased from about 151 million in 1950 to more than 200
million in 1970 (34). The increase in consumption of beef between 1950 and 1970 was
equal to about 140 percent of the total production in 1950. This increase in beef
production was facilitated by the growth and development of cattle feeding.

.Feed Grain Supplies

The strong demand for beef influenced cattle feeders to utilize the farmers'
tremendous capacity to produce feed grains. Feed grain production increased from 113
million tons in 1950 to more than 200 million tons in 1974. Government feed grain
programs were in effect during much of this time and large quantities of feed grains
were under loan or owned by the Government, with production exceeding the needs of
livestock producers. The resulting low and stable feed grain prices encouraged the
Growth of cattle feeding. Utilization of corn and sorghum in cattle feeding increased
from 11 million tons in 1960 to about 37 million tons in 1972.

Feeder Cattle Supply

The increase in feeding could not have occurred so rapidly without an adequate
supply of feeder cattle. The cattle herd, and thus the calf supply, increased by one-
third during the sixties. But the large proportion of calves formerly slaughtered as
nonfed beef provided the major source of new feeder stock for the feedlots. The
proportion of the calf crop slaughtered as nonfed beef decreased from 21 percent in
1960 to 5 percent in the early seventies.

Forage supplies for cattle also increased as acreage formerly devoted to cotton
and grain shifted into forage. Much of this adjustment was due to the movement of
cotton production out of the Southeast. More than 50 million acres of cropland
shifted to conservation practices, much in forage, as a result of the Government
cropland diversion and conservation program in the fifties and sixties. The
productivity of the acreage diverted from crops to forage was high compared to other
land in forage. Even though there were regulations limiting the use of diverted
acres, grazing was allowed except during a 5-month growing period. As a result,
farmers and ranchers planted their diverted acreage in crops for winter and early
spring grazing.

A different situation exists, today. The reservoir of cattle available for
feeding but slaughtered as nonfed beef was virtually depleted by 1973. The acreage
and conservation reserve programs were not in effect from the early seventies through
1977, and high grain prices caused many farmers to shift acreage from forage to grain
production. Later, a sharp drop in feeder cattle prices led to a liquidation of
cattle herds which are only now beginning to be rebuilt.

Advantages of Large-Scale Feeding

The development of new technology--the large commercial feedlot--was another
important factor influencing structural changes in cattle feeding. There are
efficiencies in feeding cattle in large feedlots, at least up to 40,000-head capacity
(5, 9, 12). In addition to these technical efficiencies, economies of size in buying
inputs and selling fat stock, in the acquisition of information and capital, and in
developing risk diversion strategies may offer additional competitive edges to large
units. The existence of substantial scale economies permitting commercial feedlots to
produce at a lower average cost per unit than smaller producers has contributed to the
decline in the number of feedlots and may lead to even further concentration.






Large feedlot owners and their custom feeding clients may also be able to prosper
with relatively low feeding margins per head because of the large volume of operation.
Their use of highly leveraged capital may mean that a net margin of $4 to $5 a head
will provide an 8- to 10-percent annualized return on their invested capital.

Custom feeding has helped the large feedlots achieve economies of size without
assuming unacceptable levels of risk. Most of the risks are shifted from the feedlot
owners to the custom feeding client. The feedlots remain able to feed their own
cattle efficiently, even if limited in number, since custom feeding gives them the
necessary volume to spread costs. Small feedlots cannot justify the additional
recordkeeping,the expense of dealing with the custom feeding clients or their banks,
and other matters.

Large feedlots have also been able to cooperate, or informally integrate, with
packing plants located adjacent to their feeding areas. Such arrangements with
meatpackers apparently have reduced the cattle assembly costs and production
scheduling problems of beef processing plants. Thus, decentralization of the
meatpacking industry, allowing new and more efficient plants to be located near
concentrations of feedlots, has played an important role in the relocation of cattle
feeding.

Growth of large feedlots has also been abetted by provisions in the tax laws
which make feeding attractive. Recent changes in the tax laws limit former tax
advantages for agricultural limited partnerships and syndicated custom feeding
operations, but there are still income tax management strategies that can be followed
when feeding cattle that can benefit custom feeding clients. Tax regulations
permitting farmers to use cash accounting (rather than capital accounting) for tax
computation are used to advantage by cattle feeders, including custom feeders, many of
whom are seeking tax shifts for high nonfarm incomes.


Growth of Cattle Feeding in the Southern Plains

Commercial cattle feeding in the Southern Plains grew rapidly as a result of
several influences during the fifties and sixties. These included: (1) rapid
increases in feed-grain production as a result of technological developments and the
Government's production control programs, (2) development of new ways to finance
agricultural production and spread the risks involved with large operations, including
utilizing the equity of a second party (custom feeding), and (3) importation of new
types of management abilities to operate the large industrialized feedlots. These
influences were also felt in areas other than the Southern Plains, but to a lesser
extent.

Feed grain production in the Southern Plains increased significantly as a result
of a shift from cotton and wheat production to hybrid grain sorghum. Grain sorghum
was considered a minor feed grain crop in the midfifties, and the acreage controls did
not apply to it. The Government feed grain program did, however, provide an indirect
price support which encouraged sorghum production. The planted acreage of sorghum in
1954 increased by about 2 million acres in Texas alone, a result of decreased cotton
production caused by acreage restrictions. Grain sorghum, with similar climatic,
cultivation, and mechanization requirements as cotton, was a natural alternative to
cotton; in many cases it was the only one.

The introduction of hybrid grain sorghum shortly after the cotton acreage program
was initiated further accelerated the shift (table 22). The hybrid development made
it economical to develop new irrigation systems solely for sorghum production.
Farmers also intensified use of such inputs as fertilizer and adapted other yield-
increasing practices. The result was a substantial increase in the production of





Table 22--Grain sorghum production and cattle marketed from feedlots
in Texas, 1951-73


Year :Grain sorghum :Marketings from Grain sorghum :Marketings from
:production : feedlots :: production feedlots


S 1,000 1,000 :1,000 1,000
S bushels head :: bushels head

1951 : 74,193 NA :1963 : 242,660 896

1952 : 54,264 NA : 1964 : 215,648 971

1953 : 56,837 NA :: 1965 : 294,056 1,094

1954 : 1/135,630 NA :: 1966 : 311,696 1,412

1955 : 148,309 227 :1967 : 343,485 1,669

1956 : 124,202 307 :: 1968 : 340,780 1,970

1957 : 2/244,075 291 :: 1969 : 309,800 2,706

1958 : 251,427 296 :: 1970 : 329,616 3,138

1959 : 257,832 403 :: 1971 : 303,004 3,663

1960 : 258,552 477 :: 1972 : 391,780 4,308

1961 : 229,635 548 :: 1973 : 417,000 4,412

1962 : 201,006 756
: ~::


NA = Not available.
1/ Sorghum plantings increased by 2,029,000
2,400,000 acres because of acreage allotments.


acres in 1954 as cotton acreage decreased


2/ The first sorghum hybrids were available to farmers in 1957.

Source: (27).



sorghum in a period in which there was a concentrated effort through the feed-grain
program to curb production. Texas sorghum production increased by 287 million bushels
in 1953-68.

A second important factor in the development of large feedlots in the Southern
Plains was the emergence of entrepreneurs skilled in the utilization of outside equity
capital to operate the feedlots and spread the large financial risks. This was done
mainly through custom feeding in the large feedlots for many types of clients. The
custom feeders brought capital from people who otherwise would not have invested in
agriculture. Commercial banks, particularly the large metropolitan banks in the
Southern Plains, worked diligently with feedlot managers to develop procedures to
finance both the feedlots and their custom-feeding clients. The shortrun nature of
the production of fat cattle and the increasing value of cattle used as loan






collateral made cattle feeding loans an attractive alternative for bank loans. Later,
new types of capital raising activities evolved, including debentures, public stock
offerings, banker acceptance, and limited partnership arrangements, for financing
cattle feeding and custom feeding clients.

The third important factor involved in the structural change, the importation of
management, is difficult to measure. Many feedlot managers were brought into the High
Plains from California, the Corn Belt, and other areas. Many of these managers had
previous cattle feeding experience. However, the management of these large feedlots
represents much more than just the feeding of cattle and goes far beyond the usual
type of management in traditional farming. This management involves organization and
direction of people, capital, machines and equipment, feed formulas, recordkeeping,
the analysis of these records and other data, time and motion studies,
experimentation, and working with consultants. Managerial abilities required to
operate these large feedlots more nearly approximate those found in the industrial
sector then the traditional agricultural sector.

Additional factors likely contributed to the development of the large feedlot
industry in the Southern Plains, but simply delineating these factors misses the most
important point. What is important to understand is that it was the convergence of
several seemingly unrelated phenomena--including Government commodity programs,
development of hybrid sorghums (growing out of tax-supported research), strong demand
for beef and high consumer incomes, Federal tax policies, and new approaches to
management and finance--that brought about major structural change. This observation
suggests that if the potential costs and benefits of public policies and programs are
to be fully understood, a much better job must be done of tracing through the
secondary and tertiary impacts of those programs and their interactions with other
phenomena.

The story of structural change in the Southern Plains cattle-feeding industry may
not end here. Water tables are declining in the Southern and Central Plains, reducing
the acreage where irrigation is feasible and increasing energy requirements to pump
water. Energy costs are rising rapidly, impacting heavily on energy-intensive
irrigated crops such as grain sorghum. If the declining water supplies and rapidly
rising energy costs curtail crop production in the Southern Plains, what will be the
impact on the feedlot industry located there? Will it relocate? Will shipments of
grain from the Corn Belt increase? Answers are not available, but the questions are
important and will be the subject of further research.






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