Productivity gains allow farmers to manage larger farms, earn more

Published on: Aug 29, 2013

FARMING has changed significantly over the past century, from bucolic scenes of horse-drawn plows to those of mighty machines guided by global positioning satellites.

While some look back wistfully at the "good ol' days" that have long gone by, the story of how modern farms became highly efficient, food-producing businesses is largely one of technology facilitating the ability of family farmers to produce more food using fewer resources.

According to some historical data that were recently compiled by the U.S. Department of Agriculture's National Agricultural Statistics Service, U.S. farmers are feeding far more people today than they did in 1936. For example:

* U.S. egg exports skyrocketed from 5 million doz. in 1940 to more than 700 million doz. by 1944, owing to World War II-driven changes in farm policy.

* Hybrid seed accounted for only one-tenth of 1% of the 1933 corn crop, but more than 90% of the 1956 crop harvested was from hybrid seeds.

* Iowa harvested 2.36 billion bu. of corn in 2011, more than the entire U.S. corn harvest in 1935.

* While the on-farm horse and mule population stood at 18.7 million in 1930, it declined to barely 3.1 million in 1960, after which USDA discontinued its annual data reporting series.

Such statistics are interesting to ponder, certainly, but taken in context, they help illustrate a story.

A recent study by USDA's Economic Research Service (ERS) found that farms in the U.S. are, generally speaking, becoming larger and more specialized in response to technological opportunities and economic incentives.

"The shift of acreage to larger farms is part of a complex set of structural changes in agriculture," USDA economists explained. "The number of midsized crop farms has declined, while farm numbers at the extremes — large and small — are growing."

ERS examined estimates of midpoint cropland acreage over time and found that the midpoint acreage had doubled from 1982 to 2007 to reach 1,105 acres.

Meanwhile, the midpoint acreage doubled in 16 states and also doubled in each of five major field crops, including corn, wheat and soybeans.

The report outlines several reasons why farms have become larger over the past 30 years, one of the most important of which is economic.

"Larger crop farms continue to realize better financial performance: Average rates of return on equity increased with farm size in five major commodity categories analyzed in this report," the ERS economists wrote. "In turn, larger farms utilize labor and capital more intensively, which provide them with the primary source of their financial advantage."

However, technology was, perhaps, the first major driver of a shift in farm size and composition.

ERS singled out such watershed events as the widespread adoption of the tractor, hybrid seeds, chemical pesticides and genetically modified crop varieties as each allowing farmers to produce more food using less labor, thus delivering an improved rate of return to their equity.

In the long term, such shifts led to another key facilitator of farm size in the latter half of the 20th century: the separation of livestock farming from crop farming.

 

Becoming a specialist

Adopting ag technologies: Productivity gains allow farmers to manage larger farms, earn moreERS found that most farms raised multiple species of livestock as late as 1960, with most farms also raising corn to feed those animals.

Over time, however, livestock production has become more specialized, with fewer than 5% of farms having chickens, hogs or milk cows by 2010 and with most of those farms purchasing their feed rather than producing it on the same farming operation (Figure 1).

Because raising beef cows, particularly in the cow/calf segment, is less labor intensive than dairy, egg or pork production, many farms still raise beef cattle, and the beef industry, in general, has not seen the same type of consolidation as other farm sectors have.

Furthermore, since more livestock producers purchase feed rather than grow it, fewer farms now grow corn, and crop-specific operations have increased in size.

While livestock producers have become highly specialized due to the economies of scale available to larger hog, dairy, fed cattle and poultry farms, crop farms still display some level of diversity, typically producing two or three different commodity crops.

For example, fewer than 5% of corn production occurs on farms that produce only corn (Figure 2). Rather, more than half of corn production occurs on farms that produce at least two other crops, such as wheat and soybeans, in a rotation.

Rice and hay production is often the most specialized, with as much as 33% of hay coming from farms that raised the hay as their only crop.

Critics of consolidation, however, should take heart. In its study, ERS noted that the rate of increase in farm size has slowed significantly over the past decade following more than 20 years of a consistent trend.

This suggests, possibly, that the productivity gains farmers had enjoyed began to level off in recent years and stymied the growth rate somewhat.

Another factor to consider in analyzing size of farms is the basic cost of living.

While the midpoint for U.S. milk cow inventory increased from 80 head per farm in 1987 to 570 head in 2007 (612.5%), the Consumer Price Index increased from 113.6 to 207.3 (82.5%).

Given that farmers generally do not set the price at which they sell their products, the interplay of a rising cost of living is an important consideration.

Using the dairy example, the farm operator has to consider not only the amount of profit needed to feed his own family but also the wages he will have to pay his workers on the farm.

As one measure of the wage increase over time, the federal minimum wage in 1987 was $3.35 per hour, compared with $5.85 in 2007 (and $7.25 today).

James McDonald, a co-author of the ERS report on farm size, cautioned that the Consumer Price Index trends are only part of a larger, more complex story.

"For someone who has not adopted new technologies and whose costs have not fallen, you're going to have to get a lot bigger to maintain a given standard of living," he said.

However, "it's not necessarily the case that you have to get bigger to keep up your standard of living, but when you adopt these technologies, productivity gains mean that farmers can manage a larger farm and make more money doing so," McDonald added.

Volume:85 Issue:35