Frederick, A.L. (Roy)

English

Research Papers in Economics

REVITALIZING  FAMILY  FARM AGRICULTURE
A.L. (Roy) Frederick
University of Nebraska-Lincoln
Family farms in the United States traditionally have enjoyed a status
akin to motherhood,  apple pie, and the Fourth of July.  By significant
majorities,  public  opinion  polls  indicate  that  citizens  laud  the  past
performance  of family farms  and want them to survive  - better yet,
prosper - in the future. Moreover, candidates for political office know
that votes are to be won or lost, depending  on their responsiveness  to
the problems  of family  farmers.
Economic  Perspective  on Family  Farms
As economists,  we have justified  the existence of family-size opera-
tions primarily on the basis of technical production efficiency. Perhaps
no  other  area  of agricultural  economics  has been studied  more than
the economies  of size of farm firms. Nearly  20 years  ago,  Madden  [4]
concluded  after  an extensive  survey  of relevant  literature  that crop
farms  requiring one  or two man-years  of labor could capture  most of
the  available  economies  due to  size.  More  recently,  Miller  et  al.  [5]
found that middle-size  commercial  farms (gross incomes from $41,000
to  $76,000)  achieve  most technical  cost  efficiencies  and  any  further
increase  in size results in little benefit to society.
During  the  1980s,  family  farm  agriculture  has  been under  more
stress than at any time since the  1930s. Both the Economic Research
Service  [8]  and Jolly and Doye [1]  have found particular problems for
midsize farms, i.e., those with sales of $40,000 to as much as $500,000.
Such farms are  considered  to  be the  mainstream of family-size  com-
mercial  agriculture.  Farms with annual sales that fall below this range
often have sufficient off-farm income to service their agricultural debt.
For farms with sales above $500,000, available assets (and debt) seem
to be used more efficiently to generate high levels  of income.  In part,
this may  be a function of the  enterprises,  such  as poultry and fruits
and vegetables, in which they tend to specialize.  However,  an increas-
ing body of literature suggests that large farms have advantages that
are not manifested as technical  production efficiencies.
In particular, researchers  have found a different result if pecuniary
economies of size (defined as lower costs of purchased inputs or higher
90returns to marketings as  farm size increases)  or economies from ver-
tical integration are included in the analysis. Krause and Kyle [2],  for
example, found substantial advantages in both the purchase  of inputs
and product sales for Midwestern  corn farms in the 5,000  acre range.
Krenz,  Heid,  and  Sitler  [3]  saw evidence  of pecuniary  economies  in
both input and  product  markets for  large  wheat  farms  in the Great
Plains.  Smith,  Richardson,  and  Knutson [6]  found that vertical inte-
gration between  input markets and  farm firms  as well  as pecuniary
economies in product markets provided advantages to large cotton farms.
Tweeten  [7], meanwhile, has taken a noncommodity  approach to the
question  of economies  of size.  He  concludes  that  resource  costs  per
dollar of output decline as gross sales increase up to about  $2  million
- and perhaps beyond.  Obviously, this size of operation is not usually
thought of as  a "family farm."  (Tweeten acknowledges  the  methodo-
logical limitations to his  approach in that the very  large farms  often
offer an atypical commodity and market configuration that make com-
parisons to smaller farms difficult.)
The  point of the brief overview  above  is to raise  a  question about
the appropriateness  of defending a system of family farms on the basis
of technical production efficiency  alone. Is it futile to consider revital-
izing family  farm  agriculture  for  the  long  haul  if larger  operations
consistently have an economic advantage? Is the advantage that larger
farms  apparently  have  even  greater  on  an  after  tax  basis?  Or  can
family farms be defended  using some other  economic rationale,  such
as their favorable impact on other economic entities (e.g., farm supply
firms) within their trade  area?
If society collectively decides it is desirable to maintain a system of
family farms,  and  if such farms  do not achieve  maximum economies
of size, then targeted public policy initiatives will be necessary to  as-
sure the continuation of family farms. The present limitation  of $50,000
in direct  assistance  through  commodity  programs  may  improve  the
competitive  odds  of middle-size  farms compared  to  those with larger
sales volumes.  A wide variety of other initiatives  could be devised.
While  questions  remain about  the  long-term  prospects for  family-
size  farms,  most  recent  attention  has  been  focused  on  current  cash
flow  inadequacies,  especially  for family  farms  with high  debt  loads.
Let's turn our attention now to the immediate future.
Income  Prospects
Many family-size  farms are experiencing  stress because  they have
too much debt for the income stream that's being generated to pay off
that debt. Furthermore,  the problem is exacerbated by  continuing de-
clines in the value  of assets  on which the  debt is encumbered.  Stress
can be alleviated only if income increases, debts are reduced,  or asset
91values are stabilized.  Failure to do any of these will surely bring  ad-
ditional liquidations, foreclosures,  and bankruptcies.
There  are  many dimensions  to  any  analysis  of farm  income  pros-
pects. To make it manageable, I've selected three factors that are likely
to  be key determinants  of farm  income  for the foreseeable  future:  1)
conditions  in the  macroeconomy;  2)  prospects  in the  export  market;
and 3)  the  outlook  for  commodity  price  and  income  supports.  These
key factors  often intermingle  with each other, but each is still worth
considering independently.
Macroeconomy. The single most important  consideration in the ma-
croeconomy  is  the  continuing  federal  budget  deficit.  As  long  as  the
deficit  remains  in the  $200 billion  range, the  Board  of Governors  of
the Federal  Reserve  System  apparently  will feel obliged  to keep  real
interest rates higher than the historic norm of about 3 percent. Lower
interest rates would have many benefits: reduce farm operating costs;
put  downward  pressure  on  tlhe  dollar;  and  make  inventory  holding
more desirable,  including  land ownership.
I am not optimistic  about a significant budget  deficit  reduction for
several  reasons, the  most important of which are political.  Many  cit-
izens support the concept of reductions in federal government expend-
itures or tax reform until they determine how such changes will affect
them adversely.  Then,  more  often than not, they undertake  vigorous
lobbying  against proposed changes.
Exports. Increased  exports would seem to be an essential part of any
improvement  in  the  financial  status  of the  family  farm  sector.  Do-
mestic demand  is not sufficiently  large  now,  nor is it projected  to be
in the future, to absorb the production potential  of American farms at
desirable price levels.
Without question, the  most positive  factor  is that worldwide  popu-
lation continues to increase at the rate of 75 million per year. However,
this population  growth  does not translate  directly  into  food  demand
(in an  economic  sense)  because  most  of this increase  is occurring  in
less  developed  countries.  Opportunities  for  new commercial  sales  on
the basis of population  growth will be fairly  limited.
In addition, it must be acknowledged that the United States is facing
new competition nearly  everywhere  we turn. Some  examples  are Ar-
gentina selling to the Soviet Union, the European Community selling
to countries in northern Africa and the Middle East, and China selling
to Japan.  It  will be  difficult  to  regain  market share  in these  cases
unless it is accomplished  on the basis of lower prices or other favorable
trade  terms.  There  are three reasons  for  more price  competition:  (1)
the relatively high value of the dollar; (2)  large export subsidies, such
as  in the  European  Community;  and  (3)  increased  use of relatively
cheap  labor in countries  such as  Argentina.  In short, there seems  to
be no alternative  but to be a tougher  competitor.
92If the United  States  is unwilling  to be price competitive,  then  the
only  other alternative  is  to be prepared to  fully exploit our role as a
residual supplier. In the event of a major crop failure elsewhere in the
world,  the United States would be about the only country prepared to
make massive sales. We would benefit at least for a year or two. How-
ever,  unless the conditions noted above  change,  we ought  to be fore-
warned that any spurt in exports will be temporary, not permanent.
Price and Income Supports. Raising  price  and  income  supports  is
often  proposed  as  a  cure for  the  financial  ills of agriculture.  In the
context of current stress, the forthcoming 1985 farm bill has taken on
particular importance.  However, expectations for any farm bill should
be modest with respect to its ability to alleviate  financial stress for at
least two reasons:
*  Prosperity  in American  agriculture  is  closely  correlated  to  how
little, not how much, support programs have had to be used. Pros-
perous periods in the last 50 years have included  the World War
II  era,  the early  1950s,  and  the  1970s.  Programs  weren't  used
much in any of these periods. It is difficult to identify a prosperous
period when supports were used extensively.  Supports have been
most  useful  in  providing  an  economic  "safety  net,"  not  an eco-
nomic rejuvenation  for agricultural  producers.
*  For producers  encountering  stress  (i.e.,  those  having  debt/asset
ratios of 40 percent or more), price or income supports might have
to be increased substantially  (30 percent or more) to provide suf-
ficient cash  flow  to service  all  debt [8].  This would mean higher
costs to the government and a larger accumulation of commodities
in  government  storage.  The  present  administration  is  trying
mightily to avoid either eventuality.
Overall,  I  believe  it is  difficult  to make  a  case  for  higher income
through  1990. Perhaps the best chance would come from weather ab-
errations that cause the United States export share to increase. Hope-
fully, the macroeconomy  will treat farmers less negatively than in the
first five  years  of the current  decade.  But  expectations  of assistance
from farm  price and  income supports  should not be overblown,  espe-
cially if a transition to a greater market orientation occurs and budget
restraints prove  meaningful.
Balance Sheet  Adjustments
If incomes  can't be improved,  then it may be necessary to consider
debt restructuring or reduction  as a public policy option. While there
are no  easy alternatives  for dealing with excess  debt,  a "do nothing"
public policy will simply cause the magnitude of the problem and the
cost of adjustment  to grow.  To do nothing is policy by default.  Farm
foreclosures  and bankruptcies  would increase,  as  would agricultural
93bank  failures.  Major  structural  changes  could  be  expected  in  both
farming and institutions providing credit to farmers.
Among  the policy  initiatives  that have been  suggested  to  address
the  excess debt  problem in agriculture  are government loan guaran-
tees,  principal  forgiveness  or buy-downs,  interest  buy-downs,  a fore-
closure moratorium, and a federally  chartered agency that would buy
land  and,  in  so  doing,  help  stabilize farm  real  estate prices.  Several
issues  are  common  to  each  of these  alternatives:  How  should  debt
burdens  in agriculture  be shifted?  What would be the cost of shifting
debt burdens? Who would have operational control of agricultural pro-
duction after the  shift occurred?  Should public policy toward debt  in
the agricultural sector attempt to "buy time," or should any initiatives
taken be considered permanent?
If debt restructuring  occurs in the family farm sector, it is almost a
tautology  to suggest that assets will be restructured  as well.  A likely
prospect  is that there  will be increased  separation  of ownership  and
operation  of agricultural assets. This, in turn, raises  a number of im-
portant questions:  What should be the property  rights of tenants ver-
sus landlords?  How  much  outside equity  should be  allowed  in
agriculture?  Will new institutional structures need to be found to as-
sure efficient operation of farm firms?
Concluding  Comment
There's a tendency  for many of us - especially those of us who are
economists - to project the future  on the basis of current conditions.
In the  1950s and  1960s, this method of prognostication  worked  quite
well  for the  agricultural  sector.  It has not  worked  well  in the  1970s
and 1980s because  of the sector's growing dependence  on the macroe-
conomy and international markets. Perhaps some "bolt out of the blue"
(such as the Russian grain purchases in 1972)  will improve financial
conditions  more  quickly than expected.  Even then,  however,  one has
to wonder how much benefit would permanently  accrue to family farms,
given  the competitive  cost structure  that they  face  and  a future  de-
mand function that is uncertain at best.
REFERENCES
[11  Jolly, R.W.  and  D.G. Doye. Farm Income and the Financial Condition of United States Agricul-
ture. FAPRI Staff Report 8-85, Iowa  State University,  July 1985.
[2]  Krause,  K.R.  and L.R.  Kyle. Midwestern Corn Farms:  Economic Status and Potential for Large
and Family Size Units. Washington  DC:  USDA ERS Agr.  Econ. Rep.  216,  1971.
[3]  Krenz,  R.D.,  W.G.  Heid,  Jr.,  and  Harry Sitler.  Economies of Large Wheat Farms in the Great
Plains. Washington DC:  USDA ERS Agr. Econ.  Rep.  264,  1974.
[41  Madden, J.  Patrick. Economies of Size in Farming.  Washington  DC: USDA ERS  Agr. Econ. Rep.
107,  1967.
[5]  Miller, T.A., G.E. Rodewald, and R.G. McElroy. Economies of Size in United States Crop  Farming.
Washington DC:  USDA ERS Agr.  Econ.  Rep. 472,  1981.
[6]  Smith, E.G.,  J.W. Richardson,  and R.D.  Knutson. Cost and Pecuniary  Economies in Cotton Pro-
duction and Marketing: A Study of Texas Southern High Plains Cotton Producers. Tex. Agr. Exp.
Sta. Rep. B-1475,  Texas A&M University,  1984.
94[7]  Tweeten,  Luther. "Diagnosing and Treating Farm Problems." United States Agricultural Policy
1985 and Beyond,  ed.  Jimmye  Hillman,  pp.  19-52.  Tucson:  Dept.  of Agr.  Econ.,  University  of
Arizona,  1984.
[8]  U.S. Department of Agriculture. The Current  Financial  Condition of Farmers  and Farm  Lenders.
Washington  DC:  ERS Agr.  Info.  Bull. 490,  1985.
95STATUS  OF THE 1985
AGRICULTURAL
AND FOOD LEGISLATION

Department of Agriculture. The Current Financial Condition of Farmers and Farm Lenders. Washington DC:

Diagnosing and Treating Farm Problems.&quot;

Economies of Large Wheat Farms in the Great Plains. Washington DC:

Economies of Size in United States Crop Farming. Washington DC:

Farm Income and the Financial Condition of United States Agriculture.

Midwestern Corn Farms: Economic Status and Potential for Large and Family Size Units. Washington DC:

REVITALIZING FAMILY FARM AGRICULTURE

REVITALIZING FAMILY FARM AGRICULTURE

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