A time to choose : summary report on the structure of agriculture

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BOSTON PUBLIC LIBRARY

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GOVERNMENT DOCUMENTS DEPT
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A Time to Choose:

Summary Report on the
Structure of Agriculture

United States Department of Agriculture

■••♦on Pubic Library

A Time to Choose:

Summary Report on the
Structure of Agriculture

GOVERNMENT DOGMENT3
BOSTON PUBLIC LIBRARY
:■ . 700 Boylston Street
^^Boston,MA02117

United States Department of Agriculture
Washington, D.C.
January 1981

Digitized by the Internet Archive

in 2014

https://archive.org/details/timetochoosesummOOunit

TABLE OF CONTENTS

Page

FOREWORD, by Bob Bergland 1

INTRODUCTION: Goals for Food Policy 14

PART I: AMERICAN AGRICULTURE AND ITS ENVIRONMENT 19

Chapter 1 : The Global Context 22

Chapter 2: The Rural Context 30

Chapter 3: A Profile of American Agriculture 40

PART II: AREAS OF POLICY CONCERN 71

Chapter 4: Landownership 72

Chapter 5: Soil and Water Conservation 80

Chapter 6: Tax Policy 90

Chapter 7: Commodity Policy 100

Chapter 8: Credit Policy 112

Chapter 9: Public Research and Extension Policy 126

Chapter 10: Agricultural Labor 132

Chapter 11: Trade Policy 138

PART III: CONCLUSIONS AND RECOMMENDATIONS 141

BIBLIOGRAPHY 153

AUTHORS AND CONTRIBUTORS 164

FOREWORD

I grew up on a farm that my grandfather bought eight years before I was born, just
before the World War I "boom" broke. He, my father and my uncles worked that
farm through those bad years.

At that time 27 percent of all Americans gainfully employed were farming.

I was eight when my grandfather died. By then, the farm was a third smaller than it
had been originally, and what was left was divided five ways at his death.

On the national scene, the Supreme Court had invalidated the first Agricultural Ad-
justment Act, but Congress had quickly substituted another statute. That same year,
the Commodity Exchange Act and the Rural Electrification Act were signed into law.
President Roosevelt appointed a committee to address a chronic aspect of an al-
ready bleak farm portrait: the spread of farm tenancy.

By working in town, my parents were able to keep the farm, support us, and eventu-
ally buy out my aunts and uncles. With one of the first rural credit loans of the New
Deal, they added 200 acres of prime land along the Roseau River.

When I left agricultural college in 1948, World War II and rationing of food and ma-
chinery were over; the Farmers Home Administration, basic authorities for the Agri-
cultural Marketing Service and the national school lunch program were in place, and
more than seven years of high Federal price supports were about to end. Farmers'
equities had more than doubled in a decade.

In Washington, political, farm-organization, and church leaders were setting up or fol-
lowing through on a series of study commissions. They were concerned about agri-
culture's future. How could the Government help "family farms" get big enough to
provide a family a decent living? How could agriculture as a whole be assured of a
part of the postwar prosperity that almost everyone expected to come?

In 1950, I was able to buy my own 260-acre farm.

Across the farm belt, what we now call the "second agricultural revolution" — the sky-
rocketing advance of technology and of dreams — was underway.

Average farm size had grown from 175 acres to 213 acres in a decade, and the
number of farms had declined from 6.4 million to 5.6 million, with two-thirds of the
drop coming in the five years following the war. Of all Americans gainfully employed
then, 12 percent were farming, and 28 percent of the farm families had cash in-
comes under $1 ,000.

Of the nearly 15 million men, women, and children who would "leave the farm" in the
next three decades, 7.4 million — 48 percent — would leave in the 1950's.

1

Many of those who stayed would start moving out of pre-electricity rural isolation into
the mainstream of the American middle class. Television, radio, and the mass media
that began its own revolution during the war would start breaking down cultural bar-
riers and attitudes into shared values and dreams faster than the interstate highway
system could be built to help transform marketing. Commercial feeding of DES
growth hormones to cattle began; the mechanical tomato harvester would be a real-
ity by the end of the decade.

The Federal Government's agricultural attention would be concentrating on exports,
including the new Food for Peace program, as a way out of surpluses, along with
price supports and attempts to control production.

But technology raced ahead, productivity soared, and the surpluses became chronic.

At home, we kept our farm going with part-time jobs, and two winters of construction
work in Florida.

In time, we changed from general farming to one main crop: grass seed. Research
provided a strain that, after three years of experimentation, produced a good crop. I
was able to buy my father's farm, again with the aid of a Government loan, and
shifted away somewhat from specialization by planting timothy for export.

In 1961, I started to help direct some of the Federal farm programs as chairman of
the Minnesota Agricultural Stabilization and Conservation Service.

At that time, less than eight percent of U.S. workers were in farming, and nearly 6
million persons would be leaving farms during the decade.

In 1963, we moved to Washington for five years while I worked as Midwest director
of ASCS.

By 1964, the number of farms was below 3.5 million, and the average size was up to
332 acres, nearly double what it was before World War II started.

In 1970, I was elected to the U.S. House of Representatives from Minnesota's Sev-
enth Congressional District, for what would become a six-year stint.

There were then 9.7 million persons in the farm population, living on 2.79 million
farms. The average-size farm was 374 acres.

During my first year in Congress, the Food Stamp program was expanded to reach
more of the needy. It had become a national program in 1964, about the time it was
discovered that 30 percent of the 1 1 million rural citizens living in poverty were also
living on farms.

2

Over the following years,

• The Animal and Plant Health Inspection Service was established in the De-
partment of Agriculture.

• A Rural Development Service was created in USDA and the landmark Rural
Development Act was adopted.

• Farm credit programs, initiated during Woodrow Wilson's administration, were
updated.

• USDA lost the regulation of pesticides to the new Environmental Protection
Agency.

• "Consumer" showed up in the title of a Federal farm bill for the first time, re-
flecting not only the urban dominance of the Congress but the fact that retail food
prices in 1973 were rising at an annual rate of 14.5 percent. That act markedly in-
creased the discretionary power of the Secretary of Agriculture to manage commod-
ity programs to meet changing economic circumstances and directed him to encour-
age farmers to "produce to their fullest capabilities."

• Farm numbers continued to decline. By 1974, they were down to 2.7 million,
and the average farm size was up to 388 acres. In the previous five years, every
size category of farm had lost members except those under 1 0 acres and over 1 ,000
acres. Sixty-two percent of the farms were owned by persons who worked no other
land. The proportion of full tenants was down to 1 1 percent — but probably due in
large part to the mechanization of such crops as cotton, which took sharecroppers
out of farming in the South. In between were many of the most prosperous, large-
scale farms: about half their acreage owned, about half rented. The continued availa-
bility of irrigation water in the High Plains, and the control of publicly reclaimed water
in California on farms far larger than the 160 acres set down in the original water-
policy statute, were becoming major issues.

• With commodity futures trading rapidly moving toward $1 trillion in transac-
tions a year, a new independent agency was created to regulate the exchanges.

• The Food for Peace program was revamped, strict grain export-monitoring
was put into effect, a five-year grain agreement with the Soviet Union was signed,
and stringent new standards for weighing, grading and inspecting export grain were
enacted.

• The Homestead Act of 1862 was repealed.

I remember those years now as one crisis after another, a seemingly endless debate
on agricultural bills, with little or no discussion of agricultural policy.

As a farmer who had no choice but to roll with the punches — because that was our
home, our land, and I wanted to keep it — I had always felt there had to be a better
way to make farm policy and make the farm programs conform to that policy.

As a farm-program administrator, I still felt there had to be a better way.

After six years in Congress, I was absolutely convinced.

3

I was always troubled during those hours and hours of testimony and negotiation that
we never seemed to get off the same familiar, circular tracks: the levels of price and
income supports, the levels of exports, the constraints of the budget.

We didn't know who exactly was being helped or who was being hurt by the meas-
ure before us. The problems were seldom clearly defined. If they were, they were
cast as narrow but immediate crises that needed patches quickly. Other than a dime
a bushel here or a few pennies more a pound there, the remedies presented were
either politically unacceptable or simply made no sense.

We thought — we hoped — that if we helped the major commercial farmers, who pro-
vided most of our food and fiber (and exerted most of the political pressure), the
benefits would filter down to the intermediate-sized and then the smallest producers.

I was never convinced we were anywhere near the right track. We had symbols, slo-
gans, and superficialities. We seldom had substance.

Soon after I was appointed Secretary, some thoughtful commentary in newspapers
and magazines addressed the growing problems in agriculture in what was projected
to become a "bust" year for many farmers. Reading these articles made me want to
use my time as Secretary to try to move agricultural policy closer to that right track,
wherever that was.

I knew from my own experience some of the older problems these editorials and arti-
cles discussed and, from talking to constituents and to my daughter and son-in-law, I
also knew the symptoms of newer problems.

For example, after I was confirmed as Secretary, my daughter and her husband
leased our 600-acre farm, and their situation helped me identify with the problems
now faced by those trying to get a start in farming. Even if my wife and I had been
interested in selling the farm, my daughter and son-in-law could not have made the
interest payments on a fair market price out of the likely cash receipts. The value of
the farm's assets had quadrupled since we bought the first 260 acres in 1950, and
the demand for farmland continues to push up the price.

One neighbor with 1 ,800 acres is seeking more land for his two sons and can pay
the price. A few miles down the road, the daughter of a German industrialist owns
almost 17,000 farm acres. The pressure on land prices is not going to ease around
Roseau, Minnesota, or any other farm-based community that I know about, anytime
soon.

On the other hand, as tenants, my daughter and son-in-law can work fulltime at other
jobs, put in twice as much time during the planting and harvest, and bring in gross
receipts of $100,000.

4

But this also raises questions about Federal farm policy. Where should we be direct-
ing our programs — credit, research, conservation, and technical assistance, not just
income and price supports? Should we simply concentrate on overall production and
export volume? Should we continue to ignore the role of off-farm income? How do
we relieve the pressure on land prices, so out of proportion to the current income the
land can return that new farmers find it almost impossible to bid on it? If we can find
a way, should we?

As Secretary, I wanted to take up these central concerns. But, first, we had a farmer-
owned grain reserve to put into place, as a start toward halting the plummeting grain
prices and stabilizing markets, and there was a new farm bill to be developed.

The 1977 farm act was nine months in the making. It was and still is the most com-
prehensive assembly of elements for a national food and agricultural policy ever en-
acted in a single piece of legislation. The reserve program was endorsed; income-
supplement levels were geared more closely to the costs of producing the commod-
ity; benefits rigidly allocated by outdated acreage allotments were replaced by a sys-
tem basing them on what was actually planted. All were features designed to provide
producers with more latitude in decision-making, along with rewards for responsible
risk management.

A new organizational structure was established to help redirect research and educa-
tion, and the food stamp program was totally revamped, with eligibility for those ben-
efits narrowed but access to them eased, a relief to millions of the rural poor.

And, during the final steps of the legislative process, a provision was added reaffirm-
ing what was called a "historical policy" of encouraging the family farm system, for
the social well-being of the Nation and a competitive environment in food and fiber
production. A "family farm" was not defined, and, the Congress stated, programs
should not be exclusively administered for the benefit of family farms.

As good for farming as the 1977 farm act was, it still basically approach'^ agricul-
ture as if all farmers were alike, had the same problems, received the same benefits
from the programs, and should be assisted on the basis of farm-unit production
rather than per-person need. By and large, it failed to recognize any special prob-
lems of farms of different sizes or organization or experience, bought under different
economic circumstances in different places.

At its heart, the directions in American agriculture with which the 1977 act was con-
cerned were the direction of unit prices of supported commodities and the magnitude
of budget expenditures. Averages and the dictates of the legislative calendar were
still the principal guideposts.

There had to be a better way.

By 1978, the farm population — using the same standard for previous years — was
down from 1970 to 8.01 million persons, a decline of 1.7 million but still the smallest
eight-year decline since the end of World War II.

5

They lived on fewer than 2.5 million farms and represented less than four percent of
the population. The largest 20 percent of those farms by sales accounted for four out
of every five dollars worth of food and fiber produced. Several hundred of these
farms were selling more than $10 million worth of products a year. Many of the
smallest farms were homesites for families living reasonably well on a combination of
farm and nonfarm income. Respected observers, however, were pointing to pres-
sures on the "disappearing middle," the group of medium-sized places between the
big operations and the part-time farms.

Our larger farms — almost entirely operated by families — have given us the most
abundant, efficiently produced supply of food in recorded history, at relatively low
prices. Whenever I wondered aloud if we were on the right policy and program track,
I was pointedly reminded that abundance is the main objective of the system, that
this had been the goal of farm legislation for 50 years. But what had happened to our
farm system along the way?

The success of our agriculture is true, but it is also true that, by 1978, about 7.7
percent of the households in America owned all the farm and ranch land. Of those
households, 62,260 — the population of a medium-sized city — owned three of every
10 acres. How did this come about, in a Nation that came into being with one of its
principles being the widespread ownership of property? Ownership of property is still
one of Americans' most cherished dreams, but this was dramatic evidence that few
were achieving it, if their dream involved farmland.

What is more, about 70 percent of those who owned farmland in 1978 were over 50
years old. That land will be changing hands in the next 20 or 30 years, so now is the
time when we should be thinking hard about the directions in which we want to go.

It was clear to me that fundamental shifts were underway in the agriculture that has
been my whole life.

There had to be a way to move toward a policy that has a clear, honestly stated
purpose and direction, and away from programs fashioned by events and circum-
stances and then labelled "policy."

Farming had become an enormously more complicated business since Helen and I
bought our farm in Roseau 30 years ago. Yet policymakers— and that includes the
representatives of the general farm organizations, as well as elected and appointed
officials — were making decisions without a clear, overall focus or goal, without an
eye to the future.

As I was considering different ways to address this problem, I became acutely con-
scious of how many others shared my concerns.

All of us who cared about the future of American agriculture, I was convinced, had to
stop living inside the cliches of our own making, and start facing the serious but im-
perfect choices that were presenting themselves. In short, we had to think creatively.

Many of the changes I saw occurring in agriculture were changes in the structure of
agriculture.

These days, economists tend to use the concept of "structure" most. It's not a mys-
terious concept, although it has widely different meanings to different people. In es-
sence, it is the basic characteristics of a system — those that embody economic, so-
cial, and political goals and values.

The introduction to this report sets out many of the factors involved in structure. I
decided that studying the structure of agriculture would be the most useful way to
find some of the answers to the concerns about modern agriculture that were trou-
bling me and so many other Americans.

For years, even decades, policymakers — myself included — had concentrated most of
our attention and efforts on the whole, the big numbers: total production, total ex-
ports, total income, and national averages. It seemed the right time to take a closer
look at what is going on behind the totals and averages, where individual persons
are living their daily lives under the influence of all those larger forces.

In March of 1979, I was invited to address the annual convention of the National
Farmers Union in Kansas City. I used that occasion to call for a national dialogue on
the structure of American agriculture — how and why it developed the way it has;
whether this is what farmers and the general public want; if not, whether the Govern-
ment should help the citizens involved try to effect changes, and, if so, how it should
go about this.

That fall, I conducted all-day public meetings in 10 regions of the country — outside
the sometimes-inhibiting atmosphere of Washington and within reach of the farmers,
rural residents, consumers, business men and women, clerics, and others I wanted
to hear from directly. Thousands attended. What I didn't hear from the panelists or
the audience during the meetings, I usually heard over the table at lunch.

Thousands of other citizens wrote about their experiences in farming, of trying to
break in, of feeling forced out. Some sent us books or theses. By mid-winter 1980,
we had more than 10,000 pages to digest, not counting the books.

I was gratified to see that verbal adversaries within the farm organizations and on
the cutting edge of farmer-consumer debates were speaking to each other (some for
the first time), sharing their concerns, searching for common ground in the larger
issues.

I was just as pleased to learn that, during the six months before the meetings began,
scholars, churches, state and regional farm and rural organizations had their interest
in structural issues sparked or renewed with an enthusiasm not seen for 25 years.

7

8

As I expected, we found there were many more questions than answers. Certain
questions some people didn't even want asked. But the meetings did confirm a wide-
spread desire to learn more about agriculture and its structure, to try to find, if not
the answers, at least the right questions.

I made this study a top-priority project at the Department and named a staff to or-
ganize our efforts. Drawing in part on the meetings, we established an agenda of
research for the Department's experts and those in colleges and universities. This
agenda was designed to take us closer to the basic structural questions I felt had to
be answered to bring direction to policy. A great deal of new. research was under-
taken, and some on-going research was redirected into these areas.

Some of the hard questions could be faced in the process of framing the next farm
bill, due to be enacted in 1981. The Structure of Agriculture Project could frame the
broader concepts and questions that will have to be faced down the road.

The staff, and the independent consultants I brought in, were told that no subject
was to be considered off limits. If the Federal tax code affected the structure of agri-
culture, for example, I wanted it explored.

They and I operated with only three preconceived notions:

• First, that American agriculture and the world of which it is a part had
changed fundamentally since the basics of our principal policies and programs were
developed, and our programs and policies probably had not kept pace with or wholly
reflected those fundamental changes.

• Second, that many of the fundamental beliefs and values Americans of all
backgrounds have shared and passed down to the next generation for centuries
have not changed, but the purposes and goals derived from them in particular cir-
cumstances might have become either blurred or less relevant to the new
circumstances.

• And, third, that through its policies and programs the Federal Government,
from the time of its inception, might have had a substantial influence on the direction
and force of structural change in American agriculture.

The research was undertaken to establish what was happening and why, what the
true problems were as a result, and what the likely needs of agriculture would be in
the future.

In the spring of 1980, with some results of our research starting to come in, I spent
three days in Washington listening to the views of the leaders of national organiza-
tions, respected economists, and governors on the central issues which had surfaced
in the regional meetings.

9

During the following months, three particularly difficult problems were addressed as
spin-offs from the Structure Project:

• A group of public advisers and Department officials were concentrating on
that portion of the regular research program that involves increased mechanization of
agricultural activities in order to establish guidelines by which the Department could
be certain it was using public funds to serve the public interest as a whole.

• A small group of officials inside the Department was studying the problems
smaller-scale farmers are encountering in trying to directly break into their local and
regional food markets with their commodities.

• A working group of large-scale growers, farmworkers, and expert consultants
was "brainstorming" to discover and publicize within agriculture the innovative meth-
ods in use to try to resolve age-old labor-management problems in agriculture, while
defining for us the problems that result from Federal policies.

Additionally, the project staff last fall conducted a seminar on tax issues to discuss
the problems uncovered in the research and to explore the possible effects of tax-
code changes that seemed worth considering.

The research and the issues raised at the public meetings were, on the surface,
more oriented to economics than to anything else. But these issues, as everyone
involved was aware, are intimately woven together with our basic beliefs and values
as Americans.

As John Carlin, the Governor of Kansas, testified on the first day of the Washington,
D.C., meeting, the choices we make in agricultural policy in the years immediately
ahead "are constrained by the basic values that we as Americans share." Among
the values he cited were freedom of choice and recognition of the right of private
property.

There are more than that. During the first week of the regional meetings, a farming
grandmother from Frankfort, Ky., tried to put some of these others into words. Phyllis
Rambo has been in this business seven years longer than I have and has grandchil-
dren farming — or leaving the farm for town. Hers seems to have been a good life,
but a hard one, too. I asked her why she stayed with it.

"Well, we stayed with farming because we like farming. We like the ground. We
like the dirt. We like to grow things. We like to see things grow. Then, we're our
own boss. We can quit in the middle of the day, if we want to. We can work until
midnight if we want to, and it's a free life and a good life. It's working hand-in-
hand with our Maker. . . .1 think contentment of heart goes a long way in lifting
up the social life of our world and being happy with what you have and not
reaching out and grasping for being a millionaire, and counting your blessings,
living with your family, and appreciating good things."

Mrs. Rambo said a lot in those few words. There is, indeed, much more to farming
than the business of growing things for market. There are deep personal feelings and
values like those she expressed.

But there is more to this than personal values. At the first meeting, in Montpelier,
Dick Wood of Freeport, Maine, a farmer for 25 years now, talked about all the farm-
land that will change hands soon and about the changes we've seen in agriculture
since the end of World War II. And then he reminded us of the positive political value
of having a broad array of farmers, of having the freedom to choose to go into farm-
ing if you're willing and qualified, and of having the sort of clearly seen roots that
farming gives a person. He closed his testimony this way: "As we consider the struc-
ture of our agriculture, remember that we are dealing with the shape of our
democracy."

So, in addition to respecting our American belief in private property and the freedom
of choice that Governor Carlin mentioned, other basic goals for our society must
guide us, and other beliefs must be respected. These include:

• Belief in the equal dignity and worth of all.

• Rewarding the striving for excellence as long as it is not at the expense of
others' dignity and survival.

• Promoting access to opportunity, and equity in the distribution of resources,
rewards, and burdens.

• Cooperation and shared responsibility.

Those precepts were nurtured during the two centuries after the first colonists ar-
rived, two centuries during which what became the United States was predominantly
agricultural. I believe they still flourish today.

Their roots in that agricultural era are a principal reason why Americans today value
farming as a way of life, as well as a business. Those beliefs and values are the
common property of city dwellers, suburbanites, and rural residents alike.

They must be the basic guideposts of our policy. But even if a clear connection can
be established and maintained between policy and the purposes expressed in our
beliefs, that does not mean the choices among various courses of action will be
easy. In fact, using such a framework for policymaking will probably mean that deci-
sions will focus on a continuous series of adjustments in policies and programs,
rather than on selecting one course from two or three alternatives and waiting a
number of years to review the decision. That will require a greater willingness to ad-
mit error than I have seen in my years in Washington.

Decisions on public policy will undoubtedly continue to be influenced by immediate
economic conditions and needs, but they will have to reflect all the other policies and
purposes we embrace and pursue as a Nation, too.

Such choices among values and beliefs, under the pressure of economic forces,
present themselves throughout society today. The issues raised during the Structure
Project were stated in the vocabulary of agriculture, but nearly all can be paralleled
in the concerns expressed daily by a wide range of Americans. It could scarcely be
otherwise, considering our shared body of beliefs and values.

11

The following document describes what we have learned through the Structure Proj-
ect. Some of the questions we had in mind when fashioning the research agenda
could not be answered, because the forces are still moving so rapidly that much re-
mains unresolved, because the study methods in existence today cannot reach to
those issues, or because there was not enough time for thorough study.

With this report, nonetheless, we hope that we show clearly the paths that must be
more thoroughly explored and the points where reinforcement is necessary if the di-
verse agricultural system that the public wants, and the flexible, equitable system our
country needs, are to be maintained. We hope it will constitute a national policy
agenda for food and agriculture in the 1980's and beyond.

The underlying issue explored in this report is the question of control. Who controls
the land and, in turn, our food supply, by default or by design? Who controls the
prices and access at each step of the food system? How do we help individuals con-
trol their own lives amidst the ambiguity and uncertainty that we all must face?

This report is extensive but necessarily incomplete; time would allow no more. But I
believe that its findings are meaningful and cannot be ignored by anyone who cares
about American agriculture.

I do not expect ready, wholehearted agreement with all our findings and recommen-
dations; it will take time for all of us to better understand the new realities. But I do
believe that the project will prove to be an important beginning, a step toward a bet-
ter approach to agricultural policy.

I want to leave with one more thought. This exercise has convinced me, in a way
few other experiences in public life have, that the adversary relations we have used
for so long to forge public policy need tempering. The persons who care need to be
talking to each other, not at each other.

The late Hubert H. Humphrey, a mentor and friend, put it best, when he said during
another period of national stock-taking:

"We need each other, now more than ever."

BOB BERGLAND

Washington, D.C.
January 1981

INTRODUCTION: Goals for Food Policy

INTRODUCTION

American agriculture has changed in this century — radically
in some ways — and especially since the end of World War
II, the last time its status and future were closely examined
by the Government. It is not what it used to be, much less
what we thought it used to be.

Such a change was not totally unexpected. Yet a number of
persons close to agriculture and the Federal programs as-
sociated with it have observed in recent years that this mas-
sive change — and the prospect for another period of sus-
tained, dramatic change in the immediate future — has been
neither obvious to all policymakers nor accepted by many of
them.

As a result, these observers have concluded, Federal food
and agricultural policy has not kept pace with, anticipated,
or reflected the changed nature of farming in the United
States; it is in danger of failing either those who live on
farms and produce our food or the larger public interest, or
both.

The Structure of Agriculture Project was initiated in March
1979 by Secretary of Agriculture Bob Bergland to research
current structural issues, to determine the impacts of current
market forces and policy on agriculture, and to recommend
policy alternatives. This is the summary report of the proj-
ect. Highlights of the research initiated are incorporated
here.

Much of the research is reflected in Part [. This section de-
scribes the new global and rural contexts in which American
agriculture functions and the characteristics of farmers and
their operations, and analyzes the general implications of
these new realities for public policy.

Part II details more specific areas of policy concern — land-
ownership, soil and water conservation, tax policy, commod-
ity policy, credit policy, research and extension, agricultural
labor and international trade — which grew out of the re-
search agenda and from the 10 regional and 4 national pub-
lic meetings conducted in conjunction with the project.

The project's broader conclusions with recommendations for
policy are contained in Part III.

Structure: What and Why

In addition to the economic contexts in which American agri-
culture must be viewed today, this report must also be read
in a philosophical context. The concept of structure with
which we worked is broad. It involves:

• How farms of different sizes, commodities, incomes,
assets, and locations organize their natural, financial, labor,
and other resources.

• Who controls, manages and/or operates those farms,
and by what means — including the degrees and kinds of
separation among ownership, management, operation and
labor functions.

• The degree of freedom of choice enjoyed — and the
degree, source, and kinds of risk faced — by those who con-
trol, manage, and operate those farms.

• The distribution of wealth among the persons contrib-
uting to production on our farms, and the distribution of in-
come associated with this wealth.

• The ways in which those farmers secure the inputs,
including capital, they need to produce and market their
products.

• The requirements for entering farming as an occupa-
tion, and the relative ability of those entering to meet those
requirements.

• The means used to transfer the farms to a new gen-
eration, the effects of different types of transfers on the indi-
vidual unit and the make-up of farming as a whole — locally,
regionally, and nationally.

• The effects of different types of agricultural organiza-
tions and techniques on natural resources.

• The performance of the food system in providing the
quantity and quality of food sought by consumers.

• The ability of the entire food system to withstand
shock, to adapt to changing technology and economic cir-
cumstances, and to respond to changes in consumer
preferences.

• How the system, in all its components, meets objec-
tives the American people set for themselves as a society.

As that list indicates, practical economics, while indispensa-
ble to the structural concept used, was just a starting point.
Examination of structure allowed us to observe not only the
responses of the food and agricultural system to economic
and political forces, but also its accordance with American
beliefs and values.

Our food and agricultural policy has never had an explicit
structural pillar, although legislation and position papers re-
ferred to "family farms" as the type of farm firm to be en-
couraged. This report is intended to demonstrate that, be-
cause of the changed realities in agriculture, food and
agricultural policymakers should now consciously focus on
the structural effects of their decisions.

But guideposts are needed. The research behind this report
suggests that a number of structural patterns can be com-
parably efficient and productive. Some additional standards
are needed if a conscious structural policy is to have any
meaning or purpose. Those criteria are found in the goals,
the ideals, that the people set for food and agricultural pol-
icy and express through their hopes and their dissatisfac-
tions with present courses.

15

Most would agree that the American people share four
straightforward objectives with respect to agricultural and
food policy: a stable, prosperous farming sector; an abun-
dant, nutritious supply of food available at reasonable
prices; support for and maintenance of a resilient, equitable
farm structure, and capacity to contribute to the realization
of a peaceful, productive world.

Yet, stated so broadly, those objectives are not fully useful
in developing policy. We need to look behind them, apply
them to situations, and try then to develop a framework of
more specific goals to guide us.

For example, some might wonder why we do not, as a mat-
ter of course, use the term "family farm" in this report. The
term is a broad label. Persons of all backgrounds and ambi-
tions use it to describe their situation. The American people
generally regard it as a positive symbol.

Over the years, policymakers, economists, sociologists, and
many others have attempted to define the "family farm" to
use it as a program-directing tool. The testimony at the pub-
lic meetings reaffirmed previous findings that broad agree-
ment on a definition of "family farm" — by acreage, income,
sales, legal form, or any other readily available measure-
ment— is impossible for the purpose of economic and policy
analysis and perhaps for program implementation also.
Nearly every organization and individual farmer has a differ-
ent definition. But the ideas behind the symbol, the values
attached to it, reflect many, if not most, of the goals Ameri-
cans of all occupations and backgrounds seek in a food and
agricultural policy.

Goals for Food Policy

Policy goals provide a set of criteria and principles by which
all can measure how well the system is working, where im-
provements need to be made, and whether a change in
public policy or involvement could bring about those
improvements.

In the absence of a set of principles agreed upon by all the
actors who have legitimate (if frequently competing) inter-
ests, decisions will be made on an ad hoc and narrow ba-
sis. The arbitrators may be more familiar with one party's in-
terests than another's, or the principles endorsed by one
group may be unrealistic, considering the interests of an-
other equally concerned and equally powerful group.

The purpose of this introduction is to provide a policy con-
text and criteria for examining the issues explored in Part II,
in the context of the new realities described and analyzed in
Part I.

There are several fundamental, partly overlapping goals the
public of any nation expects the food economy to try to
achieve.

"The family farm is democracy and free enterprise at its
best, a family running and working a business together,
working together to produce food and fiber. . . . The family
farm is not the agribusinessman in town, the lawyer at the
courthouse, the doctor at the hospital, the professional man
in his office. He is not people looking for a farm to buy as a
hedge against inflation, nor the person looking for ways to
reduce his income tax while making a safe investment. This
group also includes the multinational corporations, food-
processing industries and vertical integrators."
William C. Beach of Oak City, N.C., at the Fayettevllle
meeting.

"Some Americans see the small family farm as an economi-
cally insignificant reminder of an outdated, romanticized way
of life. But the public's preference is for 'a country which
has a relatively large number of small farms'. . . . Signifi-
cantly, there is a broad-based consensus on this issue, with
strong support for the small family farm in evidence in every
region of the country and in every significant demographic
subgroup of the population. ..."

Louis Harris & Associates, in a report to the Department
on a 1979 survey.

The first relates to the nutritional well-being of the people.
This means that the food supply should be maintained, that
food should be nutritious, and that food should be available
to all. Price considerations, although part of this goal, are
not easily defined. For example, approximately 20 million
Americans, or about one-tenth of the population, who do not
have sufficient incomes to secure an adequate diet, partici-
pate in the food stamp program; at least another 4 million
have incomes below the poverty line. But the question of
price has been, and will continue to be, a major political
concern, buttressed by the food economy's serious, direct
impacts on the overall inflation rate. Programs to ensure
food safety and quality also reflect this goal.

Our agriculture is becoming more internationalized and our
supplies and prices more closely linked with other nations,
many of which are not able to feed themselves. As this hap-
pens, questions of long-term food abundance, the security
of the food supply, and price become more complex. If
global demands on the United States continue to grow, cou-
pled with growing costs for energy and other resources, the
continued abundance of food at low prices may be threat-
ened. There is evidence that increases in food prices over
the next decade may be considerable. The issue of achiev-
ing security in the face of greater world price-and-supply
fluctuations is also a concern.

16

A second basic goal embodied in agricultural policy is a rea-
sonable level of income for farmers, the actual producers of
food and fiber. Many traditional agricultural programs and
their costs have been justified partly because they provide a
secure supply of abundant, nutritious food. But concern for
farmers' incomes is a legitimate and separate goal. Farm-
ers, like others in business, must earn a decent income to
stay in farming. Few enterprises are as capital-intensive as
farming or so vulnerable to cash-flow fluctuations. Policies
for price and income support and for risk-sharing, to help
maintain a viable farm sector, are part of the income issue.

As a different structure of agriculture evolves, with a rela-
tively small number of larger farmers who produce most of
our food and fiber and do not have low incomes, the ques-
tion of keeping farming an attractive occupation, with com-
petitive returns, will be an important part of food-security
and farm-income concerns. The means of achieving this,
and Government's role, may be different than in the past.
More distinctions might be made, for example, among the
various business risks, and different judgments may result
as to which risks the public should share.

A third goal for the food economy, and one which attracted
much comment and many different ideas, is equity. Despite
concern about Government involvement, a frequently ex-
pressed attitude of persons at Structure Project meetings
was that Government involvement in the economy is
needed to protect those with less power from larger and
more powerful persons and institutions. The issue is distri-
bution of power. Farmers feel, with some justification, that
their survival depends on redress of the imbalance of power
between themselves and the surrounding industry on both
sides: their suppliers and their buyers.

The overall need for adequate returns to producers has al-
ready been mentioned. But, that is not the limit of concern
when it comes to adequate and competitive levels of returns
to persons, organizations, and resources involved in an effi-
cient food system.

Hired farmworkers, workers throughout food processing, dis-
tribution and marketing, and investors who provide capital
should all earn a fair share of competitive returns. In the ab-
stract, this goal of equity is hardly controversial; achieving it
is necessary to assure the well-being of significant seg-
ments of the population and the future flow of resources to
the food system.

The particular level of returns, their derivation, and their dis-
tribution among the various persons involved in the food
economy — from different-sized farmers in different regions
to industrial workers and employers — are issues of constant
debate.

A related but distinct concern over the years is shown in
farmers' support for policies and programs designed to as-
sure fair practices by all sides in the market. These include
accurate weights and measures, truthful labeling and prod-
uct information, and fair pricing and payments practices. A
corollary concern is access for all to information about mar-
kets. Although the specifics are controversial, providing in-
formation on which farmers, consumers, and other partici-
pants in the food industry can base well-informed choices is
an important part of equity in the food system.

Another goal is independence or self-determination. This
goal is entwined with our basic cultural self-definitions.
Those in agriculture, like many others in business, value in-
dependent management and freedom. Farmers have always
expressed strong support for policies that give them deci-
sion-making flexibility and freedom to manage their opera-
tions. Such policies benefit the whole of society because
they promote initiative and enterprise.

Farmers sometimes demonstrate a willingness to compro-
mise on this goal to achieve other purposes, such as higher
prices and incomes, more stable prices, and more orderly
markets. Nonfarmers' support for this goal is tempered
when they feel that their short- or long-term interests — in
food quality or environmental quality, for example — are infr-
inged upon. For workers, consumers and others, maximum
freedom of choice is also a key consideration.

A longtime major goal for the food and agricultural economy
is efficiency. Despite a relative abundance of good land and
other productive resources, Americans are coming to realize
two things: first, that those resources are not without limits;
and, second, that, as we approach those limits, prices and
costs may rise rapidly. If the market functions properly,
these developments should cause people to use the re-
sources more judiciously or seek alternate ways to accom-
plish their tasks.

Standards of efficiency and competition also are applied to
the food-distribution structure. Increased attention has been
paid over the last two decades to the structure and organi-
zation of the food industry. From a food-policy perspective,
it is important to assure not only a healthy, viable food pro-
duction system but also one that delivers wholesome and
safe food at reasonable prices. That can be assured only if
no firm or group of firms possesses sufficient power to ma-
nipulate supplies or prices. Full efficiency also requires the
absence of unnecessary constraints — rules, regulations, or
institutions — that hinder the flow of food or services or stifle
technological or institutional innovations, but this require-
ment is often modified to serve other goals.

17

One added aspect of efficiency is the extent and cost of
Government involvement. It is inefficient, for example, to
use Government money to pay for something that the mar-
ketplace can handle or to encourage a farm sector that is
highly dependent on subsidies.

Clearly, efficiency is one of those goals to be pursued within
the context of other goals.

Another goal for agriculture is resilience under stress and
flexibility for the future. Historically, resiliency within the farm
sector is due to farmers' dependence on farm resources —
especially the family's own labor — for which low returns
could be accepted in hard times.

This is no longer an acceptable concept of flexibility. How-
ever, the ability to change crops and change the mix of in-
puts and output in response to economic changes will be
crucial in the future. For example, considerable price insta-
bility probably will result in shifts in consumer tastes. The
same concern applies across the food system where a few
large firms — and ultimately our food security — might be vul-
nerable to economic stress.

A related but distinct goal of food and agricultural policy is
conservation of resources and protection of the environ-
ment. In this context, most attention has been given to con-
serving land and water and, more recently, energy re-
sources. While the day-to-day aspects of conservation are
probably embodied in any enlightened definition of effi-
ciency, there is, in fact, a constant tug-of-war in agriculture
and other industries between the long- and short-term. This
goal has implications for our longer-term food security, for
trade, and for many other decisions.

Assured opportunity is a forerunner of many of the other
goals. Access and equity, for example, are what opportunity
is all about. Efficiency, resiliency, or any other goal for a
food system cannot be achieved if the barriers to entering
farming — whether for young people or others without experi-
ence— are insurmountable, or if farmers' access to markets
is circumscribed by factors over which they have no
influence.

Opportunity extends beyond the circumstances of an indi-
vidual producer or would-be producer. An important stand-
ard of judgment for any industry is the extent to which it
provides employment opportunities for both workers and
entrepreneurs.

"You can't get social directions or moral prescriptions from
the data.

"You can tell when you're reaching a historical watershed,
because you find yourself going beyond the technical ques-
tions to right and wrong, good and bad. Why are we doing
this? For whom? What are the implications for our children
and our grandchildren?"

— Economist Hazel Henderson, in Omni, 1980.

The final and most comprehensive goal of food policy
should be relative consistency with other objectives of our
society. While there will always be a need to allocate limited
resources to a variety of purposes, there should be as much
consistency as possible among all social and economic
goals.

Nutritional well-being, a reasonable level of farm income, ef-
ficiency, equity, independence, opportunity, resilience, con-
servation, and consistency with the rest of public policy —
these nine commonly expressed and widely accepted objec-
tives for American agriculture do not directly address the
question: "What form, what manner of agriculture do we
want for the future?"

That may be just as well, since it is unlikely that widespread
agreement could be reached on a specific number, size,
and configuration of farms for the United States. Neverthe-
less, no individual or collective judgments can be made
about the form and manner of our agriculture without refer-
ence to these goals. They have structural implications, as
the report will show, and any structural policy must be con-
sistent with overall food and agricultural policy and goals to
be accepted and supported.

This framework of goals was presented here to show the
spirit in which this report was shaped, as it first examines
the context in which agriculture today functions and the
characteristics of that agriculture, and then explores specific
structural aspects of major concern to a new food and agri-
cultural policy.

18

PART I AMERICAN AGRICULTURE
AND ITS ENVIRONMENT

19

For more than five decades, agriculture in the United States
was viewed as having virtually limitless potential.

At times, it was operating perhaps as much as 25 percent
below its capacity. While millions went hungry, the world
marketing system was such that, at existing prices, this hun-
ger could not be translated into sufficient effective demand
to avoid the accumulation of surpluses as fast as farmers
harvested them.

Now, it has become accepted by many that American agri-
culture has entered an era of limits and critical choices, re-
quiring significant adjustments in the use of our resources.

Shifts within our agricultural system, a surge in demand
from abroad, and policies that fostered prices consistent
with supply and demand conditions changed U.S. agricul-
ture from a sector with surplus resources and production
into one with production and demand more closely in bal-
ance and with resources more fully used.

This closer balance means that any adjustments in markets
and production resources have potentially far greater impli-
cations than in the earlier era of large stocks and significant
acreage held out of production.

The interlocking complexities of modern agriculture's envi-
ronment mean that an unanticipated shift in one element —
weather or the cost or supply of a key factor in production,
such as petroleum — can reverberate throughout the world,
causing widespread disruption in prices, supplies, and mar-
ket activities.

It is important to understand from the outset, then, that
American agriculture's new "equilibrium" does not mean
stability.

Largely because of this fact, the public interest in agriculture
has broadened from the traditional two-pronged concern of
equitable returns to farmers and adequate supplies of food
at affordable prices.

To fully appreciate the new concerns, as well as the
changed context in which the more traditional interests must
now be viewed, it is necessary to first review the develop-
ments of the 1 970 s and to look ahead for the rest of this
century — to present the global context in which the structure
of our agriculture will have to function.

The more immediate context in which farmers, farmworkers,
and their families live and work — rural America — also has
changed. It, too, must be sketched before the ramifications
of change can be fully appreciated.

Then we will profile that structure as it stands today — the re-
sources and the people and institutions that influence how
the resources are used, the people and institutions that are
agriculture.

20

CHAPTER 1 THE GLOBAL CONTEXT

Growth in foreign demand for U.S. food, feed, and fiber
since the end of World War II could not have been more
striking. It may well prove to be as important a catalyst of
change in our agriculture as the "closing" of the frontier in
1890.

American agriculture had, by the end of the 1970's, become
truly internationalized. Exports accounted for only 10 per-
cent of all farm products marketed and 1 of every 5.5 acres
planted in the 1950's. By the end of the 1970's, exports
were 30 percent of the farmers' marketings, equivalent to 1
of every 3.5 acres planted.

In varying degrees, the level and variability of farmers' in-
comes have become increasingly dependent on those
sales. What farmers buy, how much more land they seek,
the way they mix their capital, labor and production re-
sources— all these decisions have come to depend signifi-
cantly on supply and demand for their crops around the
world.

Food and Agriculture Trends

The last three decades were a period of strong growth in
world food production and unprecedented gains in
consumption.

Record-breaking population increases, greater affluence,
and declining real prices (after subtracting the effects of in-
flation) all combined to generate an average annual in-
crease in foreign demand of 2.9 percent — more than twice
the average for the first half of this century. At the same
time, agricultural production abroad grew at an annual aver-
age rate of 2.8 percent — thanks to the commitment of more
resources to food production, gains in productivity, and,
over all, favorable weather.

By the end of the 1970's, world per capita food supplies ex-
ceeded by 8 percent the minimum caloric intake recom-
mended by the Food and Agriculture Organization of the
United Nations. In the early 1950's, intake averaged slightly
below the minimum. Much of the uneven distribution of
growth in food production and demand among individual
countries was offset by trade. Trade in agricultural products
expanded at roughly twice the rate of growth in
consumption.

But, while impressive in the aggregate, these strong global
gains in production, consumption, and trade bypassed large
numbers of persons in poor countries and many of the poor
in the more affluent countries. The number of malnourished
people worldwide quite likely increased from 100 to 200 mil-
lion in 1950 to more than 500 million at the end of the
1970's.

Grains and oilseeds account for three-fifths of total world
agricultural production. The patterns of growth in their pro-
duction, consumption, and trade over the last three dec-
ades, despite year-to-year swings, were representative of
changes in total food and agricultural production. Foreign
production of these commodities increased from 540 million
metric tons in 1950 to more than 1.3 billion tons in the late
1970's. Foreign use increased from 555 million tons to more
than 1.45 billion tons. U.S. exports increased nine-fold —
from 16 to 145 million tons — to close much of the gap be-
tween production and consumption.

As a direct result of this widening difference between for-
eign food production and consumption, American farmers
and exporters found a market for commodities that, at
home, had been perennially in surplus. They came to de-
pend heavily on the income from those foreign sales, as
farmers expanded output to supply that market. Another re-
sult of this increasing trade was that the rest of the world's
self-sufficiency in these commodities — its ability to meet its
demand out of its own production — dropped from 98 percent
to 90 percent.

In contrast to this growth in foreign demand for U.S. farm
products, demand at home grew relatively slowly. Hence,
strong gains in productivity that were being recorded at the
same time meant that our capacity to produce through the
1960's was still far greater than total demand for our com-
modities. Farmers adopted technological advances in the
form of new machines and new practices linked to chemi-
cals, continued to develop land, and saw their numbers
dwindle. The average farm grew in size by 20 to 30 percent
per decade.

As a result, real prices declined an average of about 1 per-
cent each year, and returns to farmers for their time and in-
vestment continued low relative to returns in the rest of the
economy. The world market continued to be a buyers' mar-
ket as our supply of farm products grew persistently faster
than demand. The problems were not temporary but per-
sisted for many years.

Against that backdrop, the major agricultural policy deci-
sions of the 1950's and 1960's were made. These decisions
adapted the details but continued the basic framework of
Depression-era farm programs, using the same fundamental
rationale.

As many as 62 million acres — nearly one-fifth of our crop-
land— were held out of production in an attempt to bring
supplies in closer balance with demand and to enhance re-
turns to crop farmers. These and other policies transferred
income to farmers from taxpayers and other consumers.

The economic environment abruptly changed in the early
1970s.

23

Worldwide, the decade proved to be one of slower growth
but also of greater year-to-year variations in production and
consumption and marked increases in trade. In contrast to
the 1950's and 1960's, the 1970's saw wide fluctuations in
real prices, from a postwar low to an all-time high within five
years. The decision in 1971 to let the dollar "float" in foreign
exchange markets effectively lowered the price of U.S.
products and made our exports more competitive at pre-
cisely the same time foreign demand increased dramatically
due to a combination of global economic, demographic, pol-
icy, and weather factors.

By the end of the 1970's, virtually all of the cropland re-
sources in the United States that had been idled through
Government programs were returned to production.

The conclusion that U.S. agriculture has entered a new era
is inescapable when one supplements the global develop-
ments with such signs as a sharp reduction in the rate at
which the farm population is shrinking, the emerging equal-
ity between the incomes of farm and nonfarm citizens, and
the essentially full use of available cropland.

The disequilibrium between resources and the market that
had so long plagued agriculture seems to have passed. The
post- World War II era of chronic surpluses is over.

Global Prospects

Our analysis suggests that, for agriculture, the 1980's will
be far more similar to the turbulent middle and late 1970's
than to the first 25 years of the postwar period.

Slower population and economic growth notwithstanding,
overseas demand for agricultural products is likely to in-
crease at a near-record rate of 2.5 to 2.7 percent per year.
An idea of the amounts involved can be gained by noting
that a 2.5 percent increase in foreign use of grains and oil-
seeds over the 1975-79 base would exceed 33 million met-
ric tons, more than the total production of all but the 15 to
20 largest countries in the world.

At the same time, production in the rest of the world is not
expected to increase at anywhere near as fast a rate.

For the world as a whole, population growth slowed in the
1970's to a 1.85 percent annual rate, down from about 1.95
percent in the 1960's, with all continents except Africa
showing a decline. Demographers are in general agreement
that population growth rates in the 1980's will gradually de-
cline to about 1 .82 percent, due to relatively small changes
in birth and death patterns in the more affluent countries but
pronounced changes in the developing nations.

Those forecasts can be deceptive, unless one remembers
that this fractionally lower percentage growth rate is applied
to an even-larger population base, that changes in age
composition associated with slower growth imply greater per
capita food requirements, and that slower population growth
rates are likely to translate into stronger demand for im-
proved diets around the world. For example, even at the
lower population growth rate of 1 .82 percent, the absolute
number of people to be fed will increase more than 82 mil-
lion per year by the mid-1 980's — an increase roughly equal
in size to the population of Bangladesh. That can be com-
pared to increases of 62 million a year in the 1960's and 72
million in the 1970's.

These factors, in combination, suggest that population-re-
lated increases in the volume of food products demanded
by the middle of the decade will be more than one-third
greater than the absolute increases in demand in the

1970's.

Economic forecasters, while their specific projections vary,
generally expect less favorable global economic conditions
in the 1980 s than existed in the last two decades. The
years through 1 985 are likely to be marked by a sharp re-
duction in world economic growth and the persistence of se-
rious inflation and unemployment. Recovery, which could
begin in late 1981, is likely to be more prolonged than past
recoveries. Moreover, growth rates are not expected to re-
bound to the high levels reported after earlier recoveries.

However, variations in economic activity among countries
and the absolute levels of income that are forecast for much
of the world should nearly offset the negative effects those
poor economic trends normally would have on the demand
for agricultural products. At the same time, some developing
nations that lack oil or other high-value resources to export,
to pay for imported food, could be severely strained.

Growth in global agricultural production in the early 1980's
is expected to slow to an annual rate between 2.1 and 2.4
percent — three-fourths of the postwar rate and well below
the projected growth in demand of 2.5 to 2.7 percent.
Equally important, the sources of growth in production and
the costs of increasing production also are likely to change.
Gains as a result of relatively inexpensive expansion in ara-
ble areas are likely to be significantly smaller than for any
other period over the last 30 years — less than 4 million hec-
tares (9.8 million acres) a year, or less than half the aver-
age postwar increase. Many countries face absolute land
constraints or are nearing levels that have to be considered
as such.

As remaining reserves of readily available, relatively fertile
land are depleted, the expansion of agriculture will mean
moving farther onto fragile soils, risking erosion and other
environmental damage. Production costs will be higher, and

24

yields substantially lower. The greater the shift onto mar-
ginal lands, the greater the chances are for wider swings
from one year to the next in production, because even
slightly less rainfall than normal could result in a crop failure
on those new lands.

In the face of those basic resource limitations, future in-
creases in food production will depend upon accelerating
the growth in productivity. That, in turn, will depend upon
faster adoption of existing technology and assuring farmers
of a greater supply of attractively priced, yield-enhancing
production supplies.

However, just sustaining the current pace of growth in pro-
ductivity could be difficult in the next few years. The rising
cost of inputs — many of which are petroleum-based — could
strain many producers' abilities to maintain, let alone in-
crease productivity in areas where practices are already in-
put-intensive. Cost will be even more an inhibiter in areas
where the potential for higher yields is great, but the in-
comes and other resources needed to finance their attain-
ment are low. No significant technological breakthrough or
speed-up in adoption of existing technology appear
imminent.

In combination, all these factors shaping growth in foreign
food production and consumption suggest, then, that the
gaps between supply and demand will continue to widen in
the 1980's — possibly at twice the rate of the 1950 s and
1960's, and only slightly slower than the record pace of the
1970's. (Figure 1)

As noted before, during the last three decades, world trade
in farm commodities to fill such gaps increased more than
twice as fast as world production and consumption in-
creased. The United States has been the largest source of
supply for this expanding trade flow. The total value of U.S.
exports quadrupled in the 1970's alone. In the early 1950's,
the rest of the world depended on the United States for 2
percent of its agricultural supplies; by the late 1970's, it de-
pended on the United States for 1 1 percent.

To fill the widening gap between foreign production and for-
eign demand outlined above, U.S. exports would have to
grow at a rate of 6 to 8 percent a year. By 1 985, the rest of
the world could well be buying 15 percent of its food, feed,
and fiber supplies from the United States.

Figure 1

World Grain and Oilseed Production and
Disappearance, 1950-79

Mil. metric tons
1700 r

1500

1300

1100

900

700

500

World production and disappearance

World disappearance
(less the United States)

World production (less the United States)
I I I

1950

Source: ESS/USDA.

1960 1970
Fiscal Year

1980

Forecasts for supplies of and demand for specific commodi-
ties suggest that the strongest growth in demand will be for
feedgrains and oilseeds and will come from the middle-in-
come countries, the less affluent developed nations, certain
centrally planned states, and the richer developing countries
with a combined population of more than 600 million. The
potential for expanding feedstuff production fast enough to
fill their strong, livestock-related growth in demand is quite
limited. In many of the more populous countries, with partic-
ularly limited production potential, any significant improve-
ment in diets will have to come through imports.

In many already established markets, import demand is
likely to continue strong, too, with western Europe and Ja-
pan remaining the world's largest food and feed importers.
Even if lagging economies bring a slower growth in de-
mand, these developed countries still will have to import
one-quarter to one-third of the farm commodities they need.

The lowest-income nations will face an ever-more-serious
gap between the amount of food needed to meet basic hu-
man requirements and the amount they can pay for, or "ef-
fective demand," in the market. With the demand from other
countries for food commodities increasing and tightening the
market, the ability to meet those needs will be lessened.

25

The economic growth of these countries is jeopardized by
high levels of international debt and continuing balance-of-
payments difficulties. Energy is crucial to the maintenance
of their economic progress and creation of additional em-
ployment opportunities. However, the high costs of fuel
could seriously depress their economies, in turn reducing
their demand for imports of farm products. Similar consider-
ations are applicable to some of the developed countries.

Exporters other than the United States may not have the
capacity to help meet expanded world demand. By 1985,
the United States could, as a result, be shipping twice as
much grain and oilseeds as it did in the early 1970's and
supplying a larger share of a substantially larger market.

Yet several of the factors underlying the rapid growth in for-
eign demand likely in the 1980's will also tend to generate
wide year-to-year fluctuations in our exports. Shifts in pro-
duction or consumption virtually anywhere in the world could
translate into sharp fluctuations in demand for U.S. com-
modities— all the more so if the United States assumes
greater dominance in world markets.

Demand for grains and oilseeds, for example, could vary by
30 million metric tons from one year to the next due to
weather conditions or changes in trade policies abroad. It
should not be forgotten that it was policy shifts in many of
the other developed or centrally planned nations, notably
the Soviet Union, that accelerated the demand for substan-
tially larger quantities of U.S. farm products, and, in turn,
helped move American agriculture to today's closer balance.
All the forecasts of production, demand, and trade summa-
rized above assume that middle-income and affluent coun-
tries, through their agricultural and trade policies, will try to
maintain or improve the diets of their people rather than re-
turn to greater self-sufficiency.

Domestic Prospects

Many of the forces that have shaped foreign demand over
the last three decades were also operating in the United
States. Domestic demand for food and feed increased about
1 .7 percent a year over that period (in contrast to the an-
nual average increase of 2.9 percent abroad). Slightly less
than two-thirds of the increase came from population
growth; the remainder reflected increased affluence. Grow-
ing incomes and abundant supplies of commodities at rela-
tively low prices caused a dramatic shift in diets toward ani-
mal products, especially grain-fed livestock, in the early
postwar period, a dietary pattern now largely taken for
granted.

Forecasts for the 1980's project slower growth in U.S. food
demand. Considering only population and income, these
forecasts suggest a rate about three-fourths that of the last
30 years. The slower growth reflects declining birth rates
and expected slower rates of real economic growth. The
slower growth in the rate of increase in food demand could
be altered somewhat by such factors as unemployment
compensation, the food stamp program, and shifts in per-
sonal spending patterns. Conversely, it could be accen-
tuated if we are unable to deal effectively with such eco-
nomic pressures as rising energy costs.

Conceivably, the changing world situation could drive U.S.
food prices up sharply, at a rate substantially more rapid
than the overall inflation rate. This depends significantly on
the extent to which energy prices increase and the extent to
which we subsidize the use of food commodities to produce
energy.

Federal and State subsidy programs now being imple-
mented focus on producing ethanol for motor fuel, with corn,
at least in the early 1980's, the predominant source. That
could expand this component of total demand to record lev-
els, but the absolute quantities involved in the short term
are limited by the available ethanol-production capacity, the
economics of alcohol production, and public incentives.

But, by as soon as 1983, ethanol-making capacity could be
increased to as much as 1 billion gallons, and as much as 2
billion gallons by 1986. At current rates of conversion, 14 to
26 million tons of corn would be required for this use in
1986, adding the equivalent of a 0.2 to 0.3 percent annual
increase to total domestic demand for agricultural products.

The forecasts of foreign supply and demand suggest that
this decade, like the last five years, will be a period of con-
tinuing worldwide adjustments — to record or near-record
growth in demand, to slower growth in production, and to in-
creased dependence on U.S. supplies.

When combined with expected domestic demand, it is ap-
parent that American agriculture will face adjustments in the
use of our resources to produce farm products, in the use
and distribution of farm products within this country, and in
the pattern of exports. A more intensive use of our agricul-
tural and nonagricultural resources is implied.

For the foreseeable future, there is no question about agri-
culture's ability to meet conventional food demand at home
and abroad, although prices will undoubtedly rise. But, by
the beginning of the 1990's, agriculture could well face
shortages of natural resources, and food prices could be in-
creasing at a rate close to or above the general rate of
inflation.

26

Inflation and Agriculture

That likely economic future for the agricultural and food sec-
tors takes on a much greater importance when it is consid-
ered in the broader context of national economic perform-
ance and goals.

Our most pervasive economic problem today is the inability
to gain significant control over the underlying causes of con-
tinuing rapid rates of inflation. The agricultural sector is im-
portantly affected by this, both immediately and in a less ap-
parent underlying way, more than by any other economic
force. It is thus imperative that the emerging conditions for
food and agriculture be viewed in relation to the broader
economy, and especially in relation to inflation.

Our history is marked with relatively short periods of infla-
tion followed by longer periods of deflation and stability. Our
recent experience with inflation is unprecedented. Since
1964, prices have risen dramatically in four waves. The lat-
est and most severe of these waves continues today as in-
flation persists at a rate well over 1 0 percent.

Inflation has enormously important impacts on agriculture.
Over the last decade, rapid inflation has driven up produc-
tion costs, in turn creating pressures for higher commodity
price supports. It has worked to change the effects of spe-
cial tax rules for farming by stimulating activities that take
advantage of these tax rules. It has also contributed to ex-
cessive demands for credit, as farmers attempt to acquire
more assets in order to capture the capital gains from in-
creased land prices.

Continued, unabated inflation will be a particular concern for
agriculture. The inability to control it may give rise to pres-
sures to restrain U.S. exports, to limit credit for farming, to
modify legislation that restrains production or restricts com-
petition, to encourage food imports, and the like.

Two of the many impacts of inflation on agriculture are par-
ticularly critical to farm structure. Inflation increases the
wealth of those who own farmland, and it leads to higher
rates of interest — rates that are greater than "current earn-
ings" from land over extended periods of time. Together,
these two effects strengthen the competitive position of
wealthy people — farm and nonfarm — in buying farmland. To
the extent this occurs, it leads to further concentration of
farmland ownership and to fewer, larger farms. This effect
of inflation points up the crucial importance of slowing infla-
tion if the trends in farm structure are to be significantly
altered.

Our ability to deal with inflation in the future is problemati-
cal. With "supply-side" economic policies being embraced,
we are embarking on an unprecedented national experi-
ment. At the same time, a tight balance between world food

supply and demand could stimulate even greater pressures
on the rate of inflation.

However, our society does not have to experience inflation
even if the food supply-demand situation tightens and food
prices increase significantly. But inflation tendencies will
emerge under these circumstances — for example, if the
amount of money in the economy is increased to accommo-
date these food-price increases, so that other prices do not
decrease.

The agricultural community thus has a special stake in the
affairs of the general economy, the control of inflation, and
the handling of monetary policies in ways that food-price in-
creases (if they should develop) are not allowed to be trans-
lated into inflation.

Similar reasoning applies to the way our society adjusts to
future increases in energy prices. Past practice has been to
increase the money supply so that increases in energy
prices are accommodated without necessitating declines in
other prices. Many of us prefer this approach individually. It
forestalls declines in our nominal wages and the nominal
prices of our products. But, in the end, inflation is abetted,
our real wages and real product prices decline, and those
with assets — including farmland — have a gain in real wealth.
These are the people who, in turn, can further concentrate
the ownership of farm resources into their relatively few
hands. But, as with food prices, higher energy prices need
not be translated into inflation.

Changing Perspectives

Given these global supply-demand prospects and inflation
problems, the emphases of food and agricultural policy and
the day-to-day concerns of officials charged with managing
policy could, therefore, be quite the opposite from those of
the past decades.

Rather than overproduction and surpluses, the task of sup-
ply management will more likely relate to shortages, encour-
aging production, and facilitating adjustments stimulated by
these conditions. Concerns will likely become much broader
and involve questions significantly different from those tradi-
tionally addressed by agricultural policy.

27

Important — in fact, crucial — questions arise when the pro-
spective increases in demand and higher energy costs are
considered. One is, what is the nature of the supply of land
for agricultural use? If it turns out to be sharply less or re-
quires longer to bring into production than thought, higher
product prices (and higher food prices) can be expected. If
not, adjustments will be less difficult. Unfortunately, our un-
derstanding of the response of land use to farm prices is
not as adequate as we would like. One reason is that condi-
tions comparable to the most likely scenario of prospective
supply-demand balance have not been experienced for sus-
tained periods in recent years.

A tight demand-supply situation also implies windfall profits
for owners of productive land. The resulting wealth of those
owners can be used by them to compete with others for
land; thus, further concentration of land ownership and pro-
duction could result unless compensating adjustments
develop.

Further, under this scenario, conservation will become an
even more critical concern. As the increase in real prices
encourages the expansion of production onto more fragile
lands, environmental degradation would undoubtedly be-
come greater; that implies a loss in future productive capac-
ity. This would raise the question of whether market prices
truly reflect all incurred social costs (such as loss of topsoil,
environmental degradation, subsidized water, subsidized
transportation, et cetera). As the competition for the same
land between export crops and forage or lower-return crops
intensifies, the cattle cycle, supplies of beef, retail food
prices, and related elements of the food economy would all
be affected. Inevitably, the wisdom of a policy of maximizing
exports would be scrutinized.

Those probabilities alone clearly point to the need for a
well-developed farm- and food-policy framework that allows
for careful evaluation of the exchanges of cost and benefit
between trade and other objectives of our society.

28

J

CHAPTER 2 THE RURAL CONTEXT

In the previous chapter, we viewed American agriculture as
it functions in today's global setting. During the same period
that global forces led to the emergence of the United States
as a dominant supplier of food to the rest of the world, do-
mestic forces fundamentally changed the character of rural
areas. It is this second, parallel environment — the rural con-
text—that is examined in this chapter.

For most of our history as a Nation, rural people primarily
lived on farms and worked the land. Rural communities pro-
vided the facilities and services required by these farm fami-
lies and businesses, and rural policies and farm policies
were virtually synonymous. Thirty years of technological
change in agriculture — accompanied by farm consolidation
and massive out-migration from farms and rural areas —
have markedly reduced the usefulness of rural residence as
an indicator of economic or social condition.

Farming no longer dominates rural life.

When farming was the dominant economic activity of rural
people, it was logical to view farm income-support policies
as a major tool to deal with rural poverty. After all, the in-
comes of a large percentage of farm families fell below the
poverty level. By the 1960's, however, the logic of using
farm commodity programs to try to solve rural income prob-
lems began to be questioned. Despite more and more
costly price-support programs, more than half of all farm
families remained in poverty in 1960. Moreover, rural non-
farm poverty continued largely unabated, and these nonfarm
families made up over 65 percent of the rural poor.

The failure of conventional agricultural policy to solve the ru-
ral poverty problem and the large number of poor people in
rural areas led to a new round of thinking about rural-devel-
opment policy.

Two different views of what should be done emerged from
this rethinking. One group argued that the solution to rural
poverty was the promotion of a more vigorous rural nonfarm
economy that would create new jobs for the rural poor, in-
cluding farmers and their families. This economic develop-
ment was seen as an approach that would correct an unbal-
anced growth pattern that was wasting rural-community
resources and reverse the migration from the countryside to
cities that was placing great strains on cities that could no
longer absorb more poor people.

A second group argued that the answer to rural poverty re-
mained in agricultural policy, but one that would rejuvenate
the farm economy by fostering greater participation on more
favorable terms for the "small" farmer. To do this, policy
was to be reformed and redirected toward smaller produc-
ers. Corporations would be discouraged from entering farm-
ing, and new efforts were to be made to help farmers retain
access to land and markets, assuring their continued
viability.

Only a few, if any, individuals suggested that the appropri-
ate approach to rural-poverty problems would be to combine
these strategies. The arguments were largely made in an
either-or framework.

Advocates of both of these approaches were evident at the
Structure Project meetings.

When we looked anew at rural America after the experience
of the past decade, we could not help but be struck by the
magnitude of the changes that have transformed the rural
economy and rural communities in the United States. As
farm production and earnings have continued to become
more concentrated into fewer and larger units, the rural non-
farm economy has grown rapidly and diversified in ways
that have had profound implications for farmers, especially
small-farm operators and their families; for other rural resi-
dents, and for rural communities.

The accompanying tables indicate how dramatic the
changes in the rural economy have been.

Of the 1 3 million jobs created nationally between 1 970 and
1977, more than 40 percent were located in nonmetropoli-
tan areas, even though these areas held only about 35 per-
cent of the population (Table 1). Moreover, as we see from
Table 2, the rural population grew by almost 1 1 percent dur-
ing this period, while the urban population grew by only 4.4
percent.

This population growth represented a significant reversal for
rural areas. Three million more people moved out of rural
areas than moved into them in the sixties; there was net in-
migration of 2.25 million persons into them from 1 970
through 1 976. That net in-migration probably reached 3 mil-
lion by 1978. Reduced out-migration from farms, increased
numbers of persons deciding to retire in rural areas, growth
in longer-distance commuting to urban or suburban jobs,
and a strong preference for rural areas or small towns as a
place to live have all contributed to this growth.

31

Table 1: Change in employment of persons 16 years and over by major industry group, 1970 to 77

Item

Additional Employment 1970 to 77
(thousands)

Percent Distribution of Additional
Employment

U.S.

Metro

Nonmetro

U.S.

Metro

Nonmetro

Total, all industries

12,961

7,652

5,399

100.0

100.0

100.0

Agriculture, Forestry, Fisheries

707

1 RR
I DO

n r

u.o

O. 1

Mininq

113

59

54

0.9

0.8

1.0

Construction

456

141

314

3.5

1.9

5.8

Manufacturing

663

-217

880

5.1

-2.9

16.3

Transport, Communications, Public Utilities

580

270

310

4.5

3.6

5.7

Wholesale Trade

409

256

153

3.2

3.4

2.8

Retail Trade

2,789

1,818

979

21.5

24.0

18.1

Finance, Insurance and Real Estate

1,115

824

291

8.6

10.9

5.4

Business and Repair Services

763

578

185

5.9

7.6

3.4

Personal Services

291

93

198

2.2

1.2

3.7

Entertainment and Recreational Services

249

211

38

1.9

2.8

0.7

Professional and Related Services

4,637

3,066

1,571

35.8

40.5

29.1

Public Administration

687

430

257

5.3

5.7

4.8

Source: U.S. Dept. of Commerce, Current Population Reports, Special Studies, P-23, No. 75, Social and Economic Characteristics of the Metropolitan
and Nonmetropolitan Population: 1977 and 1970, (Washington, D.C.: U.S.G.P.O., Nov. 1978)

Table 2: Regional population change, 1970 to 77

Item

Population Growth or Decline 1970
to 77

Percent Change 1970 to 77

Distribution of Growth by
Residence

U.S.

Metro Nonmetro U.S.

Metro Nonmetro

U.S.

Metro Nonmetro

(thousands)

(percent)

(percent)

All Regions

12,747

6,049

6,698

6.4

4.4

10.7

100.0

100.0

100.0

Northeast

230

-933

1,162

0.5

-2.4

12.0

1.8

-15.4

17.3

North Central

1,421

330

1,091

2.6

0.9

5.9

11.2

5.5

16.3

West

4,377

3,220

1,157

12.8

12.0

15.9

34.3

53.2

17.3

South

6,718

3,430

3,288

10.9

10.0

12.1

52.7

56.7

49.1

Source: U.S. Dept. of Commerce, Current Population Reports, Special Studies, P-23, No. 75, Social and Economic Characteristics of the Metropolitan
and Nonmetropolitan Population: 1977 and 1970, (Washington, D.C.: U.S.G.P.O., Nov. 1978)

32

Table 3: Selected demographic characteristics: Metropolitan and nonmetropolitan population, 1970 and 1977

Itom
1 ioi 1 1

1977

1970

Metro

Nonmetro

Metro

Nonmetro

Average age of family head

29.5

29.6

28.2

28.1

Percent of population white

85.4

89.5

86.8

89.8

Average family size

3.37

3.39

3.56

3.58

Percent high school graduates of pop. 25 Years

and Over

68.1

58.3

55.7

46.4

Percent with 4 years of college of pop. 25 years

and over

10.5

6.8

6.5

4.7

Mpriian inrnmp MQ7fi dollar^

All regions

15,841

12,831

16,048

11,931

North and West

16,116

13,877

16,549

13,244

South

15,089

1 1 ,494

14,220

10,202

Percent of families below poverty

10.7

14.0

11.2

19.3

Percent of families with head employed 50-52

Weeks below Poverty

2.0

5.2

2.7

6.7

Percent of pop. 16 and over in labor force

76.7

73.6

77.6

72.3

Percent of women 16 and over in labor force

49.2

45.4

43.2

38.6

Percent of labor force unemployed

8.6

8.3

4.9

5.7

Source: U.S. Dept of Commerce, Current Population Reports, Special Studies, P-23, No. 75, Social and Economic Characteristics of the Metropolitan
and Nonmetropolitan Population: 1977 and 1970, (Washington, D.C.: U.S.G.P.O., Nov. 1978)

The significant movement of people into rural and small-
town communities in the seventies has added to the diver-
sity of rural pursuits. The largest groups of newcomers sup-
plied professional services (29 percent), followed by those
working in wholesale or retail trade (21 percent) or manu-
facturing (16 percent). Further, the order of employment in
the three leading categories for recent in-migrants is the re-
verse of the order for these same categories among all non-
metropolitan workers. The newcomers are less likely to go
into manufacturing and more likely to be involved in profes-
sional services. This mirrors the trend in overall rural em-
ployment during the seventies. Secondary industries such
as wholesale and retail trade, finance, insurance and real
estate, and services together accounted for over 60 percent
of all rural employment growth.

If we look more closely at the trends in Table 1 , one fact is
clear: agricultural employment growth played almost no role
in the recent rural economic revival. In this new rural eco-
nomic environment, even those who live on farms are al-
most as likely to work in nonagricultural jobs as to work on
the farm. Of the 3.3 million farm residents in the work force
in 1978, 44 percent were not employed in agriculture. The
growth of rural nonfarm job opportunities, and the combining
of farm and nonfarm pursuits has important implications for
the economic well-being of many small farmers.

The impact of this economic transformation on the rural
economy is visible in the various characteristics depicted in

Table 3. For example, median real income (adjusted for in-
flation) actually declined between 1 970 and 1 977 in metro-
politan areas, while median real income rose in rural areas.

Rural families' incomes remained, however, about 20 per-
cent below those of urban families. The incidence of poverty
in the rural population has fallen dramatically, although rural
poverty still represents a disproportionate share of national
poverty. Unemployment, which grew in both settings, rose
less in the rural areas and was lower there in 1977 than in
urban areas (although rural unemployment may be under-
stated because of measurement problems).

Behind those averages lies much diversity. Nearly 700
counties, significantly concentrated in the Great Plains and
Corn Belt, continue to have agriculture as a principal source
(20 percent or more) of personal income. Most of these
counties continued to lose population in the 1970's.

More than 2 million rural families remained below the pov-
erty level in 1 978, and 7 percent of these were farm fami-
lies. Neither rural development nor agricultural policies have
significantly improved the economic well-being of this group.

33

Figure 2

Farm Population, 1920 to 1980

Millions Percent of total

1920 1930 1940 1950 1960 1970 1980
A Preliminary.

Source: U.S. Departments of Agriculture and Commerce.

Employment

The number of persons employed primarily in agriculture in
1979 was 3,297,000, about equally divided between farm
residents and those living off the farm. Persons self-em-
ployed in agriculture — farm operators — are mainly farm resi-
dents. Of these 1,642,000 farm operators, about 1.1
million — or two-thirds — lived on farms. The rest lived in
towns or nonfarm homes in the open country.

Agricultural laborers were more likely to live off the farm and
commute to work. A sample survey of workers who indi-
cated they worked at least one day on a farm during 1979
found 2.7 million persons in the hired farm work force. This
estimate does not account for undocumented aliens, al-
though, in some regions and for some crops, illegal workers
might compose a majority of the hired work force. Total
hired farm employment currently is more or less stable, a
long-term decline apparently having ended in the seventies.

Most farm workers are hired by the largest farms; two per-
cent of the farms account for more than one-third of all
hired labor expenditures. But one in every five farms with
gross sales of $40,000 or less employs hired labor as well,
and these operations account for more than half of all
employers.

The Farm Population

Before proceeding to what the changes in the connections
between the farm and rural economies might mean, it is
useful to take a closer look at the farm population itself.
When it was first enumerated separately in 1 920, the farm
population totaled 32 million persons, or 30 percent of the
total population. It has declined almost continuously since,
at a pace that corresponds generally with a decline in the
number of farms. (Figure 2)

In 1 979, the most recent year for which final data are available,
about 6.2 million persons were living on farms (Table 4).
Put another way, only 1 out of every 33 persons — 3 percent
of the Nation's 220 million — resided on a farm.

That estimate is based on the 1978 definition of a farm: the
farm population consists of all persons living in rural territory
on places with sales of agricultural products totalling $1 ,000
or more a year.

The previous definition, in effect since 1959, included all
persons in rural areas on places of 1 0 acres or more with at
least $50 worth of agricultural-product sales, or places of
less than 1 0 acres with at least $250 worth of sales. Using
this earlier definition, the farm population in 1979 would be
an estimated 7.6 million persons. Changing the definition,
therefore, reclassified about 1 .3 million persons out of the
farm population.

Slightly more than one-third of the hired farm work force are
heads of households or single. More than three-fourths are
men or boys. Less than half of all farmworkers 25 years old
or older have completed high school, but more than half are
under 25 years old. Minority farmworkers as a group tend to
be significantly older, but the median age for the work force
as a whole is about 23 years.

Increased seasonal employment on cash grain farms, espe-
cially in the Midwest, accounts for a trend in recent years
toward a younger hired agricultural work force.

This examination of the characteristics of the farm popula-
tion and the agricultural work force in rural America leads to
some summary observations:

• The total population of the United States has more
than doubled since 1 920, but the rural population has re-
mained relatively constant in absolute numbers at 54 to 55
million for the last several decades. As a proportion of the
total, the rural population has, of course, declined, from
about 45 percent to about 25 percent todav.

• The farm population over the same period has de-
clined by 80 percent — that is, for every 10 persons in the
farm population in 1 920, there are now only two. But the
rate of decline appears to have slowed in the seventies.

34

Table 4: Selected population characteristics, 1920-79

Year

Total
resident
population3

Rural
population15

Farm
population0

Total
agricultural
employment"1

Agricultural
wage & salary
workers0

(Thousands)

Previous definitions

i y<du

1 (JO, / 1 1

Ci ceo

b i ,bbo

O ^ A 7 A

M A

NA

M A

NA

■* oo a

1 OO 7CC

1 zoo

CA A/1 O

b4,U4^

or\ con

oo,b<iy

M A

NA

M A
NA

i QA A

I -id., i bo

of ,4by

OA C A ~7

o0,b4/

M A

NA

M A
NA

i yb(J

H C -\ OOC

C/1 >1 ~7A

b4,4/y

OO A/1 O

/,1bU

■t CO A

i ,boU

i ybu

1 7Q OOO

C/1 AC/1

b4,Ub4

1 c coc
1 b,bob

C A CQ*

b,4bo

I ,1'Oc.

1970

203,810

53,887

9,712

3,462

1,152

1971

206,219

NA

9,425

3,387

1,161

1972

208,219

NA

9,610

3,452

1,216

1973

209,859

NA

9,472

3,452

1,254

1974

211,389

NA

9,264

3,492

1,349

1975

213,051

NA

8,864

3,380

1,280

1976

214,680

NA

8,253

3,297

1,318

1977

216, 400

NA

7,806

3,244

1,330

1978

218,228

55,000 (est.)

8,005

3,342

1,418

1979

220,099

55,000 (est.)

7,553

3,297

1,413

Current definition

1978

218,228

55,000 (est.)

6,501

3,342

1,418

1979

220,099

55,000 (est.)

6,241

3,297

1,413

Source: U.S. Bureau of the Census, Decennial Census of Population and Current Population Reports, U.S. Department of Labor, Bureau of Labor
Statistics.

NA = Not available

'Denotes first year Hawaii and Alaska included in the data.
3 Estimate as of July 1 each year.

0 Persons outside urban areas in open country, on farms, and in places with a population less than 2,500.

c Current definition: Persons on places with at least $1,000 of agricultural sales. Previous definitions: Since 1960, persons on places of 10 acres
or more with at least $50 of agricultural sales and on places under 10 acres with at least $250 of agricultural sales. Prior to 1960, farm residence
was based essentially on self-identification of the respondent.

a Sole or primary agricultural employment of persons 16 years old and older. The data are not strictly comparable over time because of definitional
changes. Data are annual averages.
6 Persons 16 years old and older.

35

Figure 3

Agricultural Counties, 1950

• The total agricultural labor force, regardless of resi-
dence, has declined 60 percent, the largest decline being
among self-employed owner-operators. Hired farmworkers
have declined in numbers since 1950 by nearly 40 percent,
but the total was relatively stable in the seventies, actually
increasing slightly from its low point in 1970.

• The out-migration of persons from agriculture over
the past 50 years was tremendous. One of the results is
that total farm-sector earnings are distributed among a
much smaller number of persons today; any comparison of
per capita incomes among various sectors of the economy
must take this into account.

Changing Links Between Farming and the Rural
Economy

Those various employment and demographic statistics make
clear that the connections between agriculture and rural
America have changed significantly over the last few
decades.

One dramatic indication of the changed rural situation is
that, while more than 2,000 counties spread across virtually
the entire country had agriculture as a principal source of
personal income in 1950 (Figure 3), by the mid-1 970's, as
already noted, there remained fewer than 700 such coun-
ties, mainly in the Corn Belt and Great Plains (Figure 4).
Accordingly, there was a significant decline in the number of
people living in areas with major dependence on agricultural
income — from nearly 25 percent of the U.S. population in
1950 to less than 4 percent in 1977.

36

Figure 4

Agricultural Counties, 1975-1977

□□Other counties.

Agriculture has not disappeared in those formerly agricul-
tural counties; rather, it has been replaced as a principal
component of economic activity by growth in the nonfarm
sector. For nonmetropolitan America as a whole, three ma-
jor industries — manufacturing, wholesale and retail trade,
and professional services — each now employ roughly twice
as many workers as agriculture.

The 673 counties which today continue to rely most heavily
on agriculture typically average about 1 1 ,000 residents
each, according to preliminary results of studies conducted
as a part of this project. In them, almost 78 percent of the
resident farmers regarded agriculture as their principal occu-
pation, and more than half did not work off the farm. Ten-
ancy is more common, and operators tend to be slightly
younger than the farmers in other rural counties. Farm own-
ership by minorities is lowest in these counties. Not many of

these counties' citizens suffer from substandard housing,
but their day-to-day access to urban-based services and
businesses is limited.

On the whole, they are not poor counties. In the 1975-77
period, per capita income in the farming-dependent counties
was still 20 percent less than that in counties that had never
been farming areas, but that income had increased by 77.4
percent since 1969-71, when it was 26.2 percent below the
urban areas. The per capita income in the rural counties
where farming accounts for a smaller share of the local
economy than in the 1950's fell about 4 percent behind the
farming-dependent counties during that 6 year interval, but
grain prices also set record highs during this period.

37

The belief that a direct relationship exists between farming
and the health of the rural communities nearby has been
firmly held over the years and was voiced repeatedly at the
Structure Project meetings. There is evidence to support
this belief, and many groups have used it to argue in favor
of maintaining a large number of farms as a way to pre-
serve the vitality of communities.

The problem with this argument is that, as we have seen,
most rural communities no longer depend primarily on agri-
culture to shape their futures. Even farm-dependent rural
communities do not exist in a vacuum. Many forces besides
those associated with agriculture play important roles in
changing them. Most prominent among these forces are
new methods of retailing, the mobility of an automotive/
trucking age, and new rural industries. Farm and nonfarm
rural citizens alike are affected by these factors, and most
of the changes these forces brought about would have oc-
curred regardless of changes in farm structure.

This is not to imply that farm structure has no impact on the
rural economy or community. The work that has been done
has shown generally that a change in the local pattern from
one of small farms to one of larger ones means greater re-
gional income, while a pattern of more small farms means
greater regional employment. However, the magnitude of
these impacts was found to be small.

Another very interesting research finding, however, is that
the significance of the local structure of agriculture for rural
development is not so much in farm sizes but how the farms
are organized. That is, rural communities appear to be af-
fected by whether farms are owned, operated, and man-
aged by a family or whether these three economic functions
are separated and undertaken by different groups of individ-
uals, such as an absent owner, hired workers, and a resi-
dent manager.

Walter Goldschmidt's examination 40 years ago of Arvin
and Dinuba, two towns in California's San Joaquin Valley,
analyzed the impacts of family versus industrialized agricul-
ture. Goldschmidt's central hypothesis was that the key fac-
tor influencing community development was the percentage
of hired workers in the farm-occupation mix: the higher the
proportion, the lower the quality of life in the commmunity.
His work supported the hypothesis. In addition to the effects
of a less-stable population in Arvin, where hired workers
were greater in number, the owners of industrialized farms
around Arvin generally lived elsewhere, with rents and re-
turns to capital investment diverted from the community.

Goldschmidt's research remains the most detailed of any
done on these questions. In 1977, the Small Farm Viability
Project conducted a follow-up to the Arvin-Dinuba study.
This group found that Goldschmidt's basic findings were still
valid. Meanwhile, William D. Heffernan and others con-

ducted studies in Missouri addressing the relationship be-
tween farm organization and community vitality. They con-
cluded that managers of nonfamily farms are less involved
in community social participation than are family farmers,
but there was no difference between managers and family
farmers in activities with a purely economic benefit.

Recently completed work, again in California, concluded
that the relationship between farm structure and the rural
community is more complex than has been suggested in the
35-year debate over farm sizes.

While these studies are suggestive about the impact of farm
ownership and structure on rural community life, they do not
provide sufficient evidence to be definitive. The behavior of
owners, workers, and managers is influenced by many fac-
tors, and our understanding of the relative importance of the
various elements, and the data available to achieve better
understanding, are still inadequate.

Part-time Farmers

We have seen how the forces of change in the United
States since World War II have meant, among other things,
that "rural" and "farm" no longer mean essentially the same
thing, and that the relative importance of agriculture to the
rural economy has shifted measureably, even though nearly
700 counties continue to depend significantly on farming.

One development of recent decades in rural America — part-
time farming — deserves particular attention because of its
implications for the rural economy and the implications it
might hold for the structure of agriculture in the years
ahead.

Part-time farming has apparently developed as a permanent
institution, with a different character than the one attributed
to it in years past. It was widely believed during the 1950's
and 1 960 s that part-time farming was a byproduct of the
rapid changes taking place in agriculture — a transition for
persons either entering full-time agriculture or leaving it.

The conventional wisdom has maintained that some produc-
ers sought off-farm work to secure the money to meet such
farm-related goals as buying more land and equipment or
paying off existing debts, while other such producers
worked temporarily off the farm to gain the skills needed to
leave agriculture for another type of work. However, our re-
view of the research on structural issues found more recent
evidence that a significant number of the part-time farms
are not in a state of transition or under economic stress but
are stable operations maintained by reasonably prosperous
individuals.

38

Much of the new off-farm work is permanent. Studies in the
last two years in Kentucky and Illinois found that a majority
of those working off the farm did so to increase family in-
come, but not for reinvestment in the farm or with plans to
entirely give up farming.

The stability offered by part-time farming could be a buffer
against further concentration in farmland ownership. In addi-
tion, the increased income provided by combining farm and
nonfarm jobs affords a way out of poverty for families on
many small- and medium-sized farms.

Conclusions

The incomes of rural people and the economies of rural
areas are each year becoming less affected by changes in
farm prices and incomes from farm sources. The economic
health of many rural areas is increasingly linked to the per-
formance of the general economy. This is a reversal of the
situation existing when farm commodity policies were first
developed 50 years ago; today, farm policies and rural poli-
cies are no longer synonymous. This does not mean there
is no longer any link at all.

Clearly, the incomes of many people living on places still
defined as farms are more dependent on rural nonfarm de-
velopment and policy than on farm policy. That is, the avail-
ability of nonagricultural employment is important to farm
families in achieving the income necessary for an adequate
standard of living. Furthermore, for some people establish-
ing themselves in farming, off-farm activity may be a way to
obtain the resources necessary to farm. Thus, rural devel-
opment and policy today are of fundamental importance to
the incomes of many farm operations and an important
means to retain diversity in farm sizes and situations.

We have also seen that nearly 700 counties do still have a
particularly large stake in agricultural policy today. Well over
40 percent of the direct income-support payments from farm
programs went to farmers in those counties in 1 978. Be-
cause these counties continue to specialize in agriculture,
most have not shared in the rural population growth of the
seventies. They continue to be unable to develop new em-
ployment opportunities rapidly enough to offset disappearing
opportunities in local agriculture. These counties do not
have large concentrations of poverty, substandard housing,
or other distress. However, access to urban-based services
is a serious problem for residents in many of these areas.

Finally, it is important to recognize that farming and non-
farming activities are compatible and, in fact, highly comple-
mentary for many people. The challenge for Government
policy is to devise, first, rural-development policies that help
families improve returns from their nonfarm activities and,
second, devise farm policies which, at a minimum, do not
hinder the farm activities of families farming part-time.

Selected References

Beale, Calvin L. "Recent U.S. Rural Population Trends and
Selected Economic Implications." Statement before the
Joint Economic Committee, United States Congress,
Washington, D.C. May 1978.

Brown, David L. "Farm Structure and the Rural Commu-
nity." Structure Issues of American Agriculture. Eco-
nomics, Statistics and Cooperatives Service, United
States Department of Agriculture, Washington, D.C. Ag-
ricultural Economic Report 438. November 1979.

Carlin, Thomas A. and Linda M. Ghelfi. "Off-Farm Employ-
ment and the Farm Sector." Structure Issues of Ameri-
can Agriculture. Economics, Statistics and Cooperatives
Service, United States Department of Agriculture,
Washington, D.C. Agricultural Economic Report 438.
November 1979.

Carlin, Thomas A. "Small Farm Component of U.S. Farm
Structure." Structure Issues of American Agriculture.
Economics, Statistics and Cooperatives Service, United
States Department of Agriculture, Washington, D.C. Ag-
ricultural Economic Report 438. November 1979.

Deavers, Kenneth L. and David L. Brown. "Social and Eco-
nomic Trends in Rural America." Rural Development
Background Paper. The White House, Washington,
D.C. October 1979.

Jordan, Max and Tom Hady. "Agriculture and the Changing
Structure of the Rural Economy." Structure Issues of
American Agriculture. Economics, Statistics and Coop-
eratives Service, United States Department of Agricul-
ture, Washington, D.C. Agricultural Economic Report
438. November 1979.

LeVeen, E. Phillip. "Enforcing the Reclamation Act and Ru-
ral Development in California." Rural Sociology. Vol. 44,
No. 4., pp. 667-690. 1979.

MacCannell, D. and Jerry White. "Agricultural Land Owner-
ship and Community Structure in California's Central
Valley." Mimeo. University of California-Davis. Decem-
ber 1980.

Miller, James P. Nonmetro Job Growth and Locational
Change in Manufacturing Firms. Economics and Statis-
tics Service, United States Department of Agriculture,
Washington, D.C. RDRR No. 24. August 1980.

United States Department of Agriculture. Rural Development
Pespectives. No. 2, Focus on Rural Poverty. Economics
and Statistics Service, Washington, D.C. March 1980.

United States Department of Commerce. Farm Population of
the United States. Current Population Reports, Series
P-27, No. 53, Bureau of the Census and Economics
and Statistics Service, United States Department of Ag-
riculture, Washington, D.C. September 1980.

39

CHAPTER 3 A PROFILE OF
AMERICAN AGRICULTURE

While much closer global food supply-demand balances
were signaling the end by 1980 of 60 years of chronic sur-
pluses of farm commodities in this country, and while rural
America was diversifying its economic base, away from a
dependence on agriculture, other pervasive forces were fun-
damentally and irreversibly altering the economic, techno-
logical, and institutional character of the farm sector.

By the late 1960's, observers were becoming aware of the
cumulative significance of a number of the trends. The im-
mediate short-supply crisis of the early 1970's diverted at-
tention away from those trends, but they persisted. The
structural changes they brought to agriculture could no
longer be ignored by the late 1970's.

The emergence of the American Agriculture Movement and
tractors on the U.S. Capitol Mall grabbed the public's atten-
tion and generated a host of questions about who those
farmers were and why they were having problems — espe-
cially since news accounts of those demonstrations re-
vealed that many participants controlled large acreages of
farmland and had assets and net worths undreamed of by
the average citizen.

A number of factors converged at the same time to compel
a hard look at the status of the farm sector. At the Depart-
ment of Agriculture, research was already in progress,
aimed at providing clearer understanding of the structural
changes taking place in the farm sector and in the links be-
tween agriculture and other firms and persons in rural
America. Many of these findings have been submitted in an-
nual reports to the Congress on the status of the family
farm.

The first results of the research efforts brought to the
public's attention the significance and pervasiveness of
changes that had already taken place: farm production and
landownership are now highly concentrated in a relatively
few hands; hundreds of thousands of very small farms con-
tribute little to total production, but their owners are no
longer poor; many large farms are heavy users of borrowed
capital and increasingly vulnerable to an instability in com-
modity prices, and, by and large, investments and resources
in commercial agriculture are earning rates of return com-
petitive with other investments.

But when researchers began to look behind the national-av-
erage statistics, to seek causes for and better explanations
of the changes, many began to fully grasp the significance
of what was happening to the farm sector and the implica-
tions for the continued usefulness — indeed, the appropriate-
ness— of longstanding farm policies.

Existing policies and programs were founded on premises
no longer supportable; they were designed to address prob-
lems that might no longer exist.

Existing policies do not fully address new kinds of problems
that a markedly changed farm sector will encounter in the
new global and domestic economic settings described in the
previous chapters.

Because of the greatly changed mix of farm firms and their
economic characteristics, continuation of past programs and
policies will likely contribute to further concentration of eco-
nomic power, inflation in land prices, and unwise use of re-
sources, without apparent benefit to the rest of society.

In this chapter, the available data and findings from recent
research are used to develop a profile of American agricul-
ture today — its farms, people, resources, financial condition,
and economic performance — in a way that reveals the sig-
nificance of the changes for future public policy. Some of
the implications are drawn at the end of the chapter.

The Farms and Their Characteristics

Perhaps the best-known characteristics of the farm sector
are that the total number of farms has declined over time
and the average size has increased (Figure 5).

Those parallel changes have been the most visible manifes-
tations of the forces affecting agriculture. Primary among
those forces are the technological innovations that permitted
economic efficiencies and higher incomes, attainable only
by farms growing larger. A result was an excess of labor fol-
lowed by emigration from farming.

The decline in total farm numbers is also the most likely sta-
tistic to be used in discussions of general policy issues,
such as what some believe to be the demise of the family
farm. Yet, this statistic, while making a point about what has
occurred, conceals much more than it reveals about the
farm sector today. This section attempts to look behind the
total numbers to the sizes, types, locations, and income and
wealth characteristics of the farms remaining today.

41

Figure 5

Number and Average Size of Farms

Millions Acres

Number of farms\^

New definition

„„. \

»»»' *
VvOld definition

New definition -

>

ii 1 1 1 > , , . i . , , . i . . . .

0

1920 25 30 35 40 45 50 55 60 65 70 75 80
Sources; Average size of farms 1920 50 from 1964 Census of Agriculture
All other data from Crop Reporting Board, USDA

Farm Numbers

Any discussion of farm numbers and sizes today is impor-
tantly conditioned by definitions, perhaps more so than
when there were several millions of farms regardless of how
defined. The most widely used source of farm numbers is
the every-five-year agricultural census of the Department of
Commerce. The census reports two definitions of a farm:
the new official one adopted in 1978, and the former one,
which is continued in use for continuity of the data series.
(The old definition is used here because it is more consist-
ent with other data presented.) The most recently available
comprehensive estimates are from the 1974 census; com-
plete data from the 1978 census had not been released
when this report was written.

The other source of farm numbers is the Department of Ag-
riculture. Its estimates are derived using the census counts
as benchmarks for extrapolation, with modifications as sug-
gested by other information.1 The Department's estimates
for 1978 are shown in Table 5.

The new definition of a farm is more restrictive, counting a
place as a farm only if it has product sales of $1 ,000 or
more, regardless of acreage. This definitional change af-
fected only the number of farms in the smallest-sized cate-
gory (sales less than $2,500). The number in this category
was reduced by about 302,000 (to 609,000) reducing the to-
tal number of farms in 1978 to 2,370,000. Thus, the total
number of farms in the United States is 2.67 or 2.37 million,
depending upon the definition used. (The 1978 Census of
Agriculture reported 2.48 million farms under the new
definition.)

Farm Size

The size distribution of those farms, or the proportion of the
farms in each size category, provides additional insight into
their characteristics. Shown by value of sales (economic
class), the distribution is far from "normal" — that is, an
equal proportion of farms of varying sizes both above and
below the mean size. It is, in fact, highly skewed toward the
smaller sizes; there are many more farms below [he mean
size than above it.

But when we consider the contribution of farms in each size
category to the total value of all food and fiber production,
we see (Table 5) that the relatively numerous smaller farms
contribute proportionally much less to total production. For
example:

• Farms below $5,000 in sales constitute 44 percent of
all farms, but contribute only 2 percent of the total sales.

• Farms with $5,000 to $40,000 in sales are 34 per-
cent of the total number of farms and represent 16 percent
of production, by value.

Together those two size categories represent 78 percent of
all farms, but only 18 percent of sales. On the other hand,

• Farms with $40,000 to $100,000 in sales are 15 per-
cent of all farms and have 25 percent of the total sales.

Farms with sales above $100,000 are 7.1 percent of
the farms and have 56 percent of the total sales.

• The 64,000 farms with sales of more than $200,000
a year constitute 2.4 percent of all farms but 39.3 percent of
the total sales. (The 1978 Census of Agriculture counted
81,000 in this category.)

• Farms with more than $1 million in sales comprised
0.26 percent of the farms in 1978 but 19.9 percent of the
sales.

Looked at yet another way, the 2.08 million farms with 1978
sales under $40,000 averaged $10,379 in sales, but the
64,000 with sales above $200,000 averaged $711,141
each. Lumping all farms together, the national average
sales were $43,328.

The concentration of production into a relatively small num-
ber of larger farms is obvious. These data also suggest that
there would be many more economically disadvantaged
farm families (and many below the poverty line) on the
smaller farms if farming were the sole or even the primary
source of income. A farm that grosses only $40,000, for ex-
ample, even with the best of management, is unlikely to
provide a net income to the operator and family that would
be considered adequate today, much less near the national
median income of $17,640 (in 1978). On many of the
smaller farms, however, the income is supplemented by a
larger amount of income from off-farm sources.

42

Table 5: Farm numbers and average sizes, 1978

Size by

Wall IP r\f Qalcao

Farms

Value of Sales

Off-Farm Income

INUIMUC7I \\J\J\JJ

rci ocl ll

Dollars (Mil.)

Percent

Dollars (Mil.)

Percent

Less than 2,500

911

34.1

1,056

0.9

15,760

46.0

2,500 - 4,999

275

10.3

1,289

1.1

4,506

13.1

5,000 - 9,999

281

10.5

2,580

2.2

3,814

11.1

10,000 - 19,999

294

11.0

5,259

4.6

2,980

8.7

20,000 - 39,999

323

12.1

1 1 ,406

9.9

2,520

7.4

40,000 - 99,999

398

14.9

28,962

25.0

2,670

7.8

100,000 - 199,999

126

4.7

19,708

17.0

2,029*

5.9*

Over 200,000

64

2.4

45,413

39.3

Total

2,672

100.0

115,773

100.0

34,279

10070

Source: ESS/USDA. (1959 Definition of "Farm")

Off-farm income is calculated for farms of $100,000 in sales and over.

Table 6: Number of farms and land in farms by acre size, 1978

Acres

Farms

Land

Number

Percent of Total

Million Acres

Percent of Total

Less than 1 0

215,674

8.7

1.1

.1

10-49

475,815

19.2

14.3

1.4

50-179

814,371

32.8

93.7

9.1

180-499

596,482

24.0

202.8

19.7

500 - 999

215,150

8.7

161.4

15.6

1 ,000 - 1 ,999

98,602

4.0

147.9

14.3

2,000 or more

63,772

2.6

409.9

39.8

Total

2,479,866

100.0

1,031.1

100.0

Source: Adapted from the 1978 Census of Agriculture.

Acreage

An examination of farms by acreage size is also revealing.
The total land in farms, about 1.031 billion acres, was dis-
tributed across the 2.5 million farms enumerated in prelimi-
nary returns from the 1978 census as shown in Table 6. In-
terestingly, 61 percent of the farms had less than 180 acres,
the next largest one-fourth of the farms had between 1 80
and 500 acres, and the largest 1 5 percent of the farms had
more than 500 acres.

In terms of acres controlled, the farmland acreage, like
sales and production, is controlled by relatively few of the
largest farms — 6.6 percent of the farms encompass 54.1
percent of the land in farms.

Farm Income

A central consideration in farm policy traditionally has been
the level of income in the farm sector. That issue merits fur-
ther examination from two perspectives: the economic well-
being of farm people, and the sustained economic viability
of farm businesses. Are total incomes of farm people below
a socially acceptable norm? Are the rates of return to in-
vestments in farm businesses sufficient for continued
survival?

The economic well-being of farm people is examined first,2
while the issues related to farms as businesses will be
looked at later in this chapter.

The net income from farming varies widely across the var-
ious sizes of farms. It is, of course, quite small on the small-
est farms. If many of the smallest places counted as farms
had to rely solely on farm income for their livelihood, as was
once the case, a significant problem of widespread low in-
comes within the farming community would be evident.

43

Net farm income increases as farm size increases, and it is
not until a farm achieves around $40,000 in gross sales that
farm income alone begins to approach an amount consid-
ered adequate for an acceptable standard of living.

On farms beyond that size, the level of net farm income,
from the point of view of personal well-being, is not sub-
standard in relation to most others in our society.

These disparities in net farm income among sales-size
classes have increased over the last two decades. The larg-
est farms (over $100,000 in gross sales) in 1960 amounted
to 0.6 percent of all farms and earned 6.4 percent of the net
income. By 1978, this group comprised 7 percent of all
farms and had 36 percent of the net farm income. At the
same time, the proportion of net farm income received by
the smallest farms (under $2,500 in sales) steadily dropped
from 13.4 to 5.9 percent of the total.

It is now widely recognized that examining only the average
income of farm-operator families from farm sources gives a
misleading indication of the well-being of farm families.

As we learned in the last section, the significant incidence
of off-farm income earned by farm families is a relatively
new phenomenon, having grown rapidly in the last two dec-
ades. Today, in the aggregate, nonfarm income earned by
farm families exceeds what they earn from farming.3 Includ-
ing income from all sources, the average net income per
farm operator family in 1 978 was almost $23,000 — 30 per-
cent more than the national median family income, and 132
percent more than the average income from farm sources
($9,809) alone.

Off-farm income is of greater importance, exceeding farm
income by several times, among those farms with sales un-
der $20,000. (Table 7). Off-farm income declines as a pro-
portion of farm income as the size of farm increases — from
being 10 times greater than farm income for the smaller
size class to only one-fifth of farm income for the largest
farms.

The addition of nonfarm income has contributed -to a much
more equal distribution of total income among farm families
(Figure 6) and between farm families and the rest of the
population. This underscores the close link between the
economic well-being of a majority of farm families and the
nonfarm economy, a link growing stronger as time pro-
gresses. When total income is compared with the median
income of the total population, only farms with sales be-
tween $5,000 and $20,000 are slightly below that standard.
These size categories are somewhat "in between," with in-
sufficient off-farm income to live on and not selling enough
to achieve adequate farm incomes.

It should also be noted that, while those with sales under
$5,000 can reach the national median income with their off-
farm earnings, the farmers in the middle — $5,000 to $40,-
000 in sales — cannot, on the average, reach median income
with either farm or off-farm earnings alone.

Several questions about farm families' income patterns need
to be answered for both a fully definitive portrait of the sec-
tor and effective policy based on such a portrait: Are many
of these smaller farms really rural residences only? Is the
income from wages or salaries earned by the household
head, who claims an occupation other than farming? Or do
the spouse or other family members earn this income in
supplementary employment? More information about the
sources of the nonfarm income and the regional variations
in the availability of nonfarm jobs could be especially reveal-
ing for policy purposes, if it provided insights about the moti-
vation and aspirations of people living on the smaller farms.

Special studies were conducted to provide contemporary
data of this nature on the smaller farms. Unfortunately,
these surveys were not completed in time for this summary,
so little definitive information on such questions can be pre-
sented. However, some insights can be gained from studies
with data from varying time periods.

One that examined family incomes in 1 973 focused on the
level, sources, and distribution of income for families with
farm income.4 Four groups of rural people were examined:
low-income farm-operator households, households associ-
ated with small farms, households dependent solely on
farming, and households dependent primarily on off-farm
income.

This research revealed that:

• Only 1 in 1 2 farm families depended entirely on farm-
ing for income. Of the others, almost 8 in 1 0 had income
from wages and salaries, the most important source of non-
farm income. And, generally, as total family income rose,
the portion of total income from wages and salaries, rather
than farming alone, rose, except at the higher income
levels.

• Farm families reporting farm profits had a signifi-
cantly higher average total income than families reporting
farm losses. Farm losses reported were small and fre-
quently reported by younger operators, who had higher
wage-and-salary earnings and less total income from non-
work sources, such as dividends, rents, and royalties.

• Regional differences in incomes were associated with
nonfarm job opportunities and farm-household characteris-
tics. Most low-income farm families were in the South and
associated with the older farm households. The absence of
a full-time wage earner in the household contributed to the
low-income problem. Households reporting only farm in-
come had a much higher probability of being in the low-in-

44

Table 7: Off-farm income per farm operator family as a percentage of net farm income, 1960-78

Sales class ($)

1960-64

1965-69

1970-74

1975-78

Less than - 2,500

408

646

857

1,006

2,500 - 4,999

128

261

472

902

5,000 - 9,999

68

130

217

423

10,000 - 19,999

31

54

91

174

20,000 - 39,999

24

30

38

66

40,000 and over

17

22

17

25

40,000 - 99,999

NA

23

21

30

100,000 and over

NA

20

14

21

All Farms

89

115

104

141

Source: Adapted from Farm Income Statistics, U.S. Department of Agriculture.
NA = Not available.

come category than did households reporting income from
both farm and non-farm sources.

• Small farms and low-income households are not syn-
onymous. Except for the households with farm income only,
low farm income per se was not the sole cause of poverty.

• Families with only farm income had average farm-
product sales almost four times as great as those families
who had farm and nonfarm income.

• About 301,000, or 10.6 percent of the farm families,
were below the poverty threshold, with the greatest concen-
tration occurring in the South. (For the population as a
whole today, an estimated 11.4 percent live in poverty.)

An examination of average total current annual income per
farm across the sector as a whole must conclude that the
incomes of most farm people are no longer "low" by any
reasonable standard. This does not mean there are no farm
families with low incomes or no remaining poverty, ob-
viously. But low income and poverty seem associated with
particular circumstances and geographic regions and are
not pervasive across the entire farm sector, as was once
the case.

While policies designed to improve farm income would ben-
efit all farm operators to some extent, the benefits and im-
pacts on household income would vary directly according to
the reliance of the household upon farm income and to the
size of the farm operation.

Figure 6

Income per Farm Operator Family,
By Farm Size, 1978

Sales Percent
class of farms

National median
family income ($17640)

34.1

Under
$2,500

2,500-
4,999

5,000-
9,999

10,000-
19,999

20,000-
39,999

40,000-
99,999

100,000
and over

All farms

Source: ESS/USDA.

20 30 40 50
Income ($1,000)

It is clear, for example, that policies designed to increase
commodity prices to enhance farm incomes will be of little
benefit to the 1 .8 million farms with sales less than $20,000.
This is borne out by studies of the distribution of farm-pro-
gram benefits, which reveal that the greatest proportion of
the benefits accrue to the larger farmers — those with the
greatest volume of production, hence the greater farm
incomes.

45

Table 8: Characteristics of the Nation's largest farms, 1978

Categories
($1 ,000 gross sales)

Farms

Gross Sales

Averages Per Farm

Number

Percent

Amount (Bil. $)

Percent

Acres

Sales ($)

200 - 299

39,303

1.59

9.4

8.71

1,643

240,223

300 - 499

23,911

.96

9.0

8.28

2,538

375,335

500 - 699

7,408

.30

4.3

3.97

3,438

581,533

700 - 999

4,395

.18

3.6

3.33

4,220

822,869

1 ,000 - 4,000

5,464

.22

10.0

9.21

5,987

1,828,183

5,000 - 9,999

456

.02

3.1

2.83

10,673

6,731 ,842

Over 10,000

370

.02

8.5

7.85

8,046

23,007,885

Total

81,307

3.29

47.9

44.18

2,581

589,278

Source: Preliminary data from the 1978 Census of Agriculture.

This recent research5 found that, of all direct income-support
payments, the smallest 50 percent of farmers by Normal
Crop Acreage received 9.7 percent of the 1978 programs'
payments. The largest 1 0 percent of the recipients (about 3
percent of the farms) received 46 percent of the funds (and
more than half of the wheat and cotton payments). The na-
tional average payment was $2,373. Averages varied by
acreage size from $852 for places under 220 acres, to
$14,234 to those with 1,000 to 1,500 acres, to $36,005 for
those with more than 2,500 acres.

Major Categories of Farms

The diversity of farm sizes and incomes suggests that future
agricultural policies will need to be based on more careful
identification of problems and correct delineation of the
subgroups of farms that each policy is to treat. At least
three and perhaps four types of farms can be seen to have
enough common characteristics to be grouped into major
categories.

First are the places with little production and relatively high
off-farm incomes. These may be simply rural residences
and hobby farms. At a minimum, the smallest size category
(under $2,500 sales) would be included here, and probably
the next size category, with sales between $2,500 and $5,-
000, could be included as well. This group, which might be
labeled "rural farm residences," would encompass 44.4 per-
cent of all places counted as farms today.

A second group, which could be called "small farms," might
include the next three sales classes, up to $40,000 in sales.
Most of these farms produce too little to be able to rely fully
or primarily on farming for a livelihood and must depend on
supplemental, nonfarm income — but to a lesser extent than
do the smallest farms.

Table 9: Farms with over $40,000 in sales, by type, 1974

Type

Farms

Number

Percent

Cash grain

179,701

37.7

Cotton

9,500

2.0

Sugar, peanuts, potatoes, etc.

22,966

4.8

Dairy

78,083

16.4

Poultry, eggs

32,537

6.8

Horticultural

6,578

1.4

Livestock

100,036

21.0

Tobacco

8,886

1.9

Vegetable & melon

6,000

1.3

Fruit & tree nut

13,769

2.9

General crop farms

1 1 ,566

2.4

Animal specialty

1,703

0.4

General livestock farms

4,518

0.9

Not classified

1,066

0.2

Total

476,909

100.0

Source: 1974 Census of Agriculture

Farms in the third category we might call "primary farms."
They are those that generate more than $40,000 in gross
sales and their operators depend primarily upon farming for
their incomes. Since they produce most of the Nation's food
and fiber, the actions of these farmers largely determine the
effectiveness of commodity programs, including the grain-re-
serve program. Their managerial decisions also are signifi-
cant causes of structural change in the farm sector.

These farms, and perhaps the middle group as well, are the
ones of major interest for commodity policy. But this cate-
gory of primary farms actually can be divided into two
equally important categories— from $40,000 to $200,000 in
sales, and those with sales above $200,000 a year. Prelimi-

46

Table 10: Distribution of farms and agricultural product sales, by type of farm, 1974

Less than $40,000 sales More than $40,000 sales All farms

Type of farm

Number

Percent

Percent
of total
sales

Number

Percent

Percent
of total
sales

Number

Total sales
($1,000)

Cash grain

400,024

69.0

25.9

179,506

31.0

74.1

579, «0

23,548,215

Cotton

18,848

68.6

14.4

8,622

31.4

85.6

27,470

1,724,981

Horticulture

7,130

62.5

8.0

4,286

37.5

92.0

11,416

1,165,140

LIVcSlOGK

7Q 7

/ y. /

1 Q P

i y.o

qq pnn
yy ,ouu

on q

'fy i ,ooy

Dairy

116,777

60.2

27.8

77,084

39.8

72.2

193,861

9,623,312

Poultry and eggs

9,500

23.4

3.3

31,163

76.6

96.7

40,663

5,999,795

Sugar, peanuts, potatoes,

etc.

43,626

66.8

0.9

21,641

33.2

99.1

65,267

5,185,796

Tobacco

74,796

89.5

55.8

8,762

10.5

44.2

83,558

1 ,528,268

Vegetable and melon

4,536

56.2

4.2

3,529

43.8

95.8

8,065

1 ,564,748

Fruit and tree nut

31,372

71.8

16.9

12,346

28.2

83.1

43,718

2,561,219

General crop farms

15,514

72.4

32.4

5,910

27.6

67.6

21 ,424

812,808

General livestock farms

2,147

59.1

24.8

1,487

40.9

75.2

3,634

168,656

Total of above*

1,116,329

71.1

21.1

454,136

28.9

78.8

1,570,465

75,937,603

Source: ESS/USDA.

*These figures may vary somewhat from similar aggregate data; the difference is due to disclosure problems.

nary data from the 1978 Census of Agriculture provide a
useful overview of the 81 ,000 largest farms (Table 8). The
most striking feature of these farms is their sheer size.
These 3.3 percent of the farms produced 44 percent of the
total sales. Over 6,000 of these farms had sales in excess
of one million dollars each.

This latter 0.26 percent of all farms produced 19.9 percent
of the gross sales — $21 .6 billion — for average sales of $3.4
million per farm, on a land base exceeding 8,000 acres
each (Table 8).

Primary Farms

The 1974 census counted 476,909 farms with gross sales
of at least $40,000. (This number increased to 588,000 in
1978). These farms accounted for 78.4 percent of total out-
put in 1974 and likely account for a much larger share to-
day. What do these farms produce, and how viable are
they?

The Bureau of the Census classifies farms by type based
on the Standard Industrial Classification (SIC) codes of the
Department of Commerce. These codes classify a farm ac-
cording to the commodity that accounts for more than 50
percent of its gross sales. Thirteen major farm types are de-
lineated by the Census Bureau.

Of farms grossing over $40,000 in sales, livestock farms —
including dairy, poultry, animal specialty, and general live-
stock— account for 45.4 percent of the total number. Crop

farms (grains, cotton, sugar, tobacco, and general crop)
make up 48.8 percent; and horticultural and various other
miscellaneous types constitute the remaining 5.8 percent
(Table 9).

Dairy farms, the only livestock category with a direct price-
support program, alone comprise 16.4 percent. Cash grain
and cotton farms, those for which the major crop commodity
programs have been operated for more than half a century,
are 39.7 percent of the total number of farms in this
category.

The contribution to total sales by size of farms within each
of these types is further revealing. As expected, production
is concentrated: a relatively small number of producers ac-
count for a much larger proportion of total production (Table
10). Concentration varies by types from the larger sugar,
peanuts, and related farms, which produce virtually all the
given commodity, to tobacco growing, where the larger
farms produce 44 percent of the output. Among grain farms,
the larger farms (31 percent of the cash grain farms with
over $40,000 sales, but only 7.3 percent of all farms) make
74.1 percent of total sales.

47

Table 11: Grain and cotton farms with over $40,000 in sales, by state, 1974

State

Wheat

State

Corn/soybeans

State

Cotton

Kansas

12,957

Illinois

26,328

Texas

2,250

North Dakota

10,952

Iowa

23,446

California

1,148

Washington

3,447

Nebraska

11,513

Arkansas

933

Montana

4,209

Indiana

1 1 ,271

Arizona

620

Oklahoma

3,909

Ohio

7,362

Mississippi

1,953

Total

35,474

Total

79,920

Total

6,934

Source: 1974 Census of Agriculture

Table 12: Average characteristics of cash grain and cotton farms with over $40,000 in gross sales in predominant
wheat, corn/soybean, and cotton-producing States, 1974

Item

Wheat

Corn/Soybean

Cotton

(Numbph

ric. A-7A
OsJ,H 1 *T

7Q Q?n

0,570*t

(Acres)

Land inventory:

Acres operated

1,728

565

1,254

Cropland acres

1,199

475

982

Acres harvested

802

431

801

Cropland not harvested

397

44

181

Pasture, range & woodland

490

74

221

Other land

on

lb

01

Tenure

Acres owned & operated

940

241

634

Acres rented in

839

337

696

Acres rented out

51

13

76

Crop enterprises:

Wheat

540

40

38

Corn

40

213

4

Soybeans

15

148

109

Other grains

51

11

72

Hay & fieldseeds

52

16

34

Other crops

102

3

35

Cotton

509

(Dollars)

Value of sales:

Grain

77,414

74,630

30,806

Fieldseeds and hay

1,770

445

8,492

Other field crops

1,629

302

2,538

Vegetables

16

224

2,808

Fruit

3

8

900

Other crops

820

619

134,078

Livestock

10,090

11,865

3,488

Total

91 ,742

88,093

183,110

Source: 1974 Census of Agriculture.

48

Table 13: Average financial characteristics of cash grain and cotton farms with over $40,000 in gross sales in
predominant wheat, corn/soybean, and cotton-producing States, 1974

Wheat

Corn/Soybean

Cotton

(Dollars)

Balance sheet

Assets

318,310

255,158

433,180

Debt

37,609

30,555

71 ,907

Equity

280,701

224,603

3b 1 ,273

Percent equity

88.2

88.0

83.4

Current income

uross receipts

01 CC1

oo.uyo

1 QO 111

I o3,1 1 1

Total expenses

56,329

53,038

147,899

Net income to equity

35,332

35,057

35,212

Other income

Net farm related

1,278

2,759

3,289

Nonfarm

2,708

2,761

4,178

Total

3,986

5,520

7,467

Total income (all sources)

39,318

40,577

42,679

Total income (farm sources)

36,610

37,816

38,501

Real estate asset appreciation

16,582

9,244

-14,967

Returns to equity from:

(Percent)

Annual farm income

13.04

16.84

10.66

Real capital gains

5.91

4.12

-4.14

Total

18.95

20.96

6.52

Source: Calculated from 1974 Census of Agriculture data.

Note: The financial characteristics were determined in the following manner: Gross receipts are equal to total market value of agricultural products
sold. Total expenses were calculated weighting the average variable costs for farms with gross sales of more than $100,000 with those of farms
having gross sales of $40,000 to $100,000. Wheat farms were those classified by the Census of Agriculture as cash grain farms in the predominant
wheat growing states of Kansas, North Dakota, Washington, Montana, and Oklahoma; corn/soybean farms were cash grain farms in the predominant
corn/soybean states of Illinois, Iowa, Nebraska, Indiana, and Ohio; and cotton farms were listed as cotton farms in Texas, California, Arkansas,
Arizona, and Mississippi. Total variable costs include cash rent, taxes, interest, depreciation, as well as the customary cash items. In addition, a
management charge, representing five percent of total sales and a labor charge calculated from crop production budgets were included. Returns
to equity were calculated by taking the ratio of total income from farm sources to equity and the ratio of real estate asset appreciation to equity.

To delineate a set of primary grain farms for analysis one
must identify the specific grain crops produced. The census
data do not permit such an identification directly, so this
must be done indirectly. One way is to identify the major
grain-producing States by type of grain produced (from cen-
sus acreage data) and assume that farms in these States
produce these grains. Using this procedure, 115,394 pri-
mary grain farms were found in the five major wheat- and
corn-producing States, with the remaining 64,112 primary
grain farms spread throughout the United States (Table 11).

Having identified these farms, some notion of the nature of
these farming operations can be obtained by looking at av-
erages for these farms (Table 12; and, again, recognizing
the limitations of averages in the diverse agriculture of to-
day). Using census data, current income and capital-gains

returns have been computed and compared to the
operator's average equity in the farm business to show the
average financial situations of these farms (Table 13). Re-
turns vary by State, but total rates of return are comparable
to returns in the nonfarm economy in 1974. Likewise, total
income (farm and nonfarm) accruing to farm operator fami-
lies is comparable to the median family income for 1974.

Again, these are average situations. The average amount of
operator equity in these farm businesses is large, and cash-
flow requirements are much less stringent than for a renter
or beginning farmer who is more likely to have a much
smaller equity.

49

The averages also conceal some of the circumstances that
drive structural change. A farmer owning 1 ,000 acres of
prime midwestern farmland that was purchased 20 or even
10 years ago, for example, not only has obtained large
gains in net worth (which can be used as loan collateral),
but also has lower cash obligations to be met out of annual
receipts. That large equity and cash flow can be used to
outbid other would-be purchasers of nearby land for sale.
As explained in Part II of this report, the Federal income tax
laws also work to reduce the real cost of such investments
to high-income producers, increasing their competitive
strength.

The Economic Viability of Farm Businesses

The economic viability of farm businesses is important to
farm policy and to any study of the structure of agriculture
because it influences the motivations of firms, whether capi-
tal and other resources will be attracted to the sector and
under what circumstances, the technological progressive-
ness of the sector, the responses of individual firms and the
overall sector to economic conditions, their resiliency under
adverse conditions, and which firms will survive at the ex-
pense of others.

In the long run, the economic health of the sector deter-
mines its productive capacity and thus the supply and cost
of food. The distributive characteristics of that health will
also play a role in determining the eventual structural char-
acteristics of the farm sector. In the short run, the issue is
one of capability to adjust to immediate economic condi-
tions, such as volatile demand and the resulting wide
swings in prices and incomes.

In economic terms, a business firm is viable over the long
run if it generates enough income to pay all of the factors of
production employed — land, labor, capital and
management — a rate of return sufficient to hold them in the
particular business endeavor. Stated another way, either the
rate of return must be comparable to rates the resources
could earn elsewhere or, under certain specific assump-
tions, such as the ability of those factors to be freely moved,
they will shift to another endeavor where returns are
greater.

Such a shift is precisely what happened in agriculture. For
several decades, agriculture's annual income was insuffi-
cient when distributed among all resources to provide re-
turns comparable to those earned elsewhere. A "low" rate
of return resulted, and the excess resources (primarily la-
bor) gradually shifted to other sectors of the economy where
the earnings were greater. But, in examining today's agricul-
ture, how do farm resource earnings compare with the non-
farm sector?

Rates of Return for the Farm Sector
The Department of Agriculture has sufficient data to com-
pute returns to the farm sector back to 1 940. Estimates
have been calculated for the rate of the return to equity (the
current market value of assets, minus the outstanding debt)
in agricultural production assets from current income (gross
receipts minus production expenses, including interest paid,
operator and family labor, and asset appreciation) (Table
14). Several observations and references may be drawn
from these estimates6:

• Higher returns in the form of current incomes during
the forties reflect the high commodity prices resulting from
wartime conditions. Total returns were relatively stable
through the fifties and sixties. The seventies boom is re-
flected in both current income and capital returns.

• The return in the form of capital gains reflects mainly
increases in the value of the largest production asset, land.
These returns were relatively stable through the immediate
post-World War II decade and the sixties, but then in-
creased rapidly, reflecting the rapid escalation in land prices
that began after 1972.

• The average total return to equity is appreciably
higher for the seventies than in the previous three decades
(excluding the war years of the early forties).

Total returns to agriculture have increased markedly in the
seventies, yet this information tells us little about the bal-
ance between returns to resources in agriculture and the
rest of the economy unless we compare agricultural earn-
ings with earnings elsewhere. Such comparisons have their
limitations, but some useful insights can be gained.

Returns to current income and capital gains from common
stocks and long-term Government bonds are frequently
viewed as representative of business investment earnings in
the nonfarm economy. In Table 15, estimates for stocks and
bonds are compared with estimates of farm sector earnings.
While again recognizing that they are not strictly compara-
ble, these estimates also permit some interesting observa-
tions:

• Rates of return to current income among all three in-
vestments do not differ greatly over the entire 30-year pe-
riod, and especially not in the past 15 years. Long-term
bonds have consistently but not greatly outperformed the
other two. However, farm income is the most volatile of the
three.

• Capital-gains returns to equity are greater for stocks
and farm assets than long-term bonds. Stocks outperformed
farm assets in the fifties and sixties, but the reverse oc-
curred in the seventies. Interestingly, farm-sector capital-
gains returns are much more stable than such returns to the
other two investments.

• During the past 15 years, rates of total returns to
farm investment equity have substantially exceeded invest-
ments in common stocks and bonds. Although annual farm
income is the most variable, it is more than offset by the

50

Table 14: Returns to investment equity in farm production assets, selected periods, 1940-79

Period

Residual

Real

Rate of return to equity investment from

Equity in

income to

caDital

Current

Capital

assets

equity

gains

income

gains

Total

(Billion $ 1967)

(Percent)

1940-44

81.3

6.3

6.2

7.8

7.4

15.2

1945-^9

115.8

8.3

1.1

7.2

1.0

8.2

1950-54

133.1

6.4

0.8

4.9

0.8

5.7

1955-59

144.5

4.1

6.9

2.8

4.8

7.6

1960-64

161.8

5.3

5.0

3.3

3.1

. 6.4

1965-69

178.3

7.3

5.4

4.1

3.1

7.2

1970-74

192.0

11.8

13.2

6.1

7.0

13.1

1975-79

241.4

8.8

19.6

3.7

8.2

11.9

Source: Balance Sheet of the Farming Sector, (1979 supplement), U.S. Department of Agricutlure.

Note: Farm production assets are valued at current market prices deflated to a constant dollar basis. Residual income to equity equals income
to production assets minus interest on real estate and non-real estate debt.

Table 15: Rates of return to stocks, bonds, and farm assets, selected periods, 1950-79

Current income

Real capital gains

Total

Long

Long

Long

Common

term

Farm

Common

term

Farm

Common

term

Farm

Period

stock

bonds

assets

stock

bonds

assets

stock

bonds

assets

1950-54

5.85

2.61

4.95

11.95

-1.69

3.28

17.53

0.92

8.23

1955-59

3.94

3.38

3.18

13.12

-4.65

4.02

17.06

-1.27

7.19

1960-64

3.20

4.00

3.61

7.45

-1.49

2.42

10.65

2.51

6.02

1965-69

3.18

5.01

4.46

1.61

-9.09

2.48

4.79

-4.08

6.94

1970-74

3.47

6.25

6.26

-8.66

-8.65

6.15

-5.19

-2.40

12.41

1975-79

4.68

7.49

4.50

-4.09

-12.06

5.10

0.59

-4.57

9.60

Source: ESS/USDA.

less variable capital-gain returns. Thus, the risk in farm in-
vestment has been substantially lower than the risks of in-
vesting in the other two.

Over all, these data suggest that, to the extent that stocks
and bonds are good proxies for both current-income and
capital-gains returns, the agricultural sector lagged until the
late sixties but today enjoys comparable or superior rates of
earnings.

These data also suggest that the earnings performance of
agricultural land investments could have major future impli-
cations. Rising land prices are frequently noted as tending
to disenfranchise younger and lower-equity farmers as bid-
ders in the market and reinforcing the concentration of land
purchases among the more established farmers, who can
supplement the earnings from newly purchased land in or-
der to realize the capital gains later. This, of course, holds

their savings together in real terms and provides a net sur-
plus when land prices rise faster than general inflation.

The profitability of farm assets, particularly land, has a num-
ber of longer-term implications for the farm sector that are
explored in more detail in Part II of this report. Briefly
stated, as long as farm assets are at least as attractive an
investment, particularly in times of inflation, as nonfarm in-
vestment instruments (such as stocks and bonds), interest
will increase on the part of nonfarm investors, large institu-
tions, and even farmers in accumulating farm assets for
long-term appreciation and capital-gains purposes, rather
than for earning current farm income by operating the farm.

51

Table 16: Variation in farm income and product prices, selected periods, 1955-78

Item

Coefficient of Variation'

1955-63

1964-71

1972-78

Index of prices Received

All products

2.6

5.9

14.6

Crops

2.9

3.8

18.9

Livestock

5.5

11.3

13.7

Cash receipts

Crops

10.4

9.1

20.6

Livestock

8.3

14.6

15.7

Personal income received by the farm population

Farm income less Government payments

9.4

18.6

24.3

Farm income

6.3

14.1

21.7

Nonfarm income

12.5

16.0

15.7

From all sources

5.5

12.1

13.9

Source: ESS/USDA.

1 The coefficient of variation is the standard deviation of the data series divided by the mean and expressed as a percent.

As that happens, the lines of distinction between farmers
and people who own farm assets will become increasingly
blurred. This fact has implications for the rationale of our
present farm programs, because, for example, the benefits
of the farm programs, tied to production volume from a
given acreage, are capitalized into land values and thus ac-
crue to landowners (farmers and nonfarm investors) rather
than to farm operators per se.

The most significant single collection of savings in this
country is pension funds, which have recently been badly
battered by inflation. A midwest group planning to invest
pension funds in farmland has been the subject of recent
news-media attention and a congressional hearing. There
are likely to be more such ventures in the future. A major
economic factor in this decade could be efforts by all sorts
of groups outside the farm establishment to participate in
the kinds of capital-gains returns occurring over the past
decade, and that could be a major factor in determining how
future policy will work. This would mean that it is not only
young farmers who will have difficulty in getting established
as landowners, but older farmers will also meet increased
competition from bidders with large amounts of resources to
invest.

Variations in Incomes and Returns
Two important facets to any discussion of rates of return
from annual income and from asset appreciation are the
amount and the variability of the rate of return. Total income
to farm families in recent years has been shown to compare
favorably to the national median family income. The total
rate of return to investment in farm businesses since about
1 970 compares favorably to rates that could be earned from

investments in the nonfarm economy. What about the varia-
bility or stability of current income and those investment
earnings?

Some insights are obtained by measuring the variability in
commodity-group prices and income for three periods (Ta-
ble 16). These data suggest:

• The periods of 1 955 to 1 963 and 1 964 to 1 971 were
stable relative to the period 1 972 to 1 978 — when variability
in prices received for all products increased sixfold; for
crops, over sixfold, and for livestock, over twofold.

• The variability in farm income was over three times
as great in the seventies as in 1955-63. Income variability in
all periods was reduced by Government payments and re-
duced further when income from nonfarm sources was
included.

• In contrast to the instability in farm prices and in-
comes, nonfarm income received by the farm population
was relatively stable, primarily reflecting economic condi-
tions in the nonfarm economy.

As a whole, those figures confirm that the volatility or insta-
bility of farm income from one year to the next has in-
creased for the entire sector in the last decade.

Looking beyond sector aggregates, we examined income to
the farm-operator family by source and size of farm for the
sixties and the seventies (Table 1 7) and observed that:

• Variability in farm income increased substantially for
farms of all sizes in the seventies, compared to the sixties.

• Farm family income varies more than twice as much
for farms with more than $40,000 in sales than for those
with less gross income. This difference is due to the larger

52

Table 17: Variability in farm income per farm operator family by size of farm, selected periods, 1960-78

Sales class (§)

Coefficient of variation

Net farm income

Total income

1960-72 1973-78

1960-72

1973-78

Less than - 2,500

8.5

10.8

33.2

15.6

2,500- 4,999

6.9

16.2

30.6

14.6

5,000- 9,999

4.4

16.0

23.9

12.2

10,000 - 19,999

6.8

15.7

18.9

7.3

20,000 - 39,999

11.9

13.7

15.0

7.7

40,000 - 99,999

12.9

15.2

8.6a

10.7

100,000 and over

19.6

32.0

16.3*

26.5

Source: ESS/USDA.
'For 1965-72.

Table 18: Cash production expenses as a percentage of cash receipts, selected periods, 1935-78

Farms with Gross Sales of

Period

All farms

Less than

$40,000

More than

$40,000

to $100,000

$100,000

(Percent)

1935-39

59.8

NA

NA

NA

1940^5

56.3

NA

NA

NA

1946-^19

53.4

NA

NA

NA

1950-54

58.7

NA

NA

NA

1955-59

63.2

NA

NA

NA

1960-64

67.1

60.2

71.8

85.6

1965-69

68.5

59.6

69.4

84.8

1970-74

67.4

55.9

63.9

80.6

1975-78

72.1

57.4

63.5

81.3

Source: ESS/USDA.
NA = Not available.

Note: Cash receipts include marketings from livestock and crops, Government payments, and income from recreation, machinery hire, and custom
work. Cash expenses include operating expenses, taxes, interest on farm mortgage debt, and rent to non-operator landlords

proportion of total income from farm sources for the larger
farms.

• For farms under $20,000 in gross sales, total income
was highly stable. As this income is mainly from wages and
salaries, household incomes on these farms are little af-
fected by farm-income variability.

Thus we can conclude that, as farm income is proportionally
a smaller part of total income on small farms than on large
farms, small farms are less vulnerable to fluctuations in farm
earnings.

The implications of this increased economic instability in the
farm sector are especially significant for primary farms and

for those smaller farms that have little nonfarm income.
These larger farms are dependent on purchased inputs from
the nonfarm sector, and some of them have large fixed an-
nual cash obligations. This means that the large farms are
less able to "tighten their belts," take a lower return on their
labor and capital, and weather the bad times than the mod-
ern part-time farmers.

For example, the ratio of cash production expenses to gross
farm income has trended upward since World War II (Table
18). The increased reliance on purchased inputs and bor-
rowed capital varies by farm size, and the ratio is much
higher for the larger farms. Likewise, the debt-to-asset ratio
is much higher for the larger farms, which shows the added
cash requirement for annual debt servicing (Table 19).

53

Table 19: Debt to asset ratio, by farm size, selected years, 1960-78

Farm Size by Sales Classes

Year:

All Farms

Less than

2,500 to

5,000 to

10,000 to

20,000 to

40,000 to

100,000

2,500

4,999

9,999

19,999

39,999

99,999

and over

(Percent)

1960-64

13.5

8.1

10.2

12.9

15.0

15.0

15.2

18.8

1965-69

16.3

9.2

9.4

14.4

17.8

17.8

19.2

23.4

1970-74

16.4

5.1

8.8

11.5

15.5

17.8

19.7

24.9

1975-78

16.0

4.7

6.9

7.6

12.2

14.9

18.2

24.9

Source: ESS/USDA

Table 20: Sensitivity of annual net income to changes in production expenses

Ratio of Production expenses to cash receipts

Item

70%

85%

90%

(Dollars)

Gross receipts

100

100

100

Production expenses

70

85

90

Net cash income

30

15

10

10 percent increase in production expenses

77

94

99

Net cash income

23

6

1

(Percent)

Decrease in net cash income

23

60

90

This reduced financial flexibility has important implications
for the cash-flow situation — and needs — of what we call the
primary farms, those producing most of the Nation's food
and fiber.7 The consequences of that higher ratio of cash
production expenses to gross receipts, when it comes to
variations in net income, is a point quickly made. Any partic-
ular increase in production expenses, or reduction in cash
receipts, is much more severe the greater the farm's de-
pendence on purchased inputs and the greater its fixed-pay-
ment obligations. For example, if a farm has $100 in gross
receipts and expenses of $70, and expenses increase 10
percent, then net cash income is reduced by 23 percent
($7). But if its expenses are $90, a 10 percent increase in
expenses cuts net cash income by 90 percent — from $10 to
$1 . (Table 20)

The import of this is that more and more farms are vulnera-
ble at a time when the increased dependence on foreign
markets means greater potential variability in market prices,
hence greater variability in cash receipts.

Efficiency and Resource Use

In the face of tightening world supply and demand balances
and the resulting pressure on our land, water, mineral, and
energy resources, it is imperative that public policies en-
hance the efficiency of use of those resources. This pres-
sure is complicated by rising real costs of energy and per-
haps capital, because the great surges in productive
capacity over recent decades have resulted from adoption
of capital- and energy-intensive technologies. Further, the
adjustment to changing resource supplies and costs will
have to be made in markets that are likely to be frequently
confused by highly volatile commodity prices and thus re-
turns to those resources.

Efficiency of resource use is relevant to farm structure in
two major ways:

• How farming is organized into sizes and types of
farms affects productivity and efficiency of resource use;
and,

• The changing relative supplies and costs of re-
f100sources influence the structure and organization of farming
through adjustments in technology, and therefore changes

the distribution of costs among farms.

54

Table 21: Land in farms, selected years, 1900-78

ties and early seventies, when large acreages were idled by
Government programs.

Year
T ecu

Land in farms8
(million acres)

Change
(percent)

1910

879

+ 4.8

1920

956

+ 8.8

1930

987

+ 3.2

1940

1,061

+ 7.5

1950

1,159

+ 9.2

1954

1,158

0.0

1959

1,120

-3.3

1964

1,110

-0.9

1969

1,062

-4.3

1974

1,017

-4.2

1978

1,031

+ 1.4

Interestingly, the amount of land used for crops in 1 979 was
the same as in 1929 (Table 22). Yet many of these acres
were significantly more productive, owing to improvement
through capital investment in irrigation, drainage, forming,
conservation practices, and other measures.

The total cropland base (excluding pasture land) is slightly
larger than the total used for crops in any one year, sug-
gesting some additional acreage (undoubtedly of lower qual-
ity) may be available for cropping if economic conditions
warrant.

While there is general agreement that some relatively small
additional acreage exists which could be brought into pro-
duction rather quickly, there is much less agreement on the
quantity that could eventually be used for crops. The esti-
mates range from a few to several million acres of varying
capabilities. However, it is clear that, the larger the amount,
the greater the investment required to make that land suita-
ble for sustained production. This investment, of course, will
occur when economically feasible — when the expected fu-
ture stream of real returns to agricultural production justifies
the commitment of the capital to this particular use. Greater
public awareness of the fragility of the entire natural-re-
source base and its relation to the quality of the environ-
ment has made the future productive capacity of American
agriculture a much more immediate issue than it was a dec-
ade ago.

Agricultural Productivity

The process of economic development in societies histori-
cally has been characterized by changes in sector produc-
tivity that permit the release of labor from food production
for subsequent employment in the nonfarm economy.

This was true, of course, for the United States, after techno-
logical innovations and their adoption led to large numbers
of people leaving farming. Growth in the nonfarm economy
was, at most times, sufficient to provide jobs for them. It
was this problem of transition — this emergence of excess la-
bor in agriculture to be eventually absorbed elsewhere in
the economy— that formed the basis for the "farm problem"
that endured for several decades. This "labor pool" was an
important source of aggregate growth for the nonfarm econ-
omy; labor with low value in agriculture shifted to where it
was more highly valued economically.

Further perspective can be gained by reviewing the use of
labor and other resources and the measures of changes in
productivity in the farm sector.

Source: ESS/USDA and 1978 Census of Agriculture

"Data are not adjusted for changes in enumeration methods and

farm definitions.

In the past, much of the gain in productivity and efficiency of
resource use has come from consolidation of smaller farms
made inefficient by advancing technology. Two questions
arise: have the efficiency gains from consolidation been
largely exhausted, and how do the changes in energy costs,
in resilience in the face of instability, and other aspects af-
fect the relative efficiency and viability of smaller farms, es-
pecially part-time farms?

Also in the past, large productivity gains have come from re-
placing labor with machines and chemicals. Both of the lat-
ter are energy- and capital-intensive. Labor-saving devices
did not always mean increased production. Without abun-
dant supplies of unused land and cheap energy and capital,
should the focus in technology shift to enhancing output
through higher yields and total resource efficiency?

In this section, we review the available information on the
land used in farming, what has happened to productivity of
resource use, the economics of farm size, and the implica-
tions of these aspects for farm policy.

Land in Farms

The total land area in farms has changed relatively little in
the 20th century (Table 21). Land development was still
being encouraged early in the century, with over 150 million
acres added to farms between 1910-40. Land in farms con-
tinued to increase slightly until 1950 and has declined
somewhat since.

Land in farms is used for crops, pasture, fallow, forests,
lots, and the farmstead itself. Total land used for crops was
greatest just after World War II and was least in the late six-

55

Table 22: Major uses of land, selected years, 1924-79

Year

Cropland
harvested

Crop
failure

Fallow

Total
used for
crops

Idle

Pasture

Total
cropland
excluding
pasture

Acres
idled by
programs

(Million Acres)

1924

346

13

6

365

26

NA

391

n

\J

1929

356

13

10

379

34

NA

413

0

1934

296

64

15

375

40

NA

415

0

1939

321

21

21

363

36

NA

399

0

1944

353

10

16

379

24

NA

403

0

1949

352

9

26

387

22

69

409

0

1954

339

13

28

380

19

NA

399

0

1959

317

10

31

359

33

66

392

22

1964

292

6

37

335

52

57

387

55

1969

286

6

41

333

51

88

384

58

1972

289

7

38

334

51

NA

385

62

1973

316

5

31

352

32

NA

384

19

1974

322

8

31

361

21

83

382

3

1975

330

6

30

366

NA

NA

NA

2

1976

331

9

30

370

NA

NA

NA

2

1977

338

9

30

377

NA

NA

NA

0

1978

331

7

31

369

NA

NA

NA

18

1979

342

7

30

379

NA

NA

NA

12

Source: ESS/USDA.
NA = Not available.

Table 23: Index measures (1967 = 100) of resource use, output, and farm productivity, 1920-79

Selected inputs Output Productivity (output/input)

Year

All
inputs

Labor

Real
estate

Mechanical
power and
machinery

Livestock

Crops

Total

All
inputs

Land8

Labor

1920

98

341

102

31

44

65

51

52

61

14

1930

101

326

101

39

54

59

52

51

53

16

1940

100

293

103

42

60

67

60

60

62

20

1950

104

217

105

84

75

76

74

71

69

34

1960

101

145

100

97

87

93

91

90

89

65

1970

100

89

101

100

105

100

101

102

104

115

1971

100

86

99

102

106

112

110

110

112

128

1972

100

82

98

101

107

113

110

110

115

136

1973

101

80

97

105

105

119

112

111

116

130

1974

100

78

95

109

106

110

106

105

104

136

1975

100

76

96

113

101

121

114

115

112

152

1976

103

73

97

117

105

121

117

115

111

162

1977

105

71

99

120

106

130

121

114

117

173

1978

105

67

97

125

106

131

122

116

121

182

1979

108

66

96

129

110

144

129

119

130

198

Source: ESS/USDA

a Measured as crop production per acre.

56

The total inputs committed to agricultural production have
increased only slightly — 10.2 percent — since 1920 (Table
23). But the composition and, undoubtedly, the quality of
those inputs has changed markedly.

The amount of land committed has declined only slightly —
5.9 percent — but the substitution of capital for labor has
been dramatic, making agriculture today one of the most
capital-intensive sectors of the economy.

Total factor productivity — changes in output obtained from
all inputs — has risen 1 29 percent since 1 920. On the aver-
age, 2.19 percent more production has been obtained each
year with an equivalent amount of inputs.

The rate of productivity for two of the major inputs, land and
labor, presents an interesting picture, too.

The productivity of land, measured as crop production per
acre, more than doubled (rising 113 percent) over the six
decades from the twenties through the seventies, increasing
most rapidly in the fifties.

The productivity of labor rose a phenomenal 1,314 percent,
an average of 22.3 percent per year. This rapid rate of
growth would be expected in an industry with more labor
than could be fully employed and the surplus moving out,
particularly when the sector was also experiencing exten-
sive technological change. The substitution of capital that
was part of the technological revolution made the remaining
labor more productive.

Whether total productivity growth in agriculture is slowing
perceptibly is a subject of some controversy. The inability to
delineate weather effects and the crudeness of current pro-
ductivity measures, owing to definitional, procedural and
data limitations, preclude definitive judgments. However, if
the rate of productivity growth is indeed slowing, with the
readily available land resource (the other source of in-
creased output) largely committed, then the prospects for
future expansion of production are not bright — absent a ma-
jor breakthrough in production technology. This comes at a
time when global food demand and demand for U.S. ex-
ports are quite likely to grow, as noted in Chapter 1 .

Economies of Size

The conventional wisdom has been that technological ad-
vancements over time have created potential efficiencies
that could be "captured" more effectively by farms' growing
larger. That is, in substituting newer machines for labor, the
investment costs per acre or per unit of production can be
reduced, to a point, by increasing the size of the operation.
Among the cumulative impacts would be consolidation of
farms and a reduction in unit costs of production — per
bushel, bale, pound, et cetera. The cost of food would be
reduced for consumers.

Consumers have benefited from the past gains in efficiency
in agriculture that have lowered relative food costs at the
same time they have brought reduced numbers of farms.
But, the question now arises as to whether, given existing
technology and relative prices, further significant efficiency
gains can be realized from continued consolidation of
farms? Is this farm size/food price trade-off still valid? Have
the primary farms realized most of the attainable economies
of size?

Again, any generalizations are severely limiting — each farm
situation is different. Moreover, there are conceptual and
empirical difficulties in determining economies of size. For
example, how does one value operator labor, land, and
management costs, difficulties peculiar to agriculture?

Nonetheless, we reexamined technical economies of size,
and qualified estimates of least-cost farm sizes for seven
farming situations have been developed.

These estimates bore out previous studies that found unit
costs to fall rapidly as farms grow from relatively small
sizes, and to then remain relatively stable. That is, most of
the technical economies of combining various amounts of
inputs are attained at relatively small sizes (Table 24). Note
that 90 percent of the available technical economies of size
can be captured by relatively small farms but achieving the
last 10 percent requires that farms more than double in
size.

There may be significant market economies in the purchase
of inputs and sale of outputs that can be achieved by further
growth of the firm. To the extent that these market econom-
ies result in real savings in the cost of providing these farm
services, they contribute to lower food costs for consumers.
Studies underway to identify and evaluate these market
economies will be available next spring.

57

Table 24: Least cost farm sizes for various farming situations, 1979

Rpoion and farm tvrje

Size at which 90 percent
of economies are attained

Size at which 1 00 percent
of economies are attained

(Sales ($))

(Acres)

(Sales ($))

(Acres)

Northern Plains/wheat-barley farm

13,000

175

105,000

1,475

Pacific Northwest/wheat-barley farm

54,000

450

156,000

1,890

Corn Belt/corn-soybean farm

60,000

300

145,000

640

Southern Plains/wheat-sorghum farm

28,000

400

100,000

1,490

Delta/cotton-soybean farm

47,000

335

122,000

1,237

Southern High Plains/cotton-sorghum farm

58,000

395

175,000

970

Southeast/peanut-soybean-corn farm

55,000

143

130,000

399

Average (arithmetic) of seven farms

45,000

314

133,000

1,157

Source: ESS/USDA.

How do the major-commodity farms in the principal produc-
ing states compare on average with the least-cost sizes
noted above? Again, the comparison is limited: the census
data are for 1974, and data on the seven farming situations
are for 1979. If the 1974 situations are adjusted to 1979 dol-
lars, some notion of relative magnitudes can be gained. The
comparison in Table 25 would suggest that all primary farms
have attained a size at which 90 percent of the technical
economies can be attained, and many approach the size at
which 100 percent of the economies may be achieved.

Recent research explored fundamental questions about
causes of structural change in farming, specifically focusing
on the role of economies of size.8 This research suggested
that:

• The increasing average size of farms does not nec-
essarily imply the existence of attainable economies of size.
It only implies the absence of significant diseconomies of
size.

• Growth in farm size may be due to increasing per
capita income in the nonfarm sector, and the farm size
needed to obtain comparable incomes.

• Based on the observed diversity of farm size, it may
be that no significant economies of size exist in agricultural
production; any enterprise that exhibits significant econom-
ies of size breaks away from agricutural production to be-
come a separate indusrty.

It could also be suggested that, historically, it has been
more common that economies of size have resulted in
"functions" or "operations" breaking away from farming (for
example, into marketing and processing of products), rather
than in greater production.

Links Between Size and Production Costs

A separate issue related to the efficiency question, is the re-
lationships among farm size, cost of production, and the dis-
tribution of program payments. It is important, at the mini-
mum, because the national average unit cost of production
for program commodities is the basis for determining the
benefits in most present farm programs.

The general relationship is that the production costs per
bushel, pound, or hundredweight decline as farm size in-
creases, up to some point.

It has been suggested that farms which specialize in pro-
duction of a commodity in a region particularly suitable for
that production, and which have reached a size indicated
above, would be likely to have unit costs well below the av-
erage costs of all farmers producing that commodity in tan-
dem with other commodities or also specializing.

Another element to keep in mind is that the vast majority of
payments from the programs go to these primary farms be-
cause of their volume.

Target prices for grains and cotton were initially established
and are adjusted annually in relation to national average
costs of production on essentially all the acreage on which
the particular crop is grown. This means that high-cost pro-
ducers and high-cost regions are blended into the average
with low-cost producers from low-cost production areas.

Direct income-supplement payments are made under the
programs when the average market price for the first
months of a new season fall between the target and the
lower price-support loan rate on the commodity. The rate of
payment is the per-unit difference between the market aver-
age and the target.

58

Table 25: A comparison of Census averages with efficient farm sizes

Primary farms

1 Q~7A Ponci ic

average cropiana
acres

Acre size where specified percent
of economies are realized

100% 90%

Wheat farms:

Kansas

1,003

tuu

North Dakota

1,214

1 47^

1 7R
I 1 O

wasningion

1 ,4/U

4^0

Moniana

I ,oOo

1,475

175

UKianoma

QUO

ooo

1,490

400

Corn/soybean farms:

Illinois

472

640

300

Iowa

401

640

300

Nebraska

638

K 1 A

NA

NA

Indiana

478

o40

300

Ohio

464

640

300

Cotton farms:

Texas

1,019

970

395

California

925

NA

NA

Arizona

890

M A

NA

Arkansas

823

1 ,237

335

Mississippi

1,078

1 ,237

335

1 Q7A

i y /

i y / *t gross

Gross sales to attain

Primary farms

Average gross

sales in

percent of economies

sales

1979 dollars3

100%

90%

Wheat farms:

Kansas

93,432

1 17 R/1Q

100,000

28,000

North Dakota

82,292

191 917
1 £ 1 ,do 1

105,000

13,000

Washington

1 6 1 ,yoU

156,000

54,000

Montana

OO Ovl o

130,012

105,000

13,000

Oklahoma

oU,y4b

119,253

100,000

28,000

Corn/soybean farms:

Illinois

90,904

133,925

145,000

60,000

Iowa

83,349

122,794

145,000

60,000

Nebraska

90,229

132,930

NA

NA

Indiana

91,796

135,239

145,000

60,000

Ohio

84,162

123,992

145,000

60,000

Cotton farms:

Texas

93,510

137,764

175,000

58,000

California

360,065

530,468

NA

NA

Arizona

306,015

450,839

NA

NA

Arkansas

124,310

183,141

122,000

47,000

Mississippi

172,771

254,536

122,000

47,000

Source: ESS/USDA and 1974 Census of Agriculture.
NA = Not available.

"The 1974 dollar sales estimates were inflated to 1979 dollars by the Consumer Price Index.

59

To whatever extent the average cost and the resulting tar-
get price exceed the cost of the low-cost producers in the
major regions for the commodity, the target-price system
provides what is usually referred to as a windfall gain, if
payments are triggered that season. At the same time, to
the extent that high-cost producers outside the major re-
gions for the crop have expenses exceeding the average
and the target price, the programs provide insufficient bene-
fits to them in comparison to the others.

The major impact — without judging the propriety or equity of
the imbalance — is the capitalization of windfall benefits into
capital assets, primarily into land. The greater equity and
cash flow of an existing operation, as a result, can lead to
rising land prices as its owners seek to expand by consoli-
dating nearby farms.

After the Farm Gate

Any profile of American agriculture would be incomplete
without some sketching of those who buy from farmers and
the processing and distribution segments of the food sys-
tem. That marketing system accounts for the vast majority
of the costs ultimately paid by consumers for food.

The distinction between farming and marketing was once
clear. But the boundaries have become blurred with the ev-
olution of the entire food system. Today, the links between
farming and the subsequent stages of the food system are
complex and growing more so.

The structural links run two ways: changes in the economic
organization of farming provoke accommodating changes in
the marketing institutions; changes in consumer demands,
product characteristics, and the economic organization of
markets impose constraints on the farming sector and force
it to change. The impacts of those changes — in both direc-
tions— may not be equitably distributed. Thus, to fully under-
stand problems in the farm sector, we must understand its
position in the total food system.

We begin with the first markets for the raw farm products on
their way to becoming food and fiber for domestic and for-
eign customers.

Food Processing and Distribution
Changes in the number and sizes of initial buyers of farm
products have paralleled the changes in farm numbers and
average sizes — fewer buyers, larger buying firms. One re-
sult has been, obviously, increased concentration at the
first-handler level, which, in turn, has affected the structure
of the farm sector.

Increased concentration at this level exerts several forces
that may influence farm structure:

• A tendency toward a market in which there is only
one or a few buyers for the products of several sellers leads
to increased cost-and-profit margins for handlers, resulting
in lower prices to the farmers. This, in turn, will hasten the
exit of marginal producers.

• The procurement methods and technology for han-
dling goods of the large buyers may favor larger producers.

• There may be incentives related to size and volume
for first handlers which encourage them to use forms of co-
ordination— between themselves and producers — that favor
larger farms as suppliers. Some of the forms of coordination
being used include contracts and direct ownership of pro-
ducing units.

Conglomeration — the formation of superfirms with many un-
related divisions — often follows concentration at the first-
handler level. This has additional implications for farm struc-
ture. Corporate decision-makers comparing profit state-
ments of their conglomerate divisions have shown a tend-
ency to spin off integrated processing operations closest to
farmers, for example. Many large companies have dropped
their vegetable canning and freezing operations. They are
less profitable, and the firms can sometimes use their mar-
ket power to play small processors off against each other
and thus obtain processed products cheaper than if the
large company ran the processing unit itself. When this hap-
pens, markets are foreclosed or producers are forced to in-
tegrate forward into the marketing sector through coopera-
tives, to retain their market access.

Therefore, concentration at the first-buyer level has major
implications for farmers' access to markets and for determi-
nation of market prices.

Large buyers' procurement methods often involve contrac-
tual arrangements with farmers and pre-arranged pricing
procedures. Because the buyer's procurement costs can be
reduced by reducing the number of producers to a mini-
mum, the handlers who buy through contracts prefer to deal
with large producers and are reluctant to contract with
smaller farmers. This has effectively foreclosed small pro-
ducers' access to the market in some commodities (such as
broilers and processing vegetables) in which contracts are
the predominant arrangement between farmers and first
handlers. This has been one factor in the demise of smaller
producers of these commodities.

For several major commodities, the growth of such contract-
ing and administered pricing has reduced the quantity of
those commodities traded in open, competitive exchanges.
As one result, publicly available price information is based
on a very small percentage of the commodity being mar-
keted, a situation referred to as a "thin" market.

60

Thin markets increase the opportunity for price manipulation
that lowers prices paid to the producers. They also tend to
make prices more volatile for those farmers not covered by
contracts. Thin markets at the first-handler level, by increas-
ing the likelihood of incorrect price signals being transmitted
back to the farm level, also can result in misallocation of
farm resources.9

Some examples of the forces at work and their effects can
be seen in specific commodities.

In markets for processing fruits and vegetables, where 90
percent or more of the processor purchases are contracted,
large processors are reluctant to contract with small growers
because of the high costs of providing services in the fields.
Green-pea processors, for example, typically harvest peas
for their contract growers. Harvest scheduling and the effi-
ciency of the huge combines used are significantly impaired
when acreage units are small.

In some cases, cooperative purchasing of processing facili-
ties has been necessary to maintain producers' access to
markets for processed fruits and vegetables because of
conglomerates cutting off processing divisions. These coop-
erative purchases place additional financial burdens on
smaller growers who have to put up the capital.10

In poultry markets, the discovery of significant economies of
size in both selling and processing, as a result of technolog-
ical developments, led to high concentration at the first-han-
dler level. This in turn created incentives for backward inte-
gration into production by processors of broilers and
turkeys, and forward integration into processing and produc-
tion by feed suppliers, to insure full-capacity operation and
meet buyers' specifications. Today, a handful of contractors
control most of the poultry production and small- or moder-
ate-sized growers have no independent access to the
market.

In grains and oilseeds, the local country elevators remain
the dominant first handlers. In general, smaller farmers have
little disadvantage compared to their larger competitors in
acquiring access to country elevators. However, large farm-
ers have been able to obtain premium prices unavailable to
smaller farmers. In addition, very large grain producers can,
in some cases, more economically transport grain over long
distances to terminal elevators and processors — to, in ef-
fect, capture the country elevator's share of the price at the
next stage for themselves.

Food Manufacturing and Distribution
Changes in levels of concentration in the food-manufactur-
ing and -distribution industries have paralleled those that
have occurred at the farm and first-handler levels.

"The family farm has changed from an institution whose
principal relationships were internalized to one whose princi-
pal relationships are externalized. . . . The family farm has
been both victim and victimizer in the expansion of intersec-
toral relationships. . . .

"The farmer is . . . the enterpriser who brings together the
necessary resources to produce farm commodities. "
James L. Gulley, Beliefs and Values in American Farm-
ing, USDA, 1974.

For example, the 50 largest food manufacturers controlled
74 percent of all food-manufacturing assets in 1 978, com-
pared to 36 percent in 1950. Similarly, the 50 largest gro-
cery-retailing firms accounted for 27 percent of all national
sales in 1 940 and 44 percent by 1 977.

The most obvious manifestation of increased concentration
in these sectors of the food system is the dominance of na-
tional— in some instances, multinational — food processors
and supermarket chains. In addition, several major food-
processing firms are now divisions of conglomerate manu-
facturing corporations.

The decrease in firms has been identified almost entirely
with the demise of small, local enterprises. The reasons for
their demise are many, but they include technological devel-
opments that shifted the competitive relationships among
types and sizes of firms, increased urbanization of the Na-
tion, and the growth of mass markets along with mass
communications.

Large multi-product firms that are national or regional in
scope have taken an increasing share of the market. Their
growth, and the simultaneous disappearance of local firms,
have had a major influence on agricultural production. Na-
tional processing and distribution firms, for example, are not
dependent on any one production area for farm-produced
raw materials. They obtain supplies according to where they
can get the volume, quality, and prices needed to support
nationwide marketing programs. As a result of that influence
on production patterns, producers for localized markets and
their suppliers and marketing outlets may be placed at a
competitive disadvantage.

61

Furthermore, these major firms have been innovators in de-
veloping new techniques for tailoring the activities of the
production sector to their requirements, with obvious effects
both on independent, locally oriented firms and on farmers.
A major factor in the decline of independent feed manufac-
turers, for example, has been the development of inte-
grated, precisely controlled systems for producing and mar-
keting livestock, in which manufacturing the feed for the
animals has become an integral part of the firm itself.

Integration and Coordination

In any productive process with more than one stage, some
mechanism must be devised to coordinate the activities of
the several stages. This is as true for the food system as it
is for the manufacturing and distribution of automobiles.

Market requirements must be evaluated. Inputs meeting
particular specifications must be acquired and assembled at
the right place and time and in the right quantity for each
stage of the production process. Then the final product must
be distributed to geographically scattered markets in an or-
derly manner.

Many different arrangements are used in the food system.
Some that have entailed changes in traditional relationships
between farmers and the processing-distribution complex
have become the subjects of critical public scrutiny.

The major methods in use for coordinating production with
the other stages are: open markets, contracts, and vertical
integration, which is ownership control of more than one
stage moving up and down the chain between production
and consumption. The principles underlying these methods
apply regardless of the type of legal business entity — propri-
etorship, corporation, or cooperative.

Agricultural commodities that are produced to a significant
extent under contractual arrangements or vertical integration
possess, in general, a number of characteristics that distin-
guish them from commodities traded in open markets at the
farm level.

In general, the formally coordinated or industrialized com-
modities are characterized by a more intensive use of both
land and capital. They tend to be the more perishable prod-
ucts and products where there is thought to be some poten-
tial for establishing brands and a consumer perception of
differences among brands.

For certain commodities, technological innovations in either
production or processing have provided the impetus for
shifting from open markets to contracts or vertical integra-
tion. In some cases, large food retailers or fast-food firms
want to be sure that the raw food products they sell or use
have consistent size and quality characteristics. To assure
control of those qualities, they contract backwards or di-
rectly buy into the farm production process so they can
specify how the product will be produced.

The extent of formal coordination between production and
processing in the food system (both contracts and vertical
integration) ranges among commodities from sugar beets
and sugar cane, in which virtually all the new supply each
year is coordinated, to feedgrains and hay and forage
crops, in which less than one percent is coordinated. Milk,
broilers, turkeys, and fruits and vegetables also are highly
coordinated through formal arrangements. In recent years, a
growing proportion of grain-fed cattle and hogs have been
produced under contract to meatpackers.

As a national total, about 25 percent of U.S. agricultural pro-
duction is controlled by formal vertical arrangements (con-
tracting and direct ownership of production).

Commodities that depend primarily on open markets include
wheat, feedgrains, and soybeans. These continue to be pro-
duced by traditional, independent family-farm operations for
the most part.

Vertical integration (production under contract and/or owner-
ship of several stages of the process) is highly related to
the size of farms as measured by sales. In 1 974, for exam-
ple, while about 10 percent of all farms reported using con-
tracts, nearly 40 percent of the farms selling $500,000 or
more sold all or part of their production under contract. Only
5 percent of the farms in the $10,000-to-$20,000 category
reported selling commodities under contract." Yet the prod-
ucts produced under contract tend to be the highest-value
products and could offer small- and moderate-sized farmers
the greatest opportunity for improving their incomes.

Integration, Coordination, and Structure
Highly formalized techniques for achieving vertical coordina-
tion might not be the primary factor causing increased farm
sizes and, in fact, might be the result of increased farm
sizes. Nevertheless, the techniques play a significant role in
the changing structure of agriculture.

Risk and uncertainty have been cited by some researchers
as factors that limit the size of farms.

To the extent that contracts, for example, are an effective
means of reducing some of the risks inherent in farming,
they increase the comparative advantages of larger farms.

62

The economics of contracting also favor larger farms. Con-
sequently, a cycle develops in which the growth of large
farms leads to contract production, which promotes further
growth of those farms.

If and when formalized vertical coordination becomes the
predominant means of marketing a given commodity, tradi-
tional open markets for that commodity might die out. Pro-
ducers without contracts or other direct market ties might
find themselves with no outlet for their production. Large
producers are more readily able to obtain contracts, so the
brunt of the decline of traditional open markets falls on
smaller farmers.

Consequently, any further growth in contracting and other
vertical arrangements has major implications for the survival
of smaller farms unless, through cooperatives or other
means, they can capture the same access to markets that
the larger farms have.

There are, however, some benefits to be gained from these
types of coordination, even though their growth has hurt
market access for certain classes of farmers and contrib-
uted to the growth of thin markets at the farm level. These
benefits relate to risk management, scheduling, control of
quality, and technical (within a unit) efficiencies of
production.

The processor or marketer of perishable agricultural com-
modities faces a number of risks with respect to raw-product
supplies, including uncertainties over their availability, price,
and quality. Formal coordination with the production of them
provides the processing-marketing sector with a means of
managing those risks.

To the buyer of farm commodities, there are three important
aspects of raw-product availability: the total volume of pro-
duction of a commodity; the rate at which the commodity is
delivered to the buyer, and the uniformity required by food-
processing firms at the next stage.

Contracting allows the marketing firms to develop longer-
range programs and, consequently, promotes orderly mar-
keting. Processors and marketers must schedule their labor,
transportation, and other elements in advance to assure effi-
cient operations. Close ties to farmers allow them to sched-
ule the receipt of raw commodities of consistent quality
more precisely than would be possible if they relied on
open-market purchases of raw commodities.

Market access, especially for highly perishable commodities
and commodities that have limited outlets, is a major con-
cern of producers. Simply producing such commodities with
the hope of finding a market at the end of the production
period is highly speculative. Farms with such commodities
to sell are vulnerable with respect to obtaining a reasonable

price, //they can find a buyer at all. They are in a much
stronger bargaining position to deal with prospective buyers
prior to making production decisions. Consequently, produc-
ers of perishable and specialty commodities have a strong
incentive to sell prior to committing their resources, and a
high proportion of such commodities are produced under
contract.

Price variability for storable commodities is the major factor
leading producers into contractual arrangements. Most con-
tracts for commodities of this type are agreements to deliver
a fixed volume sometime in the future, at a set price. These
contracts are initiated by the producer as a means of pricing
his or her product at a known acceptable level, reducing ex-
posure to price risks.

The Process of Structural Change
Recent research on the structural changes that have oc-
curred in the broiler, fed-cattle, and processing-vegetable
segments of the food system suggests that, in these three
commodities, structural change began outside agriculture
with the imposition of new or changed factors.12 While this
finding cannot be generally applied from the existing evi-
dence to all commodities, it is applicable to those commodi-
ties which take a relatively small amount of land but a large
capital investment.

The factors causing change include one or more of such
things as new mechanical, biological or organizational tech-
nology, shifting market forces (such as demand), and new
Government policies and programs.

The structural change which followed these changes in out-
side forces was a process of adjustment — initially to exploit
or accommodate new conditions but later to better manage
newly emerged risks.

The analysis of these commodities suggests that this kind of
structural change occurs in four identifiable stages:

• Innovators in a commodity subsector (including sup-
pliers, processors, and distributors, as well as farmers)
adopt new technology.

• Production of the commodity shifts to new geo-
graphic areas and to new producers more amenable to the
changed methods and practices.

• Production of the commodity rises rapidly, using the
newly gained efficiencies.

• New institutions emerge, and new buying and selling
arrangements within the subsector change to better manage
new risks.

The innovative early adopters of new technology are often
new to farming or to the particular commodity, attracted by
the potential for profits afforded by changes in technological,
market, and policy environments.

63

The main structural effects at this first stage are growing
capital requirements for production, increasing output per
unit of labor and land, the emergence of economies of size
not attainable under traditional methods, and increasing val-
ues for land and other resources in areas most favorable to
the new methods. New organizational forms for allocating
resources and coordinating activities are introduced in this
stage.

In the second stage, the innovators become established in
the most favorable production areas, shifting the competitive
balance among regions in favor of those areas and concen-
trating production geographically there.

In the third stage, the new production and organizational
technologies become entrenched as the standard operating
models for the subsector. Increased specialization and con-
centration of production in the new areas is accompanied by
a decline in the commodity's traditional growing areas. Out-
put per farm in the new areas increases rapidly. In all
stages of the commodity's movement through the food sys-
tem, market economies develop in the new areas. New in-
formation systems develop. Total production grows rapidly,
possibly causing periods of overproduction. The level and
nature of risks faced by participants in all stages of the sub-
sector change.

In the fourth stage, new strategies and institutions for avert-
ing risk are developed. The degree of vertical coordination
increases, with a heavy reliance on forward contracting.
Control over the flow and characteristics of products shifts
from farm producers to processors and marketers. The de-
gree of industrialization throughout the subsector rises.

Initially, the commodities studied were characterized by
large numbers of smaller-scale farmers who produced broil-
ers, fed cattle, or processing vegetables as sidelines to
other types of farming. They sold their products freely in lo-
cal markets, assuming a high degree of price risk but enjoy-
ing relative ease of entry and exit.

Within 20 years, most production of these commodities had
shifted to a relatively small number of large, highly special-
ized, and highly capitalized operations, using the latest tech-
nology and concentrated in a few regions of the country.
These farms are closely integrated with input suppliers and
processors, who often share with producers both control
over production decisions and the risks. Products are now
sold into closed markets with little access for outsiders. Both
entry of farmers into production of the commodity and exit
from it are difficult.

The analysis concluded that a key requirement for modern
agriculture is stability and predictability. If public policies and
programs do not provide this stability, the private sector

will.13 However, if recent developments are a prologue to the
future, the private arrangements that evolve may not be
equitable for all groups of producers and will likely reinforce
trends toward further concentration in the production sector.

Marketing-Sector Conclusions

The central issue, then, is whether the desired stability and
predictability required for efficiency in our modern food sys-
tem will be achieved by whatever arrangements evolve from
the workings of private markets or whether there will be
some degree of public intervention to deal with the struc-
tural and distributive impacts of those arrangements.

The public-policy question is, how to assure the most equi-
table distribution of the benefits of technological change
among farmers, other stages of the food system, and
consumers?

The food system has increasingly shifted from a commodity-
production orientation to a consumer product-merchandising
orientation. Evidence for this can be readily found in the
growth of mass-merchandising techniques and the prolifera-
tion of various fabricated and ready-prepared food products.

These adjustments have been particularly bewildering at the
farm level because this change in orientation has required
reversals in the priorities of the roles of the production and
product-marketing sectors. Evidence of some of the ten-
sions this has generated can be found in the comments of
several who spoke at the public meetings that were a part
of this project, who said, "Just let us do what we do best:
produce."

The agricultural production sector, once the direct supplier
of many consumer food products, is now the source of raw
materials for a food system dominated by processing, distri-
bution, and marketing.

This concept of agricultural production as a source of raw
materials diverges from the traditional concept of agriculture
as the food producer and the processing and distribution
stages as mere vehicles for delivering farm products to the
final consumer.

The difference between the two ways of viewing the rela-
tionship between production and processing might be sub-
tle. However, it bears directly on the question of who con-
trols or will control agriculture. It is one basis of much of the
current concern about the future of the independent family
farm.

Under the traditional concept, the basic decisions concern-
ing the kinds and volumes of food products to be produced
were made in the production sector, independent, in large
part, of the other stages in the system.

64

When the production stage is viewed as a raw-material sup-
plier to the processing sector, many of the key decisions
about what is produced and how it is produced get made in
the forward stages of the food processing and distribution
system. The economies and logistics of this process tend to
favor dealing with fewer, larger producers or production
contractors.

Producer cooperatives could serve an important role in ov-
ercoming market-access problems and diseconomies of
buying and selling food by small- and moderate-sized pro-
ducers and part-time farmers. But, to some extent, coopera-
tives have followed other trends in the farm sector that con-
centrate production in the operations of the large
commercial producers. To be effective in countering present
trends, the promoters and regulators of cooperatives will
need to take deliberate initiatives to refocus the thrust of the
cooperative movement back toward helping those disadvan-
taged by developments in farm-product marketing.

Implications of the Changed Profile

When the existing farm policies were instituted, and as they
have been fine-tuned, the problem they were to solve was
seen as an excess of resources devoted to food production.

A stream of technological advances kept production capac-
ity growing faster than the requirements of the domestic and
foreign markets of the times. The result was low commodity
prices and low farm incomes — low in relation to the incomes
of the nonfarm population. Public programs intended to aid
farm families were then instituted.

The problem proved to be chronic. Resources were slow to
adjust, and the technological advancements permitted con-
tinued growth in production, even with fewer and fewer
farmers. But, since society benefitted from those technologi-
cal advancements, it supported continuing public expendi-
tures for farm programs.

Over the years, labor resources migrated from agriculture at
a varying pace and, at the same time, the domestic and for-
eign markets grew, gradually bringing the production poten-
tial and market requirements into closer accord. Sometime
in the early 1 970's perhaps, most of the excess capacity
was absorbed, and a much more evenly balanced supply-
and-demand situation was finally reached for the first time in
more than 60 years.

"Support for the family farm as the appropriate unit for agri-
cultural production and its accompanying lifestyle in the
community is challenged by larger farm units with greater
economies of scale and efficiency in production of food and
fiber. . . . The difficulty in such a debate is the determination
of what is a family farm. Is a family farm to be classified by
a size in acres, annual income, style of management, a
combination of management and labor supply within the
family unit or some yet-to-be-established criteria? Across
the Nation do we have a common definition, or a definition
modified by the nature of the enterprise? Is a 25-acre truck
farm of vegetables a family farm, as is a 3,000-acre dryland
wheat farm in the Great Plains States?"
Letter to Secretary Bergland from Osgood T. Magnuson,
regional planning director, Division of Ministry & Mis-
sion, Lutheran Council in the USA, Minneapolis, Minn.

As we enter the 1 980's, the long period of adjustment to ex-
cess capacity and disequilibrium in U.S. agriculture appears
to finally be behind us. The implications of that alone are
significant enough for the policies, programs, and institu-
tions that attended that period. But the factor which is in
large part responsible for bringing the disequilibrium to an
end — the growth in global demand for U.S. agricultural prod-
ucts^— promises to continue to significantly impact the mar-
ket environment in the decade ahead.

Demand fluctuations for U.S. products tripled in the 1970's
over those of a relatively tranquil post-war period; this varia-
bility could be even greater during the 1980's. This potential
instability in agricultural commodity markets promises to be
a serious concern in the future.

The problems confronting agriculture today and in the future
are likely to be of a nature much changed from those which
so long prevailed. Moreover, the future economic climate for
agriculture may be far different from that to which we have
grown accustomed.

Thus, the vintage rationale for farm policy, the justification
given in most of the rhetoric for regulation of the industry
and expenditure of tax dollars, is no longer strictly valid.

But this is not to say that there is no longer any rationale for
public programs in agriculture. Rather, the justification for
programs and the approach we use to treat the current ma-
jor problems will need to be quite different.

Based on the profile above, a number of important changes
in agriculture can be summarized.

65

The farms that comprise the sector today have widely di-
verse characteristics. The economic well-being of these
groups, especially the smaller farms, has in recent years
become more closely tied to the nonfarm than to the farm
economy. For the smaller sales categories, income from
nonfarm sources surpasses by several times the income
from farming. This advent of significant nonfarm earnings
has markedly reduced the disparity of incomes among farm
people. And, in relation to the incomes of people in the non-
farm economy, the incomes of the residential and the pri-
mary farms compare favorably. The incomes of the small-
farm group, although not widely divergent, would compare
less favorably.

Within the farm groups are significant differences in income
and well-being. Among the rural farm-residences group, off-
farm income is high, averaging around $16,678, and reli-
ance on farm income is less significant. In the next group,
the small-farm group, there is evidence of poverty. This
group as a whole averages over $10,000 in off-farm income
to supplement farm income, but not all in this group do so
well. This does not mean that every one of these people are
poor, either, but it may mean that the 300,000 or so farm
people who do suffer from significant poverty probably fall
within this category. And it is also in this size category that
the combination of farm and off-farm income is most critical
to an adequate median income. With the removal of either
one, there would be considerably more incidence of poverty.

The relatively few blacks, Hispanics and other minorities re-
maining as farm operators are probably clustered in the ru-
ral farm-resident and small-farm groups and are dispropor-
tionately represented in the poverty groups. While large
numbers of minorities were once farm laborers, sharecrop-
pers and tenant farmers, few attained owner/operator status
as farming shifted from being labor-intensive to capital-in-
tensive. Minorities were heavily represented in the millions
of workers displaced by capital and thus bore much of the
brunt of adjustment as agriculture was industrialized.

Among the primary farmers there are also significant differ-
ences. It has been speculated that the fulltime farmers who
are having the most difficulty surviving as farmers fall within
the $40, 000-to-$1 00,000 sales group. These are men and
women who have farms that are, for the most part, large
enough to realize most of the efficiencies associated with
size, who have little off-farm income, and who, in some
cases, do not have sufficient volume for an adequate
income.

However, having noted these income problems within the
categories, it must be concluded that average total family in-
come for all farm-size categories compares favorably with

incomes earned elsewhere in the economy. An examination
of average total current annual income per farm for the sec-
tor as a whole concluded that incomes of farm people are
no longer low by any reasonable standard. Low income and
poverty seem associated with particular circumstances and
geographic regions and are not pervasive across the entire
farm sector, as was the case when many of our programs
were instituted.

Failing to recognize the fundamental changes in agriculture
will obscure identification of the real problems that now exist
and thus impede the development of appropriate future pol-
icy and program approaches. Most of the basic program
mechanisms that are in use were originally developed for
treatment of the low-income problem. Even though they
have been adapted over time and, for the most part, no
longer directly support commodity prices, they still contain
some of the original characteristics. They provide benefits
based on the volume of production, implicitly skewing the
distribution of benefits to the large-volume producers. Fi-
nally, these mechanisms implicitly treat the farm sector as a
homogeneous monolith through use of national averages for
setting program parameters (loan rates, target prices, cost
of production), a decision that might inherently favor groups
with costs of production below the national average.

These instruments will require further modification in the fu-
ture if they are to prove effective (or cost-efficient for tax-
payers) in treating current and emerging problems.

The inherent instability in agriculture significantly increased
in the 1970's with the advent of rapid growth in foreign mar-
kets. This instability, ultimately reflected in farm earnings,
most severely affects those farms most reliant on farm in-
come, who also depend most heavily on debt financing — the
primary and, to a lesser extent, the small farms. Least af-
fected are the residential farms.

The financial structure of farms is much different today, ow-
ing to the proportionally larger use of purchased production
inputs and that still-growing use of debt capital. This has
greatly increased the annual cash requirements of most
farms, because they now have larger and more numerous
annual fixed financial obligations. This pattern varies across
farm sizes, becoming greater for farms of larger sizes, and
is most pronounced for the primary farms, where the debt-
to-asset and cash expenses-to-production-receipts ratios
are much larger than for the smaller ones.

So the vast improvement in the rates of total return to farm
investment does not mean the primary-farm group of opera-
tors has no problems. The changed financial structure of
these farms would suggest they are much more vulnerable
because of the increased variability of incomes and returns.
This is especially true for the most financially leveraged

66

farmers, those with little equity who use debt capital to ac-
quire assets — generally the newer farmers.

That would suggest the need for price-stabilizing programs,
not only for these farms, but for the benefit of the overall
system and to protect the nonfarm economy from disruptive
impacts arising out of the agricultural economy. Also, there
is a need for a closer look at the possible structural impacts
of instability and the ability of the food system as a whole to
withstand shocks from abroad and domestically.

The delineation of the major categories of farmers rein-
forces the important points to keep in mind when address-
ing policy and structural concerns:

• The needs of farm businesses and farm people as-
sociated with the groups are different.

• They respond differently to economic conditions and
public programs, generating different consequences for
structure and other policy objectives.

• Subdividing the primary farms by type of principal
commodity produced reveals the surprisingly small number
of farms that account for the vast proportion of production of
each commodity.

Finally, the profile and the research used in developing it
confirm some important hypotheses that have been offered
in recent years about the efficiency of the farming system
and point to some needed changes in focus for programs
and for research agendas of the future.

Recent studies reaffirm, for example, earlier findings that
the longrun average cost curve for farms decreases rapidly
as farm size increases, up to a point, and then becomes rel-
atively flat over a wide range in size. It thus appears that
most of the primary farms have reached or surpassed the
size needed to attain most economies related to size. The
major portion of our food and fiber is thus produced by firms
that are beyond the most technically efficient size.

Economies-of-size studies suggest that few public benefits
accrue from farms of sizes beyond those necessary to
achieve the available cost economies. The success of the
farm sector in providing consumers with food at an ever-de-
creasing proportion of their disposable income was largely
possible through greater efficiency — achieved in the main by
farm consolidation, the growth in size needed to capture the
existing technical economies. Results from these studies in-
dicate that, for the primary farms as a group, technical
economies (and, one could conjecture, the pecuniary econ-
omies as well) have largely been realized with existing tech-
nology and price relationships. There would thus appear to
be no further significant gains to be had by consumers from
further consolidation and size growth within this group of
farms. This, of course, calls into question further subsidiza-
tion by taxpayers if it is justified by the expectation that fur-
ther food price-reducing efficiencies would result.

"We Americans are a romantic lot. While the pedestal we
place various professions on is a little shakey of late, we
still idealize certain folks. . . . In no other area have Ameri-
cans romanticized an occupation more than with the farmer
and the rancher— particularly the family farmer.

"For many it is almost un-American to find the farmer . . .
having goals, ambitions and needs like his counterpart in ur-
ban and suburban areas. For nearly two-thirds of our popu-
lation, those born since World War II, their only knowledge
of the farmer is from their parents, a trip in the country, or
what they read and see in books and on TV or at the mov-
ies. It is for the most part a distorted picture . . . , but one
they believe is the real Americana and to be stored and re-
trieved when a tie to the 'wonderful' past is called for. . . It is
fulfillment of the American dream to move upward to better
and more rewarding occupations and higher income. Yet let
the farmer add acreage, a larger tractor, more stock, or a
bigger barn, that not only improves the farmer's lot but gives
the consumers wider choice, better quality and lower-priced
food, and we begin to look for a bogeyman. . . .

"We should never forget that our way of life as farmers and
ranchers — whether on 10 acres or 10,000 acres — is only
possible as long as we meet our customers' needs. Our
claim for our way of life is not superior to any other profes-
sion or occupation, and hope alone will not save us. . . .

"In summary, I do not believe government should set policy
based on some stereotype, or, worse yet, the average fam-
ily farm. No two people have the same idea of what consti-
tutes the family farm today, and no idea of what the family
farm will look like in the future. More importantly, any pro-
grams aimed at such a 'will o' the wisp' definition is destined
to mean more government regulation and intervention. "
Hubbard Russell, Jr., chairman, National Cattleman's
Association committee on private lands and water
usage, at the Denver meeting.

The economies of size might be as they are in part because
of the past focus of public research on such things as large-
scale equipment and technology based on inexpensive en-
ergy and inexpensive capital. If more research could be fo-
cused on making efficient complements of machinery for
smaller farms and on energy-efficient practices, thus chang-
ing the cost curves, perhaps this would permit a more plur-
alistic farm sector in terms of size mixes and less concen-
tration of production into one or two size categories.

67

Footnotes

1. The procedures used in the 1974 Census of Agriculture did not
completely count all farms. Primarily, the census tended to miss
small farms. To account for any discrepancies, a census survey
on the completeness of the enumeration was made along with the
actual census. Some time after the census data are released, ad-
justment percentages are made available to account for differ-
ences between the reported numbers and what are believed to be
the "actual" numbers. USDA then uses the adjustment percent-
ages to recalculate the census numbers for such publications as
"Farm Income Statistics" and the "Balance Sheet of Agriculture,"
but not for all USDA publications.

2. The generalizations in this and subsequent sections are condi-
tioned by a rather fundamental limitation in the data. The census
statistics assume a single operator per farm. There is no informa-
tion on the frequency or the distribution of multiple-person opera-
tions across farm sizes. Recent observations suggest, however,
that the larger operations tend much more to be two- or three-per-
son operations and that one or more of these individuals often is
in the younger age categories. To the extent that multiple opera-
tors occur, one may well overestimate the difference in well-being
of operators on such units in relation to smaller, single-operator
farms. Likewise, there are no data on the off-farm earnings of
second or third partner in such operations.

3. Intriguingly enough, off-farm income accounted for 40.7 percent
of the farm population's income in 1934 but did not again reach
that level until 1959, staying above it since and above 50 percent
for 1 1 of the last 13 years.

4. Crecink, John C, Families with Farm Income: Their Income, In-
come Distribution and Income Sources, Economic Development
Division, Economics, Statistics, and Cooperatives Service, U.S.
Department of Agriculture, November 1979.

5. Lin, William, James Johnson, and Linda Calvin, "Farm Com-
modity Programs: Who Participates and Who Gets the Benefits,"
Economics and Statistics Service, U.S. Department of Agriculture
(forthcoming).

6. Objections are always certain to arise when discussing rates of
return to agriculture that include increases in asset values (capital
gains). The objections, essentially, are that the capital gains are
unrealized, that they are illiquid wealth, that the increase cannot
be captured without selling the asset. In the case of land, this is
an unreasonable act for one wishing to continue in farming. But
the gains can become the equivalent of money when the in-
creased equity in the assets is used to obtain credit for farm
expansion.

The inappropriateness of adding the rate of return from current
income with the rate of return from nominal capital gains has
been pointed out by Emanuel Melichar and others. However, they
have also overcome this objection by calculating the real return
from asset appreciation (capital gains) which is comparable with
net income. Real capital gains (the increase in wealth after adjust-
ing for inflation) represent the amount of increase in the wealth of
the farm business that could be taken out without reducing the
real wealth position, the viability of the business. Therefore, real
increases in asset values are no less a return to farming than cur-
rent income is. For further discussion of this subject, see Meli-
char's "Capital Gains Versus Current Income in the Farming Sec-
tor," paper presented at the American Agricultural Economics
Association annual meeting, Washington State University, August
1, 1979.

7. For additional analyses of the effect of equity on cash flow for
several typical farming situations, see Status of the Family Farm,
Third Annual Report to The Congress, U.S. Department of Agri-
culture (forthcoming).

8. See Thomas A. Miller, "Economies of Size, Structural Change,
and the Impact of a Family Farm Policy," paper presented at the
Western Agricultural Economics Association annual meeting, Las
Cruces, N.M., July 21-22, 1980.

9. Edward V. Jesse, "Thin Markets for Agricultural Products:
Causes, Effects, and Public Policy Options," National Economics
Division, Economics, Statistics, and Cooperatives Service, U.S.
Department of Agriculture, staff paper, September 1980.

10. Allen B. Paul, Robert W. Bohall, and Gerald E. Plato, "Farmers'
Access to Markets," National Economics Division, Economics,
Statistics, and Cooperative Service, U.S. Department of Agricul-
ture, staff paper, September 1980.

1 1 . Status of the Family Farm, Second Annual Report to the Con-
gress, Economics, Statistics, and Cooperatives Service, AER No.
434, September 1979.

12. Donn A. Reimund, J. Rod Martin, and Charles V. Moore, Struc-
tural Change in Agriculture: The Experience for Broilers, Fed Cat-
tle, and Processing Vegetables, Economics and Statistics Service,
U.S. Department of Agriculture. Forthcoming.

13. LeVeen, Phillip, "Comments on a paper by Reimund, Moore,
and Martin on 'Structural Change in Broilers, Cattle Feeding and
Processing Vegetables,' contracted correspondence to the Struc-
ture of Agriculture Project, Office of the Secretary, U.S. Depart-
ment of Agriculture, October 1980.

Selected References

Lin, William, George Coffman and J. a. Penn. U.S. Farm
Numbers, Sizes and Related Structural Dimensions:
Projections to Year 2000. Economics and Statistics Ser-
vice, United States Department of Agriculture, Washing-
ton, D.C. Technical Bulletin 1625. July 1980.

Lin, William, James Johnson and Linda Calvin. "Farm Com-
modity Programs: Who Participates and Who Benefits."
Economics and Statistics Service, United States De-
partment of Agriculture, Washington, D.C. Forthcoming.

McDonald, Thomas and George Coffman. Fewer, Larger
U.S. Farms by Year 2000— and Some Consequences.
Economics and Statistics Service, United States De-
partment of Agriculture, Washington, D.C. Agriculture
Information Bulletin 439. October 1980.

Miller, Thomas A., Gordon E. Rodewald and Robert Mc-
Elroy. "Economies of Size in Major Field Crop Farming
Regions of the United States." Economics and Statis-
tics Service, United States Department of Agriculture,
Washington, D.C. Forthcoming.

68

Moore, Charles V. "Acreage Limitation: Interim Report."
Special Report to the United States Department of the
Interior, Water and Resources Service, Washington,
D.C. March 1980.

Penn, J. B. "The American Farm Sector and Future Public
Policy: An Economic Perspective." Economics and Sta-
tistics Service, United States Department of Agriculture,
Washington, D.C. Forthcoming.

Reimund, Donn A., J. Rod Martin and Charles V. Moore.
Structural Changes in Agriculture: The Experience for
Broilers, Fed Cattle, and Processing Vegetables. Eco-
nomics and Statistics Service, United States Depart-
ment of Agriculture, Washington, D.C. Forthcoming.

Schertz, Lyle P. "Inflation: A Food and Agriculture Perspec-
tive." Economics and Statistics Service, United States
Department of Agriculture, Washington, D.C.
Forthcoming.

Schertz, Lyle P. and others. Another Revolution in U.S.
Farming. Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C. Ag-
ricultural Economics Report 441. December 1979.

Status of the Family Farm. First Annual Report to the Con-
gress. Committee Print. Committee on Agriculture, Nu-
trition and Forestry, United States Senate, Washington,
D.C. 1979.

Status of the Family Farm. Second Annual Report to the
Congress. Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C. Ag-
ricultural Economics Report 434. September 1979.

Status of the Family Farm. Third Annual Report to the Con-
gress. Economics and Statistics Service, United States
Department of Agriculture, Washington, D.C.
Forthcoming.

Structure Issues of American Agriculture. Economics and
Statistics Service, United States Department of Agricul-
ture, Washington, D.C. Agricultural Economics Report
438. November 1979.

PART II AREAS OF POLICY CONCERN

Landownership

Soil and Water
Conservation

Tax Policy

Commodity Policy

Credit Policy

Public Research and
Extension Policy

Agricultural Labor

Trade Policy

CHAPTER 4 LANDOWNERSHIP

Landownership has been a deep-seated personal goal in
the American culture since the beginnings of this country as
a collection of European colonies. The attachment to wide-
spread private ownership of property, of which landowner-
ship has been a prominent aspect, has been of primary im-
portance in shaping the economic, social, and political
structure of the United States from that point on.

Even when they could not always attain their goal, having a
chance to own the land they worked and to realize the in-
come from it has always been a value fundamental to un-
derstanding the beliefs and actions of American farmers.

The Public Interest in Land

The intensity of the public's interest in farmland ownership
has fluctuated over time. Transferring to private ownership
about half the land ceded to the Federal Government by the
new States after the Revolution was a major public objec-
tive until the late nineteenth century — as a way to settle the
territories and protect borders, to raise money, to promote
education, and to develop transportation.

But even with relatively inexpensive land available on the
frontier, tenancy persisted. One-fourth of the farmers in
1880, for example, were tenants. Subsequently, this propor-
tion increased, with tenant farms accounting for 70 percent
of the jump of 2.8 million in the total number of farms be-
tween 1900 and 1935. As a percentage of the total, tenant
farmers reached a peak of 42 percent in 1 930, a time of se-
vere and widespread economic deprivation that began in
agricultural areas.

This high level of tenancy was among the most prominent of
the problems upon which policymakers, business and agri-
cultural leaders focused during the thirties.

The number of full tenants declined by 1 .5 million between
1935 and the end of World War II, and the total would drop
by another 1.14 million by 1974, when only 261,836 were
reported by the Census of Agriculture. The disappearance
of these tenant farms accounted for 58 percent of the 4.5-
million-unit decline in the total number of farms between
1935 and 1974.

During the same period, farmers who owned part and
rented the rest of what they worked became the most prom-
inent category of farm operators. While their numbers have
declined slightly over the postwar period, these part-owners,
who accounted for 16 percent of all farm operators in 1950,
comprised 26 percent of the total in 1974.

As important as that growth in part-ownership is the fact
that their operations accounted for 53 percent of American
farmland. This means that, for more than half the farmland
in use, the functions of ownership and operation are not
held entirely in the same hands. Many farmers who owned

land found it a convenient strategy to rent additional land,
both to capture the potential of new technology and machin-
ery and to reduce the capital requirements for that growth.
The trend to part-ownership farming has slowed in recent
years because rapid inflation in land prices has made in-
vestment in ownership of additional land by those already
owning some land a more attractive financial strategy. An-
nual increases in land values have been greater than cur-
rent earnings from farming and that appreciation is taxed
eventually at a lower rate, if it gets taxed at all.

As a policy issue, tenancy is not much discussed today —
perhaps because full-tenant operations now account for only
about 1 1 percent of our farms. Moreover, being a tenant
farmer in many instances no longer implies either poverty or
reduced social status. The focus of ownership issues has
shifted toward the transfer from one generation to the next,
corporate ownership, and, to some extent, foreign owner-
ship of U.S. farmland. One reason for the prominence of
these concerns has been a sustained increase in land
prices for more than a decade.

However, for reasons which will become apparent in the
chapters which follow, the potential for continued increased
concentration in landownership could well mean reduced
access to landownership by those wishing to farm. Some
owning land will do so more for the investment returns and
will look to others to farm it, however. Thus there is consid-
erable potential for increased separation of landownership
and farming — hence increased tenancy. This could well be-
come an increasingly sensitive public policy issue.

Structural Issues

Attempting to address those concerns, the Structure of Agri-
culture Project focused on three pivotal questions:

• What is the distribution of ownership of farmland
among Americans today?

• What are the trends and the prospects for future
ownership patterns?

• Is owning the land still as important to farm operators
today as it traditionally has been, and, if so, do Federal poli-
cies foster the achievement of that goal or detract from it?

Our analysis of landownership trends — based on recent sur-
veys, research into particular aspects of the issue, and the
testimony of those who spoke at the public meetings — led
us to these summary answers:

• Ownership of farmland in the United States is rela-
tively concentrated (Table 26). Farmland comprises more
than half of the land. In 1978, less than 3 percent of the to-
tal population owned all of the farmland. About 0.14 of one
percent of the total U.S. population — or five percent of the
farmland owners — owned 48 percent of those farm and
ranch acres.

73

• Forces promoting concentration have intensified in
recent years. If present conditions continue, landownership
will become more concentrated, with increased separation
between the ownership and the use of the land — that is, an
increase in absentee ownership and a corollary increase in
tenant farming.

• Ownership by farm operators of the land they work
remains a cherished goal in our society.

A Profile of Landowners

Who owns this land now? A survey of landownership in the
United States in 1 978 and other recent work discovered
these facts about the owners and the distribution of this vital
asset (Tables 26-28):

• Including individuals, partnerships, and corporations,
there were slightly more than 6.9 million owners of the 938
million acres of farms and ranches.

• Another 26.8 million owners account for the other
409 million acres of privately held land in the United States.

• One percent, or 337,000, of the owners of private
land, including farmland, own nearly one half of that land, or
648 million acres — an average of 1 ,923 acres each. Sev-
enty-five percent of the owners hold 3 percent of the private
land; conversely, 25 percent own 97 percent.

• Governments — Federal, State, and local — own less
than 1 billion acres, or about 40 percent of the 2.3 billion
acres of land in the United States, excluding Alaska. Of that
1 billion, the Federal Government owns about 85 percent.

• About 88.1 percent of the 6.9 million owners of farm
and ranch land are either sole proprietors or husband-wife
co-owners. Another 7.4 percent are family partnerships or
family corporations. Together, these categories comprise
95.5 percent of the owners but hold only 90.3 percent of the
acreage. The other 9.7 percent is owned by nonfamily part-
nerships and corporations, 4.5 percent of the owners.

• One percent of the farmland owners possess 30.3
percent of the farmland. The percent of farmland owned by
the largest one percent varies among regions — from 8.4
percent in the Lake States and Corn Belt to over 37 percent
in the Mountain States. In 1946, before Alaska and Hawaii
were States, a survey found that one percent of the farm-
land owners controlled 28 percent of the acreage.

• Less than 3 percent of the farmland changes hands
each year, and 72 percent of the buyers are farmers.

• Most of the farmland owners are white males be-
tween the ages of 50 and 69, although this finding does not
fully recognize husband-wife holdings and family
partnerships.

Who Can Buy Farmland?

Research has shown that, as long as we expect significant
inflation in the economy, returns to ownership of farmland
will continue to be split between current net returns to land
and capital appreciation of the land. During the 1970's, ap-
preciation in land values was by far the greater part of those
returns.

The last decade showed that farmland ownership has been
a good investment when both these streams of returns are
considered. It has consistently outperformed all other poten-
tial individual investments except real-estate trusts since the
late 1960's. But what are the impacts on investors of having
very favorable total returns split between current income
and capital gains? The future ownership of land resources
is crucially dependent on who can invest in farmland.

At least three types of investors have potential importance
in farmland ownership issues:

• Farm owner-operators who are primarily dependent
on farm receipts to sustain their operations;

• Individual absentee-owners and farm owner-opera-
tors who have significant wealth and income sources inde-
pendent of agriculture, and,

• Tax-exempt institutional investors, such as pension
funds, churches, or charitable foundations.

The differences among these classes of investors stem pri-
marily from their dependence on current income from agri-
culture, their tax liability or exemption status, and their abili-
ties to use debt financing to leverage their ownership of
capital assets. An analysis of the ability of these investors to
bid for specific parcels of land and the rates of return they
would experience led to the following conclusions:

• Tax status and effective tax rates are of great impor-
tance to the ability of investors to bid for farmland.

• Ability to use debt financing to leverage control of
capital assets is especially important in times when high
rates of inflation are expected to continue.

• Beginners and other investors who depend primarily
on farm sources for current income are at a competitive dis-
advantage in buying land.

The interpretation of those conclusions for each of the
classes of potential investors in farmland is:

• Established owner-operator farms are in a very
strong competitive position compared to both potential new
owner-operators and other investors. The established
owner-operators can obtain a de facto tax-exempt status,
deferring taxes on current income by continued growth and
expansion of a farm they expect to pass intact to a suc-
ceeding generation. How this works is explained further in
the tax-policy chapter which follows.

• Entering owner-operators may have net returns simi-
lar to established owner-operators but cannot handle the
negative cash flows that result from low current returns and
high levels of debt financing. In a sense, land has come to
have the characteristics of a growth stock"; it is a good,
long-term investment but the current earnings will not pay
for it. This means that would-be beginning farms cannot
borrow money to buy land and repay that loan with farm
earnings, especially in the early years of the loan.

74

Table 26: Distribution of landownership and age of landowners (farmland), 1978

Proportion held by

Age

Region

Largest 5

Largest 1

unaer

35-49

50-64

65-74

75 and

percent

percent

or

ob

over

(Percent of acreage)

Northeast

34.2

13.8

7.8

29.1

38.4

16.3

8.4

Lake States

24.2

8.4

9.6

31.3

36.0

15.2

7.9

Corn Belt

24.6

7.9

6.2

25.1

37.4

18.5

12.8

Northern Plains

32.7

14.9

6.4

24.0

39.9

19.5

10.2

Appalachian

39.1

17.0

6.5

24.1

37.5

20.5

11.4

Southeast

49.2

27.1

4.3

22.1

42.1

20.4

11.1

Delta

45.8

23.0

5.2

25.1

37.2

22.2

10.3

Southern Plains

53.6

33.4

4.7

20.1

39.6

21.3

14.3

Mountain

67.2

37.6

5.0

26.5

43.6

17.9

7.0

Pacific

71.0

43.0

4.3

23.1

42.4

18.2

12.0

United States

48.1

30.3

5.9

24.6

39.8

19.1

10.6

Source: ESS/USDA.

Table 27: Distribution of farmland owners and acreage owned, 1978

Owners with less than 50 acres

Owners with more than 1 ,000 acres

Region

Percent of

Percent of

Owners

Land

Owners

Land

Northeast

66.4

14.9

.2

20.7

North Central

43.5

6.8

.3

23.5

South

69.3

14.3

.4

26.3

Great Plains

35.0

1.8

3.3

23.3

Southwest

77.6

6.3

4.7

67.5

Northwest

72.7

6.3

5.9

60.9

Source: ESS/USDA

Table 28: Distribution of farmland owners and value of land owned, 1978

Region

Owners with farmland valued
less than $50,000

Owners with farmland valued
more than $1 million

Percent of
Owners Value of land

Owners

Percent of

Value of land

Northeast

69.0 11.2

.4

40.8

North Central

40.0 5.4

1.2

13.7

South

79.3 20.0

.4

21.3

Great Plains

49.4 6.1

1.1

28.9

Southwest

62.2 7.9

2.1

44.1

Northwest

64.5 7.0

3.4

55.6

Source: ESS/USDA

75

• Individual absentee owners, who are not dependent
on current returns from farming, can obtain a similar de
facto tax-exempt status through continued land purchases
and debt financing. Thus, they are in a very strong competi-
tive position to acquire and hold farmland for the purpose of
accumulating an estate.

• Tax-exempt institutional investors, such as pension
funds, charitable foundations, and churches, enjoy a tax-ex-
empt status but, in general, cannot employ debt financing to
increase their control of assets in inflationary times. Thus,
they are in a stronger competitive position than a beginning
owner-operator but in a slightly less competitive position
against an established owner-operator or an individual non-
farm investor with independent sources of income.

Smaller and beginning farmers are at a clear disadvantage
in buying land against both the pension funds and larger,
well-established farmers.

However, it is important to note that, to be fully competitive
with the tax-exempt institutions, even the well-established
farmer must aggressively expand, using debt financing. But
this sort of expansion is not without problems for the individ-
ual and, at times, for the public as a whole, if emergency
relief measures become necessary. The lower-equity farmer
who must depend on current earnings to meet his financial
obligations, including interest and repayment of debt, is at a
distinct disadvantage in a rising land market. His cash flow
may be insufficient to meet obligations. The pension funds,
on the other hand, have no cash-flow problems. With 100
percent equity financing, they face little risk, but they force
farmers into taking a very risky course in order to compete
with them.

A large-scale infusion of capital into farmland from either
pension funds or other kinds of institutional investors would
also have other impacts.

First, the farmland market is very thin. Only a small number
of transactions, compared to the total amount of land, occur
in any given year. In the year that ended February 1, 1980,
only $17 billion worth of farm real estate changed owners.
That am6unted to 26.5 million acres out of a farmland base
of about 1.04 billion acres, valued at $668 billion. In the last
six years, the market has gotten thinner. In 1974, there
were about 140,000 transfers compared to the 86,000 last
year — a decline of about 40 percent.

Further, last year about 2.5 percent of the farmland was
transferred, but much less than that made it to the open
market. Historically, nearly half (43 percent) of the farm
acreage is purchased from a relative, inherited, or received
as a gift. The other 57 percent of the land is transferred
through nonfamily sales, but a substantial proportion of
these sales are to friends and neighbors — prearranged
sales of parcels that are not publicly advertised.

It is unknown exactly how much land is available for sale to
the outside investor or to young farmers who do not happen
to be connected, but it is likely to be less than one half of
the total land transfers, or less than $8.5 billion worth in
1980 values. In 1978, private pension funds alone, had as-
sets worth $564 billion, around 10 percent more than the to-
tal value of farm real estate in contiguous states that year.
That is, it would have required only 1 .5 percent of their total
assets to buy up all the land that was available nationally on
the open market.

The second major impact is on the price of farmland. There
is no national exchange for buying and selling farmland, and
forces at the local level, including these who have recently
bought or want to buy, exert a major influence on the actual
transaction price. The entry of even a small fund or other
institutional investor could dramatically increase the asking
prices in a local area.

Inflation, Land, and the Distribution of Wealth

Very likely, the greatest single force propelling changes in
the current structure of landownership in agriculture is not
the nonfarming investor, the industrial corporation, the large
agribusiness firms exerting their market power, or even es-
tablished farmers trying to expand. Instead, the greatest
force is probably inflation.

The concentration of ownership of farmland corresponds to
the concentration of wealth in farming; — which is not surpris-
ing, considering the role that land plays in determining that
wealth and the fact that land values surged during the
1970s.

In current dollars, physical assets of farm operations (land
and buildings, machinery, livestock, and crops stored on
and off farms) more than tripled in value between 1960 and
1978, with the major increases occurring after 1972's boom
in grain prices. This increase in farm-related wealth of farm
asset-holders more than kept pace with inflation. Conse-
quently, the real wealth of the sector as a whole increased
substantially, and farm wealth as a proportion of total na-
tional wealth increased from 7.7 percent in 1970 to 8.7 per-
cent in 1978.

But the capital gains accrued by farm asset-holders were
not shared in a manner proportionate to the holdings of as-
sets at any one particular time. Aggressive individuals who
acquired farm physical assets during this period gained
more than others. Thus, inflation contributed to the in-
creases in wealth among farm asset-holders and also to the
increase in concentration of that wealth among those who
were aggressive in acquiring such assets as land.

76

As noted, one of the most important trends affecting agricul-
tural structure has been soaring farmland prices since World
War II. Until the early 1970's, land values appreciated at a
compound average rate of 5.6 percent per year. This appre-
ciation reflected a combination of increased farm earnings
and relatively low rates of inflation. The price increases of
the 1970's were greater as earnings increased and inflation
accelerated.

The previous section observed generally that, as an invest-
ment, land, both urban land and farmland, compared favor-
ably during the last decade with other kinds of investments
available to individuals. Comparing annual yields from var-
ious investments shows that, since 1 970, the annual earn-
ings of farmland ownership (the ratio of net rent to land
value) have usually been lower than earnings from all other
types of investments except common stock. In the 1960's,
earnings to landownership were more competitive with other
investments. Capital gains, on the other hand, have been
much higher from farmland than from other investments. In
the year that ended March 1, 1980, farmland capital gains
exceeded 1 5 percent.

The magnitude of increases in farm wealth (capital gains)
may be better understood when that wealth is related to
farm earnings over time. In the seven-year period of 1972 to
1978, the value of U.S. farm assets more than doubled.
This increase of more than $400 billion was nearly three
times the total farm earnings in the same period and equiv-
alent to total farm income for the previous 38 years.

Slightly over half of the $583 billion in capital gains accruing
to physical farm assets between 1 960 and 1 978 can be at-
tributed to increases in the general price level (inflation).
The balance represented the increase in the real wealth of
those owning the assets.

There can be little doubt that, if the attractiveness of farm-
land as an investment holds its own, farmers who already
have large holdings will continue to aggressively acquire
more land. Landownership probably will become more con-
centrated in the future as a consequence.

These patterns develop because land is a good investment
hedge against inflation. But, more importantly, it is a good
tax shelter. With high interest rates induced by that inflation,
the distance between "current" earnings on farmland and
the amount needed to carry the financing is widened. The
rate of current earnings might even be decreased by the
same inflation that raises interest rates. The growing gap
between interest and returns to land is most easily filled by
those who are rich. Under our tax laws, they are especially
favored when it comes to trying to span this distance.

"One of the great issues facing agriculture today is the
gathering sentiment that land really belongs to the people,
and that the farmer has only a stewardship right in the as-
set. It is a kind of socialist mentality, and it has an adverse
effect on the farmer. It leads to the belief by politicians and
consumers alike that the farmer has a responsibility to pro-
vide cheap food, that the economy can't afford escalation in
food costs commensurate with increases in production
costs. It is essential that the consumer understand that . . .
he simply will spend more of his take-home pay in the food-
basket. "

J. Howard Settle of Baltimore, Md., in Fayetteville.

Inflation thus both compounds the attractiveness of farmland
as an investment and strengthens the competitive position
of the wealthy in buying land.

Ownership and Government Policy

The competitive advantage held by those who are expand-
ing their land base is augmented by Government programs
through which the general public absorbs price and produc-
tion risks, offers subsidized credit, and provides tax advan-
tages to those with enough income to take them.

The assumption of risks by the public makes those who
would otherwise have to shoulder those risks themselves
more confident about their economic future and their ability
to repay debt. It enhances their bankers' confidence as well,
because the chances of these people going bankrupt are
lessened by that assumption of risk.

Tax rules, which are examined in detail in Chapter 6 of this
part of the report, reinforce the effect of inflation in strength-
ening the competitive position of the wealthy in buying land.

The permissive accounting rules used in reporting income
from the farm investment frequently produce losses that are
accounting losses, not economic losses. These tax losses
shelter other income, either farm or nonfarm, from the in-
come tax. The capital gains produced by farm activities are
not taxed as they accrue. The gains, therefore, are almost
always taxed much later than the time when the expenses
associated with the original purchase or development of the
capital asset are claimed as deductions. Most frequently,
the gains are taxed, if they are taxed at all, as long-term
capital gains. High-income taxpayers are in a position to ex-
ploit these rules the most.

77

Sometimes these tax shelters are discussed as if they ben-
efitted only individuals "outside of farming." The tax provi-
sions are, however, used regularly by larger farmers to
lower their taxable incomes. For example, a lawyer may uti-
lize a farm operation to generate $50,000 of accounting
losses to reduce, for tax purposes, his $75,000 income from
practicing law. A farmer may use a similar set of farm re-
sources to generate $50,000 of accounting losses to place
against $75,000 in income from other farm operations.

Those not-always-taxed capital gains and increased wealth
are not shared equally by asset holders. Different people re-
spond differently to inflation. Those who are aggressive and
acquire additional physical assets during inflationary periods
gain more than those who do not. Inflation also contributes
to the wealth of those who have leveraged themselves the
farthest. Tax, credit, and risk-sharing programs have sup-
ported this action.

In many cases, these aggressive purchasers have reduced
their own flexibility — their ability to withstand reductions in
farm prices or increases in interest rates. They would be
most susceptible to bankruptcy if Government did not bear
some or all of the price and production risks.

Increased land values also make it more difficult to pass a
moderate-sized farm intact to one's children. The greater
the value of the farms, the more difficult these transfers
from one generation to the next become.

Summary

Three summary points about landownership are important:

• There will probably be continued rapid inflation in
land prices because of strong global demand for food and
the consequent pressures on the land base; the related rise
in earnings to farm production; continued inflation in the
general economy, which increases the attractiveness of in-
vesting in land as a shelter; continued availability of liberal
credit arrangements from private and especially public farm
real-estate lenders, and incentives for landownership pro-
vided by tax policies and risk-reducing farm commodity
programs.

• That will reinforce present trends toward concentra-
tion in landownership) — mostly into the hands of large farms
growing larger but also in those of some wealthy nonfarm
investors.

• Those trends imply a gradual disenfranchisement, a
separation, of the majority of the people from the land.

Those conclusions produce an irony of sorts. The long-held
belief that widespread ownership of land by those who farm
it will produce a more responsible citizenry includes the be-
lief that those who farm it should have few restraints on how
they use it or on their ambitions to acquire more land. (That
is, no publicly imposed limits on growth of individual farm
businesses). In fact, "growth" has become a measure of
business "success" in our society. Market forces, and the
incentives outlined in this and other chapters by which pub-
lic policies have reinforced them, will continue to move agri-
culture toward a situation in which a few will own the land.

Those speaking for land interests will be fewer and fewer
and thus may increasingly not speak for the interests of
those who would like to own land or to secure access to
land to farm.

In effect, present trends in landownership and use could
move agriculture in the same direction as the rest of the
economy and society: from a nation of many small busi-
nesses and private owners to a nation of a few large firms
and many wage-earners.

Selected References

Bills, Nelson L. and Arthur Daugherty. Who Owns the Land?
A Preliminary Report for the Northeast States. Staff Re-
port. Economics and Statistics Service, United States
Department of Agriculture, Washington, D.C. NRED 80-
8. 1980

Boxley, Robert F. Landownership Issues in Rural America.
Economics and Statistics Service, United States De-
partment of Agriculture, Washington, D.C. ERS-655.
1979.

DeBraal, J. Peter. Foreign Ownership of U.S. Agricultural
Land. Economics and Statistics Service, United States
Department of Agriculture, Washington, D.C. Agricul-
tural Information Bulletin 440. 1980.

Gertel, Karl and James A. Lewis. "Returns from Absentee-
Owned Farmland and Common Stock, 1940-79." Agri-
cultural Finance Review. Vol. 40 1980.

Gustafson, Gregory C. Who Owns the Land? A Preliminary
Report for the Western States. Staff Report. Economics
and Statistics Service, United States Department of Ag-
riculture, Washington, D.C. NRED 80-12. 1980.

Lewis, Douglas G. Who Owns the Land? A Preliminary Re-
port for the Southern States. Staff Report. Economics
and Statistics Service, United States Department of Ag-
riculture, Washington, D.C. NRED 80-10. 1980.

Lewis, James A. Landownership in the United States 1978.
Economics and Statistics Service, United States De-
partment of Agriculture, Washington, D.C. Information
Bulletin 435. 1980.

78

Lewis, James A. White and Minority Small Farm Operators
in the South. Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C. Ag-
ricultural Economics Report 353. 1976.

Moyer, D. David. Who Owns the Land? A Preliminary Re-
port for the North Central States. Staff Report. Econom-
ics and Statistics Service, United States Department of
Agriculture, Washington, D.C. NRED 80-11. 1980.

Schertz, Lyle and others. Another Revolution in U.S. Farm-
ing? Economics and Statistics Service, United States
Department of Agriculture, Washington, D.C. Agricul-
tural Economic Report 441. 1979.

Sechler, Susan. Statement before Select Committee on
Small Business, United States Senate, 96th Congress,
2nd Session, Washington, D.C. October 8, 1980.

Thompson, Allen R. and Michael Green. The Status of Mi-
nority Farms in the United States 1974. Staff Report.
Economics and Statistics Service, United States De-
partment of Agriculture, Washington, D.C. NRED 80-14.
1980.

United States Department of Agriculture. Monitoring Foreign
Ownership of U.S. Real Estate: A Report to the Con-
gress. Economics and Statistics Service, Washington,
D.C. 1980.

Wunderlich, Gene. Facts About U.S. Landownership. Eco-
nomics and Statistics Service, United States Depart-
ment of Agriculture, Washington, D.C. Information Bul-
letin 422. 1979.

Wunderlich, Gene. Foreign Investment in Southern Real Es-
tate: Methods and Trends. Conference Series No. 9,
Georgia World Congress Institute, Atlanta. 1980.

CHAPTER 5 SOIL AND WATER
CONSERVATION

Perhaps no single aspect of our agricultural system has
been so taken for granted as the abundance of our natural
resources — our water, fossil fuels, and productive soil. But,
as the capacity of our production system is being pushed
ever closer to its outer bounds, the physical limits of our
natural resource base are coming to be much more fully
recognized and appreciated.

As we look across this decade and beyond, increased de-
mands on our food-production plant are indicated. Resource
problems that exist now might become even more severe,
and additional problems might emerge. All, in combination,
could significantly affect our future food-production ability.

The Government and the public it serves must begin to give
greater attention to conservation of the Nation's natural re-
sources; we must give greater thought to their most benefi-
cial use to society as a whole, not just for the present, but
for future generations.

Confronted with growing demands for food and fiber in the
future, an understanding of the extent and nature of the
margin between current production capacity and the full po-
tential of our resource capacity assumes a growing impor-
tance. The two sources of greater quantities of food produc-
tion— higher productivity and our natural resource base — will
in the future become more and more inextricably linked. The
policies we subsequently pursue must not only take account
of immediate productive capacity needs, but they must also
give more explicit attention to maintaining and expanding
the capacity over the longrun and doing so in a broader so-
cial context, regardless of how the resources are organized
and held. Resource conservation and environmental policies
may either constrain or enhance increased food production.
Most are constraining in the shortrun, but there are trade-
offs between operating at maximum production in the short-
run with environmental degradation and sustained longrun
capacity with environmental enhancement.

The conservation and use of our land and water
resources — explicitly addressing such areas as reduction of
soil erosion and sedimentation, preservation of prime agri-
cultural lands, retention of agricultural wetlands, enhance-
ment of instream water flows, water conservation in irrigated
agriculture, and competition for agricultural land and water
resources from energy production — must be crafted as an
integral part of food and agricultural policies for the future.

The Land Resource

The 1.5 billion acres of U.S. land not owned by the Federal
Government are now categorized as follows:

• 413 million acres available for use as cropland, 387
million of which were used for crop production in 1980.

• 542 million acres used to graze livestock, including
134 million acres of cropland and native pasture and 408
million acres of range.

• 370 million acres primarily in forests.

• 176 million acres in primarily nonagricultural uses —
small towns, urban areas, highways, and airports.

In addition to the 413 million acres of land classed as avail-
able for crop production, 127 million more acres of the pas-
ture, range and forest land are considered to have potential
for use as cropland.1 Thirty-six million of these acres are
considered to have high potential for conversion to cropland
use with little investment. Another 91 million acres have me-
dium potential but would require some developmental costs
and conservation investments to remain in crop use.

Soil Erosion

On large parts of the agricultural land base, a severe man-
agement problem is the depletion of the soil resource
through erosion. The most dominant form of that erosion is
caused by water runoff, estimated in 1977 to amount to
4.044 billion tons, the equivalent of 2,247,000 acre-feet of
soil. (An acre-foot is a 1 -foot-deep slice of soil large enough
to cover 1 acre.) A second source of erosion is wind, re-
sponsible in 1977 for the movement of 1.462 billion tons
(812,000 acre-feet). Losses from gully erosion were 298.3
million tons, or 165,700 acre-feet.

Water and wind erosion redistribute soil, depositing it on
other tracts, on floodplains, and in streams. Some soils are
enhanced by this deposition, and most soils have some nat-
ural regenerative capacity, perhaps as much as 2 to 5 tons
per acre annually. When erosion exceeds this, the depth of
the most productive topsoil is being reduced, diminishing
over time the crop-yielding capacity of the land and causing
other detrimental effects, such as stream sedimentation and
pollution when nutrients and toxic chemicals are carried with
the sediment.

While severe in the aggregate, erosion does not occur uni-
formly across land types. More than one-half of all erosion
occurs on cropland, one-third is on rangeland, and smaller
proportions occur on the forest and pasture land. On most
agricultural land, erosion occurs at relatively low rates: less
than 5 tons per acre annually is lost on two-thirds of the
land. On cropland, the loss exceeds 10 tons per acre on
only 17 percent of the acreage. The most serious cropland
erosion is thus concentrated on a relatively small land area
(Figure 7).

81

Figure 7

Total Cropland Erosion, 1977

One dot equals 250,000 tons
of soil eroded annually; total annual
soil loss equals 2 billion tons.
Most serious sheet and rill erosion occurs in the
Corn Belt and Delta states and west Tennessee.

Almost 95 percent of the erosion on cropland occurs where
cultivated and close-grown crops are produced; the average
annual loss is 8 tons (5.4 tons sheet and rill and 2.6 tons
wind). Because of the protective influence of growing vege-
tation and crop residues, erosion on cropland not in cultiva-
tion, is, of course, much lower.

Crops differ in the average annual erosion associated with
them according to the region and the type of soil on which
they are grown. Water and wind erosion rates for the five
principal crops are: cotton, 19.9 tons; sorghum, 12.6 tons;
soybeans. 8.2 tons; corn, 7.6 tons: and wheat/fallow, 6.5
tons.

That briefly sketches the problem at present. But the prob-
lem is not static — what about the future, when the pressures
for increased domestic and foreign production will become
even stronger and undoubtedly increase the economic in-
centives to extend cultivation to additional lands?

Prior to 1970, when the agricultural plant was operating well
below capacity and significant acreages were idled by Gov-
ernment programs, larger and larger production was ob-
tained on successively smaller acreages of land. Crop pro-
duction had become concentrated on the best land — the
highest yielding, lowest-production-cost acres, and the acres
least prone to erosion.2 But, with the rapid growth in export
demand, farmers have in the last 10 years reversed the
trend of the previous 4 decades, and expanded the land
used for crop production by 54 million acres.

82

The inherent erosion potential is much greater on the crop-
land not now in cultivation. Estimates of the average erosion
per acre annually on the land now cropped (5.4 tons per
acre) are greatly exceeded by the estimated average ero-
sion rate that would occur (about 10 tons per acre) on the
potential additional cropland acres under the same condi-
tions. As crop production extends onto a greater land base,
the potential erosion problems can be expected to become
more and more severe, with greater associated environmen-
tal problems.

While soil erosion is a major problem, it is by no means the
only important problem affecting our land resource and our
ability to produce food and fiber now and in the future.

The Wetlands

This Nation has 166 million acres of swamps, marshes, and
floodplains unsuitable for cropping that are classified as
wetlands. Additionally, another 104 million acres also classi-
fied as wetlands could be cropped, at least intermittently,
with drainage to increase the crop yields. These wetlands
are now recognized as having important roles in the ecolog-
ical balance. Reflecting this, Federal policy no longer subsi-
dizes their drainage for crop production unless an overriding
conservation or pollution-abatement goal is to be realized.
In fact, Federal and State programs now attempt to maintain
the wetlands; more than 19 million acres are being pre-
served for wildlife habitats through either long-term leases
or direct purchases of the land.

Growing incentives for greater commodity production will, in
the future, heighten pressures to drain the wet soils for
cropping. Maintaining the wetlands in their current state, of
course, implies an increased use of marginal croplands, at
higher production costs per unit of output, and greater prob-
lems of erosion and sedimentation.

Preservation of Prime Lands

Another important factor affecting our present and future
food-production capacity is the conversion of prime agricul-
tural land to nonagricultural uses, which also aggravates the
soil-erosion problem to the extent that production must shift
to the potentially less stable lands. When inventoried in
1977, the Nation had 344.5 million acres of prime agricul-
tural lands. The cropland base of 413 million acres included
230 million acres of prime lands; prime lands not included
consisted of pasture, range, and forests not presently
cropped. The rate of conversion of current and potential
cropland to urban or other nonagricultural uses was esti-
mated in 1975 to be 900,000 acres per year, 675,000 acres
of which came from the current cropland base. Perhaps
two-thirds of the land converted was prime land or land that
has suitable physical and climatic characteristics for farming.

Public policy presently discourages the irreversible conver-
sion of prime lands. Forty-eight States now have some type
of policy to protect agricultural lands, by such means as
preferential property-tax assessments, agricultural district-
ing, easements or contracts, zoning, and development
rights. At the Federal level, the Department of Agriculture
advocates the retention of prime lands.

The relatively small proportion of the cropland base being
converted may not affect the geographic distribution of the
production of major crops or the structure of American agri-
culture in the aggregate. But, the State and local effects are
very important, particularly in areas where nonfarm influ-
ences may seriously affect the viability of farming.

Water Resources

Agriculture is the predominant user of water in the United
States, accounting for almost one-half of all fresh-water
withdrawals from surface and ground sources and over four-
fifths of the actual consumption. Almost 98 percent of the
water consumed in agriculture is used to irrigate crops; the
remainder, for livestock.

The total productivity of agriculture is importantly enhanced
by irrigation. The acreage irrigated has steadily increased
over time — from 7.17 million acres in 1900 to 14.6 million
acres by 1930, 20.7 million acres by 1945, 30 million acres
by 1955, 45.3 million acres by 1975, and, by 1978, 51.3 mil-
lion acres were under one form of irrigation or another (Fig-
ure 2). Over 20 percent of the irrigated acreage received
water from the Federal water and power resources services
projects, 29 percent received water from non-Federal proj-
ects, and 50 percent received all water from on-farm
sources.

The growth in irrigated acreage has been possible only with
substantial capital investment — over $16.9 billion in 1975, of
which $9.0 billion was Federal investment and the remain-
der non-Federal public and private investment. The implied
average investment per irrigated acre was $270 in project
facilities, $105 in on-farm facilities, and $375 over all.

Irrigated acreage has historically been concentrated in 17
western States but with rapid growth has shifted eastward in
recent years. Acres irrigated east of the Great Plains in-
creased by 65 percent between 1 974 and 1 978, in contrast
to only 14 percent in the western States. Supplemental irri-
gation in the rain-fed farming areas will become increasingly
important.

83

Groundwater Depletion

The estimated volume of groundwater supplies of the United
States exceeds that of all surface supplies, including the
Great Lakes. The volume, equivalent to about 35 years of
surface runoff, is 97 percent of total freshwater supplies.
Despite these impressive supplies, withdrawals of ground-
water occur at rates exceeding the natural recharge in many
important agricultural areas. Withdrawals have been esti-
mated at 68 to 85 million acre-feet annually; the extent to
which these figures reflect groundwater depletion is uncer-
tain. In some areas, however, declining water levels in com-
bination with the rising cost of energy necessary to lift the
water are causing irrigation wells to be abandoned.

One of the most critical depletion areas is the High Plains of
west Texas and eastern New Mexico. Continued irrigation
on several million acres is at risk in this region because of
the increasing inadequacy of available groundwater sup-
plies. The aquifers from which the water is pumped are con-
tained in the Ogallala Formation, one extremely slow to
recharge.3

Because local surface-water supplies as alternative sources
are often inadequate, few options for the Ogallala problem
are available except to slow the rate of groundwater mining.
As things now stand, farmers have economic incentives to
continue pumping for shortrun production needs. Yet, an
acre-foot of water pumped from Ogallala aquifers is often,
literally, "mined," not to be replaced for generations.

An irony of past policies is that irrigation development in the
Ogallala area was certainly encouraged, if not subsidized,
by Federal programs at the same time the Nation was trying
to cope with chronic agricultural production surpluses. Now
that the surpluses are gone, much of the water is, too.

In the absence of practical alternative sources of water sup-
ply, irrigated lands now dependent on groundwater overdraft
will continue to revert to dryland production. Production and
farm income will be reduced in areas where irrigation is
abandoned. Ultimately, this could increase the economic
pressures for individual farms to grow if income from dry-
land farming is to equal that realized from irrigation. At the
national level, the production losses due to the abandoning
of irrigation will have to be made up elsewhere if output is
to be maintained. This also could aggravate the soil erosion
problem as fragile lands in humid regions are brought into
production.

Water Conservation

President Carter in 1978 established water conservation as
a national priority and directed it be made a major compon-
ent of national water policy. This meant that water conser-
vation (actions to reduce the demand for water, improve ef-
ficiency in its use to reduce losses, and improve land-
management practices) should be fully integrated into
water-resource development plans for achieving national
economic development and environmental-quality
objectives.

The potential for increasing the productive capacity through
improved irrigation efficiency may be much less than gener-
ally perceived. In the shortrun, the potential is extremely lim-
ited. By the year 2000, water withdrawals from surface and
underground sources could be reduced an estimated 39 mil-
lion feet under a greatly accelerated water conservation pro-
gram. However, not all of this additional water is available
for immediate consumptive use; as much as four-fifths of
the reduced withdrawals would have returned to streams
and underground aquifers for subsequent consumptive use.

Continually rising energy prices may have significant im-
pacts on production and water use. Higher energy prices in-
crease the cost of water to the farmer and will result in less
being used, unless commodity prices rise as well. Farmers
respond to higher energy costs by lowering water applica-
tion rates, changing to crops requiring less water, or by
abandoning irrigation. This is already occurring in the Texas
High Plains and other areas of deep-pumping lifts and fall-
ing water tables.

Surface-Water Shortages

In almost every region of the West, more water could be
used for irrigation if it were available. Competition for exist-
ing surface water supplies is intense. Energy development
and municipal and industrial uses are bidding away water
previously used either for agriculture or recreation or to
maintain fish and wildlife habitats. Although competition for
water from municipal and industrial water supplies continues
to increase, the greatest potential conflict may be between
energy development and irrigation. Both uses require large
amounts of water. Periodic droughts aggravate the situation.

Competition for Resources for Energy

An increasing share of our Nation's energy in the coming
decades is expected to come from coal and synthetic fuels.
Mining coal and processing it into energy for electricity-gen-
eration plants (liquification, gasification, et cetera) require
land and water resources. Since the values of land and
water in energy production will likely exceed their values in
agriculture production, energy producers might be able to
outbid agriculture for these resources.

84

Overall, the impact on the Nation's agricultural productive
capacity from the loss of these resources to energy devel-
opment will be slight, although local economic impacts could
be severe. About 570,000 acres of rural land will be used
temporarily for strip-mine coal production. The impact of oil-
shale development on agricultural-resource productivity will
be imperceptible at the national level.

Water Quality

The improvement of water quality relates to water conserva-
tion and the use of water in a context broader than just agri-
culture. The major efforts at improving water quality are fo-
cused on pollution control. Nonpoint pollution-control efforts
are directed at controlling erosion and runoff from agricul-
tural and forested areas and at the use of pesticides. Point-
source controls primarily affect livestock feedlots and food-
processing plants.

New and modified processes reduce water use and waste
loads from food-processing plants. Changes within the
plants involve water conservation through new processes,
process modification, recycling, and improved cleaning proc-
esses. Wastewater treatment and disposal include water
renovation by land treatment, irrigation, and wastewater
treatment, including lagoons. Over all, water savings can
amount to 50 percent or more in many food-processing
plants, which is important to the seasonal water demands of
small towns and communities.

Improved water use through water-quality practices could
change the pattern of land use and cropland utilization.
Management practices on farms to improve water
quality, such as minimum tillage, taking land out of produc-
tion for buffer strips, terracing, et cetera, will influence yields
and production patterns. Productivity may be reduced; pro-
duction costs may rise.

The regional effects of water-quality improvements have im-
portant implications for the structure of agriculture. The im-
pacts on farm size, cropland use, and enterprises would be
expected to vary significantly from region to region.

Future Conservation Policy Directions

The concern for productivity loss and other detrimental ef-
fects of erosion have led to substantial Federal and State
programs of cost-sharing and technical assistance to en-
courage landowners to undertake erosion control on their
lands. Presently, the Federal Government spends over $1
billion annually on conservation programs alone; another
$152 million of State, county, and local funds go for the
same purpose.

In the broad area of planning, development, management,
and use of the Nation's water resources, annual Federal
outlays now exceed $10 billion. In spite of this tremendous
outlay of funds, water problems still exist— flood damages

increase each year, water quality deteriorates, instream
uses compete more intensely for withdrawals, and water
shortages occur with increasing frequency across the
country.

As we undertake a forward look at the kind of actions most
appropriate to ensure the wise use of our resources, it is
useful to review the types and nature of past policies this
Nation has pursued.

Past Policy

The foundations of national policy for the conservation of
soil and water resources are contained in the Soil Conser-
vation and Domestic Allotment Act passed in 1935. This act
established the Soil Conservation Service, and provided
that, in return for furnishing technical and financial assist-
ance on private lands, certain things could be required of
the States. Specifically, the States were to enact and en-
force laws imposing permanent restrictions on the use of
erosive lands. Contributions of either cash or in-kind ser-
vices to farmers were authorized for activities beneficial to
private interests.

The initial thrust of Federal conservation policy had clear
regulatory overtones, but the regulatory powers were not to
be exercised at the Federal level. Rather, State and local
governments were expected to establish and exercise the
land-use controls. The theory was that farmers should im-
pose land-use controls upon themselves. Following the lead
of a 1935 Texas law, States were asked to pass legislation
authorizing soil conservation districts as governmental sub-
divisions. Districts were to be organized based upon the fa-
vorable vote of the "land occupiers" in a proposed district.

The idea of conservation districts caught on; by 1942, 41
States had passed the required enabling legislation. Today,
nearly all agricultural land is in a conservation district. The
State laws that brought the districts into being, however,
made the passage and enforcement of controls on the use
of erosive lands difficult. Few, if any, instances are recorded
in which the regulatory powers granted to the districts have
actually been used to conserve soil for long-term public
benefit. Thus, one of the basic intents of national conserva-
tion policy, local controls on the use of problem lands, has
been lost.

With one exception, the Great Plains Conservation Pro-
gram, the assistance provided by the Soil Conservation Ser-
vice is technical. Assistance is based on personal interac-
tion with land users and extends from informing them of the
benefits of erosion control and water conservation to the de-
sign and engineering of drainage systems and irrigation fa-
cilities. The primary impact is to increase awareness of
land-management problems, both conservation- and produc-
tion-oriented.

85

(

The act was amended in 1936. In part, the amendments
were to replace provisions of the Agricultural Adjustment Act
of 1933 struck down by the Supreme Court. They empow-
ered the Secretary to make payments to farmers for a vari-
ety of purposes, including soil and water conservation. The
resulting program evolved into the Agricultural Conservation
Program (ACP).

The ACP was initially intended to be temporary. The States
were given two years to enact legislation enabling them to
develop and implement plans for preserving and improving
soil fertility, promoting the economic use of land, reducing
the exploitation ;of soil, protecting rivers and harbors against
the results of soil erosion, and reestablishing the purchasing
power of the net income of farmers, relative to nonfarmers,
to a level equivalent to that which prevailed from 1909 to
1914. Once the States had acceptable programs for these
purposes, the ACP was to make grants to the States for
their implementation.

During the time that State plans were being developed,
ACP was to be administered through a system of farmer-
elected county and community committees. No State sub-
mitted an acceptable plan by the end of 1938, and Con-
gress extended the ACP for another two years. Eventually,
Congress extended the ACP as a temporary Federal pro-
gram nine times. Only one State ever submitted a plan,
however, and it was not acceptable. Finally, in 1962, Con-
gress repealed the State-plans provision of the original act.
A temporary program for 26 years finally became legally
permanent. The system of farmer-related committees that
had governed the program since 1936 was also given per-
manent sanction.

Unlike the Soil Conservation Service programs, the ACP is
a program of financial assistance. Until recently, the ACP
offered financial assistance for much the same things for
which the SCS provided technical assistance — conservation
as well as production-oriented practices. Although the form
of assistance was different, the impact was much the
same — to increase the extent to which land- and water-
management problems are solved by shifting part of their
costs to the public. As with the SCS programs, the recipient
was the ultimate decisionmaker as to the specific problem
that was to be solved and the practice or measure used to
solve it.

From their inception, the conservation programs have had
an element of inconsistency, if not contradiction. For exam-
ple, soil erosion arose as an issue of national prominence
out of the very obvious soil-erosion problems and the farm
depression in the late twenties. The response was public
programs intended to control soil erosion. These programs
were accompanied by subsidized land development through
drainage, irrigation, and other means. More land, of course,
enabled greater production — at a time when already-excess

production held commodity prices and farm incomes low.
During the thirties and forties, farmers were still largely re-
liant on natural fertility and, in attempting to maintain income
levels in the face of low prices, continued exploiting the soil
resources to maximize their shortrun returns without regard
to the longer-term consequences. This, of course, worked
counter to the objective of reducing erosion. Thus, actions
intended for one major purpose were being simultaneously
undermined as those actions aggravated the basic incomes
problem in the sector.

There is still a contradictory element today in Federal action
in the name of soil and water conservation. Although the
ACP program has been reformed to shift the orientation
from primarily production-oriented practices, many of the
programs still provide assistance for them. These programs
offer cafeteria-style technical and financial assistance, with
the recipient making the decision as to what will be done.
The crisis atmosphere that accompanied the initiation of
those programs, exacerbated by the Depression, resulted in
little attention being given the benefit/cost relationships in-
volved. Given the production technology and conditions ex-
isting at the time, taking the benefits of erosion control as
self-evident may well have been appropriate. But the situa-
tion is different today, not only in terms of the technology of
production but also in terms of the scarcity of public and pri-
vate resources relative to the alternative uses to which they
can be put.

The impact of changes over time in agricultural technology
on erosion control relate to fertility depletion and soil deteri-
oration.4 Agricultural technology was such in the 1930's that
erosion control addressed both fertility depletion and soil de-
terioration. Synthetic fertilizers were not yet commonly used,
and production was generally dependent on natural fertility.
In large respect, the soil served as a storehouse of natural
fertility. Crops that yielded the highest incomes frequently
used more natural fertility than they replaced. Consequently,
these crops were grown in rotation with "soil building"
crops, those that tended to increase the quantity of plant
nutrients in the soil. Multiyear crop rotations thus served to
alternately deplete and restore soil fertility.

So long as agriculture was dependent on natural fertility,
any practice that reduced water runoff tended not only to re-
duce erosion, but also to maintain the fertility available in
the soil. Benefits of these practices were thus derived from
both fertility maintenance as well as from preventing the de-
terioration of the soil resource itself.

86

The agricultural technology emerging and adopted since the
Great Depression has effectively separated fertility depletion
from soil deterioration. Use of commercial fertilizers has re-
sulted in a situation in which "soil-building" crop rotations
are no longer commonly used. High-income crops still tend
to deplete nutrients in the soil, but chemical fertilizers are
now substituted for "soil-building" crop rotations as the pri-
mary means of providing plant nutrients. Where cropland
was historically "farmed-out" and then restored over the
course of a multiyear crop rotation, it is now, in a sense,
farmed out and "restored" annually. Moreover, the use of
chemical nutrients easily absorbed by plants, as well as the
ability to optimally time and place their applications, has re-
sulted in crop yields much higher than those achieved when
agriculture was dependent on natural fertility.

Just as with the commodity programs, tax provisions, and
other Federal programs, the drastic changes in farming that
have occurred over time are not reflected in the conserva-
tion programs. While the technology of agriculture has
changed tremendously since the 1930's, the administration
of Federal erosion-control programs is carried out in much
the same context as it was during the Great Depression.
This is particularly true in terms of benefit/cost relations to
the farmer, the landowner, and to society at large.

The performance of these programs has at best been
mixed. Emphasis has been placed primarily on getting prac-
tices "on the ground." One of the consequences of this ap-
proach is that more than half of all ACP-assisted erosion-
control practices have tended to be installed on lands that
were eroding at relatively low rates.

About one-half of all terraces on cropland are on lands that
would not erode over seven tons per acre if the terraces
were not present. Over 70 percent of the land on which
minimum tillage was used in 1977 would not erode over five
tons per acre without the practice. Of the 1 75 million acres
of cropland on which crop-residue use, contour farming,
minimum tillage, or contour strip-cropping were used in
1977, 74 percent would not erode at rates over 5 tons per
acre annually without the practice.

So long as fragile lands are cultivated, it might not be feasi-
ble to control erosion on them at a level that even ap-
proaches the conventional standard of five tons per acre.
The effectiveness of minimum tillage might have to be sig-
nificantly increased to make it a feasible control practice on
fragile lands. Terraces can also be used to reduce erosion
on fragile lands. However, erosion rates may still exceed 5
tons per acre on terraced land with slopes greater than 5
percent. This, of course, suggests limits to its feasibility as a
means of effective control on fragile lands. Over the near
term, available technology appears to be such that we can-
not expect to cultivate fragile lands and hold erosion to ac-
ceptable levels except at very high and perhaps prohibitive
costs.

The benefits of soil conservation are difficult to quantify. For
example, some research has examined the relationship be-
tween soil erosion and crop yields under current conditions.
Results cannot be generalized — the yield effects of erosion
vary greatly from one situation to the next. When yield de-
clines are due to fertility depletion they are reversible simply
through the use of fertilizers. In general, however, it is not
known what the productive capacity of soil is in terms of re-
lating rates of erosion to changes in soil properties that are
thought to be relevant to its productivity. Scientists, how-
ever, do agree that soil erosion reduces soil productivity, al-
though it is not known whether the rate of productivity de-
cline is linear or curvilinear and accelerating. There is a
point beyond which current technology cannot fully offset
the soil productivity loss from erosion.

New Policy Directions

Past conservation policies and programs have not been
closely coordinated with those relating to production. Our
conservation programs have limited this concern to agricul-
ture's relationship to the land. In so doing, they have
avoided becoming directly entangled in the complex of
prices, ownership, and rural living-condition problems. In ad-
dition, technical-assistance programs have not been fully
coordinated with financial-assistance programs. The results
have been overlap and duplication of administrative struc-
ture and other program features. This has undoubtedly led
to some program inefficiencies.

Future conservation programs must be effectively integrated
toward common rather than separate goals and constitu-
ents. Financial assistance should only be given commensur-
ate with benefits that accrue to the general public. Technical
assistance should be used to ensure that priority policy ob-
jectives are accomplished. Because production and conser-
vation are inextricably linked, production-adjustment and re-
source-conservation programs should be similarly linked.

87

What of incentives? Changes in the technology of produc-
tion since the Great Depression have increased the separa-
tion of, public and private interests, particularly where soil
conservation is concerned. While the income situation of
farmers is much improved, financial pressures are enor-
mous. Under these conditions, farmers may not undertake
practices that yield little, if any, benefits to them, even if fi-
nancial and technical assistance reduce the farmer's share
of their installation costs to zero. If production activities
cause conservation problems, then conservation incentives
must compete with the rewards of production. Farmers grow
corn because the market demands corn and pays for it,
bushel by bushel. If public policy is to effectively conserve
resources, then society may have to consider paying for it,
ton by ton and acre-foot by acre-foot, or insist on it through
enforcement of regulatory standards for tolerable erosion
and sedimentation limits.

Specifically, a new focus for resource-conservation policies,
appropriate to the kind of economic environment that may
prevail in the future, could include:

A. Soil Conservation

• The effectiveness of Federal cost-share funds for
conservation can be increased by targeting a large propor-
tion of the funds to those areas and farms where erosion is
most severe.

• Diversion of land now used for crops to pasture or
other extensive uses is needed in the critically high erosion
areas. Long-term diversion contracts specifically for soil
conservation could be used in areas with chronically high
erosion rates. The long-term contracts could specify crop-
ping patterns and resource-management systems. Remun-
eration could be based on the difference in net returns from
cropping and the more socially desirable use.

• Conservation achievement contracts provide annual
payments to farmers based on the amount of reduced ero-
sion achieved by using selected conservation and tillage
practices. This new conservation incentive offers maximum
flexibility to farmers to use conservation practices that are
most suitable to their particular farming situation. A pilot pro-
gram could be initiated to assess the operational feasibility
of this incentive measure.

B. Agricultural Land Retention

• The policies and programs of various Federal agen-
cies have been inconsistent in their effects on the conver-
sion of agricultural land. Federal policy should be made
consistent.

• Current and past agricultural land-retention policies
have tended to focus almost entirely on land rather than the
quality of that land for producing agricultural products. Fed-
eral policy should more specifically address the factors af-
fecting the viability of farming in settings where agriculture is
or should be preserved.

C. Water Resources

• Water conservation is an important complement to
water development, as a means to avoid water shortages.
Low water prices, some of which are the result of Federal
programs, tend to discourage water conservation. Policies
at both the Federal and State level are needed, either
through taxation or direct pricing schemes, to make the
price of water to the user more nearly reflect its cost or
value in use. Legislation that would allow adjustments in
prices of water from Federal irrigation projects would en-
courage more efficient water use and extend available
supplies.

• Groundwater supplies in many parts of the country
are being depleted faster than they are being recharged.
Measures are needed to mitigate depletion of these ground-
water supplies and reduce the potential adverse impacts on
farmers and rural communities. Federal and State policies
for water management should be coordinated and linked
with agricultural policy in a manner to make the most so-
cially effective use of groundwater over time.

D. General Resource Policies

• Stronger State and local leadership and roles, con-
sistent with land-use planning and regulatory powers em-
bodied at those levels, are needed. State capability and ca-
pacity for addressing soil- and water-conservation problems
have been increasing, and State-led initiatives to reduce
erosion and sediment are growing. A total of 12 States now
have statewide erosion and sediment control laws; in 8
States the laws apply to all or some agricultural activities.
Model legislation supported by the Council of State Govern-
ments is available.

• If demands for exports and energy feedstocks signifi-
cantly increase pressure on the Nation's land base, a tax
program related to these activities may be appropriate to
provide funds for support of soil conservation and agricul-
tural land-retention programs. Such an arrangement would
result in those who benefit from the added burden on the
Nation's resource base paying the social cost associated
with that use.

• Information on the status of the Nation's land and
water resource is inadequate. No information on private in-
vestments and disinvestments in resources exists. Conse-
quently, rigorous analysis of the potential of the land and
water base is not possible. New programs providing for the
collection of land and water resource data are needed.

88

Footnotes

1. This potential was based on economic conditions prevailing in
1976. The potential will change with future economic conditions.
Since 1969, land planted to crops increased 54 million acres,
about one-third of which is estimated to have been converted
from pasture and timber uses and the rest from the existing crop-
land or cropland pasture base.

2. Soil loss from erosion is primarily determined by three factors: the
inherent potential for erosion in the land itself, in terms of the
force of erosive agents, soil characteristics, and topography; the
extent of crop canopies and residues reducing the inherent poten-
tial, and the influence of conservation practices, such as contour
farming and strip-cropping.

3. The Ogallala Formation is a thick deposit of sand that underlies
parts of Nebraska, Colorado, Kansas, Oklahoma, New Mexico,
and Texas. Although depletion problems appear to be most se-
vere in Texas and New Mexico, they have begun to appear in the
other states, particularly in dry years when withdrawals for irriga-
tion are heavy.

4. Fertility depletion is the removal of plant nutrients through crop-
ping, leaching, and other means; soil deterioration, on the other
hand, refers to the physical or chemical impairments of the soil
which are largely irreversible and which reduce the productive ca-
pacity of the soil regardless of the amount of fertilizer or other
productive agents applied to it. Simply put, fertility depletion oc-
curs when plant nutrients are withdrawn from the soil faster than
they are replaced, while soil deterioration actually reduces the ca-
pacity of a soil to serve as a medium of fertility.

United States Department of Agriculture. "Prime and Unique
Farmlands." Federal Register. Part 657, Vol. 43, No.
21. Soil Conservation Service, Washington, D.C. Janu-
ary 1978.

United States Department of Agriculture. "Resource Conser-
vation Act Appraisal 1980." Economics and Statistics
Service, Washington, D.C. Forthcoming.

United States Department of Agriculture, United States De-
partment of the Interior, and Environmental Protection
Agency. "Irrigation Water Use and Management." An
interagency task force report. Washington, D.C. June
1979.

Selected References

Lee, Linda. A Perspective on Cropland Availability. Econom-
ics and Statistics Service, United States Department of
Agriculture, Washington, D.C. Agricultural Economics
Report 406. 1978.

McMartin, Wallace, Virgil Whetzel and Paul R. Myers. "Re-
sources at Risk: Coal Development and Rural
America." Economics and Statistics Service, United
States Department of Agriculture, Washington D.C.
Forthcoming.

Timmons, John. "Agriculture's Natural Resource Base: De-
mand and Supply Interactions, Problems, and Reme-
dies." Speech presented at National Conference on Soil
Conservation Policies, Washington, D.C. November
1979.

United States Department of Agriculture, et. al. "Interagency
Task Force on Instream Flows, Water Policy Implemen-
tation." Final Summary Report. Washington, D.C. De-
cember 1979.

United States Department of Agriculture. Our Land and
Water Resources, Current and Prospective Supplies
and Uses. Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C.
Miscellaneous Publication 1290. May 1974.

89

Taxes are levied to raise revenue for public purposes and
as one means to stabilize and/or help direct the economy.
The way in which they are levied — fiscal policy — affects the
distribution of income and wealth in our society. The form
they take also affects the way our society and economy
function.

The Structure Project was not concerned with the first of
these, the purposes and levels of taxation and their effect
on the economy as a whole.

Rather, it focused on the impacts of taxation on the struc-
ture of agriculture. That is, for example, have our Federal
taxes had any influence on patterns of ownership and con-
trol of farm assets? On the distribution of wealth in the agri-
cultural sector? On the way that agricultural components are
organized and operated? If so, what influence?

The answers to those questions are closely related to the
efficient use and allocation of agricultural resources and to
the fair sharing of the bounty that flows from agricultural
production. Equitable distribution of the economic values
that are tied into agricultural production similarly is related to
assuring our society of adequate food supplies at fair and
relatively stable prices.

Tax Policies Bearing on Agricultural Structure

Several tax policies can influence investment behavior and
thereby have a bearing on agricultural structure. They are
strewn throughout our tax laws. Some were developed by
the Congress; some, by the Internal Revenue Service.
Some have been with us for a long time; others are recent.

The tax policies which impact on agriculture are general in
their design. That is, they were not designed to benefit one
size or type of farm over another or to influence structure in
any pre-determined direction. But, in fact, those individuals
or firms with considerable wealth or in high income-tax
brackets have the greatest incentive or financial ability to
utilize the tax rules to their benefit. Wealth and financial sta-
tus cannot be directly correlated with the categories of
farms around which much of this report is developed. Thus,
the benefits and impacts of tax provisions are not precisely
delineated by these farm groupings. Nevertheless, it is the
distortion in exploitation of tax laws that dictates differential
investment and financial-management behavior and ulti-
mately a structure and organization of production different
from what would have prevailed in the absence of the tax
provisions. Research results to date are consistent on one
point: the direction of change caused by tax policies has
been toward increased concentration of farm production and
wealth and, perhaps, more capital-intensive technology.

Cash Accounting/Capital Gains
In administering the Federal income-tax code, the Internal
Revenue Service decided early that farmers could use cash
accounting in reporting their incomes while also deducting
the costs of developing farmland, crop-producing perennials,
and herds of animals — expenses with a later pay-off. Later,
the Congress specified that the income from the sale of
some of the assets produced by these costs — a new gener-
ation of animals or a vineyard, for instance — could be
treated as long-term capital gains and taxed at a lower rate
than ordinary income would be.

Together those rules frequently allow costs to be separated
from the income associated with them. The costs are de-
ducted from ordinary income and can shelter income from
that year that would otherwise be taxed at high, progressive
rates. The future income associated with those costs is
treated as long-term capital gain, and only 40 percent of it is
taxed.

Consequently, the tax benefit produced by deducting the
development costs is greater than the long-term capital-
gains tax levied on the income generated later by the devel-
opment costs. When this occurs, the returns on investment
in farm assets are augmented by returns from the tax sys-
tem, so the total return on the investment is higher than it
would be without these provisions of the tax law.

The results are not always dramatic. Even so, the income-
tax rules applied to farming are liberal, and farm income fre-
quently is bolstered by them to some extent. Again, the im-
pacts are not evenly distributed.

Preferential Estate-Tax Rules

Agricultural investments also frequently qualify for preferen-
tial estate-tax rules.

One such rule allows the payment of estate taxes over a
long period of time. During this period, the unpaid estate
taxes (or a part of them) bear interest at only 4 percent.
This provision was enacted to give relief to estates having
little liquidity, because a substantial part of the estate was
tied up in business assets. This longstanding concept was
revised and liberalized in 1976.

Another preferential provision allows farmland to be valued
for estate tax purposes well below its market value, under
certain circumstances.

91

Miscellaneous Rules

Several miscellaneous tax rules bear on the structure of ag-
riculture. An entire panoply of rules differentiates between
the way corporations are taxed and the way individuals are
taxed. Another set of rules was designed to reduce the cost
of capital and encourage its flow. Yet another set imposes
taxes on wages to serve the broad social purpose of provid-
ing retirement benefits through Social Security and tempo-
rary unemployment assistance.

Consequences of Tax Policies

Those tax policies have had some influence on the structure
of agriculture. How much influence they have had — com-
pared to such other factors as interest rates, crop prices,
weather, technological change, and subsidy programs — is
uncertain.

Some observers believe that the force of tax policy has
been strong. Others think it has largely reinforced the direc-
tions in which other factors were propelling agriculture. This
dispute, which the project did not attempt to resolve, should
be kept in mind when reading the following discussion,
which outlines the direction in which tax policy has pushed
or pulled; precise estimates of the intensity of its effects are
simply not available.

With that qualification, the following conclusions are
justified:

• Tax law tends to perpetuate ownership of farm as-
sets, particularly land.

• The separation of ownership from management is a
corollary to continuity of ownership. Absentee ownership is
encouraged by the tax code to some degree, but the absent
owner may frequently participate in some management
decisions.

• Tax law seems to encourage capital structures with a
higher ratio of debt to assets and greater use of debt capital
relative to other resources than would otherwise exist.

• Tax law encourages the growth and expansion of ex-
isting farms. Some of this growth comes at the expense of
other farms; some, at the cost of denying entry to persons
who want to begin farming. Tax law thus has abetted the
trend toward fewer and larger farms, but with perhaps more
diverse ownership.

• We have imposed taxes on labor while allowing tax
breaks for capital investment. We do not know the eco-
nomic incidence of these taxes and benefits, however. As a
consequence, we do not in fact know precisely the eco-
nomic results caused by these taxes. But it can be said that
farmers have either a real or an apparent incentive to con-
sider the substitution of capital for labor.

• Some commodity prices are lower because the tax
system has stimulated the development of assets producing
those commodities, thus distorting relative prices in the
economy.

• Recent changes in tax policy encourage increased
use of corporations as a way of organizing agricultural
operations.

• Management practices may be chosen because they
allow the best use of tax rules. They may not be the best
crop and animal management. The overall impact could be
less efficient use of resources.

Those conclusions were drawn from previous studies and
special research undertaken for this project, the results of
which will be published separately. Particular aspects of tax
policy as it affects the structure of agriculture need to be
highlighted here, however.

Prices and Ownership of Farmland
Estate Tax Special-Use Valuation: In 1 976, the taxation of
estates was substantially revised. During the shaping of this
legislation, farmers argued that estate-tax values for farm-
land were unfairly being established by market value.

This value frequently did not reflect the apparent income-
generating capacity of the lands, but rather depended on
the money that could be made from potential future nonfarm
as well as farm purposes, simply because land values were
rising due to its scarcity. Farm interests argued that farm-
operator families could not realize these higher values on
which estates were taxed without selling the land or remov-
ing it from farming. If the land were to be kept in farming,
they said, its fair estate-tax value should be the capitalized
value of the annual cash flow, rather than market value.

The Congress accepted this argument despite the fact that
most purchases of farmland were by farmers, at market
value, for use as farms. It adopted what is called the spe-
cial-use valuation provision for qualifying farms.

Under this provision, the value of qualifying land may be re-
duced from its market value to its "use" value under a pre-
scribed formula. While no one estate is allowed to reduce
its tax value by more than $500,000, the use value of most
farms is still substantially below market value under this for-
mula. To qualify, the land must have been farmed by the
decedent or a member of the family for five of the eight
years before death, and the family for five of eight years
after death. The heir also must keep the land for 15 years
or lose at least a part of the tax benefits.

In addition, at least one-half of the estate's assets must be
qualified personal and real property and 25 percent must be
qualified real estate.

92

For income-tax purposes, profits on a subsequent sale of
the land are computed by using the special-use valuation
rather than the higher market value. Choosing special-use
valuation to calculate the amount in the estate thus pro-
duces lower tax liabilities without increasing the amount of
cash in hand.

Under these provisions, then, the estate-tax burden is low-
ered for those who own enough farmland to qualify. It is
lowered the most for those who have the largest estates.

The seeking of this lower tax burden increases the demand
for land. Since their eventual tax burden is lowered,1 people
who can qualify through land purchases can pay more for
the land than those who do not qualify or who do not expect
to die soon. While land purchases by taxpayers seeking
qualification under these provisions may not be a large part
of all purchases, they are sufficiently significant to increase
the price to all, whatever their reason for buying.

In addition to increasing the demand for land, these provi-
sions also directly and indirectly restrict the supply of land
offered for sale. Those who might otherwise sell land are
encouraged to reduce estate taxes by holding enough land
until death to qualify for special-use valuation. Such land is
thus removed from the potential market and does not return
to the market until long after death, since the heir must hold
the land for up to 15 years or lose some or all of the tax
preference. This provision indirectly keeps the land off the
market because, in reducing estate-tax liability, it reduces
the necessity to convert land and business assets to cash
for use in paying estate taxes.

Income Tax Provisions: Higher land prices are also encour-
aged by provisions of the income tax law — specifically,
those rules that allow the deduction of the costs of develop-
ing an asset (particularly crop-producing perennials and ani-
mals) and those that allow capital-gain tax rates to apply to
some assets produced by these development costs.

As noted earlier, these permissive tax rules may produce
either a very low or, perhaps, if there is sufficient other in-
come, even a negative tax rate on the profits from the farm
investment. Because the income and expenses may be re-
ported under cash-accounting rules, the taxpayer has sub-
stantial freedom in choosing the time when the tax liabilities,
if any, must be paid.

Also, when a farm generates both a high rate of apprecia-
tion (upon which taxes are deferred) and a low rate of ordi-
nary income (taxed that year), the high-bracket taxpayer
can pay substantially more for land than a low-bracket tax-
payer can. If the situation were otherwise — if farmland
earned a high current cash return with little appreciation —
the low-bracket taxpayer would be relatively competitive in
the land market.

In today's inflationary market, high appreciation rates, low
rates of cash return on farmland, the lack of taxes on un-
realized appreciation, and allowing interest payments to be
deducted when calculating taxable income, all combine into
a powerful inducement to buy and develop farm assets, par-
ticularly land.

Because tax benefits are proportionate to the tax rate on
the income sheltered through these rules, the greatest in-
ducement is offered to the wealthiest and highest-income
taxpayers. Consequently, many farm assets — but particu-
larly land, certain real estate improvements, and capital
gain-yielding assets — are very attractive to high-bracket tax-
payers who have income (either farm or nonfarm) that can
be sheltered from tax and can afford to carry land.

Some of those taxpayers are farmers by any definition. Oth-
ers, however, rely largely on nonfarm pursuits for their in-
come. The farm assets were purchased solely to reap these
tax benefits. Farm assets have thus become relatively more
valuable to these taxpayers, who have bid up the price for
all farmland.

Consequences of Higher Land Prices

The increase in land values produced by the new estate-tax
rules under the 1976 Act is a one-time increase, fully effec-
tive only when equilibrium is reached, with the oldest and
the highest-bracket potential estate-taxpayers owning the
land.

It should be kept in mind that the land market is a local
market, and any national trends at work would be felt differ-
ently in different locales. But, generally, landowners who
held land in 1977, when the transition to higher values com-
menced, have profited the most. Others who bought or who
perhaps can now buy — if the transition is not complete in an
area — will also benefit from the higher values so induced.

Those who bought for estate-tax purposes will not, however,
be able to realize these higher values through sale. Nor will
their heirs, unless the sale is postponed for a long period
after death, because sale will cause a loss of the estate-tax
benefits.

The farmer who seeks the estate tax benefit will tend to
hold land, as will the heirs. Not all buyers and sellers of
land will seek the estate tax benefits, however. Some of
them will simply be interested in the profits to be made from
buying and selling land — from speculation, in other words.

93

The higher values result in the transmission of larger es-
tates to heirs. Since the monetizing — converting to cash — of
these higher values by sale during the 15 years following
death comes only on pain of losing the tax benefits, the
heirs undoubtedly will be slow to sell. This reluctance to sell
will undoubtedly be reinforced by the higher taxable profits
that would be realized on sale of land valued under the spe-
cial-use provision.

These features tend to lock heirs into their land. If they want
to convert these higher values to cash, they must borrow on
the land and pledge it as security for a loan. Higher debt
structures are thus encouraged; greater financial instability
may flow from an unexpected downturn or weakening in
prices — as occurred in 1977 and 1978, for example. The
greater land values may also induce a feeling of security
that will argue against saving from annual returns.

Other segments of society will also deal with the higher val-
ues. For example, the local assessor may translate them
into higher assessed values and, thus, higher property
taxes. Higher property taxes will, of course, decrease the
farm's annual income.

While both the estate- and income-tax rules thus argue for
higher prices and then the separation of ownership from op-
eration, the benefits of special-use valuation will not be
available unless the decedent and an heir both participate in
management. It is thus likely to induce retired farmers or in-
active landlords to restructure their arrangements.

Certainly for the future, participation in farming decisions by
landowners will be encouraged. Historically, this kind of ar-
rangement has been carried on through crop-share tenant
arrangements. Yet, such tenant arrangements could bring li-
ability for the self-employment (Social Security) tax. This
burden may in part be offset by the eligibility for Social Se-
curity benefits that flows from the self-employment tax.

The resolution of this potential conflict between Social
Security and estate-tax rules argue for an increase in tenant
farming. If the alternative to crop-sharing tenancy is an em-
ployee-employer relation, the recordkeeping requirements
and labor-tax costs associated with hiring a manager as an
employee likely reinforce the push toward tenant farming
provided by the estate tax. It may be that the tax laws, on
balance, will encourage a tenant-landlord relationship
through sharecropping.

Growth and Continuity of the Firm
Incentives to Incorporate: The tax-rate schedules for corpo-
rations and noncorporations differ substantially. Beginning
rates are lower for individuals, but they soon rise to rates
that are higher than those applicable to corporations.

When income reaches $25,000 or so, the corporate taxes
on income are likely to be less than taxes paid by a sole
proprietor on the same amount of income. Even better, if
some income first earned by a corporation is paid out as
salary to an employee-shareholder, the income is split be-
tween the corporate schedule and the individual schedule
and lower rates are produced on both schedules. As income
rises, the size of the tax benefit from incorporating
increases.

In addition to the benefit of lower rates, a corporation may
deduct the cost of providing substantial, tax-free fringe ben-
efits to its shareholder-employees. These expenses fre-
quently could not be deducted (or deducted only in lower
amounts) if incurred directly by an individual.

Corporations also facilitate the transfer of property to others
in the family. The transfer of fractional interests in farm as-
sets is typically a relatively complex matter. In contrast, if
the assets are first transferred to a corporation, gifts of par-
tial interests can easily be accomplished by giving away a
part of the stock in the corporation.

Not only do corporations thus facilitate transfers, but there
may also be a tax bonus to be gained. If the stock does not
carry control of the corporation, it can frequently be valued
at less than the value of its proportionate interest in the cor-
poration's assets. Some observers believe that further dis-
counts in value may be taken if the stock has no market,
and stock in small farming corporations likely will not have a
market.

There are some costs, including tax costs, that are higher
for corporations. The Social Security tax on an employee's
salary is higher than the self-employment tax. In some
cases, what had been profits for a sole proprietor before in-
corporation will become wages paid to an employee-share-
holder and therefore subject perhaps to unemployment
taxes and even workers-compensation contributions.

Even so, under the present tax structure, corporations will
frequently incur less immediate tax costs than an individual.

Having encouraged the transfer of assets to corporations
through lower corporate tax rates, the tax law then raises a
new set of problems.

94

First, putting the corporation's earnings into the
shareholder's hands can usually be done only at a higher
tax price — an individual income tax paid by the shareholder
on the dividends. This tax on the shareholder can be
avoided by not paying out the earnings, by allowing them to
accumulate at the corporate level. While accumulation at
the corporate level is encouraged, that route is not without
obstacles either. When accumulations of earnings inside the
corporation reach $150,000, the possibility of an additional
corporate tax on further accumulations arises, unless the
additional accumulation serves the reasonable needs of the
business.

While the "reasonable needs of the business" is not an eas-
ily defined concept, it does include the expansion and
growth of the firm through asset purchases. The firm thus is
induced to grow, to prevent the disagreeable alternatives of
either the accumulated-earnings tax or the tax on dividends.

While the tax rules do not require that the growth be in the
same business that produced the earnings, few small entre-
prenuers will be inclined to take on responsibilities in an un-
familiar business. The conclusion that expansion will nor-
mally be in the farm business seems warranted.

Death may offer a good chance to remove some of the
earnings from the corporation at bargain tax rates, through
a redemption of shares that will be treated as a sale of the
stock. A sale may not have any tax consequence, because
the basis of the stock for computing gain will be equal to its
value. Since this opportunity is literally a one-time matter,
the assumption at the corporate level of new financial bur-
dens at a shareholder's death, to provide funds for the re-
demption, may be encouraged. These new burdens may
weaken the firm significantly — at a time when there also
might be a shift in management to add to uncertainties.

Both lifetime and death transfers, then, are facilitated by in-
corporation. There is, in turn, more likelihood that the firm
will be continued. Firm continuity may mean that few assets
will be liquidated. The supply of farmland — for farming or to
expand an existing operation, especially — may be reduced.
Also, if there is no management heir, continuity of the busi-
ness may mean that ownership and operation are more
likely to be separated. Ownership will be maintained to pre-
vent a loss of estate-tax benefits that depend on ownership,
but management will pass to others.

In short, absentee ownership may be encouraged.

The rules on incorporating a farm are no different from the
rules for incorporating other businesses. They do have
some different impacts, however, because of farming's
uniqueness as a business and especially because the key
asset in farming is frequently land. The supply of land is lim-

" Farmers are the largest single group of taxpayers in this
class [of small and medium-sized proprietary businesses].
The combined effects of inflation and tax policy . . . [by] pro-
moting specialization and mechanization, . . . have led to a
form of monoculture, associated with the export of unpro-
cessed agricultural products. This is creating a pattern of
one-crop, export-based agricultural activity in the corn, soy-
bean, wheat and sorghum regions that is very similar to the
type of monocultural dependence formerly associated with
colonialism. In an important and sobering sense, the grain
belt of America is acquiring the characteristics of a colony. "
Philip M. Raup, at the Washington meeting.

ited, and thus generally applied rules have an impact in ag-
riculture that would not be felt in sectors where basic re-
sources are theoretically far less limited.

Installment Payment of Estate Tax: The 1 976 Tax Reform
Act also allowed qualifying businesses, including farms, to
pay estate taxes over a period beginning 5 years and 9
months after death and ending 14 years and 9 months after
death. Estate taxes on $1 million of the estate's value qual-
ify for the very low interest rate of 4 percent during this pe-
riod of extended payment. If the land or business were dis-
posed of during this time, the deferred payments would be
accelerated.

This provision may encourage the purchase of business as-
sets that qualify, and farm property will likely be among
such assets. The provision is not, however, tied to a particu-
lar asset, such as land, and it should not distort land values.
Seemingly, it will encourage the transmission and thus the
continuity of qualifying businesses. Also, sales of farm as-
sets before death are discouraged by this provision since, to
qualify, the estate must be comprised of at least 65 percent
qualifying business assets.

At the very least, in times of high interest rates the lower
interest rate on the tax produced by $1 million worth of es-
tate may provide so large a benefit that some farms will be
held intact and not sold by heirs for the sole purpose of
gaining this benefit.

These heirs are free to change the relationship to the as-
sets— for example, from owner-operators to sharecropping
landlords — so long as the assets remain in the heirs' hands.
Ownership by heirs is encouraged, but a particular form of
ownership is not. The heirs are free to participate or not
participate in later business decisions without losing this es-
tate-tax benefit.

95

Taxes on Labor and
Incentives to Substitute Capital

Taxes on Labor: The Federal tax system imposes two taxes
on wages below certain maximum amounts. The Social Se-
curity tax is imposed equally on the employer and the em-
ployee; it is also imposed on the business profits of the sole
proprietor. Contributions for unemployment insurance are
exacted from an employer who, in either the current or pre-
vious year, employs 1 0 or more workers at any time in each
of 20 or more weeks in the year, or who, in either year,
pays $20,000 in wages in any one quarter. Once either of
these thresholds is reached, the minimum wages paid in
October will produce an unexpected tax on wages paid ear-
lier in the year.

Frequently, an employer is also required to make contribu-
tions to workers' compensation funds. Qualifying criteria and
the level of contributions vary from State to State, but they
are often significant.

These levies not only impose financial burdens, they also
sometimes require the keeping of records that otherwise
would not be maintained. Records for Social Security proba-
bly need not show great detail. But, for a taxpayer who may
be paying wages close to the minimum requirements under
the unemployment system, records must be very detailed, to
show whether the thresholds were crossed.

For many farmers, the cost of the tax may not be thought to
be as onerous as the cost of maintaining records necessary
to demonstrate whether the tax is due. Since the record-
keeping system must be in place for those who may be
close to the minimum requirements, it could discourage the
use of labor beyond amounts that quite clearly will not result
in a liability for tax.

If the record-keeping system were implemented, then the
operator close to qualifying might monitor the use of labor
very closely, to prevent qualifying for the tax. Since States
have an initial fixed charge for some of these taxes, the
marginal cost would be highest to those who barely exceed
one of the qualifying minimums.

Consequently, the use of small amounts of additional labor
may be discouraged among those already near the qualify-
ing point. For those at the edge, the tax can also create un-
certainty about total labor costs.

A farmer in that position might deal with the uncertainty by
buying more or larger equipment and substituting it for labor
and, thus, move further below the qualifying point. By doing
so, the need for records and the uncertainty of knowing
whether the tax would arise could be reduced. In contrast, if
liability for the taxes were an accepted matter, the marginal
costs and complications of the recordkeeping can be re-
duced by spreading these costs over large increments of
labor.

In addition, for those who clearly must pay the tax, costs will
be higher unless wages are depressed by an amount equal
to these taxes. If wages are reduced by amounts equal to
the taxes, then the employee, in effect, pays the taxes
rather than the employer.

If wages are not so reduced, whatever part of the tax can-
not be passed through to a buyer is paid by the farmer.
Therefore, the farmer has an incentive to consider substitut-
ing capital for labor that has been made more expensive by
these taxes.

Such a substitution is far from a certainty, however. Incre-
ments of capital may be so large in comparison to the addi-
tional labor cost that little or no substitution occurs, at least
until a large amount of new capital equipment can be
added. Whether, in reality, conditions for substitution occur
is simply not known, nor do we know the real incidence of
these taxes.

Capital-Substitution Incentives: Generally speaking, over the
past quarter-century or so, Federal tax policy has moved in
the direction of reducing the cost of capital investment. Ac-
celerated-depreciation rules and the investment tax credit
have been more notable devices.

The credit does not reduce costs, however, unless there is
a tax liability against which it may be applied. Accelerated
depreciation means the most to those who can use it to off-
set income that would otherwise be hit by the highest tax
rates.

Thus, accelerated depreciation and other similar deductions
likely confer the greatest benefits on established operators
or high-income beginning farmers. They provide few bene-
fits for those who have small incomes and little capital.
These rules may thus tend to favor expansionists over
those with few nonfarm resources seeking to enter farming.

For those who benefit from these tax provisions, the cost of
capital will be reduced. Except in times of equipment short-
ages, the benefits likely are not captured by the seller of the
equipment but rather by the purchaser.

96

Whether that benefit increases the buyer's cash return is
questionable. Some economists have theorized that returns
to farmland are the residual returns in agriculture. If this the-
ory is partially or wholly valid, even these benefits on ma-
chinery and equipment may find their way into the land-
owner's hands. If so, these provisions, too, have helped
maintain an upward pressure on land prices.

Prices of Products

Under regulations issued very early in the history of the in-
come-tax law, the costs of developing trees and vines that
produce fruits and nuts have been deductible as they were
incurred. In reality, these costs are capital costs; in most
pursuits, the tax rules generally do not allow the deduction
of capital costs from current income. The proceeds on sub-
sequent sale of the assets produced by these costs often
are taxed as long-term capital gains.

Since the development deductions reduce ordinary income
that frequently would bear very high tax rate, and since the
deduction might produce capital gain, development of these
crops is an ideal tax shelter. The tax benefits flowing from
the deductions are much larger and are realized earlier than
the tax liability incurred upon the sale of the improved
property.

The overall etfect is that of a negative tax on these develop-
ments. In other words, the financial returns from these costs
are enhanced, rather than diminished, by the tax system.

This negative tax effect exists only because the taxpayer
has other income, either from labor or other investments
that, without the tax shelter, would be subject to ordinary in-
come tax.

This subsidy through the tax code could be syndicated and
sold, so a number of firms began to offer high-income tax-
payers a chance to "buy into" development schemes which
converted current income into assets in the forms of live-
stock herds, orchards and vineyards. Because of concern
that production would be overstimulated by these invest-
ment syndicates, citrus and almond growers persuaded the
Congress to repeal those rules for their commodities. The
shelter continued unabated for other perennials.

The shortrun results of requiring development costs for cit-
rus and almond growing to be treated as capital costs,
rather than expenses deductible from current income, were
slower increases in production and hence increased prices
of these products.

Where the tax-shelter provisions remained, production in-
creased and the prices for the commodities decreased. In
the long run, however, supplies of crops in which develop-
ment costs had to be capitalized also increased, in re-

sponse to those temporarily high product prices, and these
larger supplies eventually resulted in lower prices for the
crops.

While the structural implications of those lower product
prices are not clear, the use of that provision does raise sig-
nificant questions about efficiencies and resource
allocation — among operations and geographically — and thus
it undoubtedly affects structure. Moreover, those taxpayers
in a position to exploit these tax provisions can outbid small
farmers or would-be beginning farmers who do not have
large incomes or wealth from other sources.

Changes in Management Practice
Several features of the tax system affect management prac-
tices and therefore bear on efficiency and allocation of re-
sources. A few examples will illustrate these developments.

Until recent years there was little interest in fattening cattle
in large feedlots that were not integrated with a farm or
farms producing the crops to feed them. In the mid-1 960's,
several promoters found that, by placing cattle in feedlots,
they could construct and syndicate tax shelters that had the
effect of deferring for one year the investors' taxes on in-
come generated in other pursuits. The maximum deferral at
the least expense was generated by waiting until late in the
year to create the tax-sheltering entity and also having it en-
gage in its transactions near the year's end.

Some observers believe that already volatile livestock mar-
kets were rendered more volatile by heavy tax-shelter buy-
ing near the end of the year. This heavy year-end buying
was frequently followed by heavy selling in the new year, or
so the argument runs.

Two consequences for agriculture were attributed to these
manuevers: (1) the fattening of cattle in feedlots was en-
couraged, and (2) volatility in commodity markets was in-
creased. Whether production or marketing efficiency was in-
creased by these developments has not been determined.

Another example of tax rules' influencing management prac-
tices is found in the swine industry. Without the tax policy
presently in effect, hog producers typically would stock their
breeding herd with sows to be used for a number of farrow-
ings before being sold. Sows usually produce larger litters
and provide better care for the offspring after the first litter.
The use of mature sows, however, increases the proportion
of total hog sales from animals under one year of age.

97

The tax code, however, discourages this practice. It allows
the sales proceeds from breeding stock held more than one
year to be reported as a long-term capital gain rather than
as ordinary income, the way proceeds from the sales of
other hogs must be reported. Therefore, there is a tax in-
centive to farrow the gilt (a sow being bred for the first
time), and sell it after a year, replacing it with another gilt.
The number of gilts "moved through" thus can be econom-
ically quadrupled, and the amount of income subject to capi-
tal-gains rates (rather than higher ordinary-income rates) in-
creased. The practice of using gilts for a single litter, despite
the inferior farrowing and mothering qualities, has spread
with the sole purpose of reporting a higher proportion of to-
tal hog sales as capital gain — a dependable annual tax
break.

Under cash-accounting rules, income is taxed only when
cash or its equivalent is received; expenses are deducted
only when they are paid. Under these rules, then, taxes can
be deferred by prepaying expenses and deferring the re-
ceipt of cash from sales of commodities. In combination,
these techniques may offer the opportunity to defer a con-
siderable amount of taxes.

Timing of cash receipts and expenses, therefore, sometimes
depends more on the tax consequences than on commod-
ity-price trends and prospects.

Such deferral has another dimension. If next year's ex-
penses are paid prematurely, or if this year's income is de-
ferred to next year, income and the potential tax bill in the
following year will be increased dramatically unless these
practices are adopted again.

Given the progressive structure of our tax rates, there is a
significant incentive to engage in these practices on a recur-
ring basis. Each year, the same alternatives are presented:
pay up for last year's tax-deferring practices or take a large
bite out of taxable income by pushing some of last year's
tax forward through deferrals of more income and anticipa-
tion of more expenses. Such growing deferrals and anticipa-
tions ultimately are reconciliable only by expanding
operations.

By continually engaging in such tactics, tax liability (fre-
quently a growing one) is deferred into the future until the
operation ceases. Then all of the previous years' deferrals
can come to rest in a single year. Sometimes this liability is
taken head on, but, frequently, the farmer may realize that
absolution can be gained after death.

Death absolves these past tax liabilities by allowing the tax
basis for all assets to be moved to market value, in the
hands of the decedent's estate or heirs. This fair-market-
value basis will likely reduce or eliminate the tax on prior
years' crops. There is thus a further encouragement to
maintain ownership of the farm assets until death.

Summary

Research has shown that Federal tax policies impact on the
structure of agriculture in several important ways:

• Higher land prices, reduced land sales, and in-
creased concentration of land ownership, all of which con-
tribute to increased tenant farming and to concentration of
wealth (land) in the hands of those who did not earn it.

• Strong incentives for larger farm operations to grow,
substitute capital for labor, and use debt heavily — all con-
tributing to concentration in farm ownership and production
and to more capital-intensive technology.

• Artificial incentives to high-income taxpayers to invest
in certain farming activities solely to be able to shift income
taxable at current income rates into capital gains taxable at
lower rates. This distorts the use of land and other re-
sources and thus probably reduces overall economic effi-
ciency in the farm sector.

The chief tax provisions which permit and encourage the
above developments include estate-tax provisions which
have been liberalized to benefit present landowners, cash-
accounting provisions, and capital-gains rules. The first two
of these provisions were provided to meet what appeared to
be legitimate and unique needs of farmers but without re-
gard for their longer-term consequences.

It is important to note that the extensive ability to exploit the
tax provisions and thus generate the structural conse-
quences noted above depends not only on the tax bracket
of the taxpayer, but also on the presence of persistent infla-
tion, particularly inflation in land values. Were land values
not rising, much of the incentive to exploit the tax laws — es-
pecially to shift current incomes to capital gains — would be
reduced. Thus, this analysis of tax-policy effects reinforces
our understanding of the debilitating impacts of inflation and
the importance of making sure that our public farm policies
do not unnecessarily contribute to land-price inflation.

Footnote

1 . Arguably, the tax burden faced by the heirs will be higher be-
cause the basis from which profit is computed on a sale of the
land by the heirs will be the special-use valuation, rather than the
higher fair market value. As a consequence, the taxable gain on a
sale by the heirs is higher by the amount that the taxable estate
is reduced. If special-use valuation is elected, however, the heirs
usually must defer selling until 15 years after death. Such a re-
mote tax liability, especially in periods of high inflation rates, prob-
ably would not be given much consideration in determining the
price to pay for land while the decedent still lives.

98

Selected References

Barkley, Paul W. "Some Possible Effects of Economic Se-
curity Taxes on the Structure of Agriculture in the
United States." Economics and Statistics Service,
United States Department of Agriculture, Washington,
D.C. Forthcoming.

Boehlje, Michael. "An Analysis of the Implications of Se-
lected Income and Estate Tax Provisions on the Struc-
ture of Agriculture." Economics and Statistics Service,
United States Department of Agriculture. Forthcoming.

Boehlje, Michael and Charles Davenport. "The Effect of Tax
Policy on the Structure of Agriculture." Economics and
Statistics Service, United States Department of Agricul-
ture, Washington, D.C. Forthcoming.

Boehlje, Michael and Ken Krause. "Economic and Federal
Tax Factors Affecting the Choice of a Legal Farm Busi-
ness Organization." Economics and Statistics Service,
United States Department of Agriculture, Washington,
D.C. Forthcoming.

Burt, Lawrence A. and M.E. Wirth. "The Economic Conse-
quences of Alternative Tax Reporting Methods on the
Financial Growth of Pacific Northwest Farms." Econom-
ics and Statistics Service, United States Department of
Agriculture, Washington, D.C. Forthcoming.

Carman, Hoy F. "The Estimated Impact of Orchard Devel-
opment, Cost Capitalization Provisions on California Or-
chard Development." Economics and Statistics Service,
United States Department of Agriculture, Washington,
D.C. Forthcoming.

Collins, Robert A. "An Analysis of the Impact of Federal In-
come Tax Laws on the Willingness of Various Classes
of Landowners to Engage in Soil and Water Conserva-
tion Projects." Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C.
Forthcoming.

Harl, Neil. "Influencing the Structure of Agriculture Through
Taxation." Paper presented at the Federal Taxation and
the Structure of Agriculture Seminar on October 30,
1980. Structure of Agriculture Project, Office of the Sec-
retary, United States Department of Agriculture, Wash-
ington, D.C. Forthcoming.

Hjorth, Roland L. "The Effect of the Federal Tax Structure
Upon the Ability of Farmers to Purchase Agricultural
Land." Paper presented at the Federal Taxation and
the Structure of Agriculture Seminar on October 30,
1980. Structure of Agriculture Project, Office of the Sec-
retary, Washington, D.C. Forthcoming.

Olsen, Alfred J. "Taxes and Agriculture: Some Observa-
tions." Paper presented at the Federal Taxation and the
Structure of Agriculture Seminar on October 30, 1980.
Structure of Agriculture Project, Office of the Secretary,
Washington, D.C. Forthcoming.

Ridenour, Philip. "Federal Income Taxation and the Trend
Toward Family Farm Corporations." Paper presented at
the Federal Taxation and the Structure of Agriculture
Seminar on October 30, 1980. Structure of Agriculture
Project, Office of the Secretary, Washington, D.C.
Forthcoming.

Wile, Phillip H. "Federal Tax Laws and the Structure of Agri-
cultural Operations." Paper presented at the Federal
Taxation and Structure of Agriculture Seminar on Octo-
ber 30, 1980. Structure of Agriculture Project, Office of
the Secretary, Washington, D.C. Forthcoming.

99

CHAPTER 7 COMMODITY POLICY

One of the oldest forms of major Federal public assistance
to individuals in the history of this Republic is the 48-year-
old collection now commonly known as the "farm
programs."

Direct action to control commodity production and compen-
sate growers was the first of the major income-redistribution
statutes of the New Deal. Every four years or so since, the
Congress and the Executive Branch have repeated the ar-
duous ritual of fine-tuning the basic legislation and then
reauthorizing the programs for another period.

These so-called "farm bills" are, by and large, the embodi-
ment of what constitutes this Nation's farm policy. In recent
times, modifying that legislation — by authorizing statute or
appropriations-bill language — to meet one "crisis" or an-
other has become an annual or even semi-annual event.

The content of that policy has generally been bipartisan, de-
termined more by the economic conditions in the farm sec-
tor at the time than by the ideology embraced by either po-
litical party.

That policy has always tended to follow events and changes
rather than anticipate and lead them — that is, the approach
to developing policy has largely been reactive, dealing with
one emergency after another.

Times of a studied, deliberate approach to the design of a
forward-looking farm policy, rather than adjustment of the
previous statute, have been rare. Careful attention to more
than the immediate national effects of the programs used to
implement policy has likewise been scarce.

There is little doubt that some of the programs that have re-
sulted from this ad hoc, crisis-oriented policymaking have
subsequently exacerbated problems of farmers or, over
time, produced unintended and unwanted consequences for
the farm sector as a whole.

Even when these side-effects have been recognized, it has
been next to impossible to secure any significant program
modifications because, as with most public-policy programs,
once they are enacted, a constituency is formed: the benefi-
ciaries of the programs, those who speak for them, and,
more frequently than we like to admit, a captive
bureaucracy.

The burden of change is always on the "reformers" —
whether an organization outside the official institutions or an
Executive Branch faced with burgeoning budget outlays, ris-
ing inflation, and similarly broad problems, in the name of
which little political leverage is available to achieve specific
program reforms.

Today we recognize that agriculture has passed a major
stage in its evolution and that the present farm structure is
far different from that existing when the basic structure of
the programs was devised. But, even so, there is little
sense of urgency expressed within the institutions most di-
rectly involved for a major reexamination of the programs
and careful, creative thought as to what might be most ap-
propriate for the future.

However, such a sense of compelling need for that evalua-
tion and thought was clearly, deeply expressed within the
farm community and that part of the general public who par-
ticipated in the Structure of Agriculture Project meetings or
mailed their opinions to the Secretary.

The message of grass-roots opinion and the findings of re-
cent research agree: those of the old approaches that are
based on outdated assumptions and a structure of agricul-
ture that has since changed markedly are going to prove
grossly inadequate for the future.

Commodity Programs and Farm Incomes

The commodity programs arose out of a need to ameliorate
the low incomes of farmers, to bring their incomes closer to
the rest of the population.

Farm incomes were persistently low due, in large part, to
the tremendous force of technology on agricultural produc-
tion. With this technology and our land base, farmers simply
produced more than the domestic and foreign markets could
absorb at prices that would give incomes sufficient to allow
farmers to share in the rising standard of living the rest of
the population was attaining. The problem proved to be
chronic, and incomes remained depressed over the years.

The initial goal of farm policies was to transfer income from
other taxpayers and consumers to farmers who were disad-
vantaged by the technological advances that were, in part,
supported with public funds and programs and benefitted
the whole of society by improving the quantity and quality of
the food supply.

The major program instrument used in pursuit of this goal
was artificial commodity pricing — supporting prices above
those that would otherwise prevail in the market. This was
done through the nonrecourse loan program, which, in es-
sence, established a floor under the market prices for
grains, cotton, tobacco, and peanuts.

101

Growers borrowed money from the Government with the
crop as collateral. The amount loaned per unit was based
on a notion of a "fair" price for the commodity.

If the market price fell to or below the loan rate, and the
farmer decided to forfeit the crop rather than sell it at the
market price, then the Government through the Commodity
Credit Corporation (a quasi-governmental corporation estab-
lished in 1933 solely for this purpose) took possession of
the crop under loan (accepting it as full collateral) — serving
as a market of last resort and effectively setting the mini-
mum price paid to farmers.

The CCC stocks became excessive, requiring growing Gov-
ernment outlays. Farmers were then required to reduce the
acreage planted to the surplus crops in an attempt to bring
commodity supplies into closer accord with projected market
requirements. But advancing technology and greater use of
relatively cheap fertilizers and chemicals kept increasing
yields per acre, so surpluses and high government costs
persisted. This condition was viewed as a chronic, not a
temporary problem.

Those basic programs have lasted over the years with
many minor, but few major alterations. By the late 1960's,
the price-support loan rates were consistently higher than
world-market price levels; large stocks accumulated which
could only be sold into those markets at subsidized prices.

In 1963, direct income-support payments were adopted so
that price supports could be reduced to world-market levels
without reducing the total income support to farmers. That
separation of price support and income support was a key
to our subsequent competitiveness in world grain markets
and is continued in the program structure today.

Eligible producers receive the difference between a Govern-
ment-calculated target price and the market price if the mar-
ket price is lower. Those deficiency-payment provisions
were introduced in 1 973 but were not triggered for three
seasons.

Commodity Program Impacts

In the light of economic conditions in farming having
changed far more than the basic structure of those pro-
grams, it is important to evaluate their efficacy and their
roles both in relative isolation and as an influence on those
changes.

Whom did these income-enhancing programs benefit? Did
they create conditions that propelled the farm sector along
the paths that developed? Have the programs been equita-
ble, helping the small and large farms alike? How have
these programs influenced the structural characteristics of
the farm sector?

While the price and income programs succeeded to some
extent in raising commodity prices for the farm sector,
professionals and lay people alike recognize that this was
not their only impact.

They have almost certainly fostered the continued growth in
the size of farm firms, caused the program benefits to be
capitalized into land values, at times promoted production
beyond market needs or the producers' best interests, and
sometimes fostered a less-than-efficient allocation of
resources.

Distribution of Benefits

The amount of benefit from the programs to each farmer
has always been closely tied, not to individual needs, but to
the volume of production (in bushels, bales, and pounds) on
a farm. The rates for price supports and, after 1963, for the
income-support payments are based on the assumption that
a "national average farmer" is a valid concept. The pro-
grams have never fully reflected the wide diversity in farm
sizes and crop mixes (on or among farms).

The inherent tendency of the programs to skew the distribu-
tion of benefits to the larger producers has been well-known
and documented for 20 years. But the full extent of the dis-
parity is made strikingly obvious by a soon-to-be-published
examination of the distribution of the direct payments under
the 1978 programs, which included acreage set-asides.

Thirty percent of the farmers (739,105) participated in the
wheat, feed grains, rice and cotton commodity programs in
1978. Based on numbers alone, participation is proportion-
ally largest for the smaller farms. But, because payments
(deficiency, disaster, and land-diversion payments) are dis-
bursed according to the amount of production on each farm,
most of the total payments went to the largest farmers:

• Ninety percent of the participating farmers had a Nor-
mal Cropland Acreage (NCA) of less than 500 acres. They
received only 54 percent of the payments.

• The smallest 30 percent of the farmers received less
than four percent of the payments.

• The larger farmers with an NCA of 500 or more
acres — 1 0 percent of all farmers who participated — received
46 percent of the payments.

The average size of payment ranged from $365 for farmers
with an NCA of 70 acres or less to $36,000 for farmers with
2,500 acres or more.

102

Eighty-five percent of the payments went to farmers in the
North Central and Plains regions: the feed grains and wheat
areas. The concentration of payments among a few, larger
farmers was highest in the South: the cotton and rice areas.

But, what about those farmers who did not participate in the
programs?

The farm size of participating corn and wheat growers is
nearly double that of nonparticipants. Simply put, partici-
pants in commodity programs are the larger farmers and, of
the participants, the largest farmers receive most of what-
ever benefits the programs offer.

The commodity programs have succeeded to some extent
in supporting prices received by all farmers — both partici-
pants and nonparticipants. But the evidence clearly sug-
gests the programs have distributed income to the largest
farmers, not necessarily on the basis of need.

An obvious question is: If the programs have been of most
benefit to the largest farmers, why was this program struc-
ture perpetuated?

The answer is, in part, simple: The programs would not
have worked without the participation of the large produc-
ers. Since the large farmers produce the bulk of the com-
modities, they had to be enticed into the program — enticed
to set-aside land, divert acres, et cetera — so that production
would be reduced enough to appreciably increase market
prices for all farmers.

Commodity programs, to be effective, must attract those
who most influence national production totals. But, in so
doing, they inequitably distribute the benefits, presenting a
dilemma in policymaking that has never been effectively
resolved.

The relevance of this for the structure of the farm sector is
that the larger producers received greater payments and are
likely the ones who can use the tax and other programs in
combination to the greatest advantage. This, of course,
would increase their competitive edge in bidding for, and
being able to make payments on, additional land and ma-
chinery. Thus, the way payments were distributed by the
Government perhaps contributed to the consolidation of
smaller farms into fewer and larger farms.

Payment Limitations

Primarily, attempts to rectify the imbalance in volume-based
program benefits have centered on some form of payment
limitation as one means to prevent the big farmers from re-
ceiving hugh amounts. Such a limit was finally adopted in
1970. It and successive limits, some of which have been
undercut by less-publicized exemptions in the following
year, have never proved effective.

"Consumers are willing to pay the price for guaranteeing a
safe, healthy food supply. We are not willing to continue to
pay for the special protections given to agribusiness to pre-
vent them from having to compete in the free-enterprise
system. . . . From a consumer's standpoint, it's always been
our position that the broadest number of efficient producers
serves the consumers best, and that all segments of the ag-
ricultural community should be maintained to the extent that
that's possible. . . . I think Government always had a valua-
ble role to play in minimizing risk-taking for certain ventures
as a public policy. I think encouraging an adequate supply
of food for the country has to be one of our highest orders. "
Harry Snyder of San Francisco, Calif., in Fresno.

The payment limit in 1978 was $40,000 per individual (ex-
cluding disaster payments). The impact was negligible. Only
1,184 farmers — 0.2 percent of all participants — were directly
affected, and the total Treasury costs were reduced only
1.33 percent. Without the limit, those 1,184 farmers would
have each received an average of $20,000 more, for a total
of $24 million.

The programs make no provision for taking the amount de-
nied the larger farmers and redistributing it to those farmers
needing more assistance.

Nationally, two-thirds of the farmers affected by the limit had
a Normal Crop Acreage of more than 2,500 acres — 90 per-
cent had at least 2,000 acres. Farmers with less than 1 ,000
acres were virtually unaffected by the payment limitation.

The effects varied among regions. In the South, nearly 90
percent of the affected farmers had more than 2,500 acres,
while in the Northeast only 50 percent did. Except for those
in the South, producers with planted acreage under 1 ,000
acres were unaffected.

The payment-limit concept undeniably prevents multimillion-
dollar payments being made to a handful of producers. Pub-
licity about such large payments earlier raised the ire of ur-
ban legislators. But, to ensure large participation in a vol-
ume-oriented program, the limits could not have been much
lower than they were. Therefore, the limit is essentially a
political compromise, having no real substantive effect on
the distribution of program benefits or the workings of the
agricultural economy.

103

Other means of shifting payments from the larger to the
smaller producers are advanced from time to time, and the
testimony in the meetings for this project included many of
these. For example, one is to graduate payments on the ba-
sis of size of farm sales. This approach would limit pay-
ments— per unit of production — by farm size. That is, a
small farm would receive a "high" target price, with the rate
gradually declining as farm sales size increased. Some
other graduation schemes were advanced, under which the
payment limit would be lowered as dollar sales rose and
farms above a certain amount of sales would be ineligible
for payments altogether.

While such approaches have appeal, they would be difficult
to administer. They might also provide incentives for pro-
ducers to "farm the programs" — to limit farm size on paper
to be eligible for higher benefits. A graduated payment ap-
proach could also distort the efficient allocation of resources
if the wrong price signals were given to small producers.

More importantly, however, income-increasing programs are
probably no longer generally needed for the large farms.
Their problems relate more to cash-flow and the stability of
receipts and expenses — the stability rather than the level of
incomes.

Any remaining need for income-supplement assistance rests
with the small and medium farms, those with sales between
$5,000 and $200,000.

The very smallest units, though defined as farms by the
Census, are likely overwhelmingly rural farm residences,
with the occupants' basic incomes derived off the farm.

Regardless of categories of relative need, recent research
and analysis, to be finalized and published later, strongly
suggests that the use of commodity programs is an ineffec-
tive and inefficient way to solve income problems. Other,
more direct approaches would undoubtedly prove to be a
more efficient, more equitable expenditure of tax dollars. In-
stead, the case for farm programs rests upon the fact that
farmers need protection against sharp declines in prices
and incomes. That is, income protection (stability) instead of
income enhancement should be the appropriate role of any
such programs today. The existing programs, with some im-
portant exceptions, however, have evolved in the direction
of stability.

Capitalization of Benefits

Another problem generated by the commodity programs,
also long known and long left unresolved, is that the bene-
fits tend to get capitalized, or bid into the price of land.

Since the benefits are proportional to the amount of produc-
tion, they tend to be capitalized into the value of the most
limiting resource, land.

Individual farmers already have incentives to expand farm
size to increase total income. The capitalization aspects of
commodity programs help them realize this objective.

Program benefits that lead to higher land values accrue to
the owners of farmland. But, landowners are no longer syn-
onymous with farm operators. This is of crucial importance
because renters cultivate over one-half the acreage of
crops. Generally, the major commercial growers rent just
under half of the acreage they farm. The average acreage
of full owners — who rent no extra land — is about one-third
the national average; that of places run by hired managers,
roughly 10 times the national average.

Thirty-five percent of the acres worked by participants in the
commodity programs are rented acres. Therefore, a large
proportion of the program benefits that become bid into
higher land prices and then higher rents simply increases
the wealth of landlords who are not farming their land.
These benefits were originally intended for farm operators,
not necessarily nonfarming landowners.

Location of Production and Misuse of Resources
Commodity programs have transferred to the society as a
whole a substantial portion of the risks that farmers face in
producing our food, feed, and fiber. Putting aside for the
moment the benefits that society has received in return,
such a reduction in risks may have shifted the use of re-
sources in ways that were unintended.

For example, the disaster payments reduced the risk of
farming in dryland areas, perhaps encouraging the cropping
of land unsuited for that purpose and sometimes even the
production of a crop (wheat), the supply of which was al-
ready far out of balance with demand. Now, in some of
those areas, the reservoirs of underground water
resources — for anyone's use — have been seriously, perhaps
irreversibly depleted, or the soils need and will need ex-
traordinary conservation measures because of the land's
use for crops instead of pasture.

Quite simply, when programs guarantee farmers that they
will recoup some proportion of their production costs, more
acreage of those crops will be grown than would be the
case if the farmer bore all the risks of such a decision. Con-
tinual subsidy support of this type will result over time in
production in a region where a particular crop has no actual
comparative advantage.

Basically, the farm commodity programs made producing
the supported crops seem more profitable than would have
been the case if farmers had received only market prices

104

that, in theory, reflect the true worth to society of the addi-
tional commodities produced. As a consequence of the arti-
ficially high pricesand profitability, farmers produced more
and used more land (and used it more intensively), more
water, and more fertilizer and other inputs than market
prices would have signaled them were necessary to use.

Therefore, the additional resources used were wasted — pro-
ducing products with more resource value embodied in
them than society (through market prices) would have said
those products were worth to it.

The additional production hung over the markets, depressed
prices even further, squeezed the profit margins on the
crops produced, and added incentives for individual farmers
to expand volume to maintain income levels. In yet another
way, then, the commodity programs contributed to the pres-
sure for farm firms to grow. With the farmland base rela-
tively fixed, that meant fewer, as well as larger, farms.

These particular effects of the programs occurred in times
when at least the original motivations for the programs were
more in line with the economic circumstances of the farm
sector. But what about today?

Agriculture in Transition: The 1970's

The environment in which American agriculture operates
underwent a dramatic transformation in the 1970's, detailed
in Part I. Even in the fifties and sixties, while we were
preoccupied with chronic surpluses, forces were slowly but
surely mounting that would markedly change the economic
environment.

Agriculture's increased interdependence with foreign mar-
kets largely resolved the problems associated with excess
capacity. But this also increased our reliance on sustaining
these markets for our exports. Put another way, this in-
creased our vulnerability to even relatively small changes in
the economic, political, and weather circumstances around
the globe.

Grain prices increased dramatically in the early seventies
due to the global situation. World food production declined.
In response, U.S. grain exports almost doubled, stocks were
depleted, and prices rose to unparalleled heights.

With our shock-absorbing stocks reduced, the U.S. econ-
omy was forced to bear a disproportionate share of the
global adjustments to this situation.

This disparity arises from those policies of major importers
that insulate their consumers (and producers) from world
market conditions. Because of this, the import demands of
Japan, the European Common Market, the Soviet Union,
eastern Europe, and China, for example, are not very re-
sponsive to changing world price levels. Their consumers
are insulated from major price changes and their consump-
tion patterns vary little in response to changing world prices.
Consequently, when world supply or demand changes, the
few nations with relatively open markets and no insulating
policies experience drastic swings in their prices; they bear
the adjustments.

That new economic environment raised worldwide concern
about food security and international market stability and re-
newed interest, in turn, in an international grain reserve.
This situation led to increasing awareness of the need for
domestic grain reserves, at least, as a buffer against the
shocks and volatility of the new relationships. In 1977, the
United States implemented the first managed grain-reserve
program in the history of the country.

As we look to the 1 980's, global supply-and-demand projec-
tions suggest that the average growth in foreign demand for
agricultural products will exceed growth in supply. This
again means increased world dependence on U.S. agricul-
tural products and suggests a reversal of a trend since
World War II in which commodity prices decreased in real
terms (that is, after being adjusted for inflation).

But there will be considerable variation around this trend —
perhaps twice as much as experienced in the seventies.
This again underscores the reality that U.S. agriculture is in-
terwoven into the global food markets and is vulnerable to
even the smallest changes in supply and demand anywhere
in the world.

As the farm sector passed through the major stages of this
transition to greater global interdependence and became
more susceptible to the destabilizing forces in the world
market, the structure of U.S. farms was also being
transformed.

In today's economic environment, the agricultural sector is
no longer characterized by underemployed resources.
Farm-family incomes and the returns on resources used
compare quite favorably with the nonfarm business sector;
the pervasive problem of the primary farmers we have pro-
filed is stability of income, prices, cash receipts, and cash
flows.

The instability derives principally from the internationaliza-
tion of U.S. agriculture but is reinforced by the changed
structure of the main-stream farms — those highly debt-lever-
aged, commodity-specialized operations heavily reliant on
industrial inputs.

105

It is those new realities that suggest careful attention to the
appropriateness of the present programs (and the rationale
for those programs) for the future. The implications are
clear.

The commodity programs were designed to increase in-
comes and had the effect, among other things, of enhancing
land values. But, in addition to low incomes no longer being
the pervasive problem, more and more of the farmers who
participate in the programs do not own all the land they use
to grow crops on which benefits are based, and the pro-
grams are of little benefit to the nonlandowning operators,
renters and smaller farmers.

With resources no longer underemployed, restricting pro-
duction is unlikely to be needed again at anywhere near the
degree once needed. Without that as a principal objective of
programs, as well as a means for achieving others, ensur-
ing the participation of bigger farmers (whose incomes are
not low, anyway) may no longer be essential for the pro-
grams to be effective. The dilemma of distributing benefits
equitably while securing cooperation from the segments
needed to make the programs work will fade.

Commodity Programs in the New Era

The initial rationale for the commodity programs was in
large part derived from the impact of domestic forces exter-
nal to agriculture — particularly the availability of new tech-
nology. In other words, the operation of the national eco-
nomic system produced results in agriculture that were
contrary to our social goals as Americans.

This will likely hold true, too, in the new era in which re-
sources are not underemployed, returns to those resources
are, potentially, extremely variable, and the strongest forces
are international. The results from this new and less-fettered
market will not meet all of society's goals.

Some Government intervention will be required — as most
people would agree, while disagreeing on the extent and
direction.

One of the areas of public intervention will be the assump-
tion of some of the risks facing the farm industry. Identifying
which risks should be assumed or shared, and to what de-
gree, will be the subject of debate.

The most appropriate means for assuming risk are some-
what limited. One obvious means, however, is the grain re-
serve. The grain reserve has emerged in just a few years
as the major agricultural policy tool.

It is useful for taking supplies from the market when prices
would otherwise fall to unreasonably low levels. Once re-
moved, however, these stocks remain available to the mar-
ket for times when production falls short of or demand rises
above expectations. Market prices are left free to fluctuate,
allocating available supplies to those willing and able to pay
them. But the consumers of grain and the consumers of
food are afforded a large element of protection from erratic,
extreme, and disruptive price increases.

This protection does not come at the expense of the farm-
ers. On the contrary, the stocks held from the market con-
tinue to be farmer-owned; when the grain is needed and
prices rise to signal that need, it is the producer who reaps
the benefits.

The general public shares in the costs of holding the grain
until needed. The entry payment (special nonrecourse loans
and storage-cost subsidies) is offered by the Government to
producers as an incentive to store grain.

The grain-reserve program has provided a much-needed in-
surance against runaway prices (up and down), the type of
assurance producers need to make prudent capital invest-
ments and rational financial and production plans.

And the reserve increased the incomes of producers during
the abundant harvests of 1977-79. Even though grain grow-
ers do not comprise a majority of farmers, farm income
would have been significantly lower if the reserve had not
been available to isolate the abundant grain supplies and
keep prices from falling well below trend.

The benefits of the reserve have regional dimensions as
well as national. The program, less than 4 years old now,
has allowed a more even flow of marketings within the year,
especially in grain-surplus States. A more stable marketing
pattern reduces the strain on storage capacity at harvest
and provides for more efficient use of transportation and
storage facilities.

But how do the benefits of the reserve program flow among
the various categories of individual farmers?

The benefits are not equally distributed, to be sure. But it
should be kept in mind that this is different from a direct in-
come-subsidy program; it is a risk-sharing venture with a
clear, greater public goal explicitly involved.

Grain Reserves

The grain reserve, in today's world, is the essential means
in place for bringing some assurance of stability to the
marketplace.

106

The larger producers are most likely to use the reserve. A
soon-to-be published study of the wheat reserve showed
participating farmers had an average cropland base of 1 ,-
100 acres. Those farmers eligible, but not participating had
an average of just over 600 acres of cropland.

Predictably, those farmers owning storage space would be
more likely to participate than those with little storage ca-
pacity or limited access to it. Thus, we can expect the larger
farmers, those identified in Part I of this report as primary
farms, to be the ones most utilizing the reserve and obtain-
ing the benefits.

But the rationale for their receiving the benefits is more ex-
plicit from the viewpoint of the public at large and more jus-
tifiable than in the case of the direct-payments programs —
particularly so if the other program subsidies offered them
were to be reduced.

A fundamental question, especially in view of the projected
future environment in which the agricultural economy will
operate, is an appropriate size of the reserve. A reserve
must ensure that total carryover stocks of grain at the end
of a growing and marketing season are sufficient to pre-
clude most of the disruptive shortage-induced price fluctua-
tions that could otherwise result.

The marginal benefits of price stability from a grain reserve
are inversely related to its size; that is, the smaller it is, the
greater the price fluctuation. The general public, through the
Congress, has indicated its willingness to pay the subsidy
necessary to achieve a reasonable amount of price stability.

At the present time, for example, the corn stocks remaining
from the 1979 and earlier crops proved sufficient to stabilize
corn prices near the level at which the grain is "called" out
of the reserve — but total stocks exceeded 1 .6 billion bush-
els. Corn production for marketing in crop year 1980/81 is
nearly 1 7 percent less than the previous, record year. Cou-
pled with strong foreign demand, that smaller crop will
cause stocks to be drawn down to "pipeline" levels — or no
slack in the system— and force the 1981 market price above
the call price. A second short corn crop in the United States
or stronger global demand this year would drive U.S. grain
prices beyond levels ever imagined.

Although total 1 979/80 stocks— the reserve plus amounts
held outside this contractual arrangement with the Govern-
ment— were large, they may not have been large enough to
achieve the goal of stability. And because other major na-
tions with which American agriculture is intertwined do not
respond internally to such price gyrations, higher ratios of
stocks to projected use are obviously required for the future
in order to stabilize U.S. prices.

"We regard chronically low farm prices and income as the
primary hazard to family-type farm operators and consider
them factors which aggravate all other farm problems. . . .
There is very little wrong with the past, present and, I hope,
future farm problems that more money to the farmer
wouldn't take care of."

Lowell E. Gose of Des Moines, Iowa, in Sioux City.

The size of the reserve is a paramount question in crafting
future policy. But, there are also operational issues to be re-
solved: How much does the reserve, as implemented, in-
crease total stocks (reserve plus privately-held stocks) be-
yond the quantity that would be carried without the reserve
(through private speculation), and what additional means
are available to increase that total? Where, in terms of the
long-term market-equilibrium price, should Government set
the price levels at which participant-growers are released
from their commitments to hold stocks in the reserve?

Even though our domestic reserve can moderate the disrup-
tions from limited production aberrations in the world, the
United States simply can never feasibly carry enough stocks
on its own to be the primary stabilizing agent for the global
market when major production shortfalls deplete global
stocks.

Other major importers and exporters will have to be pre-
vailed upon to assume their fair share of that burden or the
United States will have take another tack in search of stabi-
lizing mechanisms.

One suggestion has been to sever the link between domes-
tic and world prices once some upper price boundary is
reached. This violates competitive-market goals, to be sure,
and is the same kind of action that created the instability in
the first place — countries insulating their domestic agricul-
tural sectors from world events — but stability is a goal, too.
Without an international reserve system, few alternatives
are at hand that would not mean some adjustment in com-
petitive principles for the sake of stabilizing the market.

107

Disaster Protection

Perhaps the agriculture industry's last remaining claim to
uniqueness in the business world rests in its ultimate de-
pendence on biological processes and the vagaries of the
weather.

Protection against total failure as a result of natural disaster
through publicly subsidized programs is the means whereby
the rest of the society absorbs part of this risk involved in
producing its food.

Insurance and recovery-credit schemes subsidized by the
public or direct indemnity payments help sustain individual
farmers. . .according to production volume and abilities to
pay premiums or repay loans.

But they also help maintain the viability of the productive
sector when natural forces overwhelm it, recognizing a rou-
tine, perennial risk of doing business peculiar to agriculture,
regardless of the size or configuration of the business.

Any negative structural impacts of the various disaster-pro-
tection and -compensation schemes have resulted from the
subsidies involved. The subsidies cause misuse of re-
sources and inflated land prices, which, in turn, lead to con-
centration of production and landownership into fewer
hands, through processes noted throughout this report.

Those undesirable consequences can be ameliorated, while
preserving the risk-reducing character of the protection
schemes, by ensuring that the insurance premium is based
upon the actual risk and making the programs more actuar-
ially sound.

Gasohol

A relatively new consideration in agricultural policy is the
large-scale use of food commodities for industrial purposes,
specifically the production of liquid fuels.

The Energy Security Act of 1980 subsidizes the conversion
of biomass — organic materials — to ethanol for use in gaso-
hol. Currently, corn is the most technically feasible biomass
feedstock for ethanol production.

Because of the extent of the subsidies, this program is al-
ready increasing the effective demand for corn and prom-
ises to do so even more in the future. Yet, corn is already in
strong demand for traditional uses as food and as feed for
livestock that produce food products.

By subsidizing the use of corn in producing fuel energy, this
program indirectly taxes consumers of corn products — direct
and indirect — to the extent that the market price of corn is
increased for this purpose. Moreover, this program adds to
the instability of the price of corn.

There is no doubt that the use of corn to produce fuels, as
a substitute for imported petroleum, is not now cost-effec-
tive. But this extra cost of inefficiency must be weighed
against the potential cost of the disruption that would result
from a break in supplies from petroleum exporters in an in-
creasingly unstable area of the world.

Furthermore, gasohol proponents argue that the use of corn
for this purpose is temporary; new technology will make
nonfood products feasible as feedstocks in the future.

At present, however, this program has great potential for
distorting the efficient use of scarce resources, adding to
households' food budgets, and increasing the potential for
instability in commodity prices.

Programs such as the alcohol-fuels program have implica-
tions for farm-sector structure in that they increase the de-
mand for commodities such as grain. Higher prices are then
necessary to increase production from the less-productive
land. The resulting windfall gains to those already owning
the more-productive land are then used to outbid others on
any land for sale — once again leading to higher land prices
and fewer, larger farms.

Appropriate Policies for the New Era

A review of the evolution of the commodity programs over
time indicates that modifications have moved them from the
original objective — of increasing farmers' income to levels
closer to incomes of nonfarm people — to more of an in-
come-security objective. They have, in essence, assumed
more of a risk-protection role. While such a change in em-
phasis is clearly consistent with the changing nature of the
problems in the farm sector, the programs will still warrant
close examination and scrutiny to ensure they will most ap-
propriately meet the needs of the future. A fundamentally
different economic future and the greatly changed nature of
the farm sector itself suggest that more careful attention to
the specific problems of particular groups in the widely di-
verse farm sector will be necessary to ensure the programs
are efficiently operated.

The profile of the farm sector in Part I showed some clear
delineation of groups of farmers according to particular
characteristics that provoke important policy concerns.

108

One such group encompasses the medium-sized farmers,
responsible for a major share of the food and fiber produc-
tion. The evidence shows they no longer have a pervasive
problem of low income — to the extent that one remains, it is
among the smaller farms in that group, those with $100,000
in sales or less. The major problem facing the larger opera-
tors is economic stability — avoidance of wide swings in
prices, cash receipts, costs, and incomes that affect their
very survival as business entities.

This would suggest that economic-stabilization measures
and measures to ameliorate weather-related and biological
risks are most needed.

An expanded grain reserve would largely accomplish the
former and the all-risk crop-insurance programs would serve
to meet the latter objective. The annual commodity price-
support loan program could be retained to assist in orderly
marketing and cash-flow management, but perhaps should
be modified to eliminate the nonrecourse feature not avail-
able to businesses outside agriculture. The target-price pro-
grams are no longer needed to increase incomes but more
appropriately could be maintained as an economic insur-
ance program.

Since it is large producers who most frequently use the re-
serve— and, because of their large volume of production,
they will be most relied on in the future for its successful
operation — its entry, release, and call prices could be more
specifically adjusted to their needs. That is, cost-of-produc-
tion information developed from specific surveys of these
size farmers could be used to calculate these price levels in
a manner that covers their production costs.

A second group of farmers, identifiable by their peculiar
characteristics, merits different attention than the primary
group. This group, which we have termed small farmers, to-
gether with those in the medium-sized group who have yet
to capture all the economies of size, more nearly resemble
the agriculture of old in terms of problems. For example,
there may be a significant number with low incomes as a
result of their limited resources.

While the stabilization programs provided to the primary
farmers would be beneficial to this group (and the programs
would be accessible to it), more direct assistance is neces-
sary for most small- and medium-sized farmers to help them
overcome the structure-related disadvantages of their size.
This could take the form of a modified target price-direct
payment program, with the amount of assistance geared di-
rectly to the costs of this specific group.

That more careful targeting of programs tailored to specific
groups, based on their need rather than their production vol-
ume, removes the dilemma long faced by the Congress and
the Executive Branch — a low payment limit for equity pur-
poses versus incentives to high-volume producers to make
the program work. It is unlikely that production-control pro-
grams, although perhaps needed very infrequently, will
again in the foreseeable future be major instruments of
commodity policy. In the instances where they may be
needed, a carefully crafted diversion program rather than
set-asides will prove to be most cost-effective. Since wide-
spread farmer participation in programs to reduce produc-
tion and increase market prices is not likely to be neces-
sary, neither is a high payment limit.

A third group of farmers was noted in the profile, the group
with very small sales of farm products we termed rural farm
residents. This group does not appear, as a group, to have
pervasive economic problems — neither low absolute in-
comes nor any great vulnerability from economic instability
in the farm sector. Rather, their economic well-being is
much more closely determined by nonfarm economic condi-
tions. To the extent any problems requiring public assist-
ance now exist or emerge, they could almost certainly be
treated more effectively through nonfarm programs — and
agricultural assistance of a more educational, planning, or
technological nature — than through any of the commodity
programs.

The commodity programs for the more regional commodi-
ties— peanuts, tobacco, and sugar — and for dairy are only
cursorily treated in this report. This is intentional — most of
the limitations and structural implications of the major com-
modity programs apply, and perhaps even more so, to
these programs. Further, the inadequacies of these pro-
grams have been documented in study after study.

A rational, coherent, and forward-looking policy must incor-
porate substantial reform for all these programs, bringing
them into the policy mainstream with perhaps greater atten-
tion to easing the transitional adjustments.

Selected References

Betterly, Susan, Ken Eckhardt and John Groenewegen.
"Characteristics of Participants in Commodity Pro-
grams." Working Paper. Economics and Statistics Ser-
vice, United States Department of Agriculture, Washing-
ton, D.C. 1980.

Burnstein, Harlan. "An Evaluation of the U.S. Grain Re-
serves Programs. "Working Paper. Economics and Sta-
tistics Service, United States Department of Agriculture,
Washington, D.C. 1980.

109

Ericksen, Milton H. and James Johnson. "Commodity Policy
Issues for the 1980's." Southern Journal of Agricultural
Economics. Vol. 12, No. 1. July 1980.

Groenewegen, John R. and James Johnson. "Graduated
Target Prices by Size of Operation." Selected Paper.
Southern Agricultural Economics Association Meeting,
Atlanta. February 1981.

Groenewegen, John R. "The Target Price Concept: An Is-
sue Paper on Income (Price) Support." Staff Paper.
Economics and Statistics Service, United States De-
partment of Agriculture, Washington, D.C. Forthcoming.

Johnson, James. "New Policy Direction and Farm

Structure." Speech given at the Symposium on Farm
Structure and Rural Policy. Iowa State University,
Ames. October 1980.

Lee, John E., Jr. "A Framework for Food and Agricultural
Policy in the 1980's." Southern Journal of Agricultural
Economics. Vol. 12, No. 1, pp. 1-10. 1980.

Lin, William, James Johnson and Linda Calvin. "Distribution
of Farm Program Payments: Do Payment Limitations
Make Any Difference?" Contributed Paper. American
Agricultural Economics Association Annual Meeting, Ur-
bana, III. July 1980.

Lin, William, James Johnson and Linda Calvin. "Farm Com-
modity Programs: Who Participates and Who Benefits?"
Staff Report. Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C.
Forthcoming.

Penn, J. B. and William T. Boehm. "Research Issues Reem-
phasized by the 1977 Food and Agriculture Legisla-
tion." Agricultural Economics Research. January 1978.

Penn, J. B. "The American Farm Sector and Future Public
Policy: An Economic Perspective." Agricultural-Food
Policy Review. Economics and Statistics Service,
United States Department of Agriculture, Washington,
D.C. Forthcoming.

Short, Sara D. "Concentration of 1978 Deficiency Pay-
ments." Paper prepared for the Southern Agricultural
Economics Association Meeting, Atlanta. February
1981.

Walter, Alan S., James Johnson, et al. "Prohibiting Com-
modity Program Payments to Nonfarm Corporations
and Partnerships." Staff Paper. Economics, Statistics,
and Cooperatives Service, United States Department of
Agriculture, Washington, D.C. June 1979.

110

CHAPTER 8 CREDIT POLICY

112

Assuring farmers access to loan funds at favorable rates
and terms has been a part of agricultural policy since the
second decade of this century. This policy has been pur-
sued by reducing risks in agriculture to make underwriting it
more attractive to private lenders, by improving the workings
of money markets and lending institutions, and by interven-
ing directly in the credit market with programs of direct and
insured loans and loan guarantees.

New research has revealed that these policies have:

• Achieved the apparent objective of plentiful supplies
of capital for farmers, at favorable rates and terms,
but

• Also contributed to an inefficient use of resources, an
increased dependence on capital- and energy-inten-
sive technology, inflation in land prices, and the con-
centration of production in the hands of fewer, larger
farms.

Those consequences have been exacerbated by the inter-
action among credit policies, tax policies, commodity poli-
cies, and general economic conditions.

The purpose of this section is to describe how and why
credit policies have influenced the structure of the farm sec-
tor, to suggest what general farm credit policy would be
consistent with the goals expressed for agriculture, and to
examine how the programs of the major public lender to ag-
riculture, the Farmers Home Administration (FmHA), might
be modified to support those goals.

The Historical Setting

Agriculture is financed from the savings of farmers and
other owners of farm resources and from borrowed funds.
Farmers compete with other borrowers in national money
markets for available loan funds.

As a result, farmers' access to private loan funds is affected
by the supply of funds in the money markets and the
strength of competition for those funds at any given time.
However, farmers often are pressured by time and
biology — the need to plant within a set period, or the need
to market perishables, for example — in ways those competi-
tors might not be.

General economic, fiscal, and monetary policies directly and
indirectly impact on money-market conditions and thus are
important determinants of the availability and cost of bor-
rowed funds to farmers. Commercial banks are the major in-
stitutional agents for servicing farmers' credit needs through
the private money markets. In addition, life-insurance com-
panies, merchants and dealers, and individuals are impor-
tant sources of private loan funds.

Modern credit programs directed specifically at farmers and
farming evolved out of the depressed conditions in agricul-

ture following World War I. Farm incomes were low, income
prospects were uncertain, and credit was considered risky
business by both lender and borrower. Under such circum-
stances, farmers had difficulty obtaining funds. When they
could obtain loans, interest rates were usually higher than
for other borrowers and the terms were often unfavorable,
thereby increasing farmers' business risks.

Since World War I, and especially since the 1930 s, at least
four major developments in Federal farm-credit policy have
dramatically altered the competitive position of agriculture in
securing capital, especially borrowed funds:

• First, the price- and income-support programs and a
host of related commodity programs did much to re-
duce the riskiness of farming, making the sector
more attractive to private lenders. Some of these
programs, such as those which provided nonre-
course loans on farmers' crops, also reduced the
need for private-market borrowing.

• Second, there have been overall improvements in
the workings of the commercial banking system that
have improved the ability and willingness of banks to
service farmers' needs.

• Third, the establishment of the Farm Credit System
(FCS), a system of cooperative banks, gave farmers
direct access to the national money markets.1

• Finally, in the 1930's, the Farm Resettlement Admin-
istration, later to become the Farm Security Adminis-
tration, was set up to deal with farm and rural prob-
lems requiring more than credit alone. Basically,
assistance was provided the severely economically
disadvantaged through planning and supervision,
along with credit, as an integrated package. In 1 946,
as a result of new legislation, this agency was re-
named the Farmers Home Administration and its mis-
sion was scaled back to that of providing production
credit to small and low-income operators, especially
those needing management assistance, and owner-
ship loans to help beginners, small farmers, and ten-
ants become viable owner-operators. Today FmHA is
the principal public lending agency for farmers and
rural communities.

Partly as a result of the Federal initiatives, farmers generally
have had access to plentiful supplies of loan funds at com-
petitive costs. In fact, many farmers have obtained more
funds at lower costs than their counterparts in other sectors
of the economy because of the isolation of some rural
money markets (less today than in the past), access to un-
limited funds at cost through the nonprofit FCS banks, and
subsidized loans from public agencies.

113

As a result, farmers have greatly increased their use of and
reliance on borrowed funds, invested heavily in capital-in-
tensive technology, and increased their use of purchased
production supplies (fertilizers, for example) to replace farm-
produced inputs. Farm-sector debts increased 13-fold, from
$12 billion in 1950 to about $158 billion on January 1, 1980,
for example. At the same time, the amount of labor used in
agriculture declined sharply as farmers substituted relatively
cheap capital for relatively scarce and expensive labor.

In short, borrowed funds have become the lifeblood of mod-
ern agriculture.

Prospects for the Eighties

Farmers are expected to continue to increase their use of
debt financing in the decade ahead. A study of probable
farm credit needs and problems in the 1980's2 concluded:

• Farm production expenses will more than double.
Funds needed to finance annual farm production ex-
penses could increase by more than $200 billion
over the decade, compared with about $134 billion
total farm production expenses in 1980. Most of the
additional funds will have to be borrowed, although
innovations in equity financing are also expected.

• Farm-sector debt, which increased from $12 billion in
1950 to $158 billion in 1980, could be about $600 bil-
lion by the end of the decade. However, asset values
of farm businesses are expected to rise to more than
$3 trillion, so the ratio of debts to asset values will
not be significantly higher than the 16 to 17 percent-
of -assets range of recent years.

• Competition for loan funds will remain strong. Agri-
culture will remain competitive and will be able to at-
tract its fair share of funds. Farm prices and incomes
should begin to rise strongly by the middle of the
decade, increasing the ability of farmers to compete
for production and investment funds.

• Land prices probably will increase rapidly, especially
in the latter half of the decade. This will increase the
wealth of landowners but will also increase the diffi-
culty of getting started in farming, especially for those
having no other sources of income to subsidize the
beginning years. The added wealth of existing land-
owners, combined with tax advantages, will enable
them to outbid other would-be land buyers and thus
continue the trend toward fewer and larger farms.
Higher land prices will also greatly increase the flow
of debt funds needed simply to refinance the owner-
ship of land, generally into the hands of fewer and
fewer owners.

• By 1990, nearly 80 percent of the farm debt will be
owed by farms having annual sales of $40,000 and
more. Farms with annual sales of $100,000 or more
will owe about one-half of all farm debt. These latter
farms are expected to average nearly $6 million each
in assets and nearly $5 million in net worth. This

means that only slightly more than 20 percent of all
farm lending will be to farms with sales under $40,-
000, and less than 8 percent will be to farms with
sales under $20,000.

• Large farms will continue to depend more on debt-fi-
nancing for capital and thus have higher debts rela-
tive to assets than smaller farms, which depend more
heavily on internal financing (from savings from farm
and off-farm income). However, for all sizes of farms,
asset values are expected to rise faster than debts,
especially in the second half of the eighties, leaving
them in an improved financial condition compared to
their position at the beginning of the decade.

• Poultry, dairy, and cattle-feeding operations will con-
tinue to be the heaviest users among farm types of
debt financing. All three of these types of enterprises
use capital-intensive facilities and large amounts of
purchased feed compared to the value of their sales.

A disconcerting aspect of those projections is that roughly
half of the borrowed funds will be used to finance transfers
of landownership — that is, roughly half of the borrowed
funds will add little to the productive capacity of the farm
sector. Most of the transfers will be to larger farms, and the
money will be borrowed by those with large net worths.

That suggests that a major concern in agricultural policy-
making should be assuring the availability of short-term pro-
duction credit.

Over all, the expectations are that the economic health of
agriculture will be sufficiently sound that farmers will be able
to compete with other borrowers to obtain funds at competi-
tive rates.

The "primary" farms — those with over $40,000 in sales, and
especially those with more than $100,000 in sales — are and
generally will be earning competitive returns and can com-
pete for funds on an equal footing with other firms in the
economy. Since some of these farms will be highly debt-le-
veraged, they will occasionally encounter repayment difficul-
ties. However, there would appear to be no compelling rea-
son to promote special treatment for them.

The "rural farm residences" having sales under $5,000
have significant off-farm incomes and presumably will con-
tinue to either finance their farm expenses out of internal
savings or use nonfarm income to repay loans. Rather than
being disadvantaged in credit markets, the majority of these
part-time farmers are viewed by many lenders, especially
small banks, as preferred customers.

114

Those farmers who are generally not wealthy and frequently
must depend largely on uncertain post-harvest farm income
to repay loans are the small farms with sales between $5,-
000 and $40,000 a year. As a group, they tend not to be as
heavily debt-leveraged as the larger farms and thus have
some resiliency to fluctuations in cash flows. However,
those in this group who depend primarily on farming for a
living and must incur substantial debt for operating ex-
penses or acquiring additional resources will be quite sensi-
tive to changes in interest rates when they rise rapidly dur-
ing so-called "tight-money" periods. These are also the
farms most likely to be dependent on country banks for their
borrowing.

Structural Consequences of Credit Policies

Credit policies, together with other economic and farm poli-
cies, have permitted farmers to make economic adjustments
to changing technology and resources, to improve efficiency
and incomes and generally to transform U.S. agriculture into
the efficient and productive sector it is today. But they have
also fostered some corollary developments in the changing
structure of the sector and control of its resources.

First, the industrialization process that permitted the devel-
opment of an efficient and productive food system is the
same process that is driving the continuing structural
changes that are now our concern in this report. The availa-
bility of abundant supplies of funds at competitive (and
sometimes lower) rates made it possible and attractive for
farmers to rapidly adopt capital-intensive technology, in-
crease their degree of specialization, and increase the use
of purchased inputs compared to those supplied from the
farm.

That resulted in at least two incentives for consolidation and
subsequent growth in farm sizes:

• As increased production pulled down commodity
prices, and as increased dependence on purchased
inputs increased cash costs, the resulting cost-price
squeeze and lower margins of return prompted indi-
vidual farmers to expand in order to improve total in-
comes, and

• The advanced technology increased the size of the
farm and the volume of production that one person
could manage.

Modern, industrialized, high-technology agriculture was built,
in large part, on abundant supplies of relatively cheap
capital.

Second, research evidence suggests that past credit poli-
cies have been responsible, in part, for a misuse or ineffi-
cient use of capital and other resources. To the extent that
farmers have been able to obtain more funds at lower inter-
est rates than competitive markets provided for the rest of
the economy, they have overinvested in capital assets (pro-

ductive capacity) and such production supplies as fertilizer
and pesticides. Economists view this as a waste of re-
sources and a cost to society in the form of lost opportuni-
ties for higher-return uses elsewhere. This overinvestment
in resources and overproduction speeded the industrializa-
tion process and the resulting structural changes described
above.

Third, in recent years, we have become more aware that
past and present credit policies, in conjunction with farm
policies and especially tax policies, have contributed to infla-
tion in land prices. Studies have shown that subsidized in-
terest rates, lower downpayments, and longer repayment
periods translate into an ability and incentive to pay higher
prices for land. The higher the tax bracket of the purchaser,
the greater the incentive to incur debt, to deduct interest ex-
penses from income as a current cost for tax purposes, and
thus to shift income taxable at current rates to income taxa-
ble at lower capital-gains rates.

That process is supported by credit policies which assure
unlimited quantities of funds, low downpayments and liberal
repayment terms. Specifically, economists have suggested
that the liberalization of Federal Land Bank credit in 1971
(reducing downpayments and lengthening repayment pe-
riods) contributed significantly to land-price inflation there-
after. As we saw in the last chapter, farm price supports not
only increase the potential income flow from land (and thus
are bid into higher land prices) but also make land buyers
willing to go deeper into debt than they would otherwise, be-
cause the risks are reduced.

As a result, the tax structure, farm-commodity programs,
and the availability of abundant loan funds at liberal terms
have combined to drive up land prices.

Those structural consequences of credit use emerge primar-
ily because of the elements of subsidy and risk-shifting
present in farm-credit markets, public farm-lending pro-
grams, and farm-commodity programs.

Subsidies, whether in the form of lower interest rates, lower
downpayments, or liberal repayment terms, effectively make
money appear less expensive than it really is, thereby en-
couraging borrowers to use more credit and pay more for
what they purchase than would be the case if the money
were obtained under more competitive market conditions.

Similarly, the ready availability of loan funds for refinancing
during periods of repayment difficulty and the availability of
public loans to cover natural disasters or economic emer-
gencies effectively reduce farmers' conscious risks and en-
courage them to undertake riskier activities and to make
more capital investments than they otherwise might.

115

Emergency loans from the Small Business Administration or
the Farmers Home Administration both have a subsidy as-
pect (they supplement the income of those receiving them)
and effectively shift risks from farmers to the general public.
The Commodity Creit Corporation's nonrecourse loans —
since the crop under loan as collateral will always be ac-
cepted as full payment — and the disaster provisions of com-
modity-support programs have the same risk-shifting effect.
The public's sharing of private risks is a transfer payment, a
redistribution of income from taxpayers at large to those
whose risks are reduced.

All of those forces blend with each other and with other
public policies to speed the concentration of production agri-
culture into fewer, larger units. As will be discussed later,
even the public programs designed to help the smaller
farms have contributed to this trend. These impacts, largely
unconsidered a decade ago, have been documented by re-
search and are now more widely recognized.

Priorities for Public Farm-Credit Policy

The Department of Agriculture does not manage or have re-
sponsibility for a national farm-credit policy, as such, with
the Farm Credit System an independent agency with its own
legislation. But the Department does have responsibility for
the lending activities of the Commodity Credit Corporation
and the Farmers Home Administration and a responsibility
to speak to the needs and problems of the food and agricul-
tural system. In that sense, then, it would be an advocate of
credit policies that are consistent with the goals for food and
agricultural policy outlined earlier in this report.

To review and summarize our findings to this point, we
know that:

• The demand on the agricultural sector will be great in
the years ahead, as it gears up to meet a growing
global demand for food;

• Large amounts of borrowed funds will be needed to
finance the expanded output and rising costs;

• An increasing share of production will take place on
large farms;

• These farms will be the primary users of credit in the
decade ahead;

• These large farms are financially strong and can
compete for funds in private markets, although some
of them borrow heavily to expand and then encoun-
ter repayment difficulties when cash flows are not
sustained, for whatever reason;

• Many small part-time farms have sufficient nonfarm
income to finance their farm needs, and

• Some small- to moderate-sized farmers who depend
primarily on farming for a living may have difficulty
obtaining and repaying credit funds.

We have also learned that, to the extent that credit exten-
sion includes an element of subsidy or shifts risks from bor-
rowers to others, there are structural consequences, which
might not always be desirable in the context of overall food-
policy goals.

Therefore, agriculture has a long-term vested interest in
credit policies and credit-market conditions which meet its
legitimate needs but which minimize the adverse structural
consequences and misuse of resources. Given the current
mix of borrowers and the structure of the farm sector, that
interest would be best served by:

• Assuring that the private money markets and lending
institutions work as well as possible (that is, assuring
equitable, competitive access to loanable funds by all
borrowers in the economy).

• Focusing public farm lending more precisely on those
who would not be served by efficient, competitive pri-
vate markets, but in whom there is a public interest —
that is, where a broader economic or social purpose
justifies limited distortion of marketplace allocation of
capital.

Private money markets are thought to be reasonably effi-
cient and effective in allocating funds to the uses that bring
the highest returns. In the general economy, some of the
primary distortions in the allocation of funds come not from
a failure of money markets but from provisions of Federal
income-tax laws that generate misleading signals of true so-
cial and economic returns. There are also some distorting
influences in the money markets that are not of major con-
sequence but which have some modest implications for
structure.

One of these problem areas has to do with commercial
banks, especially small country banks. Country banks his-
torically have loaned from reserves deposited in savings
and checking accounts. These were low-cost funds and en-
abled these smaller banks to, in turn, lend to farmers and
local businesses at interest rates usually below the prime
rates charged in larger money centers. Thus, farmers were
somewhat insulated from the effects of national "credit
crunches" and restrictive monetary policies. This insulation
has largely eroded during the last two years, as banking
regulations have changed and competitive pressures have
forced smaller banks to offer certificates of deposit and
other instruments which, in effect, now tie their costs more
directly to the central money markets.

116

Nevertheless, even during the scarce credit periods during
the winter and spring of 1980, farmers continued to borrow
from rural banks at rates below those charged by large ur-
ban banks. In effect, rural savers have been subsidizing ru-
ral borrowers, including farmers. In the future, the ability of
country banks to service farmers may depend on their ac-
cess to the central money markets; access to the Federal
Reserve discount window, at terms compatible with the real-
ities of farm lending; development of over-line and co-lend-
ing relationships with other lenders, to get around con-
straints on loan size, and changes in the size and financial
requirements of farms.

It appears that country banks will move in one of two possi-
ble directions. One direction is to gradually become special-
ized lenders, focusing on that part of the market serving
small and part-time farmers and local businesses. The other
direction is to merge with or develop a close relationship
with large banks, to overcome their loan-size limits. In this
case, they could lose some of their traditional independence
and operating freedom and become increasingly the local
service outlets for the larger banks.

Banks, then, face some of the same structural pressures as
agriculture and the rest of the economy. To improve their
competitive positions and their abilities to serve moderate-
sized but efficient family farms, public policy could be di-
rected to giving special attention to the regulatory problems
of small banks, including giving them greater access to
money markets through Federal Intermediate Credit Banks
and other means.

The banks of the Farm Credit System, with virtually unlim-
ited access to funds in the central money markets and un-
constrained by usury laws and banking regulations, have
been the most aggressive gainers in shares of farm lending
this century. Production Credit Associations are second only
to banks in extending production credit, and Federal Land
Banks dominate the market for farm real-estate credit.

These banks pay the going market rates for funds and re-
flect the average cost of all these funds in the rates they
charge farmers. Thus, they are responsive to monetary con-
ditions— but with a lag.

There is no question that the Farm Credit System has
served farmers well in terms of being a dependable supplier
of competitively priced funds. Its banks have also been pro-
gressive and innovative in developing ways of meeting
farmers' unique needs. The policy questions here are
twofold:

• Have the banks of the Farm Credit System been too
liberal in extending credit, thereby contributing to
land-price inflation and further concentration in
farming?

"The major impact of inflation on agriculture is on land val-
ues and the cost of energy and other farm inputs. The initial
response to rapidly appreciating land values was positive,
as it provided an unending source of credit, even though
production returns were not keeping pace. However, the
rapid increase in interest rates has now left many growers
in the equity-financing trap, threatening their very survival as
they attempt to generate enough capital to survive debt. "
Allen Wood of Caldwell, Idaho, in Spokane.

• Is it consistent with sound national monetary policy to
have what has become a large, second banking sys-
tem operating outside the purview of monetary au-
thorities, who continue to give high priority to fighting
inflation?

Those issues could become more visible and sensitive in
the 1980's. Given the importance of the Farm Credit System
in farm lending and the importance of lending policies to the
structure of agriculture and the achievement of agricultural
policy goals, a strong case could be made for improved pol-
icy coordination between the Farm Credit Administration and
the Department.

Despite the problems identified above, one has to judge that
the private money markets and lenders serving agriculture
perform reasonably well, and that, by and large, farmers as
a group are not disadvantaged by them, although there may
be some undesirable longer-term structural implications.

However, the major structural impacts as a result of credit
policies probably have come from the public farm programs,
including farm lending. It is the re-examination and modifica-
tion of these programs that offers the greatest potential for
reducing economic forces that abet land-price inflation and
the continuing trend toward concentration of production and
control in the farm sector.

We turn now to the role of the major public farm lender, the
Farmers Home Administration.

The Farmers Home Administration

There are three major public agencies that lend directly to
farmers: the Small Business Administration (SBA)3, the
Commodity Credit Corporation (CCC)4, and the Farmers
Home Administration (FmHA). The FmHA is the largest of
these and the most important in terms of reflecting the
credit policies and structural interests of the Department of
Agriculture. It was also the agency most criticized by name,
for poor program administration, at the 10 regional public
meetings that began this project.

117

The FmHA is also closely linked to concerns about the
structure of agriculture because of its predecessor's histori-
cal role in attempting to rebuild and restructure the farm and
rural economies during the depths of the Great Depression
and because of its current stated mission of serving farm
and rural borrowers who cannot obtain credit elsewhere.

The FmHA program has undergone dramatic change in re-
cent years. In 1960, FmHA administered eight programs, of
which farm-operating loans accounted for 64 percent and
farm-ownership loans accounted for 14 percent of total
funds. In 1979, FmHA operated at least 23 programs, with
farm-operating loans accounting for 6 percent and farm-
ownership loans accounting for 5 percent.

Emergency-disaster, economic-emergency, individual-hous-
ing, rural rental-housing, water-and-waste, and business-
and-industrial development loans, along with some grants
programs, each accounted for larger shares of FmHA activ-
ity. This does not necessarily mean that FmHA has ne-
glected its traditional role. The absolute levels (as opposed
to percentage share) of farm-operating and farm-ownership
loans were record highs in 1 979.

What this indicates is that FmHA has become a giant,
many-faceted agency that perhaps has been absorbing pro-
grams and mandates faster than it can maintain a clear
sense of purpose and direction. The addition of large loan
and grant authorities in 1980 to support the alcohol-fuels
program merely aggravated this situation.

Over $14 billion in loan and grant obligations were made by
FmHA in 1979. In 1980, the FmHA portfolio was nearly 50
times its size in 1960.

The large changes in the size and content of the FmHA pro-
gram suggest the need to re-evaluate who it is, who it
should be serving, and how the programs might be modified
to minimize undesirable structural impacts.

The latter concern stems from the fact that FmHA has been
the major provider of subsidized credit and emergency
loans. Recent research indicates that the very fact that
FmHA is a lender of last resort tends to expand farmers'
perceptions of their capacity to borrow money safely, en-
couraging them to pursue riskier production and marketing
strategies and more aggressive financial plans.

The emergency lending programs tend to reduce the overall
threats farmers face from the weather and in the market
and thus have contributed to farm consolidations and higher
land prices, through the processes described earlier. The
magnitude of their impact may be suggested by the growth
in the relative importance of emergency loans. Currently, to-
tal public emergency loans outstanding constitute almost 10
percent of total outstanding farm debt.

The emergency lending programs have been referred to as
free insurance programs, with the overuse that predictably
accompanies any "free" goods. The implication is that these
programs substitute for actuarially sound insurance pro-
grams and discourage the development of other, private
and/or individual risk-management strategies.

What Needs Should FmHA Serve?
If credit is anything other than a free good, it will be rationed
by competitive markets to those who can afford to pay the
cost or to uses that yield more than the cost. Those who will
have difficulty obtaining and repaying borrowed funds are
the so-called "marginal" farmers, who are often those
whose access to productive resources is limited.

But who is included in the marginal-farmer group varies, de-
pending on farm-product prices, interest rates and other
considerations. In the winter of 1980, when interest rates
were at record-high levels and farm-commodity prices were
relatively low, many farmers who would normally qualify for
credit were temporarily considered marginal, in the same
way that prospective homeowners temporarily found their in-
comes were inadequate to qualify them for mortgages, until
rates began to decline in March 1 980. The situation was
made worse by an actual shortage of loan funds in banks.
After that time, interest rates moderated but have recently
reverted to new record highs, while commodity prices have
improved substantially. Many farmers considered marginal
became "creditworthy" again during the summer as interest
rates fell, but the positions of all borrowers have changed
repeatedly since then.

Thus, there is a continuum of farmers, ranging from those
with sufficient financial strength and resources to weather
the hardest of times to those who could not be expected to
be able to borrow and repay funds under any reasonable
set of conditions. Should the fortunes of all farmers be left
to the ups and downs of economic conditions — that is, sur-
vival of the fittest? Or are there economic and social rea-
sons for providing some or all of them assistance?

It might be useful to categorize those would-be farm borrow-
ers who would not be served by a reasonably efficient and
competitive farm-credit market and to examine some pros
and cons of serving them with public loan funds or with
changes in public policies to facilitate their being served by
private credit institutions.

118

It will be useful here to recall the earlier conclusion that the
policy position on farm credit which best serves agriculture's
longterm interests is one that assures that the money mar-
kets channel funds to the uses that bring the highest re-
turns, that farmers have competitive access to those mar-
kets, and that any deliberate directing of loan funds to other
than the highest-return uses be done in a way that mini-
mizes adverse structural changes.

Such redirections usually involve a subsidy and hence a
transfer payment from the general public to the targeted
beneficiary. Economists suggest that such transfers can be
justified on the grounds either that they improve the overall
efficiency of the sector or that the targeted group is deemed
by society, speaking through the political process, to de-
serve special treatment. If transfers improve overall effi-
ciency the benefits of that improved performance are
deemed to eventually be captured by the public at large. If
the targeted group deserves special treatment, the benefits
to society of that treatment outweigh the costs and/or any
adverse structural impacts.

Earlier in this report, it was suggested that a useful delinea-
tion of the present farm population consists of the primary
commercial farms, rural residences having farm sales under
$5,000 annually whose owners primarily depend on off-farm
income, and the small farms in between. The small farms
can be further divided into those who are wealthy, have ad-
equate nonfarm income, or generate a satisfactory net farm
income, and those who have limited resources and inade-
quate incomes from all sources.

There is also continuing concern about the beginning farmer
and the difficulty of entry into farming other than by inheri-
tance or access to independent wealth. Finally, legislators
are increasingly pressed to provide loans to those farmers,
whatever their size and wealth, who face losses because of
natural disasters or economic emergencies.

Large Farms. It has already been suggested that FmHA
has no compelling reason to provide loans to this group of
large farms, certainly not those with annual sales above
$200,000. They are efficient and yield incomes on invest-
ment that are fully competitive. Their average assets and
net worth are quite high. These farms produce two-fifths of
our agricultural product sales and should be assured, as a
result of their success and prowess, fair and competitive ac-
cess to funds through private lenders.

Rural Farm Residences. This group of farms would not be a
productive group for public farm lending to target. With
sales under $5,000 annually, they have little prospect of
generating farm incomes adequate to support a family. They
generally have nonfarm incomes above the national aver-
age for all families.

However, some among these may be genuinely poor and
have few off-farm employment opportunities. Where super-
vised credit would permit the development of a viable sup-
plementary enterprise that would efficiently employ other-
wise under-used resources, FmHA assistance would appear
to be in the public interest — provided that the borrower
could not obtain funds from private sources. Since the ag-
gregate resources involved are small, the overall impact on
the efficiency of resource use would be minimal. Where the
suggested conditions were met, FmHA assistance might be
the best means, economically and socially, of poverty relief.

Limited Resource Farms. There are a number of farms in
both the small- and medium-sized categories that face
credit problems and other financial difficulties. They are the
ones operated by persons who are primarily farmers, are
not large enough in their operations and sales to generate
adequate family incomes, need more resources to be effi-
cient, and are at a competitive disadvantage relative to
larger farmers. This group of farmers has been declining in
national importance as the farm population has become
more visibly divided into a small number of very large pro-
ducers who sell most of the farm products, and a large
number of very small farmers who depend mostly on non-
farm income and together produce only a small share of all
farm production.

Nevertheless, it is this group of small and medium-sized
farms which, if viable and efficient, could most effecttively
counter or at least moderate the trend toward concentration
in the farm sector, and assure the pluralism and diversity
necessary for a robust, competitive and more shock-resist-
ant agriculture.

To minimize adverse impacts on resource use and land
prices, those in this group who apply for FmHA loans
should have to first provide credible evidence that credit
was not available from private sources. Then, the FmHA
loan should be subsidized as little as possible. If analysis
suggested that neither a subsidy nor special management
assistance is needed, but that the loan simply cannot be ob-
tained from private sources because of the risk involved,
then a guaranteed loan would reduce administrative costs
and free up limited staff to work with those most needing
help. There must be a reasonable likelihood, determined by
appropriate analyses, that the loan can be repaid and that
the firm can eventually be graduated to private credit.

Some farms in this category could require both short-term
production credit and loans to acquire additional land or
capital resources. The conditions suggested above imply
substantial FmHA staff involvement in each loan.

119

For those limited-resource farmers who need specialized
credit help or terms, the appropriateness of public credit as-
sistance depends on the likelihood that they will success-
fully graduate to private credit and eventually repay the pub-
lic investment through taxes, more efficient use of
resources, and a contribution to economic vitality and com-
petition in the farm sector. It is for this group of farmers and
for beginning farmers, more than any other, that social and
economic objectives of policy come face to face.

Beginning Farmers. The issue of assistance to beginning
farmers is a difficult one. If more people desire to begin
farming than there are systemwide opportunities for viable
and efficient units, the criteria for selection among the
would-be borrowers might be difficult to determine. Not all
beginning farmers need public assistance. Many are chil-
dren or other relatives of farmers and can obtain family help
or work their way into the farm operation gradually. Others
have financial resources from other sources. Still others be-
gin as renters or tenants, with little real-estate investment
required.

The complexity of trying to assist beginning farmers can be
illustrated with the problem created by inflation in land
prices. Several economists have shown rather convincingly
that the high land prices of recent years are quite rational.
In other words, in terms of long-term returns to investment
from farming and from land-value appreciation, land is a
good buy even at today's high prices. But studies have also
shown that, if that land were purchased with borrowed
funds, the income flow from farming will not cover principal
and interest payments during the early years of the loan.
This is especially true where the farmer must draw his own
livelihood from those earnings. A USDA study of irrigated
lands in the western Federal irrigation districts showed that
irrigated land purchased at today's prices would generate
returns adequate to begin to cover amortization costs some-
where between the 1 0th and 1 5th year of a 30- or 40-year
mortgage. Land has been characterized as a "growth stock"
that might be an excellent long-term investment, but one
could not expect to pay for it from the earnings in early
years.

This poses a dilemma: only those who inherit land or those
who can cover payments from other sources of income can
begin farming as owner-operators. A "selecting out" proc-
ess, strengthened by the impacts of the tax laws on those
of different incomes and income sources, chooses which in-
dividuals and firms can outbid others for land and thereby
further bid up land values. Not surprisingly, the selection
process tends to favor those with high incomes, including
operators of large farms with high equities in land they al-
ready own. In fact, existing farmers buy about two-thirds of
the land sold each year; they are the primary entrepreneurs
of increased agricultural concentration.

That process indicates coming increases in tenant farming
unless loans for beginning farmers could be arranged such
that repayment schedules are matched with income flow —
that is, more of the amortization could be postponed to the
later years of the mortgage. This approach has its dangers.
Unless such loans are restricted to those unable to afford
early payments, who also intend to farm the land over a
long period of time, the loans would could increase the re-
turns to the owner's equity in early years, enable him or her
to bid up the price of the land, hold it for a few years while
ownership costs are still low, and then sell it at an inflated
price when repayment costs begin to rise. Such a program
could thus worsen land-price inflation unless safeguards
were built into it. One possibility, which has been suggested
but not studied, concerns Government-assisted loans to be-
ginning farmers who sell before repayment. It has been sug-
gested that they would only receive a specifically limited
portion of the capital gains accrued to the land — the rest
would be returned to the Treasury.

FmHA assistance for beginning farmers may be justified to
slow the increasing concentration of land in the hands of
those already wealthy or controlling land resources. As sug-
gested in the previous paragraph, the loans should be re-
stricted to those who are unable to afford early payments
and are likely to farm the land over a long period of time.
Interest-rate subsidies should be minimized and the loans
limited strictly to those who cannot get credit elsewhere. Be-
cause of the seriousness of the land-price inflation problem,
FmHA might better assist new farmers by encouraging them
to begin by renting, rather than buying land. This would re-
duce credit needs to production items and permit the new
farmer to achieve more quickly the size needed for reasona-
ble efficiency.

Emergency Cases: Providing public credit to preserve the
normally healthy, moderate-sized farm operated by some-
one temporarily caught in adverse conditions, natural or
economic, could be consistent with the long-term goals of
agricultural policy. An analysis of present trends suggest
that about two-thirds of the land sold each year is bought by
operating farmers and consolidated into existing farm units.
This is the primary source of increasing concentration in the
farm sector. If the farms that are normally healthy but tem-
porarily in trouble were allowed to go out of business, it
would not be unreasonable to assume that some of them
will be consolidated into other existing units. Therefore, as-
suring that such farms obtain funds needed to stay viable
would be consistent with the goals of efficiency, preserving
a pluralistic agriculture for resiliency and future flexibility,
providing economic opportunity for more people, and ulti-
mate food security.

120

As discussed earlier, there are some offsetting structural
consequences arising from the shifting of certain kinds and
degrees of risk to the public sector. This problem could be
minimized by reducing the subsidy as much as possible,
thus reducing the attractiveness of the emergency credit as
simply a source of cheap funds.

If, instead of a moderate-sized family farm, the farm in tem-
porary trouble were very large, it is not clear that the same
arguments for public credit assistance hold. If the farm were
much larger than necessary for achieving efficiencies, and if
the odds favored some or all of the land being sold in
smaller tracts to new farmers or moderate-sized existing
farmers, then there would be no particular public interest in
"saving" the larger farm.

Also as discussed earlier, the availability of FmHA emer-
gency loans represents a shifting of risks — from farmers to
the public. Because of the subsidies involved in the pro-
gram, there are undesirable structural consequences. If
there were no subsidies involved, economic theory holds,
the reduced uncertainty resulting from the availability of
emergency loans could actually lead to more efficient use of
resources.

Consequently, an actuarially sound emergency insurance
program, or an emergency loan program with a premium
charged above market interest rates to compensate for the
additional risk and costs, would achieve the emergency-pro-
tection objective without the structural distortions caused by
subsidies.

In summary, the criteria developed in the light of research
on probable financial conditions and credit needs of farm-
ers, as well as new research on the consequences of past
credit policies, especially subsidized credit, suggest that the
future health, diversity and resiliency of production agricul-
ture would be best served if FmHA's farm lending activities
were focused on those borrowers who:

• Truly cannot obtain credit elsewhere,

• Have small and moderate-sized farms with limited fi-
nancial and farming resources or are temporarily in
trouble because of economic or natural disasters,
and

• Seek to finance sound activities with a reasonable
expectation of eventual graduation to private credit.

Characteristics of FmHA Borrowers

Who is now served by FmHA's farmer-loan programs?

A recent study of these borrowers suggests that, in 1 979,
the farm-operating and farm-ownership loans were heavily
directed toward younger farmers and those with small net
worths and low incomes. More than 68 percent of the
money loaned in the farm-ownership program that year
went to farmers with less than $12,000 in net cash income
and less than $120,000 in net worth. Over 74 percent of the
farm-operating loan money went to farmers in the same cat-
egory. In the same year, 50 percent of the money loaned in
each of these programs went to persons under the age of
30. (Table 29)

However, the economic-emergency loans were distributed a
bit differently. These borrowers tended to have low incomes
(presumably, that is what put them in an "emergency" situa-
tion) but more than one-third of the money loaned in 1 979
went to farmers with more than $500,000 in assets. Farms
with gross sales of over $40,000 represent one-fifth of all
farms but received over two-thirds of the money loaned un-
der the emergency program in 1979.

The data suggest that FmHA's farm-operating and farm-
ownership loan programs basically serve the smaller farms.
The data do not reveal the complete economic conditions of
the borrowers, how they have changed over time, or how
the loans affected the organization, management, and effi-
ciency of the borrowers' farms. There are also no data on
the characteristics of those refused credit by FmHA.

Implications for Future
FmHA Farm-Lending Priorities

The preceding analysis suggests that Farmers Home has a
legitimate role consistent with the goals of an efficient agri-
culture and slowing trends toward concentration of eco-
nomic power in the farm sector. Adjustments in the direction
of that role would require:

• Substantial redirection of staff toward providing su-
pervised credit to limited-resource farms, including
coordinating their assistance with other agricultural
experts and agencies around them.

• Shifting more credit to loan guarantees and eliminat-
ing interest-rate subsidies wherever possible. This
would free staff to work with limited-resource farms,
reduce inflationary pressures on land prices and re-
duce over-use of artificially cheap capital.

• Providing no funds for farms larger than the size nec-
essary to be reasonably efficient, a category that
probably includes most farms with sales over $100,-
000 (in 1980 prices). Economic analyses reveal nei-
ther gains in economic efficiency to farmers nor
lower food costs for consumers from making subsi-
dized loans to the larger farms.

121

Table 29: Percent of program money loaned to various net worth-net farm income categories of FmHA Borrowers, by
farmer program, 1979

Program/Income

Net Worth

Less than $120,000

More than $120,000

Total

Operating loans
Less than $12,000
More than $12,000
Total

74.4
17.5
91.9

(Percent)

4.3
4.0
8.3

78.7
21.5
100.2*

Farm Ownership
Less than $12,000
More than $12,000
Total

68.1
19.7
87.8

4.9
6.5
11.4

73.0
26.2
99.2*

Soil and Water
Less than $12,000
More than $12,000
Total

38.1
19.9
58.0

15.2
26.1
41.8

53.3
46.5
99.8*

Economic Emergency
Less than $12,000
More than $12,000
Total

29.6
20.4
50.0

22.1
27.6
49.7

51.7
48.0
99.7*

Program/Income

Net Worth

Less than $300,000

More than $300,000

Total

Operating loans
Less than $22,000
More than $22,000
Total

89.7
9.6
99.3

(Percent)

.6
.3
.9

90.3
9.9
100.2*

Farm Ownership
Less than $22,000
More than $22,000
Total

86.5
11.7
98.2

.7
.4
1.1

87.2
12.1
99.3*

Soil and Water
Less than $22,000
More than $22,000
Total

65.1
21.3
86.4

5.4
7.7
13.1

70.5
29.0
99.5*

Economic Emergency
Less than $22,000
More than $22,000
Total

57.0
22.0
79.0

10.4
10.3
20.7

67.4
32.3
99.7*

'Totals may not equal 100 percent due to rounding.

122

• Elimination of subsidized emergency credit. There
could be enhancement of economic efficiency if un-
certainty related to natural and economic emergen-
cies were reduced. That reduced uncertainty could
be provided by actuarially sound emergency insur-
ance or unsubsidized loans; that would reduce the
undesirable structural consequences of such emer-
gency programs.

• Limiting credit for beginning farmers to those seeking
to finance operations no larger than necessary to be
viable and efficient, and instituting a rigorous pro-
gram of graduation to the private market for these
loans.

• Improving the rigor and credibility of procedures for
verifying that potential borrowers could not obtain
credit elsewhere.

Summary: Credit Policies

and the Structure of Agriculture

In general, the private money markets and institutions (in-
cluding the Farm Credit System Banks) serve agriculture
well. Studies conducted and reviewed as a part of this proj-
ect indicated, however, that the "tilt" is perhaps toward pro-
viding more credit funds to agriculture than a purely and
perfectly competitive market would suggest. This might con-
tribute to wasted resources, inflation in land values, and fur-
ther concentration of production and land-ownership in agri-
culture into fewer hands.

Some other imperfections in private money markets include
the problems of small banks in getting competitive access to
funds and limits on loan size. This reduces the funds avail-
able to farmers where alternative lenders are not available
and reduces the viability of small banks as lenders to agri-
culture. It also contributes to a decline in the role of small
independent banks as community institutions and detracts
from the viability of rural communities and small towns.

Public lending programs imply an element of subsidy and
thus sharing the risk between farmers and the general pub-
lic. An implication for structure is that farmers tend to be-
have as though risk were reduced or even removed, make
less-efficient use of resources in the short run, and bid up
values of land and other assets. The inflation in land prices
makes land an attractive investment, leading to further bid-
ding up of land prices. This attracts exploitation of the tax
laws to shift current income, taxable at high rates, into the
category of capital gains, taxed at a lower rate. High land
values, compared to current income flows from that land,
mean that only those having other income, including exist-
ing farmers with excess incomes, can afford the amortiza-
tion costs of newly purchased land. Thus, efforts to shift
risks via subsidized credit have adverse structural impacts
on the farming sector.

Examination of the type of borrowers who would not be
served by private credit markets suggest that some with lim-
ited resources have potential for being efficient and viable
and that assisting them over temporary adverse conditions
could possibly contribute to longer-term efficiency and
strength in the farm sector. Assistance to others must be
justified on the basis of achieving other societal goals or
minimizing long-term social cost. There appears to be little
economic rationale for providing public credit to farms larger
than the minimum sizes needed for reasonable efficiency.
The subsidies could be better spent helping small farmers,
minorities and others increase their stake in society by gain-
ing access to the land.

Public credit policies which appear to be consistent with the
several goals of food and agricultural policy include:

• Assuring that agriculture has competitive access to
private capital markets at competitive rates. This in-
cludes, on the supply side, assuring that financial
rules and regulations are such that agriculture has a
fair access to the markets, and on the demand side,
assuring that economic conditions and institutions in
agriculture do not reduce agriculture's ability to com-
pete in the capital markets.

• Augmenting the workings of private markets to pro-
vide direct loans, insured loans and guaranteed
loans either to those who would not otherwise be
able to compete for funds but, if funded, would con-
tribute to achieving the goals of agricultural policy or
to situations whereby ultimate social costs would be
minimized through the use of such funds.

• Reducing the growing dependence of farmers on
emergency credit. Efficiency and structural goals
would be better served by shifting farmers to an ac-
tuarially sound disaster-insurance program.

• Refocusing the programs and priorities of the Farm-
ers Home Administration more toward those in agri-
culture who meet credible tests of need and who, if
helped, can expect to ultimately contribute to im-
proved performance of the farm sector.

123

Footnotes

1 . The Federal Land Banks (one for each Farm Credit System Dis-
trict plus local offices) were first established in 1916 to provide
farmers with funds to purchase land and to permit them to borrow
against the value of their real estate for other purposes. The Fed-
eral Land Banks (FLB's) are now the dominant real-estate lenders
in agriculture. In the 1920's, the Federal Intermediate Credit
Banks (FICB's) were chartered to channel loan funds from central
money markets to local Production Credit Associations (PCA's)
which, in turn, provide short-term and intermediate-term produc-
tion loans to farmers. The Banks for Cooperatives (BC's) com-
pleted the Farm Credit System and were set up to finance farm-
ers' cooperatives. The FCS banks were initially funded with
Federal funds, but those funds have long since been repaid. The
banks now operate much like private lenders and credit unions,
except that they have unlimited access to funds and serve only
producers and their cooperatives.

2. Hughes, Dean W., Stephen Gabriel, et. al., Financing the Farm
Sector in the 1980's: Aggregate Needs and the Roles of Public
and Private Institutions, draft report prepared for the Structure of
Agriculture Project, Office of the Secretary, U.S. Department of
Agriculture, Washington, D.C., December 1980.

3. The Small Business Administration, an independent Federal
agency, is designed to provide credit to small businesses unable
to obtain credit in the private sector. It has authority to provide
direct and guaranteed loans to farm firms with gross annual re-
ceipts under $1 million. The loans generally contain a subsidy
either in the form of below-market interest rates or in lenient
terms of repayment. SBA's role has been and will likely continue
to be relatively small as an agricultural lender. On January 1 ,
1981, SBA is expected to hold about 1 percent of total farm debt
outstanding. In addition, the Congress recently imposed a require-
ment that farmers attempt to obtain an FmHA emergency-disaster
loan before applying for an SBA disaster loan, the SBA program
which accounts for most of its loans to farmers.

4. The lending activity of the CCC is important but is secondary to
the objectives of the stabilization programs. That probably should
continue to be the case so as to not compromise the flexibility
needed to achieve fundamental program objectives. Nevertheless,
for farmers who use the loan and reserve programs, the nonre-
course loans are an important source of funding. The CCC also
provides loan funds for farm commodity storage and drying facili-
ties. CCC had $4.5 billion in outstanding debt with farmers on
January 1 , 1 980, accounting for 3 percent of all farm debt. CCC
debt for the most part substitutes for debt by other lenders (as
opposed to FmHA loans, which are supposed to supplement pri-
vate lending to farmers).

Selected References

Boehlje, Michael, Stephen Gabriel and John E. Lee, Jr.
"Public Policy Toward Agriculture Credit." Paper pre-
sented at a Symposium on Future Sources of Loanable
Funds for Agricultural Banks, Kansas City, Mo. Decem-
ber 1980.

Hughes, Dean W. "An Overview of Farm Sector Capital and
Credit Needs in the Eighties." Agricultural Finance Re-
view. Forthcoming.

Hughes, Dean W., Stephen Gabriel, Michael Boehlje, David
Reinders and George Amols. National Agricultural
Credit Study; Financing the Farm Sector in the 1980's:
Aggregate Needs and the Roles of Public and Private
Institutions. Economics and Statistics Service, United
States Department of Agriculture, Washington D.C.
Forthcoming.

Lee, John E. and Dean W. Hughes. "Capital Needs in Agri-
culture in the 1980's." Paper presented at Conference
on Financing Agriculture in the 1980's, Minneapolis.
September 1980.

Lins, David and Peter J. Barry. "Availability of Financial
Credit as a Factor of Structural Change in the U.S.
Farm Production Sector." Committee Print. Committee
on Agriculture, Nutrition and Forestry, United States
Senate. April 1980.

124

CHAPTER 9 PUBLIC RESEARCH AND
EXTENSION POLICY

126

Technological change is a pervasive and persistent theme
in the evolving structure of agriculture. The development
and adoption of new technology can and does have a revo-
lutionary effect on the economy and society, radically alter-
ing expectations, relationships, values, and lifestyles.

Technological change is almost never neutral. It frequently
provides an advantage to those who seek or can readily
adapt to change; at the same time, it usually puts some at a
disadvantage, those who did not or could not readily adapt
to change.

It is clear from even a cursory review of the history of U.S.
agriculture that the development and application of new
technology has significantly affected the structure of farm-
ing. Before 1925, for example, increases in agricultural pro-
duction were largely a function of an increasing total amount
of acreage used. Then came advances in technology and
risk-reducing farm policies encouraged rapid adoption of
that new technology. These changes greatly increased the
production capacity of agriculture on a given land base.

The new technology was oriented to relatively inexpensive
chemicals, petroleum and capital. A major effect was that it
sharply reduced the labor requirements of farming. Later,
when surpluses became burdensome, trying to curtail pro-
duction by focusing on acreage, while technological devel-
opment continued, was often a frustrated effort.

The extent to which new technology generated, made possi-
ble, or simply reinforced structural changes initiated by other
factors is discussed in other parts of this report. This chap-
ter focuses on what we have learned about ways structural
change is affected by technology and considerations rele-
vant to the future research agenda, in the context of public
policy for agriculture.

Public Research and Extension
As Sources of New Technology

New technology most often is the result of new understand-
ing, new knowledge that offers up different ways of doing
things. Scientific and technological change are looked to by
society to improve life for all.

The cooperative system of agricultural research and exten-
sion of that research into practical fields of application, as
carried out by the Department of Agriculture and the land-
grant colleges, is one of the oldest farm-related activities of
the Government. It was founded on the belief that the appli-
cation of scientific methods to the problems of agriculture
would enhance the welfare of rural Americans and improve
the food supply for all citizens.

Viewing new technology as a major influence in structural
change, and public research and extension as a major
source of new technology, two sets of interrelated questions
emerge as fundamental to the structure of agriculture:

• What problem areas and clientele interests are to be
addressed by agricultural research and extension?
What priorities are to be placed on them in order to
best serve the long-term goals the public as a whole
establishes for food and agriculture?

• How can our agricultural research and extension ac-
tivities best be organized, coordinated, and funded in
order to address effectively and efficiently this
agenda of critical problems and needs?

The issues are many and complex. They reflect an increas-
ing awareness of the impacts, both beneficial and adverse,
of technology. They also reflect the demands of an increas-
ingly pluralistic clientele (including farm laborers, con-
sumers, small and limited-resource farmers, environmental-
ists, and nonfarm rural residents) that their interests be
given greater attention in agricultural research, teaching,
and extension programs.

Those concerns and their implications for research, exten-
sion, and the structure of agriculture are noted below in
terms of some of the major problem areas.

Rising World Demand

The economic environment detailed in Part I suggests that
even with significant increases in productivity in regions of
the world not now self-sufficient, demand for U.S. exports is
expected to continue to rise rapidly. The manner in which
the United States meets some or all of this demand will im-
portantly affect the structure of American and possibly
global agriculture. With science and technology undoubtedly
playing a major role in meeting this demand, research and
education may now be more important than ever. But the
research and educational institutions face new constraints
and considerations that appeared less important in the past.

First, rising costs of productive inputs mean that continuing
to develop technologies built on intensive use of energy, pe-
troleum-based chemicals, and capital will become increas-
ingly unattractive economically. These are also the technol-
ogies which have contributed most to farm specialization
and concentration and to environmental degradation.

At the same time, with most of the good land now in pro-
duction, we have lost the flexibility we once had to shift to
more land-extensive technologies in lieu of the capital- and
energy-intensive technologies. Moreover, the past emphasis
on labor-saving technology may be less appropriate, as
other resources become scarcer and more expensive rela-
tive to labor.

127

These developments imply that major shifts are needed in
publicly supported research to develop farm production
technologies that are more energy- and capital-efficient,
more compatible with the environmental stress of a fully
used land base, and more beneficial to farms of all sizes.

Increasing U.S. farm productivity through technology and
practices that are less energy- and chemical-intensive will
also reduce pressure on limited global production resources
and reduce domestic vulnerability to rising energy costs and
disruptions in supply. And, these objectives would be fur-
thered by research and extension efforts to address technol-
ogies appropriate to the resources and needs of those not
now self-sufficient in food production.

Agricultural Production Capacity
and Efficiency

Our current capability to provide an expanding supply of ag-
ricultural products is attributed to the development and use
of cost-reducing or production-enhancing technology and
the expanded use of readily available cropland.

The most common cost-reducing, efficiency-increasing tech-
nologies have been geared in large part to the substitution
of cheaper inputs (petrochemicals and energy, capital, er
cetera) for more scarce or relatively more expensive inputs
(labor, for example). A result has been a contribution to
both the increasing concentration of farm production on
fewer and larger farms and the displacement of farm labor.

The movement of labor and other resources from farming to
the production of other goods and services has contributed
to national economic growth and development. But signifi-
cant social costs also resulted — some displaced people had
difficulty finding new work, and rural communities suffered
from declining population before adapting to the changes in
the local, regional, and national economy. Some of these
problems continue, although declines in the agricultural la-
bor force slowed dramatically in the past decade, and use
of labor in farm production appears to be stable now.

Expansion of farm size has been an important aspect of the
past gains in production efficiency. Economies of size, fos-
tered in part by the development of new size-biased tech-
nology (for example, the development of large machinery
and other capital-intensive tools and practices) have allowed
farmers to reduce unit production costs by expanding farm
size. Other research has removed some of the biological,
technical, and managerial constraints on large-scale, spec-
ialized production. For example, the development of im-
proved poultry disease-control techniques helped remove a
significant barrier to large-scale production of broilers and
turkeys.

In addition, innovative and adequately financed medium- to
large-sized farmers have readily taken advantage of new
technology (such as new seed varieties) and extension in-
formation that was necessarily size-biased. This increased
their competitive advantages and contributed to their
growth, at the expense of smaller or less innovative
producers.

Research and extension programs have been generally tar-
geted towards these larger-scale, innovative producers, rea-
soning that the demonstrated benefits would trickle down to
the smaller farmers. This strategy lies behind much of the
successful contribution to technological and productivity ad-
vancement for which research and extension programs
have been widely praised. But it also lies behind the corre-
sponding lack of attention to other social and technical prob-
lems for which they have been increasingly criticized.

This strategy now needs to be reexamined in the light of
current and prospective conditions. Many farms are now so
large that further expansion in size may yield little benefit in
improved efficiency (reduced unit production costs), or add
little to an individual producer's net income. Additionally,
continued concentration of production capacity may inhibit
the flexibility needed to respond to changing needs and
situations.

Reassessment of research and education programs is also
necessary to respond to emerging resource pressures. This
includes assessment of the technological adjustments re-
quired to reduce production costs and reduce dependence
on scarce nonrenewable resources, reassessment of the full
consequences and potential payoffs from relatively greater
attention to the needs of smaller farms, and a willingness to
explore the long-run potential for unconventional production
practices. All of these potential adjustments have clear
structural implications.

Natural Resources

and Environmental Concerns

Closely related to maintaining our production capacity and
efficiency is the growing recognition of the constraints on
natural resources as production inputs and the quality of the
environment.

Natural-resource and environmental problems have become
increasingly important as increased demands for food and
fiber production have coupled with growing, competing de-
mands for other uses of water, forests, and other natural re-
sources to intensify total demand on the resources and the
environment. Excessive erosion of soil from fragile lands
pressed into intensive production, dwindling water supplies
in some regions, water pollution, and other environmental
and health hazards from past and current production prac-
tices have become increasingly evident.

128

Environmental problems, concerns about the safety and
quality of our food supply, and related issues have in-
creased the public demand for regulation. Today, inade-
quate knowledge of environmental and health hazards and
of the impacts of pesticides, food additives, and other pro-
duction and processing practices restrict and complicate
Government's ability to guarantee public health and safety.
Continuing failure to find technological and educational solu-
tions to these problems will almost certainly increase de-
mand for added regulation.

The aspects of those concerns on which research and ex-
tension focus and the manner in which they are treated can
have significant impact on the structure of agriculture. For
example, concentration on the problems of preserving natu-
ral-resource inputs (for example, development of new soil-
conserving production practices) might affect farm size and
machinery design. Furthermore, development and wide
adoption of economical conservation practices by farmers
would lessen the need for public assistance or regulatory
programs to deal with soil erosion and related programs.

Conversely, concentration on problems of maintaining cur-
rent or increased levels and current types of inputs might
eventually lead to increases in resource costs, affecting cur-
rent and future production capacity. For example, significant
shifts in regional production patterns will be likely unless
major advances in water-conservation practices are devel-
oped and implemented in areas with limited water supplies,
increasing competition for water use, and rising energy
costs for pumping irrigation water.

Marketing, Processing, Distribution,
and Consumption of Agricultural Products
The off-farm segments of the food and agricultural system
have grown in significance with increasing functional spe-
cialization and demands for marketing services. These
trends, combined with substantial supply cost increases (for
labor, energy, et cetera) have resulted in the processing-
and-distribution sector's accounting for a substantially larger
portion of the consumer food dollar than the farm sector
does. Food and fiber prices are thus increasingly dependent
on improved productivity and efficiency in the nonfarm
sector.

"It is amazing how much can be accomplished in a contro-
versial area if one does not acknowledge what he is doing!

"But evidence has come before us that the land-grant col-
lege system, whatever its intent, whether real or professed
or both, has served to speed the trend toward an industrial-
ized agriculture. It simply has not been possible to make
such great advances in efficiency as have occurred without
having profound effect on the structure of agriculture. . . .
The Extension Service, with its advice that a farmer should
have a business 'big enough to be efficient, ' undoubtedly
speeded up the process of farm consolidation and reduced
the number of farms. In the classroom, emphasis on mod-
ern management helped put the traditional family farm into
a state of total eclipse. "

Don Paarlberg, "The Land Grant Colleges and the Struc-
ture Issue," May 23, 1980, draft.

Increasing economic concentration in marketing, processing
and distribution industries — facilitated by new technology —
raises concerns about the adverse effects of monopolistic
power on both consumers and producers. Further, many
firms in these industries now have significant capacity and
incentives to conduct the research, development, and inno-
vation needed to address the most pressing inefficiencies.
However, this may lead to further concentration as these
firms gain further competitive advantages. The need is for
technologies and systems that can reduce costs and im-
prove efficiency, while contributing to the maintenance of
fuller competition in the nonfarm agribusiness sector.

Technological advances have also increased concentration
of economic activity and power in the marketing sector. Ver-
tical integration and coordination and contract growing to
meet processor or retailer specifications have significantly
altered the organization of farm production in some com-
modities and regions and have reduced market outlets of
small farms.

Changing technology and increased processing of raw food
commodities are increasing concerns about the nutritional
quality and safety of our food. For the most part, these con-
cerns have not been dealt with by publicly funded research
and extension programs as extensively as farm-production
problems and concerns. However, changes in these areas
have major significance for the structure and performance of
the food and agriculture system, and an increasing propor-
tion of the public is making it clear that exclusive emphasis
on relatively low-cost delivery of any product, handled in
any manner, is no longer acceptable.

129

Addressing Long-term Pressures
and Short-term Problems

The time horizons for research and extension planning and
funding potentially affect the structure of agriculture as
much as the substance of the research.

Generally, the more fundamental concerns of agricultural
science, those with the most potential to alter the structure
of agriculture, require years of work and long planning and
funding horizons. Examples include nitrogen-fixation re-
search, which could alter producers' chemical use and de-
pendency, and now-emerging germplasm techniques, which
may revolutionize the food-production industry over time.

There are indications that, because of our emphasis on en-
ergy- and chemical-intensive practices while such resources
are dwindling, we eventually must face fundamental read-
justments in agriculture. These are problems that may re-
quire, in response, fundamentally different practices and
technologies that can be achieved only by investment in
long-term research.

At the same time as these demands exert increasing pres-
sure on our capacity to produce and as production and dis-
tribution become increasingly specialized, the resulting vul-
nerability to short-term fluctuations in input prices, to the
weather, and to other factors may generate increasingly se-
rious short-term problems. These include significant fluctua-
tions in the availability, quality and price of food, and in eco-
nomic returns to producers, with attendant consequences in
all directions.

The capability of the food and agricultural system to adjust
rapidly and efficiently to changing conditions is a growing
concern. This capability is partially determined by our ability
and willingness to anticipate and confront changing condi-
tions in the long term. Successful long-term basic research
providing new breakthroughs will be of major importance, as
will the responsiveness of the extension system in providing
assistance and services to changing and varied clients.

A major problem for agricultural research and education is
to develop appropriate planning for sustained efforts to meet
long-term needs and to allocate resources sufficient to sup-
port those efforts, while retaining the flexibility to respond to
urgent short-term problems. This will require more careful
assessment of long-term priorities, anticipation of short-term
problems, and better-coordinated determination of overall
priorities.

Some of the emerging concerns about our food and agricul-
tural system documented in this report can arguably be at-
tributed to past inadequate assessments of longrun and
system-wide implications of our research and extension poli-
cies. This points out the consequences of allowing policies
to be set entirely on the basis of short-term, narrowly fo-
cused problems.

Organization, Funding and
Administration of Agricultural Science
Clearly, agricultural research and extension, by developing
and disseminating new technology, have significant influ-
ence on the structure of agriculture. The questions of future
relevance here are, how, by whom, and for what interests
will decisions be made by publicly supported agricultural sci-
ence institutions in determining how they will address the
array of problems facing agriculture?

Because the influence of technology is so significant, it is
important to examine and consider the organization and
administration of the research and extension system.

Both the public and the private sectors conduct substantial
food and agricultural research and education. Demarcation
of appropriate or even expected responsibilities has not al-
ways been clear. However, there has been a traditional ex-
pectation that work for which the private sector lacks the ca-
pacity or incentive to adequately address, and which is in
the public interest, is an appropriate focus of publicly funded
work.

Agriculture has enjoyed close collaboration between the
public and private science communities, which suggests that
expansion or contraction of publicly funded work in some
areas will affect private investment. The reverse should also
be true. Public science planners need improved understand-
ing of private sector science plans and investments to en-
sure the most efficient and effective use of all science funds
and research capacity.

Federal in-house research programs and directed funding
provide a centrally planned and coordinated means to ad-
dress critical national needs. However, the food and agricul-
tural sciences are so broad that such programs are by no
means confined to USDA. Numerous oversight and review
groups have pointed out that improvements are needed in
the coordination, planning, and management of agricultural
science programs at the Federal level. There is now no
good way to be sure that centrally directed Federal pro-
grams avoid duplication and consistently give priority to na-
tional needs that other public or private institutions cannot
or will not address. As one result, the Federal system lacks
coordinated analysis of and planned influence on national
agricultural structure.

130

The cooperative research and extension system for agricul-
ture is unique in the United States. The Federal government
provides continuing, largely undirected support to the land-
grant colleges for research and extension activities. The
system is organized as a cooperatively funded partnership.
Because Federal funding has been almost totally undi-
rected, the system has gradually evolved a highly decentral-
ized planning and decision structure, which has allowed and
encouraged research and extension workers to give highest
priority to the immediate needs of local agricultural interests.

While this orientation toward local problem-solving has been
one of the major reasons for past successes in addressing
commercial food and agricultural problems, it has also been
a factor in inhibiting the redirection of research and exten-
sion work toward longer-term, fundamental problems, and
toward nontraditional problems or client groups. That is, as
long as the local orientation dominates "cooperative" deci-
sionmaking, there will be a tendency to emphasize research
and extension that will reinforce current structure or struc-
tural trends.

No one could realistically argue for complete centralization
of planning and decisionmaking in agricultural science. The
potential for misdirection and inefficiency in such a system
is readily apparent in international examples. However, a to-
tally decentralized planning and decision system holds
equivalent, if substantively different, potential problems.

The need is to improve planning and decisionmaking mech-
anisms so a more balanced approach, with more efficient
and effective capacity to mobilize research and extension
for the changing problems of the future, can be developed.

The Future

At the very least, a major review of planning and decision-
making practices in the realm of publicly supported agricul-
tural science seems called for by the new realities we face.

Such a review should reconsider the logic of a cooperative
system. "Cooperative" does not imply that it is necessary
for all partners to hold identical aims — in fact, it assumes
that they do not. The obvious variance in aims is clearly jus-
tified in the case of Federal, State, and local interests and
needs. The tensions and complexities in such a mixed sys-
tem make it difficult to reach consensual decisions on em-
phasis. The logic of a cooperative system suggests that,
rather than being primarily (and sometimes wholly) locally
oriented, decisions should be reached by open negotiation
of the different interests and perspectives of all cooperating
partners.

If the research and extension system is to consider current
structural concerns and the longer-term structural conse-
quences of what it does, new and more effective means of
stating and negotiating the often disparate interests and ob-
jectives of the many legitimate constituencies of the food
system are imperative.

Selected References

Baker, Gladys, et. al. A History of the Agricultural Extension
Service. Economics and Statistics Service, United
States Department of Agriculture, Washington, D.C.
Forthcoming.

Lu, Yao-chi, Philip Cline and Leroy Quance. Prospects for
Productivity Growth in U.S. Agriculture. Economics and
Statistics Service, United States Department of Agricul-
ture, Washington, D.C. Agricultural Economics Report
435. September 1979.

National Agricultural Research and Extension Users Advi-
sory Board. Report. United States Department of Agri-
culture, Washington, D.C. October 1980.

O'Brien, Patrick. "World Agriculture in the 1980's." Econom-
ics and Statistics Service, United States Department of
Agriculture, Washington, D.C. Forthcoming.

United States Department of Agriculture. Changes in Farm
Production and Efficiency, 1978. Economics and Statis-
tics Service, Washington, D.C. Statistical Bulletin 628.
January 1980.

131

CHAPTER 10 AGRICULTURAL LABOR

132

The history of hired agricultural labor presents one of the
most notable cases of conflict between market performance
and the expectations of its participants.

Labor is an important resource in agricultural production, the
one that makes all the others work. Modern industrialized
agriculture is increasingly looking to hired workers to meet
its labor needs, yet the current farm-labor market structure
and environment is not satisfactorily meeting the needs of
farmworkers, employers, or the larger society.

For many of the nearly three million people employed by
farmers, the farm-labor market frequently fails to provide
stable employment opportunities with reasonable levels of
earnings and the working conditions they seek.

By virtually any objective economic measure, farmworkers
as an occupational group fall below minimally acceptable la-
bor-force standards. The mechanisms for providing labor
market information and the requisite skills to qualify workers
for jobs on technologically advanced farms likewise are not
performing satisfactorily.

At the same time, many farm employers are having difficulty
hiring adequate numbers of sufficiently productive workers
to produce competitively in domestic and world markets.

Hired labor is a critically important input to many farmers.
While hired labor costs average only eight percent of farm
production expenses across all farms, they comprise one-
quarter to more than one-third of production expenses on
vegetable, fruit, and horticultural specialty farms.

Many employers face an uncertain and unstable labor sup-
ply, low productivity, rising wage levels and an uneven regu-
latory environment. They, too, find labor-market information
and skill-upgrading mechanisms unsatisfactory.

Society identifies much farmwork as socially undesirable
and farmworkers as a severely economically disadvantaged
group of laborers whose conditions, as individuals and as
an occupational group, tend to be self-perpetuating. The
public is concerned about lack of equity in farm-labor legis-
lation and regulation, heavy reliance on foreign workers, the
problems of migratory workers, and other social ills related
to agricultural employment. At the same time, the public is
also concerned about the health of the agricultural industry
and the availability and cost of agricultural products. It is
concerned that those who are able to work seek the avail-
able jobs before relying on public assistance.

As a result, for example, mechanization to replace labor has
been publicly supported, but concerns have arisen over a
lack of attention to improving manual methods or retraining
workers in the new skills now needed. Also, some realize

that, even though agriculture now is recognized as a field
requiring keen management skills, one of those skills — ac-
quiring and managing labor — is seldom stressed when the
others are imparted.

The Federal Government has mounted numerous programs
to treat specific farm-labor problems. These attempts to as-
sist have been largely ineffective in the past. They have
most frequently been ad hoc, treating symptoms rather than
causes. Many of these programs have contained reasona-
ble components of an overall farm-labor strategy, but essen-
tial parts of such a strategy have been omitted.

Farm Labor Use

Most of the Nation's farmwork is performed by farm families.
However, the role of hired labor is becoming more important
to the agricultural industry and to the Nation each year.

Even as the number of farms has decreased, the proportion
of farmwork being performed by hired workers has been
growing steadily. Advancing agricultural technology is in-
creasingly dependent upon this work force's possessing so-
phisticated technical skills.

• Nearly three million people do hired farmwork some-
time during the year.

There are nearly as many hired farmworkers as there are
farm operators and unpaid members of their families who
work on farms. Employment of hired agricultural workers
currently is relatively stable. The long-term decline over pre-
vious decades apparently ended in the seventies; there is
even some evidence of increasing employment in a few
regions.

• One-third of U.S. farms hire workers; employment is
concentrated on large farms and in certain regions
and commodities.

Two percent of the Nation's largest farms incur more than
one-third of the total hired-labor expense. However, many
small farms also hire labor. One in five farms with gross
sales of $40,000 or less employ hired labor, and they com-
prise more than half of all farms hiring labor. California,
Texas, and Florida together account for over one-third of all
hired-labor expenditures in the United States. Those three
and seven other States — Washington, North Carolina, New
York, Illinois, Pennsylvania, Iowa, and Arkansas — account
for more than half of national farm-labor expenditures.

Expenditures for hired and contract labor are almost equally
divided among agronomic crop farms, horticultural (vegeta-
ble, fruit and nut farms, and nurseries) crop farms, and live-
stock and general farms.

133

The Work Force

The hired farm work force encompasses a wide range of
persons who vary greatly in their commitments to such
work. Table 30 summarizes the salient characteristics of
short-term seasonal, long-term seasonal, and year-round
workers.

• Most hired farmworkers, like most farmers, do not
depend on agriculture for their only income or
employment.

About 60 percent of the hired farm work force are short-
term seasonal workers who spend only a relatively brief
time during the year working in an agricultural job. A major-
ity of these workers are not in the labor force most of the
year.

Another 25 percent of hired farmworkers are long-term sea-
sonal workers who have a commitment to and dependence
on agriculture. Nearly three-quarters of this group is in the
labor force most of the year, and roughly two-thirds work
exclusively in agriculture.

Finally, about 1 5 percent of hired farmworkers are employed
all year in agriculture. Some of these workers piece together
a sequence of seasonal jobs to obtain year-round work.

• Most hired farmworkers are young, local and white,
but the hired farm work force is a very diverse group.

More than one-quarter of the hired farm work force is mem-
bers of racial or ethnic minority groups; they tend to be
long-term seasonal workers.

More than one-third are students; they are primarily in the
short-term seasonal group.

More than three-quarters of all hired farmworkers are men
or boys.

Slightly more than a third are heads of households or sin-
gle. The rest are spouses or other family members.

Migrants comprise only about eight percent of the total farm
work force. In absolute numbers, there are only about half
as many as a decade ago. They are most heavily repre-
sented among the long-term seasonal workers. Although
their numbers are small, they face unique problems not en-
countered by persons commuting daily to seasonal agricul-
tural jobs from established homes.

Educational levels among farmworkers are low, but part of
this is a result of the generally young age of this work force.
Less than half of all farmworkers who are 25 years of age
or older have completed high school, but more than half of
all farmworkers are under 25 years of age.

The median age is about 23 years. Minority farmworkers
tend to be significantly older as a group than do white work-
ers. Because of increased seasonal employment on cash
grain farms, especially in the Midwest, the trend in recent
years is toward a younger and whiter hired agricultural work
force.

A particularly high incidence of the Nation's working poor
can be found among the men and women working for
wages on farms. They rank second only to domestic house-
hold workers at the bottom of the national income scale.

Households headed by a farmworker average only about
half the national mean income for all households having an
employed head.

Various studies have suggested that farmworkers as an oc-
cupational group suffer abnormally high illness and accident
rates and live in poorer quality housing than do other broad
occupational categories.

Current national data are inadequate to provide policymak-
ers with sufficient insight into or perspective on many impor-
tant issues regarding agricultural labor. Many people who
do farm work cannot be identified with agriculture in stand-
ard labor-force statistics, and the principal sources of spe-
cialized statistics may be seriously undercounting the farm-
worker population. Furthermore, national data obscure or
"average out" many regional and commodity patterns.

Finally, it is likely that undocumented workers are largely
omitted from the statistics, although they are surely a signifi-
cant component of the Nation's farm work force and a re-
curring public-policy concern.

Changing Work Relationships in Agriculture

The U.S. agricultural employment system is largely casual.
There is an absence of commitment among employers and
workers which would provide an assured work force of high
quality, on the one hand, and adequate farmworker employ-
ment, livelihood, and living standards, on the other.

In recent years, however, changes have been taking place
which are resulting in a reassessment of the traditional
farm-labor management and market mechanisms.

134

Table 30: Distribution of the hired farm work force: selected demographic and economic characteristics, by
duration of farm work, 1977

Short-tprm

I onn-tprm

Selected

seasonal

seasonal

Permanent

characteristics

(74 days

(75 - 249

(250 days

or less)

days)

and over)

(Pprrpni)

11 ul uwl 11)

Rarp/pthniritv

White

77

62

69

Hispanic

8

16

12

Black

15

22

19

Sex:

Male

71

82

93

Female

29

18

7

Age:

Under 25

65

45

32

25-44

22

29

40

45-64

9

21

23

65 and older

4

5

5

Rp'sidpnrp'

Farm

17

27

45

Nonfarm

83

73

55

Migratory status:

Nonmigratory

93

91

94

Migratory

7

9

6

Chief activity during the year:

Hired farm work

3

55

87

Student

48

20

9

Keeping house

12

5

NA

Nonfarm work

23

9

NA

Other

14

11

4

Number of persons (000)

1,723

617

391

Average days of all paid work

93

183

317

Average annual earnings ($) from all paid

work

2,185

4,193

6,563

Source: ESS/USDA.
NA = Not available.

135

A more mechanized, capitalized and highly technical agri-
culture has resulted in requirements for skilled manpower
which often cannot be met in the existing farm work force.
Quite apart from the imperatives of mechanization, however,
there has been increased pressure from workers and in-
creased realization among employers of the necessity of re-
ducing instability and improving efficiency and economic re-
turns to the agricultural employment system. Impetus for
change has also resulted from the application to agriculture
of employment, safety, health, and other general labor-force
regulatory standards.

One result of these changes has been to create an environ-
ment in which technical competence in managing labor is as
essential as technical competence in managing the farm's
financial and physical resources and purchased supplies.

In widely scattered parts of the United States, innovative
persons and organizations in the agricultural community
have been exploring new solutions to the increasing prob-
lems of providing agriculture's necessary manpower.

A small but apparently growing number of firms has been
experimenting with the adaptation to agriculture of ideas
and methods of modern industrial labor management — a
particularly logical development on farms that are industri-
ally organized, with functions such as ownership, manage-
ment, labor, and basic decision-making shared among per-
sons who are not necessarily family. This has involved
recombining short-term jobs into longer employment se-
quences, the creation of job ladders, skill and managerial
training, innovative renumeration and benefit packages, and
employee-relations programs.

In general, the result has been improved earnings and pro-
ductivity, which has helped employers to attract and retain
better workers, and, in turn, has helped provide for employ-
ers a more stable and productive labor supply. While fewer
workers were required, those jobs that remained were good
jobs.

Labor-stabilization measures can only be applied so far, of
course. While there is some evidence that both productivity
and wages for peak seasonal labor can be improved, it is
also obvious that the potential for converting seasonal agri-
cultural jobs into long-term jobs has limits.

One of the major obstacles to more widespread adoption of
progressive labor-management practices in agriculture is
lack of knowledge. Few agricultural employers are even
aware that options to the present casual labor market sys-
tem exist. Even university graduates in farm management
rarely encounter courses in labor management. There are
few professional agricultural labor-management resources in
the public or private sector that farmers can turn to for
advice.

In a few locales, where educational programs in modern
personnel management have been conducted and compe-
tent assistance has been available, farmers' responses
have been enthusiastic and the resulting benefits to farmers
and workers have been encouraging.

Another obstacle to more widespread adoption of progres-
sive labor management is uneven enforcement of labor laws
and regulations. In some cases, current economic trends
are of themselves adequate incentives to adopt progressive
personnel policies. But in others the presence and enforce-
ment of labor laws are a critical additional incentive. Some
employers have found that progressive labor-management
practices are competitive only when there is equitable and
consistent regulatory enforcement across all jurisdictions.

At the present time, farm employers in many locales and
commodities face choices between labor-management sys-
tems that stress large crews of very transient workers or a
reorganization of their own operations to accommodate la-
bor-management systems stressing more stable and perma-
nent employment patterns. The first approach results in a
continued demand for large numbers of low-skilled, low-
earning seasonally employed workers. The second will likely
result in a reduced number of people doing agricultural work
and demands for higher skills among those that remain, but
it provides potential for more stable employment and higher
earnings.

A Future Strategy

Programs to provide training in higher skills and good jobs
to intermittently employed workers are in direct conflict with
the labor-market strategies of agricultural employers who
depend on such low-skilled workers now. However, the un-
skilled labor pool has not been a good source of the quality
labor that agricultural employers increasingly need.

Agricultural employment policy must be devoted to mecha-
nisms for making agricultural employment competitive with
the other employment opportunities available to workers. It
clearly cannot be based upon policies aimed at maintaining
a labor force which is available only because it has no bet-
ter alternatives.

136

Retaining workers in a more stable and competitive employ-
ment pattern requires upgrading the quality of the work they
do. In addition to longer periods of employment and higher
earnings, this requires better working conditions, profes-
sional and respectful relations between workers and em-
ployers, advancement opportunities within their chosen oc-
cupation, and the ability to enjoy health, housing, education,
social status, and other benefits of community life on an
equitable basis with others in the labor force.

Raising incomes of agricultural workers will require sus-
tained productivity increases if it is not to result in increased
production costs. Moving away from highly casual labor pat-
terns toward more stable remunerative employment should
provide incentive to employers and workers to make invest-
ments in acquiring skills that should itself enhance produc-
tivity. More systemmatic labor management and progressive
labor relations should have the same effect.

However, it is likely that not all the added cost of making
farm employment competitive with other work will be offset
by improved labor productivity; some increases in agricul-
tural products' prices will result. These same equity consid-
erations have been faced in other industries, and it is an im-
plicit principle of U.S. labor policy that substandard
employment practices cannot be justified by lower product
prices.

The questions and issues regarding the structure of agricul-
tural labor in the United States, as this summary review
clearly indicates, are thorny and complex. The immediate
question before the Department of Agriculture is less how to
resolve them all than it is, simply, how to get started on
them in some significant way.

A necessary first step, and perhaps the single most impor-
tant step, is for the USDA to establish a positive departmen-
tal policy to actively develop and protect workers in agricul-
ture. This means, in effect, making the same commitment to
developing the potential of human resources that the De-
partment has made to developing the potential of the physi-
cal, financial, technological, and natural resources employed
in agriculture.

In implementing an agricultural human-resources policy, the
USDA should devote priority attention to the 1 5 percent of
the hired farm work force who are year-round workers and
the 25 percent of the work force who have a substantial
commitment to and dependence on agriculture for their live-
lihood, but who are only seasonally employed.

The challenge is to make these industries more competitive
in the labor market and the commodity market at the same
time.

Selected References

Agricultural Labor in 1980: A Survey with Recommenda-
tions. Report of the United States Department of Agri-
culture/United States Department of Labor Agricultural
Employment Working Group. Economics and Statistics
Service, United States Department of Agriculture,
Washington, D.C. December 1980.

Fritsch, Conrad F. Occupational and Nonoccupational Fatal-
ities on U.S. Farms. Economics and Statistics Service,
United States Department of Agriculture, Washington,
D.C. Agricultural Economics Report 356. 1976.

Rowe, Gene and Leslie Whitener Smith. Households Eligi-
ble for a National Farmworker Program Under the Com-
prehensive Employment and Training Act of 1973. Eco-
nomics, Statistics, and Cooperatives Service, United
States Department of Agriculture, Washington, D.C. Ar-
gricultural Economics Report 324. 1976.

Rowe, Gene. The Hired Farm Working Force of 1975. Eco-
nomics and Statistics Service, United States Depart-
ment of Agriculture, Washington, D.C. Agricultural Eco-
nomics Report 437. 1 978.

Smith, Leslie Whitener and Gene Rowe. Food Stamp Parti-
cipation of Hired Farmworker Families. Economics, Sta-
tistics and Cooperatives Service, United States Depart-
ment of Agriculture, Washington, D.C. Agricultural
Economics Report 403. 1 978.

Smith, Leslie Whitener and Gene Rowe. Income of Farm
Wageworker Households in 1971. Economics and Sta-
tistics Service, United States Department of Agriculture,
Washington, D.C. Agricultural Economics Report 251.
1974.

Smith, Leslie Whitener and Robert Coltrane. Agricultural La-
bor Needs in the 1980's. Economics and Statistics Ser-
vice, United States Department of Agriculture, Washing-
ton, D.C. 1980.

Smith, Leslie Whitener. Social and Economic Characteristics
of Spanish-Origin Hired Farmworkers in 1973. Econom-
ics and Statistics Service, United States Department of
Agriculture, Washington, D.C. Agricultural Economics
Report 347. 1976.

Priority attention should also be given to those sectors of
the agricultural industry requiring particularly large amounts
of labor. In some of them, survival of the farm probably de-
pends on being able to successfully meet their labor needs
within competitive production-cost ranges.

137

CHAPTER 11 TRADE POLICY

138

The new equilibrium emerging in American agriculture, as
described in Part I of this report, has serious, far-reaching
implications both for the role trade plays in the farm sector
and the role our farm sector plays in the world agricultural
economy.

Many of our key trade policies and the complex of programs
linking our agriculture to the rest of the world were devel-
oped in the 1950's and 1960's and suited to the needs of a
farm sector facing excess capacity, the resulting surpluses
at home, and a buyer's market abroad.

As our supplies of resources readily available to commit to
food production become visibly limited and the world market
shifts gradually toward a seller's market, our trade policies
and programs will have to be recast to suit fundamentally
different circumstances.

Historical Perspective

The rationale underlying our existing international agricul-
tural policies evolved immediately prior to and over the dec-
ade following the Second World War. The majority of the
policies and programs designed and implemented early in
the postwar period reflected Depression-era concern with
excess production capacity and wartime experience with ex-
ports as a means of easing, at least temporarily, price-
dampening surpluses that were, among other things, a bur-
den on the Federal budget.

The surpluses were the most visible result of the imbal-
ances in a farm sector with a far larger capacity to produce
than required by domestic demand for its products — and
with technological advances undermining even the best of
intentions to restrict annual production.

Given the magnitude of the capacity problem, postwar poli-
cymakers concluded that producing food, feed, and fiber for
commercial export — even for concessional or subsidized ex-
port under food-aid or export-credit programs — was as effi-
cient a use of the resources as other uses competing for
them. Moreover, producing for export would measureably
benefit the Nation's balance of payments, farm income, and
Federal budget.

A strong sense of this beneficial impact of agricultural ex-
ports underlay our postwar policy stance favoring liberalized
world trade, particularly in grains and other products in
abundant supply in the United States.

The international programs developed over the first 25
years of the postwar period included export promotion pro-
grams to foster long-term growth in exports; food aid; devel-
opment assistance; commercial credit programs, and, for
selected products such as wheat, export subsiay programs
designed, at least in part, to help dispose of the immediate
surpluses.

The positive effects of trade at that time far outweighed any
adverse effects of tying the domestic market directly to the
world market.

Realigning Agricultural Trade Policies

The economic conditions outlined in Part I for the 1980's
suggest that future trade policy and related program deci-
sions will have to be made in a markedly different setting —
one characterized by a distinct trend toward tightening sup-
plies and complicated by increased year-to-year swings in
production.

The role exports play in the farm sector and the cost of pro-
ducing more for export, compared to other investments or
uses for the resources, increased dramatically with the ex-
pansion of trade and the disappearance of excess capacity
in the 1970's.

Should the supply and demand forces outlined earlier ma-
terialize— especially in light of political preferences for ex-
panded trade to maintain incomes and reduce balance-of-
payments deficits — trade will play an even more dominant
role in agriculture. The costs involved in producing more for
export will also increase.

Today, the United States is the dominant trader, supplying
roughly one-half the volume of products moving on the
world market and almost 1 0 percent of the rest of the
world's consumption. Over the eighties, the U.S. share of
world trade could rise to three-fifths, and our exports could
constitute as much as 13 percent of the world's food
consumption.

Exports in the volume likely in the 1980's will tend to have
high additional costs — both for farmers, in producing and
marketing the commodities, and in a broader social and
economic sense, in raising food prices, intensifying the use
of renewable and nonrenewable resources, and putting fur-
ther stress on the environment. This further complicates the
trade-policy reassessment needed in the eighties.

For the economic future that appears highly likely, there will
be at least three key trade-policy areas which need reexam-
ination. Policymakers will face the critical problems of:

• Fully integrating trade policy into domestic food and
agricultural policy.

• Realigning our international policies and programs to
maximize the return on our increased participation in what is
likely to be an increasingly unstable world market.

• Meeting our expanding international food-aid, food-
reserve, and development-assistance responsibilities.

139

Integrating Policies

The challenge of consciously integrating our trade policies
and broader food policies relates to the difficult task of ra-
tionalizing conflicting objectives for resource use and con-
servation, for food-price stability, and for curtailing inflation,
as well as such subsidiary national economic purposes as
improving our balance of payments.

Until now, temporary shifts in demand from overseas, due
to weather-related developments or changes in others' do-
mestic policies, and fluctuations in production in the United
States forced policymakers to decide priorities among what
proved to be temporarily competing trade-policy and domes-
tic agricultural-policy goals.

These decisions involved temporary trade-offs between for-
eign and domestic consumers without change in a seem-
ingly permanent commitment to maximizing exports.

The new equilibrium in resources, compared to demand for
commodities, will necessitate a fundamental re-evaluation,
as the 1980's progress, of the level of exports that is good
for the economy as a whole — for the immediate future and
the rate of growth advisable over the longer run.

Maximum Returns from Expanded Exports
The question of maximizing returns on our increased partici-
pation in the world market involves our basic trade-policy
stance and the day-to-day administration of trade programs.

Do we continue to function largely as free traders, in a
largely protectionist world market, and allow foreign con-
sumers open access to our supplies? Or do we weaken, or
possibly break, the links between the domestic market and
the increasingly unstable world market? Do we modify ex-
port-marketing strategies, possibly in favor of bilateral trade
arrangements or some form of export-marketing boards, to
ensure that the return on export sales covers the full cost of
producing and marketing agricultural products?

While export-promotion programs may appear initially to be
superfluous in the 1980's, their role might well expand if
they were to be focused on promoting products that mini-
mize pressure on our resource base and food-price inflation
but maximize the value added to the product and the bene-
fits for the farm sector and the general economy.

International Responsibilities

The third area of concern centers on meeting our interna-
tional responsibilities. These relate first and foremost to our
food-aid commitment to low-income countries, a commit-
ment to ameliorating hunger in the world.

The food-aid programs of the last three decades served as
an outlet for surplus production, as a market-development
tool, and as a vehicle for aiding developing countries. The
wide fluctuations in aid flows over the postwar period to
date reflect changing emphases among these three sepa-
rate goals and/or ability to commit resources toward their
achievement in a given year.

Over the 1980's, the need for surplus disposal and market
development is likely to decrease significantly; the cost of
food aid is likely to increase substantially.

The production, population, and income trends noted at the
beginning of this report suggest, however, that food-aid
needs overseas will increase substantially.

Consequently, as the poorer countries' food needs grow —
possibly at a record rate — the United States is likely to once
again face difficult decisions on the basis of available sup-
plies— honoring the commitment to meet those increasing
needs for aid at a time when commercial demand is high,
too.

Closely related to the question of food-aid responsibilities is
the issue of food reserves. If year-to-year variations in world
production increase and global productive capacity is used
closer to its maximum than in the 1970's, the need for re-
serves will prove even greater than during that turbulent
decade.

As the United States becomes both the world's major and
residual food supplier, its vested interest in a reserve sys-
tem will increase substantially — both as a means of meeting
commercial and concessional trade commitments and of in-
sulating the domestic market from imported instability.

Common to both the food-aid and reserves issues is the
United States' vested interest in — and its strong position to
insist on — a more equitable sharing among nations of the
costs and benefits of world trade.

Finally comes the question of development assistance to
low-income countries, so that their ability to meet their own
food needs is strengthened in the decade. Food needs, par-
ticularly in these countries, are expected to grow at a rate
beyond that which can be supplied by trade, even if that
were desirable. The United States must continue and accel-
erate its commitment to assist these countries and to look
for ways to increase the effectiveness of that assistance.

140

PART III CONCLUSIONS AND
RECOMMENDATIONS

■ 435a
aHetoer

Throughout this report, we have discussed the contempo-
rary problems and issues of our agricultural and food sys-
tem. We have attempted to illuminate those issues by pre-
senting and discussing what we have learned over the
course of the Structure Project. Parts I and II of this report
were largely developed from the work and technical exper-
tise of the Department's Economics and Statistics Service
and several consultants. However, any judgments and pol-
icy recommendations made on the basis of that work in this
report, and especially in this concluding chapter, are entirely
the responsibility of Secretary Bergland, other policy offi-
cials, and the Structure Project staff.

General Conclusions

One of the clear lessons of this study is that the many indi-
vidual forces affecting structure cannot be fully understood
and addressed without regard for their interactions with
other forces. Tax, credit, commodity, and development poli-
cies, inflation, technology, and market forces, to name a
few, all interact in a kind of economic chemistry. The struc-
tural products of that interaction vary in response to the
many factors with which they interact, including type and
size of farm, wealth of the individuals and firms, and general
economic and agricultural conditions. We cannot expect to
fully measure the singular impact of all these complex inter-
actions. But policies that fail even to recognize that such in-
teractions exist will, at best, be of limited effectiveness and,
at worst, generate undesirable and perhaps irreversible ine-
quities and structural changes.

Although we have been unable to precisely quantify the rel-
ative importance of the many policies and programs that
have and continued to affect the structure of agriculture, the
hearings and subsequent studies provide conclusions that
can serve as the basis for informed judgments.

First, the present tax policies are having a significant effect
on farm structure — on balance, they are biased toward the
larger farmers and wealthy investors.

Second, technology — the product of past research and edu-
cation— has had a major impact on structure.

Third, changes in the agricultural maketing system have af-
fected structure. Increasingly, the marketing system is ori-
ented to better serve the larger producers.

Fourth, farm commodity and credit policies have been of
greater benefit to the larger producers, and this has affected
structure.

Fifth, the policies, programs, and events that have created
jobs for rural residents have had an impact on farm
structure.

At the same time, it has become increasingly evident that
the gains to the Nation that remain to be captured from the
continued shift to larger and larger farming operations have
become smaller over time. When the net losses to farming
communities associated with the continual decline in the
number of farm families are taken into account, we have
passed the point where any net gain to society can be
claimed from policies that encourage large farms to become
larger.

Further, there is no overall reason for public policy to en-
courage farm growth and consolidation beyond the size
necessary to be efficient. Beyond this size, society has no
reason to encourage or subsidize growth, nothing to gain
either in terms of efficiency or lower food costs, and little to
gain in terms of ensuring adequate incomes for farmers.

As commodity prices increase in the future and land prices
further accelerate in value, the market will undoubtedly stim-
ulate growth on its own. Policies that explicitly or uninten-
tionally encourage this tendency are both inflationary and an
inefficient use of resources.

General Recommendations

It seems fairly certain that the future economic climate,
combined with a continuation of current policies and pro-
grams, will continue and even accelerate the shift to large
and super-large farms. Therefore, unless present policies
and programs are changed so that they counter, instead of
reinforce and accelerate the trends towards ever-larger
farming operations, the result will be a few large farms con-
trolling food production in only a few years.

This does not mean that present policies and the programs
derived from them should be summarily abandoned. It does
mean that they should be modified. This study has shown
the wide diversity in the impacts of present policies as well
as the dangers associated with extreme volatility in the mar-
ketplace. The need for care in modifying polices is found,
for example, in the vulnerability of a large proportion of to-
day's primary farms to such volatility. That vulnerability un-
derscores the importance of modifications based on accu-
rate interpretations of farmers' needs and of changes that
lessen this vulnerability and promote flexibility.

Programs designed to protect today's farmers from the eco-
nomic and natural disasters that remain as threats are justi-
fied and must be maintained. But they also must be tailored
to these farmers' needs. Programs that seek to guarantee
market prices or incomes in excess of those needed by fully
efficient producers will only lead, again, to a Nation of large
and super-large farms and further the demise of farming
communities.

142

Consequently, policies and programs should be carefully
modified, with farm structure clearly in mind, so that they no
longer encourage economic cannibalism within agriculture
or short-sighted exploitation of agricultural resources with no
thought for their use over the longer term. They must recog-
nize the costs to society that are the consequences of un-
necessary concentration and be so modified that financial
and technical assistance is made available to help those
who, in its absence, will be adversely affected by economic
forces and policies.

The resourcefulness, initiative, and foresight of the Ameri-
can farmer is legendary. These characteristics, however,
evolved from a tradition of facing and coping with risks
largely on one's own. An environment which not only dis-
courages individual risk management, but also actively en-
courages its convenient transfer to the Government and
general public, endangers that tradition.

Central to the nescessary modifications are policies and
programs that help the medium-sized and smaller farm op-
erators obtain credit, achieve production efficiencies and
marketing opportunities, protect their natural resources and
the environment, have access to off-farm employment op-
portunities, and offset the bias towards bigness in tax
policies.

These modifications are the only way in which food and ag-
ricultural policy can be conformed to the public interest
clearly expressed in the goals and purposes outlined in the
introduction to this report. Present policies and programs
should be modified so that they promote opportunity within
agriculture, provide access to its rewards, and an equitable
distribution of those rewards and risks.

Finally, we submit that if a diverse farm sector is to be
maintained, it is important that policies recognize problems
peculiar to specific groups of farms and address those prob-
lems directly. The "broadside program" approach, perhaps
more appropriate in the past, is doing more to concentrate
production than it is to protect the farm sector.

Specific Findings

Concurrent with the passing of the chronic excess produc-
tion capacity is the disappearance of some fundamental
problems of the farm sector — notably those problems that
were most directly related to persistent surpluses. We found
that incomes in agriculture are no longer pervasively or
chronically depressed, nor markedly lower than incomes of
nonfarm people. The emergence of industrial employment
opportunities in rural areas has contributed significantly to
greater incomes on the smaller farms, and to a major less-
ening of the disparity of incomes among farm people. In
fact, most of the 1 .2 million of the very smallest places
counted as farms are rural residences whose occupants de-
pend primarily on nonfarm jobs.

The improved income situation in agriculture is also partly
due to improved earnings from farm businesses. Those
farmers who own the land they farm have both current in-
come and capital gains, and both have increased in real
terms over the previous decade. Their returns are greatest
from appreciation of capital assets, especially land. The
rates of return from real capital gains (with inflation's effects
removed) are fully comparable to earnings from investments
in the rest of the economy. Rates of return from current in-
come are still relatively moderate, although substantially
above levels that have prevailed during most of the postwar
period. When the returns from both sources are combined,
earnings of farm investments seem fully comparable to in-
vestment earnings in the rest of our economy.

But, not all producers realize income benefits from apprecia-
tion in land values. Much of the land (about one-third) is
owned by nonfarming landlords. Thus, much of the in-
creased wealth resulting from higher land prices is not ac-
cruing to farmers but to individuals outside the farm sector.
To the extent that farm-policy benefits intended for farmers
get capitalized into higher land values and flow out of agri-
culture, the policies are inappropriate. Tenant farmers who
rent land on a cash or share-rent basis may see only higher
rents.

We also found a growing concentration throughout the en-
tire food industry — a concentration that showed itself in sev-
eral ways. Commodity production is highly concentrated.
The benefits from the commodity programs, still disbursed
by the volume of production on each farm, are similarly con-
centrated. Ownership of the resource most important to
farming — the land — is vested in the hands of relatively few
people. Agricultural input suppliers, the agricultural market-
ing system, food processing, distributing and retailing, are
all increasingly concentrated.

The supply of land is limited, and its role in farming is
unique. Simultaneously, it is a production input, a store of
wealth, the ultimate repository of program benefits, and the
biggest barrier to occupational entry. The concentration of
landownership and the declining share controlled by farm
operators are fundamental structural changes, and, there-
fore, are most serious.

143

Rapid appreciation in land prices is a central cause of con-
tinuing concentration of landownership into fewer hands.
The fact that land prices have been rising faster than the
general inflation rate has made land an attractive invest-
ment for farmers and nonfarmers alike. Those best able to
exploit the benefits from investing in agricultural land are
nonfarmers and wealthy farmers — those with sufficient sup-
plemental income to enable repayment of principal and in-
terest on purchase loans, since earnings from the land
alone are insufficient. Further, appreciation in land prices
encourages exploitation of tax provisions that permit current
income to be taxed as capital gains. The taxes thus
saved — greater for those who can afford to defer income —
become a benefit to be used to outbid others for land. Thus,
rapid increases in land prices inspire the wealthy to exploit
the tax laws and outbid others for land. Farms become
fewer and larger, and land prices rise in a continuing infla-
tionary cycle.

Our studies also found vast changes in characteristics of
farms that are not so readily apparent. One is their financial
structure. Farms today are more specialized and capital-in-
tensive than formerly; they are more dependent on industrial
production inputs, and many are much more highly debt-le-
veraged than in times past. Annual cash obligations are a
high proportion of gross receipts on all farms, and the pro-
portion grows as the size of farm increases. These large an-
nual cash-flow requirements heighten the vulnerability of
farms to even mild production or market fluctuations. Thus,
while agriculture may no longer be beset by a chronic low-
income problem, it does face a severe problem of economic
instability.

Furthermore, as part of the past program of technological
development in agriculture, labor productivity has been a
primary focus. This meant that each farmer had to try to
outrun low prices by reducing costs and expanding the size
of the farm to get more volume in an effort to get larger in-
comes. A result was the large capital-for-labor substitution,
resulting in the capital-intensiveness of the sector today. But
today the labor component of agricultural production — both
the number of farmers and workers — is very small, and the
producivity of the remaining labor is very high. Continuing a
focus on labor displacement may thus actually be counter-
productive. Smaller farms, for example, depend more on la-
bor than on capital and can choose to successfully use or-
ganic farming practices if not undercut by program
administration or a lack of appropriate technology.

Before turning to a more detailed discussion of the future
economic climate and structural tendencies, and our recom-
mendations for responding to them, it is useful to re-exam-
ine the subdivisions of today's farms into groups with com-
mon characteristics that are significant for policy purposes.
We delineate four categories. This delineation is not perfect,

to be sure, and is not appropriate for all purposes, but it
does provide a much clearer focus on just who and what we
are dealing with in the farm sector today.

The four categories, shown in the accompanying table and
Figure 8 with 1978 data, are: Rural Farm Residences, Small
Farms, Medium-Sized Farms, and Large Farms.

The Rural Farm Residence category, although the largest,
is seen to have small total production. Off-farm income ac-
counts for most of the total income and is quite substantial
on average. The major farm-related problem this group
faces may be obtaining appropriate markets for the com-
modities it produces. At this volume, direct-marketing
schemes and cooperative marketing may be most suitable.

The second group, the Small Farms, produces gross sales
of $5,000 to $40,000 each. It is in this group where the
combination of farm and nonfarm earnings is especially im-
portant. By the time farms reach $40,000 in gross sales, net
farm income is slightly over one-half of total income, and to-
tal income, on the average, approaches the national me-
dian. It is in this group where the remaining poverty is per-
haps most concentrated. And, it is for this group that a
combination of strategies becomes important: for example,
nonfarm employment opportunities; marketing improve-
ments, including cooperative ventures; technical assistance;
access to credit; focused research and technology develop-
ment, and new, innovative forms of commodity and farm
programs.

The next group, the Medium-Sized Farms, includes those
with annual gross sales between $40,000 and $200,000.
There are undoubtedly some part-time farmers near the low
end of the bracket, but, by and large, farming is the major
source of income for these farm families. Our studies show
that most of the technical economies are achieved at sizes
well within this bracket. In fact, by the time gross sales
reach the neighborhood of $130,000, the technical econom-
ies have been fully obtained and most available market
economies have probably been achieved as well.

The fourth category contains the farms with more than
$200,000 in gross sales, the Large Farms. These farms un-
doubtedly have achieved all technical and virtually all mar-
ket economies. Incomes per farm family are more than ade-
quate by any standard, and the farm business generates a
combined current-income and capital-gains return fully com-
parable to returns in the nonfarm economy. The farm fami-
lies' labor is fully occupied. But, income stability — cash
flow — is a primary concern.

144

■

Farms

Gross Sales

Off-Farm Earnings

Category

Gross sales

Number

Amount

Amount

(000)

Percent

(bil.$)

Percent

(bil.$)

Percent

Rural farm residences

Under $5,000

1,186

44.4

2.3

2.0

20.2

58.6

Small farms

$5,000 - $40,000

898

33.6

19.2

16.4

9.5

27.5

Medium-sized farms

$40,000 - $200,000

524

19.6

49.6

42.2

4.0

11.6

Large farms

Over $200,000

64

2.4

46.3

39.4

0.8

2.3

Total

2,672

100.0

117.4

100.0

34.5

100.0

Figure 8

Income per Farm Operator Family,
By Farm Size, 1978

Gross

Category sales

Rural farm Less than
residences $5,000

Small farms $5,000-$40,000

Medium-size $40,000-5200,000
farms

Large farms Over $200,000

All farms

National median
family income ($17,640)

Net farm income

income

0 15 30 45 60 75 90
Income ($1,000)

Economic Stability

The period of the 1950's and 1960's, although one of low
returns, was also one of relative economic stability in agri-
culture. There were few instances of severely disruptive
price fluctuations. Those that did occur were slight and due
largely to the deviations in the size of the domestic crop.
This stability derived, in large part, as a side effect of the
commodity and other programs that formed the "farm pro-
gram" complex. These programs provided a price floor — the
loan rate. Prices never fell significantly below this floor, and
the large quantities of commodities that accumulated in
Government storehouses through the loan program always
overhung the market. Thus, commodity prices tended to re-
main very near the support price. Any shortfall in production
could immediately be made up from the large stock, and
market prices were precluded from rising significantly above
the loan rate, effectively eliminating the opportunity for re-
turns from farming to match those in other sectors of the
economy.

The stability that was largely taken for granted during that
period was abruptly shattered by the explosive events that
began in 1972 with the first major Soviet grain purchases.
Prices rose to disruptively high levels, subjecting the do-
mestic livestock sector to a shock that adversely affected it
through the balance of the decade. Farmers' gross receipts
increased, while costs lagged for a time, and crop produc-
ers enjoyed atypical prosperity. But, subsequently, com-
modity prices returned to more normal levels, and inflation-
induced costs soon caught up. Political pressure was thus
generated for increased price and income supports.

Boom prices also sparked the rapid inflation in land prices
that continued through the decade. Spiraling land prices in-
creased renters' production costs, contributed to greater
ownership and wealth concentration, and created an even
greater need for more capital simply to finance the resource
base, without adding to its productivity.

145

Rather persuasive arguments have emerged indicating that
future economic conditions for agriculture could be funda-
mentally different from those to which we have become ac-
customed over the past 50 years. Many of the demographic,
economic, weather, and political factors that caused the
instability of the early 1970's are still at play and are likely
to be exacerbated during the 1980's.

The growing global population and the rising affluence of
many of the world's peoples are each year further narrowing
the gap between food-production capacity and the current
consumption requirement. That production-consumption bal-
ance, always precarious, is increasingly sensitive to small
deviations in production and use. The world's growing de-
pendence on marginally productive areas will translate into
widening swings in production and demand for imports —
swings that will have to be countered to an increasing ex-
tent by only a few countries, notably the United States.

When we examine the pace at which our food and agricul-
tural production plant is presently operating, we find it al-
ready very near its short-term capacity. We find our re-
source and technology bases fully stretched. The once-
excess labor is gone from agriculture, the program-created
land reserve is no more, and our stockpiles of most com-
modities are at dangerously low levels. The thin margin be-
tween scarcity and surplus is more than ever a function of
the weather, something over which we still have little
control.

The continuation of an era in which growth in foreign food
demand, on the average, will likely outpace growth in for-
eign food production should not be interpreted as a call to
our farmers to plant "fence to fence." It is not. Rather, the
situation calls for development of well-conceived methods of
coping with a tightening world balance, so that we can an-
ticipate problems rather than confronting them in an atmos-
phere of crisis, only after they are upon us. Proper planning
will also allow attention to be given to many of the other rel-
evant considerations which society deems to be important
but which all too often get neglected in crisis policymaking.

Nor does the emergence of a close accord between the
world's ability to produce food and the consumption require-
ment mean that all of the problems we have previously ex-
perienced in agriculture will never appear again. It is highly
likely that we will face surplus periods — when production
temporarily will outpace demand — due to successively fa-
vorable weather years. These will be times of downward
pressure on commodity prices, and declines in farm income.
But the fundamental difference from previous periods is that
these will be temporary — rather than chronic — imbalances.
As such, it is important that we now view them appropriately
and deal with them differently.

Rather than immediately turning to production controls as
stocks accumulate, we will need to devise appropriate meth-
ods for holding that temporary abundance for use in subse-
quent periods of shortage. It should not be forgotten that
even one year of shortage and high prices can, if the re-
sponse to it is inappropriate, disrupt the domestic livestock
sector for several years. Quite simply, vacillation between
short periods of comfortable supplies and discomfiting short-
ages will occur with increased frequency, and policy must
be sufficiently flexible to accommodate this fact.

Recent projections suggest that the price volatility which
could result from such vacillation between shortages and
surpluses may be even greater than in the 1970's. This has
several implications. Volatile commodity prices imply unsta-
ble farm income. For moderate-sized farms, incomes could
fluctuate between adequate and inadequate. Large farms,
especially those that are highly debt-leveraged and highly
dependent on purchased inputs, are increasingly vulnerable
to temporary dips in cash flows. Thus, the several farm cat-
egories have a vested interest in commodity programs
which reduce price instability or which shift the risks associ-
ated with such instability. Volatile farm product prices mean
unstable food prices, and all the associated ripple effects
through the economy. Farmers, consumers, and taxpayers
all lose.

How we address the problem of instability will be very im-
portant to the future structure of agriculture. Most past and
some existing programs, designed to reduce or shift
farmer's vulnerability to price instability, tended to exacer-
bate the forces causing concentration of production and
higher prices. This is because those programs often contain
subsidies which tend to disproportionately benefit larger
farmers and landowners. The subsidies also make produc-
tion activities appear more profitable than is really tne case
and, thus, promote misuse of production resources. In the
future, programs designed to deal with instability should
also be designed to minimize unnecessary subsidies and
distortions in resource allocation.

Many nations have approached the problem of instability by
insulating their domestic markets almost completely from
fluctuations of world markets, through very high price
thresholds and state trading organizations. Both of these
approaches, however, are fundamentally inconsistent with
our long-held policy of promoting freer trade globally and of
having open, freely accessible markets responsive to de-
mand. But, we, too, have a means consistent with our sys-
tem for ensuring stability, and that is the farmer-owned grain
reserve.

146

The important choice for the future is not whether we should
maintain a reserve. Instead, it should be the scope of our
reserve policy and the appropriate size of the various com-
modity reserves. While we must continue to encourage
greater participation by other nations in a multinational re-
serve scheme, we cannot wait for such an eventuality. It is
in our self-interest to proceed unilaterally. At a minimum,
our reserve policy should be extended to the oilseeds. As
the world's major oilseed supplier, the lack of a reserve pol-
icy makes both us and those who depend upon us increas-
ingly vulnerable.

Determining the adequate size for the reserve cannot be
done simply by gauging reserve stocks against historical
stock levels. The size of the base — the greatly increased
food requirements in absolute amounts — has grown so rap-
idly that reserve quantities considered enormous just a few
years ago can now be depleted in a few months. The 1 980
season clearly underscored this. In 1979, we harvested the
largest feed grain crop in the history of this Nation. Re-
serves exceeded 31 million tons. Yet, in just one subse-
quent poor season — not a disaster, just a poor season — the
reserves are being depleted and stocks are being drawn to
dangerously low levels.

We must also improve our ability to successfully operate a
reserve over a full cycle of accumulation and depletion. Pe-
riods of abundance present relatively few problems. The dif-
ficult part is operating a buffer stock reserve in times of fre-
quent scarcity.

Additional attention is needed as well to establishing entry
and release prices for the reserve that are equitable to pro-
ducers and provide sufficient stability for domestic and for-
eign buyers. Reserve release and call prices are now based
upon all farmers' average cost of production. While the limi-
tations of cost of production as a standard in farm policy are
well known to critics and proponents alike, no feasible alter-
native has yet emerged. Policy decisions must be made,
however, while the search for an improved measure contin-
ues. Our studies show that the reserve is used most by
those farmers with the largest volumes of commodities,
those most able to afford investment in on-farm storage and
handling facilities. It would thus seem appropriate to base
the reserve indicator prices on the costs of the most typical
users, the operators of fully efficient farming operations.
Cost-of-production studies used to set those prices could be
oriented to farmers with over $100,000 in sales, rather than
to all farmers producing the commodity, as at present. While
the reserve would continue to be available to farmers of all
sizes, the cost-based indicator prices would most nearly re-
flect the conditions of the vast majority of the users.

Future Farm Structure

Decisions will be made this year and in the next few years
which will shape the options available for generations to
come and will importantly affect the quality of life of all citi-
zens. These decisions will determine the structure and orga-
nization of our agriculture and the adequacy of our resource
base to meet the future food needs of our citizens and peo-
ple around the globe. More than anything, now is a time for
serious thought — for giving consideration not only to our im-
mediate needs, but to the needs of future generations of
Americans.

We have to make choices between the maximization of cur-
rent production and exports and long-run resource utilization
and conservation. We have to make choices about how we
will allocate our products between domestic consumers and
foreign customers in years when there will simply not be
enough for all. Perhaps the most critical of the far-reaching
choices is to explicitly decide, what structure of agriculture
do we want to attain and to perpetuate?

A future characterized by relatively tight commodity supplies
and relatively high market prices for farm products, com-
bined with a continuation of current policies and programs,
means an acceleration in the shift towards larger farms.
More specifically, it means:

• increasing concentration in the entire agricultural and
food system;

• incomes of farmers comparing favorably with those in
other occupations, and a higher rate of return to assets from
current income;

• continued rapid gains in agricultural land prices, and
even higher earnings after capital gains are taken into
account;

• a higher proportion of part-owner farmers renting an
increasing share of the land they farm;

• greater dependence on industrial production inputs,
with cash expenses accounting for a higher proportion of
gross receipts;

• greater pressure on our land and water resources;

• a continued rapid rise in credit use for the agricultural
system;

• greater pressure for funds for research designed to
increase agricultural productivity;

• greater pressure for tax provisions that are judged to
be productivity-increasing;

• an increase in use of farm labor;

• increasing tension between domestic and foreign
buyers of our agricultural products, and

• increasing difficulty in obtaining funds needed for
food-assistance programs.

147

Those trends derive from the economic climate in which we
find ourselves today. If they are allowed to continue untem-
pered, this will become a nation of fewer and fewer farm op-
erations of ever-increasing size. There is little or nothing to
be gained from allowing these tendencies free rein, in terms
of the society's expressed goals for the food and agricultural
system. Indeed, allowing these trends free rein would in-
stead produce, in many respects, results which are the op-
posite of those sought by our society.

Certain widely held objectives can be achieved as a result
of this economic climate — income levels for farm operators
comparable to those of others in the society, for example.
Meeting other objectives — a flexible structure of agriculture
and equity within the system, for example — will, however,
require tempering the economic forces that exist.

Many of the choices to be made now and in the future in-
volve issues treated in the preceding chapters — taxation,
credit, land, commodity programs, resource conservation,
farm labor, international trade, research and development
and others. Specific recommendations in these areas follow.

Land

There is perhaps no factor more crucial to the structure of
the farm sector than the land. Among farmers, a major is-
sue concerning landownership in recent years has been the
estate tax. However, this is only one of the issues critical to
a family-farm system of agriculture. Smooth intergenera-
tional bequests of land are necessary to a structure of agri-
culture that centers on family farm operations. However, at
least two other conditions must also be met if we are to
have our agriculture organized primarily into family farm
units and are to offer the opportunity of farming, and owning
land, to persons other than the heirs of current farmers.
Those are:

• A significant proportion of heirs not wishing to farm
must find it economical to sell their inheritance to people
outside of the family; and

• People not previously owning land, but interested in
farming, must find it possible to buy the land and pay for it
with earnings from that land.

Meeting these conditions has been made substantially more
difficult by the rapid increases in land values, which mark-
edly accelerated during the i970's, and by the continued
persistent inflation. As inflation persists, land becomes an
increasingly attractive hedge, causing people, who might in
other cases sell, to hold on to it, and causing other kinds of
investors, normally not interested in farming, to buy farm-
land. Further complicating this are tax breaks, such as capi-
tal-gains treatment, special provisions for certain institutional
investment plans, and other inducements for both farmer
investors and nonfarm investors to purchase farmland.

It may not be possible, given our strong feelings about pri-
vate ownership in the United States, the probable inflation-
ary future, and the expected increased future earnings, to
radically alter the trends toward greater separation of own-
ership and operation, increased concentration in ownership,
or higher land prices. However, we should correct policies
that accelerate rather than retard these trends.

At a minimum, we should:

• Conduct agricultural and food programs so that they
do not aggravate inflation. The Government's role in risk
management should be defined so as not to encourage
people to incur large debt in anticipation that the Govern-
ment will bail them out.

• Direct the benefits of farm-related programs to those
who operate their farms, rather than to nonfarming owners
of land. Current farm policy makes little or no distinction be-
tween working farmers and farmer investors when, for ex-
ample, the benefits of the peanut and tobacco programs are
tied to acreage allotments, or other programs' benefits are
tied to inflexible normal crop acreages, rather than to the
person who works the land. Perhaps some of this cannot be
helped. But, as a principle behind our commodity, tax, and
credit policies, we should try to direct the benefits to work-
ing farmers, and dropping such direct acreage connections
would be a step in this direction. The farm sector does not
need to have additional investment stimulated through spe-
cial privileges to nonfarm investors — this only adds to infla-
tion and puts working farmers in competition with wealthy
investors.

• Facilitate intergenerational transfers of efficient-sized
farms, but tax farmland death transfers very progressively,
without exception, once the amount of land involved is
larger than an efficient family-sized farm.

• Neutralize the tax code's impact on farmland as an
investment. This would involve reexamination of special
pension-fund provisions and other institutional arrangements
and also investigating ways to limit capital-gains benefits.

• Use Farmers Home Administration credit to help
young and limited-resource farmers who do not have ade-
quate financial backing to purchase and operate farmland.
Since the government shares the risk, perhaps it should
share in the asset appreciation, too.

In general, we must systemmatically remove from our poli-
cies those incentives which encourage and even reward the
acquisition and holding of farmland in quantities beyond that
necessary for an efficient-sized production unit.

148

Tax Policy

The Secretary and Department of Agriculture have little or
no direct control over numerous policy areas which impor-
tantly affect farmers and farming. Because agriculture has
become much more closely integrated into the national
economy, this situation needs to be altered. Greater capa-
bility within the Department of Agriculture should be devel-
oped to address the impacts of decisions in these areas on
farmers and other participants in the food economy, and in-
stitutional arrangements should be made for far greater
USDA participation in the decisionmaking process. One
such area of special importance is tax policy.

The impacts of tax policy on farms and the structure of
farming have been little perceived and even less well under-
stood. Our studies find that tax policy has significantly af-
fected the structure, largely by reinforcing and supporting
the consequences of other economic forces and policies.

Provisions affecting agriculture appear throughout the tax
law. Many provide special treatment for farmers and were
adopted at times when special treatment may have been
justified. In most cases, this special treatment no longer
seems warranted and, in some cases, may perform a
disservice.

Many of our studies would suggest that the tax provisions
give an advantage to large operations and that this advan-
tage encourages consolidation of farms and growth in farm
size. Thus, a general recommendation is that all tax provi-
sions relating to farming should be carefully reexamined by
the Departments of Treasury and Agriculture and the Con-
gress for modifications, so that the tax advantages should
only be provided up to the size of farm that permits most
economies of size to be captured. This examination should
develop appropriate legislative recommendations, focusing
on the following specific areas:

• Reexamining special preferences in the estate tax
law. These provisions were developed to limit the tax on a
moderate-sized family farm by taxing them according to
their value as production units. The intent was to allow effi-
cient-sized units to be passed on to farmers' heirs who want
to farm, but at the same time rigorously taxing estates
larger than this size. These provisions have apparently not
had the effect intended. This reexamination would focus on
how these provisions should be modified to achieve their
original purpose.

• Removing the allowance of capital gains on assets
that have been developed, improved, or carried by deducti-
ble costs. Ways should be investigated to eliminate the im-
pact on land and product prices of tax-motivated invest-
ments, perhaps by either requiring capitalization of their
costs or treating their proceeds as ordinary income or both.

• Examining the elimination of the cash-accounting
rules. Since the original justification for these rules has

largely disappeared, the benefits and problems arising from
their elimination or from the imposition of further limits on
their use should be addressed.

• Reexamining the investment tax credit. The effect of
capital incentives should be carefully studied to ascertain
whether they have had the desired effect of lowering capital
costs and improving efficiency.

• Treating agriculture as a special industry. All of the
special rules raise the question of whether agriculture pre-
sents economic or tax issues that should be resolved by
unique tax treatment. If it does, its needs should be speci-
fied and dealt with in a way that provides incentives to en-
sure a future farm structure that best serves our society's
goals.

Commodity Policy

The expected economic climate within which the U.S. and
world agricultural system will operate during the 1980's
means the value of a reserves policy — national and interna-
tional— will be much greater. It also means:

• Target prices (deficiency payments) are less likely to
be needed to prevent economic disaster.

• Cropland set-aside and diversion authorities are
much less likely to be needed.

• A comprehensive all-risk crop insurance program will
be of even greater importance.

• Greater attention will have to be given to protecting
the basic productive capacity of our soil and to conserving
our water.

Our specific recommendations are:

• Reserve policies should be maintained for grains and
extended to other crops, especially oilseeds. Reserve re-
lease and call prices should be based upon production
costs of fully efficient producers.

• The target-price program should be specifically fo-
cused and designed solely on the conditions of the intended
beneficiaries. The reserve and regular loan programs should
continue to be available to all farmers.

— For the largest farmers, those with over $200,000 in
gross sales, the target price/deficiency payment program, if
maintained, should be designed to provide a return that per-
mits them to cover only shortrun costs; that is, serving
solely as an income stabilizer, an "economic safety net." In-
come-increasing programs for these farmers are no longer
needed; economic stability is essential and achievable
through the reserve program and measures to counter
weather relateo^shocks.

— Target-price authorities should be modified so that
the small- and medium-sized farm operators receive assist-
ance sufficient to offset size-related disadvantages.

149

• Set-aside and diversion authorities, although not
likely to be needed, could be maintained essentially with the
flexibility they now possess, but should be tied firmly to soil-
conservation objectives. Bid-diversion authorities could be
used to help ensure this linkage.

• Agricultural land should be classed according to its
use capability, and only land farmed in a manner consistent
with its capability should be eligible for Federal programs.

• The disaster payments and emergency credit pro-
grams should be replaced by the newly enacted all-risk crop
insurance program as soon as possible. This insurance pro-
gram is subsidized, but the premiums can and must be tail-
ored to the risk associated with the particular crop, on land
of known production capability.

• The policies and programs for dairy, peanuts, and to-
bacco should be modified so that the advantages to large
operations and abnormal rents to nonfarming landowners
are eliminated.

Agricultural Credit

The private money markets and institutions (including the
Farm Credit System banks) have generally served agricul-
ture well. In fact, studies suggest more credit funds might
have been available to agriculture than would have been al-
located by a purely competitive market. This might have
contributed to inefficient resource allocation, inflation in land
values, and further concentration of production and
landownership.

Many limited-resource borrowers who are not being ade-
quately served by private credit markets are potentially effi-
cient and viable. Assisting them will contribute to the farm
sector's longer-term strength. There appears little economic
rationale for providing public credit to farms larger than the
sizes needed for reasonable efficiency and adequate
incomes.

Public credit policies which appear to be consistent with the
several goals of food and agricultural policy include:

• Assuring that agriculture has competitive access to
private capital markets at competitive rates. This would in-
volve, on the supply side, assuring that financial rules and
regulations are such that agriculture has fair access to the
markets and, on the demand side, assuring that economic
conditions and institutions in agriculture do not reduce agri-
culture's ability to compete in the capital markets.

• Augmenting the workings of private markets to pro-

vide direct loans and guaranteed loans specifically to lim-
ited-resource and beginning farmers who would not other-
wise be able to compete for funds. This would involve
refocusing the agricultural programs of the Farmers Home
Administration on those who meet credible tests of need.

• Reducing the growing dependency of farmers on
emergency credit. Efficiency and structural goals will be bet-
ter served by shifting farmers to an actuarially sound disas-
ter-insurance program.

Land and Water Conservation
There can be little doubt that one of the most important
tasks before us is maintaining the productive capability of
our resource base over the long term. It is also clear that
the market may fail to adequately reflect the full costs of re-
source use over the long run. Intensive production in re-
sponse to temporary market signals may cause irreparable
damage by severely reducing the resource base's produc-
tive capability at some future time.

The intensiveness with which resources are used is inextri-
cably linked to the quality of the environment. Farming prac-
tices that seriously erode land reduce water quality; pesti-
cides and chemical fertilizers are moved into streams;
wildlife and their habitats are adversely affected, and the
ecological balance is seriously altered. So, it is not only the
present and future productive capacity of our resources that
concerns us, it is the quality of the environment, the quality
of life, for future generations as well.

This is an area in which the States should be urged to as-
sume a greater role. Federal policy can provide broad direc-
tions, but programs more closely attuned to local needs and
conditions are perhaps most appropriate.

Agricultural land should be classed according to its capacity,
as a basis for all Federal programs, and conservation pro-
grams should use the same classification system. Our spe-
cific recommendations include:

• Greater and more careful targeting of Federal cost-
share funds for conservation — targeting specifically to those
areas and farms where the erosion and other resource
problems are most severe.

• Land in the critically high erosion areas now used for
crops must be shifted to a less intensive use. Measures
must be taken to link Federal program benefits to the use of
this land in the most socially desirable way.

• Eliminating aspects of Federal policy which encour-
age the irreversible conversion of prime agricultural lands to
other uses

• Obtaining legislation to allow more realistic pricing of
water. Like energy, as long as water's price is not reflective
of its value in use, conservation will be inadequate. Struc-
tural concerns should be addressed specifically in pricing
policy. The original intent of legislation, to direct benefits to
moderate-sized operations, should be maintained.

150

Trade Policy

We have long sought to achieve a better balance between
what our agriculture supplied and what the markets could
absorb. Now that we seem to have achieved this goal, the
pendulum shows signs of swinging too far. Our trade policy
in the future will inevitably focus more and more on allocat-
ing limited supplies between domestic and foreign cus-
tomers, either through restricitive export policies or higher
prices.

The issues in this area are profound and likely to generate
heated controversies. Nevertheless, the choices still con-
front us. Our general recommendation is that, in formulating
agricultural trade policies and programs, full recognition be
given to the fact that they will operate in an unstable, pro-
tectionist world market, making our less-protected domestic
market extremely vulnerable to production and policy
changes.

Our specific recommendations are:

• Clarify our policies with respect to the allocation of
short supplies of agricultural commodities.

• Encourage a stronger system of internationally man-
aged but nationally owned food reserves designed to stabi-
lize world markets.

• Advocate strongly a more equitable international
sharing of food-aid responsibilities by urging larger food-aid
donations from traditional donor countries as well as the
high-income food importing countries. Closely associated
with this initiative would be a greater effort on our part to
use a larger proportion of our food aid to alleviate emer-
gency needs in the low-income developing countries.

• Focus more of our international development assist-
ance on expanding indigenous food production and improv-
ing food-security facilities in the lowest-income developing
countries.

• Focus our agricultural export-promotion programs
and trade initiatives on those products that bring the least
pressure on our resource base and which offer the highest
value-added return to farmers and the general economy.

Agricultural Labor

Programs for the farm sector have always been concerned
with equity, mainly in relation to farm operators. Another
participant group in the farm sector, long neglected and only
recently gaining recognition, as it develops organizational
and political strength, is farm labor. Once viewed solely as a
production input, farm labor must in the future be accorded
a higher priority in our policy concerns. This will require
greater coordination of agricultural labor-related issues and
programs among USDA, the Labor Department and other
agencies with an interest in them.

Our recommendations in this area include:

• Reexamining the Labor Department's migrant and
seasonal farmworker training programs with the objective of
improving long-term planning and development activities es-
sential to promoting more viable agricultural careers for
farmworkers.

• Developing educational programs for employers,
farm-labor contractors, worker organizations, and others to
improve personnel-management practices in agriculture and
develop less casual labor markets.

• Focusing a portion of USDA's rural-development ac-
tivities on programs to enhance the stability of employment
for seasonal agricultural workers in areas where their num-
bers are significant.

• Influencing the direction of research and develop-
ment in agricultural technology and management to improve
agricultural-employment conditions.

• Assuring that firms that are in compliance with the
law are not competitively undercut by firms able to profit
from unofficially sanctioned exemptions from the law.

Research and Extension

Technological change has a major influence on the struc-
ture of agriculture. It is also an important source fo improve-
ment in welfare and living conditions. The question is not
whether to support development of new technology, but
rather how to better determine what types of technological
development deserve public priority.

Increasing demand for agricultural products, increasing
costs for energy and other inputs, natural-resource con-
straints, and changing social and personal values are all in-
tensifying the demands on agricultural science. How these
problems are approached scientifically will affect the tech-
nology and, in turn, the structure of agriculture. Recent pat-
terns in defining problems have emphasized short-term, in-
cremental developments which tend to facilitate or reinforce
current structural trends, at the expense of alternatives that
might fundamentally alter structure or structural
relationships.

Our assessment of the probable future suggests that there
is little to be gained for society in the continued displace-
ment of either farm operators or farmworkers, and that un-
derwriting this displacement therefore should not be a focus
of publicly supported technological research and develop-
ment. Beyond that point at which relative efficiency is
achieved, such displacement does not increase the overall
quantity of production nor does it improve the quality of
food. It only allows one farmer to work a larger parcel of
land, increasing the sector-wide incentive for growth and
consolidation of farms. Agricultural research, therefore,
should be increasingly directed to the particular problems of
the small and medium-sized farms.

151

Our specific recommendations are:

• Reorientation of research and extension strategies to
develop new technologies and approaches to reduce costs,
increase efficiency and facilitate the economic viability of
smaller and medium-sized farms to promote the mainte-
nance of a diverse, resilient, and competitive agricultural
system. The social and economic payoff from further devel-
opment and promotion of labor-saving technology for the
agricultural sector is limited.

• Research and extension programs should give
greater attention to the problems of marketing, transporting,
and processing the agricultural products of smaller farms. In
this regard, many smaller farmers with limited funds could
lower their input costs through organic farming practices but
need further research to fully develop their operations'
efficiency.

• The Federal Government, States, and the private
sector should be mindful of the roles they play and the
areas in which they have comparative research advantages.
Improved planning, decision, and management systems for
food and agricultural science — which give emphasis to long-
term planning and funding horizons, improved coordination,
and more pluralistic participation and problem-solving are
needed. They are necessary to ensure that critical long-term
problems are adequately addressed and that more balanced
approaches are taken toward addressing the broadening so-
cial, economic, and environmental concerns affected by re-
search and extension. Requirements include improved and
more timely research and extension project-information sys-
tems, means to facilitate exchanges of public-private sector
science planning information, and improved ways to assess
impacts of technology on society.

• Research should reassess and offer alternatives to
current chemical-, capital-, and energy-intensive strategies
for enhancing U.S. agricultural productivity and efficiency.
Fundamental long-term research, to find new paths to ap-
propriate technological developments, is essential for suc-
cessful adjustment to new pressures.

• Greater attention by food and agricultural science to
the major deficiencies in our understanding of environmen-
tal, health, and nutritional hazards (and benefits) from food-
production and processing practices.

The Fundamental Choice

We have tried in this report to show some of the fundamen-
tal changes in our agricultural system and have argued that
these changes offer us the opportunity — if not the obliga-
tion— to reexamine our policies and their effects on
structure.

are not always between stark alternatives, as they often
seemed to be in the past. We have seen, for example, that
many smaller producers today do not necessarily have to
choose between rural poverty or moving to the cities. In-
stead, many are able to stay in rural communities by com-
bining farm and nonfarm incomes. Similarly, we as a society
do not have to choose between efficiency — achieved in the
past through farm consolidation — and stable farm numbers.
We have largely realized the first goal and can now afford
to devote more attention to the second.

Continuing existing policies and programs without change
will almost certainly mean that present structural trends will
continue. We will see continuing growth in farm sizes, fur-
ther declines in farm numbers, greater economic vulnerabil-
ity among our larger producers, and mounting resource-use
problems.

It has become evident as this study progressed that power-
ful forces underlie the trends toward concentration, and to
slow those trends will require major changes in our policies.
More than a single change in a policy or program is neces-
sary. Instead, it will require numerous changes across sev-
eral areas, all of which must be more carefully coordinated
and harmonized than ever before to avoid one offsetting the
other. But, if the recommended changes in the tax code,
commodity, credit, resource-conservation, research and
other programs are made, there will be a slowing of the
trend towards greater concentration and a better chance of
realizing the broad set of goals. We are convinced that
slowing this trend will be beneficial to our farmers and con-
sumers, and in the best long-term interests of our Nation.

Government policies are not, of course, the only forces pro-
pelling current trends. But, they are among the most impor-
tant and, realistically, among the few we can control. Failure
to act will amount to a decision to allow the trends to extend
into the future, regardless of how conditions may change,
and regardless of the cost or inequity.

That will amount to a decision to accept greater and greater
separation among the business functions of farming — own-
ership, management, labor, and operation — and greater
concentration of landownership among fewer and fewer
people, violating a long-held American principle and relegat-
ing the concepts behind "the family farm" to the status of
museum relics.

Our agriculture is today at a crossroads. The time of chronic
surpluses is behind it; a time of growing demand and tighter
supplies lies ahead. We are now presented with an oppor-
tunity for reflection and the choice of policies appropriate for
guiding us to the end of the century. The choices before us

152

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163

AUTHORS AND CONTRIBUTORS

Bob S. Bergland, Secretary of Agriculture

Susan E. Sechler, Project Coordinator,

Deputy Director, Office of Economics, Policy Analysis and

Budget

Project Staff: Brian B. King, Joseph Belden, Susan De-
Marco, Beverly Ganley, and J. Gibson Edwards (design and
production).

Research and Technical Assistance

Economics and Statistics Service, USDA: Barbara Claffey,
Kenneth Clayton, Kenneth L. Deavers, John Groenewegen,
David H. Harrington, James D. Johnson, John E. Lee, Jr.,
°atrick M. O'Brien, J.B. Penn, Donn A. Reimund, Richard
Rizzi, Felix Spinelli, and Lyle P. Schertz, Vicky Smith.

Office of Budget, Planning and Evaluation, USDA: John
Fedkiw, Lynn Maish, and Arnold Miller.

Farmers Home Administration, USDA: Richard W. Long.

Science and Education Administration, USDA: James
Meyers.

Consultants to the Project: David Baldock, Michael Boehlje,
Charles Davenport, Jack Doyle, Frances Hill, Colin Hines,
James Holt, E. Phillip LeVeen, William E. Meyers, Robert
Stavins, and Martin Strange.

Reviewers: Emerson M. Babb, David E. Brewster, Howard
W. Hjort, Janet Keyser, Pamela Mayall, William Motes, Cliff
Ouse, Elizabeth Webber, and James C. Webster.

Contributions of ideas and materials also were made by
Don Paarlberg, Willard Cochrane, Jack Keyser, John Obert,
Dean MacCannell, Isao Fujimoto, Philip M. Raup, William D.
Heffernan, and Harold F. Breimyer.

The public meetings for this project were organized by, in
addition to the staff named above, Garry South, Karen
Voight, Susan McCaskill, Nancy Rubin, Patricia Stolfa, Ovid
Bay, Joseph McDavid, and Robert W. Norton. Particular
thanks are owed to the 575 speakers at the regional meet-
ings, the panelists at the Washington meetings, and the
thousands of others who attended the meetings and/or
mailed their opinions and suggestions to the Secretary dur-
ing the last two years.

Special thanks also are due to Tricia Pennington, Karen
Boggs, MonaCheri Clarke, Corless Hamm, Bernice D. Jef-
ferson, and Vickie Price; to David Sutton and Jan Proctor of
the Design Center, and Al Senter and Joseph Stanton of
the Printing Center, Office of Governmental and Public
Affairs.

164

* U. S, GOVERNMENT PRINTING OFFICE : 1981 723-560/686