During the 20th century, America had four basic policy goals for the food and agricultural sector: 1) producing an abundant supply of food, at reasonable prices, for the nation; 2) assuring a prosperous and productive economic climate for farmers; 3) maintaining the family farm as the basic unit of production in the food-supply chain; and 4) promoting a high quality of life for all individuals living in rural areas. How well did we do? The first goal was achieved relatively easily because the U.S. enjoys an abundance of resources and has led the world in developing scientific and technological innovations to increase agricultural production.
The second goal, however, met with much less success because the food-producing industry is inherently unstable. The main economic explanation for this instability is that the aggregate demand for food--in the short run at least--and the aggregate supply of basic food products are highly inelastic. Thus, any small shift either in the aggregate demand or supply of food products leads to a large price response, up or down--with a consequent change in farm incomes. A variety of factors, such as war, peace, long-term droughts, or major technological breakthroughs, continuously shift the aggregate demand or supply of food. As a result, the food-producing industry cannot, and will not, level off at some desirable economic level and stay there. Economic forces--especially inelastic aggregate demand and inelastic aggregate supply--won't let it.
Other major sources of the food system's instability during the past 70 years were the government's farm-support programs; notably, price support, deficiency payments, and acreage controls. These lacked the capacity and, in many cases, the appropriate design to cope with the great downward swings in farm prices--some of which were generated by a faltering aggregate demand and others by a surging aggregate supply. For example, it took the mammoth programs of World War II, and the once-in-a-lifetime increase in the demand for farm products that these programs created, to pull the farm sector out of the deep depression of the 1930s.
In the 1960s, however, farmers and their political leaders rejected the idea of turning the food-producing industry into a government-managed monopoly or public utility as a way of coping with the unruly shifts in aggregate demand and supply. Perhaps that was the proper decision at the time for the nation. But, once again in 1999, falling global demand for U.S. agricultural products has pushed the food-producing industry into a depression.
Efforts to achieve the third farm policy goal have met with even less success. The total number of farms in the U.S. declined from 6.5 million in 1935 to 2 million in 1997. Most of this huge decline took place among family farms. Moreover, even the 2 million figure is an overstatement, because 1.3 million "farms" (or about 63 percent of the present day total) are limited-resource, residential, or retirement farms--leaving approximately 700,000 actively managed farms in the nation. Since 1935, therefore, the nation has lost 4.5 million farms, most of which were family farms. Today there are about 540,000 small- to medium-sized family farms and 160,000 large farms struggling to survive in the midst of a farm depression. How did this happen? There are a variety of causal explanations. Certainly, some farmers fell by the wayside because they were poor managers, but does that explain a net loss of 4.5 million farms? I think not.
Three factors explain these changes. First, the roller-coaster-like behavior that the farm sector experienced in the 20th century caught many farmers in exposed financial positions and, as a result, many were forced out of business when their product prices fell sharply. Families just getting started in farming and those engaged in expanding their operations were especially vulnerable.
Second, farm programs, which were put in place to help family farmers, in fact, contributed to the demise of many of them. These support programs provided income or price support depending on the number of units that a farmer produced, and the more a farmer produced, the more price or income support he or she received. As a result, the strong became stronger and the weak became weaker--until the weakest dropped out of farming.
And third, the rush to adopt modern technology forced many farmers out of business--particularly the smaller ones, or those on the financial edge. Much of the new mechanical technology was not size neutral, because large tractor hookups required large acreages over which to spread the huge costs of such hookups and thereby gain economic efficiencies from adopting them. The adoption of large, expensive machines pushed farmers in the direction of acquiring more land--but where could they get it? From their smaller neighbors, of course. And even size-neutral technologies like new and improved seeds put additional financial burdens on the farmer to purchase seeds--and the fertilizer and the herbicides to go along with the new seeds. As a result, the costs of planting a crop of corn skyrocketed from 1950 to 1999, which caused many farmers on the financial edge to sell out to their more successful and aggressive neighbors.
Today, a small number of very large farmers produce about two-thirds of the nation's grain, livestock, fruit, and vegetables. The remaining third is produced by small- to medium-sized family farmers, who are struggling to survive. I say "struggling to survive" because smaller farmers do not have access to the favorable rates of short-term credit and long-term capital enjoyed by large, corporate farmers. In addition, small farmers are excluded from using the latest products of the biotechnology industry--such as genetically modified seed--unless they enter into production contracts with the agribusiness firms that supply these technologies. Such changes, and the farm depression of the 1990s, I believe, will continue to put family farmers out of business.
It is questionable whether the quality of life in rural areas has improved over the past 100 years. Certainly the poorest of the poor still remain out there--in small rural towns, in backwater agricultural areas, and in immigrant labor camps. Federal governmental efforts to aid these people have been minimal, and even those efforts have been opposed by conservative farm organizations. But probably the most important negative factor has been the decline in the number of family farms, and decimation of the human population in the countryside. As farm families have disappeared, so has the support for small towns and the services they provided such as health, educational, shopping, and repair services. In many farming areas, neighborhood activities have simply disappeared with the people.
In commercial agriculture today, two developments are creating problems for family farmers--and the outcome of these developments will determine their fate.
The first problem is the continuing struggle, which is often minimized by economists, over who controls the use of productive resources on farms. Do family farmers or multinational corporations control these resources? The outcome of this struggle will determine whether there are any independent family farmers left in the year 2010.
The second problem is the continuing price-income crisis, which will determine whether family farmers remain in business or go under in the next few years. Both of these problems, although different in nature, will have a similar consequence for the family farmer.
Since the 1970s, the productive resources of the food-producing industry have become concentrated in a relatively small number of large, corporate farms. These farms are characterized, as a general rule, by the following features:
All of these trends are taking place in a rapidly changing and often unpredictable global economy. In my view, farming is not farming anymore because food production is now an industrialized business in which important operating decisions are made by agribusiness executives and not by local farmers themselves.
I strongly believe that with the increased use of contracts, patents, and financial controls, the food-production sector is being converted into a poorly understood area of monopolistic-competition. Moreover, continued developments in this direction could have dire consequences for both farmers and consumers alike.
Another trend in today's food-production industry is the reduced number and increased size of the corporations in each segment of the industry. As a result, the market power of the corporations that remain is increasing. In the past, most agricultural research was conducted by small groups scattered across the nation in universities, federal government, and midsized agricultural firms. Today, however, much agricultural research is done by large, multi-national corporations, which allows them to create product monopolies.
At the input supply level an oligopolistic structure is the norm. For most nonfarm produced inputs (for example, herbicides and farm machinery), a few large firms supply most of the products. In addition, at the handling and processing level, local farmers find few local buyers for their products. And at the retail level, the distribution and sale of food products is concentrated in a relatively few very large chains such as Kroger, Albertsons, Wal-Mart, Safeway, and Ahold, which are responsible for 40 percent of all retail food sales in the U.S.
Only at the farmer-producer level do we find the classic atomistic market structure--that is, a situation where each seller is so small relative to the whole market, that he or she can have no appreciable effect on price. As a result the typical farmer-producer has no market power. At the input supply level, monopolists or oligopolists set the price on their product that best suits their long-run needs--and the farmer-producer can take it or leave it. Similarly, at the handler/processor level, monopolists or oligopolists set the price they will pay--and the farmer-producer, again, can take it or leave it.
Today, many suppliers of farm inputs enjoy near monopolies (and consequently, high prices) for their products, which is putting many small family farmers out of business. With the current move against monopolies in other industries (for example, the recent court proceedings against Microsoft), I suggest the Justice Department form a special unit in the monopolies division to investigate the monopolies that are being formed in the agricultural industry. Monopolies, however, are not the only problem; the very bigness of big business creates a problem in itself. Bigness is the problem--and the power that bigness brings with it.
Introduce a giant corporation providing a commonly used farm input into a local farming community, and it will have an advantage in every transaction, or activity, that it enters into--from fixing terms with a local farmer, to obtaining a tax-free site from the local government on which to locate its plant, to squeezing its local competitors. The power such a corporation wields will often disrupt and overwhelm the local business environment.
Are other factors contributing to the decline of the family farmer? One factor that is undoubtedly causing the family farmer problems is the inelastic nature of the world's demand for food.
The global market for food products is a closed system with a given population distribution, a given income distribution, a given set of national laws and rules, and a given set of human tastes and preferences. Taking account of these givens, there exists at any point in time a global demand for food products. This concept may be difficult to measure, but it is real and is highly inelastic. Global demand for food is highly inelastic because the stomach of each individual in the world can only take in a finite amount of food.
The continuing increase in world production of food products in recent years, in combination with the erratic shifts in the severely inelastic global demand for those products, has led to disastrously low prices for those products--and business failure for many American farmers. It should be noted, however, that all food product prices will not rise or fall in lock step; the major products most directly affected by developments in the global economy will lead the way, and the pricing behavior of those products will spread to other products through the ubiquitous substitution process in the global market system.
As suggested above, both the global demand for food products and the aggregate supply of those products will continue to expand as populations and national economies grow. Supply and demand, however, are unlikely to grow at the same pace because the underlying factors that affect each are different. Population growth and income growth are the principal determinants of demand, while climate change, new research, new technologies, and spending on capital items (such as irrigation systems) are leading determinants of supply.
Thus, it seems likely that, on occasions, aggregate global supplies of food products will push ahead of aggregate demand, which will cause farm prices to fall sharply. On other occasions, aggregate demand will push ahead of aggregate supply, causing farm prices to shoot skyward. Whenever either happens (and I believe both will happen frequently), consumers can expect food prices to change--and change dramatically.
Food prices can change dramatically as a result of the interaction between a severely inelastic global demand for food products and an unpredictable aggregate supply of those products within the global economy. Consumers will continue to experience severe changes in food prices as long as humankind influences the nature and slope of the aggregate demand curve for food products. Thus, food producers, both large and small, would be wise to recognize that theirs is a high-risk industry. Domestic policies can mitigate the impacts of these price risks but they cannot eliminate them.
History tells us that boom times are the dangerous times for farmers. During such periods, producers tend to get carried away; they expand their operations with generous applications of credit and forget that boom times have always been followed by hard times--times when those who have over-extended their credit, unfortunately, go broke.
Agriculture is a high-risk, unpredictable, and unstable industry. What can family farmers do? Fold their tents and steal away into the night? There is, I believe, another option. They could form a national association--call it the National Trade Association of Family Farmers (NTAFF).
A powerful trade association of family farmers could achieve some important objectives. A newly formed NTAFF could
Trade associations have worked well for other sectors of the agricultural industry. Sugar beet growers, cotton producers, and wheat farmers have all formed trade associations that clearly benefited members. A strong trade association of family farmers would give them real market power and real political power. By organizing, family farmers could once again become a vital--and thriving--part of our nation's economy.
Willard W. Cochrane is a professor emeritus with the Department of Applied Economics at the University of Minnesota.
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