Technology Change in Agriculture and Cochrane*s Treadmill

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Technological Change in
Agricultural Production:
Dealing with Cochrane’s
Treadmill
Paul D. Mitchell
AAE 320: Farming Systems Management
Learning Goals
 Review data on U.S. farm productivity and
income over past century or so



See effects of technological change
What are its effects on farm income?
What is Cochrane’s Treadmill?
 Examine pressures facing farm managers
due to technological change

How can farms deal with Cochrane’s
Treadmill?
Technological Change in U.S.
Agriculture
 U.S. agriculture has increased productivity
tremendously over past century



Development of hybrids, new varieties,
improved genetics
Use of more and improved inputs
Improved management practices
 See in per acre crop yields and in milk
production per cow
U.S. Average Corn Yields
180
160
140
Yield (bu/ac)
120
100
80
60
40
20
0
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
U.S. Average Soybean & Wheat Yields
50
45
40
Yield (bu/ac)
35
30
Soybeans
Wheat
25
20
15
10
5
0
1910
1930
1950
1970
1990
2010
Average Annual Milk Production (lbs/cow)
24,000
21,000
Milk/Cow (lbs/year)
18,000
15,000
12,000
9,000
6,000
3,000
0
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Main Point: Big Increases
 Tremendous increases in crop and livestock
productivity due to technological change
 Do farmers capture the value of these
productivity increases?


Have to buy new technologies
Price effects of supply increases
 What’s the net effect on farmer income?
Farm Income Effect of
Technology Change
 Input Augmenting: If technology change augments
farmer supplied inputs (land, labor, management) or
off-farm inputs, farmer earns more income
 Farmers “win” if augments their inputs
 Induced Innovation: new technologies to reduce use
of costly inputs
 Means Neutral Technology change: producers (on
or off-farm) don’t win, just consumers
 Key Issues:
 How fast does consumer demand change relative
to technology change?
 Is technology change slowing down? Have we hit
yield plateaus? Corn yield growth by county
Rate of Increase for County Average
Corn Yields 1990 to 2009
Many areas saw record gains over last 20 years
Many areas saw no gains over last 20 years
bu/ac/year
<=0
0 to 1
1 to 2
2 to 3
3 to 4
>4
Lauer, Mitchell, Diallo 201?
Consumer Demand and Technology
Change
 Technology change increases supply
(reduces cost): shifts supply curve outward

Means drives prices down
 Consumer demand increases with population
increase and income increase: shifts demand
curve outward

Means drives price up
 Which effect wins?
Changing Technology and Demand
can lead to price increase or decrease
Base Case
P
D0
Price Decrease
P
S0
D0
S0
Price Increase
P
D1
S0
D0
S1
S1
P
P
D1
Q
Q
Price effect depends on whether supply or
demand curve moves the most
Which has dominated in USA?
Q
Nominal Grain Prices ($/bu)
12
Nominal Price ($/bu)
10
8
Corn
Wheat
Soybean
6
4
2
0
1860
1880
1900
1920
1940
1960
1980
2000
Real Grain Prices ($2010)
60
Real Price ($/bu)
50
40
Corn
Soybeans
Wheat
30
20
10
0
1910
1930
1950
1970
1990
2010
Cochrane’s Treadmill
(Willard Cochrane, Ag Economist, U of MN)
 New Technology: reduces costs, increases supply,
eventually reduces market prices




Early adopters: sell increased production at lower cost,
farm income increases, drive down market prices
Later adopters: farm income falls as prices fall, forced to
adopt lower cost technology to survive with lower prices
Farmers on a treadmill – always running to adopt
newest technology to stay ahead of declining real prices
Farm income distribution shifts to larger farms as small
farms drop out, more rural inequality and poverty
 Consumers are the winners: lower food prices
Cochrane’s Treadmill
 Real price data show a decline in real prices
 Supports Cochrane’s Treadmill
 Cited by many to explain shift to larger farms
 Less popular among academic economists
 Debate and analyze data, an empirical issue: have
farmers become better off by technology change?

Ramifications for developing nations
 What about future? Has there been a paradigm shift?
 Have demand shifts begun to outstrip supply shifts?
 Are Asian income growth (China, India) and energy
prices creating a new economy for farmers?
Real Revenue ($2010/acre) in U.S.
1200
Real Revenue ($/ac)
1000
800
Corn
Soybeans
Wheat
600
400
200
0
1910
1930
1950
1970
1990
2010
Real Revenue, Costs and Returns ($2010)
for All U.S. Agricultural Production
500
450
Real 2010 $ Billion
400
350
300
Revenue
Costs
Returns
250
200
150
100
50
0
1910
1930
1950
1970
1990
2010
Real Returns ($2010/Acre) for All
U.S. Agricultural Production
$160
Real 2010 $/ac Returns
$140
$120
$100
$80
$60
$40
$20
$0
1910
1930
1950
1970
1990
2010
Real Returns ($2010/Farm) for All
U.S. Agricultural Production
$60,000
Real 2010 $/Farm Returns
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1910
1930
1950
1970
1990
2010
Average U.S. Farm Size (acres)
500
450
Average Size (acres)
400
?
350
300
250
200
150
100
50
0
1910
1930
1950
1970
1990
2010
Average U.S. Farm Size (acres)
500
450
Average Size (acres)
400
350
300
250
200
150
100
50
0
1910
1930
1950
1970
1990
2010
Average WI Farm Size (acres)
250
Average Farm Size (ac)
200
150
100
50
0
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Profit Margin (Returns/Revenue)
60%
50%
40%
30%
20%
10%
0%
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Summary
 Real Prices have declined for grains
 Real Revenue for grain peaked in 1970s, but recently
approaching it again, especially corn
 Real Returns ($/ac) for US Agriculture have been flat
over last century, but highly variable


Max in 1970s, Min in 1980s
New peak in 2011-2014 (not on plots)
 Real Returns ($/Farm) also variable, but increasing
as farm size has increased
 Profit Margin decreased from ~45% to ~20% today

Greater purchase of off-farm inputs now
Cochrane’s Treadmill
 Cochrane’s Treadmill theory



Decline of real prices supports it
Flatness of real returns does not
Farm size leveling off since mid 1970s doesn’t
 What is farm household income relative to US
household income?



Are farmers behind rest of US?
What are sources of farm household income?
What’s happening to rural income distribution?
Ratio of Median Farm Household Income to
Median US Household Income (current dollars)
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: http://www.ers.usda.gov/briefing/wellbeing/farmhouseincome.htm
44%
% HH Income
from Govt Paymts
16%
0%
4%
0%
63%
20%
27%
27%
7%
Source: http://www.ers.usda.gov/briefing/wellbeing/farmhouseincome.htm
52%
3%
% of Govt Paymts
% of Farms
Components of U.S. Farm Household
Income in 2009
------ Level of Government Payments -----Item
Number of
Farms
None
$1 to $10,000 $9,999 $29,999
1,338,362 577,253
147,554
$30,000
or more
All
67,838 2,131,007
Household
Income
73,221
70,047
105,505
154,019
77,169
Net Farm
Earnings
-4,656
9,317
55,276
108,046
6,866
0
3,037
17,040
68,027
4,168
77,877
60,730
50,229
45,973
70,302
Government
Payments
Off-farm
Income
Components of U.S. Farm Household
Income in 2009
-- Level of Government Payments -Item
None
$1 to
$9,999
$10,000 $29,999
$30,000
or more
% of Farms
63%
27%
7%
3%
% Household Income from
Farming
-6%
13%
52%
70%
% Household Income from
Government Payments
0%
4%
16%
44%
% Farm Income from
Government Payments
0%
33%
31%
63%
% of Government
Payments
0%
20%
28%
52%
Farm Strategies to Deal with
Technology Change
 “Get big or get out”



Large farms can survive and thrive
Government payments very important
Off-farm income less important, but used
 Mix of farm and off-farm income



Chosen by smaller and mid-sized farmers
Off-farm income very important
Government payments also important
Main Point
 Technology change has been a major driving
force in agriculture that has greatly affected
farm structure and rural economies/societies


Does not look like it’s about to change
Cochrane’s Treadmill has been part of ag
industrialization, with winners and losers
 As a farm manager, you will have to respond
to and manage technological change

Two common strategies


Aggressively pursue new technologies, or stay
small and use off-farm income to survive
Both rely on government payments
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