AGEC 640 -- Agricultural Development and Policy
Farm households and the
“industrialization” of agriculture
September 9, 2014
• Today: Structural transformation -- does agriculture industrialize?
• Thursday: Inputs, R&D and Technology
• Reading: Allen and Lueck, The Nature of the Farm (excerpts)
• Next week.: Nutrition and food markets
• Readings: Haddad, L. et al., “Nutrition Trends and Implications”
• Homework #2 (on food prices and the least-cost diet)
due Thursday 9/25 in class
Slide 1
Conclusions on economic growth and
structural transformation
As incomes grow…
(1) Farming declines as a fraction of the economy
• in favor of industry and services
• even within agriculture
(2) Farmers’ incomes at first decline relative to others
• but then farm incomes catch up
• eventually farmer incomes pass nonfarmers’ incomes
(3) The number of farmers first rises and then falls
• speed depends on both population and income growth
• eventually the number of farmers stabilizes
Slide 2
More conclusions from last week…
• Demographic transition and structural transformation
interact, causing a rise & then fall in the number of farmers
• Today’s developing countries have had very fast decline in
death rates, leading to unprecedented speed of change;
• With small shares of the population in nonfarm
employment, this led to unprecedented rural population
growth and declines in land available per farmer.
• The rural effect is compounded by shift in age structure:
• first, more children/adult (the “demographic burden”),
• then, more child-bearing women (“population momentum”),
• then more working-age adults (the “demographic gift”)
a
race
• These are powerful drivers of change in agriculture and in
agricultural policy, but occur slowly and are often ignored!
Slide 3
From last week’s slides…
Interaction of demographic and structural change
makes the number of farmers rise and then fall…
…and
eventually
stabilize
Today: within the farm sector, (how) does it “industrialize” ?
Slide 4
Does agriculture industrialize? If so, how?
first, speculation…
In what ways might farms become “factory farms”?
In what ways might agriculture become “industrial”?
then, a flood of data from the U.S.
and explanations from Allen and Lueck (2002)
…with some cross-country evidence
Slide 5
Does agriculture industrialize?
 4/farm
 .02/farm
 2/farm
 2/farm
Source: Reprinted from Allen and Lueck (2002), p. 19.
Note: Recall that 1920 was near the peak of number of farmers in the US.
Slide 6
How big are modern farms?
Source: Reprinted from Allen and Lueck (2002), p. 18.
Slide 7
Are these “family farms”?
How does farm ownership differ from
ownership of nonfarm enterprises?
Organization of farm and nonfarm
enterprises in the U.S. (1990s)
Enterprises
Receipts
Farms
Family
Partnership
Family Corp.
Nonfamily Corp.
Other
86.0%
8.9%
4.0%
0.4%
0.8%
52.2%
18.1%
23.3%
5.6%
0.9%
Nonfarm Businesses
Proprietorships
Partnerships
Corporations
73.0%
8.3%
18.0%
5.9%
4.0%
90.0%
Source: Calculated from United States 1997 Census of
Agricuture, Table 47 and Statistical Abstract of the United
States 1993, Table 848, as reported in Allen and Leuck
2002, page 24.
Slide 8
What are “family farms”?
Reprinted from D.E. Banker and J.M. MacDonald, ed., Structural and Financial Characteristics of U.S.
Farms: 2004 Family Farm Report. USDA Agricultural Information Bulletin No. 787, March 2005. Slide 9
More and more farms are for residences/lifestyle, but
more and more output comes from the largest farms
Reprinted from D.E. Banker and J.M. MacDonald, ed., Structural and Financial Characteristics of U.S.
Farms: 2004 Family Farm Report. USDA Agricultural Information Bulletin No. 787, March 2005. Slide 10
Small operators are spending money earned elsewhere to
maintain their farms, but even large operators work off-farm;
All but the poorest have above-average incomes.
Farm household income by type of farm, 2001
Total Farm Sales Category
under $10,000
$10,000 - $99,999
$100,000 - $249,999
$250,000 - $499,999
$500,000 - $999,999
over $1,000,000
Farm
Earnings
-5,755
-1,365
25,321
37,182
87,994
332,494
Off-Farm
Earnings
52,034
38,041
24,433
18,915
19,841
21,318
Unearned
Income
15,948
17,597
9,516
14,096
10,984
13,413
Total
Household
Income
62,227
54,273
59,270
70,193
118,819
367,225
Total
Farm
Off-Farm
Unearned Household
Farm Typology Group
Earnings
Earnings
Income
Income
Limited-Resource
-3,165
6,272
4,841
7,948
Retirement
-1,070
10,341
38,331
47,602
Residential
-5,694
77,333
9,614
81,253
Farming Occupation-low sales
-2,552
17,493
20,924
35,865
Farming Occupation-high sales
26,497
18,788
8,332
53,617
Large
37,182
18,915
14,096
70,193
Very Large
181,660
20,407
11,914
213,981
Adapted from D.E. Banker and J.M. MacDonald, ed., Structural and Financial Characteristics of
U.S. Farms: 2004 Family Farm Report. USDA Agricultural Information Bulletin No. 787, March
2005. <www.ers.usda.gov>.
Slide 11
Data drawn from USDA ERS Agricultural Resource Management Survey (ARMS), Phase III.
Even the largest farms have a significant
fraction of their wealth in non-farm assets
Net worth of farm operator households by type, 1998
Source: USDA ERS, 1998 ARMS for farm data; US average income from Current
Population Survey, US average net worth from Survey of Consumer Finances.
Slide 12
How do farms acquire land?
Most full-time operators own some and rent in more
Reprinted from D.E. Banker and J.M. MacDonald, ed., Structural and Financial Characteristics of U.S. Farms: 2004
Family Farm Report. USDA Agricultural Information Bulletin No. 787, March 2005. <www.ers.usda.gov>.
Note: The additional land rented by farm operators comes from about 1.25 million nonoperator farmland owners, 95% of whom are individuals or partnerships (with 66% of the
individuals over age 60), who rented a total of 125 million acres to farm operators.
Slide 13
How do farms sell their output?
A few crops have used contract sales for decades
Reprinted from Allen and Lueck (2002), p. 25.
Slide 14
How do farms sell their output?
Contracting for livestock production grew in the 1990s
Reprinted from D.E. Banker and J.M. MacDonald, ed., Structural and Financial
Characteristics of U.S. Farms: 2004 Family Farm Report. USDA Agricultural Information
Bulletin No. 787, March 2005. <www.ers.usda.gov>.
Slide 15
Contracting is growing fastest
for swine and also for cotton
Reprinted from D.E. Banker and J.M. MacDonald, ed., Structural and Financial
Characteristics of U.S. Farms: 2004 Family Farm Report. USDA Agricultural Information
Slide 16
Bulletin No. 787, March 2005. <www.ers.usda.gov>.
How do farms acquire non-land assets?
Source: Reprinted from Allen and Lueck (2002), p. 25.
Slide 17
Allen and Lueck’s “Nature of the Farm”
• Why do family farms predominate?
–Why do other forms persist in some cases?
• Settler farms and “latifundia” (spacious-farms) or haciendas in
S. America and Southern Africa,
• Plantations with slavery or other labor restrictions in tropics
• Absentee owners and wage workers in some crops and livestock
• Why do family farms use certain types of contracts?
–Why is sharecropping so widespread and persistent?
• Sharecropping and “landless” farmers in South Asia
• Piece-rate contracts and migrant workers everywhere
• Land markets and land use in industrialized countries
• How we answer these questions is important for policy, and
of great interest for economics as well.
Slide 18
Allen and Lueck - Context
• Readings are excerpts from the book,
–focusing on historical data and anecdotes
–skipping the analytical models and statistical tests…
• Previous research and policy focuses on risk, leading to a
big role for wealth and risk aversion:
–in earlier view, farm workers progress up a “tenancy ladder” from
wage worker to sharecropper to owner-operator as their wealth
increases and they can absorb more risk
–credit and insurance to absorb risk is key to efficiency
• Allen and Lueck focus on transaction costs and
information, leading to very different policy implications!
–sharecropping is much more efficient than previously thought
–information & communication technology is key to efficiency
Slide 19
Allen and Lueck - Objectives
• Allen and Lueck argue that self-motivated effort
(i.e. family farming) is more likely to persist if:
– Activity is seasonal in nature,
that is, is sequenced in between random events
…which limits the scope for specialization, and
– Activity is difficult to observe
…which limits owners’ ability to specify contracts
• They argue that
– the type of contract used maximizes joint wealth
– given the information constraint on contract choice
Slide 20
Historical examples of nonfamily operations
Allen and Lueck’s cautionary tale:
• “Bonanza” wheat farms in the U.S. (1870-90)
– up to 1000 workers/farm, organized like factories
– facilitated by abundant land, eastern markets, and railroads
– after boom & bust cycles, land soon subdivided and leased/sold to workers
Other famous failures:
• Plantations
– characteristic of tropical environments
– used restrictions on labor mobility to keep serfs, slaves, etc. on the job
– some persist after labor is free to move
• Collective farms
– characteristic of socialist systems
– use restrictions on private ownership to keep farms under political control
– some persist after individuals are free to work independently
Slide 21
Historical examples of nonfamily operations
Where do nonfamily operations succeed?
• Some plantations, where:
– Activity is year-round, so workers can specialize more;
but note that family operations still better unless…
– Activity is spatially concentrated, so supervision is easier;
often this occurs due to on-site processing (e.g. fruit)
• Some livestock, where:
– Activity is “industrialized” due to “control of nature”
• Many specific operations, especially:
– Harvesting, where specialized workers migrate north-south
Slide 22
Farm structure in low-income countries
• In rich countries, when farm sizes are large and rising…
– governments often try to support smaller farms
• In poor countries, when farms are small and shrinking
– governments often try to support larger farms
• What farm sizes are economically efficient?
Slide 23
1. Does land tenure matter?
Theoretical argument:
Security of land rights should affect:
- land prices (capitalization of improvements)
- the intensity of cultivation
- the use of credit.
And therefore…the efficiency of land use.
Why?
Gershon Feder and David Feeny (1991) “Land Tenure and Property Rights:
Theory and Implications for Development Policy,” The World Bank Economic
Review, Vol. 5, No. 1, pp. 135-153.
Slide 24
Two distributions of farm size
IF small farms are more efficient than large farms,
then breaking up large farms will be desirable.
Source: Reprinted from Tomich, Kilby and Johnston, p. 20.
Slide 25
Slide 26
Farm size and labor use
Big farms use labor less intensively. Why is the intensity of
labor use important?
Slide 27
Farm size and technology adoption
Slide 28
Farm size and the cost of capital
This is one
explanation for the
patterns in the
previous slide
larger farms have
better access to credit
Slide 29
Confused?
Is it better for a farm to be capital intensive or
labor intensive?
How do we conceive of “efficiency”?
Slide 30
What farm size is economically efficient?
• Need to take into account all inputs (factors)…
• Land
• Labor
• Purchased inputs
“Total Factor Productivity” (TFP) is the portion of output not
explained by the amount of inputs used in production. Its
value is determined by how efficiently and intensely factors
are utilized in production.
Usually measured as a “residual” or as a time trend for an index.
Slide 31
Source: Avila and Evenson “Total Factor Productivity Growth in Agriculture:
The Role of Technological Capital”
http://www.earthinstitute.columbia.edu/cgsd/events/documents/evenson.pdf
Slide 32
Farm size and total factor productivity
Slide 33
Conclusion: what is optimal farm size?
• Across space, optimal farm size varies widely:
– across types of land (better land=>smaller farms)
– across farm families (more capital => more land)
• Over time, optimal size remains that which employs a family’s
workers, earning their opportunity cost
– the optimal size falls and then rises, as the number of farmers rises
and then falls, but farms remain family operations
• Exceptions are when employee supervision is easy, and/or scale
economies are large:
– confined livestock operations,
– crops that are closely tied to processing (e.g. tea & sugar)
• When processing can be delayed, use of smallholder farms helps
lower costs (e.g. cotton, cocoa, and coffee).
Slide 34
Conclusion: does agriculture industrialize?
• In what ways do individual farms become like factories?
• In what ways does the agriculture sector as a whole become
“industrialized”?
• Does tenure matter? Yes, in theory, and often in practice, but
informal institutions may be as good as formal institutions. See
Michler, J. and G. Shively “Land Tenure, Tenure Security and
Farm Efficiency: Panel Evidence from the Philippines.” Journal of
Agricultural Economics, in press.
Slide 35