technological change in agricultural production: dealing with cochrane’s treadmill paul d....
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Technological Change in Agricultural Production: Dealing with Cochrane’s Treadmill
Paul D. Mitchell
AAE 320: Farming Systems Management
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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?
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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
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U.S. Average Corn Yields
0
20
40
60
80
100
120
140
160
180
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Yie
ld (
bu
/ac)
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U.S. Average Soybean & Wheat Yields
0
5
10
15
20
25
30
35
40
45
50
1910 1930 1950 1970 1990 2010
Yie
ld (
bu
/ac)
Soybeans
Wheat
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Planted Area: Corn Soybeans Wheat
0
20
40
60
80
100
120
1920 1940 1960 1980 2000
Pla
nte
d A
cres
(m
illi
on
)
Corn
Soybeans
Wheat
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Total Planted Area: Corn, Soybeans, Wheat
0
50
100
150
200
250
1925 1935 1945 1955 1965 1975 1985 1995 2005
Pla
nte
d A
rea
corn
so
yean
s w
hea
t
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Average Annual Milk Production (lbs/cow)
0
3,000
6,000
9,000
12,000
15,000
18,000
21,000
24,000
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Mil
k/C
ow
(lb
s/ye
ar)
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Dairy Cows in U.S. (millions)
0
5
10
15
20
25
30
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Dai
ry C
ow
s (m
illi
on
s)
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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?
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Farm Income Effect of Technology Change Depends if technology change augments farmer
supplied inputs (land, labor, management) or off-farm inputs 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
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Rate of Increase for County Average Corn Yields 1990 to 2009
<=00 to 11 to 2
2 to 33 to 4> 4
bu/ac/year
Many areas saw record gains over last 20 yearsMany areas saw no gains over last 20 years
Lauer, Mitchell, Diallo 201?
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Consumer Demand and Technology Change Technology change increases supply
(reduces cost): shift curve outward Means drives prices down
Consumer demand increases with population increase and income increase: shift outward Means drives price upward
Which effect wins?
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Changing Technology and Demand can lead to price increase or decrease
S0S1
D0
D1
P
Q
PS0D0
P
Q
P
Q
PS1
S0D0D1
Base Case Price Decrease Price Increase
Price effect depends on whether supply or demand curve moves the most
Which has dominated in USA?
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Nominal Grain Prices ($/bu)
0
2
4
6
8
10
12
1860 1880 1900 1920 1940 1960 1980 2000
No
min
al P
rice
($/
bu
)
Corn
Wheat
Soybean
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Real Grain Prices ($2010)
0
10
20
30
40
50
60
1910 1930 1950 1970 1990 2010
Rea
l P
rice
($/
bu
)
Corn
Soybeans
Wheat
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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 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
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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?
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Real Revenue ($2010/acre) in U.S.
0
200
400
600
800
1000
1200
1910 1930 1950 1970 1990 2010
Rea
l R
even
ue
($/a
c)
Corn
Soybeans
Wheat
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Real Revenue, Costs and Returns ($2010) for All U.S. Agricultural Production
0
50
100
150
200
250
300
350
400
450
500
1910 1930 1950 1970 1990 2010
Rea
l 20
10 $
Bil
lio
n
Revenue
Costs
Returns
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Real Returns ($2010/Acre) for All U.S. Agricultural Production
$0
$20
$40
$60
$80
$100
$120
$140
$160
1910 1930 1950 1970 1990 2010
Rea
l 20
10 $
/ac
Ret
urn
s
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Real Returns ($2010/Farm) for All U.S. Agricultural Production
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
1910 1930 1950 1970 1990 2010
Rea
l 20
10 $
/Far
m R
etu
rns
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Average U.S. Farm Size (acres)
0
50
100
150
200
250
300
350
400
450
500
1910 1930 1950 1970 1990 2010
Ave
rag
e S
ize
(acr
es) ?
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Average U.S. Farm Size (acres)
0
50
100
150
200
250
300
350
400
450
500
1910 1930 1950 1970 1990 2010
Ave
rag
e S
ize
(acr
es)
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Average WI Farm Size (acres)
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
50
100
150
200
250
Ave
rag
e F
arm
Siz
e (a
c)
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Profit Margin (Returns/Revenue)
0%
10%
20%
30%
40%
50%
60%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
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Summary
Real Prices have declined for grains Real Revenue for grain peaked in 1970s, but recently
approaching it again, especially corn Real Returns ($/ac) for US Agriculture have been flat
over last century, but highly variable Max in 1970s, Min in 1980s
Real Returns ($/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
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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?
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Ratio of Median Farm Household Income to Median US Household Income (current dollars)
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
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Source: http://www.ers.usda.gov/briefing/wellbeing/farmhouseincome.htm
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Source: http://www.ers.usda.gov/briefing/wellbeing/farmhouseincome.htm
63% 27% 7% 3% % of Farms 20% 27% 52%0% % of Govt Paymts
0% 4%
16%
44%
% HH Income from Govt Paymts
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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
All
Number of Farms
1,338,362 577,253 147,554 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
Government Payments
0 3,037 17,040 68,027 4,168
Off-farm Income
77,877 60,730 50,229 45,973 70,302
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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%
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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
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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