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Slide 1 Today: Structural transformation -- does agriculture industrialize? Thursday: Inputs, R&D and TechnologyReading: Allen and Lueck, The Nature of the Farm (excerpts)

Next week.: Nutrition and food marketsReadings: Haddad, L. et al., Nutrition Trends and Implications Homework #2 (on food prices and the least-cost diet) due Thursday 9/25 in class

AGEC 640 -- Agricultural Development and Policy

Farm households and the industrialization of agriculture

September 9, 20141Conclusions on economic growth and structural transformationAs incomes growFarming declines as a fraction of the economy in favor of industry and services even within agricultureFarmers incomes at first decline relative to others but then farm incomes catch up eventually farmer incomes pass nonfarmers incomesThe number of farmers first rises and then falls speed depends on both population and income growth eventually the number of farmers stabilizesSlide 2Slide 3

Demographic transition and structural transformation interact, causing a rise & then fall in the number of farmersTodays 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)These are powerful drivers of change in agriculture and in agricultural policy, but occur slowly and are often ignored!More conclusions from last weeka race3Slide 4

From last weeks slidesInteraction of demographic and structural change makes the number of farmers rise and then falland eventually stabilizeToday: within the farm sector, (how) does it industrialize ?4Slide 5Does agriculture industrialize? If so, how?first, speculationIn 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 evidence5Slide 6Does agriculture industrialize?Source: Reprinted from Allen and Lueck (2002), p. 19.Note: Recall that 1920 was near the peak of number of farmers in the US.

4/farm 2/farm 2/farm .02/farm6Slide 7

Source: Reprinted from Allen and Lueck (2002), p. 18.How big are modern farms?7Slide 8Are these family farms?

How does farm ownership differ from ownership of nonfarm enterprises? Organization of farm and nonfarm enterprises in the U.S. (1990s)EnterprisesReceiptsFarmsFamily86.0%52.2%Partnership8.9%18.1%Family Corp.4.0%23.3%Nonfamily Corp.0.4%5.6%Other0.8%0.9%Nonfarm BusinessesProprietorships73.0%5.9%Partnerships8.3%4.0%Corporations18.0%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 24.8Slide 9What 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. . 9Slide 10More 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. .

10Slide 11Farm household income by type of farm, 2001 Total Farm Sales CategoryFarm EarningsOff-Farm EarningsUnearned IncomeTotal Household Incomeunder $10,000-5,75552,03415,94862,227 $10,000 - $99,999-1,36538,04117,59754,273$100,000 - $249,99925,32124,4339,51659,270$250,000 - $499,99937,18218,91514,09670,193$500,000 - $999,99987,99419,84110,984118,819over $1,000,000332,49421,31813,413367,225Farm Typology GroupFarm EarningsOff-Farm EarningsUnearned IncomeTotal Household IncomeLimited-Resource-3,1656,2724,8417,948Retirement-1,07010,34138,33147,602Residential-5,69477,3339,61481,253Farming Occupation-low sales-2,55217,49320,92435,865Farming Occupation-high sales26,49718,7888,33253,617Large37,18218,91514,09670,193Very Large181,66020,40711,914213,981Adapted 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. . Data drawn from USDA ERS Agricultural Resource Management Survey (ARMS), Phase III.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.11Slide 12Source: USDA ERS, 1998 ARMS for farm data; US average income from Current Population Survey, US average net worth from Survey of Consumer Finances.

Even the largest farms have a significant fraction of their wealth in non-farm assetsNet worth of farm operator households by type, 199812Slide 13How do farms acquire land?Most full-time operators own some and rent in more

Note: The additional land rented by farm operators comes from about 1.25 million non-operator 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.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. . 13Slide 14

Reprinted from Allen and Lueck (2002), p. 25.How do farms sell their output?A few crops have used contract sales for decades14Slide 15How 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. . 15Slide 16

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. . Contracting is growing fastest for swine and also for cotton16Slide 17How do farms acquire non-land assets?

Source: Reprinted from Allen and Lueck (2002), p. 25.17Slide 18Allen and Luecks Nature of the FarmWhy 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 tropicsAbsentee owners and wage workers in some crops and livestockWhy do family farms use certain types of contracts? Why is sharecropping so widespread and persistent?Sharecropping and landless farmers in South AsiaPiece-rate contracts and migrant workers everywhereLand markets and land use in industrialized countriesHow we answer these questions is important for policy, and of great interest for economics as well.

18Slide 19Allen and Lueck - ContextReadings are excerpts from the book,focusing on historical data and anecdotesskipping the analytical models and statistical testsPrevious 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 riskcredit and insurance to absorb risk is key to efficiencyAllen and Lueck focus on transaction costs and information, leading to very different policy implications!sharecropping is much more efficient than previously thoughtinformation & communication technology is key to efficiency19Slide 20Allen and Lueck - ObjectivesAllen 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 eventswhich limits the scope for specialization, and Activity is difficult to observewhich limits owners ability to specify contractsThey argue that the type of contract used maximizes joint wealth given the information constraint on contract choice20Slide 21Historical examples of nonfamily operationsAllen and Luecks 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 independently21Slide 22Historical examples of nonfamily operationsWhere 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 natureMany specific operations, especially:Harvesting, where specialized workers migrate north-south22Slide 23Farm structure in low-income countriesIn rich countries, when farm sizes are large and risinggovernments often try to support smaller farmsIn poor countries, when farms are small and shrinkinggovernments often try to support larger farms

What farm sizes are economically efficient? 23Slide 241. 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 thereforethe 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. 135-153.24Slide 25Two distributions of farm size

Source: Reprinted from Tomich, Kilby and Johnston, p. 20.IF small farms are more efficient than large farms, then breaking up large farms will be desirable.25Slide 26

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Farm size and labor useBig farms use labor less intensively. Why is the intensity of labor use important?27Slide 28

Farm size and technology adoption28Slide 29

Farm size and the cost of capitalThis is one explanation for the patterns in the previous slide

larger farms have better access to credit29Slide 30Confused?

Is it better for a farm to be capital intensive or labor intensive?

How do we conceive of efficiency?

30Slide 31What farm size is economically efficient?Need to take into account all inputs (factors)

LandLaborPurchased 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.31Slide 32

Source: Avila and Evenson Total Factor Productivity Growth in Agriculture: The Role of Technological Capital

http://www.earthinstitute.columbia.edu/cgsd/events/documents/evenson.pdf32Slide 33

Farm size and total factor productivity33Slide 34Conclusion: 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 familys workers, earning their opportunity costthe optimal size falls and then rises, as the number of farmers rises and then falls, but farms remain family operationsExceptions 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).34Slide 35Conclusion: 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.35