Today: More Structural transformation AGEC 640 Agricultural Development and Policy The “industrialization” of agriculture September 4, 2018 Today: More Structural transformation In what ways does agriculture industrialize? Thursday: Inputs, R&D and Technology Reading: Allen and Lueck, The Nature of the Farm (excerpts)

Conclusions on economic growth and structural transformation As incomes grow… Farming declines as a fraction of the economy in favor of industry and services even within agriculture Farmers’ incomes at first decline relative to others but then farm incomes catch up eventually farmer incomes pass nonfarmers’ incomes The number of farmers first rises and then falls speed depends on both population and income growth the number of farmers stabilizes and farm/non-farm incomes converge But…beware the “middle income trap” old before prosperous squeezed by countries from above (capital rich) and below (low wage)

The “middle income trap” Source: Figure 3, panel B in Glawe & Wagner (2016) “The Middle-Income Trap: Definitions, Theories and Coutnries Concerned—A Literature Survey” Comparative Economic Studies 58: 507-538.

The “middle income trap” Source: Figure 4 in Glawe & Wagner (2016) “The Middle-Income Trap: Definitions, Theories and Coutnries Concerned—A Literature Survey” Comparative Economic Studies 58: 507-538.

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 leads to high rural population growth and falling land/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

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” ?

Does agriculture industrialize? If so, how? First, speculation… In what ways might farms become “factory farms”? In what ways might agriculture become “industrial”? Then, data from the U.S. and explanations from Allen and Lueck (2002) …with some cross-country evidence

Does agriculture industrialize?  4/farm  2/farm  2/farm  .02/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.

How big are modern farms? Source: Reprinted from Allen and Lueck (2002), p. 18.

Are these “family farms” 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 86.0% 52.2% Partnership 8.9% 18.1% Family Corp. 4.0% 23.3% Nonfamily Corp. 0.4% 5.6% Other 0.8% 0.9% Nonfarm Businesses Proprietorships 73.0% 5.9% Partnerships 8.3% Corporations 18.0% 90.0% Source: Calculated from United States 1997 Census of Agriculture, Table 47 and Statistical Abstract of the United States 1993, Table 848, as reported in Allen and Leuck 2002, page 24.

What are “family farms”? From Banker and MacDonald (eds.) Structural and Financial Characteristics of U.S. Farms: 2004 Family Farm Report. USDA Agricultural Information Bulletin No. 787, March 2005.

More and more farms are for residences/lifestyle, but more and more output comes from the largest farms From Banker and MacDonald (eds.) Structural and Financial Characteristics of U.S. Farms: 2004 Family Farm Report. USDA Agricultural Information Bulletin No. 787, March 2005.

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   Farm Earnings Off-Farm Earnings Unearned Income Total Household Income under $10,000 -5,755 52,034 15,948 62,227 $10,000 - $99,999 -1,365 38,041 17,597 54,273 $100,000 - $249,999 25,321 24,433 9,516 59,270 $250,000 - $499,999 37,182 18,915 14,096 70,193 $500,000 - $999,999 87,994 19,841 10,984 118,819 over $1,000,000 332,494 21,318 13,413 367,225 Farm Typology Group 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 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>. Data drawn from USDA ERS Agricultural Resource Management Survey (ARMS), Phase III.

Net worth of farm operator households by type, 1998 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 farm data; US average from Current Population Survey, US average net worth from Survey of Consumer Finances.

How do farms acquire land 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 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 Allen and Lueck (2002), p. 25. How do farms sell their output? A few crops have used contract sales for decades Reprinted from Allen and Lueck (2002), p. 25.

How do farms sell their output How do farms sell their output? Contracting for livestock production grew in the 1990s From Banker and MacDonald (eds.) 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 cotton From Banker and MacDonald (eds.) Structural and Financial Characteristics of U.S. Farms: 2004 Family Farm Report. USDA Agricultural Information Bulletin No. 787, March 2005.

How do farms acquire non-land assets? Source: Reprinted from Allen and Lueck (2002), p. 25.

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.

Allen and Lueck - Context Previous research and policy focuses on risk, leading to a big role for wealth and risk aversion: • early view: farm workers progress up a “tenancy ladder” from wage work to sharecropper to owner-operator as wealth increases and they can absorb more risk • credit and insurance needed to absorb risk: key to greater efficiency Allen and Lueck focus on transaction costs and information, leading to very different policy implications! • sharecropping more efficient than previously thought • information & communication technology is key to efficiency

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

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

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