Slide 1 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 AGEC Agricultural Development and Policy Farm households and the “industrialization” of agriculture September 9, 2014

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

Slide 3 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”) These are powerful drivers of change in agriculture and in agricultural policy, but occur slowly and are often ignored! More conclusions from last week… a race

Slide 4 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 5 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 6 Does 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 .02/farm

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

Slide 8 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) EnterprisesReceipts Farms Family86.0%52.2% Partnership8.9%18.1% Family Corp.4.0%23.3% Nonfamily Corp.0.4%5.6% Other0.8%0.9% Nonfarm Businesses Proprietorships73.0%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.

Slide 9 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

Slide 10 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

Slide 11 Farm household income by type of farm, 2001 Total Farm Sales Category Farm Earnings Off-Farm Earnings Unearned Income Total Household Income under $10,000-5,75552,03415,94862,227 $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 - $999,99987,99419,84110,984118,819 over $1,000, ,49421,31813,413367,225 Farm Typology Group Farm Earnings Off-Farm Earnings Unearned Income Total Household Income Limited-Resource-3,1656,2724,8417,948 Retirement-1,07010,34138,33147,602 Residential-5,69477,3339,61481,253 Farming Occupation-low sales-2,55217,49320,92435,865 Farming Occupation-high sales26,49718,7888,33253,617 Large37,18218,91514,09670,193 Very Large 181,66020,40711,914213,981 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 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.

Slide 12 Source: 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 assets Net worth of farm operator households by type, 1998

Slide 13 How 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

Slide 14 Reprinted from Allen and Lueck (2002), p. 25. How do farms sell their output? A few crops have used contract sales for decades

Slide 15 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

Slide 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 Contracting is growing fastest for swine and also for cotton

Slide 17 How do farms acquire non-land assets? Source: Reprinted from Allen and Lueck (2002), p. 25.

Slide 18 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 19 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 20 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 21 Historical examples of nonfamily operations Allen and Lueck’s cautionary tale: “Bonanza” wheat farms in the U.S. ( ) – 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 22 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 23 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 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

Slide 25 Two 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.

Slide 26

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

Slide 28 Farm size and technology adoption

Slide 29 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 30 Confused? Is it better for a farm to be capital intensive or labor intensive? How do we conceive of “efficiency”?

Slide 31 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 32 Source: Avila and Evenson “Total Factor Productivity Growth in Agriculture: The Role of Technological Capital”

Slide 33 Farm size and total factor productivity

Slide 34 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 35 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. Michler, J. and G. Shively “Land Tenure, Tenure Security and Farm Efficiency: Panel Evidence from the Philippines.” Journal of Agricultural Economics, in press.