Structure of the US farm economy EconS350 Fall Semester, 2010

Top-down and bottom-up forces Global trends in trade, production, demand National Regional Farm *Our focus in this course will be on how decisions are made at the farm level *Agricultural markets are assumed to be “purely competitive”, SO no individual farmer can directly change things going up.

HouseholdsFirms Sales Factor payments Income Consumer spending Factor markets Product markets Labor Goods, services Production inputs Goods, services Flow of $Flow of quantities Gov’t

Factors of production: Land Little change in land in farms for US in aggregate in recent decades However, this hides significant changes regionally Agricultural land use categories – Cropland – Pasture – Forest land grazed Total US land area for lower 48: about 2 billion acres

Factors of production: land (1,000 acres) CroplandPastureForest Northeast25,02713,70010,1263,02561,78865,484 Lake States46,18442,10210,0665,39354,46049,039 Corn Belt92,22495,72826,32613,07828,95431,304 Northern Plains95,470101,97882,29571,0364,0954,340 Appalachian35,04026,01113,6316,25363,66971,539 Southeast26,97314,8248,6868,28272,99473,661 Delta States22,19221,0467,2156,24651,40450,667 Southern Plains51,82355,670105,086115,75046,31818,007 Mountain32,35646,265339,243302,823121,489116,799 Pacific23,40423,94956,82452,33896,54678,296 US Total450,693441,550659,498586,521601,717651,163 All of Washington is 42,000,000 acres

Factors of production: Land Major Uses of Land in the United States, 2002/EIB-14 Economic Research Service/USDA

Factors of production: Labor Number of large farms is growing U.S. agriculture in the year 1910 v – Total employment in agriculture: 11 v. 1 million – % of all employment in agriculture: 32 v. 2% – Non-agricultural employment: 21 v. 140 million – Number of farms: 6.2 v. 2.1 million – Agricultural GDP as share of total GDP: 7.5% v. 0.7% What happened? – Economic recovery following the Great Depression – Beginning of long-run growth in farm productivity

Factors of production: Capital All farm equipment, buildings, irrigation infrastructure, fencing, etc. Massive substitution of capital for labor in U.S. agriculture in the last 100 years. Measuring capital inputs is more complicated than land due to things like depreciation.

Government payments Cannot understand farm management decisions without knowing the role of government payments. Direct or ‘fixed’ payments – Payments based on historical cropping patterns but not current operator decisions. Price based payments – Payments that depend on current market prices – Often called ‘countercyclical’ payments Conservation program payments – Conservation Reserve Program – Environmental Quality Incentives Program – Conservation Security Program Various forms of disaster or relief payments

Government Payments

Farm Structure Definition: Farm structure – Efficiency and competitiveness of the farm sector – Well-being of farm households – Design of public policies – The nature of rural areas Percent of U.S. farms that are family farms? – 98% Large-scale family farms and non-family farms are: – 10% of farms – Account for 70% of the value of production

Farm Income We will go into detail about different ways to measure the financial performance of a farm. Profitability is strongly and positively associated with farm size. In 2004, – Average net farm income: $25,000 – Percent of farms with positive net farm income: 70% Major lending sources – Commercial banks: 49% – Farm Credit System: 25% – Farm Service Agency: 3%

Farm Income

Management Decisions What should I grow? How should I grow it? What is the best investment I can make in the long run? Should I lease in or lease out land? What is the best way to sell my production? Primary Goal of this Course!! – Understand how to maximize long-term profitability of farm or ranch operation. – In addition to maximize financial potential, how to meet other non-financial objects.

Very important economic concepts!! Discounting Opportunity Cost Economies of Scale