1. Paul D. Mitchell AAE 320: Farming Systems Management
Technological Change in Agricultural Production: Dealing with Cochrane’s Treadmill
Paul D. Mitchell
AAE 320: Farming Systems Management

2. 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?

3. 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

4. U.S. Average Corn Yields

5. U.S. Average Soybean & Wheat Yields

6. Planted Area: Corn Soybeans Wheat

7. Total Planted Area: Corn, Soybeans, Wheat

8. Average Annual Milk Production (lbs/cow)

9. Dairy Cows in U.S. (millions)

10. 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?

11. 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

12. Rate of Increase for County Average Corn Yields 1990 to 2009
Many areas saw record gains over last 20 years
Many areas saw no gains over last 20 years
<=0
0 to 1
1 to 2
2 to 3
3 to 4
> 4
bu/ac/year
Lauer, Mitchell, Diallo 201?

13. 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?

14. Changing Technology and Demand can lead to price increase or decrease
Base Case
Price Decrease
Price Increase S0 D0 P Q S0 S1 D0 D1 P Q P Q S1 S0 D0 D1
Price effect depends on whether supply or demand curve moves the most
Which has dominated in USA?

15. Nominal Grain Prices ($/bu)

16. Real Grain Prices ($2010)

17. 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

18. 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?

19. Real Revenue ($2010/acre) in U.S.

20. Real Revenue, Costs and Returns ($2010) for All U. S
Real Revenue, Costs and Returns ($2010) for All U.S. Agricultural Production

21. Real Returns ($2010/Acre) for All U.S. Agricultural Production

22. Real Returns ($2010/Farm) for All U.S. Agricultural Production

23. Average U.S. Farm Size (acres)?

24. Average U.S. Farm Size (acres)

25. Average WI Farm Size (acres)

26. Profit Margin (Returns/Revenue)

27. 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

28. 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?

29. Ratio of Median Farm Household Income to Median US Household Income (current dollars)

30. Source: http://www.ers.usda.gov/briefing/wellbeing/farmhouseincome.htm

32. % HH Income from Govt Paymts
44%
% HH Income from Govt Paymts
16% 0% 4% 0%
20%
27%
52%
% of Govt Paymts
63%
27% 7% 3%
% of Farms
Source:

33. 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
3,037
17,040
68,027
4,168
Off-farm Income
77,877
60,730
50,229
45,973
70,302

34. 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
33%
31%
% of Government Payments
20%
28%

35. 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

36. 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