Today: Structural transformation -- does agriculture industrialize ?

1. AGEC 640 -- Agricultural Development and PolicyFarm households and the “industrialization” of agriculture September 9, 2014 • 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

2. 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 • eventually the number of farmers stabilizes

3. 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 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! a race

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” ?

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

6. 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.

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

8. Are these “family farms”? How does farm ownership differ from ownership of nonfarm enterprises?

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 2005. <www.ers.usda.gov>.

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 2005. <www.ers.usda.gov>.

11. 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.

12. 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 for farm data; US average income from Current Population Survey, US average net worth from Survey of Consumer Finances.

13. 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.

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

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 2005. <www.ers.usda.gov>.

16. Contracting is growing fastest for swine and also for cotton 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>.

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

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.

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

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

21. 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

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

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?

24. 1. 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? • GershonFeder 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.

25. Two distributions of farm size IF small farms are more efficient than large farms, then breaking up large farms will be desirable. Source: Reprinted from Tomich, Kilby and Johnston, p. 20.

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

28. Farm size and technology adoption

29. Farm size and the cost of capital This is one explanation for the patterns in the previous slidelarger farms have better access to credit

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

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.

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.pdf

33. Farm size and total factor productivity

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).

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.