Presentation on theme: "Paul D. Mitchell AAE 320: Farming Systems Management"— Presentation transcript:
1Paul D. Mitchell AAE 320: Farming Systems Management Technological Change in Agricultural Production: Dealing with Cochrane’s TreadmillPaul D. MitchellAAE 320: Farming Systems Management
2Learning GoalsReview data on U.S. farm productivity and income over past century or soSee effects of technological changeWhat are its effects on farm income?What is Cochrane’s Treadmill?Examine pressures facing farm managers due to technological changeHow can farms deal with Cochrane’s Treadmill?
3Technological Change in U.S. Agriculture U.S. agriculture has increased productivity tremendously over past centuryDevelopment of hybrids, new varieties, improved geneticsUse of more and improved inputsImproved management practicesSee in per acre crop yields and in milk production per cow
10Main Point: Big Increases Tremendous increases in crop and livestock productivity due to technological changeDo farmers capture the value of these productivity increases?Have to buy new technologiesPrice effects of supply increasesWhat’s the net effect on farmer income?
11Farm Income Effect of Technology Change Depends if technology change augments farmer supplied inputs (land, labor, management) or off-farm inputsFarmers win if augments their inputsInduced Innovation: new technologies to reduce use of costly inputsMeans Neutral Technology change: producers (on or off-farm) don’t win, just consumersKey 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
12Rate of Increase for County Average Corn Yields 1990 to 2009 Many areas saw record gains over last 20 yearsMany areas saw no gains over last 20 years<=00 to 11 to 22 to 33 to 4> 4bu/ac/yearLauer, Mitchell, Diallo 201?
13Consumer Demand and Technology Change Technology change increases supply (reduces cost): shift curve outwardMeans drives prices downConsumer demand increases with population increase and income increase: shift outwardMeans drives price upwardWhich effect wins?
14Changing Technology and Demand can lead to price increase or decrease Base CasePrice DecreasePrice IncreaseS0D0PQS0S1D0D1PQPQS1S0D0D1Price effect depends on whether supply or demand curve moves the mostWhich has dominated in USA?
17Cochrane’s Treadmill (Willard Cochrane, Ag Economist, U of MN) New Technology: reduces costs, increases supply, eventually reduces market pricesEarly adopters: sell increased production at lower cost, farm income increases, drive down market pricesLater adopters: farm income falls as prices fall, forced to adopt lower cost technology to survive with lower pricesFarmers on treadmill – always running to adopt newest technology to stay ahead of declining real pricesFarm income distribution shifts to larger farms as small farms drop out, more rural inequality and povertyConsumers are the winners: lower food prices
18Cochrane’s Treadmill Real price data show a decline in real prices Supports Cochrane’s TreadmillCited by many to explain shift to larger farmsLess popular among academic economistsDebate and analyze data, an empirical issue: have farmers become better off by technology change?Ramifications for developing nationsWhat 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?
27Summary Real Prices have declined for grains Real Revenue for grain peaked in 1970s, but recently approaching it again, especially cornReal Returns ($/ac) for US Agriculture have been flat over last century, but highly variableMax in 1970s, Min in 1980sReal Returns ($/Farm) also variable, but increasing as farm size has increasedProfit Margin decreased from ~45% to ~20% todayGreater purchase of off-farm inputs now
28Cochrane’s Treadmill Cochrane’s Treadmill theory Decline of real prices supports itFlatness of real returns does notFarm size leveling off since mid 1970s doesn’tWhat 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?
29Ratio of Median Farm Household Income to Median US Household Income (current dollars)
32% HH Income from Govt Paymts 44%% HH Income from Govt Paymts16%0%4%0%20%27%52%% of Govt Paymts63%27%7%3%% of FarmsSource:
33Components of U.S. Farm Household Income in 2009 Level of Government PaymentsItemNone$1 to $9,999$10,000 - $29,999$30,000 or moreAllNumber of Farms1,338,362577,253147,55467,8382,131,007Household Income73,22170,047105,505154,01977,169Net Farm Earnings-4,6569,31755,276108,0466,866GovernmentPayments3,03717,04068,0274,168Off-farm Income77,87760,73050,22945,97370,302
34Components of U.S. Farm Household Income in 2009 -- Level of Government Payments --ItemNone$1 to $9,999$10,000 - $29,999$30,000 or more% of Farms63%27%7%3%% Household Income from Farming-6%13%52%70%% Household Income from Government Payments0%4%16%44%% Farm Income from Government Payments33%31%% of Government Payments20%28%
35Farm Strategies to Deal with Technology Change “Get big or get out”Large farms can survive and thriveGovernment payments very importantOff-farm income less important, but usedMix of farm and off-farm incomeChosen by smaller and mid-sized farmersOff-farm income very importantGovernment payments also important
36Main PointTechnology change has been a major driving force in agriculture that has greatly affected farm structure and rural economies/societiesDoes not look like it’s about to changeCochrane’s Treadmill has been part of ag industrialization, with winners and losersAs a farm manager, you will have to respond to and manage technological changeTwo common strategiesAggressively pursue new technologies, or stay small and use off-farm income to surviveBoth rely on government payments