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

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?

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

U.S. Average Corn Yields

U.S. Average Soybean & Wheat Yields

Planted Area: Corn Soybeans Wheat

Total Planted Area: Corn, Soybeans, Wheat

Average Annual Milk Production (lbs/cow)

Dairy Cows in U.S. (millions)

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?

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

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?

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?

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?

Nominal Grain Prices ($/bu)

Real Grain Prices ($2010)

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

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?

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

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

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

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

Average U.S. Farm Size (acres) ?

Average U.S. Farm Size (acres)

Average WI Farm Size (acres)

Profit Margin (Returns/Revenue)

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

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?

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

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

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

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

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%

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

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