Testimony for the United States Senate Committee on Agriculture, Nutrition, and Forestry Hearing on Agricultural Consolidation, Antitrust, and the

Farm Share of the Food Dollar

John Crabtree

Center for Rural Affairs

Walthill, Nebraska

July 27, 1999

A Fair Share for Farmers?

For most of this century the farm share of the consumer and export dollar has trended steadily downward. Not coincidentally, the number of farms has trended down at a mirroring pace. If the current farm share trend line is extended for another 20-21 years the farm share of the consumer dollar would be predicted to reach 0. If we leave current policies and trends in place for another generation, there will be virtually nothing left of family farming and ranching.

It need not be this way. Trend lines are economic constructs, predictions of the future.

Observing a bus hurtling toward a cliff, it is easy enough to predict the eventual outcome. However, predictions of a catastrophic ending assume that no action will be taken to change direction.

Agricultural concentration and the decline of owner-operated farms and ranches are not the inevitable result of inexorable forces of nature. Nor is family farm and ranch decline driven by efficiency gains associated with large scale agriculture. Iowa State University economist Mike Duffy's research analysis of Iowa farm records demonstrates that economies of size run out at about 600 acres of row crops and about 150 sows farrow-to-finish. Levels well below the size of today's most rapidly growing operations.

The farm share of profit in the food system is declining, as the profit share captured by farm input, marketing, and processing companies grows. Food processors and meatpackers rationalize that their consumption of an ever increasing share of the consumer dollar is only the result of their "adding value" to farm commodities. Judging by current trends in the farm share of food system profit, farmers and ranchers can ill-afford to have much more of this kind of "value" added to the crops and livestock they raise.

Unless we reverse this trend, and ensure that farmers and ranchers receive a fair share of the profit from the food system, nothing else we do to maintain family size farms will succeed. We should not lose hope, however. Concentration in agricultural production is driven by policy choices. We can choose another path. There can be a future for family farmers and ranchers, and our rural communities. The choice is before us and time is of the essence.

Why Should We Care?

The common assumption of U.S. policy on family farm decline is that it is the result of the forces of competition that lead to a more efficient system of production. That is the way the rest of the economy is organized. Why should agriculture be any different?

This view is fundamentally flawed. Societies in which income, wealth and power are more equitably distributed are generally healthier than those in which they are highly concentrated. A system of economically viable, owner-operated family farms contributes more to communities than systems characterized by inequality and large numbers of farm laborers with below average incomes and little ownership or control of productive assets. Replacing mid-size farms with big farms reduces middle class entrepreneurial opportunities in farm communities, at best replacing them with wage labor.

Everyone who has done careful research on farm size, residency of farm land owners and social conditions in the rural community finds the same relationship: With increased farm size and absentee ownership, social conditions in the local community deteriorate. Communities that are surrounded by farms that are larger than can be operated by a family unit have a bi-modal income distribution, with a few wealthy elites, a majority of poor laborers, and virtually no middle class. The absence of a middle class at the community level has a serious negative effect on both the quality and quantity of social and commercial service, public education, local governments, etc.

Some argue that the structure of agriculture is economically irrelevant to rural communities. That is certainly not true in the farm and ranched based counties of the Midwest and Great Plains. The Center for Rural Affairs has identified 277 counties that remain highly dependent on farming and ranching in the six state area of the Dakotas, Iowa, Kansas, Minnesota and Nebraska. These farm-based counties account for over half of all counties in the six states. These counties have not been well served by traditional rural development strategies. They've suffered population decline, and incur much higher rates of poverty than the region overall.

Internal Revenue Service data indicates that farm and ranch counties in Nebraska and the Dakotas account for over one third of the nation's 50 lowest income counties. Farm and ranch counties in Nebraska alone account for the nation's three lowest income counties and ten of the bottom 50.

Low income levels and inadequate economic opportunity are taking a toll on agricultural communities. The Nebraska Rural Development Commission projects that Nebraska's most rural areas will lose 25 percent of their population over the coming decades - becoming repositories of the poor and aged - absent fundamental changes in both agriculture and economic development policy.

The deepening economic crisis in farm and ranch country gives a more immediate view of the economic destruction in store for rural America if we fail to address the decline of family farms and ranches.

The Federal Reserve Bank in Kansas City reports that agricultural loan repayments are down; agricultural loan renewals and extensions are up; the commodity price index is the lowest since 1987.

Economists and bankers are predicting mass defections from farms and ranches.

Agricultural income in 1998 are predicted to fall from 15 to 60 percent in Midwestern states.

University of Nebraska Bureau of Business Research concludes that low prices for farm commodities are causing a significant slowdown of Nebraska's economy.

Lending institutions most threatened by these numbers are smaller, often rural, banks that are crucial to the economic viability of family farms and rural communities. The U.S. Small Business Administration reports that smaller banks (less than $100 million in assets) make over 50% of small farm loans despite the fact that they own only 6% of total bank assets.

These are indicators of what the future has in store for rural America if current trends are left unchecked. Rural communities with fewer farms, fewer small businesses, fewer banks, fewer people, lower incomes, a diminished local tax base, declining public services, struggling schools, etc. That is not progress. That is social decay.

What can we do?

The ongoing consolidation in the food system and the resultant family farm and ranch decline requires redirecting the government we have away from reinforcing the destructive tendency toward excessive concentration of wealth and toward providing genuine opportunity, strengthening communities, fostering environmental stewardship and enabling all to gain a stake in society.

Farm and Ranch Income Initiative

The declining farm share of food system profit reflects choices in technology and markets. Public research programs have focused on developing expensive technologies that enable input corporations to increase their income by selling more to farmers, and that reduce the role of and need for farmers in producing food.

In addition, farmers have been largely relegated to producers of cheap raw commodities. The attributes that make products unique and add to their sale price have largely been added in plants of food processing corporations. Companies that capitalize on these attributes have received a growing share of food system profit.

In short, agribusiness corporations have been strategic. They have shaped technologies, products and markets to increase their profit share.

A new federal initiative should be established to do the same for family farmers and ranchers. It should provide competitive funding for activities that increase the farm share of food system profit, as they enhance environmental stewardship and consumer choice.

A portion of the funds should be focused on research to develop new knowledge and production systems that enable farmers to use their management and skills to increase their share of the food system profit by cutting input and capital costs and/or producing higher value products.

Funds should also be committed to new market development initiatives. Consumer markets are becoming segmented. Many consumers are increasingly willing to pay a premium for products with the unique attributes they desire, including food produced in an environmentally and socially sound manner. That presents an opportunity for family farmers and ranchers, especially those committed to producing high quality products in a sustainable manner.

A new federal initiative could providing funding for feasibility studies, cooperative development, consumer research and other up-front costs of establishing new high value markets. The explicit foci should be enabling family farmers and ranchers to capture a larger share of food system profit. Proposals should receive additional credit in the competitive funding process for demonstrating environmental benefits.

Funding could be secured in part by directing existing research and market development programs toward these objectives, and in part by redirecting a portion of the federal funding baseline currently committed to direct farm income support payments.

Rural Entrepreneurship Initiative

One of the core strengths of the nation's farm and ranched based communities is the entrepreneurial bent of their people. Self employment rates in the farm based communities of the Dakotas, Iowa, Kansas, Minnesota and Nebraska are double those of other counties in the same states.

Public policy does little to nurture that strength, either on the farm or off. A portion of the federal budget baseline now committed to AMPTA payments for direct farm income support should be redirected to support the establishment of owner operated farms and rural businesses.

The initiative should restore funding for federal beginning farmer credit programs that have long been the sole federal approach to new farm establishment. In addition, it should provide competitive funding to state, local, land grant, cooperative and nonprofit initiatives that support the establishment of farm and non farm businesses including:

Training and technical assistance in business planning;

Assistance in conducting feasibility studies for new enterprises, such as developing new food products;

Link new enterprises to new high value markets through cooperatives and other vehicles;

Link retiring farmers and business people with those who would like to get started in a rural business and provide them with assistance in structuring transfer agreements that work for both parties;

Educational programs on strategies for entering farming with limited capital - including low capital production systems and innovative financing arrangements;

Support the creation of lending pools for micro enterprise and beginning farmers;

Training on environmental stewardship.

Access to Commodity Markets

The greatest future opportunity for family farms is in high value markets. But in the mean time, most family farmers must survive in raw commodity markets.

Those markets are increasingly biased against small producers, especially in livestock production. For example, large corporate hog producers use their market power to gain price premiums from meat packers not available to small producers of hogs of identical quality.

Two immediate actions are needed to provide family farmers access to a level playing field in livestock markets. First, the federal government should take immediate steps to require meat packers to report their pricing practices - especially their contracting arrangements and the volume based premiums provided larger producers.

In addition, Congress must define what constitutes illegal price discrimination against small producers. The Packers and Stockyards Act prohibits price discrimination, but Courts have narrowed its applications in recent years to make the statutory prohibition almost meaningless. Congress should clarify that an undue price preference is a price preference based on volume that does not reflect differences in transaction costs associated with size.

Choices

There is a palpable anger in farm communities and growing sentiment that their future is being sacrificed to transnational corporate agribusiness. People in farm communities see they are growing poorer and their prospects bleaker. We face stern challenges in rural America. The choices that we make today will decide if the next century will include a place for economically viable family farms and ranches and rural communities with real opportunities for future generations, or if family farms and many rural communities will become distant memories.

The time to act is now. If you choose a path of boldness and decisive action, rural Americans will stand with you.