The Overproduction Trap in U.S. Agriculture

A Study of Resource Allocation from World War I to the Late 1960's

Glenn Johnson, C Leroy Quance

• Publisher: RFF Press
• Year: 2013
• ISBN:
  9781135984410
• Edition: 1
• Topic: Business
• Subtopic: Agribusiness
• Index: Business

This book emphasizes resource use and efficiency in the agricultural sector and offers facts and analytical concepts of interest to welfare economists, sociologists, and agricultural policy makers. Originally published in 1972

THE OVERPRODUCTION TRAP IN U.S. AGRICULTURE

PART I

The Problem of Problems in a Dynamic Agriculture

Most people agree that the United States has a “farm problem.” But there is much disagreement in defining, explaining causes and impacts, and in prescribing public policies for alleviating the chronic adjustment needs in agriculture. The areas of disagreement depend on understanding the area of agreement—i.e., what is the “farm problem”? The most difficult part of our inquiry is its initiation. Before a problem can be solved, it must be correctly defined and a mode of communications established. The four chapters of Part I, in discussing important characteristics of the U.S. agricultural economy, summarizing a theoretical model that will serve as an analytical framework, and then discussing a basis for evaluation, provide the initiation of our inquiry.

CHAPTER 1

Introduction

GLENN L. JOHNSON

Since 1917 (and possibly some time before), United States agriculture has been characterized by a capacity to expand production every twenty to twenty-five years by as much as it produced in 1875. Further, this impressive rate of growth has been accompanied by an almost chronic tendency to expand production (both before and since the introduction of price and production controls) to the point at which product prices fail to cover investments and expenditures in producing farm products. Results have been (1) relatively abundant supplies of low-priced food for consumers and (2) either low returns and capital losses for producers or taxes to shift the burden of losses from individual farmers to the public at large.

More fundamentally, there has been a substantial loss to the American economy from the commitment of resources to produce relatively less-needed farm products instead of needed (1) infrastructures such as roads and schools; (2) means of relieving domestic poverty; (3) military means to fulfill our international commitments; and (4) means to assist underdeveloped countries to attain viable self-sustaining economies. The need to improve allocative efficiency in the United States agricultural economy is not alleviated by the facts that some of the capital losses to farmers were offset by inflationary gains and that the overall growth of the American economy much more than offset the adverse consequences of overcommitted resources in agriculture.

Clearly, the resource allocating mechanism of the United States agricultural economy requires careful study. A basic question is: how do we manage this important sector to minimize losses (to investors, consumers, and/or taxpayers) without sacrificing ability to grow and to supply products to consumers at reasonable prices? This book attempts to join a somewhat original theoretical approach to the problem with new and on-going empirical work for the 1917–69 period. We hope that this will create a clearer understanding of how the United States agricultural economy operates, and provide a basis for making recommendations to improve its operations.

The general thesis of the book is that United States agriculture has an empirically observed tendency to use such large amounts of labor and capital and to value land so highly that, in general, marginal earnings of all three resources fail to cover investments in, and expenditures on, the resources. The explanation for this behavior which appears, superficially, perverse is found in ordinary classical economic theory provided it is recognized (1) that entrepreneurs are imperfectly informed about continuously recurring changes in technology, institutions, and people and (2) that there are costs for transferring resources from sector to sector, region to region, farm to farm, and enterprise to enterprise.

Among the theoretical implications of such reasoning is the conclusion that the ex post consequences of decisions by individual entrepreneurs often impose economic losses on other entrepreneurs. Such losses would not exist in either (1) an economy operated by perfectly informed entrepreneurs or (2) an economy characterized by zero costs of transferring assets from one use to another. The theoretical existence of these imperfections precludes the application of evaluative criteria which implicitly assume the absence of such losses. Yet it is precisely these criteria that are often used by some economists, politicians, and policy students in evaluating the operation of economic sectors and total economies—and rejected by others. Our book tries to get at this “root of the farm problem” and, as such, provide a theoretical and empirical basis for understanding the problems of appraising and improving the operations of a mixed control (private and public) sector of our national economy.

We stress that, while allocative efficiency has a great deal to do with welfare, the book is not a study of welfare or of poverty, per se; instead, it is a study of the efficiency with which the United States allocates its agricultural resources. In Chapter 2, we describe the main structural characteristics of the agricultural economy; in Chapter 3, the theoretical consequences of taking these structural characteristics into account are ascertained. Chapter 4 provides a basis for evaluation. Following is a historical analysis extending over several chapters. Product price expectations, a necessary ingredient for studying resource allocation, are studied in Chapter 5. Chapter 6 examines the overall pattern of production, consumption, exports, and carryovers, 1917 to date, while Chapters 7 to 11 look at capital, labor, and land utilization, 1917 to date. Chapter 10 summarizes the preceding chapters, and Chapter 11 evaluates and yields suggestions for improving the operation of the U.S. agricultural economy.

CHAPTER 2

Characteristics of U.S. Agricultural Economy

GLENN L. JOHNSON

Our objective in this chapter is to determine those characteristics of the national agricultural economy that have underlying significance for gaining theoretical understanding of how farm resources are allocated. Economic abstractions based on realistic assumptions with respect to such characteristics should imply, predict, or indicate the operating characteristics. Therefore, it is left mainly to later chapters to examine the correspondence or lack of correspondence between (1) the theoretical consequences of the structural characteristics summarized here, and (2) the operating characteristics. The presence or absence of this correspondence determines the advisability of using the theoretical formulation and empirical analysis presented in this study as a basis for designing changes in U.S. agricultural policies and programs. However, some attention must also be given to operating characteristics at this point to assure a relevant theoretical formulation in the sense that appropriate dependent variables are studied.

In the following pages attention is given characteristics of (1) U.S. agricultural factor markets, (2) product markets, and (3) the managerial units for agricultural firms. Much structural significance is revealed when: (1) factor markets are examined in a broad sense, including attention to technological and institutional change; (2) product markets are examined, including attention to increases in demand due to population growth, changes in per capita income, and changes in income distribution; (3) the managerial units producing farm products are described; and (4) the aggregate behavior of U.S. agricultural output is described.

AGRICULTURAL FACTOR MARKETS

The classical categorization of factors—land, labor, and capital—is useful, particularly if capital is divided into land-saving, labor-saving, neutral (with respect to land and labor), and a mix produced as a result of labor-saving, land-saving, and other technological developments.

The most important single characteristic of land for theoretical purposes is probably the space it occupies on the face of the earth. Its other productive characteristics are relatively easy to replace or reproduce, as demonstrated by fertilizer factories, irrigation systems, and drainage facilities. But space, in which the energy of the sun can be collected is to date a characteristic not readily reproducible by man. While land becomes increasingly passive as a factor of production [Schultz, May 1951, pp. 204 ff.], the impact of the space it occupies remains important in the operation of factor markets.¹

One square mile is required for four 160-acre farms. Of necessity, some of the farms within an area of a thousand 160-acre farms must be almost 20 miles away from a single central supply point for factors of production in the nonfarm sector. For farm-produced factors, such as feeder animals and feed, supplying and demanding farms even within a single group of a thousand farms average several miles apart and transportation costs are of substantial importance.

Given regional specialization in farm-produced inputs and sector specialization in producing tractors, machinery, trucks, etc., by the nonfarm economy, transportation costs for durable inputs are clearly of major importance. These costs grow out of the space-occupying characteristics of land. In turn, transportation costs create substantial differentials between acquisition costs and disposal values of storable production factors, both durable factors which are used repeatedly—such as tractors—and nondurable factors which are used but once—such as feed or gasoline. In addition to transportation costs, there are other costs of transferring resources from one use to another including commissions, brokerage fees, taxes, loss of knowledge, changes in interest rates, etc. Thus, it is necessary for economic analysis to account for differentials between acquisition costs and salvage values growing out of transportation costs made necessary by the space-occupying characteristic of land.

As land itself is not transported, the differential between land acquisition costs and salvage values is less affected than are the acquisition cost and salvage value differentials for factors associated with land. However, large differentials develop for prices of comparable lands in varying locations. Von Thunen’s theory on the location of agricultural production does not adequately handle the role of opportunity cost necessarily introduced by positive differentials between acquisition costs and salvage values. In theoretical analyses of static equilibria based on the assumptions that farmers are perfectly informed, this makes little difference; however, an analysis which recognizes the mistakes likely to be made by imperfectly informed farmers must take into account the price at which farmers can salvage their mistakes if salvage prices are lower than acquisition costs.

As noted earlier, physical capital associated with land is either durable or nondurable. Viewed technologically, physical capital is further classed as land-saving, labor-saving, relatively neutral, or mixed—with respect to its impact on land and labor use.

Durable, land-saving capital includes irrigation facilities, land leveling, terraces, and drainage facilities. These are often heavy, expensive structures, sometimes created in place. As such, their salvage values may be less than zero, i.e., it costs money to destroy or eliminate some of them entirely, though, of course, they may have some value when the land is sold to another farmer. Because such facilities are expensive to acquire and often have negative salvage value, their value in use depends, like that of land, on the price of the products they produce and can vary from negative to as high as their original or present acquisition cost.

Nondurable, land-saving capital includes irrigation water, highly soluble fertilizers, and pesticides—items that tend to have values in use quite near acquisition costs. Though often storable, these items are generally acquired as they are used, mainly within a current production period, and farmers make fewer mistakes of overcommitment than they do for durables such as drainage facilities which may produce services for several decades.

Thus, for a substantial proportion of land-saving capital used in agriculture, acquisition costs exceed salvage values. Whether or not this proportion is increasing is an empirical question not easily answered. The use of durable land substitutes is expanding rapidly and is in many instances driving marginal lands out of cultivation. Use of nondurable, land-saving capital (mainly fertilizer, improved seed, and feed-saving technology) and product-conserving technology is also expanding rapidly. Though these nondurables have low salvage values once acquired, they tend to be used quickly with their earning power covering acquisition costs.

Durable labor-saving capital ranges from fences and buildings through tractors, trucks, horses, and combines, to hoes, pitchforks, and electric sheep-shearing equipment. At one extreme are heavy and expensive items that are produced in place. At the other extreme are light, inexpensive, and easily transported items. Some items, such as milking machines and hay bailers, are specialized even within agriculture. Others, such as plows, are specialized to agriculture, but flexible between the agricultural and nonagricultural sectors. Generally, it is clear that transportation costs for durable, labor-saving capital, plus its tendency to be specialized, combine with the space-occupying characteristics of agriculture to create substantial differentials between acquisition costs and salvage values for a high proportion of the labor-saving, durable capital used in agriculture. As labor-saving technology advances, the proportion of labor-saving durables increases in the factor mix used.

Nondurable labor-saving capital used in U.S. agriculture includes gasoline, electricity, herbicides, and pesticides. These one-use items, like the nondurable land-saving capital items discussed above, are generally acquired as farmers are convinced that their earnings will cover acquisition costs. Thus, the substantial differential which the space-occupying characteristics of land introduces between acquisition costs and salvage values for these items is of less practical significance than for durable labor-saving capital.

The importance of labor-saving capital is steadily increasing in the factor mix for United States agriculture. Since 1917 there has been an almost complete replacement of horse feed by petroleum products, both of which substitute for human labor. On the durable capital side, a corresponding replacement of horses with tractors and trucks occurred. Thus, it is difficult to judge whether the difference between acquisition costs and salvage values for labor-saving capital ha...