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

0

20

40

60

80

100

120

140

160

180

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Yie

ld (

bu

/ac)

U.S. Average Soybean & Wheat Yields

0

5

10

15

20

25

30

35

40

45

50

1910 1930 1950 1970 1990 2010

Yie

ld (

bu

/ac)

Soybeans

Wheat

Planted Area: Corn Soybeans Wheat

0

20

40

60

80

100

120

1920 1940 1960 1980 2000

Pla

nte

d A

cres

(m

illi

on

)

Corn

Soybeans

Wheat

Total Planted Area: Corn, Soybeans, Wheat

0

50

100

150

200

250

1925 1935 1945 1955 1965 1975 1985 1995 2005

Pla

nte

d A

rea

corn

so

yean

s w

hea

t

Average Annual Milk Production (lbs/cow)

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

24,000

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Mil

k/C

ow

(lb

s/ye

ar)

Dairy Cows in U.S. (millions)

0

5

10

15

20

25

30

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Dai

ry C

ow

s (m

illi

on

s)

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

<=00 to 11 to 2

2 to 33 to 4> 4

bu/ac/year

Many areas saw record gains over last 20 yearsMany areas saw no gains over last 20 years

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

S0S1

D0

D1

P

Q

PS0D0

P

Q

P

Q

PS1

S0D0D1

Base Case Price Decrease Price Increase

Price effect depends on whether supply or demand curve moves the most

Which has dominated in USA?

Nominal Grain Prices ($/bu)

0

2

4

6

8

10

12

1860 1880 1900 1920 1940 1960 1980 2000

No

min

al P

rice

($/

bu

)

Corn

Wheat

Soybean

Real Grain Prices ($2010)

0

10

20

30

40

50

60

1910 1930 1950 1970 1990 2010

Rea

l P

rice

($/

bu

)

Corn

Soybeans

Wheat

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.

0

200

400

600

800

1000

1200

1910 1930 1950 1970 1990 2010

Rea

l R

even

ue

($/a

c)

Corn

Soybeans

Wheat

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

0

50

100

150

200

250

300

350

400

450

500

1910 1930 1950 1970 1990 2010

Rea

l 20

10 $

Bil

lio

n

Revenue

Costs

Returns

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

$0

$20

$40

$60

$80

$100

$120

$140

$160

1910 1930 1950 1970 1990 2010

Rea

l 20

10 $

/ac

Ret

urn

s

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

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

1910 1930 1950 1970 1990 2010

Rea

l 20

10 $

/Far

m R

etu

rns

Average U.S. Farm Size (acres)

0

50

100

150

200

250

300

350

400

450

500

1910 1930 1950 1970 1990 2010

Ave

rag

e S

ize

(acr

es) ?

Average U.S. Farm Size (acres)

0

50

100

150

200

250

300

350

400

450

500

1910 1930 1950 1970 1990 2010

Ave

rag

e S

ize

(acr

es)

Average WI Farm Size (acres)

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100

50

100

150

200

250

Ave

rag

e F

arm

Siz

e (a

c)

Profit Margin (Returns/Revenue)

0%

10%

20%

30%

40%

50%

60%

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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)

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

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

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

63% 27% 7% 3% % of Farms 20% 27% 52%0% % of Govt Paymts

0% 4%

16%

44%

% HH Income from Govt Paymts

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

0 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

0% 33% 31% 63%

% of Government Payments

0% 20% 28% 52%

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