Agricultural Economics

Abstract

Just as in every other human endeavor, the production and distribution of foodstuffs adheres to certain basic economic principles. Unlike other kinds of competitive markets, though, the dynamics of supply and demand for agricultural goods do not always optimize resource allocation or maximize productive capacity. The most vexing problem here has to do with pricing. Left to its own devices, a commodity market regularly pays out a return that does not even cover the farmer's production costs. Truly efficient farming these days is also far more capital-intensive than it is labor-intensive. Profitability largely depends on successfully leveraging ever larger economies-of-scale and more cost-effective technology. Yet, most of the world's farmers still till small plots by hand.

Overview

One word—famine—starkly sums up why, compared to other specialized forms of economic activity, agriculture is 'first among equals.' Whenever food production falls far short of demand, sooner or later people somewhere starve. Those in the developed world rarely dwell on the sheer precariousness of a sufficient supply of crops and livestock; still a daily fact-of-life in parts of the developing world. Catastrophic drought, floods and pestilence can and do occur at a moment's notice, wiping out a whole growing season's harvests in the course of months, weeks, or even days. Even industrialized agribusiness is exposed to more risk than most forms of manufacturing.

Natural hazards, moreover, tend to overshadow the seriousness of much more likely economic risks common to highly volatile commodity markets (Clever, 2003). Price-takers by necessity, not choice, farmers always run the attendant risk of supply exceeding demand, which would depress market-prices below producer-costs. Ironically in such instances, far from earning higher profits, efficient producers actually go deeper in debt. Very real disincentives like this have caused increasing-numbers small-acreage owner-producers to abandon farming as a livelihood when and where circumstances permit. In much of the least developed world and large swaths of the developing one, circumstances do not allow for this. Indeed, the most striking structural feature of the worldwide agricultural sector is the sharp divisions in modes of production, crop yields, types and amounts of capital investments, labor intensiveness, technological inputs and concentration of ownership between developed and developing countries. Agricultural economics looks at the fundamentals in consumption, production, exchange and distribution of foodstuffs in both developed and developing countries (Ise, 1920).

Developing Nations & Farming. In the world's poorest nations, agriculture is practiced today much as it was millennia ago. In small plots tilled mostly by hand, with night soil the only affordable fertilizer and rainfall the sole source of water, farm owners or their tenants still eke out a subsistence living. All that is available in the way of technology consists of a metal plows, manufactured scythes and hoes and perhaps a beast of burden to help plow or draw water from a deep well. Most of the time, too, any labor-saving device, any soil-enriching agrichemical, any form of genetically-modified seed costs money that must be borrowed either from lenders that charge high interests rates or provided as part of a tenancy arrangement. In a tenancy arrangement, farmers are given a plot of land to cultivate in exchange for rentier income such as a sizeable share of the farmer's harvest. The amount of this share is critical, for it must be delivered to landlord's storehouse no matter how little is left to feed a farmer's typically large family until the next harvest (Bardhan, 1979). There is a point of no return, moreover. Agronomics has established that one out of every three seeds of most cereals must be replanted to sustain future life. A subsistence farmer who consumes more than two thirds of a grain harvest will not be able to grow enough food to feed his family the following year. Cash-poor, in debt, and subject to the ever present threat of drought or flooding and soil depletion from over-cultivation, farmers in developing nations constantly live at the margins. It is an unenviable position to be in, but is something nearly one-half of the world's population struggles with daily.

Developed Nations & Farming. Farming in rich nations, by contrast, tends to take place on larger plots of land, using costly fertilizers, herbicides, growth hormones and now genetically-modified seeds. Sowing, cultivating and reaping are mostly done mechanically. Elaborately-engineered irrigation systems supplement spotty rainfall. This 'industrialization of agriculture' has raised the productivity of the individual farm laborer many fold in the last century. The industrialization of agriculture has also improved the farm's crop yield, the metric of agricultural output that measures the amount of a grain (wheat, corn, rice, sorghum, barley, or rye) grown in a standard sized unit of land like the acre or hectare. Indeed, productivity gains alone may well have staved off the dire warnings of 19th Century economist Thomas Malthus who rather famously predicted that geometric growth in the world's population would inevitably outstrip arithmetic growth in agricultural output. It might have been but for the mechanization of farming that occasioned a proportionate geometric growth in output. However, farm machinery, fertilizer and other productivity multipliers are capital goods that depreciate over time, which creates the need for ongoing investment. Financially, then, the greater the acreage a producer has under cultivation, the more efficiently he can leverage costly technology via economies-of-scale. Smaller producers cannot compete in the long run because they no longer fall within farming's optimum scale of enterprise, while large producers have every incentive to grow even larger for the very same reason. No wonder, then, that the so-called "family farm" faces extinction; increasing returns to scale favor consolidated operations owned by fewer producers; the modus operandi of agribusiness.

Agribusiness. In the strictest sense of the term, an agribusiness is a corporation dedicated to the high capacity production of a cash crop. Vertically integrated, an agribusiness is owned and operated using several distinct, interlocking phases that facilitate the process of bringing crops and livestock to the dinner table. Agribusinesses not only cultivate farm-land, but can also provide seasonal contract labor; rent out expensive farm equipment; or transport grains, produce or livestock in bulk to food processors through satellite operating companies (Cook & Barry, 2004). In the broadest sense of the term, agribusiness refers to the constellation of industries that produce, process, and/or distribute foodstuffs. As long as this process proceeds efficiently, a greater concentration of ownership is in everyone's vested interest. At a certain point, however, concentration can go too far in the direction of an oligopoly. In such a case, the few remaining firms that supply a given product segment or are instrumental to a necessary stage in the production process will not compete as intensely and allow inefficiencies to creep into production.

Further Insights

Challenges Faced by Farmers: Agriculture & Competition. 'Perfect' competition holds sway in markets where the exact same product is sold by a large number of suppliers free to enter or exit the market at will; each supplier knows as much about prices as the next. The notion's genesis dates back to the 18th century laissez-faire economic theory of Adam Smith. It endures to this day as a powerful model of free-market behavior. Be it of rice, grains, soybeans, produce, poultry or livestock, numerous producers of each certainly supply an identical crop and, to a lesser extent perhaps, share the same pricing information. Given the necessity of land ownership or tenancy and the level of required investments or sunk costs in seed and equipment, however, they all clearly do not have the same freedom to enter or exit the market. Even so, a lot of 'same-crop' suppliers also, by dint of their undifferentiated product, make it impossible for any one farmer to charge some buyers more than another, theoretically at least. Of course, transportation costs increase the greater the distance between the buyer and seller. However, Adam Smith and like-minded neoclassical economists of more recent vintage considered location-related matters a burdensome distraction and so simply ignored the problem; a license economic model-builders frequently resort to.

Price Elasticity. The individual producer of any agricultural 'staple,' then, effectively has one of two choices: Sell at the going market price or do not. Storing a staple to be sold at a more favorable price at a later date creates additional costs that must be offset by a selling at price even higher than the one currently sought. Any such decision rests on the anticipation that prices will rise when they may in fact fall; a real possibility that dissuades risk-adverse farmers from this course of action. In either case, the individual producer runs head-on into the price inelasticity of demand for crops. It's a ratio with the percentage change in quantity consumed as the numerator and the percentage change in price as the denominator. When this yields a value greater than one, the item is said to be elastic: A higher or lower price results in a proportionately greater or lesser demand for it. A value of less than one signals the item is inelastic. A price change here has far less effect on consumption levels. Only a comparatively large swing in prices will appreciably increase or decrease demand for it. By its very nature, a staple good like bread tends to be price inelastic; people are going to buy a certain amount except when shortages push the price up exorbitantly. So, only a large increase in price tends to generate higher farm revenue. Conversely, a large decrease tends to depress it. Farming has high fixed costs. Machinery must be repaired and replaced, soil quality chemically refurbished, seasonal labor paid the going rate.

Market Forces & Farming. Making matters worse for the farmer is the economic reality that he's individually powerless to change the going market price because his output accounts for a miniscule fraction of the total quantity available for sale. The question then becomes: Do market forces always efficiently allocate agricultural resources in practice as it does in theory? Not necessarily, for the actual producers rarely receive the full selling price and so are under compensated for their labor. Transaction and transportation costs typically siphon off a farmer's share as does rentier income, the largely unearned share owed by sharecroppers to landlords, and/or interest on outstanding debts (Breiymer, 1974). The producer thus ends up getting a fraction of the selling price as actual income even when prices are high. When prices are low, farmer income can dip below acceptable levels. If a farmer's potential earnings, or opportunity costs as they're called, promise larger earnings than farming does, then this alternate economic activity better meets the farmer's needs. As rational economic agents, we must all look to maximize our utility.

Individual self-interest can conflict with national interests if too many farmers exit the market. If the base of suppliers shrinks past a certain point and automation can't adequately make up a shortfall in output in the near-term, productive capacity will contract. In this situation, imports cannot necessarily come to the rescue due to quotas and tariffs on agricultural goods. Exactly why this is so in the era of 'globalization' has as much to do with history and politics as it does with economics. One hundred years ago, farming accounted for a greater share of Gross Domestic Product in developed countries than it does today. Monumental gains in agricultural productivity paled in comparison to much greater gains in manufacturing. Farming employed considerably more of the overall labor force at that time, as well. Protecting rural voters' livelihoods from cheap agricultural imports paid political dividends. With any entrenched power base, there's lobbying and political pressure which, in turn, influences policy and government spending, some of which now regularly goes towards agricultural price supports.

Government Oversight. A larger reliance on imports for staple goods does raise legitimate anxieties about long-term agricultural self-sufficiency. Continuity in the food supply, what's more, can only be assured by maintaining an indigenous agricultural sector capable of feeding an entire country indefinitely. As such, governments have a duty to turn 'perfect' competition on its head and intervene in free markets to prop up sagging agricultural prices. The most rudimentary form of intervention is to impose a price on the market above its current equilibrium price. This price floor, as it's called, can be difficult to enforce without regulatory oversight, so governments typically take a more expedient course of action and buy a certain quantity of a commodity in bulk at a set price. In the process, governments literally, as well as figuratively, tinker with market equilibrium by decoupling demand from price in order to stimulate supply. Of course, they cannot resell what they acquire any time soon for fear of suppliers lowering their output in response. Nor may they ever resell in bulk at a profit when the market once again sets the price. A sudden influx of supply in the absence of a proportionate rise in demand would lower the selling price and demand for staples. It is for this reason that governments finance such purchases with tax payer funds; individuals and firms can not as readily sustain the loss. Commodities purchased to support a floor price often end up being stockpiled and recycled as foreign aid or humanitarian relief. Finally, as odd as this may sound, agricultural price supports are now so common that governments actually pay farmers directly not to cultivate parcels of land to avoid the costs of additional stockpiling all together.

Issues

Farming & Market Risk. Farming is a seasonal undertaking with comparatively long production cycles. By its very nature, then, it is fairly unresponsive in the short-run to changes in market conditions. Expectations of future demand thus play a leading role in deciding how much of which crop to plant at the beginning of a growing season. No matter how sound these expectations may seem, the reality of events often proves disappointing. Farmers are thus regularly exposed to greater market risk than most manufacturers and service-providers. Yet, they are not well rewarded for their risk-taking unlike virtually any other kind of investor. This curious anomaly is one that points to an even more basic contradiction: Namely that for an economic activity so essential to our survival, resources are frequently not as efficiently allocated as one might expect. Nor, for that matter, are the financial returns over time necessarily commensurate with an individual's investment of capital and labor.

The best hope for the world's hungry lies in the spread of 'industrialized' farming. But there's a tradeoff the developing world must reconcile with. For all its undeniable advantages—higher crop yields, more nutritious foods, greater availability—there is a price to be paid. In the U.S. today, farming requires less than three percent of the labor force to produce substantial surpluses year in and year out. In the least developed countries, it involves much as eighty percent of the labor force yet rarely ever produces a surplus. Industrial farming may prove very socially costly for the family farm that still dominates much of the world's landscape. The 'problem' of the family farm remains an emotive issue even today in rural America, even almost a century after workers began migrating en masse to the manufacturing and service sectors. A dislocation of far greater proportion over a shorter time-span will be required for the developing world to feed its rapidly growing population. Success here may hinge on how well or ill these tradition-bound societies adjust to profound, systemic change as much as on how they amass the capital and expertise required to modernize their agricultural infrastructures.

Terms & Concepts

Agribusiness: A term most frequently used today to describe the upstream and downstream industries that collectively produce, process, and distribute foodstuffs or the equipment and chemicals used towards those ends. It can also refer to a large, vertically-integrated firm engaged in multiple stages of commercial farming.

Agronomics: Once a specialized field of economics concerned with maximizing agricultural output while minimizing soil depletion. Agronomics' current focus is more oriented towards the application of scientific and technical knowledge and less on economic concerns.

Capital Goods: Goods requiring an investment like machinery employed to produce other goods like farm commodities.

Cash Crop: A crop grown exclusively for sale, not for direct consumption by the producer or the producer's livestock.

Commodity Markets: Trade in basic agricultural products like wheat, corn, soybeans sugar, coffee, cattle, and pork bellies.

Crop Yield: The amount of a grain produced during a growing season in a standard-sized unit of farm land.

Land Tenancy: An economic arrangement where sharecroppers cultivate some one else's farm land, compensating the landowner with either a portion of the actual harvest or a percentage of the revenue earned by the sale of a cash crop. For their part, land owners typically provide tools, fertilizer and living stipends to support sharecroppers during the lean months of the growing season.

Price Inelasticity of Demand: The case when demand for a product remains relatively unchanged at different pricing-points.

Optimum Scale of Enterprise: The size at which a firm most efficiently meets market demand.

Price Supports: Government subsidies paid to farmers when the market price of a commodity falls below an economically tenable threshold.

Rentier Income: Earnings from assets as opposed to labor.

Subsistence Farming: The near total consumption of crops and livestock directly by the producer to the detriment of any saleable or tradable surplus.

Bibliography

Alston, J. M., Anderson, K., & Pardey, P. G. (2016). Antipodean agricultural and resource economics—introduction. Australian Journal of Agricultural & Resource Economics, 60(4), 493–505. Retrieved December 7, 2016 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=118479516&site=eds-live

Antle, J. (1999). The new economics of agriculture. American Journal of Agricultural Economics, 81, 993. Retrieved September 4, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=2864782&site=ehost-live

Bardhan, P. (1979). Agricultural development and land tenancy in a peasant economy: A theoretical and empirical analysis. American Journal of Agricultural Economics, 61, 48. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4623019&site=ehost-live

Breimyer, H. (1974). Agricultural economics in a less expansible economy. American Journal of Agricultural Economics, 56, 812. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4599496&site=ehost-live

Clever, T. (2002). Chapter 3: Microeconomics and maroeconomics. In Understanding the world economy (pp. 53–67). Oxfordshire, UK: Taylor & Francis, Ltd. Retrieved August 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=16867330&site=ehost-live

Cook, M., & Barry, P. (2004). Organizational economics in the food, agribusiness, and agricultural sectors. American Journal of Agricultural Economics, 86, 740–743. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13355720&site=ehost-live

Ise, J. (1920). What is rural economics. Quarterly Journal of Economics, 34, 300–312. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9182730&site=ehost-live

Suggested Reading

Barkley, A. P., and Barkley, P. W. (2016). Principles of agricultural economics. New York, NY: Routledge.

Colin, J., & Crawford, E. (2000). Economic perspectives in agricultural systems analysis. Review of Agricultural Economics, 22, 192. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3402944&site=ehost-live

Rausser, G. (1982). Political economic markets: PERTs and PESTs in food and agriculture. American Journal of Agricultural Economics, 64, 821. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4609643&site=ehost-live

Roe, T. (1996). Applications of game theory in agricultural economics: Discussion. American Journal of Agricultural Economics, 78, 761. Retrieved July 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9611122717&site=ehost-live