Section D: The Economics of Field Crop Production

• Projected Outcomes
• Background / Lessons
  • Introduction
  • How does sustainable agriculture affect the costs of production?
  • How does sustainable agriculture affect yields?
  • How does sustainable agriculture affect prices?
  • Government payments
  • Looking at economics from the food system end
  • Conclusion
• Activities
• Career Pathway content standards

Projected Outcomes

• Students will learn how sustainable practices can affect farm profitability
• Students will learn how government programs can affect farm profitability
• Students will learn about hidden costs of cheap food, including:
  • Environmental costs
  • Farm business failures
  • Increase in obesity and persistence of hunger in US and worldwide

Background / Lessons

Introduction

The profitability of field crops is the product of

• The costs of production,
• Yield, and
• Price

This section begins by looking at how sustainable agriculture affects costs of production, yields, and prices. It then goes on to introduce some of the other forces that affect the economics of agriculture, including government payments and the handling of external costs.

Costs of Production

Sustainable farmers generally seek to replace purchased inputs with resources recycled on-farm. This approach can significantly reduce some costs of production, but not others. (For examples of production costs see sample budgets on the Iowa Ag Decision Maker website http://www.extension.iastate.edu/agdm/)

For a side-by-side comparison of production costs for conventional and organic field crops see “Adapting Crop Share Agreements for Organic and Sustainable Agriculture.” http://www.extension.iastate.edu/Publications/PM1982.pdf

Let’s look at typical production costs one by one.

Land is often the largest single production expenditure for field crops. In general, land costs are determined by costs elsewhere in the county and by soil type more than by farming practices. If the farmer owns the land, sustainable farming practices should, over time, help the land hold or increase its value.

Fertilizer Sustainable practices such as including legumes in the crop rotation and applying manure can greatly reduce or eliminate most fertilizer costs, other than lime. In addition, building soil organic matter and preventing erosion help keep nutrients on the farm.

Seed costs may be higher or lower on sustainable farms, depending on the specific practices. Certified organic seed is typically more expensive than standard seed. Farmers who rely on rotary hoeing for weed management often plant at higher densities and so need to pay for more seeds per acre. Seeds for unusual crops and varieties can be expensive. On the other hand, genetically modified seed is likewise expensive, and farmers are not allowed to save their own seed. (High-yield corn, sorghum, and sugar beet are grown from hybrid seed, which must be specially produced, but other major field crops such as soybeans, wheat, and canola are not hybrids, so farmers can save their own seed�as long as it is not genetically modified.)

Pesticides Sustainable operations generally have considerably lower expenditures for herbicides and insecticides than other farms.

Machinery, fuel, repairs, and machine hire can be higher or lower for sustainable operations. Conservation tillage and carefully integrated management can reduce trips over the field and associated fuel costs. On the other hand, practices such as ridge tillage, flaming for weed control, and incorporating small grains and hay in the rotation require specialized equipment. Many sustainable farmers manage machinery costs by being excellent mechanics who build or adapt and maintain their own equipment.

Labor needs on sustainable farms tend to be more spread out over the course of the year because different crops need work at different times. This means that full-time farmers are less likely to need to hire additional labor at planting and harvesting. However, the total labor demands on sustainable farms are typically at least as high as or higher than on farms using conventional practices. This can pose a challenge for farmers who also work off the farm.

Yield

Many people assume that sustainable agriculture produces low yields. Some sustainable practices may reduce yields, at least temporarily, but others have little impact on yields, or can result in yield increases over time. Let’s look at three examples of sustainable practices to see how they might affect yields.

Conservation tillage is a practice designed to reduce soil erosion, build soil organic matter and improve structure and tilth. There are different types of conservation tillage, ranging from mulch tillage (light tillage right before planting with discs or harrows) to full no-till (where the soil is never disturbed by tillage). In the first year, conservation tillage often produces a decline in yields, in part because the decomposition of surface crop residues can tie up available nitrogen sources. Over time, however, conservation tillage can result in yield increases due to improvements in soil quality.

Organic agriculture is a set of practices, including a requirement that no synthetic fertilizers or pesticides be used. During the 3-year transition period from conventional to organic production farmers often see significant reductions in crop yields. However, long-term organic farmers note that after the initial transition, yields generally recover. Depending on the particular conditions of each individual farm, established organic yields may be slightly lower, equal to, or in a few cases higher than yields for conventionally grown crops. In some cases, organic yields remain lower because different crop varieties are used. For example, organic growers often plant food-grade soybeans, which typically have lower yields than feed-grade beans. The growers choose these varieties because they can get significantly higher prices (see price discussion below).

Crop rotation produces yield increases so consistently that this phenomenon is called the “rotation effect.”

When we discuss yield of field crops we typically mean amount produced per unit of land. One could also measure production against units of labor, fossil fuel, money spent, or other input factors. Why do we typically use land, and how would perceptions change if we used other measures?

Price

The impact of sustainable agriculture on price depends on the specific production and marketing practices of the farm. Many sustainable practices, such as conservation tillage, have no effect on the price received for the crop.

Some sustainable practices result in higher prices for the crop. Certified organic crops often get significant price premiums. For example, organic food-grade soybeans can receive prices of $15 per bushel, and organic soybeans for feed and organic corn usually receive a 50 to 100% premium over their conventional counterparts. (For current comparisons of organic and conventional prices, see the Rodale Institute website; for a discussion of the special requirements and challenges of marketing organic grains see the ATTRA website.) A few farmers get price premiums for growing grains with special properties, such as certified non-gmo grains, or for adding value to their crops by processing.

Sustainable farms more often include minor or alternative crops, such as small grains, with poorly established marketing infrastructures. The prices for these crops can be particularly variable. Grain farmers who also raise livestock can feed these crops to their stock when markets are poor.

The Wisconsin Cropping Systems Trials compare returns from grain and forage cropping systems.

Government payments

In a free market system, production costs, yield, and market price would determine the farm’s profitability. But field crops do not operate in a free market. The 500-pound gorilla of agricultural economics, in the US and worldwide, is government subsidies. The US has one of the most highly subsidized agricultural systems in the world. Overall, our subsidies are second only to those of the European Union. And unlike the EU, the bulk of our subsidies go directly to commodities, rather than to support environmental or recreational benefits of agriculture. In Iowa and Wisconsin , corn and soybeans receive the vast majority of government payments. The particularly high government support for corn puts sustainable farmers who practice extended crop rotation (or who rely on grazing) at a serious economic disadvantage. Environmental and sustainable agriculture advocates have tried to change the structure of farm subsidies to make them more compatible with sustainable agriculture. One promising new program in the 2002 Farm Bill is the Conservation Security Program, which is intended to provide farm payments based on the farm’s environmental stewardship. In its first years, however, the program has been under-funded by Congress and sidelined by the USDA. However, a few farms in Wisconsin and Iowa are participating in the limited program that is being offered.

The Environmental Working Group provides detailed information on farm payments on their website, and a Congressional Research Service report analyzes payment limits for farm commodity programs. For information about the Conservation Stewardship Program, see the Natural Resources Conservation Services website or The National Sustainable Agriculture Coalition site.

US commodity subsidies also have an impact on the agriculture of other countries. For example, farmers in Mexico find their corn undersold by cheap, subsidized US corn exports. See Exporting Cheap Corn and Ruin, by Michael Pollan.

Brazil challenged US cotton subsidies in the World Trade Organization (WTO) late in 2003, claiming these subsidies violate international trade agreements and hurt farmers in developing nations. The WTO ruled against the US cotton subsidy in March 2005. It is likely other nations will now challenge other key commodity subsidies. For full stories about this issue, see Brazil Triumphs Over U.S. in WTO Subsidies Dispute and The WTO Decision on U.S. Cotton Subsidies from The American Society of International Law.

You can use an internet search engine to look for more recent stories, with key words such as: WTO, ruling, US, agricultural subsidies, and cotton subsidy.

Activity 1: What’s the bottom line?

Looking at economics from the food system end:

Cheap food and its hidden costs

The combination of government subsidies, industrialized farming, an abundance of good farmland, and a wealthy population have resulted in cheap food for the average American. Overall, Americans only pay around 10% of their income for food. This is the lowest percentage in the world. In general, having affordable food is a good thing. But the way our society is providing it turns out to have some steep hidden costs.

Cost 1: Struggling farmers

Food may be cheap compared to what the rest of the world pays, but in fact what the consumer pays for food at the cash register has stayed about the same in the last 30 years, when controlled for inflation. What has dropped by more than half in real terms* is the price received by the farmer. Where does the difference go? To processing, packaging, advertising, and transportation (see A New Look at Where Our Food Dollars Go. The result is very narrow or non-existent profit margins for the farmer, and a steady decline in the number of farms.

Understanding costs over time

When economists look at how prices and costs for particular products change over time, they have to take inflation into account. Inflation is the tendency for the value of money to decline over time. When people talk about how gas used to cost less than a dollar a gallon and a loaf of bread used to cost 50 cents, they are providing examples of inflation.

Economists have formulas for calculating what the overall rate of inflation has been over a certain period of time. The challenge is that inflation is not even. Some prices increase quickly, while other prices (such as the cost of electronic goods) may even decline over time. Also, the changes are not necessarily even between regions: housing costs may rise steeply in one area while they stay flat in another.

When economists have taken overall inflation into account, they can talk about how the cost of a particular item has changed in real terms, that is how it has changed relative to income and the costs of the other things people buy.

Extra credit activity

Cost 2. Environmental damage

The pollution that results from agricultural activities has real costs, but they don’t show up in the dollars and cents people pay for food. Some of them show up as extra water treatment costs that communities and their residents have to pay for safe drinking water. Others are harder to translate to monetary terms, such as the decline in healthy fish populations in rivers and lakes and even the Gulf of Mexico . Still other costs, such as higher rates of cancer and birth defects in some rural areas, may be the result of agricultural pollution, but people are not completely certain.

Economists have a special name for costs that result from the production of an item but that are not reflected in the price of the item: external costs or externalities. Externalities are a social justice problem, because someone sometime does pay their costs, just not necessarily the person or people responsible for them. According to one rough estimate, external costs of agriculture in the US add up to around $20 billion per year (for comparison, the entire budget for the US Environmental Protection Agency for the year that calculation was made was a little over $7 billion) (Jules Pretty, Agri-Culture: Reconnecting People, Land and Nature, 2002, London, Earthscan Publications, p. 58).

Cost 3. Persistent hunger, increasing obesity

Activity 2: Food inequality

You might think that cheap food would mean that no one in America would need to go hungry, but that is not the case. Nearly 35 million people in the US (11%) live in households that experience food insecurity. About 9.4 million people in the US (3.5%) experience outright hunger some of the time. Food insecure households are those that are not able, for financial reasons, to get a sufficient diet at all times over the course of a year. Households labeled hungry are those where one or more household members experienced hunger due to lack of financial resources at some time in the year. The Census/USDA definitions are rigorous and assure that only those experiencing significant hunger or food insecurity are so classified. (Food Research and Action Center, USDA briefing)

How can we have so much hunger and cheap food at the same time? One reason is that while the US is a very wealthy country in world-wide terms, we are also a very unequal country. That means that we have a lot of extremely rich people, but also a lot of poor people. While the average American pays 10% of disposable income for food, getting enough to eat may take more than 50% of poor people’s income, forcing them to choose between adequate food and shelter, or providing neither. (Other wealthy countries, such as Canada , Japan , and western European nations, have less inequality because they impose higher taxes on their wealthy and provide more social and financial services to all.)

At the same time that the age-old problem of hunger persists, we have a new problem: too much of the wrong foods. More than 60% of US adults are overweight, and half of those are obese. Obesity is also increasing among children. Two factors contribute to this problem. One is a decline in physical activity. The other is an increase in food consumption, especially the consumption of fats and sugars. Remember what corn and soybeans contribute to our food system? Sweeteners (or sugar) and oil (or fat). They are cheap (subsidized by government payments for corn and soybeans), they make processed foods taste better, and when we eat too much they contribute to heart disease, diabetes, and a host of other health problems. (For information on health risks of obesity see http://www.cdc.gov/nccdphp/dnpa/obesity/faq.htm#what and for a summary of changes in US patterns of consumption see http://www.usda.gov/factbook/chapter2.htm)

Conclusion

Many factors influence the profitability of field crop production. Some sustainable farms are more profitable than their conventional neighbors, others less so, depending on their management strengths and the specific practices they use.

The economics of field crop production in this country (and others around the world) are heavily influenced by government programs. US agricultural economic policies have had several different goals which often conflict, including the following:

• Make food cheap for consumers. US food is indeed relatively cheap, but cheap food has not solved the problem of hunger, which persists in the US .
• Support the income of farmers. Although some farmers benefit handsomely from government subsidies, for many real farm income has declined, and bankruptcies are common.
• Open foreign markets to US agricultural products
• Protect US markets from cheap foreign agricultural imports

On the whole, current economic policies favor conventional over environmentally sustainable practices, although some government programs reward farmers for certain practices designed to protect water quality and soils.

Finally, there are many costs of agricultural production that are not normally considered in agricultural economics, including environmental and health impacts.

Career Pathway content standards