Down (and out) on the farm: When even the good years don’t look so good

farmsky2

In late 2006, I was driving by corn fields in eastern Iowa when Tom Ashbrook's  NPR show "On Point" came on the radio. The topic was ethanol. Among the commentators was an ag economist from Iowa State -- which seems to produce ag economists at a rate close to that at which Iowa produces corn -- who suggested that between rising oil prices and government ethanol mandates, corn farmers were poised to become "the Saudi sheiks of the Midwest."

Now, I'm not an ag economist, but I'm happy to pretend I know enough to call them out from time to time, and that struck me as flawed logic. In any commodity market, the wealth doesn't lie with the raw ingredient, but with the finished product. Think cacao growers in the Ivory Coast whose product gets turned into gourmet chocolate bars, or coffee growers in Ethiopia whose crop ends up in your morning cup of Starbucks. Even when those producers are being paid a "fair price," the pot of gold is at the end of the supply chain rainbow, not the beginning.

Farmers did invest in ethanol plants when the boom first began, but by 2006, the majority of new refineries in the Midwest were being built by mega-corporations like Archer Daniels Midland. Farmers were input suppliers, not shareholders. (And many farmers saw corn ethanol as little more than a flash in the market pan anyway, not a vehicle they could ride to a swank retirement on some Caribbean island.)

If the ag economist knew this - and let's give him the benefit of the doubt and assume he was being hyperbolic - then what he must have been suggesting was that corn prices were rising high enough due to ethanol demand that farmers were going to get a big income boost relative to what they'd been making. That sentiment was echoed far and wide by the media last year, as corn prices soared 50% above their average for 2006. But a new report [pdf] out last week analyzes the 2007 USDA census data and finds that for all but the very largest farms, the "year of record-high prices" actually sucked for family farmers. And that suggests that if our goal is vibrant rural economies, we're going to have to do a lot more than shell out extra pennies per bushel.

Chewing on the data

The report was written by Tim Wise and Alicia Harvie at Tufts University's Global Development and Environment Institute (where, in the interest of full disclosure, I used to work). It followed up on Wise's analysis [pdf] of 2003 USDA farm income data, which found that while averages looked good (we've all heard the claim that "farm households have higher incomes than the average non-farm household in the U.S."), they were totally misleading. That's because when USDA calculates farm-sector averages, it includes the 2/3 of all U.S. farms that are considered "lifestyle" operations -- your doctors and lawyers who live on farms but do not farm as their occupation. Because the USDA also includes money made at off-farm jobs when it calculates "farm household income," all those lifestyle farmers' salaries get included, skewing the average. Wise showed that when you looked only at family operations that farm full-time, the situation was much more dire. Family farmers were not only not making money at farming, they were losing it.

But that was 2003, when corn prices were 87% lower than they were in 2007. Soybean prices were 47% lower, and wheat was a whopping 91% lower. So things have improved for family farmers since then... right?

Wrong, say Wise and Harvie. The household incomes of small and mid-sized family farms did increase over those five years, jumping 23%, but the entire increase came from off-farm income. By the end of 2007, family farm households made on average about 8% more than the average non-farm household, but not because of farming.

Why did record crop prices not turn into record farm incomes for these families? Wise and Harvie explain: "One reason they didn't pocket more money is that their crops weren't the only commodities with rising prices. Input costs skyrocketed too, particularly for fertilizer and fuels, which increased 67% and 100%, respectively, from 2003 to 2007. So, as any farmer might have told anyone who asked, prices were high but most of the added income went to fuel, fertilizer, seed, feed, and equipment suppliers."

As it turns out, only the largest commercial farms -- those making over $500,000 a year in gross sales -- made money off the commodity boom. These operations' take-home pay grew 21% between 2003 and 2007, to over $267,000, and all of the increase came from farm income.

Spitting out solutions

So what does this mean? Well, a few things, as far as I can tell. It means first that farm families are going to have a much tougher time weathering the economic downturn than many would have expected coming out of this "banner year" for commodity crops. Wise and Harvie put it nicely: "Any suggestion that farmers should be able to weather this storm by drawing on savings from the price boom is misguided. For family farmers, at least, there were no savings. With prices falling precipitously and costs remaining stubbornly high, and with credit tight due to the financial crisis, family farmers face a very difficult year on the farm."

windmillsPerhaps the second lesson is one that also holds true for financial markets and for ecosystems: there is security in diversity. In an era of global supply chains, small and mid-sized family farms can't leverage the economies of scale needed to make money growing only one or two commodity crops. Things will improve if they can move toward generating a greater number of products on the farm and if they can retain ownership over the wealth-generating stages of production: the processing of dairy or meat or grain or produce, or direct sales to consumers. Energy-generation is a piece of it too. In the midst of the 2007 boom I attended a conference of the American Corn Growers Association (not to be confused with the National Corn Growers - ACGA represents smaller farms) and they'd clearly seen the ethanol writing on the wall. The focus of the conference was on-farm wind energy.

But they're not going to do it alone, especially in a slumping economy. In April, when President Obama releases the details of his budget plan, we'll post an analysis of how well it supports farm diversification and the construction of small-scale processing and distribution infrastructure in rural areas, as well as other priorities. For now, say the good folks at the National Sustainable Agriculture Coalition, we can be glad that the stimulus package includes some money for farm loans (though not as much as NSAC would have liked). Some of the money even targets "local and regional food enterprises that process, distribute, aggregate, store, and market foods produced either in-state or transported less than 400 miles from the origin of the product." Now that's real economic stimulus.

2 Responsesto “Down (and out) on the farm: When even the good years don’t look so good”

  1. Jackie says:

    Thank you for this.  I only wish it had been written and widely distributed last summer, when farmers were getting blamed for every economic and environmental problem out there.   It is hard to be the perpetual scapegoat.  And a bit frustrating that farmers are the last segment of the population that are expected to work essentially for free.  People sure love their poor farmers.

  2. I second my thanks. I've never suspected small farmers of getting rich off subsidies but didn't realize how skewed the data was toward farmers with major non-farm income. A few of the most passionate local farmers I know majorly subsidized their farm income with "real" jobs off the farm (mostly software engineers, for some reason), and were only able to have one farm-spouse quit after major successes. I wonder if the "lifestyle" farmers are often in this position; they choose the farm as their true love but must maintain serious professional jobs to pay the mortgage.

    <a href="http://www.supereco.com/news/2009/03/02/farm-subsidies-follow-the-money/">As I wrote on supereco, the silver lining is that sustainable polyculture farms are a great way to make more money</a> -- I only hope that more farmers see that and the government gets on board with appropriate incentives.