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Corporate Involvement in Agriculture

Steve Savage recently had a post about the growing size of farms in the US and Canada, but he also noted the striking feature that the vast majority of these farms are still family owned (rather than corporate owned).  That prompted Rachel Laudan to ask these two insightful questions.

“1) Why is it that farming, which as Savage shows is innovative, modern, and forward-looking, is still overwhelmingly a family business? Is there any other highly efficient sector of the modern economy of which this is true?

2) Why is it so important to so many that farming be a family business? Leaving aside those who distrust all corporations, most people today are happy to have their smart phones, their cars, their clothing, their entertainment, and their groceries produced by corporations. Why not their farm produce?”

Interestingly, Savage and Laudan's posts came out at virtually the same time as this piece from the Economist suggesting that the high rates of return to agricultural land in recent years might be drawing in corporate interests.  

Here are my thoughts on Laudan's questions.

First, there is more corporate involvement in agriculture than perhaps first meets the eye.  Yes, Savage's statistics are true in terms of the numbers of farms (95%+ farms are family owned), but how much of the output is accounted for by corporate farms?  How large are the corporate farms relative to the family farms?  The Economic Research Service of the USDA regularly puts out interesting statistics on these matters.  Here's one chart from a 2007 publication (showing what are now probably dated figures from 2004).  While only 2.2% of farms were "nonfamily farms" in 2004, 15.2% of the value of agricultural output was from "nonfamily farms."

One commentator on Twitter had a humorous response put it when I posted this graphic 

Laudan also pointed out that there may be more "corporate" involvement in ag than often meets the eye

As to the first question: why isn't there more corporate involvement in agriculture?  The answer I often hear from ag economists is that land and farming equipment are expensive.  And that the rates of return, omitting the recent run up, have been too low and too risky to merit the investment.  

Many restaurant corporations wanting to expand do so by franchising.  Why?  Because the start-up restaurant corporation doesn't have sufficient capital and cannot borrow enough at competitive rates to expand, but lots of individual franchisees can.  In a somewhat analogous way, many individual farmers might be able to borrow much more (and raise more capital) than can a single corporation.  Indeed, if one looks at the poultry and pork industries, there is a large corporate influence (though it must be mentioned that many of these corporations grew out of family farms), but these corporations own almost none of the land where the broilers or hogs are grown.  The Tyson's, Smithfield's, et al. contract with the growers who own the land (or have a note at the bank on the land).

I suspect there are also a large number of legal and tax advantages (perhaps also some that flow from the nature of farm subsidies and other programs) that favor family over corporate farms. 

The other answer is that crop farming requires a lot of local knowledge about weather, soils, etc. that may make it difficult to standardize.  This is an issue explicitly noted in the Economist article

“For more money to flow in, financiers and farmers will have to learn a lot more about each other. Money managers need to get their hands dirty and find out more about crops. Only a handful have the expertise needed; farmers gleefully share stories of Wall Street types wondering how chicks are planted. And farmers can do more to attract capital, for example by seeking out financial deals where investors’ incentives are aligned with their own, such as through joint ventures.

Investors need to separate the wheat from the chaff, too. Farm investing requires patience; it is ill-suited to flipping and trading. But those willing to climb over the barriers could reap big rewards.”

On that last point, I'm somewhat skeptical.  Yes, agricultural land values have risen a lot in recent years.  But, how sustainable are these increases?  Most of the presentations I hear on agricultural land values these days focus on whether there is a "bubble"; hardly something you want to hear if you're considering an investment.  Sergio Lence from Iowa State University recently published a paper in the journal Applied Economic Perspectives and Policy on this issue, and he concludes that the price increases are not sustainable.  Here's a graph from his paper showing the ratio of farm land values to the rental rate (this is the dark black line now at an all-time high), and historical rates of return (these are the grey and dashed lines which are typically negative)

Laudan's second question about why we care whether farming is a family or corporate business is a difficult one that probably escapes good economic answers.  Though I would say that often economic incentives (many of which are discussed above) get interpreted as normative judgements.  Because the economic forces often favor family farms, then we believe this is the way it "should" be.  Still, I don't think that can explain all of it.  Maybe there is a belief that smaller family farmers will better internalize some of the negative externalities associated with farming than would a corporation.  However, I think that's probably too sophisticated to explain the average person's intuitive belief. Laudan asks:    

“Is it a lingering Jeffersonian belief that a republic is best made up of yeoman farmers?”

I certainly think that's part of it.  I suspect its a belief that many farmers actively promote among the general public (think of the "God Made a Farmer" commercial).  And, from the perspective of the 95 plus percent of family farms, it's in their economic interest to do so.  Is it in the best interest of the tax payer and food consumer?  That's a harder question to answer.

Food Labels - Environmental Edition

I had a recent request on Twitter asking for my thoughts on environmental labels for food.  The question seems to be motivated by recent discussions about the USDA and the Dept of Health and Human Services possibly incorporating environmental considerations into the federal dietary guidelines.  As I've previously noted, this move makes me a bit nervous because it entails non-scientific value judgments about how to integrate disparate issues (health and environment) into a single overall recommendation.  But, even as I said there: 

“It isn’t necessarily a bad idea for the government to convey the scientific evidence on the environmental impacts of producing different foods.”

Of course, that still leaves many unanswered questions.  What do we mean by environment?  Just C02, or is it water quality, or deforestation, or what?  Is the label voluntary or mandatory?  How will food companies respond to the label?  What do consumers understand about the label?  And so on.

In principle, it is possible to imagine something like a nutrition facts panel for environmental issues.  However, the two are not as analogous as might first appear.  First, scientists have a pretty good idea how to measure the fat, carb, and protein contents of food, whereas measuring C02 or deforestation impacts is tricky business with a lot of uncertainty.  Moreover, the nutritional content of a processed food is relatively stable regardless of where the raw ingredients came from, which plant or facility was used to manufacture it, how it got to the store, or how you transported and cooked it.  None of this would be true for an environmental label, which would require more more extensive (and more costly) monitoring and tracing, and if it is at all accurate, one could have two Wheaties boxes that are nutritionally equivalent but with very different environmental impacts.  That may be all the more reason to inform consumers, but the point I'm trying to emphasize here is the much higher cost and greater uncertainty in informing about nutrition vs the environment.  

Finally, an perhaps most importantly, nutritional outcomes are, by and large, what we economists would call "private goods."  The nutrient contents of the foods I eat affect me personally and not others (let's put aside Medicare/Medicare, which is another issue I've touched on here, here, here, and here).  In these cases, the effects of a label on my choices, and ultimate welfare consequences are more straightforward.  Let's compare that to environmental labels, which signal attributes associated with public goods and possible externalities, where we suspect there are likely to be problems with coordination, free riding, etc.  I suspect most economists would tend to look toward getting the property rights or the prices right as the "solutions" in these cases rather than looking toward labels (here's a paper I wrote on that issue).

Finally, I'll note there is a long literature in agricultural economics on food labels - focusing on when and under what conditions labels enhance social welfare.  The results of this literature are hard to summarize (meaning the effects are complex).  Here are a few good places to start if you're interested in the topic.

My answer to the question: should food products contain environmental labels?  I don't know.  There are far too many unanswered questions to say anything more precise than that.

What is a GMO?

Andrew Pollack had an interesting article in the New York Times yesterday that was ostensibly about companies using various techniques to get around regulations surrounding GMOs.  But, that's not what I think the key point of his article is.  Rather, it emphases exactly how hard it is to define what a "GMO" is and it underscores the lack of precision by opponents of the technology who use the term (and no I'm not referring to the folks shown in the Jimmy Kimmel segment that didn't even know what the acronym stands for).  The article also appropriately raises the issue of the costs and entry barriers that exist with the current regulatory regime (a topic I've previously touched on).  

Here's what I wrote about the definitional difficulties a couple months ago in the Milken Review:   

“Genetic engineering involves the transfer of a gene (or multiple genes) from one species to
another through synthetic means. Just because the process occurs in a lab, it doesn’t follow that the resulting seeds couldn’t have been produced by “natural” means. . . . Resistance to certain herbicides, for example, can also be attained, albeit at a slower rate, via traditional plant breeding. Indeed, many strains of rice grown today are conventionally bred to be resistant to herbicides. Traditional plant breeding requires the breeder to find wild or unusual cultivars that display the trait of interest and repeatedly crossbreed them with a commercial variety until getting an offspring that is similar to the original commercial variety yet exhibits the desired trait.

Genetic engineering, by contrast, attempts to speed up the process by moving only those genes of interest into the commercial variety. Sometimes these genes come from wild
variants of the same species (using so-called cisgenic technology) or from entirely different species (using transgenic technology) [Pollack’s NYT article seems to mainly be about gene editing - turning on and off genes already present in a plant]. As the comparison of cisgenic and transgenic technologies suggest, the dividing line between what is and what is not genetically engineered is fuzzy and somewhat arbitrary: Transgenic is often considered genetic engineering, whereas cisgenic is not, despite the fact that both approaches use the same methods and differ only in the origin of the genes transferred.

Some of the unusual cultivars used in aforementioned conventional crossbreeds are created by mutagenesis – that is, exposing seeds to radiation or to chemicals in hopes of random, beneficial, mutations. This approach has been used for more than half a century and is not considered genetic engineering, nor is it regulated as such. In fact, certified organic
seeds can arise from varieties produced via mutagenesis.”

Then, later in the same article . . .

“Ultimately, it must be recognized that genetically engineered foods are not a single “thing.” To broadly claim that they cause harm lacks precision (not to mention evidence). One needs to tie a specific genetic alteration to a specific type of harm. It is possible to imagine genetic modifications that could trigger allergies (the purely hypothetical example of inserting a peanut gene into corn comes to mind). But most of the commercially used applications on the market today are not of this sort, and new GE crops that were couldn’t pass regulatory muster. ”

Some plant researchers from UC Davis were quoted in Pollack's article as saying,

“the regulatory framework had become “obsolete and an obstacle to the development of new agricultural products.””