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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.