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rent, economies of size, and government payments
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tkastens
Posted 8/18/2007 01:11 (#189082)
Subject: rent, economies of size, and government payments


Wow, this forum moves fast -- so I'll start a new post, reflecting on the large section further below on this topic. Naturally, I love the responses of Plowboy and Lucas, and yes independently of any current or past connection of theirs to K-State. Meanwhile, here are a few observations or recaps as it were.

For the most part government payments work their way to the landowner, whether the land is cash rented or crop share rented. Crop share rents adjust over time or don't adjust where they otherwise would have in the absence of payments.

Average farm size means absolutely nothing and others noted that below. It has been fairly constant nationwide (around 400 acres) for many years. That is because of numerous hobby farms balancing out the smaller number but much larger large farms. So, finding agreement about where government payments should be capped from a farm size perspective will be really tough -- and also because everyone believes that "any farm bigger than mine is too big."

Similar to most other businesses, there exist massive economies of size associated with farming but one of them is generally not government payments (except for jumping from the really small farms, which don't have enough payments to justify the signup desk time in the FSA, to those slightly larger). In fact, government payments are generally assoicated with diseconomies of size in farming, especially at sizes where payment limits are actually effective and even at sizes that call for extra accounting work associated with multiple business entities. So, government payments likely have not caused farms to be larger than they otherwise would be.

Tighter caps on government payment limits will have two important effects relevant here. First, it certainly will inject a diseconomy of size to farming, but likely not one sufficient to hold down farm consolidation significantly (just look at the dairy industry, with one of its important goverment subsidies effectively capped at around 120 cows). Secondly, tighter payment limits will greatly accelerate the demise of the whole government subsidy program since political support will quickly wane.

Given a social goal of holding down farm size, one would have to go after a much more radical program than limiting government payments, for example, limiting farms to 100 hp tractors or perhaps to only 1 tractor, or perhaps no tractors at all. Or, perhaps we might limit the number of hours a tractor could be operated in a 24 hour period. I'm not being facetious but merely stating that it will take a really radical farm policy to arrest farm consolidation. After all, this trend has been going on for many decades and long before government programs -- since it is based on technological advance, which technologies are nearly always associated with economies of size. Finally, I believe that agriculture is too important and large of an industry in the U.S. to impose massive constraints on technology (i.e., what it would take to slow consolidation). There's just not enough political will to sacrifice the necessary economic well-being to achieve the social goal of keeping farms small. It sort of works in places like Japan but I just don't think it would politically fly in the U.S.

Yes, as any of you who have heard me speak know, I can be counted among those who thing government payments should go away. But, I do believe that such action will somewhat accelerate farm consolidation. This doesn't mean I believe government subidies are a good way to stop consolidation, In fact, I believe they are greatly inefficient at that role. Rather, if we as a people really want to cap farms at 500 acres, then we should just declare it by law and imprison those who don't comply. Or is it 1000 acres? I would be most interested to hear respondents' maximum allowable farm size for their area. So, if you respond, tell us your general geographical area and just how large farms should be allowed to be.

Personally, I have no problem accepting the what I consider to be inevitable farm consolidation in the coming years. Nearly every industry has seen consolidation in the last 100 years and its not the end of the world -- most folks are much better off than their parents and grandparents were and our economy has been one of the best in the world during the time. I believe that those who embrace consolidation and learn to prosper from it, or at least learn to accept it even though they might decide not to chase it, will spend the rest of their lives happy while those who don't will often be bitter into their retirement. At least that is what I regularly observe in my myriad conversations with farmers regarding this topic. Either way, consolidation will happen. It's just that some folks will be happy and others less so along the way.

Finally, I believe that if a survey were taken nationwide asking the question, Should government farm programs be abolished, my guess is that the middle-sized farms would be the most likely ones to answer the question "No." The really small farms already have major off-farm income and so won't quit doing what they're doing in the absence of payments. The really big farms belive they'll be able to compete better in a level playing field with no payments. The middle-sized farms are the ones who most need government payments. Since I am not aware of any such survey results, I can't say with certainty that I am right on anticipated producer respones. But, my perception is once again consistent with the conversations I regularly have with farms of all sizes.

Terry Kastens, ag economics, Kansas State University
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