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THE SCHOOL OF BANKING OF THE SOUTH Lecture Date: June 10, 1956 Course Lecturer: Darryl R. Francis Subject: Farm Capital Investment Neeos, Uses and Returns Agricultural Economics Course Coordinator: J. W. Fanning I. A Brief Review A. Agriculture - 1900 to 1950 1. From subsistence to commercial farming 2. Decline in home-produced inputs; rise in purchased inputs Examples: horse power to machinery open-pollinated to hybrid seed home-produced to commercial fertilizers B. The Stepped-up Revolution in Agriculture -1950 to Date 1. The tremendous battle to stay even 2. Flood of farm products puts pressure on prices and income (Chart) Farm, Consumer, and Wholesale Price Trends, 1950-1965 (Chart) Farm Income Versus National Income, 1950-1965 3. Number of farms declines (Table) Farms in the United States (Chart) Number of Farms, ana Average Size of Farms in the United States, 1925-1966 Page 2 Agricultural Credit Mr. Francis June 10, 1966 4. Farm output versus industrial production (Chart) Farm Output and-Industrial Production 5c The great rise in productivity in agriculture (Chart) Real Product Per Man-Hour in the Private Economy - United States 6o Readjustments in resources contribute to increases in realized net income per worker (Chart) Number oi' Farm Workers ana Income Per Worker 7. New types of farming developed Examples? integrated or contract farming vegetables, broile's commercial beef feedlots commercial milk parlors I I . Farm Technology Dictates Changes in Capital A. Total Production Assets Increase 1. Total production assets in agriculture have gained significantly in recent years, 2o A large portion of the gain reflects rising land prices which have more than doubled since 1950, and more tnan quadrupled since 1940. 3» Non-real estate assets have also made sizable gains, with greatest increases *n value of farm machinery. (Chart) Farm Production Assets Page 3 Agricultural Credit Mr, Francis June 10, 1966 B0 Gain in Assets Per Farm lo Production assets per farm have increased very sharply (rising threefold since 1950) in the competitive struggle to attain greater efficiency through farm enlargement. 20 Approximately 50 per cent of the gain in assets per farm reflects rising land prices. 3. The other gains are from new investments in both real estate and other assets. (Chart) Total Capital Per Farm United States, and Total Capital Less Real Estate Appreciation C. Ownership lc Owner-operator equities In farms decline, proprietors' equities also down somewhat. 2. Large owner-operator equities increasingly difficult to build as capital requirements rise. (Chart) Proprietor and Operator Equities as a Per Cent of Farm Assets 3. Organization 1. Likely increase in corporate form of organization E. Management I. Fewer owner-operators, rising proportion of part owner-operators and others. Page 4 Agricultural Credit Mr0 Francis June 10, 1966 F. Rate of Return on Farm Capital Points to Future Inves;, ,r.t Trends 1. Capital in agriculture is increasingly competitive with capital in non-farm uses, 2, The industry is thus not in isolation from other sectors of the economy (capital, labor, land and product markets). 3c Returns to scale of operations have been great during the postwar period, and the margin of efficiency on larger farms is still great (Chart) Average Return on Farm Capital Specified Types of Commercial Farms by Size (1947-1964) 4. The smaller farms barely provide an opportunity for the operator and family to earn wages at the national average farm wage rate, 5. Returns to size have been more pronounced in recent years than in early postwar years» (Chart) Average Return on Farm Capital Specified Types of Commercial Farms by Si ze (Selected periods) G. Marginal Capital Invested in Real Estate Apparently Yields Greatest Returns 1. Real estate assets are a greater per cent of total assets on the larger farms which have higher returns to capital. (Chart) Farm Real Estate as Per Cent o.! Total Farm Capital - Commercial Farms by Size (1960-1964) Page 5 Agricultural Credit Mr. Francis June 10, 1966 2. A smaller proportion of total capital is required for machinery on the large, more efficient farms. (Chart) Machinery Value as Per Cent of Total Farm Capital - Commercial Farms by Size, 1960-1964 H„ Greater Operating Efficiency of Larger Farms lc The greater operating efficiency of larger farms lies primarily in the opportunity for economies in labor requirements per unit of output. (Chart) Net Income and Net Income Less Operators' Wages as Per Cent of Total Cash Receipts Commercial Farms by Size 2. Operating efficiency as indicated by labor and machinery costs is substantially greater on the larger farms than on the smallerones. (Chart) Labor and Machinery Costs as Per Cent of Gross Farm Receipts - Specified Types of Commercial Farms by Size 3. High-cost labor is a greater proportion of major cost items on small farms than on larger units. 40 The larger size farms thus provide a better opportunity than smaller farms for reducing marginal costs by replacing labor with machinery. (Chart) Total Labor Costs as Per Cent of Gross Farm Receipts, Commercial Farm by Size, 1960-1964. Page 6 Agricultural Credit Mr. Francis June 10, 1966 I. Mississippi Delta cotton farms illustrate greater efficiency of larger units 1. The greater efficiency of large crop farms is indicated by the striking differences in rate of return on capital between large and small Mississippi Delta cotton farms,, (Chart) Small and Large Mississippi Delta Cotton Farms, Average Return on Capital, 1960-1964 2o The greater efficiencies of the larger-sized units lie in: (a) Reduced machinery capital requirements per acre (b) A major reduction in labor and machinery expense relative to gross receipts (c) A decline in labor costs relative to the total of labor and machinery expense This proportionate decline in labor costs occurred despite the smaller per-acre investment in machinery,, (Chart) Small and Large Mississippi Delta Cotton Farms, 1960-1964 I I I . The Modern Farmer - Small Businessman Ao The Farm Business Versus the Commercial Enterprise 1. Similarities a„ Capital requirements (ownership) Page 7 Agricultural Credit Mr. Francis June 10, 1966 b. Importance of financial backlog increases as higher costs magnify exposure in agriculture c. Management perfection d. Operating statement, expenses as per cent of gross sales e„ Specialization in one or a limited number of commodities f. Bargaining for supplies and raw materials 2. Differences that stand out a. Natural factors (1) More likely to impair farm operating results b. Continuity of management c. The balance sheet ratios (1) d. Example: Land and buildings to total assets and sales are higher in agriculture Debt as a per cent of total assets (1) Generally higher in non-farm business Farm, Consumer (k W h o l e s a l e Price Trends Index 195.0=100 <?L 130 re* ^ Index 1950=100 130 Consumer Prices-All Items >«5» •s4' 120 120 110 110 100 100 90 90 Prices Received by Farmers 80 J 1950 1954 I J 1958 L J 1962 L 80 Farm Income versus Nati© I Income Index 1950=100 Index 1950=100 220 200 1950 1954 1958 1962 FARMS IN THE UNITED STATES Number of Farms Average 1947-49 p 1966 5,800,000 3,286,000 Land in Farms 1/ (Million Acres) 1,159" Acres per Farm 200 1/ - Data for 1949 p -preliminary 1,151 350 N u m b e r of Farms a n d A v e r a g e Size of Farms Millions of Farms in t h e U n i t e d States Acres 400 350 300 250 200 150 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 0 Farm Output and Industrial Production Index 1947-49=100 220 Index 1947-49=100 220 4 £ /} & 200 200 At 180 IF Industrial Production 160 # 180 $ 0 .o ' ^ 160 140 140 120 120 100 100 1947 1952 1957 1962 Real Product Per Man Hour in the Private Economy-United States 1920-24=1001 5001 1920-24=100 500 J 400 $ / / i A 400 1 1 1 1 rJ 300 Agric ulture >/ A, 200 300 200 Non Ag 1 100b .#*^-*du«!»r _•»' I I I ! 1920 zy^z^z - ? ^ c^ 1-.,; _.!.. I 1 I ! . ,1. 1. 1 .1 ' 1925 1930 I I I ! 1935 •fr£100 i i l I I I I ! 1940 1945 i i I.I. ,1 ill, .._L_L_L.LJ 1950 1955 1960 1965 Ny_mber__qf Farm Workers _and Income Per Worker Millions of Workers 8 Thousands of Dollars 4.0 3.5 3.0 2.5 * Income Per Worker l) 2.0 J 1950 J L 1954 1958 L 1962 0 1966 Farm Production Assets Billions of Dollars Billions of Dollars 200 200 150 100 50 0 1940 1945 1950 1955 1960 1965 Total Capital Per Farm United States and Total Capital Less Real Estate Appreciation Thousands of Dollars Thousands of Dollars: 70 n70 60 60 50 50 40 40 30 30 20 20 Capital Less Real Estate Appreciation 10 X 0 1947-49 10 J J _JL L 1953 1957 L J 1961 I L 0 1965 Pe_r Cent Proprietors' a n d Operators' Equities as a Per Cent of Farm Assets 100 90 80 70 60 Operators' Equity 50 40 30 20 10 0, 1950 1954 1958 1962 Per Cent Return on Capital Per Cent 16 Per Cent 16 Farm Capital 12 8 Common Stocks D i v i d e n d / P r i c e Ratio Nuu^fe^J u t a i s m a E^, ^ ^^ ^~* •»"»«o l= .«4'* p a Ea isa Em tsm ma tsj ^aK00OoDanaJ Aaa Corporate Bonds 0 1940 i 1945 1950 i i u_ 1955 i 1960 i i 0 1965 vercage e t u n Specified Types of C© n F I IF Per Cent Per Cent 12 11 12 ESSaSmajlest E223 3rd Largest I 1 2nd Largest Largest 10 11 REAL ESTATE APPRECIATION 10 Capital $129M 9 REAL ESTATE APPRECIATION 8 8 7.4 Capital $75M 7 REAL ESTATE APPRECIATION 3.JL 6 Capital $41M [RETURN. j FROM OPERATIONS^ RETURN FROM OPERATIONS 7.0 6.4 5 3.8 4 2 10.4 8.8 9 3 y 5ize 6 5 4 •:•:•:•*•:•:•. 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"o ^ Q CD Q CD is NO o o I ON 10 o CO o 4^ o f?J o o o L 00 o ° r : CD Machinery Value as a Per Cent of Total Farm Capital - Commercial Farms by Size,1960-64 Per Cent Per Cent 14.1 &x£ 1960-64 1960-64 ECTI.SjnallesJL V^----\ 3rd Largest 3 2nd Largest C Lajgestj 1960-64 1960-64 Net Income as a Per Cent of Cash Receipts Commercial Farms by Size Per Cent 70 mm s.n a l l e s t Per Cent 70 (nsnnno 3r d 1 60h[~ Largest lcTLargest 1 2r irgest 50.2 50h 47.0 ! NET INCOME 40h 48.3 47.6 NET INCOME Capital $55M Capital $167M Capital $95M H40 H NET INCOME LESS! ^OPERATOR WAGES 38.3^^ 30H ! 20hu • 11 i i . — . . . . i i • • • • • • • NET INCOME LESS OPERATOR WAGES 9 9 ? : 1 30 20 i........ •»• • • • • • • • • • • • • H50 NET INCOME NET INCOME Capital $30M -] H60 ^« • • • • • • • ::% NET INCOME LESS::::::::: jig OPERATOR WAGES g : • 10 PO^yX^XXXJ^ x x x x X X X J K X X X X • • .„ _ . ! _ , ; 1960-64 • • • • • • • • • • • • • • • • • • • • « J ^ 1 * J • • • • • • • • • • < 10 • a a a a a a a a a a a a a a a a a a a a a * s a a a a a a < c a a a a a a a a a a a a a a a a a a a a a a a a a a a a a • 0 • • • • • • • a • • • a « a « « a a i • • • • a . . i • • • • < t • t • i • • • • • • • • • • • • • • • • • • > a a * « a s « i • • • • • • • • • • • • • • • • • • • • • • • • • • • • • a • • • • • • • • • • • • • • • • • • • • • » a a « * a a a < » 0 0 0 » 0 » » m » » 0 » » 0 » » m r » * » » m * » m m * a • • a a a a a a a a a a a a a a a a a a a a a a a a a a a l • • a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a t • a a a a a * a « a a a « * a « a a « » « « a > « « a a a a a • • • • • a a a a a a a a a a a a a a a a a a a a a a a a l a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a « a a a a a a a a * a a a a a a a < • a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a » a a « a a a a < • • • • a * * « a a « a a a a a « * « » * a * a i a a a * a * • a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a > a a a * a a a a < a a a a c a a a a a a a a a a a a a a a a a s a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a i a a a a a a a a a a a a a a a a a a a a a a a a a a a a * 0 m 0 0 0 » » m » m a » 0 » » * » » 0 m » * m m > 0 m » 0 1960-64 4 .,., 1 . _! L_ 1960-64 1960-64 0 Labor & Machinery Costs as a Per Cent off Gross Farm Receipts-Specified Types of Commercial Farms by Size Per Cent Per Cent I^^Smallest I Kvxxxvj 3rd Largest i i 2nd Largest Largest 90 80 70 60 60.79 50 40 30 20 10 1960-64, 1960-64 1960-64 1960-64 0 Total Labor Costs as a Per Cent of Gross Farm Receipts Commercial Farms by Size Per Cent 70 Per Cent KSSS3I S m a l l e s t . . E Z 3 3rd l a r g e s t • i i 2nd l a r g e s t Largest' 60 50 40 i H I i rii i n > M v 34.64 30 20 10 1960-64 1960-64 1960-64 1960-64 0 Per Cent 13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 a n d Large Mississippi Delta Cotton Fa rms Average Return on Capital 1960-64 Per Cent LARGE 12.1% 13 12 11 Capital J238.3M Acres 1000 Per Cent Return from Operations no Per Cent Return from Real Estate Appreciation 6.5% SMALL 4.7% Capital ~$14.9M Acres 59 HI" -0.5% 9 8 7 6 5 4 3 2 1 0 -1 -2 Small a n d Large Mississippi Delta Cotton Farms 1960-64 Per C e n t Per Cent Labor & Machinery Expense as a Per Cent of Total Cash Receipts Value of Real Estate h as a Per Cent of Total Farm Capital 100 90 80 70h74.27o Capital 60 ~$14.9M Acres 59 50 40 30 20 10 0 SMALL tabor Expenses as a Per Cent of Total Labor and Machinery Expense 98.2% jM.5% Capital 1238.3M 72.4% Acres Tooo~ 56.5% Value of Machinery as a Per Cent of Total Farm Capital LARGE SMALL LARGE 69.0% SMALL LARGE SMALL LARGE 100 90 80 70 60 50 40 30 20 10 0
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