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THE COOPERATIVE FUTURE IN A CHANGING AGRICULTURE
Talk by Darryl R. Francis, President,
Federal Reserve Bank of St. Louis, before the
Finance and Management Sectional Meeting,
Farmland Industries, Incorporated,
Kansas City, Missouri, December 7, 1966
It's good to have this opportunity to discuss with members of
the Management Sectional meeting of Farmland industries, inccrporated the prospects for farm cooperatives in our emerging agriculture.
Having spent several years in the cooperative credit field, it would
be my preference to talk to you about my experiences with the farm
cooperative movement during those years. Such comments, however,
would contain little useful information relative to the assigned topic.
Thus, 1 shall take a more detached view and discuss some of the
changes that appear to be in the making for our agricultural industry.
1 shall attempt to outline the role that farm cooperatives can play in
this emerging agriculture,
1 propose to review: (1) The historical movement of agriculture
from subsistence to commercial farming; (2) the stepped-up revolution
in agriculture in recent years; and (3) the impact of these technological
advances on changes in farm capital. From this background I shall
draw some inferences relative to the successes and failures of the
cooperative movement in the past, Bv applying these experiences to




-2a projected structure of the agricultural industry, I believe that
we can visualize some successful opportunities for the cooperative
movement in ihe years ahead.
Agricultural Developments - A Brief Review
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During the first half of the twentieth century, agriculture
gradually moved from subsistence to commercial farming. Homegrown products used in the household declined from about onefourth of total farm income in 1900 to only 7 per cent In 1950.
Purchased inputs rose from about one-third of total operating
expenses in 1900 to more than half of such expenses in 1950. Horsepower constituted essentially the only source of farm power in 1900;
by 1950 only 50 per cent of the nation's farms used horses as their
main source of power. Home produced, open pollinated seed was
replaced by improved purchased seed inputs, and in the case of
seed corn, by hybrid seed Inputs. Home produced fertilizer was
supplemented by purchased commercial fertilizer nutrients.
Beginning about 1950 the oace of this revolution in agriculture was stepped up. This faster pace of the farm revolution
was the result of new market forces in our free enterprise economy.
Freed from the necessity of manufacturing military hardware and
other defense goods, our Industrial machine turned to producing
machinery, equipment, and supplies for our domestic economy, of
which the agribusiness cornpiex is a maior segment. Large supplies




- 3-

11/7/66

of pent-up technology, not used in the depression years due to
lack of capital and purchasing power and not used in agriculture
during the war because of the diversion of the nation's.resources
to winning the conflict, became available for peacetime uses. The
flow of these technological gains into agriculture came in numerous
forms. Better and more efficient farm machinery replaced the
earlier types, which in the prewar years were only slightly better
than the horse-drawn equipment. Larger multiple-row equipment
pulled by more powerful tractors replaced the single and two-row
types. Machines such as the mechanical cotton picker were
developed for performing new jobs which heretofor could be
performed only by hand labor. Chemicals were developed for
weed control, replacing a large part of the labor. Low cost, high
nutrient fertilizers came on the market. Losses from disease,
insects, etc. were reduced by new chemicals. All these flows of
technology into our agricultural plant contributed to a rising
efficiency in the industry.
The increasing output per man in agriculture can be
demonstrated by comparison both with prior years and with
output in the nonagricultural sector of the economy. Real
output (output at constant prices) rose at the relatively slow
rate of about 2 per cent per year in both the agricultural and
nonagricultural sectors of the economy from 1920 to 1935, at




-4the somewhat higher rate-of 3 per cent per year from 1935 to 1950,
and output per man hour in the nonagricultura! sector has
continued up since 1950 at about the same rate as in the 1935-50
period. The rate of growth in agriculture, however, has stepped
up to 5.5 per cent per year since 1950. For example, real output
per man hour has more than doubled in the last 15 years. In
contrast, output per man hour rose only about 90 per cent in the
prior 30 years, 1920 to 1950.
Progress Necessitates Change
The rapid rate of progress in agriculture caused major
dislocations in resource use, especially labor. With the increasing
productivity of land and labor, the flow of farm products to market
was magnified in the early 1950's. Since the domestic demand for
such products is relatively inelastic and world demand for U. S.
output is dampened by trade barriers, the rising output was
accompanied by a general decline in farm commodity prices.
After rising sharply from 1950 to 1952 as a result of the
Korean War, farm commodity prices began to drop in 1953 and by
1955 had declined to about 10 per cent below their 1950 level.
Farm prices were stabilized in 1955, reflecting both market forces and
to some extent changes in Government price support and production
control restrictions.




The price declines in the early I953!s were sufficient tc
put great pressure on farm incomes and farm resource adjustments.
Net income for all farms declined about 10 cer cent from 1950 to
1955. It remained below the 1950 level throughout the rest of the
1950's, except in 1958 when simultaneous troughs in the beef and
perk cycles pushed farm product prices up to unexpected ;eveis.
Following a sharp decline in net Income in 1959, with a return. to
more normal supply conditions, it began to slowly increase. Scon
after the turn of the 1960 decade net farm income.surpassed Its
1950 level and has continued generally up.
The major farm price and income declines of the 1950s
provided sufficient pressure, however, to hasten the reorganization of American agriculture into a truly commercial Industry.
In view of the-generally prosperous nonfarm economy, ali
prospective farmers who were lacking In farm know-how and
financial resources could earn more by applying themselves to
nonfarm pursuits where their labor was needed. There was a
great exodus of farm boys to nonfarm pursuits. New entrants to
farming, where labor was still in excess, thus declined rapidly.
The number of farms dropped at z faster rate following
1950 with the Increased oressure on farm incomes than in




-6pressure was greatest on farm incomes, the number of farms.
declined at the annual rate of 3.8 per cent. Since 1955 the number
has declined at a rate of 3.1 per cent, increases in farm size have
corresponded closely with the decline in farm numbers, as total
land in farms has not changed significantly in the last two decades.
Along with the major decline in farm prices and incomes
in the mid-1950's occurred a decline in income per farm worker.
During this period of rapid gains in new technology the farm work'
force could not be reduced as fast as new work-reducing methods
were being adopted in the industry. The result was lower returns
per worker. More recently, however, the situation has changed.
Beginning in 1955, income per farm worker began to increase, and
with the exception of 1959 which followed the unusual gain in 1958,
farm income per farm worker has increased in each successive year.
This upturn in farm income in 1955 was primarily the result
of two basic economic forces rather than special programs or other
temporary palliatives. As indicated earlier, the great backlog of
farm technology moving into agriculture in the early postwar years
resulted in a flood of farm commodities to the market. This
occurred despite a, decline in the farm labor force. By the mid-.
1950s the flow of technology into farming may have begun to




-7decline as the pent-up supply of technology was worked off in the
late forties and early fifties. In addition, the number of farm
workers began to decline more rapidly about this time. The number
of farm workers declined at the annua! rate of 2 per cent from
1935 to 1950 and 2,2 per cent from 1950 to 1955. The rate of
decline accelerated to 3.2 per cent from 1955 to 1960 and further
accelerated to 5.1 per cent from 1960 to 1966.
It is my belief that this very rapid decline in the farm work
force, coupled with the reduced technology flows, is beginning to
have a sizable impact on the volume of farm output.
These market forces, coupled with a constant rate of increase
in demand for farm products, were apparently sufficient to halt the
downtrend in farm commodity prices in the mid-fifties and turn
farm prices upward in the sixties. While over-all farm incomes
have been rising slowly, per capita, disposable income per farm
worker has been rising rapidly. During the past 10 years, income
per capita of the farm population rose at the annual rate of 6.2 per
cent, while that of the nonfarm population rose only at the rate of
3.4 per cent.
In my opinion, the strong market forces which have pushed
farm incomes up during the past 10 years are continuing to exert
upward pressure on farm commodity prices and incomes. Farm
labor resources are becoming more sensitive'to nonfarm employment opportunities. Better educational opportunities in rural



-8areas equip rural labor for all types of jobs. Thus, agriculture is
becoming fully integrated with other sectors of the economy in
contrast to its former insular position where it suffered greatly
from its excesses. This move of agriculture into a fully market
oriented industry is indeed a new horizon to those who have
chosen farming and agribusiness as an occupation. A look back
on the mid-fifties and earlier prewar years points to conditions
in agriculture to which the industry is not likely to return.
Conversely, the future in agriculture can be viewed with great
optimism.
Agriculture in a Commercial Setting
As indicated earlier, in my judgment agriculture finally
reached full commercial status in the 1950's, as opposed to'
"subsistence" or "way of life" farming. We turned the corner
when labor began to leave agriculture in sufficient numbers for
returns to labor to turn up. Resources in agriculture became
fully sensitive to the market forces in other sectors of the economy..
Labor began to move readily to occupations where returns were
greater. Although most farm labor still consisted of the farm
operator and his family help, if nonfarm opportunities were more
attractive, he simply sold his farming interests to a neighbor and
started anew in nonfarm pursuits. Improved educational




-9opportunities in rural areas were a major factor in this greater mobility
of farm labor. As more farm production inputs were purchased, the
returns to inputs had to be weighted closely against costs, investments
in farming had to be weighted against returns to investments in other
areas.
These self-adjustments in labor which, are necessary to provide
maximum efficiency in supplying goods and services to the community
are unique to the free enterprise system. Other systems must move
labor and other resources from one occupation to another by arbitrary
means if a high standard of living is to be achieved, and such movements allow much less freedom of choice than in our own system.
The enlarged flows of technology into agriculture and of labor to
other industries have also dictated major changes in farm capital.
Agriculture in its commercial setting has become highly capitalized.
Total assets in the industry rose from about $126 billion in 1940 to
about $200 billion in 1965. With the rapid increase in size of farms,
however, capital per farm more than tripled, rising from $18,000 to
$62,000 during the period. Furthermore, these averages include a
large number of subsistence or semi-retired farmers. It is nothing
• unusual to find commercial farms today that are capitalized in excess
of $400,000. I might also.add that capital per farm is increasing at a
high rate and is likely to continue to grow for several years hence. My
reasons for this conclusion are drawn from studies of returns to scale
in agriculture.



- 10 Average returns on a group (28 farms) of specified types of
commercial farms by size as computed by the U. S. Department of
Agriculture indicate the greater efficiency of larger farms during
the entire postwar period, 1947 to 1964. Excluding real estate
appreciation gains, returns varied from 0.7 per cent on the smaller
size group with average assets of $22,000 per farm, to 7.0 per cent
for the large farms with average assets of $129,000. The step-up
in rate of returns is continuous as size increases. For example,
from a 0.7 per cent rate for the smallest size group, the rate
increases to 4.3 per cent for farms in the next larger grouo, to
6.4 per cent for the second largest, and to 7.0 per cent for the
largest size group.
Although returns to scale for the entire period 1947 to 1964
were significant, returns to size have become even more significant
since the early postwar years.
During the period 1947 to 1949, ail size groups of farms
except the smallest earned a return on capital in excess of 10 per
cent. Also, there was no significant difference in the rate of return
for each of the three larger size groups. Beginning with the 1950-54
period, however, the greater efficiency of the-larger farms began to
show up at all levels, and for the most recent periods increasing
returns to scale have been significant for each larger size group.




-11In the most recent period 1950-64/the two smaller groups
of farms each had returns on capital of less than 4 per cent. The
next largest and largest groups, however, had returns of 5.7 per
cent and 6.5 per cent, respectively, excluding gains from real
estate appreciation. Furthermore, for each step-up in the size
of farms, there was also a step-up in rate of return on capital
invested throughout all the size groups.
As 1 analyze the preceding data and contemplate their
meaning, I conclude that the forces which have brought farming
out of subsistence into commercial status have not run their full
course. Further changes are shaping up that are bound to have a
major impact on. farm cooperatives, as well as on all other types
of business organizations related to the agribusiness area.
Farms are moving away from our traditional concept of small
family farms. They are moving in the direction of small to medium
size commercial business enterprises. The following factors point
to this move. The capital required in most commercial farming
operations exceeds the amount which most individuals can expect
to accumulate in a lifetime. As indicated earlier, a single operator
often has under his control assets in excess of $400,000. The transfer of these assets to the next generation is almost impossible under
the existing structure of farm business organization. We need to




-12look backward only a very few years to see when many nonfarrn
businesses reached this stage and were forced to transfer control
by means other than outright purchase or inheritance. In
addition to problems of transferring ownership, credit needs for
farm operation may be too large to depend on the life span and
qualifications of one man only. New ways will be found to finance
commercial farming. I would anticipate that as new financial
arrangements appear, they will involve some further separation of
the managerial function from ownership.
The Impact of Agricultural Changes on Farm Cooperatives
As farms become more like nonfarrn business enterprises,
problems of agglomerating the farm products of numerous small
producers and of distributing supplies to them will decline'in
importance.. The single farm will be a mass producing unit and
will often be able to negotiate sales directly to the major processors
who will have full confidence that grade, quality, and time of
delivery of such commodities will be satisfactory. In many cases,
products will be sold well ahead of the delivery date, and in some
cases, sales will be made prior to production. Many of the supplies
required by farm producing units will likewise be purchased in
large quantities directly from the manufacturer. The wholesaling,
jobbing, and commission operations will decline to a minimum and
probably go out completely for the mass of farm commodities and
the mass of supplies sold to farmers.



-13A large portion of all farm products will be produced under
close ties with processors and mass retailing organizations. We
may call it integrated farming, corporate farming, or chain farming. Prices, quantity produced, and output of individual farms will
often be determined prior to production. Financing and capitalization problems of the farming portion may be combined with other
phases of the operation. Thus, many of the financial problems of
farming as we have known them.in the past may tend to disappear
in the next half-century. We are already able to observe some
indications of this trend - namely, the large cattle feeder operations
and some broiler producing enterprises. These factors point to"
greater stability in farm output and prices.
The on-the-farm sector of our agribusiness industry will
continue to decline relative to the total. More of the inputs needed
for farm production will come from the nonfarm sector, and more
of the food processing and preparation chores will be done after
commodities leave the farm. Thus, the farm will gradually drift
into a specialized plant for processing mass quantities of raw
materials into farm products. Such producing units will grow
larger in size but will probably produce a smaller variety of
commodities. In most cases 1 would expect no more than one
or two commodities to be marketed from an individual farm.




-14Summary
In summation, these trends are likely to have the following
impact on farm cooperatives:
1. Farm cooperatives will be dealing with a smaller number
of farm producers. We will, therefore, need a smaller number of
individual associations. This trend toward fewer and larger
cooperatives is already under way, and 1 would expect it to
continue for several decades.
2. Better capitalized and better managed cooperatives will
be necessary to handle the business of the large, well-managed
farms and to comoete with large corporations and others in moves
toward integrated farming, processing, and marketing operations.
Once the farm production unit is drawn into the processing and
distribution chain, the cooperative will have about as much
difficulty getting the business as Chrysler Corporation would have
in trying to sell cars through a General Motors dealer.
Even.individual.farming units will no longer be without
bargaining power. Such operators will be able to demand low
margins from all suppliers and purchasers of his products. This
new economic position of the American farm will require a new
high quality in farm cooperative management if co-ops are to hold
the enviable position they have attained.




-153. Perhaps the greatest challenge to cooperatives in the
farm product marketing business will be in fitting themselves into
the chain of production, processing, and retailing business where
the farm products are grown on a quantity and quality contract
basis. This type of arrangement, which is already coming into
prominence, requires close coordination of farmer, processor, and
retailer. Sometimes common ownership may prevail. Cooperatives
have proven themselves capable to enter such chains in the dairy
product and some other lines. However, as such contractual
arrangements spread to other sectors, new techniques will be
required. The techniques will not only challenge farm cooperatives,
but, as many of you well know, they are already puzzling livestock
marketing agencies, meat packing companies, and the major farm
organizations.
Perhaps there are some in this audience who share with me
the nostalgia for the self-sufficient farms of our boyhood, and who,
for this and other reasons, are reluctant to accept the picture
paint for the future. If this be the case, 1 can only suggest that from
here on out any cooperative activity that is pitched toward the "forty
acres and a mule" concept of farming is destined to make its contribution to a history of failure. It is my considered judgment that
for the remainder of our time, and for the generation that is gradually




-16taking our place, the problem you face in simply maintaining the
approximate 20 per cent position you have attained in the business
of supplying inputs and processing and marketing outputs from the
American farm will require greater effort and more intelligence
than have been expended up to now in the difficult attainment of your
present prominent position in our great agribusiness complex, it
can be done — but only, I believe, by an enlightened cooperative
leadership throwing itself into the mainstream of agricultural
progress and gearing cooperative effort, activity, and functional
operation to the changes which a history of irresistible economic
pressure is so vividly etching into tomorrow's horizons.




Real Product Per Man Hour
i n t h eP r i v a t eEconomy-UnitedStates
1920-24=100
500

1920-24=100
600

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F a r m , Consumer and W h o l e s a l e Price T r e n d s
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1950




1954

1953

1962

Farm Income
i., J
nclex

versus National

Income
Index 1950=100

1950=100

1950




1954

1958

1962

Number

of Farms and Average
Size of Farms
f iz~~.
In the United States
Acres
Millions or Farms
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1925

1930




1935

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1970

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1950




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1966!

A v e r a g e Return on Farm Capital
S p e c i f i e d Types off Commercial Farms b y Size
Per Cent
12

Per Cent
12
11
10

ESSlS.-.iallost
G'.':'.'.':',l 3 r d Largest
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I 2nd Largest
[ss^g L a r g e s t

10.4
REAL ESTATE
APPRECIATION

8.8,

9

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10

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Capital $129M
REAL ESTATE
APPRECIATION

7.4

3.1
Capital $41M

2

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RETURN
FROM OPERATIONS

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5

3

7

REAL ..STATE
APPRECIATION

6

4

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2.4
Capital $75M

7

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RE I URN ••/• .
FROM OPERATIONS'

REAL ESTATE
APPRECIATION

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Capital $22M

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