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Lecture Date: June 6, 1969

Agricultural Economics


Course Coordinator:

Lecturer: Darryl R. Francis
Subject: Farm Capital Demands,
Uses and Returns

J. W. Fanning

A Brief Review
A. Agriculture made great strides during the century ending in 1950.

It changed from subsistence to commercial farming.


There was a major decline in home-produced inputs and a rise
in purchased inputs.


Horse power to mechanical power
Hand tools to automated machinery
Open-pollinated to hybrid seed
Home-produced to commercial fertilizers

Production of farm commodities became more oriented to, and
restricted by, domestic demands.
Exports as Per Cent of Production
All Farm Products




B. The revolution in agriculture has stepped up in recent years. However,
the increased rate of gain has been primarily reflected in resource
adjustments and productivity per worker rather than in total output.
Total farm output and total resources in agriculture are now determined
largely by the size of the nation's population since exports are limited by
restrictive policies of importing nations.


Demand for farm output has increased, but at a slower rate than
demand for industrial production
(Chart) Total Population, Farm Output, and
Industrial Production (1947-1968)


Concurrent with the slow increase in demand for farm products is
the phenomenal rise in agricultural productivity per worker.
(Chart) Real Product Per Man Hour in the Private
Economy - United States (1920-1967)

3. The resulting flood of farm products has put pressure on farm prices
and income.
(Chart) Farm, Consumer, and Wholesale Price
Trends (1950-1968)
(Chart) Farm Income Versus National Income
4. The pressure on incomes, coupled with generally prosperous nonfarm
conditions, provides incentive for readjustments in resources,
especially farm labor. The readjustments in turn contribute to increases
in realized net income per farm worker and greater output in the nonfarm
(Chart) Impact of Income on Labor Adjustments
5. As a result of new farm technology and rising productivity per worker
the number of farms declined sharply and the average size of farms
increased. Most of the decline in farm numbers has been in the small
farm group where income opportunities in agriculture are less than
potential incomes in the nonfarm sector.

(Table) Farms in the United States
(Chart) Number of Farms and Average Size of
Farms in the United States (1925-1969)

-36. Agriculture has become more commercial and more specialized. The
major drive for manufactured inputs occurred in the early postWorld War II years. The recent drive has been toward increased
specialization with larger purchases of farm produced inputs.
(Table) Size and Growth of Agribusiness.
7. The farming sector has remained fairly stable in dollar value added to
national income, but other sectors have grown rapidly. Purchased
farm supplies for production purposes are now equivalent to 70 per cent
of the value of farm product sales, and the processing and marketing
sector adds another 200 per cent to the value of farm output before it
reaches the ultimate consumer.
(Chart) Value of Agribusiness Product (1945-1967)
8. New types of farming developed as a result of new technology and
pressures in our competitive enterprise system.
Examples: Integrated or contract farming
Vegetables and broilers grown to
Commercial beef feed lots
Commercial milk parlors
I I . New Farm Technology Dictates Changes in Farm Capital
A. With the decline in labor inputs, demand for farm capital has sharply
1. A large portion of the gain reflects rising land prices which in turn
reflect major increases in marginal returns to land on individual
farms. Machinery, insecticides, and other new productive factors
have greatly increased the acreage that can be operated per worker.
Land prices have more than doubled since 1950 and more than
quadrupled since 1940.
2. Non-real estate assets have also made sizable gains, with greatest
increases in value of farm machinery.

(Chart) Farm Production Assets (1940-1968)

-4B. With the decline in number of farms and rising total farm assets, assets
per farm have increased sharply. As a result, agriculture is now one
of the most highly capitalized industries in the nation on a per worker basis.
1. Production assets per farm have increased (rising fourfold since 1950)
in the competitive struggle to attain greater efficiency through
farm enlargement.
2. Approximately 50 per cent of the gain in assets per farm reflects
rising land prices. While constituting a windfall to many present
operators, these increases will be a definite obstacle to future operators.
Finding it difficult or impossible to pay the market price, those who are
not fortunate enough to inherit will have to find other means - renting, partnerships, incorporation - - to gain control over
sufficient agricultural assets for efficient operations.
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. The rate of return on farm capital points to future investment trends.

Capital in agriculture is increasingly competitive with capital in
nonfarm uses.
(Chart) Return on Capital (1940-1968)

2. Thus the industry is not isolated from other sectors of the economy.
Capital, labor, land and product markets for the farm sector are all
subject to supply and demand conditions in the nonfarm sector.

Returns to scale of operations have been great during the postwar
period, and the margin of efficiency on larger farms is still large.
The smaller farm barely provides an opportunity for the operator and
family to earn wages at the national average farm wage rate.

(Chart) Average Return on Farm Capital Specified
Types of Commercial Farms by Size, 1965-1967

-54. Returns to size have been more pronounced in recent years than
in early postwar years.
(Chart) Changes in Returns on Farm Capital
Specified Types of Commercial Farms by size
D. 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 of Total
Farm Capital - Commercial Farms by
Size, 1965-1967
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, 1965-1967
E. Larger farms have greater operating efficiency. Labor costs are a smaller
proportion of total expense on large farms than on small units.
(Chart) Labor Costs as Per Cent of Gross Farm
Expense, Specified Types of Commercial
Farms by Size, 1965-1967
F. Mississippi Delta cotton farms illustrate the greater efficiency of
larger units.
I. The greater efficiency of large crop farms in the South is indicated
by the striking differences in rates of return on capital between small
and large Mississippi Delta cotton farms.

(Chart) Small and Large Mississippi Delta
Cotton Farms, Average Return on
Capital 1960-1966

2. The Greater efficiencies of the larger-sized units lie in:
(a) Reduced machinery capita! requirements per acre.
(b) A major reduction in labor and machinery expense relative
to gross receipts.
(Chart) Small and Large Mississippi Delta
Cotton Farms 1960-1966
. Greater Capitalization Points to Change in Structure of Farm Ownership
A. Debt-free ownership is more difficult for individuals to achieve.
1. Landlord-operator equities decline. Operator equities are
down to almost 50 per cent of assets.
2. Large owner-operator equities are increasingly difficult to
acquire as capital requirements rise.
(Chart) Equities as a Per Cent of Physical Farm
Assets (1950-1968)
B. Trends in ownership are indicated by the distribution of value of
products sold according to tenure of operator.
I. The rapid gain in proportion of all farm products sold by part
owners and managers and the sizable loss in sales by full owners
suggests the greater difficulty of becoming owner-operators
of efficiently sized farm units.
(Chart) Distribution of Value of Products Sold by
Tenure of Operator, Commercial Farms
C. The increasing difficulty of becoming owner-operator leads to changes
in the form of farm ownership.
I. An increase in the corporate form of organization is probable,
especially small family-type corporations.

-72. Other possible types of ownership include:
(a) More partnerships
(b) An increase in vertical farming organizations as broiler
producing and processing units, public cattle feeding
operations, vegetable producing and processing firms, etc.
D. Farm management may, like corporate management, become more
detached from ownership.
1. The rising proportion of farms operated by part owners and managers
indicates the difficulty of farm operators in achieving full
(Chart) Distribution of Commercial Farms by Tenure
of Operator
2. The rising volume of capital per farm points to an acceleration of
this trend as high-priced farmland passes on to future generations.
IV. The Modern Farmer - Small Businessman
A. The farm business and the commercial enterprise have both similarities
and differences.
I. The similarities include:
(a) Capital requirements (ownership)
(b) Importance of financial backing (increases as higher costs
magnify exposure in agriculture)
(c) Management perfection
(d) Need for 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

-82. Differences that stand out include:

Natural factors - Weather, soil conditions, insect pests
(1) More important in farm expense
(2) More likely to impair farm production


Continuity of management


The balance sheet ratios
(1) Land and buildings a higher proportion of total
assets in agriculture
(2) Debt as a per cent of total assets. Generally
higher in nonfarm business

V. Some Musts for Modern Farm Banking

A recognition of the changes that have occurred in both the farming
industry and farm credit is required.

Farm credit, like farming itself, has become more commercial
and less dependent on relative, friend, neighbor, merchant, or
local credit source.


With the entry of more financial agencies into the farm credit
business, it has become less personal, and credit tends to flow
to the most efficient users.


The closer ties of farm credit to financial markets through life
insurance companies, the Farm Credit Administration, large
agribusiness corporations, and the correspondent banking
system assure a more reliable supply of farm credit to all users.


These ties also assure competitive and more uniform interest
rates to agriculture. Farm credit rates may be slightly below
or slightly above rates charged on commercial loans of similar
quality. In contrast, only a few decades ago, interest rates
charged farmers bore little relationship to conditions in
financial markets. The banker who fails to realize this change
in the farm credit picture will gradually lose out in the
competitive race.
(Table) Changes in Interest rates


Flexible savings policies are essential. Only by paying competitive rates
on time and savings deposits can banks obtain the supply of loan funds
to meet credit demands. Unfortunately, regulations have at times
prevented banks from bidding for savings at competitive rates, and
during these periods bank savings accounts have often failed to grow,
and on occasion have actually declined. The once widely-held belief
that savers were not sensitive to the rate of return on savings is no
longer true.


Maximum use should be made of the national money market.

Loan participations are one means of easing the local strain
on credit supplies.


Insurance company credit is another means of relieving local


Some banks purchase Federal funds.


Other means are in the developing stage.


Provide sound and adequate financial advice for modern farmers.


Arrange to handle the credit needs of the large, efficient producer;
the alternative is for the bank to become a wholesaler of funds by
purchasing the credit instruments of others who are better equipped
to do the job.