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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

6 Readjustments in resources contribute to increases in
o
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

Average
1947-49
Number of Farms

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

$

.o0'
^

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

10.4
REAL ESTATE
APPRECIATION

10
9

8.8

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

11

Capital $129M

10

3

y 5ize

6
5
4

•:•:•:•*•:•:•. RETURN:::::™-:

FROM OPERATIONS':
REAL ESTATE
APPRECIATION

7

iil4.3=^

3.1
Capital $22M

l]
01

1947-64




1947-64

1947-64

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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
lc
1 2r T L a r g e s t
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
!

u
20h

• 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




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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