U.S. agriculture is trending towards greater consolidation. The number of U.S. farms in operation has changed very little over the past 30 years, but only 12 percent of farms produce 75 percent of total output. Why has this consolidation occurred? Here are a few observations that likely contribute to the trend:
Shrinking Rural Populations
In 1900, almost 40 percent of the total U.S. population lived on farms and 60 percent lived in rural areas. Today only 1 percent of the U.S. population lives on farms and 20 percent live in rural areas. From 2011 to 2016 the U.S. non-metro population decreased by an average of 43,000 residents per year.
Technology Generating Greater Economies of Scale and Scope
As technology develops, the size of the minimum-cost (highest efficiency) farm is increasing. Larger farms are also more diversified.
Technology Rising to Keep Up with a More Educate Workforce
Technologies are raising the economies of scale and the necessary skills of the workforce. A recent study shows that agricultural technology adoption has been labor-saving (and more capital-intensive) in all years from 1947-2010. Hours supplied by workers with less than high school education dropped by 94 percent and those with a high school diploma by 28 percent. Meanwhile labor supplied by worker with some college increased by 68 percent and by workers with at least a four-year degree by 114 percent. The rise in more educated workers did not offset the decline in less educated. Consequently, the number of workers is fewer, and real wages are higher on average.
Increasing Opportunity Costs
More capital-intensive farms demand similar managerial skills to jobs in the non-farm sector. For a farm to remain competitive and attract workers with desirable skills in the non-farm sector, farms must pay competitive wages and offer comparable benefits.
Cyclical Effects between Capable Farm Managers and Farm Size
Larger farms attract more capable managers and more capable managers tend to grow firms. There is likely a cyclical relationship between farm size and managerial skills.
Can smaller-scale Farms Remain Competitive in the Future?
Is there a place for smaller-scale family farms in the future? I believe so, but the key to remaining competitive in the current agricultural market lies in producing a high-quality, differentiable product. There is a growing demand for locally grown agricultural products and products that can be traced back to the farm. World incomes are growing, and as incomes grow consumers become more aware and more concerned about the quality of their food and where it comes from. A successful agricultural manager does not necessarily need a large farm to gain market share as long as the manager can produce a product that has higher value-added to the consumer.
Sources:
Lambert, David K. 2017. “Workforce Education an Technical Change Bias in U.S. Agriculture and Related industries.” American Journal of Agricultural Economics. 100(1): 338-353.
Lusk, Jayson L. 2016. “The Evolving Role of the USDA in the Food and Agricultural Economy.” Mercatus Research, Mercatus Center at George Mason University, Arlington, VA
Sumner, Daniel. 2014. “American Farms Keep Growing: Size, Productivity, and Policy.” Journal of Economic Perspectives. 28(1):147-166.
