Farming Magazine - October, 2012

COLUMNS

Opinion: New Ag Meets the New Economics

By Martin Harris Jr.

In modern education, some of the best learning takes place well beyond the classroom, both physically and temporally, and one of the most useful agriculture texts in recent years is worth reading for at least two major (and lots of minor) reasons. The title is "Policy Reform in American Agriculture," and the trio of authors includes Robert Paarlberg, scion of an ag politics and education family whose father was Don Paarlberg, one-time assistant secretary of the USDA and ag advisor to a series of administrations in the '50s and '60s.

Published in 1999, it's the only land-grant college ag policy/ag economics textbook - on your humble scribe's fairly lengthy ag-bookshelf, that is - to declare openly in favor of the concept of farm household income earned off-farm, needed and used to subsidize and enable continued production of farm commodities at returns that frequently just barely cover fixed costs and occasionally don't even accomplish that, not even to mention return on investment and other criteria used in the analysis of all other nonfarm business. That's reason for reading number one.

Reason number two is the detailed (and therefore somewhat tough reading) account of the historical trajectory of the various taxpayer-funded programs to compensate for unprofitable commodity production (and thereby encourage continued production) starting with the full-parity promises of the early 1920s and thereafter morphing into a sequence of less-than-full-parity (and lower cost to the urban-consumer voter majority) programs continuously redesigned in the ongoing search for the least expensive way to prevent production decreases (and the ensuing "undue price increases to consumers," per the preamble language in the Ag Adjustment Acts of the 1930s) and keep the minimum essential number of farmers producing on the farm for consumers in the city. Almost missing from the historical account is an equally in-depth discussion of the role of productivity increase, via labor-saving machinery, crop genetics, chemical fertilization and weed control, and even tractor-mounted global-positioning technology, in creating the resulting long-term chronic condition of commodity oversupply and underprice, which has so benefitted consumers and disbenefitted producers and shows up in the remarkable reduction in the percent of consumer income needed to buy food. That indicator went from near 25 percent in the early 1950s to below 10 percent today. Perhaps to make up, there is a (fairly brief) discussion of the key role of Vermont's iconic governor and later Senator George Aiken in the politics of pushing the parity formula from full to less-than-full in the '50s, just as his rhetoric back home was aimed at reassuring his supporters, in a then-rural and farm-based-economy state, that he was doing no such thing. But it's reason number one, in economic-necessity terms the direct result of urbanite voter success in creating reason number two, which is the more interesting because it plows new ground (a little ag analogy lingo, there) in the economics of American business.

The concept of practicing a profession or trade so unprofitably that, to continue, the practitioner's inadequate income must be subsidized by the unrelated off-farm earnings of other family members (or, in an increasing number of instances, by the passive income from inherited wealth) is unique to agriculture today. You don't see lawyers, doctors or even architects practicing at a continuing loss; nor builders, auto dealers, or stockbrokers; nor can you find a text used at Harvard Business School or the Wharton School at Penn that describes or advocates a subsidy income stream to make it economically feasible; and, until 1999 you wouldn't find the concept in an ag economics text either. However, there have been somewhat similar antecedents. One such showed up in a USDA Agricultural Food Policy Review "Perspective" of April 1981, where on page 45 the authors dismiss the then-below-production-cost farmgate value of farm commodities by redirecting attention to inflation-based farmland value gains, asserting that "thus, real increases in asset values are no less a return to farming than current income." You probably don't recall such assurances being offered to the venerable A&P food chain, owner of ever-higher-value real estate across the country as it entered bankruptcy proceedings last year, nor to the New York Stock Exchange as its owners sought a European buyer three years back (they found one in Germany) because Wall-and-Broad real estate appreciation wasn't making up for off-the-floor electronic stock trading moving elsewhere. That's because such assurances have been aimed only at farmers. And farmers have accepted the asset-appreciation, off-farm income, trust fund revenue stream concepts to buy shoes for their kids or send them to college, either by more debt against higher asset values or by cashing the off-farm checks to buy groceries. It was finally deemed safe in 1999 for the book's authors to recognize it, favorably, in print as approved USDA doctrine. Here's the page 41 quote.

"Only 15 percent of all U.S. farm households, about 300,000 households in all, derived more income from the farm than from off-farm sources in the 1990s. Improved educational and skill levels have enabled many who live on farms to earn more of their income from nonfarm employment. This healthy trend has also rendered obsolete the presumption that subsidies to farming are the best way to help rural Americans." Translation: we in the USDA and land-grant college system would prefer that subsidies enabling below-cost farm commodity production and sales continue (so retail food prices don't increase), but that the subsidies be generated by other members of the farm family household, so that we consumer beneficiaries of the cheap-food policy don't have to pay all the subsidies through our own taxes.

The concept prevails, as the authors suggest and as more detailed data in earlier columns in this space have shown, all across both traditional commercial ag and the "new agriculture." Even the largest farms depend to some extent on off-farm income, as do, even more so, the midsize and small conventional farms, and (anecdotal observation only, no published data yet) almost all the new mini farms. Presently in Vermont, a new farm advocacy group, "Keep Local Farms," is raising money to teach clients how to generate non farm-commodity income from "outdoor recreation and wildlife, activities in addition to their dairy products." Others are pushing for mini dairy private-label milk and cheese production, processing and sale by mini-farmers; for producers to become retailers with new farmstands, some at farmers' markets; and for producers and consumers to form legal compacts so that the latter don't actually "buy" product from the former, but are shareholder-owners themselves who chip in (reverse dividend, you might say) on a regular basis for ongoing feed and power costs. A nonfarm (and nonexistent) comparison would be a family computer chip manufacturer assembling, packaging, distributing and retailing (at lower cost to shareholders) its own line of computers, and funding its year-to-year losses with a live-in bachelor uncle's job in town and the monthly dividend check from the inherited family trust. Back at Harvard or Wharton, this sort of multilevel enterprise was called "vertical integration," approved when Henry Ford pioneered it by controlling every manufacturing step from iron ore mining to showroom Model T sales, and disapproved for, say, Weyerhaeuser Lumber (You wouldn't expect a sawmill operator to build houses, would you?) and seems to be performing quite well, thank you, for the new generation of mini farms now emerging, as their operators now research consumer product wishes, produce (sometimes niche) commodities, do the private label packaging and distribution, and conduct the retail sales operation at private farmstand or public farmers' markets, thereby capturing not only the sale value of the basic commodity, but also the markups of all the beyond-the-farmgate steps as well: substantial, when you consider that the commodity itself typically makes up only a minor percentage of the final retail price. Compared to farming in recent American history, for example the post-World War II decades, this is indeed both the new ag and the "new economics," even though the underlying concept of dual-source household-scale economics (classical Greek word with "household" in its meaning) is, most famously, Jeffersonian in origin - every agrarian-yeoman freeman should have one economic foot on his home farm and the other in a shop, trade, or profession. It was more recently embraced by such industrialists as Henry Ford, whose employee villages featured lots large enough for serious grow-your-own, and, of course, such urban planners as Ebenezer Howard ("garden cities") in the late 19th century followed by author Lewis Mumford and architect Frank Lloyd Wright in the first half of the 20th century.

Another aspect of the new economics involving the new ag is far more novel, and has its roots in late 19th century European Socialist objectives and then in Depression-era U.S. "Fair Trade" doctrines, whereby government would use its superior economic wisdom to prohibit Adam Smith-fashion competitive pricing by sellers by enabling manufacturers to fix mandatory retail prices they deem suitable to assure "fair" returns to suppliers and labor. In the pre-World War II years the no-price-competition policy enjoyed public approval and (therefore?) survived several Supreme Court challenges, but in the post-World War II decades public opinion shifted and so (therefore?) did the court's opinions: to negative. A new fair trade is back, now, in voluntary membership form - there's a World Fair Trade Organization and, domestically, a Fair Trade USA - and the concept is to convince consumers to choose to pay more so that worthy producers can earn more. Examples range from extra pennies on the electric bill to go to dairy farmers producing on-site methane-based generation, to extra pennies for African coffee and, most recently, in Vermont, a plea from Keep Local Farms for milk consumers to ante up a bit more on behalf of milk producers-view shed-preservers. Considering that the (largely) upper-middle-class, upper-income, upper-education folks who make up the trendsetting "new elites" described by author David Brooks in his "Bobos in Paradise" treatise, are already the folks who quite willingly pay a premium for mini farm (new ag) produce of various types, based on the extra quality perceptions, it could well be that, in selected exurban and even urban enclaves where such folks live and work, the plea will work. New ag retailer Whole Foods didn't go into downtown Detroit and Pittsburgh to sell just such items to blue-collar locals, but to white-collar commuters with offices near the store at above-commercial-price levels without accurately pregauging the market potential. And just so in exurban "rural gentry" enclaves across the country, where Brooks' "Seven Financial Rules" for the "Bohemian-Bourgeoisie" in his Code of Financial Correctness encourage above-lowest-price spending whenever the purchaser's choice of (preferably artisanal) product is suitably identifiable as both unique and high quality, and the purchase can be seen and admired by his consumer peers for its social and philosophical connotations as well. If it does, and it has already captured some 20 percent of the overall U.S. food-buyer budget, it could well be the most interesting and educational part of the entire new ag/new economics construct.

The author is an architect and former farmer.