An Outline of the
American Economy

Part 1
Introduction

PART 8

The Changing Face of American Agriculture

From the nation's earliest days, farming has had a crucially important place in the U.S. economy, and stories extolling the virtues of farmers -- their initiative, hard work and self-sufficiency -- have long had a central place in the American culture.

A review of American agriculture reveals a mixture of heroic facts tempered somewhat by lingering myths. Farmers have never been as truly self-sufficient as folk history would suggest, since farmers have always been dependent to a large extent on factors outside of their control, such as the weather, the price of farm produce in the marketplace, and government policy. Yet American farmers have shown a spirit of individualism and egalitarianism that the rest of U.S. society has admired and often sought to emulate. As a result, this has given them a special power in U.S. political thought that still endures, even while their numbers have dwindled precipitously.

American farmers are known worldwide for their ability to produce a large yield per hectare. In part, this is due to the generosity of nature. Only in a relatively small area of the western United States is precipitation so limited that deserts exist. Elsewhere rainfall ranges from modest to abundant, and rivers and underground water permit extensive irrigation. Some of the richest farmland in the world can be found in the American Midwest.

The success of the American farmer is also a function of large capital investments and the increasing use of highly trained labor. Seeds have been scientifically developed and redeveloped to be productive and increasingly resistant to disease and drought. There is a calculatedly abundant use of fertilizer and irrigation. The machinery used in cultivation and harvesting lowers labor costs and time per unit of output. It is not unusual to see farmers driving tractors with air-conditioned cabs hitched to very expensive, fast-moving plowing, tilling and harvesting equipment.

INCREASINGLY AGRIBUSINESS

American agriculture is increasingly "agribusiness," a term coined to reflect the large-scale nature of agricultural enterprise in the modern U.S. economy. Agribusiness refers to the entire complex of farm-related businesses, from an individual farmer to a multinational maker of farm chemicals. It includes farm cooperatives, rural banks, shippers of farm products, commodity dealers, firms that manufacture farm equipment, food-processing industries, grocery chains and many other businesses.

Agribusiness correctly describes changes in American farms in the late 20th century. A century ago one-half of the labor force worked on farms; in the 1990s that figure was down to less than 3 percent. In early America farms produced much of what they consumed. Now, commercial farmers have become increasingly specialized so that almost everything consumed on most farms is now bought from outside sources rather than home-grown. In general, machinery has replaced most hired labor.

In 1940 there were 6 million farms averaging 67 hectares each; in 1990 the situation had shifted to the point where there were only 2.1 million farms averaging 185 hectares each. During this same period farm employment decreased dramatically -- from 12.5 million in 1930 to 2.9 million in 1990 -- while the total U.S. population approximately doubled.

It has always been true that many farms changed hands by being passed on from father to son. The high cost of capital investment in land and equipment now makes entry into farming very difficult for most individuals. In fact, some observers assert that the small family farm is no longer viable in the United States. One-third or more of American farmers are really only part-time farmers; they also hold non-farm jobs to supplement their incomes. In the late 20th century, farms were increasingly being passed into the hands of corporations, ranging from small, one-family businesses to giant conglomerates. About one-seventh of all farmland is owned by corporations, about two-thirds of which are family corporations. Slightly less than 1 percent of U.S. farmland is owned by noncitizens.

Some commentators argue that the government has a stake in preserving family farms. They point to the role of the family farm in the American experience and argue that nonfamily-held corporations are only interested in profits. They assert that these corporations are more likely than family farms to use production techniques that might damage the environment. Defenders of corporations point out, however, that nonfamily-held corporations usually have more capital than family farms and can thus afford conservation measures that pay off only over a long period of time.

EARLY FARM POLICY

The governing bodies of the American colonies raised questions about land distribution and use soon after winning independence. In 1787, the Northwest Ordinance provided for surveying the West, with the intention of opening up land for family farms. Areas between the Ohio and Mississippi rivers, for example, were allowed to become states on equal terms with the original 13 states as soon as their populations reached a certain level. The lands were to be sold at $2.50 per hectare.

Most of the settlers who braved the many dangers of western expansion did not have money to pay for land. Often they settled as "squatters" without any clear title to their farms. After becoming established, these settlers campaigned to get the law changed so that some of the land was declared free, while other lands could be bought at a minimal price and paid for over a period of years.

Successive laws culminated in the Homestead Act of 1862, giving free land to prospective settlers provided they agreed to "homestead" or live on the land for a period of years. The strategy behind this and subsequent laws was to get land into the hands of family farmers. In 1862 the Morrill Act awarded other federal lands to each state government for the purpose of endowing a system of agricultural and technical colleges. The 69 "land grant colleges" thus created have played a key role in advancing agricultural research and educating successive generations of farmers.

As the 20th century began, agricultural leaders became concerned that the government's research findings were not reaching farmers. To show how new techniques might help farmers improve crop yields, the government set up a limited number of "demonstration farms" and joined with local business and farm groups to hire a limited number of "demonstration agents." In 1914 Congress gave this idea national scope with the establishment of a new "agricultural extension service." Financed jointly by the federal government and each state's land grant colleges, the service hired agents to establish offices in each local governmental district to provide advice to farmers and their families.

In the period between 1900 and 1930, the Department of Agriculture also began an intensive program of basic research. This helped farmers and the general public in many ways. For example, new stocks of hogs imported from the British Isles and Europe were crossbred to produce hogs that fattened faster on less grain. Soil was tested to determine the kind of fertilizers needed to increase grain production. Other types of experimentation produced dramatic results in hybrid seed, plant nutrition, treatment of plant and animal diseases, and pest control.

THE IMPACT OF AGRICULTURE OF INDUSTRY

The spread of agriculture during the 19th century played a part in the early industrialization of the United States. Although most early agricultural pursuits were related to subsistence farming, or perhaps the trading of commodities within a particular locality, what little industry did develop usually involved sales of agricultural products.

By the mid-19th century, as the Industrial Revolution began to take hold in America, the relationship between agriculture and industry had become more pronounced. The advance of industry, primarily in the field of transportation, had a profound effect on the ability of the farmer to move goods to market. Ironically, much of the labor-facilitating industrialization came from the rural areas themselves, in the form of displaced farmers who flocked to the cities to work in the factories and mills.

THE BEGINNING OF GOVERNMENT ASSISTANCE

The westward movement was characterized by periods of good prices for farm products followed by periods of low prices. The farmers who bought or homesteaded their land near the beginning of an upswing were likely to prosper. They could make money on the sale of their crops, and could often sell their land for relatively good prices. However, the farmers who began near the crest of a cycle were usually in trouble. They faced a succession of years of low prices for their products and often lost all of their farms except for the homesteads. Some of those who lost their farms became tenants, working for someone else -- a pattern especially prevalent in the South, where freed slaves often became tenant farmers, or "sharecroppers," on land owned by whites. Other farmers moved farther west to reestablish themselves on other farms as squatters or homesteaders. Most farmers of the era were basically optimists, believing in the American ideal that anyone could be successful through hard work and reasonably good fortune.

By the 1870s, farmers had become more astute vis-á-vis national politics. They recognized that federal government policies either helped or hindered their livelihoods, and began to call out for redress of certain grievances. In particular, farmers began to demand government help in stabilizing prices by slowing down the opening of new lands. In addition, they demanded reforms in the banking system that would benefit them when they needed credit, because lack of credit was a major problem for both the Western and Southern farmers. The farmers wanted a policy that would provide "cheap money," or low interest rates, on the money they had to borrow.

Other demands included an improved system of transportation, including regulation of the railroads, which exerted a stranglehold over the farmers' ability to get their products to distant markets. Railroad companies often charged unequal or unfair rates. The vital role of the railroads in transporting crops to American markets and to ports for shipment overseas is underscored by the fact that, prior to the 1870s, an estimated one-fifth of all farm products spoiled before reaching consumers. But during that decade, railroad cars were refrigerated and heated, helping preserve perishable goods.

Farmers also wanted a low tariff on imports, so that they could buy consumer goods more cheaply. Perhaps their most controversial demand was for an inflationary currency backed by both silver and gold, instead of by gold alone. The farmers hoped that expansion of the supply of money would lead to higher prices for farm goods.

The farmers' revolt reached its height in 1896, when one of their champions, William Jennings Bryan, received the Democratic Party's nomination for president. On the whole, city dwellers and Eastern business interests viewed the farmers' demands with distrust, causing Bryan's defeat at the hands of the Republican candidate, William McKinley. This marked the end of the more radical phase of the farmers' movement; however, a number of the reforms they had favored -- including regulation of transportation -- were eventually enacted at federal and state levels.

PROBLEMS AND CHALLENGES OF THE 20TH CENTURY

By World War I new lands for homesteading were practically unavailable. Overcultivation and a long period of soil erosion had reduced the fertility of much of the United States' farmland. Forests had been cut or burned to provide additional cropland. Vast regions of grasslands on the Great Plains were depleted by overgrazing. In the mid-1930s a series of dry years resulted in extreme crop losses in the Midwest. The winds of the Great Plains caused huge dust storms on overgrazed lands.

New land use and conservation policies began to develop to meet this challenge. The government decided farmers needed to be encouraged and educated on the values of better land-use practices. The independent-minded farmers sometimes found it hard to accept that they should think in terms of long-range self-interest rather than next year's crop. Government conservation agents were employed to demonstrate better techniques, and when farmers saw that their neighbors who used new methods were prospering, they began to adopt the new methods. Further, government incentives were offered in the form of free service or even cash payment to improve the land.

In the 1920s, demand for American farm products fell, as European countries began to recover from World War I and instituted austerity programs to reduce their imports. The result was a sharp drop in farm prices. This period was more disastrous for farmers than earlier times had been because farmers were no longer self-sufficient. They were paying for machinery, seed and fertilizer, and they were also buying consumer goods. The prices of the items farmers bought remained constant, while prices they received for their products fell. These developments were made worse by the Great Depression, which began in 1929 and extended through the 1930s.

In 1929, President Herbert Hoover organized the federal Farm Board. It established the principle of direct interference with supply and demand, and it represented the first national commitment to provide greater economic stability for farmers.

One of the first measures proposed by President Franklin D. Roosevelt when he took office in 1933 was the Agricultural Adjustment Act, which was subsequently enacted by Congress. This law gave the secretary of agriculture the power to reduce production through voluntary agreements with farmers who were paid to take their land out of use. The payments were funded by a use tax paid by food processors. The intent was to raise prices by limiting the supply of farm goods. This law was declared unconstitutional by the Supreme Court in 1936 on the grounds that taxes on food processors could not be used to enforce production control programs. However, new laws were passed immediately that achieved the same result of idling soil and providing flood-control measures, based on the principle of soil conservation. The Roosevelt administration believed that rebuilding the nation's soil was in the national interest and was not simply a plan to help farmers at the expense of other citizens. Later the government guaranteed loans to farmers so that they could buy farm machinery, hybrid seed and fertilizers.

Other measures were designed to help farm families in the United States. In 1935 Congress established the Rural Electrification Administration (REA), which extended electric power lines into the countryside. Local cooperatives were established and the federal government provided credit for them to build rural power lines. Farmers soon found that electricity enabled them to make great technological advances. By 1960, 97 percent of all farms had electricity. Other assistance to farmers included a network of "farm-to-market roads" that made towns and cities easily accessible to rural areas.

PRICE AND INCOME SUPPORTS

In 1938 farm legislation introduced the concept of a "parity" price for farmers, a price to provide farmers the same relative purchasing power that farm prices had in a favorable base period. If production is greater than that which can be sold at a specified percentage of the parity price, the government agrees to purchase the excess, generally through purchase agreements with farmers or nonrecourse loan programs. Under these loan programs, the government pays a set price to farmers as a loan for crops that are placed in storage. Farmers can pay off the loan in full by turning the crop over to the government.

For nearly half a century, debate raged over the wisdom of parity support. Many people have opposed such support because of the high cost. Another problem was that storage bins were bursting; abandoned ships from World War II were filled with grain by the 1950s, and other grain was piled on the ground where it quickly rotted.

The government's Payment-In-Kind (PIK) Program, introduced in the early 1980s, had a significant effect on crop production. This program aimed at reducing the available stocks of grains, rice and cotton, strengthening market prices, and lowering government storage costs. Under PIK, farmers were paid in government-owned farm commodities for reducing crop acreage. PIK succeeded in idling about 25 percent of American cropland.

In 1973 U.S. farmers began receiving income support in the form of "deficiency" payments. These are government payments designed to compensate farmers for the difference between the market price farmers receive for a crop and a set target price. To participate in this program, farmers must again take some of their land out of production.

Price supports and deficiency payments apply only to certain basic commodities such as grains, rice and cotton. Many other products are not federally subsidized. A few crops, such as lemons and oranges, are subject to overt marketing restrictions. Under so-called "marketing orders," the amount of a crop that a grower can market as fresh is limited week by week. By restricting sales, such orders are intended to increase the prices that farmers receive.

DISTRIBUTION OF SURPLUS AGRICULTURAL COMMODITIES

From the 1920s through the 1980s, America's agricultural problem was overabundance. Two types of programs evolved to help use surplus food products. In 1954, Congress passed Public Law 480, called the "Food for Peace" law. U.S. exports of food and fiber had helped promote the recovery of Europe and Japan, so policymakers reasoned that such shipments would be effective in promoting the economic growth of developing countries.

Farmers saw the Food For Peace program as a way to reduce the national surplus, which was depressing prices. Economy-minded city dwellers saw it as a way to cut the public cost of storing surplus grain. Finally, humanitarians saw it as a means of helping to feed the hungry of the world. Much of the food was used as an incentive payment in developing countries, where workers in local development projects were paid with American foodstuffs.

The success of the United States in food production is viewed by some as an integral part of the overall world effort to feed its population in the future. For many years American surplus grain has helped to constitute an important factor in the world food supply. Considering the increasing world population, it is reasonable to expect a continuing relationship between American agriculture and the rest of the world.

Surplus food has also been used to feed undernourished people in the United States. One program provides free and reduced-price school lunches to children of low-income families, using surplus dairy products and other commodities purchased by the government. In another, the government distributed surplus cheese, butter and nonfat dry milk to the poor during much of the 1980s. A third, the federal Food Stamp program, has grown rapidly since its introduction in the mid-1970's. Under this program, a person with low income is eligible to receive food coupons, which are accepted by grocery stores as payment for food.

DOMESTIC FARM POLICIES AND WORLD TRADE

Some form of price, income or other support for farmers is used in almost every agriculture-producing country. In the late 1970s and early 1980s, as world agricultural market conditions became increasingly variable, most agriculture-producing countries instituted programs to stabilize the domestic market. Countries strengthened existing programs or put new policies in place to shield their farmers from what was often regarded as a "foreign" disruption. In recent years these policies have contributed to shrinking foreign markets for agricultural commodities, failing international commodity prices and growing agricultural commodity surpluses in many exporting countries.

In the 1980s, American farmers entered a period of economic difficulty. Agricultural exports declined, partly due to the high value of the U.S. dollar relative to other currencies (which raised the cost of U.S. products to foreign buyers). Crop prices fell, interest rates rose and farmers found themselves hard pressed to keep up payments on loans taken on when incomes were higher. Several government and private programs were started to aid economic recovery.

In 1985, Congress enacted a new farm law designed to improve the international competitiveness of U.S. agricultural products. In simplest terms, the law called for price supports for basic farm commodities to change in response to shifts in average market prices. In addition, this legislation included a program to idle 16 to 18 million hectares of environmentally sensitive cropland for 10 to 15 years and reduced target prices by about 10 percent over a five-year period.

In July 1986, the United States announced a new proposal for the comprehensive reform of international agricultural trade as part of what was known as the Uruguay Round of multilateral trade negotiations. The United States asked the more than 90 countries that are members of the world's foremost international trade arrangement, the General Agreement on Tariffs and Trade (GATT), to negotiate as part of a larger package of trade reforms the gradual elimination of all farm subsidies and other policies that cause price, production, trade or other distortions of agricultural markets.

Following the submission of the U.S. proposal, several other proposals were introduced by other countries or by groups of countries. Although these proposals varied widely, initially the vast majority of participants seemed to agree on the idea of moving away from trade-distorting subsidies and toward freer markets. Specifically, the United States sought a commitment for eventual elimination of European farm subsidies and the end of bans by the Japanese and South Koreans on rice imports. However, the negotiations did not run smoothly; as had often been the case in previous attempts to get international agreements cutting farm subsidies, no agreement could be reached by the targeted deadline of December 31, 1990. The negotiations appeared stalled and possibly headed for failure, but in mid-1991 the heads of the major Western industrialized nations recommitted themselves to a successful completion of the Uruguay Round and negotiations continued through early 1992.

Meantime, with the federal budget deficits continuing to run at a high level, the U.S. government in 1990 undertook still more efforts to reduce the burden of farm supports on American consumers and taxpayers. Legislation passed by Congress that year provided the opportunity to plant alternative crops or crops other than that for which the farmer has traditionally received deficiency payments, while reducing the acreage qualifying for deficiency payments. It was hoped that this would result in savings of about $10 thousand-million over five years by spurring planting of crops that do not qualify for deficiency payments, and at the same time encouraging environmentally sound crop rotation practices. But high and rigid price supports were retained for certain commodities, and extensive government management of some farm commodity markets continues.

An Outline of the American Economy