From Chapter Three, The ECONOMIC CRISIS: Finances on the Farm of "World Crisis in Agriculture" booklet by the Ambassador Agricultural Research Dept. 1974
What does economics and finance have to do with the quantity and quality of food production and your health and well being?
The American farmer has essentially suffered 40 years of economic depression, in two stages -- from 1920 to 1940, and from 1952 to 1972 and this has continued to the present. This has commonly been referred to, by economists and politicians alike, as the farm problem. Economic fluctuations since 1972 brought new hopes to some, but disaster to others. The Golden Age of Agriculture, which many farmers are trying to recapture, was from 1900 to 1920 and to a lesser extent the 1940s.
Inflation hurts every American, but the farmer has been hurt most. Between 1940 and 1972, inflation quadrupled (increased 400%) average prices in America, but prices for foodstuffs did not even double. And even of that increase in food prices, the farmer did not receive his share of that increase. While the price of a loaf of bread doubled (between 1940 and 1972) from 13 cents to 25 cents, the retailers earned 120% more, the baker and wholesaler got 94% more, and the farmer who raised the grain got no more. He continued to earn his 3 1/2 cents per loaf!
In other words, the American farm has been subsidizing the high American standard of living. Americans spend the lowest share (16%) of their national income on food -- while Englishmen spend 29% of their income on food, Italians 45%, and Indians 80%.
(Photo caption) Millions of potatoes were wastefully destroyed in Idaho in 1970, when the market price was too low to defray the farmer's harvesting and transportation costs.
The food boycotts of 1973 apparently demonstrated that the American consumer decided he should be supplied with low-cost food, regardless of what it costs the producer. If consumers were educated to the problem, however, they would not boycott food, the end product of a complex chain, but rather "boycott" bad weather conditions, export demands, unpredictable crop diseases, higher production and processing costs and government subsidies for not planting crops. These, not the farmer, have raised prices.
Agriculture's Role in the Economy
Agriculture is the world's largest and most basic industry. Even in an industrial society like the United States, it employs more people than steel, autos, utilities, and transportation industries combined. Three out of ten workers are employed in some job related to agriculture. Five million farmers are aided by six million workers providing the supplies farmers use, and eight million workers in the storing, processing and marketing of agriculture's products -- food and fiber.
Agriculture supplies about 60% of all raw materials entering the economy. All of the coal, oil, chemicals and minerals comprise only about 35%, and forestry products about 5%. As the major supplier of raw materials for America's economy, agriculture has been the traditional bastion of free enterprise within an otherwise highly managed industrial economy. Economists consider agriculture a "pure" competitive industry, as opposed to monopolies, because of the very large number of competitive units (farms).
It is the high productivity, efficiency and competitiveness of the American family farms that has been the major hedge against inflation.
Supply and demand (see any economics textbook for a full explanation of this concept) is the cornerstone of free enterprise, yet much of "the farm problem" results from manipulated imbalances between the vagaries of "supply" and the imminence of "demand." Because of this the farmer has no way of receiving a stable monetary return on his essentially risky investment.
As two former Secretaries of Agriculture explained this point:
"People have talked about the farm problem in this country for at least 40 years," stated Clifford Hardin in 1969. "The basic difficulty stems from our ability to produce more than we can sell domestically and abroad." Orville Freeman added, "We have always had a farm problem of sorts. Initially, it was a problem of producing enough; now it's a problem of producing too much." Today, the trend may be reverting back to scarcity again.
History of the Farm Problem
Before 1900, agriculture the world over had a problem of producing enough food to get by. After 1920, however, because of mechanization, American agriculture was capable of producing too much. As Orville Freeman said, each extreme of food production reflected "the farm problem" of its day, but that golden transition period, 1900 to 1920, was a time in which the right number of farmers produced the right amount of food at the right price. It was the "Golden Age of Agriculture."
The "Golden Age" peaked in World War I with war demands putting an artificial inflation on food supplies and prices. In 1920, a flash depression struck America's business, as often happens soon after a war. Business overcame it within a year, but agriculture did not. Farmers lost their war subsidies and European food market, produced "too much," and prices plummeted downward more than 50 percent. Farmers feverishly produced more so they could earn more to pay off debts borrowed to mechanize and expand during the war, but that only drove prices lower.
Since America was still heavily rural, the agricultural depression slowly migrated from poor farmers to richer factory workers. As one plow company executive said at the time: "You can't sell a plow to a busted customer." According to many scholars, the seeds of the 1929 stock market crash were found in this "farm problem."
By 1930, the sickness in agriculture had spread to the rest of the economy. In 1932, cotton sold for 6 cents a pound, pork for 4 cents a pound, wheat at 38 cents a bushel, and corn for 32 cents. Nearly 15,000 banks closed their doors, but for every bank that went broke, more than 100 farms went bankrupt first. Foreclosures on farms increased from 20,000 in 1919 to more than 250,000 per year in 1933.
Government Farm Programs
In 1933, President Franklin D. Roosevelt and the U.S. congress saw "the farm problem" as being over-abundant crops at low prices, and they launched the U.S. Government on a program of crop subsidies and controls to regulate plantings. Over 40 years later, this subsidy program continued to lavish large funds to large farm operators, while forcing smaller family farms off the map. This was hardly the "solution" needed.
Senator Abraham Ribicoff expressed majority sentiments recently when he said: "For three decades, under Republican and Democratic administrations alike, we've allowed this subsidy-and-control program to become a self-perpetuating empire, almost with a mind and ambition of its own. Farmers don't like it. Tax payers and consumers stagger under its weight. It doles out billions to people who don't need help, and dribbles pittances to people who do." Thankfully, many of these programs are being phased out.
A more academic analysis was given in Economics, by McConnell. "...The farm program has failed to get at the cause of the farm problem. Public policy toward agriculture is designed to treat symptoms and not causes.... It is to be emphasized that production restriction programs are in substance a government-sponsored attempt to give some measure of monopoly power to the last major industry in American capitalism which approximates pure competition. Restricting supply in relation to demand in order to increase receipts is the stock-in-trade of the monopolist. And this is precisely what the farm program has attempted to do in seeking to solve the surplus problem" (p. 623). A shocking truth ignored by many is that some of our farm surpluses have been imported. But more on this later.
Farm income in 1973 set an all-time record, yet total farm income statistics of a country as large and varied as the U.S. hides most of the income instability of regions and individual farms. The floods over the Plains and the blizzards in the Rockies contributed to the death of over 250,000 head of beef cattle in 1973, worth close to half a billion dollars.
The Price of a Steak
The sudden rise in beef prices in 1973 triggered a housewives' boycott of beef. Some few took the time to study the situation to find out why beef was scarce, but most beef eaters assumed that scalpers all along the way were profiting at the consumer's expense. A look at the many steps necessary in the evolution of a steak, however, puts these "young wives' tales" to rest.
A cow produces only one calf each year (at best). In 1970, 37 million beef cows dropped 29 million calves, of which 7 million were kept by ranchers for herd replacements, 2.7 million calves died in infancy, and 300,000 died during their first year. This left only 19 million new beef cattle for the market. The calf nurses for six months, is weaned and pastured for another four to six months, is moved to a feedlot for six months, then sold to a packer for processing.
One calf to market requires 2,500 lbs. of grain, 450 pounds of protein supplement, and 12,300 lbs. of hay, silage, and pasture (plus investments of labor and capital) before it reaches a marketable weight of 1,000 lbs. From that half-ton animal, the packer can sell only 615 lbs. of dressed carcass to the retailer, who in turn trims off 183 pounds of fat and bone, leaving only 432 lbs. of steaks, roasts and hamburger.
In 1972 and 1973, due to weather and the USDA promoted Russian wheat deal, feed grain prices jumped 82% in one year, and other feedstuffs jumped 230% in the same year. Feed costs account for almost 80% of the total cost of fattening beef. The second largest expense is interest rates, which shot up to 10% in 1973. With these increased costs and the higher death losses due to a severe winter it's no wonder then that meat, milk and eggs temporarily shot upward in price in 1973.
The Banker as Investment Speculator
Bankers may have no desire to become farmers, and vice versa, but the financial operation of capital expenses and interest rates is as closely connected to farming as to any other self-employed profession. The Nebraska Agricultural Experiment Station recently published the results of an eye-opening economic study showing just how much capital a young man needs in order to realize a modest $15,000 per year income profit.
The study showed that the capital needs would range from $250,000 for an "average" 480-acre corn-swine farm in eastern Nebraska, to $1,765,000 for a 22,000 acre cow-calf ranch in northern Nebraska -- just to earn $15,000 a year.
Since most young farmers don't possess such a windfall, a large part of a farmer's costs of production are fixed debts, such as interest and mortgage debt, property taxes and equipment contracts. Farmers are therefore very vulnerable to any weather upset or general fall in price level, because they are heavy debtors, short of capital and unable for the most part to hedge their investments against any contingency.
To compound their "capital problem," most farmers must wait years for their investments to begin to pay. Most crops require a year to plant and harvest, livestock require from one to three years, fruit-bearing trees may take a decade or longer, and farm woodlots and forestry undertakings take even longer.
Death and Taxes
As the saying goes, "There's nothing as sure as death and taxes." In the case of the farmer, the two are intertwined -- taxes are killing him! The graduated income tax particularly penalizes the farmer, whose income is widely variable from year to year. Farmers in some areas may have only one good crop out of three years, so the graduated taxes during his one good year wipe out the cash buffer he needs for the two lean years.
The capital gains tax is another problem. This adds to the speculator's incentive to buy farmland as an investment (for a tax write-off) rather than for growing food. This accentuates the rise in land values and tends to remove land from the hands of owner-operators (farmers) and into the hands of absentee landowners (speculators) whose sole aim is to cut their taxes and profit from buying, holding, and selling nonproductive acres.
The inheritance tax is a double-death blow to many farm families. The tax on an inheritance can be up to 77% of the worth of the inheritance. Since the "estate" is usually composed of relatively fixed assets (land, machinery, buildings and stores), potential inheritors face the backbreaking problem of assembling enough cash to pay the tax on what would rightfully be theirs by the biblical law of land inheritance. It's no wonder the majority of farm children leave the farm for the city, thus losing $100 billion in farm assets each generation in favor of tax collectors, bankers, and speculators.
Property tax is yet another burden putting a special squeeze on the farmer. Property taxes have shot up from $450 million to $3,000 million between 1940 and 1971, taking an increased cut of the farmer's net income -- from 10% in 1940 to 17% in 1971. Even if land is idle, property taxes drain the land of its potential cash resources. Since all land "improvements" increase taxes, this is a further incentive to let land deteriorate.
In the Lake States, for instance, timber land that was taxed according to the market value of the standing timber was taxed so high that the owners had to cut the timber to pay the taxes, and divert the land into farming. But the land was marginal for farming, so the owners went bankrupt. And without the timber cover, the land eroded losing even further value. The land then reverted into the hands of state and local government, due to foreclosures for delinquent taxes.
This and other instances of the over-rapid development of land and the over-taxation of marginal farmland result from the fact that property tax as used in the U.S. is often based on capital values rather than on current income from the land, which is the basis of the biblical tithing system.
Does the answer to "the farm problem" lie in the collectivization of agriculture? There are many world examples that show it doesn't! Marxist governments have assumed that agriculture, like any other industry, could be readily organized on a large scale under state control. The Communists, so far, have paid dearly for this misunderstanding. Lack of incentive caused food shortages which have become a drain on their economies and overall wealth. The decision to organize agriculture on a large-scale authoritarian collective-farming system has cost the Communist countries literally billions of dollars in lost income.
Perhaps this should be a warning to the United States and other essentially free economies against the perils of monopolistic control, but Western Europe's "free" economy is rapidly going the way of socialized agriculture, much to its harm. The Common Agricultural Policy (C.A.P.) of the European Economic Community (E.E.C.) set minimum price levels for many key farm commodities. This encouraged over-production of some farm products (such as butter) at high prices, which in turn forced European governments to spend up to two-thirds of their national budgets on farm subsidies and resulted in hard-to-dispose-of surpluses. Free world trade without a world parity system does not solve the problem either. The "Russian grain deal" in 1973 triggered a gigantic wave of speculator activity and large-scale panic buying, which in turn caused wild market fluctuations. some made huge profits but many lost, including the American farmer and consumer. Some of the American wheat sold to Russia at about $1.60 per bushel was resold by them to other governments at $4.65 per bushel, a big loss to the American farmer and consumer.
Solutions to "the Farm Problem"
So far, this booklet has stressed a descriptive analysis of the three major problems in American agriculture: quantity, quality and economics. To most farmers, the "economic crisis" described in this chapter is the heart of "the farm problem," while the "quantity problem" and "quality problem" are the consumers and outside world's problems. However, the "quality problem," represented by the quality of our national health is also a problem affecting production resources and increasing production costs.
There are some piecemeal solutions available to mankind for the amelioration of these grave problems. But these problems cannot be solved simply by man's knowledge and technology. They are more deeply rooted in man's selfish nature and inability to overcome the vanity, greed and politics that prevents the right use of knowledge and technology for the long term benefit of all.
The following chapter describes the ultimate solutions provided by the Creator of the earth in His "Handbook for Planet Earth," the Holy Bible. When these guidelines are fully instituted in this world they will provide for the ultimate solutions to mankind's agricultural, health and economic ills and provide an abundance of quality foods for the benefit of all mankind. Despite today's problems and the shortcomings of the current world agriculture systems and governments, biblical laws and prophecies reveal there is fantastic HOPE for the future!
Last Update: 10/18/01