we develop computer simulation models to investigate such issues. Over the past couple of years we’ve worked with economists and farm leaders to model the corn economy. The insights are sobering. For the past several decades, despite changes in Congress, different presidents, and new farm bills, net income from farm sales of corn has hovered near zero. Some years are better, of course, but these tend to be the exception, caused by draughts or events like the Soviet grain deal of the 1970s.
Farm income is like the water flowing through a faucet into a bathtub. Some of the flow of income is from selling crops and livestock, and some comes from government support. The problem for farmers is that this bathtub has a big drain, and farm families only get to live on what stays in the tub. If money flows in really fast, as in an unusual year, the water stays high for a while, but it always drops down to the level of the drain.
The flow through the drain is determined primarily by the costs of land and technology required for farmers to stay competitive (as long as they’re on the commodity treadmill). Of all farm production expenses in 2000, 43% went to externally purchased crop inputs, 23% to livestock and feed expenses, and 23% to land related expenses and interest. Farmers have little choice but to pay these costs because of their weak bargaining position with landlords and large companies.
Since the inception of Freedom to Farm in 1996, $62 billion of its direct government payments have been used by farmers to pay higher land prices. Land values account for one-quarter to one-fifth of net cash farm income. Furthermore, $38 billion of the $62 billion increase in land values accrued to the balance sheets of non-farmer landlords.
Farm income doesn’t have to flow down the drain, pulling rural communities along with it. Instead of following the examples of the biggest farms with the most specialized production, we might want to learn from farms with rotations that reduce inputs, and we might look for markets that gain a higher proportion of consumer dollars. Instead of continually turning up the faucet, we might instead try to reduce the drain.
While larger farms comprise a relatively small proportion of farm households, they account for a large proportion of agricultural production (the 18 percent of farms with sales of $100,000 or more produce about 88 percent of total farm sales) and rely on farm profits for a higher percentage of household income than smaller farms. Over 80 percent of farm commodity program payments go to farming operations with sales of $100,000 or more. Government payments accounted for 5 to 8 percent of total gross cash farm income over the last several years. For larger farming operations that received Government payments in 2004, these payments dropped from roughly 10 percent of gross cash farm income for farming operations with $100,000 to $250,000 in sales to 5 percent of gross cash farm income for farming operations with over $500,000 in sales.
The well-being of farm households is not determined solely by the annual income of their members. Household wealth can play an important role in alleviating the impact of sudden changes in income, and most of the wealth of farm households is in the form of farm business assets, particularly farmland.