Rapporteur: Paul Lasley, Ph.D., Iowa State University
Participants: Mike Duffy, Ph.D., Iowa State University
John Ikerd, Ph.D., University of Missouri
Jim Kliebenstein, Ph.D., Iowa State University
Dennis Keeney, Ph.D., Iowa State University
John Lawrence, Ph.D., Iowa State University
Economic issues reflect historical debates over the goals and vision of farming. What likely has changed is the widening gulf between advocates of competing farming systems. It appears that there is little middle ground between the two dominant views of farming that, for convenience, we refer to as industrial versus sustainable farming.
Several themes emerged in the panel's deliberations that provide context for the responses:
1. In part, the questions reflected a widening gulf (either real or perceived) between scientists and the public they are intended to serve.
2. The lack of good data and information on such fundamental concepts as long-term efficiency and sustainability, and the failure to have comparative longitudinal data on farms of differing sizes, makes impact statements highly subjective.
3. Given declining research and extension budgets reported from several states, it appears that more efforts should be made to involve producers in data collection and interpretation.
4. It became apparent that more interdisciplinary efforts are needed to adequately address the questions.
5. Many of the conclusions can be influenced by the unit of analysis selected.
6. There is a need to differentiate between economic growth and economic development. There seems to be considerable misunderstanding between these concepts. Economic growth tends to focus on short-run, verifiable impacts that can be quantified or measured. Often jobs, incomes, and prices are used as indicators of economic growth. However, economic development is a broader concept of economic activity and generally focuses on long-term outcomes and products.
7. Concern with broadening traditional measures of efficiency and cost/benefits ratios to consider dimensions that have often been ignored. Externalities such as social costs, quality of life, resource depletion, and other observable costs that are difficult to measure and quantify are often left out of cost-benefit analysis.
8. The panel was frustrated in trying to provide succinct, cogent responses to complex issues without appearing flippant or taking sides on a particular issue. There are numerous examples of misuse of data or using selected portions of data to substantiate existing positions.
1. Evidence of large-scale swine production as efficient forms of sustainable food production.
The typically quoted measure is a financial accounting approach that places a monetary value on resources used. Monetary returns to the owner are revenues minus accounting costs. While this measure of efficiency is important for the short-term viability of a firm, it does not account for resources external to the firm (externalities) that are used in production. To be sustainable over time, production systems must cover all costs: economic or accounting, as well as environmental and social. Available public and private accounting data and economic modeling indicate that approximately 40 percent of traditional Midwest producers are competitive with large-scale production units. One advantage often attributed to large units is reduced variability in product, productivity, and returns.
2. Data from the poultry industry to assess the efficacy of the swine industry.
Contract production in the pork industry has seen recent dramatic growth. The primary reason for growers entering contract production is risk reduction. Lack of capital followed as the second reason for entering into contract production. A key in contract development will be the balance of power between industry participants. In its development phase, the poultry industry had contracts which were quite favorable to the grower. However, after the industry reached maturity, the balance of power shifted and the number of favorable contracts declined leaving many producers in precarious positions. The pork industry needs to be cognizant of these shifts.
While the poultry industry can be used to gain insight into potential development patterns of the swine contract industry, there are differences. First, hogs and birds are different, e.g., live birth versus hatching; individual birds have relatively little value compared to pigs. Thus, greater emphasis is placed on the quality of the grower in the swine industry. Second, unlike the broiler industry, the pork industry had an extensive infrastructure in place before development of the mega-operations. This will allow for more varied forms of industry adjustment to enhance competitiveness. Third, the pork industry is unlikely to see the dramatic increase in U.S. per capita consumption which has been enjoyed by the poultry industry over the past 20 years. Finally, hog producers can learn from the poultry industry, leading to a shorter learning curve and avoiding some mistakes.
3. Evidence to assess the following consequences of large-scale swine operations:
A. Family-based hog producers and their markets;
B. Rural employment;
C. Tax bases;
D. Local businesses; and
E. Demand on local services.
There is a dearth of reliable and valid information on the impacts of large-scale swine operations. The most recent case study explored the impacts of Premium Standard Farms on the local economies of north Missouri. A review of this study by Ikerd, however, questions how many independent producers may have been displaced by the expansion of PSF. Within rural sociology there are a number of studies that have explored the consequences of replacement of independent producers with large-scale farms.
Referred to as the Goldschmidt hypothesis, there are a wealth of studies that have explored the social costs of industrial agriculture. The literature suggests that the movement towards larger scale operations poses a number of important considerations about rural quality of life and socioeconomic conditions. The most recent study in this tradition uses census data to test the relationship between large-scale hog facilities and rural socioeconomic conditions concluding that the number of swine producers in Iowa is more important than the number of hogs produced for rural economic health. Research confirms that larger scale units are more likely to travel further for inputs and bypass local community suppliers. To the extent that large firms bypass local suppliers, this may have a negative impact on the number of local businesses and the economic viability of main street.
4. Evidence of a difference in the extent of local purchases between various sizes and organizations of swine production.
A Minnesota study showed that on average about two-thirds of all farm expenses were made locally. In general, smaller farms purchased a higher percentage of goods locally than did larger farms. Local expenditures declined dramatically for livestock farms as compared to crop farms. Results from a recent Iowa hog operations study showed similar results. These studies raise concerns for rural communities. Larger livestock producers have a greater tendency to bypass local communities and travel longer distances to purchase inputs, and indeed, local suppliers may be bypassed. However, it may be that suppliers in the next community have benefited; not all bypassing goes directly to factories located in some distant city. As the hog industry moves to larger and fewer operations, these pressures on rural communities will continue to grow.
5. How do large-scale swine facilities influence the distribution of income locally, regionally, and within the swine sector?
We are unaware of any study that has systematically explored how changes in the swine industry influence the distribution of incomes.
6. The relationship between the local impact of large-scale swine facilities and the economic health of the industry regionally, nationally.
Initial economic impacts of the construction and operation of large-scale swine facilities on the local community, county, or multi-county area are likely to be positive. Impacts will be considerably greater during the construction phase than after the facilities are in operation. Increases in local employment opportunities may raise local wage rates and increase labor costs to other farm and non-farm employers. Increased demand for housing by people coming into the community to work for new hog operations may increase local real estate values and property taxes, even though values of land and houses surrounding hog farms may decline.
With respect to long-term impacts on the pork industry, the increased production brought about by large-scale production units will result in lower farm level prices and ultimately in lower prices to consumers. Current evidence indicates that increased numbers of large operations will reduce the average cost of producing live hogs by a small amount. With the projected increased supply of pork, it will be critical that new markets for pork be developed to avoid falling pork prices. Unless demand for pork increases, large production units concentrated in specific regions seem likely to displace a large number of independent hog producers elsewhere in the industry.
7. The adequacy of economic input-output models in analyzing costs and externalities associated with large-scale swine production facilities.
None of the more frequently used input-output models deal with external ecological or social costs or benefits of economic activities. Such models provide estimates of direct economic effects (first-round impacts of input purchases and commodity sales), indirect effects (impacts of direct purchases and sales on local manufacturing, wholesaling, and service activities), and induced effects (impacts of consumptive spending made possible by increased employment and incomes derived from estimates of direct and indirect effects). Estimated economic impacts are based on default data which reflect historical relationships between local economic activity, employment, incomes, and spending in various sectors of the local economy during a certain period. The underlying assumption is that impact relationships within and among various economic sectors in the future will be like those observed in the data base period. Such an assumption may not be valid for assessing situations where the basic structure of an industry is changed by the economic development activity, as in the case where a hog sector characterized by independent, family-sized hog farms is displaced or augmented by large-scale corporate or contract operations.
Economic input-output models can be useful tools for local and state economic development agencies, but their limitations in addressing the specific issue of large-scale hog production at the local level should be recognized and accounted for in the impact assessment process. The inherent inability of such models to address environmental, natural resource, and social resource impacts should be explicitly recognized.
8. Portion of the retail swine dollar farmers receive. Alternative farmer-owned and controlled swine production and processing organizations.
Real (adjusted for inflation) retail pork prices have declined since the mid-1970s and the farmer's share has also declined over the last 20 years. In 1994, farmers received about one-third of the retail pork price compared to more than 50 percent 20 years ago. The farm-to-wholesale margin has declined in real terms. Retail margins have grown faster than the rate of inflation. Nearly all of the value-added activity occurs beyond the farm gate.
Producers may integrate forward into retailing, but they will have to perform or pay for all of the marketing functions between the farm and consumer. If producers enter the processing and distribution sectors of the existing market chain, they must compete against specialized large-scale firms in these industries. While there are examples of alternative farm production and processing arrangements, little is known about their competitiveness. Private entrepreneurs have tried with varying degrees of success to establish niche markets to differentiate their product based on production methods. By its mass production nature, industrialized pork production systems are often at a disadvantage to smaller producers in serving niche markets.
9. Evidence to indicate policy factors, e.g., taxation, antitrust, create uneven economic conditions for various sizes and organization of swine production. Costs and benefits of various tax abatements and subsidies used attract large-scale confinement production facilities.
Most of the tax abatement and subsidies and other policies in place are for growth (job numbers), not development (job quality). The creation of jobs generates economic activity, but it is the quality of the jobs that determines whether development is desirable. The purpose of antitrust legislation is to prevent companies from acquiring undo economic or market power. The lack of enforcement of antitrust laws has led to increasing concentration and high concentration ratios in the food production and processing industries. This is particularly worrisome when one looks across the industry in a vertical fashion and across related industries.
Corporate policies, although available across a broad spectrum of farming operations, tend to favor larger operations. One of the primary reasons for this is access to information. Large operations can devote more resources to information gathering, e.g., consultants, on-farm research, and legal interpretations. The corporate structure also tends to favor larger operations through limiting personal liability. This is especially critical if actions cause major environmental catastrophes. An individual farmer, or even a Subchapter S family farm corporation, does not enjoy the same degree of protection.
Large companies appear to get preferential treatment in direct proportion to their economic power or potential for job creation. This is particularly true when one examines the concessions given to attract new companies to a community.
Three major problems need to be addressed in conjunction with this policy discussion. First, the issue of growth versus development and who really will benefit needs to be considered. Some policy options put forth in the interest of the community at large seem to benefit a narrow range of people at the expense of many. Second, there are size related issues that need to be considered. Many of the policies have unintended consequences that favor larger farms or operations at the expense of the smaller units. A final problem is the lack of data and solid evidence and studies.
10. Inequitable access to markets, credit, and research for various sizes and organizations of swine production.
Some evidence suggests that differences exist between size of operation and input purchase cost. An Illinois study showed quantity discounts for volume purchases and premiums paid for volume sales. However, the bigger question is whether these discounts and premiums are inequitable. In the case of market access, inequitable treatment or discrimination not based upon quality is a growing concern. Some packers have set acceptable minimum standards for leanness that some producers fail to meet. This is not a size criteria. We are not aware of Midwestern producers being denied access to markets because of the numbers of hogs delivered. The second question regarding market access is the availability of long-term, price-risk share agreements for all producers. Some packers have indicated that the cost to establish and monitor these agreements on a small number of hogs is prohibitive. This would indicate that size has an impact on price received and ability to transfer risk.
Credit availability relates to the ability of the borrower to repay debt. Evidence suggest that large-scale operations have a greater list of alternative credit sources. Some lenders favor contract production over independent production because the contractor (large-scale producer) has a proven track record and the lender perceives better odds of having the loan repaid – his first objective. Some lenders are also concerned about the future of independent producers in this dynamic industry, and thus contribute to a self-fulfilling prophecy: "Small producers can’t compete, so I won’t loan them the funds to acquire the technology they need to compete." Finally, just as the quality of hogs differs, the quality of producers differs as well.
Partly due to budget cuts and shifting priorities, the creation and dissemination of publicly available information regarding modern pork production has fallen behind that of the private sector. Private sector firms are generating their own research and almost instantaneously adopt research throughout the operation. Many allied industries (feed, genetics, facilities, health) are directing research to their most important customers which, increasingly, are large-scale firms. In some cases, research at public institutions is funded by private sector firms that are given early and, under some agreements, exclusive access to these new technologies.
11. The economic impact of the loss of market share of swine production in traditional family farming states such as Iowa to an emerging large-scale production state such as North Carolina. The economy of a highly concentrated hog production region compared with that of a region producing a comparable number of hogs in less concentrated facilities.
Although North Carolina has increased its market share since 1989, Iowa's share of the breeding herd first showed a sharp decline in December 1994. Iowa will likely lose market share to other states. Facilities built outside traditionally family-farm states will stay in production until the assets are sufficiently depreciated. Even if Iowa does not lose market share, hogs will be less profitable than they have been due to larger pork supplies from outside of Iowa, and there will be fewer dollars of disposable income and less economic activity. If profit margins are tight due to large hog supplies, economic activity may still rise because the amount of inputs needed increases as hog production increases. However, if the growth in supplies comes from other states and Iowa has the same or fewer hogs and less profit, there will be less economic activity in the state from the pork industry.
The economic impact in the local community from diversified family farms is greater per hog produced than it is in large-scale units because they add greater value to the inputs they purchase. They also tend to spend more of the return locally from resources they provide. Iowa's hog industry generates more economic activity, jobs, and personal income per head than does North Carolina. The difference comes primarily from beyond the farm gate. Iowa's extensive infrastructure supports local communities by creating jobs in the wholesale, retail, and service sectors that producers in North Carolina have internalized.
12. The impact of large-scale swine facilities on neighboring property values.
Large-scale swine facilities can affect neighboring property values in several ways. The negative externalities commonly associated with such facilities would tend to decrease values. Conversely, some positive impacts may be associated with neighboring land values. It appears new facilities have a negative impact on rural residences. The impacts on farmland values appear to be positive, but this would be a one-time change associated with the increased demand for construction and disposal sites.
13. The probability packing plants will leave states with anti-corporate farming laws, environmental restrictions, and the absence of large-scale swine production facilities.
Iowa's fed cattle industry may provide a model. From 1968-1971, Iowa was the leading cattle feeding state. Iowa processing plants were approximately in balance with production. By 1994, Iowa fed cattle marketings had declined and the state's processing and production sectors were approximately in balance. New processing facilities were built near the supply of fed cattle in the High Plains region. Packers will locate where it is most profitable to operate. The largest single cost item for a packer is the cost of hogs, and they will want to be near a competitively priced supply of hogs.
It is insufficient to only criticize what is happening; we should be proactive in offering alternatives to the industrial model that has dominated agricultural development over the past 50 years. Sustainable agriculture, or what some prefer to call "post-industrial agriculture," views farming as part of an integrated food and fiber system. A sustainable agriculture would likely have the following features: a diversity of livestock and cropping systems that builds the natural resource base of the soil, water, and biological systems while providing a stable economic base for the local, state, and national economies. To achieve this vision, agriculture will have to produce a variety of value-added products in harmony with the best use of the land and natural resources, while providing a diversity of income sources, and which sustain a strong rural economy and the family farm structure of agriculture. Essentially this means continued emphasis upon human capital development as opposed to the industrial model of placing emphasis exclusively upon productivity and narrowly defined efficiency.