Economics of Agriculture 

     I have learned through the last quarter century that many people do not care about preserving an individual farmer's occupation.  I also discovered that they believe agriculture should not be subsidized.  They believe that farmers should produce the commodity and get paid market value just like any other industry.  It would be fortunate if that method worked, but it never has worked and it never will work.  Economics and capitalism won’t let it work.  It does sadden me that most farmers in the current state of agriculture rely on the subsidy check to keep their operations alive though.  Farmers don’t want to be forced to rely on that payment any more than the public wants the farmers to receive money from the public’s hard-earned tax dollars.  However, to ensure farmers’ jobs and to keep food prices low, subsidies are a staple in agriculture.  Unfortunately, subsidies are not the only solution in today’s economy.  Another form of government intervention in agriculture is needed also to preserve the occupation of the farmer.

     Agriculture’s infrastructure is designed in a way that the farmer gets squeezed out of his profits.  The companies that produce the inputs for the farmer, and the companies that use the outputs from the farmer, both make profits.  Unfortunately, the farmer is left with virtually no profits in the end.  In fact, economists claim that since farming is purely competitive, the farmer will break even in the long run, producing no profits. 

     Most of the focuses in the last five years have been on the output sector of agriculture.  Farmers are told that in order to make money, they need to market their commodity better.  Some think that farmers should learn to better read the highs and the lows on the Chicago Board of Trade.  Others suggest a vertically integrated operation will produce more profits.  Yet others think that value-added products, such as ethanol, will produce greater profits for the farmers.  These ideas may create profits for farmers in the short term.  However, these ideas may not help the farmer in the long run.  If farmers, or anyone for that matter, can read the highs and lows on the CBOT, he/she would not be working unless by choice.  Vertical integration usually costs too much money for an individual, or even a group of farmers, to incorporate into the operation.  Vertical integration is a double-edged sword right now: Farmers can’t afford to vertically integrate; yet they can’t afford not to vertically integrate.  Value-added products temporarily work for the farmers that utilize the opportunity.  These value-added products will raise the price of the commodity in the first few years and increase profits for farmers.  However, the nature of the purely competitive market will ensure the imitation of the neighboring farmer that is making a higher profit for his commodity.  Thus, supply for the inputs to this value-added product will increase and, in turn, the price for the input commodity will drop.  To illustrate my point, white corn is considered a value-added product.  At one time, white corn had a premium of about 50 cents per bushel in South Central Nebraska.  Since farming is purely competitive, more farmers grew white corn, which increased supply.  Just recently, white corn was only about 10 cents more per bushel than yellow corn, which is hardly worth the hassle to the farmer to keep the two corns separate and to ship the white corn farther to be sold.  Though these value-added ideas will help and are necessary in the short run, it is unlikely that farmers will continue to make profits in the long run since farming is purely competitive.

     President Clinton recently visited Nebraska and spoke at the University of Nebraska at Kearney.  In his speech, he mentioned that scientists are extremely close to producing an energy mixture using ethanol and gasoline with a ratio of 8:1 respectively.  Currently, the ratio is about 1:7.  President Clinton claims that this will unarguably transform America and the world since we are so dependent on transportation.  I agree with this statement somewhat.  The usage of corn will dramatically increase if this breakthrough occurs, which, in turn, will slightly increase the price of corn temporarily.  Again, since farming is purely competitive, farmers both in America and overseas will increase their production of corn and the overproduction of corn will cause the price to fall once again in a free market. 

     Pure competition occurs in farming because farmers produce identical products.  Thus, farmers cannot determine the price that they sell their commodity.  Prior to the 1996 Farm Bill, farmers had set-aside acres, which increased prices a little.  Although limiting production will increase the prices of the commodities, today that plan alone will not solve the problem of the American farmer.  Times have changed, and the industry has changed.  In a sense, this transition in the last five years has been a healthy one for agriculture.  The financial tensions have forced business owners to become better managers.  However, some of even the best and most efficient managers are quitting business because the agricultural economy is poor.  In the next ten years, I expect a much greater transition because the average farmer’s age in Nebraska is 58 years old, and I know of only a few people that are farming under the age of thirty.  This fact may have a tremendous effect on the production of the nation’s food.  In order for young people to want to farm, they need to see profits today.  One way to make profits has remained: the way to make money, in any business, is to cut costs.  Costs are incurred in the input sector in farming.

     Although the promotion of ethanol and other value added products has a very worthy cause and will help the farmer now, I believe some of the focus needs to be turned to the input sector of agriculture in order to secure farmers’ operations.  I feel that this sector has been virtually ignored in the past.  If this sector continues to be ignored, one or two corporations can potentially have control of agriculture and our food supply.  I have performed some research on some corporations, and I have found that four main corporations currently own the input sector for grains.  I am not familiar with livestock or produce farms, so I feel others are more qualified to research those industries.  These four corporations are Monsanto, parent company Pharmacia; Novartis, parent company Syngenta headquartered in Switzerland; John Deere; and Fiat also headquartered in Europe.  For an incomplete list of products by these corporations, click here.  Although I was unable to find the statistics for these corporations to determine the percentage ownership of the input sector for grains, I think I would be safe to say that these four corporations have a very large majority of the industry.  Monsanto and Novartis own most of the chemicals and seed.  Pharmaceutical corporations own both Monsanto and Novartis.  John Deere and Fiat are the two main stable companies for machinery and equipment.  It may be possible that these companies own part of their competitors' stock also.

     I am not definite whether these corporations are considered monopolies or oligopolies.  I cannot determine that without knowing the percentage of ownership in the industry.  A monopoly, by definition, is the exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition.  An oligopoly occurs when the four largest firms own at least 50 percent of the industry.  Regardless, these corporations are huge and are being ignored in my view. 

     I have heard by more than one source that these four companies among others donate money to Universities to do research for the companies, but the Universities are not allowed to publish their results.  If the Universities can’t publish their own results of their studies, how can anyone compete with these corporations?  This seems unethical to me.

     Who is to stop these corporations from raising their prices to the point where the farmer gets no profit, or even loses money?  If the farmer receives a subsidy one year to help him out, who will stop the corporations from raising their price the following year so that the farmer gets none of the subsidy intended for him?  Who will stop the corporations from raising their prices to the point that farmers go out of business?  Then potentially, these corporations will hire their own farmers to till the ground.  In time, these corporations will own the entire agricultural industry from inputs to whatever level of vertical integration they choose.  Food prices will no longer be inexpensive since monopolies lead to inefficiency and monopolistic firms can set their own price.

     Last November, San Diego has had problems with the cost of their utilities.  Why?  Utility companies have monopolies in certain areas.  Therefore, in a truly free market, they can set their own price for their product.  However, the government sets regulations on utilities companies because the general public relies on such utilities to live.  The people have no other choice but to use those utilities.  In San Diego, the utility company didn’t have government regulations setting a maximum price they could charge, and the people became outraged at the exorbitant prices on their utilities bills.  I realize utility pricing is more complicated than this example, but it proves my point.

     Similar to a utility company that has little or no regulations, these corporations with agricultural inputs can set whatever price they choose because the farmer must have these inputs to raise a crop.  The farmer has no other choice.

     In a free market, it is only a matter of time before these four corporations merge into two or one corporation.  They can have complete ownership of the agricultural inputs, and thus, have control of agriculture worldwide unless our Government stops them.  Regrettably, the 2002 Farm Bill and the promotion of ethanol will not make one iota of difference in agriculture when viewed macro-economically unless this monopoly problem is solved.  Perhaps if our Government hears a large number of concerned voices from the people, they will act on this problem.  Remind our elected politicians that Section II of the Sherman Anti-Trust Act and Section VII of the Clayton Act were created to prevent this type of situation.

Originally this text was written in January 2001 as a letter to Representative Tom Osborne.  After modifying it a bit, I posted it in the Minden Courier in April 2001 as a Letter to the Editor.  Copyright 2001... so don't even think about using this paper in school.