ECONOMIC ISSUES IN AGRICULTURE

Agricultural & Applied Economics
The University of Georgia
April, 1998

    Reducing costs and expanding production generally means more profit for farmers. This concept (industrialization of agriculture) has resulted in increased production -- but often lower prices unless there is higher demand outside the U.S.

    Producers who first adopt new technology benefit financially. But the final beneficiaries are consumers.

    It comes as no surprise, then, that we are often asked the question "Would I be better off if I sold my farm and got another job?'

    Doane's analysis of 20-years of simulated income with different alternatives on a 320 acre Midwest farm (corn and soybeans) may help in making the decision. The farm studied had no beginning debt. Local yields, commodity prices, costs and land prices were used. The results are shown below.

    Buying land was the best alternative if we began in 1975. This well timed purchase would have boosted net worth to more than $1.9 million in 1998. And share renting was better than putting money in the bank.
 

    The results changed dramatically when 1980 was used as the starting point.

    In this instance, buying high priced land in 1980 added little during the next few years to the net worth. This is in contrast to buying land in 1975 when land values were relatively low, and future land appreciation contributed significantly to net worth.

    Expansion clearly increases risk. Adding more land will likely result in several years of negative cash flow given fluctuations in yield and price.

    Southern farmers get most of their income from crops other than corn and soybeans. But as we move away from government support farm programs (and peanuts and tobacco), fluctuations in commodity prices will likely be higher in future years. More risk will be common.

    Those considering retirement must weigh the options of risking their farm assets against selling out. How much net worth do they have -- and how much can they risk?

    Is land ownership the best economic strategy? There is an axiom, "Farmers live poor and die rich". Studies have shown that if cash flow is the limiting factor, then don't buy land. But, if wealth accumulation is most important -- and if you can handle the cash flow -- then land may be for you.

    Land is compared to a forced savings account -- a good wealth accumulator, but in the meantime makes life difficult with it's cash flow. Much of the cash flow discouragement in farming cannot be blamed on "farming" -- or low prices -- or government policy. Nor can much of the wealth accumulated by farmers at death be credit to good farming; rather to land ownership. A successful farmer is one part farmer and one part land speculator.

    So the continuation of farming question depends of one's current net worth and how much they are willing to risk in the future.
 

William Givan, Editor
Extension Economist

Back to Economic Issues