Edna: you ask good questions and ones that need a thoughtful answer. I'm not
an ag economist, but will add my 2 cents and encourage others more
knowledgeable to pitch in.
> 1. What did I miss here? If small farms are more efficient, then why does
> a drop in prices cause the small ones to go bankrupt while the largest
> survive?
The answer is "margin". As the margin drops (e.g. the difference between what
it costs to produce a unit of grain, milk, or meat and the value it fetches
when sold), you need to sell more bu or liters or calves to stay even. More
than anything else, the declining margin has been the cause of farm expansion
(where one neighbor buys out another) and declinng farm population. A "large"
family farm netting $100,000 can absorb a price downturn better than one
netting $20,000 because it has more depth, more slack or flex. A large family
farm may also choose to get larger still, to grow more bushels or milk,
compensate for a price decline per unit bu or milk (and to make use of that
extra machinery it bought that is still underutilized!). A small farm, and
most especially one that is at the upper limit of its physical, labor, and
mechanical resources (and doesn't want to step up to more indebtedness) may
choose not to buy more land, cows, or machinery - so to stay "even", they have
to be more efficient to stabilize or increase their margin. But there is a
limit to how efficient one can get, at least within the prevailing paradigm
(e.g. without switching from confinement to grass, for example). This is one
reason why small farmers, in addition to enhancing efficiency, often adopt
fundamentally different approaches to both production and marketing, to lower
costs, increase price, and widen the margin, leaving them more income without
the need to produce more units, per se.
> This reminds me of the paradox that "organic" food supposedly costs less to
> produce yet costs more in the store. The only plausible explanation I've
> heard is the cost of certification, but this won't apply
> to the above discussion about small farms being more efficient but going
> bankrupt before the largest ones when prices drop.
Organic food costs more to the consumer largely because of price hikes at the
retail end. Organic is still a small player, unable to consistently occupy
shelf space year-around, look "just-picked" 7 days a week, and various other
scale concerns that occupy the minds of retailers. So, they raise the price
quite substantially to cover their own insecurity with food quality and
availability. As the volume of organic produce grows, and as retailers cope
with the notion that year-around strawberries are not essential, this will be
less of an issue. The amount actually paid to the farmer may not change much,
but the price paid by the consumer will.
It should also be said that organic will cost a lot less to produce than other
foods if and when society actually starts holding accountable those farmers
whose operations involve a lot of (unaccounted for) externalities, obliging
society to pick up the tab. Who is going to pay for all that hog manure
contamination in North Carolina? The hog farmers? Tyson? Right. Who is
paying for cleaning up the nitrate-contaminated groundwater in Des Moines?
The corn producers? The feedlot owners?
Conversely, organic farming is based on the notion of internalizing costs of
production, to effectively avoid groundwater contamination and other
externalized costs of production. In sum, the value of organic food currently
reflects 100% of its true cost of production, while the value of food that is
produced with unaccounted for externalities reflects say 70% of its true cost
of production (just a guess). When it reflects 100%, the picture - and this
discussion - will change. Ann
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