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Future of the Family Farm

December 9th, 2006

My piece in Thursday’s Fin was about claims that the family farm is doomed. This is one of these notions that seems impossible to kill, having been around for decades, it looks as if it will outlast me. It seems to appeal to just about everybody. Sometimes its pushed by farmers who want more government aid. At the moment though, it’s mainly being run by economic rationalists who want to sweep away these small and allegedly inefficient operations.

For the last fifty years or so, farmers in Australia have been told to ‘get big or get out’. This advice, like so much in Australian intellectual fashion, was originally imported from the United States, where Secretary of Agriculture Ezra Taft Benson coined the phrase in the 1950s. It was itself a reaction to the failure of policies of closer settlement, represented in the US by the Homestead Act, and in Australia by the free selection movement and soldier settlement schemes, which had invariably underestimated the land required for a viable family farm.

The call to get small farmers off the land seems to have been revived recently, partly in response to the drought crisis and partly in response to the debate over the future of AWB and agricultural marketing. It’s increasingly being argued that small farms represent a burden on the community as a whole and a drag on our export performance. The future, it is claimed, belongs to large-scale corporate farms.

There is a grain of truth in all this. Thanks to technical progress, the area of land that can be operated by an individual farmer has increased steadily over time. As a result, the average size of farms has increased and the number of farms has decreased. This process has often been painful, though the high land prices now prevailing make it less so now than at most times in the past.

But much of the discussion reflects a misunderstating of the data. ABARE statistics show, for example, that a large proportion of agricultural output is now produced by farms with a value of $1 million dollars or more, mostly owned by companies. But in the great majority of cases, a visitor to one of these farms would find a farm family, living on and working their own land, perhaps with the help of one or two employees.

The company would turn out to be a closely-held ownership structure adopted for the purposes of tax minimization and family asset management. And the increase in farm value would be, in large measure, be the product of the asset price boom (or perhaps bubble) that has spread from the cities to the bush.

A smaller but important group of farms are valued in the tens of millions, and worked mainly by employees. But these are still family operations, usually with resident owners.

Even the genuine examples of corporate agriculture, like the Australian Agricultural Company, Cubbie Station and Heytesbury Beef mostly fall into the Small and Medium Enterprise class, covering firms between 50 and 500 employments. There is no evidence that large-scale corporate agriculture is on the horizon. Rather, the relative significance of corporations in agriculture is declining.

The case of Stanbroke Pastoral Company is striking. When Stanbroke was sold by its corporate owner, AMP, there was no suggestion that it would be swallowed by a larger corporation. Rather, despite strenuous efforts to preserve it, the company’s holdings were broken up and sold off to wealthy rural families.

The other misconception relates to statistics, such as those published by ABARE, showing large numbers of small farms with low output and low incomes and low rates of return. A casual reading of this evidence overlooks some crucial facts. The nature of family farms is such that business expenses and ordinary household expenses are lumped together to a large extent. This means that a low or even negative business income does not necessarily indicate a non-viable farm.

More importantly, a large proportion of small farms have access to off-farm employment income. Off-farm employment allows a family with limited capital to earn an adequate combined income without the investment outlay required for a farm large enough to provide full-time employment.

The prospects for off-farm employment are much greater in locations close to towns and cities, and land prices in these areas reflect their location. So small farms often appear to have low rates of return of capital. But careful study suggests that when appropriate account is taken of the possibility of off-farm employment, small farms are not, in general, less efficient than large ones.

The death of the family farm has regularly been predicted, and in some cases announced, ever since I can remember, and probably long before that. Yet family farms, small and large, produce the great majority of Australian agricultural output, and will continue to do so for decades to come.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He has worked on the economics of family farms since the 1970s.

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  1. Jill Rush
    December 9th, 2006 at 11:01 | #1

    My experience supports this analysis.

    Another aspect as to why corporate farming is probably not so established is that many farmers who are employees will look to establish themselves on property of their own as they can see that working for someone else will never make them rich. The difference in wages for agricultural workers compared to owners is very clear. Family farmers also prefer the lifestyle of being in control of business decisions and a good way to raise children.

    Corporations are good for short term profits and are far less likely to invest in long term projects with environmental benefits. Employees will never see the benefits in investing in the same way as family owners who want something to pass to the next generation do. Corporations also do not have the same interest in local communities as family farmers, and investment decisions will be taken by family farmers, if they can and if it is good for their business, to limit corporations gaining control in a district.

  2. harry clarke
    December 9th, 2006 at 12:18 | #2

    John are your facts here correct?

    The Australian Agricultural Company own 1.5% of the Australian landmass – this is one helluva big ‘small-medium’ sized business. It has massive beef cattle herds.

    When Stanbroke Pastoral was sold wasn’t a bidder for it AAC? Indeed wasn’t it initially sold to a large corporate group to the chagrin of AAC – who are taking legal action against the vendors. Later it was sold off into smaller holdings. Apologies if my memory gets the facts wrong on this one but that’s the way I thought it worked out.

    The facts of the continuing rise in Australian agricultural land prices are a mystery given dismal returns on capital invested in agriculture since 1970, given the generally adverse terms-of-trade movements that have run against agriculture since that time and given the generally adverse implications of global warming for the farm sector. The fact of the current drought can’t help things much. I think you oversimplify by relating this simply to the asset price boom – it seems to me that part of the story is connected to the theme that you deny – that large landowners like AAC can make a go of it but that small farmers cannbot.

  3. December 9th, 2006 at 12:27 | #3

    I have come very close to finishing “Diet for a Dead Planet – Big Business and the coming food crisis” by Christopher D. Cook about the whole US food production system, which I thoroughly recommend notwithstanding a few minor shortcomings. On the efficiency of small farms he had this to say:

    … Smaller farms simply can’t produce enough of any one crop to keep prices down, the argument goes. But studies have shonw that small-to-medium-sized can produce just as efficeintly as big ones, or even more efficiently.

    “Small farms are far from being as unproductive or as inefficient as so many would have us believe,” argues Peter Rosset of Food First in a 1999 policy brief titled “The Multiple Functions and Benefits of Small Farm Agriculture.” Citing an array of studies, Rosset says small farms are “more productive, more efficient, and contribute more to economic development than do large farms.” although a large single farm crop undeniably yields greater volume, such operations waste valuable “niche space” between crop rows, which goes unused. Small farms growing diverse mixture of crops yield more per acre and sustain future productivity by replenishing the soil, Rosset maintains.
    Especially convincing is data from the U.S. Department of Agriculture on farm size and output. According to the 1992 agricultural census, farms just 27 acres in size averaged US$1,050 in gross output per acre, while operations of 6,700 acres averaged just US$63. Although much of the surprising disparity is due to the fact that “smaller farms tend to specialize in high-value crops like vegetables and flowers,” says Rosset, “it also reflects relatively more labor and inputs” applied on large-scale farms. These arguments, if not conclusive, at least raise serious questions about the assumption that bigger is better, and more efficient. (pages 149-150)

  4. December 9th, 2006 at 13:53 | #4

    D’oh! The URL in my previous post should have been http://www.dietforadeadplanet.com and not http://www.dietforadeadplanet.org.

    My apologies.

  5. jquiggin
    December 9th, 2006 at 14:11 | #5

    AACo (which is easily the biggest broadacre outfit) has 427 employees. Land area is not a useful measure – if it were, a lot of Aboriginal communities would be big businesses. Admittedly AACo is large for this category in revenue terms also, but it’s still far less significant than it was when it started out in the 19th century.

    The Stanbroke story is complex, but the original buyers were a consortium of individuals and family companies who got a good deal by promising to keep the business as a going concern (I think the litigious rival bidder was Peter Holmes a Court). They fell out, and the farms were sold off.

  6. December 9th, 2006 at 19:14 | #6

    The growth in off farm income is a sign of the decline of farming family, not of it’s continuing health.

    Corporate outfits failing whilst the family farm continues is not a sign of relative financial viability, but rather a sign of a different attitude to farming. Farmers are bloody minded, corporations are financially rationale, and farming has low profit margins.

    full post here.

  7. December 9th, 2006 at 19:17 | #7

    There’s only one point I’d like to clarify. The idea that with technology, a farmer can work more land is only part of the story. There is the related rural exodus thing, which means that a farmer must work more land – the rural population has been changing over generations.

    I say it is related because technological changes – using the concept loosely – are part of what makes urban lifestyles that much more viable and/or attractive. Of course, it’s always hard to sort out cause and effect with these things.

  8. pseudonym (econowit)
    December 9th, 2006 at 22:43 | #8

    As the AWB scandal clearly demonstrates, the markets for most agricultural commodities are distorted and corrupt. Whether this is at a macro/international level through trade subsidies and alike, or at the micro level through tax breaks and subsidies to individual farmers.

    Comparing returns on capital with other more liberalised sectors of the economy or comparing the efficiencies between the different size farms is a waste of time without taking into account the above-mentioned distortions. IMHO the agricultural markets need to be radically liberalised before worthwhile comparisons could be made.

    What is apparent is that the agricultural sectors in developed nations punch above their respect political weights, consequently maintaining these distortions at the expense of developing nations and consumers.

    An example of this is the infighting going on at present in the coalition over the single desk. The Nationals wanting to maintain their protected market through the single desk and the Liberals who want to liberalise markets.

    Considering there is no such thing as a level playing field in the agricultural markets and most of our competitors are subsidising their industries, the single desk should stay until the markets are liberalised.

  9. rog
    December 10th, 2006 at 00:39 | #9

    The only farmers I know who are making a dollar run it as a business or as a part of a larger business not a family enterprise, they are highly mechanised and are not afraid to borrow. The ma-pa kettle style of farms are just about finished.

    At the time Stanbroke was sold AMP was strapped for cash. The new owners, the Nebo consortium eventually broke up and sold their shares to one of the consortium, Peter Menegazzo, who later died in a plane crash. AMP and other institutions regard agriculture as generally too risky and have offloaded their rural holdings.

  10. December 10th, 2006 at 07:29 | #10

    That analysis makes sense to me, coming from a good-sized and productive farm which incidentally passed entirely to my brother to avoid dissipating the capital. There was a tendendcy to be misty-eyed about the family farm, exemplified by B A Santamaria at the time he wrote “The Earth Our Mother” but there is not need to go to the other extreme, just because of disasters like the soldier settlement schemes.

  11. Mike Hart
    December 10th, 2006 at 10:32 | #11

    JQ, correct, it is the big agribusinesses that are doomed, not the traditional ‘family farm’(whatever that was). The inexorable rise in the price of oil over the coming decade will spell the end of agribusinesses or the ‘big is better’ for farming, costs of machinery and fertiliser will see to that. I was able to contrast this approach to farming with family who still farm in SW NSW who have small holdings compared to some larger nearby aggregates and who are specialists in ‘dry land farming’. They are not going to collapse with the drought because they are virtually debt free and have always run sustainable operations since the 1920′s, in fact they are bemused by nearby recent and quite massive aggregations with their reliance on continous fertiliser applications, massive output demands and debt levels. The survivors will continue to be those family businesses simply because they are not operating to achieve double digit rates of return on investment but simply to live. So there is an interesting concept, your major competitors are businesses who are happy to live with zero or inflation rate only rate of return, so of course they will win. The real winners will be those farms that have maximised good agricutural practices, soil moisture maintenance, avoidance of expensive chemical weed eradication methods and not having a business plan are able to be opportunistic about what they plant and graze and when. We as a nation will be very pleased in the decades ahead as energy costs rise and carbon costs increase that we have just managed to retain smaller land holdings and towns (they are all not quite finished yet either)and thus have a sound platform to rebuild our towns and businesses after the folly of ‘big is better’ fails when the cheap energy drip is withdrawn.

    I too am puzzled by the continuing rise in rural land prices, especially on the back of five years of drought which is not going to break this summer and maybe not even next year. Nothing the CSIRO climate people have produced suggests any return to the past, especially for farming. It would suggest that there is a lot of speculative purchasing going on and with cheap money a number of buyers must be taking a punt on a return to normal will make it worthwhile. The collapse in rural land values will come with the end of global low interest rates, the continuation of the drought (desterification of Australia) and the continued rise in oil prices next year(once the Saudis have finished attempting to bugger the Iranians by reducing price with output).

  12. December 10th, 2006 at 10:37 | #12

    Theory of rising rural land prices if near enough to town or town water – subdivisions for residential areas.

  13. Tom N.
    December 10th, 2006 at 21:56 | #13

    THOSE DREADED CON RATS RESURFACE, BUT STILL WITHOUT BEING IDENTIFIED

    Q said: “At the moment though, it’s mainly being run by economic rationalists who want to sweep away these small and allegedly inefficient operations.”

    Exactly who are these “economic rationalists” John, and what (if any) relationship do they have with economists?

  14. jquiggin
    December 11th, 2006 at 06:37 | #14

    Tom, my reasons for non-identification were to do with the publication venue. I was responding to stuff in the AFR and it was easier to so generically than to name names. The pieces I had in mind were an editorial and a couple of opinion pieces, one by John Roskam of the IPA (attacking the AWB monopoly on the grounds that it kept small farmers in business) and one by a business consultant (can’t recall the name).

    I agree that “economic rationalists” “economists”, but standard usage of the term would include both IPA and the Fin editorial column, and the tone of both was definitely econrat.

  15. Tom N.
    December 11th, 2006 at 10:21 | #15

    ER vs ME

    I know this is an old debate but … the problem, John, is that there is no “standard” usage of the term economic rationalism (ER); at least, not one that is standard and rigorous. Rather, as Coleman and Hagger* have pointed out, it applies to no-one in particular, and so no-one bothers defending economic rationalists against the crimes that allegedly commit. But this ambiguity in turn allows the opponents of mainstream economics (ME) to use the term as a mechanism for besmirching ME, knowing that lay readers generally will make no distinction between economic rationalism and the work of ME. To avoid being a party to such unjustified besmirching in the future, I would encourage you to cease using the term, or, if you are to persist with it, to define it and explain what it does not cover (ie ME), as well as what you think it does.

    ___

    * Coleman, W. and Hagger, A. 2001, Exasperating Calculators: The Rage over Economic Rationalism and the Campaign against Australian Economists, Macleay Press, Sydney:

  16. Ernestine Gross
    December 11th, 2006 at 10:45 | #16

    “Standard usage of the term ‘economic rationalists”? Would the followig be consistent with the standard usage?

    Economic rationalims: The art of confusing corporate financial accounting with economics and making a living from selling this confusion to others. Economic rationalists: Those who are skilled in economic rationalism.

  17. Terje
    December 11th, 2006 at 11:41 | #17

    Ernestine, your definition would seem consistent with the total maluability of the descriptive term.

    If the term “Economic Rationalist” means anything at all then I would think it is a relative term that can be ascribed to anybody in a given policy debate that is more “free market” their position than the prevailing tradition. So if you are discussing labour markets the “Economic Rationalists” are those that support a more unregulated approach to wages and conditions than is traditionally the case. If you are talking about international trade they are the ones that support even less trade barriers. And if you are talking about electricity production they are the ones that support privatisation. However if you think food prices should be set by the market you are not an “Economic Rationalist” because you are not challenging any long standing tradition.

    In the context that JQ uses the term:-

    At the moment though, it’s mainly being run by economic rationalists who want to sweep away these small and allegedly inefficient operations.

    he seems to mean corporatists. Those that think corporations do things better than other classes of business. This seems to be played out latter in JQs article where he says:-

    There is no evidence that large-scale corporate agriculture is on the horizon. Rather, the relative significance of corporations in agriculture is declining.

    I can’t see anybody who subsribes to free market thinking being upset by the asendency of family owned farms. Although of course the world is full of all sorts of opinions.

    Regards,
    Terje.

  18. FDB
    December 11th, 2006 at 11:52 | #18

    Nice, EG. Submit that to one of those online dictionary things would you?

  19. December 11th, 2006 at 11:53 | #19

    I thought economic rationalism means taking an ecological approach to economic policy, to look downstream from interventions like tariffs to see whet happens, who wins, who loses, how the incentives for various forms of economic activity are altered (for example diverting efforts into lobbying for corparate welfare instead of making better stuff and trying to sell it worldwide).

  20. pseudonym (econowit)
    December 11th, 2006 at 13:17 | #20

    Considering economics is irrational, the use of the term “economic rationalists� is a contradictory act.

  21. jquiggin
    December 11th, 2006 at 13:42 | #21

    Tom, I’ve written quite a bit about economic rationalism, for example here.

    I reviewed Coleman and Hagger here (sorry about green type). My conclusion

    Connoisseurs of vituperation, a field in which Australians have long excelled, will find this book a worthy addition to their shelves. Those looking for a balanced view of economic rationalism and its critics would do better to seek out the ‘indefensible’ volume edited by King and Lloyd.

  22. December 12th, 2006 at 09:21 | #22

    Dis anyone notice Paul Sheehan’s article “We Fiddle as the Continent turns to Dust” in the Sydney Morning Herald of 23 Oct 2006?. It was also published in http://www.truthout.org?

    Here are some excerpts:

    “We have elected a prime minister, four times, who has led Australia through an era of unbroken and unprecedented prosperity, yet appeared obdurately impervious to the greatest issue of our times. He … increased federal taxes, including the GST, to a peacetime record of 25.7 per cent of gross domestic product, but did not use this unprecedented flow of funds to mobilise the nation against the greatest threat to its survival. …

    “We are creating deserts out of farmland. And when the rains do come, heavy rain will bring problems, not just relief. An enormous amount of topsoil is sitting dry and exposed, vulnerable to run-off.”

    So the whole future of Australian agriculture may be under a (non-rain-bearing) cloud. Clearly the greatest damage to our agriculatural soil has been done by the larger corporate farms. If agriculture survives to a significant degree, it will be smaller family farms not dependent upon large inputs of ferilisers, pesticides, fossil fuels and irrigation water as Mike Hart has pointed out.

  23. harry clarke
    December 12th, 2006 at 11:52 | #23

    John, Holmes a Court ran AAC at that time and AAC wanted to bid for Stradbroke. They are pursuinfg the vendor AMP in the courts at present for what they claim was not selling to the highest bidder. It was in no way a family-to-family transaction.

    The idea that AAC has anything to do with a small family business is unreasonable. They do well because their vast number of properties give them economies of scale and overall drought-proofedness. Its the reason they are successful and small family-based farming businesses are not.

    These inconvenient facts are inconsistent with the theme of your article.

  24. jquiggin
    December 12th, 2006 at 12:40 | #24

    Harry, you’re right that Holmes a Court ran AAC. I had the impression the case against AMP had been abandoned – can you update on this? You’re also right that AAC isn’t a family business: I didn’t say it was.

    But it remains incorrect to say that “AAC are successful and small family-based farming businesses are not.” It’s impressive that AAC has survived so long when so many other corporates have vanished or dwindled to relative insignificance (Vesteys, Kidmans, Stanbroke, Heytesbury), but they are still less important than they were 150 years ago. If firms like AAC are going to dominate agriculture, they are taking their time about it.

  25. Tom N.
    December 12th, 2006 at 16:44 | #25

    MORE ER and ME

    Thanks for the links John. However, irrespective of the merits or otherwise of your critique of Coleman and Hagger, it does not challenge the central point that I drew on – namely, the current use of the term ER (economic rationalism) as a mechanism for besmirching ME (mainstream economics) by the opponents of ME. Given this practice, your use of the term, without qualification and explanation, risks contributing further to that unjustified besmirching.

  26. jquiggin
    December 12th, 2006 at 21:10 | #26

    Tom, if you read my article on the topic (and for that matter C&H) you’ll see that “economic rationalist” is now mainly used, by both supporters and opponents to refer to a set of positions and styles of argument exemplified by C&H. It’s not the same as mainstream economics.

    In particular, economic rationalists are generally in favour of “rationalising” industries they regard as inefficient, without regard to adjustment costs and often without careful economic analysis. That’s the case here in my view.

  27. harry.clarke
    December 13th, 2006 at 11:01 | #27

    The case against AMP now before the courts – I read that Holmes a Court is about to appear.

    The case hasn’t been settle.ed unless this has happened very recently.

  28. Bill Pritchard
    December 13th, 2006 at 16:48 | #28

    Part of the problem is the term ‘family farm’ which romanticises what are, for the most part, land-based industrial enterprises owned by family businesses (just like McDonalds stores are mainly owned by family business franchisees). The non-regular labour hours involved in farming inevitably favour family member labour over wage-labour – which is an argument the Marxist Karl Kautsky first recognised in 1899. As technology and agri-business models have evolved, the cry of the ‘demise of the family farm’ has been regular, but John is correct to temper these claims. In any case, anyone who’s interested should check out (…wait for the self-promotion)an article on this in the latest (Jan 2007) issue of the Journal of Rural Studies by myself, David Burch and Geoff Lawrence. There, we use the term ‘family farm entrepreneurs’ to describe what we think is going on.

  29. jquiggin
    December 13th, 2006 at 17:23 | #29

    Bill, I agree entirely with your characterization. I’ll look out for the article.

  30. rog
    December 14th, 2006 at 05:32 | #30

    Dont forget the MIS, tax breaks for investors sustain companies like Timbercorp.

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