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Toward a more efficient farm machinery

industry.
M.S. Plan B

1968

 

 

 

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TOWARD A MORE EFFICIENT

FARM MACHINERY INDUSTRY

BY

James R. COOper

AN ABSTRACT OF A

Paper prepared as partial fulfillment
of the requirements for
Plan B degree of

MASTER OF SCIENCE

Department of Agricultural Economics

1968

ABSTRACT

TOWARD A MORE EFFICIENT
FARM MACHINERY INDUSTRY

BY

James R. Cooper

Against a background of favorable trends in 0.8.
farming income and farm-machinery sales during the first
half of the 1960's, farm-machinery manufacturers at mid-
decade manifested long—range optimism by accelerating
their investment expenditures and proclaiming their read-
iness to cooperate toward meeting the expanding future
food requirements of an exploding world population. By
1967, however, it became increasingly apparent that the
existing productive capacity of the nation's farms would
continue to exceed effective demand, at reasonably satis-
factory prices, for years to come. In the same year,
profits of leading machinery-producers were substantially
lower on slightly higher sales; and a small but poten-
tially growing chorus of farmers' complaints was raised
against further machinery-price increases imposed in the
face of an incipient farm-income decline. These develop-

ments, along with rather obvious questions as to the

James R. Cooper

validity of prevailing assumptions regarding long-range
machinery-demand prospects, suggest a need to examine
whether requirements for viability of the farm-machinery
industry's present market structure are consistent with
the requirements of economically efficient operation and
structural change in American agriculture.

This study rejects the notion that "workable
competition" is an adequate performance-standard for an
industry that administers development and application of
the only rapidly-changing agricultural technology which
is incorporated in extremely expensive and "lumpy" durable
farm inputs. Instead, performance--and structure, insofar
as it appears to affect performance--is pragmatically
evaluated in terms of efficiency, measured by effects up-
on economic efficiency in the farming aggregate and among
differentiated groups of farmers. It is recognized that
the major manufacturers are committed in principle to the
objective of promoting agricultural efficiency, but that
in practice this commitment is qualified by the require-
ments of the competitive situation as fundamentally deter-
mined by the industry's structure.

Selected USDA statistical time-series on inputs
and outputs are merged and compared to establish a pre-
sumption as to whether, in the aggregate, farmers' eco~
nomic efficiency in the use of machinery and equipment

has been improving or deteriorating in recent years. A

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James R. Cooper

theoretically-derived conceptualization of two contrast-
ing general types of inefficiency--overcommitment, or de-
creasing returns, and undercommitment, or increasing re-
turns--is proposed as a framework for further analysis.
The dynamics of these respective categories are examined
in terms of contributing factors, documented and illus-
trated with citations of fact and opinion from various
sources, and with emphasis on the relevance of farm-ma-
chinery acquisition and use, where applicable. Next,
burdens of internal inefficiency within the farm-machin-
ery industry are deductively related, and implications
with respect to market power and strategy are inductively
related, to consideration of the industry's structure.
Finally, first long-range probable consequences, and then
shorter-range and more clearly foreseeable consequences,
of the prevailing major thrust of strategy are projected
and evaluated for their bearing on whether the strategy
is intrinsically viable.

Principal findings of the study are as follows:

. The economic efficiency of farm-machinery use has
been deteriorating in the aggregate.

. Deterioration appears to be occurring in both the
overcommitted and undercommitted dimensions.

. The technological orientation, prices, terms, and
conditions of services of and related to farm ma-
chinery contribute to such deterioration by fos-
tering overcommitment and hampering efforts to
correct undercommitment.

James R. Cooper

. The major manufacturers have ample market power
to exploit these tendencies, but they lack the
market power required to curb them, consistent
with the imperatives of competitive market rival-

ry.

. The market power to exploit tendencies toward in-
efficiency is complemented by the requirements of
a characteristically short-range market strategy
based upon the mutual undesirability of full-
scale market competition where merger is pre-
cluded.

A monopolistically-organized industry would appear
to have the advantages of both greater internal
efficiency and sufficient market power to pursue
profitably a long-range strategy of develoPing
stable future demand based on efficient use of
machine services at lower cost. Its structure
would be more viable and its performance would
be more responsive to the pressure of public
opinion.

. Strategy based upon exploiting tendencies toward
inefficiency is not viable in the long run.
Neither is there viability in an industry struc-
ture which depends upon such strategy. Hence,
further concentration of full-line farm-machinery
manufacturing is predictable, whether through
merger or by other--probably slower, less effi-
cient, and therefore less desirable--means.

TOWARD A MORE EFFICIENT

FARM MACHINERY INDUSTRY

BY

James R. Cooper

Paper prepared as partial fulfillment
of the requirements for
Plan B degree of

MASTER OF SCIENCE

Department of Agricultural Economics

1968

ACKNOWLEDGEMENTS

My name appears as author of this paper, and its
shortcomings are mine alone. If it has any significant
merit, however, the responsibility therefor must be
widely shared.

The Ford Motor Company assisted my study by
granting my request for leave of absence to pursue it,
free of any restriction upon the direction it might take.
Perhaps even more important were the many opportunities
granted me, during my years with Ford, to observe at
fairly close range--and not infrequently as an active
participant--the difference which adequate information,
sound planning, and thorough coordination make between
good and poor economic achievement.

Dr. Richard Feltner and Dr. John Brake provided
sympathetic guidance, constructive criticism, and patient
encouragement toward shaping a worthwhile, individualized
academic program, and combining its fruits with my
previous experience in a meaningful way to produce this
paper.

Dr. Glenn Johnson is representative of the several

men of intellect whose teachings and writings have

ii

stimulated me and lighted my way, and whose ideas I have
freely appropriated to my own use.

Virginia, my wife, not only provided financial
support without which my studies might have been cut
short, but also bravely carried most of the other burdens
of parenthood during what seemed an eternity of trial and
tribulation.

Carole Carter produced a typescript the appearance
of which may well be superior to its content.

Chauncey Edgar Cooper, my late father-~farm-ma-
chinery dealer and farmer--left me the memory of a life

in which both men and machines mattered very much.

iii

TABLE OF CONTENTS

ACKNOWLEDGEMENTS O O O O O O O O O O O O O O O O 0

LIST OF TABLES O I O O O O O O O O O I O O O O O 0

FIGURE IDENTIFICATION . . . . . . . . . . . . . .

Section

I.

II.

III.

INTRODUCTION; THE UNCERTAINTY OF LONG-

RANGE DEMAND FOR FARM MACHINERY . . . .

The World Food Gap and Future Export
Demand . . . . . . . . . . . . . . .

Yield Improvement, Farm Disappearance
and Farm Enlargement . . . . . . . .

Technological Advance and the Growth of
Farm Machinery Demand . . . . . . . .

THE FULL-LINE COMPANIES--PRELIMINARY

ASSESSMENT O O O O O O O O O O O O O O

Full-Line Companies and Their Position
in the Industry . . . . . . . . . . .
Machinery Prices and the Cost-Price
Squeeze in Farming . . . . . . . . .
The Industry's Changing Near-Term
Outlook . . . . . . . . . . . . . .
The Special Position of Deere &
Company . . . . . . . . . . . . . . .
Divergent Evaluations of Structure
and Performance . . . . . . . . . . .

THE MEASURE OF ECONOMIC EFFICIENCY IN

FARM MACHINERY USE . . . . . . . . . .

Trends of Average Efficiency in Labor
and Machine Use . . . . . . . . . . .

iv

Page
ii

vii
ix

10

15

15
17
20
25
26

31

31

Booti on

IV.

VI.

VII.

A Conceptual Model: The Dual Aspects
of Macro-Inefficiency in the
Application of Machine Technology . . .
Efficient Technology and Marginal
Value Product . . . . . . . . . . . . .

THE DYNAMICS OF OVERCOMMITMENT . . . . . .

Tendency Toward Over-Commitment in

Machinery Capacity . . . . . . . . . .
Lumpiness of New-Machine and Labor
Purchases . . . . . . . . . . . . . .

Response of Farm-Product Prices to
Aggregate Output Changes . . . . . . .

Governmental Policies and Programs . . .

Rapidity of Technological Change and
Shifting of Obsolescence Costs . . . .

THE REVERSE DYNAMICS OF UNDERCOMMITMENT . .

Differences and Variability in

Managerial Adequacy . . . . . . . . .
Financial Ability and Conditions of

Firm Growth . . . . . . . . . . .
Availability of Hired-Machinery

Services . . . . . . . . . . . . . . .
Biased Tendencies in Machinery and Parts

Pricing . . . . . . . . . . . . . . . .
Direction of Technological Change . . . .
The Rational Conditions for Equipment

Replacement . . . . . . . . . . . . . .
Barriers to Exit . . . . . . . . . . . .

COSTS AND HANDICAPS OF OLIGOPOLISTIC

DUPLICATION O O O O O I O O O O O O O O 0

Engineering, Design, and Tooling Costs
Manufacturing Costs . . . . . . . . . .
Dealer Organization . . . . . . . . . .
Planning and the Flow of Information .
Transportation Costs and Decentral-
ization of Production . . . . . . . . .
Inventories . . . . . . . . . . . . . . .

THE OLIGOPOLY TRAP AND THE SPONSORSHIP

OF INEFFICIENCY o o o o o o o o o o o o o

The Frustrated Impulse toward
Monopoly . . . . . . . . . . . . . . .

Page

39
45

48

49
55

57
59

62

70

72
76
81

86
93

95

97
100
101
102
105
109
112
113
116

117

Section

Affirmative Implications of
Oligopolistic Market Power . . . . .
Limitations on Market Power--Exemption
from Responsibility . . . . . . . .
Motivation for Alliance with
Inefficiency . . . . . . . . . . . .
The Forbidden Competitive Motive . . .

VIII. INHERENT LIMITATIONS OF OVERCOMMITMENT
STRATEGY 0 C O I O O I O O O O O O O 0

Slow Growth of Food Demand . . . . . .
Diminishing Returns on the Results
of Labor-Substituting Technology . .
Developments in Competing
Technologies . . . . . . . . . . . .
Countervailing Power of Major
Agricultural Enterprises . . . . . .
Potential Efficiency-Increase in the
Use of Existing Machinery . . . . .

IX. PORTENTS OF CHANGE IN THE MARKET FOR
MACHINE SERVICES 0 O O O O O O O O O O

The Diminishing Market for Used
Equipment . . . . . . . . . . . . .
Agricultural Policies and Programs . .
Increasing Returns to Expenditures on
Substitute Inputs or Under-Utilized
Complements . . . . . . . . . . . .
Decreasing Returns to Expenditures on
Complementary Inputs . . . . . . . .
Changing Farmer-Expectations . . . . .

x. CONCLUSIONS AND SIGNPOSTS o o o o o o 0
LIST OF REFERENCES . . . . . . . . . . . . . . .

APPENDIX 0 O O O O I O O O O O I O O O I O O O 0

vi

Page

122
126
135
144
147
148
152
158
160

163

166

166
168
170

172
176

179
185
201

LIST OF TABLES

Table Page

1. Tractor ownership in 5 midwest states,
1964 v. 1959 O O O O O O O O O O O O O O O 12

2. Relationship of farm equipment shipments
to farm income, 1956-1965 . . . . . . . . l9

3. Composite operating data, selected farm
machinery companies, 1958-1966 . . . . . . 21

4. Returns on net worth in equipment and
other manufacturing, 1959-1966 . . . . . . 24

5. Profitability of Deere & Company and
composite selected companies, 1958-
1966 O O O O O I O O O I O O O O O O O I O 25

6. Selected farm productivity indices,
1957-1965 0 o o o o o o o o o o o o o o o 35

7. Index relationships of physical output,
machinery and imputed labor expense, and
machinery investment, to farm labor
input, 1957-1965 . . . . . . .'. . . . . . 37

8. Percentage increases in average retail
prices of selected farm machines and

9. Manufacturing overhead costs, selected
machines, 1932 and 1937 . . . . . . . . . 103

10. Real estate price indices, Iowa,
1962-1966 0 I o o o o o o o o o o o o o o 173

ll. Farmers' imputed costs for hired and family

labor and for interest on machinery and
equipment investment, 1957-1965 . . . . . 201

vii

Table Page

12. Farmers' total imputed machinery and 202
labor expense, 1957-1965 . . . . . . . . .

13. Computation: indices of output per
dollar of machinery and labor
expense, 1957-1965 . . . . . . . . . . . . 203

viii

FIGURE IDENTIFICATION

Page

Inefficient machine inputs on the scale
of variable proportions . . . . . . . . . 40

ix

I. INTRODUCTION; THE UNCERTAINTY
OF LONG-RANGE DEMAND

FOR FARM MACHINERY

This essay is conceived as a wide-ranging argumen-
tative analysis of the influence of market structure in
the agricultural machinery industry upon the character of
that industry's contribution toward technological advance
and economic change in farming.1 Evaluation of that con-
tribution proceeds from the premises that (1) economic
efficiency is the primary--in fact, centra1--criterion of
performance in a dynamic system, and (2) the test of ef—
ficiency in the farm-machinery industry consists in deter-
mining how the industry's conduct reacts upon efficiency
in the agricultural economy.

The business of develoPing and supplying farm
machines is of unparalleled importance, from the stand-
point of its potential influence upon the efficiency of
economic progress in farming. Alone among all other agri-

cultural input industries, the farm-machinery industry

 

1Clodius and Mueller have pointed to the advan-
tages of an integrative,inter-industry approach to market-
structure analysis (25:530-533).

 

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both controls the evolution of an essential, dynamic tech-
nology and incorporates the results of that technology in
(increasingly) expensive durable producers' goods.2 The
industry's products are both durable and costly, but the
technology upon which their value-in—use so greatly de-
pends is decidedly nondurable.

Implicit in undertaking a study of this nature is
a readiness to re—examine, and then either accept or re-
jectrany of the various established academic views and
popular notions that appear to have a significant, direct
bearing on the subject. Among the more familiar concep—
tions and assumptions herein re-examined, directly or in-
directly, are the following:

. That the goal of promoting the American farmer's
economic efficiency has been, and seems likely in
the future to be, well served by a farm machinery
industry operating under the constraints imposed

by a "workably competitive", Oligopolistic market
structure.

 

2Kaysen has made the following relevant comments:
"In (producers' durables) markets, the products are sold
to other industries, and so affect not only prices but the
production decisions . . . of other industries . . . The
final result (of a monopolistically maintained price for
a producers' durable) is a widespread change of economic
efficiency rather than a simple passing on of a higher
price to the consumer . . . Departures from a competitive
resource allocation in markets located further back in the
productive process have an amplified effect through the
distortions introduced into the resource allocations of
the buying industries . . . In terms of progress, changes
in prices (in producers' durables) industries are more
likely to generate the secondary changes in other indus-
tries which magnify their impact" (151:547-548).

 

. That the industry itself could not operate more
efficiently under any other structural arrangement,
with the possible exception of one created by
breaking up the larger firms into smaller units.

. That the industry's profitability could not be im-
proved except at the farmer's expense.

. That, regardless of findings on the foregoing, the
wider public interest is best served by preventing
further consolidation or cooperation among the in-
dustry's leaders.

In effect, this study constitutes an effort to
evaluate the manufacture, distribution, ownership, and use
of farm machinery as a total system, in order to determine
whether it is functioning well, if not why not, and what,
if anything, might reasonably be done to optimize its
functioning in the future. Admittedly, the results a-
chieved through an effort so broad in scope and unorthodox
in approach may well prove inconclusive as well as contro-
versial in a number of respects. If, nevertheless, the
findings are sufficiently meaningful and persuasive to
provide a groundwork for more intensive and scholarly re-
search, or to elicit some purposeful discussion among men
concerned with positive action, the study's purpose will
be well served.

In a sense, the paper is addressed to what is
believed to be the industry's own need for broad, poten-
tially constructive, albeit challenging criticism. This

goes somewhat beyond, yet is analogous with, the kind of

economic-intelligence need described by Scofield:

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The supply industries have increasingly expressed
their needs for economic intelligence in recent years.
They want general guidelines as to future demands and
market potentials for specific inputs. They are in-
tensely interested in probable future trends in the
number and size of farms, in geographic patterns of
input requirements, in the obstacles to adoption of
their products, and in likely changes in farm programs
and policies that directly affect their businesses.

. . . Although much has been written regarding the
technological revolution in agricultural production,
the role of the supply industries in the develoPment
and merchandising of such technology has not as yet
been appraised (128).

Almost at the time when these words were written,
the Iowa State University published a brief study in which
some useful beginnings were made toward an appraisal of
the role, problems, and performance of the agricultural
machinery industry (115). Nevertheless, there remains a
substantial amount of uncertainty and disagreement with
respect to the contribution which the industry has made
to the nation's agricultural economy, and the role which
it can reasonably expect to play in the future.

The remainder of this introductory section is de-
voted to a critical review of certain well-publicized
views with respect to the industry's long-range demand
outlook. This problem is of central importance in any
consideration of objectives-~public or private-—strategies,

and policy alternatives.

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The World Food Gap and Future Expprt Demand

During the last few years the continuing rapid in-
crease of world population has often been cited as a major
reason for Optimism regarding long-range growth in farm-
machinery demand in this country (135; 111). It has
gradually become apparent, however, that optimism on this
ground may be considerably more hopeful than realistic.

In 1967, after wheat acreage allotments were in-
creased 32 per cent in view of the vanishing U. S. sur-
plus and the prospect of mass starvation in countries
such as India, American farmers produced record crops--
not only of wheat, but also of feed grains and soybeans.
Favorable weather, moreover, contributed to better har-
vests also in the U.S.S.R., the rest of Europe, Australia,
and even in India. The cash export market fell off sharp-
ly; Public Law 480 shipments increased but little; and
Congress, meanwhile, enacted into law a new policy under
which a country's eligibility for United States food as-
sistance is conditioned upon positive measures being under-
taken to increase its own food output (168). By October,
furthermore, it was reported that authorities in the De-
partment of Agriculture no longer see the population ex—
plosion as the major ground for vast increases in U. S.
food production:

There'll be no mass starvation around the world by
1975. Birth control will really take effect in emer-

ging countries by then. Transportation and marketing
of food in those countries will be as big a problem as
production. The biggest hurdle ahead is to get our
food into prosperous countries over 'trade barriers'.
Our food exports will climb from the present near $7
billion to around $10 billion by 1980, with more of it
for cash, less as 'give-away' (118).

The new food-aid policy apparently reflects grow-
ing Congressional awareness of a number of reservations
that have been voiced concerning the PL 480 program as it
had been conceived and implemented:

. In the long run, if population continues to in-
crease in the underdeveloped nations, it seems
likely that those countries themselves must pro-
vide most of the necessary food-supply increases
(18; 24). According to one observer, "countries
lIEe Ifidia, Pakistan, Thailand and the Philip-
pines appear to have enough land resources to feed
the populations expected by the year 2000, if crop
yields can be increased to levels now realized in
Japan" (23). There is a serious question, how-
ever, whEEher--in the absence of needed internal
policy adjustments--PL480 imports may tend (a) to
eliminate incentives for governments of receiving
countries to stimulate agricultural development,
and (b) directly to discourage private initiative
in activities supporting that objective (111).

. To the extent that PL480 allocations to a given
country substitute for forms of economic assis-
tance specifically shaped to fit the benefici-
ary's developmental needs, the benefit that re-
sults is less than might be achieved at the same
cost. Similarly, equivalent benefit could be con-
veyed at lower cost (111).

. The shape of the PL 480 program is dictated pri-
marily by the need to dispose of commodities of
which U.S. surpluses happen to exist. But such a
program cannot serve equally well the complement-
ary motive of remedying dietary deficiencies, some-
times more qualitative than quantitative, in re-
ceiving countries (24). Thus, PL 480 reportedly
has done little to reduce the apparent substantial
protein deficiencies especially prevalent in South
Asia (111). The National Council on Marine

Resources and Engineering Development last year
reported a finding that the world's protein short-
age can most readily be met by further accelerat-
ing the harvest of food resources from the sea,
which has been doubling every ten years (32).

. The program owes its persistence and growth in
large measure to consideration of its effect in
bolstering farm incomes, adversely affected by
the "cost-price squeeze". This justification has
been criticized from an economic standpoint be—
cause, on the one hand, most of the income bene-
fits are received by those farmers who need them
least; and, on the other, supplementing the in-
comes of relatively inefficient farm Operators
tends to delay adjustments that would make the
farming economy more efficient (26). More impor-
tant, perhaps, are indications tHEt agricultural
policies which are economically objectionable
have become also less necessary or defensible
politically. This development mirrors a weakening
of the farm bloc's power, brought about by the re-
apportionment decisions and by a waning of the
Congressional power of the Old South (68).

Yield Improvement, Farm Disappearance

 

and Farm Enlargement

 

Other factors that have been cited (135) as sup-
POrting a confident View of long-range farm-machinery
market prospects include the following:

. A relatively static amount of cultivable land, and
the necessity for raising the agricultural yield
of that land, at least partially through increased
mechanization of farms and use of larger and more
sophisticated machinery,

. PrOSpects for greater utilization of available
farm acreage as a result of declining domestic
crop surpluses, and

. The decreasing number of farms and subsequent in-
crease in their average size.

 

 

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On these points too, there are dissenting voices
and contrary evidence. Based on experience in Japan,
where per-acre yields are extremely high, yield increases
are achieved mainly through improvement of plant varieties,
tillage methods, and crop programs; more efficient control
of water; and better use of fertilizers, pesticides, weed-
killers, and rodenticides. Mechanization, where higher
yield is the prime objective, must be adapted more toward
doing the farming job better in the land-productivity di-
mension than toward performing it with less labor expend-
iture (81).

A study of Iowa corn yields, reported in 1965,
indicated that "Iowa alone could supply the nation's en-
tire output of feed grains if only all farmers improved
their practices to the standard currently observed by the
most advanced managers" (63).

The strong trend in recent years toward larger
tractors, powered by cheaper fuels, is closely linked with
a parallel trend toward larger machines of other types,
and is undoubtedly fostered in part by the trend toward
larger farms. How far these trends will go remains to be
determined, however, as questions have arisen as to the
Optimum size of farms and farm tractors and as to whether
Supplementary power needs can better be met by larger

units or by additional units (111; 100; 79; 163).

 

 

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A study published in 1966 indicated that purchases
of new-tractor horsepower are significantly dependent upon
horsepower on farms, crop production, price and income
variables, size of tractors purchased, ages of tractors
on farms, and the number of farms. Decreasing marginal-
purchase effects were found to be associated with larger
quantities of horsepower on farms and with higher levels
of crop production; and negative purchase effects were
associated with reduction in the number of farms (which
is of course related to increasing farm size). Under
assumptions stated in the study, purchases for 1970 were
projected at about 8 million horsepower. This would be
about 7 per cent higher than the 7 1/2 million level re-
corded in 1962 (the terminal base-year for the study), and
compares with a previous peak of over 11 1/2 million, at-
tained in 1951 (62).

It should be noted that the 1970 horsepower-sales
projection, which was based on actual purchases and re-
lated conditions through 1962, assumed gradual yearly in-
creases alongwa smooth curve. The actual sales curve
shows considerable year-to-year fluctuation, tending to
reflect the rise and fall of farm income but with wider
swings (115; 21). Thus it would be reasonable to infer
that the sizable tractor sales increases achieved in the
1963-66 period (138:23) reflected partly an actualization

of previously deferred demand and partly, in effect, the

 

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10

immediate purchase of anticipated future power needs. A-
gainst this background, a slackening of the sales pace
during the next few years after 1966 was perhaps foresee-
able, even if an immediate deceleration had not been in—
duced by the 1967 farm income decline (141). A Michigan
State University study released in 1966 concluded that
"the trend of tapering demands for large numbers of new
machines is expected to continue, but at a progressively

slower rate, through 1980" (173).

Technological Advance and the Growth

of Farm Machinery Demand

Speaking to a May, 1967, conference on interna-
tional agribusiness, Massey-Ferguson's group vice presi-
dent for farm.machinery declared

In this industry we are highly competitive, responsi-
ble, and innovative, and'therefore I will advance the
conclusion that we will always serve the requirements
of agribusiness in North America sufficiently to

maintain the growth that agribusiness has maintained

in the past.
In fact, the progress of mechanization that will take

place over the next few decades in all of the devel-
Oped countries will help the farmer become a more ef-

ficient agribusinessman (133).
It is not clear whether, by "maintaining the
growth that agribusiness has maintained in the past", the

Speaker meant that he expects the agricultural machinery

industry in particular to maintain its recently experienced

 

 

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h“.

 

11

rate of sales growth. If that is what he meant, it is
logical to assume he foresees that both of the following
conditions will be satisfied:
. That there will be a fairly wide-ranging acceler-
ation of the pace of technological advancE—IH_EHe

EEEIEh and application of farm equipment, and

. That future technological improvements will be
widely translatable into improved economic effi-
ciency for farm operators--i.e., that cost factors
will not make them impracticable.

The need for acceleration of technological improve-
ment, as a precondition for maintaining an upward sales
trend, is fundamentally related to the law of diminishing
returns. Farmers who have more nearly maximized the gains
achievable with a given technology will tend to make a
smaller aggregate investment in that technology, as com-
pared with those who have lagged in its adoption. As
illustrated in Table 1, for example, the 1959-1964 in—
crease of tractor ownership was much less, for states
where tractor-concentrations per 100 farms were above
average in 1959, than for states where concentrations
were below average.

It is relevant not only that farmers in the more
heavily-equipped states bought fewer additional tractors,
Proportionally, than were purchased by farmers in other
States, but also (1) that their average farm size showed

a smaller increase both relatively and absolutely, and

(2) that they nevertheless maintained their share of

 

 

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13

total farming income received in the 48 contiguous states.
In his agribusiness-conference talk mentioned

previously3

, Massey-Ferguson's representative explicitly
acknowledged the great importance of cost factors, where

problems of mechanization in develOping countries are

 

concerned:
If mechanization were the fundamental need of every
developing agriculture, it might be argued that farm
machinery manufacturers could make their most signif-
icant contribution by, quite simply, selling more
equipment . . . Unfortunately, the case for mechani-
zation is far from being so clear-cut. . . . Even in
straightforward economic terms we cannot say, without
qualification, that mechanization is desirable. We
must always bear in mind that any increase in produc-
tion must be worth at least as much as the cost of
attaining it. This balance is not always easy to
achieve in a developing country (133).

Obviously, costs associated with technological
change are everywhere subject to economic justification,
no less certainly in developed than in developing coun-
tries. This paper will explore some of the practical
implications of a somewhat less obvious but related prop-
osition: As the technology of farm mechanization becomes
more complex, and more expensive in relation to the value
of other inputs and of the product, its economic effi-
ciency is increasingly dependent on economies of size, and

these become increasingly difficult to realize as the

scale of operations expands, for the following reasons:

3Refer to p. 10.

14

. Increasing technological complexity in itself
tends to make increasing demands on the limited
human capacity for planning, observation, coor-
dination and control. (This problem has to be
countered with still more expensive technology.)

. Increasing scale and speed of operations further
compounds the problem of human limitations, by
broadening the required span of observation and
control and by quickening the pace at which they
must be effective. (Remedy: again, more expen-
sive technology.)

. Even as the requirements imposed upon the human
factor tend to grow more strenuous and exacting,
the economic penalties resulting from error or
oversight--as well as from mechanical failures
and the effects of other imperfectly controllable
variables--become more severe. This is a conse-
quence of superimposing the costs of ever-larger
equipment upon the costs of increasingly expensive
technology.

The reason for introducing this rather pessimis-
tic-sounding proposition at this point is not to suggest,
that there are no workable solutions to the problem it
poses. Rather, at this stage it is relevant to observe
that the problem does exist--in some combination of imme-
diate and latent manifestations--and that it contributes
to uncertainty regarding the long-range outlook for farm-

equipment demand in the United States.

II. THE FULL-LINE COMPANIES--

PRELIMINARY ASSESSMENT

Before entering in the next section upon analysis
of efficiency-problems among farm operators, discussion
turns at this point to consideration of conditions and
problems among the farm-machinery manufacturers them-
selves, with particular reference to the industry's lead-
ing firms. These conditions and problems, as will be
seen, have been the subject of conflicting interpreta-

tions.

Full-Line Companies and Their

 

Position in the Industry

 

The extreme dependence of farm-machinery demand
upon farm income--in a market in which since 1954 "the
demand for new tractors and machines has been principally

for replacement purposes" (l73)--seems likely to acquire

increasing significance for the full-line manufacturers.1

k

lFull-line companies--Deere & Company, Interna-
tional Harvester, Massey-Ferguson, White Motor (Oliver,
Minneapolis-Moline and Cockshutt), Allis-Chalmers, Ford,
and Case--are those manufacturers offering a line of
tractors plus a sufficiently broad array of complementary
equipment items to give a dealer full-time employment.

15

16

Domestic sales data are not normally disclosed by the
full-line firms, but published estimates indicate that
their share of total industry sales in the domestic market,
after reaching a high of almost 74 per cent in 1948 (31).
had declined to about 65 per cent by 1961 (134). Al-
though the accuracy and comparability of these estimates
may be questioned, the direction of the indicated trend
would appear to be consistent with growth in the number

of smaller, or short-line, companies, which increased

from approximately 1,050 in 1947 (151) to 1,481 in 1963
(156). The full-line firms have largely left to these
lesser companies the development and production of special-
ized equipment, including that which comprises the rapidly
growing field of mechanized agricultural "systems" such

as those for grain-handling and -feeding, egg production,
dairy production, livestock environmental control, irri-
gation, barn cleaning and waste disposal. "Looking to

the future, there is some question as to whether the fa-
cilities of the large national companies will be the most
legical ones to exploit [the] trend toward agricultural
Systems" (11;).

Taking note of problems of excess capacity, sea-
sonal schedules, production-scheduling difficulties re-
lated to widely varying lines, and unpredictable demands,
one study reports that members of the industry as well as

interested observers have raised the question of whether

17

there will be room for all of the full-line companies al-
ready in the market, even if the more hopeful long-range
market estimates are realized (111). Phillips has ob-
served that "the merger of three firms under White Motor
(1960-63) had aspects of a shake-out of excess capacity

from the industry.‘ and had the further result of extend-
ing the already well-established trend toward diversifi-
cation so that, for the first time, all full-line firms
are heavily engaged in production other than farm

machinery (115).

Machinery Prices and the Cost-Price

 

Squeeze in Farming

 

"In their pricing policies, farm equipment makers
must recognize not only the farmer's sensitivity to cost
but also his political strength" (111). In view of changes
in the political balance, mentioned earlier, there may be
greater future significance in the movement toward farmer-
organization for collective economic action. In January,
1967, it was reported that the Farmers Unions in Iowa and
North Dakota, with 45,700 members, had joined in a boycott
against the purchase of all new equipment--including cars
and trucks as well as agricultural machinery—-produced by
large farm-implement makers. It was announced that the

strike would be maintained until constructively answered

 

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18

by manufacturers' action to lower prices or governmental
action to lower interest rates or raise farm incomes. A
spokesman explained the campaign as a protest against re-
cent increases in farm equipment prices, and high interest
rates generally, at a time when a 5 per cent decline in
farm profits was expected for 1967, while large farm im-
plement makers such as Deere and International Harvester
were reporting record sales and earnings (51).

It is altogether understandable if the full-line
companies are extremely reluctant to heed protests of
this nature. They, like their farmer-customers, operate
under a "cost-price squeeze". The hyper-response of ma-
chinery sales to farm-income changes, furthermore, has
contributed to "a somewhat fatalistic 'seven lean years'
philosophy which has accounted for much of the diversifi-
cation into other product lines, and has had a distinct
bearing on price policy" (112). The manufacturers know
from experience that industry-wide price reductions do
not bring forth fully compensating sales increases during
periods of low farm income (115). When, they might well
ask, could they hope to raise prices in order to recover
some part of their rising costs, if not at a time when
their customers have just realized the income from a rec—
ord harvest (such as that of 1966)?

The customer, however, does appear to have a

material basis for his discontent. The value of domestic

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19

Table 2.--Relationship of farm equipment shipments to
farm income, 1956-1965

 

Value of Farm Equipment Shipments
as Percentages

 

 

 

 

Year Of Gross Of Net
Farm Income Farm Income
‘7Percent) ‘7Percent)
1956 3.8 11.1
1957 3.9 11.3
1958 4.7 15.0
1959 4.5 13.5
1960 3.7 12.2
1961 4.0 12.9
1962 4.1 12.9
1963 4.3 14.2
1964 4.8 16.3
1965 5.6 18.3

 

Source: Standard & Poor's Corp., Industr Sur-
ve s, "Machinery--Agricultural: Basic AnaIysis", Apr. 13,
I967, p. M-6. (Originally from U.S. Departments of Agri-
culture and Commerce.)

farm equipment shipments, reflecting steady increases in
quantities and product-content as well as basic price-
indices, has been rising much more rapidly than farm in-
comes (See Table 2).

Percentage rises in the machinery-cost share of
farm incomes are, in principle, at least compensated by
declining labor requirements or by higher outputs for
given labor expenditures. As suggested previously, how-
ever, the practical application of this principle seems

likely, sooner or later, to elicit diminishing returns.

20

More detailed examination of empirical aspects of the
diminishing-returns problem is presented in the sections
subsequent to this. Purely as a matter of logic, a
tendency for returns to diminish is to be expected under
any of the following conditions:

. If more machinery is acquired than can be given
reasonably full employment, or

. If the prevailing mode of adOption of newer tech-
nologies of mechanization tends to create or rein-
force a bias toward overproduction in farming,
and thus to contribute toward a lowering of farm-
ers' selling prices, or

. If the total costs involved in applying new tech-
nology--including costs for additional increments
of complementary inputs such as increasingly ex-
pensive land or more highly skilled labor--rise
faster than the effects of any attendant cost
savings or output-value increases, or

. If the scale and complexity of operations required
for efficient application of new technology impose

unrealistic demands upon workers' capabilities or
managerial capacity.2

The Industryfs Changing Near-Term Outlook

Predictably, the views of the industry's leaders

with respect to its past achievements and its future pros-

pects are influenced more strongly by the trend of

 

2"It is already fairly common for the farmer, in
planting, to have as many as 32 separate mechanisms, in
addition to the tractor, under his control simultaneously.
If the trend to combined till-planting continues, addi-
tional soil-conditioning mechanisms will appear to divide
his attention even more" (89).

21

industry profits than by developments which appear to

have a less direct, certain, or immediate impact. Thus,
attitudes of recent years have been conditioned by the
fact that leading farm-machinery manufacturers experienced
booming sales and earnings during the period from 1962

through 1966 (See Table 3).

Table 3.--Composite operating data, selected farm machin-
ery companies, 1958-1966

 

 

 

 

Sales Earnings Return on
Year er Share per Share Book Value
iDoIIars) (Dollars) TPercent)
1958 57.26 2.20 6.21
1959 68.15 3.61 9.44
1960 62.16 .73 1.96
1961 62.12 1.14 3.08
1962 68.91 2.36 6.19
1963 75.51 3.17 8.19
1964 86.81 4.50 10.81
1965 94.05 4.27 9.85
1966 101.41 5.16 11.31

 

Note: Companies included are Case, Deere, Inter-
national Harvester, and Massey-Ferguson.

Source: Standard & Poor's Industry Surveys,
"Machinery--Agricultural: Basic Analysis“, April 13,
1967, Po M-l3o

 

Against this background Of growing success, lead-
ing executives representing the principal North American
farmrmachinery manufacturing companies contributed uni—

formly Optimistic appraisals of the industry's ten-year

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22

outlook, to a special survey published in September of
1966 (128). Manufacturers' shipments increased by 16 per
cent in 1966, making it "the biggest and best year in the
farm equipment industry's history" (111). Significantly,
1966 was also a year in which net farm income was at a
near-record level; but, according to a Department of Agri-
culture source, "the sharp rise in farm income in 1966
should be viewed as a special situation" (11).

Conditions since 1966 have been less conducive to
Optimistic expectations. Manufacturers' shipments in
1967, stimulated by January lst order-backlogs and the
presence of 1966 harvest-proceeds in farmers' bank ac-
counts, showed a 3 per cent increase over 1966 (111), not—
withstanding a 10 per cent decline in realized net farm
income (11). But sales gains of such modest proportions
were not enough to Offset the industry's rising costs.
Earnings (reflecting overseas farm equipment Operations
and both domestic and foreign industrial and construction-
equipment business, as well as domestic farm-equipment
sales) contracted by 11.2 per cent for Deere, 39.1 per
cent for Massey-Ferguson, and 86.3 per cent for J. I. Case,
as compared with 1965-66 averages (111). With the shape
of this outcome already fairly clear, the president of
Case remarked in October that the 1967 sales year "will
go down in the record books as one not particularly favor-

able to the manufacturers of farm and construction

23

equipment" (21).

For 1968, with respect to farm income, "prospects
indicate little improvement . . . Moreover, farmers' in-
comes will not keep pace with expected gains in the rest
of the economy" (11). Deere & Company's chairman Hewitt,
referring to the agricultural equipment sales outlook,
said in January, "We anticipate more uncertainties and
crosscurrents than usual in 1968" (111). At about the
same time, International Harvester's executive vice-pres-
ident McCormick expressed the view that "As to farm
equipment . . . it is not probable that there will be a
large increase in unit sales . . . in the 1968 season
. . . I would say perhaps 5 per cent or less." He related
this prediction both to an unfavorable price situation and
to an accumulation of new equipment in dealers' hands at
year end, reflecting a lag in retail selling rates as
compared with wholesale shipments during 1967 (92).

The preceding section introduced discussion of
problems that give rise to uncertainty regarding the mag-
nitude Of long-range demand for farm equipment. Even if
such problems could safely be disregarded, a closer look
at past returns on investment suggests it may be unduly
Optimistic to characterize the industry's prospects as
"glittering" (111). (See Table 4)

Only in 1964 and 1965 were average returns in the

farm, construction, and materials-handling equipment

24

Table 4.--Returns on net worth in equipment and other
manufacturing, 1959-1966

 

Selected Manufacturing Companies
Accounting for High Percentages of Total Sales by
Industry: Composite Percent Return on
Net Worth, 1959-1966
Year Farm, Construction

 

 

 

 

and Materials- Automobile
Handling Equipment and Truck All
Manufacturing Manufacturing Manufacturing
Percent) AIPercent) (Percent)
1959 11.2a 16.9 11.7
1960 4.2a 15.8 10.5
1961 5.8 13.2 9.9
1962 7.9 19.4 10.9
1963 9.6 19.6 11.5
1964 13.7 19.9 12.6
1965 14.4 23.4 13.9
1966 14.6 17.8 14.9

 

aAgricultural-implements manufacturing only.

Source: First National City Bank of New York,

Monthly Economic Letter, April issues, 1961, 1963, 1964,
' an o

 

industry group higher than the average for all manufac-
turing companies represented in these data. Even in
those years, furthermore, the favorable differences were
minor, particularly as compared with the sizable above-

average differences which are consistently apparent for

automobile and truck-manufacturing companies.

25

The Special Position of Deere & Company

 

Averages, Of course, can be very misleading.
Deere & Company, which for years has held a commanding or
consistent lead in both manufacture and sale of farm
equipment within the United States, fairly regularly has
enjoyed the widest profit margins among the full-line
companies, despite large foreign losses in recent years.

This significant fact is reflected in Table 5.

Table 5.--Profitability Of Deere & Company and composite
selected companies, 1958-1966

 

 

 

Net Income as Percentage Earnings as Percentage
Of Net§§les Of Book Value
Year Deere Composite Deere Composite
& Selected & Selected

 

CO. Companies CO. Com anies
(Percent) (Percent) (Percent) (Percent)

1958 8.9 3.8 12.9 6.2
1959 8.9 5.3 13.9 9.4
1960 3.8 1.2 5.0 2.0
1961 6.3 1.8 8.6 3.1
1962 6.7 3.4 9.2 6.2
1963 7.0 4.2 11.1 8.2
1964 7.3 5.2 12.6 10.8
1965 5.8 4.5 10.1 9.8
1966 7.4 5.1 13.1 11.3

 

aDeere, Case, International Harvester, and
Massey-Ferguson.

Source: Standard & Poor's IndustryASurveys,
"Machinery--Agricu1tura1: Basic Analysis, April 13,
1967, pp. M-13 and M-16.

26

Based on the comparisons shown above, it appears
that poor or unimpressive profitability, as compared with
the experience of other manufacturing industries such as
automotive vehicle production, is not so much a problem of
full-line farm-machinery manufacturing, per fig, as it is
a problem of smaller members Of the group.

Summarizing, the industry's sales and profits rec-
ord contains considerable factual support for the follow-
ing generalizations:

. Presumably because of characteristics of cost
structure, the full-line companies apparently
cannot maintain given levels Of profitability un—
less they aéhieve substantial salesgincreases
eachfyear.

. The smaller firms generally do not achieve very
notable financial success even in peak sales
years; and the profit-depressing influence Of
sales downturns affects them with particular
severity. TO the extent that their survival de-
pends on their participation in the agricultural

economy, it might be said that, like many farm
Operators, they are only marginally viable.

Divergent Evaluations Of Structure

and Performance

Academic studies and legislative inquiries into
the industry's status have rather uniformly proceeded
from a common basic assumption. This assumption, rooted
in the antitrust tradition, is that conditions in the in-

dustry can be evaluated adequately by determining whether

 

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27

Oligopolistic structure or a monopolistic tendency, among
the full-line companies, has led or could lead to an ex-
cess Of harmful competitive practices. The writers who
follow a structuralist approach have been inclined toward
affirmative conclusions. These they base essentially on
findings that the level Of ownership-concentration, and
related conditions of market structure, imply a consider-
able potential for engaging in undesirable market behavior
(22; 22: 21). The performance-minded Observers, with a
more limited commitment to structuralist doctrines, have
directed their efforts toward establishing whether in fact
the industry has Operated (1) in a reasonably competitive
atmosPhere and (2) with constructive or at least socially
acceptable results (112; 112; 21; 122; 122: 12; 112).
These less dogmatic critics focus most of their attention
on the industry's record with respect to progressiveness,
promotional efforts, price behavior, exclusionary activi-
ties, distribution arrangements, and profit levels. In
general, they find that record very satisfactory, at
least in recent years, although there is some difference
of Opinion among them regarding the extent tO which ac-
ceptable behavior has been compelled or induced by vari-
ous antitrust actions in the past or by the possibility
Of renewed efforts Of this type (112; 2).

The approach taken in this paper is purely prag-

matic: performance is adopted here as the central

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28

criterion, but a less traditional approach is followed in
evaluating it. It would appear, from the facts cited

thus far, that conditions and prospects in the relation-
ship between the full-line machinery manufacturers and
their farming-industry clientele have a tendency to be-
come increasingly worrisome. If, nevertheless, conditions
in the industry are deemed satisfactory as measured by
standards of competitive market behavior, perhaps the time
has arrived for determining whether such standards may
have diminishing relevance or usefulness for those who are
most vitally concerned, i.e. the market participants them-
selves--buyers as well as sellers. The end, efficient
service to the market, may be more important than the
means, competitive behavior, which has been sanctioned as
supposedly serving that end.

In view Of the industry's close dependence upon
the profitability Of farming, each full-line company's
management is well aware that its marketing success ul-
timately and most importantly depends upon how effective-
ly the company contributes toward improving, or at least
maintainingi the economic efficiency Of its customers.

As Phillips has noted, "The full-line companies are a-
cutely conscious Of the industry's great contribution to-
ward farm productivity" (112). Massey-Ferguson has, in
part, ascribed the success it has achieved to "aggressive

marketing methods focused on the farmer's actual needs

29

instead of what the manufacturer would like to sell"
(111). Referring to International Harvester, Whitney

says "A breadth of outlook taken by this corporation as
'leader' of the industry has sometimes been mentioned by
observers and even competitors" (112). Ford has made
contributions toward improving farmers' economic knowledge
and managerial efficiency in the pages Of the Ford Alma-
nac.3 Good intentions notwithstanding, the efficiency of
results actually experienced among farmers is subject to
Objective verification and evaluation.

For purposes Of the further inquiry pursued in
following sections, the following propositions are as-
sumed as matters of fact: each Of the full-line firms
Operates within the legal and economic limitations imposed
by an industry structure that is unquestionably Oligopo-
listic yet "workably competitive" in the view Of antitrust
advocates and enforcement authorities. Each company, fur-

thermore, has done and continues to do its individual,

non-collusive best to promote farmers' efficiency in the

 

3Titles Of some of the brief but helpful and in-
formative articles presented in the 1960 edition include
the following: "Small Farms: They Will Pay If"; "Can
You Afford More Land?"; "Figure Profits Before You Expand";
"Team with Neighbors for More Profit"; ”Part-Time Farming
--Money-Maker or Taker?"; "Help in Financing Part-Time
Farming"; "From $500 to 160-acre Farm in 5 Years"; "Op-
portunities for Farm Boys Who Can't Farm"; and "Install-
ment Buying Is Very Expensive" (122).

30

acquisition, use, and disposal Of machinery, subject to
what it conceives as the limitations imposed by the "work—

ably competitive" situation.

III. THE MEASURE OF ECONOMIC EFFICIENCY

IN FARM MACHINERY USE

Those who write or speak publicly concerning the
state of modern American agriculture have generally con-
curred, regardless Of their differences on other aspects
of the subject, in recognizing the central importance Of
the industry's remarkable gains in Operating efficiency.
Efficiency, of course, cannot be measured until it is de-
fined. It is a neutral concept and can be defined in
various ways, depending upon which productive inputs are
identified as scarce factors that should be economized

(3.3).

Trends of Average Efficiengy

in Labor and Machine Use

It has been customary, for purposes Of illustrat-
ing the beneficial effects Of large-scale mechanization,
to choose savings in man-hours of labor as the most ap-
propriate yardstick Of efficiency gains in agricultural
production. The measure of achievement in these terms is

impressive, to say the least. Farm production per man-

31

32

hour increased more than five-fold between 1910 and 1965.
In 1965, farm-product requirements for 37 persons were
supplied per average farm worker in the United States, al-
most ten times the number of persons supplied per worker
in 1820--and about half Of this increase had come in the
last ten years (122; 152:461, 463).

As Solomon Fabricant has pointed out, however,
"It is better not to limit productivity indexes that pur-
port tO measure changes in efficiency to a comparison Of
output with a single resource. The broader the coverage
of resources, generally, the better is the productivity
measure" (12). The Department of Agriculture's indices of
total farm output per unit Of input1 have met the indi-
cated need (at least approximately) for an agricultural
productivity measure that relates output to the combined
consumption Of all resources.

This study, however, is not primarily concerned
with combined physical productivity gains pg£_§gJ but
rather with how the economic efficiency of farming enter-
prises has been affected by changes in the employment of
machinery and labor. The following premises seem logical
and useful as a basis for inquiry into this problem:

. Improvement Of efficiency in terms Of physical
productivity conveys no tangible benefits to the

 

1See, for example, Table 663, p. 458, in Agricul-
tural Statistics, 1966 (152).

33

individual farm Operator, or to society, unless it
is associated with a gain in economic efficiency,
i.e. in the ratio Of value Of product to value of
total resource expenditure.

. Since labor savings and machinery cost-increases
result from tradeoffs accomplished in order to in-
crease productivity, labor and machinery costs are
classifiable as joint costs when the results Of
these tradeoffs are evaluated.

It is desirable to distinguish among three alter-
native performance measurements in terms Of which efforts
to improve agricultural efficiency may be appraised, with-
in a dynamic context of technological change:

. Differences between the technical input-output
ratios theoretically possible under a new v. an
Older state of technological development. This is
an important concept for purposes of engineering
study, but conveys no practical economic meaning.

. Differences between actual technical efficiency,
as measured during a given span of time, and what
theoretically might have been possible under the
synchronous phase Of technological development.
This meaning has abstract interest, but implies
nothing about whether there has been either tech-
nological or economic progress.

. Differences in absolute measures Of aggregate
economic efficiency over a given time period.
This is a pragmatic approach, and is the one em-
ployed in this study. It reflects recognition Of
the fact that efforts to develop and apply im-
proved technology involve costs and are confronted
with Obstacles that have an important bearing on
their economic consequences. It recognizes also
that the effects Of interaction between these
costs and Obstacles extend into the agricultural
economy, and continue in time, far beyond the
stage at which new technical potentials are first
being achieved in some commercial farming Opera-
tions. In effect, two aspects of efficiency-
change--changes in technical possibilities, and
economic performance relative to these changing
possibilities--are merged in a total view Of
changing economic performance.

34

It is presupposed herein that neither credit nor
blame for progress, or lack thereof, should be assigned to
the development and application Of agricultural technology
as a whole, since these are not under single or even coor-
dinated management. Accordingly, the contribution of
farm-machinery technology is subject to evaluation on its
own merits. Unless its net contribution to cost-efficien-
cy throughout agriculture is favorable over time, the
achievement of any related savings for society is debata-
ble at best.

It is axiomatic that judicious substitution Of
machinery for labor (and Of larger for smaller-capacity
equipment) can and in many cases does result in savings
for farm operators. Nevertheless, it is desirable to have
an answer to the empirical question of whether the farming
industry as a whole has been becoming more efficient in
the use Of machinery and labor. Comparison Of the follow-
ing indices (Table 6) will lead toward at least a tenta-
tive answer to this question.

Machinery and labor, of course, are used in the
production Of both crops and livestock. It is therefore
significant that, between 1957 and 1965, the rate of gain
in‘production per dollar Of machinery and labor expense
falls substantially short Of the concurrent rate of gain
Per farmed cropland acre and does not significantly exceed

thatper livestock breeding unit. The upward thrusts of

35

Table 6.--Se1ected farm productivity indices, 1957-1965

 

Total Physical Output

 

 

(1957-9 CrOp Pro— Livestock Per Unit PerfifiolIar
= 100) duction per Production of All of Machinery
Acre Of per Breed- Inputsb and Imputed
Croplanda ing Unita Labor Expensec
1957 93 96 96 96
1958 105 100 103 104
1959 102 104 101 100
1960 109 105 105 103
1961 113 108 106 107
1962 116 108 107 108
1963 119 111 110 111
1964 116 112 109 111
1965 124d 110d 112d 112d

 

aSource: Agricultural Statistics, 1966, p. 460.

 

bSource: Agricultural Statistics, 1966, p. 458.

cThe indicated expenses include those for repairs,
Operation, depreciation, and imputed interest charges on
farm machinery and motor vehicles, and imputed cost of
family and hired farm labor at average hourly wage rates
applicable to hired workers with 25 or more days of farm
wage work during the year. For details of computation and
statistical sources, refer to Appendix A.

dPreliminary.

both types Of biological yield-increase, furthermore, are
reflected in the indices of machinery and labor productiv-
ity. Based solely on comparison of these aggregative in-
dices, therefore, it would appear doubtful that the net
effect Of changes in machinery and labor usage and costs,
upon average-farmer efficiency, has been favorable during

the last few years.

36

Relationships among these particular indices,
however, do not disclose a conclusive answer to the ques-
tion posed. Just as more intensive fertilization and im-
proved livestock practices are reflected in higher output
per dollar Of machinery and labor expense, so outputs per
acre and per livestock breeding unit are enhanced by the
direct contributions Of modern farm equipment toward high-
er yield. Examples of such contributions include more
precise seeding; better control Of soil moisture, improved
methods of fertilizer-application and seed—bed preparation;
timelier planting, tillage and harvesting; more precise
feed-administration, and more effective control of live-
stock environment. On the other hand, it surely is beyond
argument that productivity gains attributable to mechani-
zation, although certainly important, have been on the
whole far less substantial than those derived from other,
more direct-acting, types of yield improving technology.

The problem of gauging the economic effects, at
the average farm-unit level, Of changes in machinery and
labor usage and cost can be approached more directly by
means Of indices which relate (1) levels Of machinery in-
vestment, and (2) amounts of machinery and labor expense,
to quantities Of labor input. In Table 7, these indices
are presented together with indices of total physical out-
put per man-hour, employing 1960-62 as the base period in

order to facilitate comparison of trends since the end Of

37

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mm uouomua UOQDOO mono huwdwsomz Odd mnwdfinomz usmuzo HMOHmhnm

 

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38

the last decade.

Relationships among the above index series, of
course, reflect the influence of many variables. At
first glance, the reader might be led to infer that the
rise Of machinery and labor expense per man-hour has been
kept well in check, as gauged in relation to a directly
related rise in productivity. Such an interpretation would
have little validity, because the indices Of physical out—
put per man—hour reflect also biological yield-improvements
due to all causes--i.e., not only the rise in working ef—
ficiency and the contributions made by improved machinery
design and use toward increasing yields.

The import of these index comparisons, therefore,
appears to be that manpower-productivity gains related ex-
clusively to mechanization have been occurring at a rate
substantially slower than the rate of increase in machin-
ery and labor expense per man-hour; and it is evident also
that continuing increases in aggregate farm-machinery in-
vestment have been running considerably ahead of the rate
of increase, attributable to all causes, in output per
man-hour. In crop-raising specifically, a striking illus-
tration of the latter point is implicit in the comparative
index trends Of crOp output and tractor horsepower, as
related to man—hours expended in growing crops; and the
implication would be even more forcible if presented in

economic rather than technical terms. The USDA's composite

39

index of crop prices received by farmers was almost the
same in 1965 as in 1950 (152:475); but the price index Of
tractor horsepower rose some 56 percent during the same

period (135zM-10).

 

A Conceptual Model: The Dual Aspects of

 

Macro-Inefficiengy in the Application

 

Of Machine Technology

 

Before proceeding to identify and examine specific
factors related to economic inefficiency in the utiliza-
tion of machinery, it will be helpful to establish an ap-
propriate conceptual framework. It is probably not very
useful to focus attention on either the micro (firm) or
the macro (aggregate) aspects of inefficiency unless this
is done within a rationally structured View of mutual re-
lationships and implications.

Technology is a unifying concept which may, con-
veniently and not unreasonably, be used to account in a

2 that differentiate

broad sense for most Of the variables
the more from the less efficient operators. Using this
concept as a tool Of simplifying abstraction and aggrega-

tion, it is possible to visualize the diverse pattern of

 

2The term variables is employed here in the long-
run sense to connote factors that are for any reason dif-
ferentially employed as among different Operators.

40

 

           

 

 

 

 

 

:: i

xl$|x2$...xn$

Figure 1.——Inefficient machine inputs on the scale Of
variable proportions

inefficiency among American farm firms in terms Of the
above graphic model Shown in Figure 1).

This is a static model of a production function
for the farm firm in a long moment Of time during which,
for expository purposes, it is assumed that the E2223 of
technology is fixed, but the complex Of productive factors
which embody it and give access to it 18 variable.

These technology-bearing factors and associated
complementary inputs-—i.e. modern machines, services,

fertilizer, seed, technical information, land, hired

41

machine-Operators, working capital or credit, etc---are
collectively represented by the proxy variable, Xls.
Other assumptions are as follows:

. All farm operators face identical production
functions, defined by the given state Of technol-
ogy and by identical situations with respect to
feasible enterprise choices and endowment with
fixed factors.

. The fixed factors (Xzs....xn$) are those which are
primarily competitive rather than complementary
with the inputs that directly embody modern tech-
nology. The leading contemporary example is the
manpower Of the Operator and his family. Land,
although fixed in total, is variable to the in-
dividual Operating unit and is an essential com-
plement Of factors which incorporate new technol-
ogy. Product price is not affected by output.3
The level of x15 input corresponding to Optimum

efficiency is CA, at which the marginal product of one
x13 input unit has a one-dollar value. If, however, the
inputs Of all producers were plotted along the abscissa,
many Observations would appear below the OA level and a
large number Of others above it. Assuming that OB is the
average Of all Observations below 0A, the average cost of
inefficiency among corresponding producers is represented
by the rectangle RSTU; and the related total cost amounts

RSTU multiplied by the number Of those producers.

 

3It is, Of course, so affected. This aspect
receives specific consideration in the discussion that
follows, but incorporating it into the basic model would
make the latter needlessly cumbersome relative to its
intended purpose.

 

and?“ . Flri‘

42

In terms Of the law of variable proportions, the
costs of inefficiency associated with X15 inputs Of less
than OA may alternatively be explained as reflecting too
little use of x15 or too much use of X25...Xn$. The
general interpretation employed in this paper is that the
system under which machinery is developed and used is in-
efficient tO the extent that Xls inputs of less than OA
reflect 2123 in the system.

Making a similarly arbitrary assumption that CC is
the average Of all Observations greater than 0A, the
average cost Of inefficiency among supra-Optimal producers
corresponds to MNPQ; and the related aggregate cost is
MNPQ multiplied by the number of such producers. Theoret—
ically speaking, inefficiency in this category signifies
that too much x1$ is being used, or, too little
xzs....xn$. Here, again, interpretation is required.

The position taken here is that the system surrounding
machinery-utilization is inefficient in the degree that
it fosters, or fails to discourage, use of too much X15.

The nature Of this model should not be miscon-
strued. It is, in essence, a static picture Of the con—
sequences Of a thoroughly dynamic system, and, as such,
its significance is rather descriptive than normative.
Implicitly, static theories of perfect competition have
rather limited applicability to the dynamic system to

which it relates. Farm firms are significantly unequal

43

with respect tO market power in the purchase of many key
inputs; mobility of firms and resources is limited; the
state of technology is not fixed and the implications of
its develOpment are not neutral; uncertainty is the rule
rather than the exception; economic and technical informa-
tion is unevenly distributed; influence of government
(likewise uncertain as well as uneven in its effects)

is pervasive.

What has been graphically represented is, in
effect, a bi-modal.average—firm-level, status report on
the unending contest between what may be characterized as
centripetal and centrifugal forces affecting efficiency.
Centripetal forces, associated with the law of diminish-
ing returns, are those which by imposing penalties for
inefficiency would drive every surviving producer's input
up or down to an Optimum level if the conditions Of per-
fect competition prevailed. Centrifugal forces, associat-
ed with the exceptions to purely competitive conditions,
are those which tend to promote inefficiency as a side-
effect, reward it, obstruct or retard adjustments to
eliminate it, or deflect or mask the economic penalties
to which it gives rise. These centrifugal forces are as-
sociated with inefficiencies of two general kinds, those
of decreasing returns and those of increasing returns.

Analysis of the causes Of inefficiency is an Ob-

vious prerequisite for formulating and evaluating alter-

44

natives directed toward reducing it. In subsequent dis-
cussion, separate consideration will be given to the cen—
trifugal forces or factors associated with decreasing re-
turns, and to those associated with increasing returns.4
The converse relationship between these two general types
Of inefficiency should be kept in mind, as well as the
contrasting implications with respect to rational demand
or economic need for farm machinery services.

Certainly it is not intended to suggest that per-
fectly or purely competitive conditions are possible Of
achievement; and the attempt to do so would surely be
more costly than beneficial to society. It is, neverthe-
less, clear that important reductions of inefficiency
could be achieved in many areas Of economic activity with-

out impeding desirable kinds Of progress.5

 

4It will be noted that some Of the same factors
are relevant in consideration of both decreasing and in-
creasing returns. In both situations, Of course, the in-
fluence Of these factors on marginal value products runs
in the same direction, but the practical effects tend
to be different because of fundamental dissimilarities in
the surrounding circumstances.

5The indicated finding that economic efficiency
in the use of machine inputs has been deteriorating is to
be understood in the broad sense of absolute change, not
merely in the limited context Of decline relative to a
rising level Of technical possibilities.

45

Efficient Technology and

Marginal Value Product

 

Contrary to what might have been inferred with
respect to the conceptual model presented earlier, tech-
nology-bearing inputs are Of course not homogeneous.
Broadly speaking, for example, larger farm Operators use
(and buy) new, large, modern equipment; whereas small
Operators use (and buy) Older, smaller, less-modern equip-
ment. In view Of the key role Of modern technology in

conveying opportunities for increasing economic efficiency,

 

this fact has special significance.

Efficiency depends both on (1) acquiring the most
advantageous quantities Of the potentially most efficient
inputs and (2) on employing them economically. But the
degree to which the second condition can be fulfilled is
heavily dependent on the extent to which the first one is
met. Decisions on purchasing inputs which incorporate
modern technology are, therefore, Of central importance in
determining how efficiently farmers can Operate in the
future. These are pgy_inputs and, since they add to the
existing stocks Of comparable inputs (new and Old) within
the farming economy, they are marginal inputs. The
dynamics Of change in agricultural efficiency, then, fun-
damentally consist in the interacting influence of factors

which affect individual decisions on, and collective

46

implications of, marginal purchases of new technology.
Dynamism in the system implies that some of these factors
may at times tend to invalidate (from an efficiency
standpoint) decisions that have already been made.

The most useful criterion for evaluating the
economic efficiency implications of acquiring a marginal
input is its marginal value product (MVP) (96:274).6 In
general a factor which increases the MVP of an input tends
to act as a stimulus to purchases; a factor which reduces
MVP tends to discourage purchases of the input. A dis-
tinction must be made, however, between MVP to a prospec-
tive individual purchaser and MVP of his prospective pur-
chase as measured by the effect upon farmers considered
collectively. Since individual and collective MVP-effects
may be Opposed, and since farmers do not make purchase
decisions as a committee of the whole, the direction of
probable influence on collective MVP does not indicate
whether purchases are likely to be made. It does, never-
theless, indicate the direction Of any influence on ag-
gregate efficiency.

The MVP concept, Obviously, cannot be employed

without some risk Of ambiguity. Its further use in this

 

6In this study the term MVP is used to mean (ex-
cept where the problem Of lumpiness is considered) the
addition to total receipts that results from a one-dollar
increment in expenditure on additional inputs, per unit of
time. "Total receipts" here is given the broad meaning of
present value (which may be somewhat subjective) Of the
‘expected stream of all immediate and future benefits.

 

47

paper normally has the primary connotation of measuring
or evaluating economic incentive for individual decisions
on acquiring inputs. Exceptions are indicated where a

broader meaning is introduced or Clearly implied.

IV. THE DYNAMICS OF OVERCOMMITMENT

Generally speaking, only fragmentary scholarly
attention has been given to the dynamic aSpects--underly-
ing causes and wider, cumulative ramifications--Of de-
creasing returns in the use Of purchased durables used in
agriculture. ,A principal reason appears to be that these
problems relate mostly to larger-scale farm Operators,
those who buy the largest quantities of new technology-
bearing inputs and who make the leading contribution to-
ward increasing farm output. Preoccupation with the prob—
lem of inefficient small farming Operations seems to be
mirrored in a comparative lack of concern about the prob-
lem of inefficient large farming operations.

Herein, the broad problem of economically ineffi-
cient machinery use is examined first at the decreasing-
returns end Of the scale. Empirical evidence as well as
simple logic points to this as the end at which economic
inefficiency in the form Of overly-rapid or distorted

growth is actively fed into the total system. Decreasing

 

returns, in the specified context, largely reflect the
taking of inefficient choices; increasing returns largely

reflect failure or inability to take efficient choices.

48

49

Tendency Toward Over-Commitment

in Machinery Capacity

Farm machinery is definitely included among the
resources to which Breimyer referred in writing that

. . . it is the excess of nonfarm capital inputs,
not Of farm labor, that contributes most to excess
production. Surplus labor in agriculture makes life
dismal for the persons who are surplus but does not
kick in much to gross output . . . The overapplication
Of nonfarm capital inputs lowers the realized margin-
al return for farm labor and overstates its apparent
surplus . . .

When (imputed) fixed costs are partly or wholly
disregarded in making decisions as to variable inputs,
a bias enters into the decisions. Commonly, it is an
upward bias on use of those inputs--and on total in-
puts and farm output . . . Overspending on capital
inputs may make highly skilled farm labor more valu-
able but otherwise biases farm-labor values downward.
Failure to impute sufficient cost for farm machinery
may lead to overuse Of seasonally variable inputs
such as fertilizers that require machinery for their
application.

. . . If dollars spent for durable capital inputs
Often lead to overspending on other inputs and there—
fore are not fully recovered, why do farmers spend so
generously for them? One reason lies in the well-
known phenomenon Of cyclicality. Much overspending
for durables takes place during the boom period Of a
cycle--or during any temporary good times. And to
the extent that such new spending comes in waves, the
fact that each farmer sees his output as not affect-
ing price amplifies the spending. Further, perhaps
farmers have a weak resistance to salesmanship (12).

The most systematic explanation Of persistent
tendencies toward over-production in agriculture is the
fixed-asset theory of Glenn Johnson (22) , which provides

a more formal theoretical foundation for Breimyer's

50

remarks quoted above. Johnson proceeds from the Observa-
tion that supply curves, as conceived in elementary theory
Of demand-supply equilibrium, are not perfectly reversible,
except under the improbable condition that acquisition
cost and salvage price are equal. If such equality did
exist, it would be rational, whenever for any reason the
MVP Of a given resource falls below acquisition cost
(equivalent to salvage value), to dispose Of that quantity
Of the resource the elimination of which would establish

a new equality Of MVP with acquisition price, at a lower
point on the supply curve. But, since salvage prices for
most inputs (and especially for purchased farm inputs)
ordinarily are less than acquisition costs, it is usually
rational to continue use Of the resource in production
until it is used up, unless its MVP falls below salvage
price. A resource the MVP of which is below acquisition
cost but above salvage price may be said to be trapped in
production.

The trapped-resources phenomenon would have rela-
tively little importance in explaining persistent over-
production by farmers, if all such resources were normally
expended during a single productive cycle. A large and
increasing portion Of the modern farmer's total resource
commitments, however, is in the form of durable inputs,
representing permanent investment (land) or expended

gradually over a period Of years (own and family labor,

51

machinery, buildings). Where a portion of an Operator's
durable resource commitment has, in effect, been captured
in a fixed-asset trap, with MVP less than acquisition
cost, he is saddled with unavoidable capital losses. The
extent Of such losses can be minimized only by employing
the fixed resources in Optimum combinations with other
inputs-—i.e., by producing continuously at output levels
for which MVP's are below actual or imputed marginal
costs. Loss-minimizing adjustments toward this end Often
can result in even further expansion of production, where
full utilization of an overcommitted resource requires
additional investment in other fixed and/or variable in-
puts. (For example, the owner Of under-utilized tractor
power and machinery capacity is a likely customer for
marginal land that could be brought under cultivation with
heavy doses of irrigation or fertilizer, or for other land
that may be priced above its MVP.)

Since nO entrepreneur would deliberately involve
himself in capital losses, fixed-asset entrapment is
broadly attributable to errors Of over-commitment, accord-
ing to Johnson. But, given the high degree and manifold
nature Of imperfect knowledge and inherent uncertainty
accompanying farm-input decisions, as he points out, a

very large number and aggregate amount Of errors are

52

unavoidably made by farmers, collectively, each year.1

These include, Of course, errors of undercommitment as
well as those Of overcommitment. Some errors Of under-
commitment, however, are completely correctable; and the
effects of many others can be limited to the consequences
of delay in making corrections; but errors of overcommit-
ment are in no case fully correctable, and in general are
less nearly correctable than those of undercommitment.
Hence, even assuming a random initial distribution of the
two kinds Of errors, the consequences of overcommitment

tend to accumulate, year after year.

 

1Aside from the fact that the buyer Of supra-
Optimal machinery bears only an infinitesimal portion of
the revenue-reducing consequences Of his decision (as a
usually negligible Offset to his own revenue increment),
he faces difficult problems in evaluating the probable
effects on his own profitability. These problems arise
from what Breimyer has called "a difficulty inherent in
the decision-making process--that of associating, for
several kinds Of capital input, incremental units of in-
put with those Of output" (12). "There are two principal
forms of this structural weakness. One, the more famil-
iar, . . . arises from the temporal hiatus between capi-
tal-input decisions and realized output . . . A second
form . . . is the spending on durable goods which last
several seasons, and in fact on all capital goods that
have multiple products. This is the category of fixed
overhead costs and of joint costs . . . Any spending for
a capital good that lasts through two or more production
cycles introduces an arbitrary element into the annual
production function. It interferes with the whole concept
of marginal cost, which basically applies to variable
costs determinately associatable with output. Sunk costs
establish no minimum marginal return that must be met,
other than salvage value. In short-term marginal analy-
sis, sunk dollars don't count" (12).

53

Even in a year Of severely depressed prices, in
which imputable MVP's Of many fixed resources fall below
salvage values, probably only a limited amount Of excess
capacity will be shaken out, as many Operators who are
financially able will absorb current Operating losses and
maintain existing plant in the expectation or hope of
better days. Johnson, interpreting the results of re-
search performed by Quance (112)-—which are supported by
the work Of VanGigch (121) and Of Wirth and Nielson (112:
12:21)--observes that

Over the 1917-65 period, overcommitments of

specialized farm or non-farm produced, durable capi-
tal have not been followed by liquidations, as the
salvage value of such capital outside Of agriculture
is virtually nil. Instead, these items have remained
in production at substantial capital losses to farm-
ers (22).

TO this it might be added that, where salvage
value to the current owner is determined by acquisition
value to another farmer, the same forces which bring about
a lowering of MVP will, 1p§g_ggggg, have a similar effect
on the salvage or transfer price. Under the assumption
that buyers as well as sellers make rational, well-in-
formed economic decisions regarding prospective transfers,
farmers who sell their excess durable resources to others
do not avoid or shift any part Of the capital loss result-
ing from their own errors. On the other hand, farmers

who can effect loss-minimizing adjustments--acquiring ad-

ditional complementary inputs and expanding their outputs

54

--dO thereby succeed in shifting portions Of their burden
to other farmers, through the price-depressing effects
of what they consequently add to market supply.

Moreover, in the latter case the economic losses
that eventually result for the farming industry aswa
whole are greater in aggregate than the capital losses
that would be suffered 1p_£g§g if no portions thereof
could be shifted by those immediately affected. This is
because Of (l) inelastic demand for farm products, (2)
the long-continuing productive role Of durable resources,
and (3) what might be termed a "domino effect". That is
to say, the reduction Of MVP's that results from lower
product prices implies an overcommitment condition with
respect to resources already owned. The existence of
such a condition, in turn, increases the probability of
further commitment errors (when thereafter prices of farm
products fluctuate upward for some exogenous reasonz) as

well as further loss-minimizing adjustments.

 

2Phillips declares that "on the demand side, the
outstanding feature of market structure (in the farm-ma-
chinery industry) is the high sensitivity of farm machin-
ery sales to farm income and their low sensitivity to
price" (115:337). Cromarty, on the other hand, found in
1959 that a I0 percent increase in machinery prices had
been accompanied by a 10 percent decline in purchases,
and a 10 percent increase in net farm income had been as-
sociated with only a 5 percent increase in machinery pur-
chases (33:40). On a more practically meaningful level,
however, BOEH Cromarty (33:48) and Fox (62:25) have con-
firmed that tractor purcHases have a stroneg negative
relationship to changes in the ratio Of tractor prices to

prices received by farmers.

55

Lumpiness of New-Machine

 

and Labor Purchases

 

Much of the specific relevance of Johnson's
fixed-asset theory to overcommitment, as related to farm-
machinery inputs, derives from the fact that machinery
services, in the form in which they usually are acquired,
are "lumpy" resources:

A farmer can use a little more or a little less seed
or gasoline, but tractors and combines come in large
units. . . . Where machinery is important, there is

a tendency for family-Operated farms tO adjust tO the
size that a family can take care of in rush seasons,
with the kinds of equipment available. . . . The
power unit has been outstanding among machines in
setting the pattern of farm sizes (129:391).

Yet,

It is not imperative that farmers adjust to the maxi-
mum acreage that can be handled with their equipment.
Per acre costs for each machine tend to gO down as
acreage is increased, but the additional reduction
tapers Off into insignificance as maximum acreage is
approached (129:392).

Nevertheless, given a fundamentally positive atti—
tude toward Operational growth, fostered by a technologi-
cally dynamic environment, the availability Of a new tool
Of growth clearly acts as a challenge:

The size Of farm does not respond at once to new in-
novations, however. Instead, great stresses are set
up in the structure Of farming. Farmers mechanize;
then they find that they have the machine capacity to
handle more land. The search for additional land may
cause them to move, to rent additional land, or to
bid up the price of neighboring tracts (129:391-2).

 

56

Labor inputs too are "lumpy" in the physiological
and cultural senses; and in the American culture they are
increasingly so also in an economic sense. This factor
may contribute significantly toward explaining why many
of the high-capacity machines developed in years past have
not been of such a nature as directly to diSplace laborers,
but rather have made it possible to do more work with the
farm family's own labor resources. In more recent times,
as the pace of farm-unit expansion has grown faster, as
heavier fixed investment has increased the pressure for
full capacity-utilization, and as farming has tended to
become more specialized, big-farm Operators need consider-
able hired manpower. Many of them, furthermore, are pre-
pared to pay wage-rates that are much improved over those
Of not tOO long ago.

An important difficulty, however, is that highly
specialized Operations, especially in crop-raising, are
likely not to lend themselves to full year-around employ-
ment. In such cases it would be advantageous for managers
Of such Operations to be able to buy labor in hourly,
daily, weekly, perhaps even monthly increments in order
to balance the use of both equipment and labor against
their paid-for capacities. If, however, full employment
of his own fixed resource is equally important to the
‘well-qualified prospective employee, it is not hard to

understand why much complaining is heard about the

57

scarcity Of skilled farm workers (stOOp-crop labor a-
side).

TO the extent that this somewhat speculative in-
terpretation has basis in fact, it would appear that the
dual "lumpiness" Of machinery and hired labor may have
contributed materially to diminishing individual returns
of farmers who expanded tOO hastily. The condition could
quite readily manifest itself either in the form of fully-
utilized machine capacity with under-utilized manpower,
or vice-versa. It might be expected, in View Of the
relatively greater flexibility and reversibility of com-
mitments for hired labor, that underutilization of ma-
chinery would be the more common situation, as among farm-
ers who have acquired more equipment than they and their

families can physically Operate.

Response of Farm-Product Prices

to Aggregate Output Changes

 

When the collective economics Of agriculture are
considered, it becomes apparent that overcommitment in an
aggregate sense is likely to result not only from individ-
ual choices that reflect private mistakes, but also from
rttflunh1§¥brroritrod.individual-input-decisions.

Demand for most farm products, as stated earlier,

is inelastic with respect to price changes. The broad

58

implication Of this fact, as it applies to marginal value

products of farm inputs, is that, given an assumed or ex-

pected condition of short-range supply-demand equilibrium,
the MVP of incremental inputs will be negative for the in-
dustry, though very possibly not for the individual farmer
utilizing the input increments.

Total revenue for all farmers, for any particular
year, is affected by a number of factors over which they
have little or no control, either individually or collec-
tively, such as weather conditions, insect infestations,
demand fluctuations, and monetary inflation or deflation.
The factor which is most decisive in the long run, how-
ever, is one Over which they do exercise some control,
individually but not collectively: the summation Of all
input decisions which they make individually.3 As a
seller in a purely competitive market, the individual
Operator correctly assumes that variations in his own out-
put (hence also in his inputs) will not significantly af-
fect his market price. If, however, the collective effect
Of such individual decisions is a total output that sig-
nificantly exceeds that commonly assumed as a basis for

the average anticipated selling price, the collective

 

3The benefits Of new technology are implicitly
included among the inputs which a farmer may decide to
purchase.

59

result will be a negative MVP for inputs corresponding to
the excess output.

To the extent, therefore, that additional expend-
itures on farm machinery services contribute to reductions
in product price below an average expected equilibrium
level, the MVP of such expenditures will be negative to
the farming economy as a whole, though not necessarily to

the owners of the additional inputs.

Governmental Policies and Programs

Ceteris paribus, overcommitment may be expected
to be less prevalent if it is attended by direct economic
penalties, more prevalent if it is not penalized, and
most prevalent if it is encouraged or subsidized.

Under Johnson's asset-fixity theory, strong and
persistent tendencies toward cumulative overcommitment of
purchased farm durables are expected, even under the lim-
iting assumption that individual errors are directly
penalized. But, as noted previously, losses in aggregate
farm revenue that result from input increases by some
farmers may be borne largely by other farmers, 50 that
overcommitment is not significantly penalized. Further-
more, when the influence Of long-established governmental

policies and programs is taken into account, it appears

60

there has been powerful inducement toward and subsidiza-
tion of increasing farm inputs and outputs.

A great deal Of scholarly attention has been de-
voted by agricultural (as well as other) economists to
the effects Of governmental action upon agricultural pro-
duction and resource use. A review of the literature on
this subject would lead tOO far afield and therefore is
not attempted here. It seems virtually self-evident, in
any case, that individual incentives for expanding re-
source commitments in farming have been strongly fostered
and enhanced by a wide range Of programs, policies, and
practices such as the following:

. Price-support programs

. Subsidies for approved conservation practices

. Bases employed for determining acreage allotments
. Land-reclamation and irrigation projects

. Investment tax-credits

. Export subsidies and import curbs

. Agricultural research, extension, and marketing
services

. Tax-differential on petroleum-product use
. Road-building programs
. Rural electrification

. Exemptions from minimum-wage and fair labor-
standards legislation

. Preferential treatment with respect to freight-
rate regulation.

61

Assuming that the level Of farm income is the
major variable (technology aside) associated with changes

in farm-machinery demand (115:337-8),4 it follows that

 

government programs that raise or support income from
farming Operations tend thereby to boost or maintain ma-
chinery-demand, contributing to the overcommitment poten-
tial. This contribution, moreover, derives special po-
tency from the fact that the largest share of program
benefits falls upon the class of Operators who are most
able to increase their resource commitments.

The relationship Of government programs to over-
commitment Of farm resources has two other important, in-
terdependent aspects:

. Overcommitment that comes about as a result of
governmental action is additional to the over-
commitment that would occur in any case; hence
its costs are incremental and therefore higher in
the range of decreasing returns.

. These high incremental costs are borne largely by
by (l) the non-agricultural economy and (2) farm-
ers who are not in a position, or otherwise fail,
to taEe substantial advantage of the related bene-

fits. Thus, it Often happens that such costs are
overlooked in discussion of economic efficiency-

 

4Refer to footnote 2, p. 54.

5A contemporary analogy which has received some-
what greater attention is that involved in urban traffic
congestion: "Normal automobile charges do not reflect the
high costs Of streets and highways in the large urban a-
reas. Hence a substantial part Of the cost Of cars does
not fall specifically upon the vehicles causing the urban
congestion. This has led to talk of systems for metering
urban highway use by individual vehicles" (112).

62

gains achieved by farmers who expand their Opera-
tions aggressively.

Rapidity of Technological Change and

Shifting of Obsolescence Costs

Possibly the most mischievous popular misconcep-
tion with respect to technological change in agriculture
is the notion that a rapid pace Of change can be equated
with rapid gains in economic efficiency, and hence with
rapid economic progress, among American farmers. Such a
belief would be well-founded only if there were no costs
accompanying the benefits and if the benefits were rapid-
ly disseminated and promptly and thoroughly exploited a-
mong all or most bona—fide6 farmers. These stipulations
are, Of course, widely at variance with the facts-—so far
that it appears worthwhile considering whether, within
some areas Of resource technology, the very rapidity with
which change is promulgated may tend to result in negative

net effects on agricultural efficiency.

 

6The term "bona fide farmers" is used here, in
contradistinction to "commercial farmers", to ensure in-
clusion Of part-time and other smaller-scale farmers who
have an authentic economic interest in farming, without
regard to the possibility Of an unfavorable outlook as to
their economic survival in farming.

7As Johnson has Observed, technological advances
are represented by inputs that cost money; and when this
fact is taken into account there is an implicit possibil-
ity that rates of adoption may be excessive (83:11).

63

Technology as rapidly developed and disseminated
by the farm machinery industry8 affords an apt illustra-
tion Of the problem. Fundamental considerations are that

. R & D expenditures are substantial.9

. Inevitably, considerable lost motion (i.e. waste)
is involved in R & D efforts.

. R & D activities presumably provide the impetus,
directly or indirectly, for a large share of the
industry's new capital-expenditures, which to-
taled $109 million in 1966 (122).

. The allocated product-unit share of R & D and new
capital expenditures is additional to all Of the
other manufacturing cost and markup which the
buyer (or successive buyers) must recover through
his (or their) Operations before farm-business
profit can be realized on the investment.

. Acceleration Of R & D tends to accelerate the rise
of (potential) value-product incorporated in new
equipment, as well as tO increase the cost Of
effort expended to achieve it and the capital in-
vestment committed to its exploitation;--all
three factors being reflected in the selling
price.

 

8Deere and Company, to cite a leading example,
reportedly has more than tripled its annual outlays for
product research and development in the last ten years
(138).

9It was reported that the industry spent over
$130 million on research and development in 1966, and
planned to exceed this level by more than 8 percent in
1967 (76). The $130 million cost in 1966 corresponds to
$577 p5? tractor buyer (146). The distortion contained in
this statistic is relatiVEIy moderate, considering that
(1) more tractors are sold than any other farm-machinery
product, (2) their value is a major share Of total ma-
chinery sales for farm use (about 40 percent of the 1963-
65 average (138: Table 2), and (3) many tractor purchasers
buy other equipment_also.

64

. Assuming that the product is utilized at a maxi-
mum practicable rate (an unrealistic assumption,
in view of the prevalence of Operational ineffi-
ciency), recovery on the investment is a function
Of time-in-service, provided that subsequent
technological (or other) develOpmenEs do not
erode value—productivity (and market value) 2y“
imposing Obsolescence on the product in use.

 

 

 

 

. Time-in-service required for recovery of the in-
vestment (and for subsequent realization Of pro-
fits corresponding tO expectations implied in
payment of the purchase price) is a function Of
purchase-price, annual value-product, and market
or diSposal value Of the machine.

. Ceteris paribus, annual value-product, for a ma-
chine incorporating given technology, is a func-
tion Of farm-product prices and physical depre-
ciation.

. Disposal value is a function of expected value-
product or Of scrap value, whichever is greater.

. Farm-product prices, again ceteris aribus, are a
function Of farmers' aggregate output, wHich is a
function of the quantities and combinations of
resources used in production.

. Except for Older equipment that is kept in re-
serve tO provide backup capability, farm machinery
is not finally retired from productive service
until its expected value product (net Of mainten-
ance and repairs) is reduced to the level of its
ultimate salvage value.

Based on the analySis outlined, a meaningful syn-
thesis emerges. Continuously high levels Of R & D ex-
penditure are associated with rapid increases in expected
MVP's for successive models--and quite possiblyuflh short-
er time-lapse between new-model introductions. Expected-
MVP increases induce strong new-model demands. Heavy

purchases Of new models increase the downward pressure Of

farm output on price, because Older models are retired

65

from production at a slower rate, relative to productive
capacity. The decline (absolute or relative) of farm-
product prices accelerates the depreciation of expected
value-products, and market value, of Older equipment.
Acceleration Of depreciation on Older units lengthens the
time-in-service needed for recovery Of investment plus
some profit on them. But, physical depreciation sets a
more or less fixed limit on the time period that is avail-
able for such recovery; and rapid Obsolescense may impose
an even earlier limit.10

Finally, continuously high R & D expenditures imply
another consequence, the acceleration of machinery price
increases. Unless these price increases are associated
with considerably larger increases of expected value-
product, the corresponding rise in level of farmer-invest-
ment required makes a further contribution toward length-
ening the time required to break even or to realize ma-
chine-related profit. Particularly as this factor is as-
sociated with falling output prices, it clearly increases
the difficulty Of coming out ahead and the probability

that farmers as a whole will lose economic ground with

 

l0"Rapidly changing technology makes Obsolescence
an increasingly important factor. . . . Machines may be-
come technically obsolete before they wear out" (138).

66

respect to their use of machinery.1

Let it be supposed, for the purpose of further
discussion, that over-rapid improvement of farm-machinery
technology has in fact fostered overcommitment and conse-
quent losses among farmers. How can such a tendency be
reconciled with the fact that the largest quantities Of
new machinery are bought, and traded fairly regularly for
newer models, by the same rather small group of affluent
(and/or large-scale) farm Operators? Under Johnson's
fixed-asset theory, as previously discussed, overcommit—
ment is attributed basically to errors made by individuals
in the face‘of imperfect knowledge. Also, it is held that
individuals who have overcommitted cannot shift their
losses to others. But, surely the same individuals do not
systematically repeat the same errors--and remain com—
petitively on top.

A rational explanation of this seeming paradox can
be attempted by taking an imaginary look at the problem
through the eyes of the experienced, prosperous new-ma-
chinery user:12

. The list price of the new model is significantly
higher than that of the one it supersedes, but

 

11This is, Of course, not to say that they neces-
sarily would lose ground overall; gains on use of other
improved inputs might outweigh (and thereby disguise) un-
favorable net economic effects Of machinery costs and
benefits.

12Cf. (11; g).

67

the expected value-product appears at least com-
mensurately improved. Furthermore, a sizable,
experienced customer may be able to negotiate a
special deal (Z1; 22).

Experience shows that the annual burden of market
depreciation is much the heaviest in the first
two or three years of service; and the plan is to
dispose of the machine during or at the end Of
the third year (depending on market conditions).

That burden, however, is reasonably predictable,

and will not be unreasonably heavy if the machine
is given the fullest possible employment over the
three years. Significantly, a partial Offset is

provided by warranty coverage during a portion of
that period--as well as by continuing solicitude

toward a steady customer, on the part of manufac-
turer and dealer.

Since the firm has adequate complementary re-
sources at its disposal or within reach, there is
no generally valid reason why value—in-service
covering at least the full amount of normal market
depreciation cannot be extracted from it in three
years. (Allowance is made for some decline in
output prices as other aggressive firms follow a
similar course.)

If downward pressure on farm prices elicits price-
support measures nominally dedicated to small
farmers, the contemplated machinery investment
will prove highly profitable. In any case, the
firm stands a good chance either Of using other
resources profitably with the aid Of financial
leverage, or Of experiencing a very satisfactory
capital gain.

A major consideration is the need to avoid or
minimize any costs of obsolescence. Obsolescence,
far from being only a risk, seems virtually cer-
tain (based on thoughtful Observation Of recent
trends) to be an important factor sooner or later.
However, if the machine is resold after only three
years'use there is a reasonably good chance that
substantially all of that cost will be asSumed by
the second and any subsequent users, because
usually up to that time no one knows when, how
much, or with absolute certainty if, Obsolescence

68

will be incurred before the machine wears out.13

. There is also the possibility that a trading ad-
vantage can be realized with respect to the dif-
ference between market depreciation and physical
depreciation. Market depreciation is based most-
ly on average market-evaluations of physical de-
preciation and Obsolescence on units of given
make, model and age. If the unit is given much
more than average use during the three years, it
may be possible, in effect, to sell more years or
hours of satisfactory service than remain in the
machine's useful life.

If this representation Of the new-machinery buyer's
thinking is reasonably accurate, it appears to support the
following generalizations:

. Overcommitment in machinery by farmers in the ag-
gregate may result to a considerable extent from
substantially error-free, repetitive individual
economic decisions.

. These individual decisions appear to be based
partly on considerations Of economic efficiency
and partly on Opportunities to exploit competi-
tive advantages that are inherent in a farmer's
scale and method of Operation.

. Although there is no apparent reason to suggest
that one individual can shift to another losses
which are already implicit in actual events, dif-
fering degrees of imperfection in knowledge or
understanding with regard to the future may

 

13Furthermore, there appears to be a sort of
caste-system among farmers, with respect to the degree of
Obsolescence which they are willing or economically com-
pelled to accept: "The farmer with a large Operation and
strong finances will tend to trade frequently and keep
his equipment fairly new. The Operator with a modest-
size farm may run his equipment until it's nearly worn-
Out before he trades. An Operator Of a small farm may
buy the used tractor and finish wearing it out, while
the Operator Of a very small acreage will probably hire
custom work done" (Noah Hadley, quoted in 22).

69

provide the basis for some individuals to shift
future losses to others.

The last point merits special emphasis: the
dynamics Of the system of rapid technological change in
farm machinery (and implicitly its commercial advantages)
appear to be crucially dependent upon the ability of its
beneficiaries to transfer to others the losses which it
generates.

Discussion of the costs of rapid change should
not be concluded without noting that there are conse-
quences also in the broader, socio-economic dimension, to
which Heady has called attention:

. . . An important question is whether the rate of
change in the farm firm should have been any more
rapid over the last 15 years in major farming areas

. . . especially in extensive farming areas with
great spatial separation from concentrated population
and industrial areas.. The nation's relatively high
unemployment rate could.be given as one reason. . . .
Change in the structure of individual firms has its
impact on nonfarm families in rural communities
through diminished demand for goods and services, a
declining tax base at a time Of need for increased
investment in education.and public services, and fre-
quently a general deterioration of services in rural
communities. Optimum is a common trade term in
economics, but what is an Optimum rate of change
(72)?

V. THE REVERSE DYNAMICS

OF UNDERCOMMITMENT

Farming under conditions of increasing returns to

new machinery-technology is a situation that applies to a
very large number of Operators, generally including those
with relatively small and unprofitable outputs. Not only
are they at the lower end of the scale with respect to
acquisition to new technology, but also many of them lag
in the adoption and efficient use Of prevailing tech-
nology. Undoubtedly, there are among them some who years
ago greatly overcommitted themselves on equipment that
now is Obsolete. Warren saw this happening as long ago
as 1916:

The danger of overinvestment in machinery is even

greater [than that Of overinvestment in buildings],

for there are skilled agents whose business it is to

make sales. The average farm in Livingston County

has an investment in machinery of $6 per acre Of

crops. Many a farm Of an amateur has ten times this

amount. The machinery on a general farm ought not to

cost over $10 per acre Of crOps (166).

Increasing returns or undercommitment on inputs

Of modern machine services, as experienced by individual

Operators over extended time-periods, indicate the pres-

ence of one or more Of the following handicaps:

70

71
. Inadequate managerial ability relative to the
tasks of Operating farms of viable size.

. Inadequate total financial resources for viable
Operation and business growth.

. Inefficient fixed-resource combinations attribut-
able tO the cumulative effects of past commit-
ment-errors.

. Economic and cultural barriers to exit by Opera-
tors who are not able to earn satisfactory returns
from farming.

In a study which is concerned with problems Of in—
efficiency, the inefficiency Of undercommitment is not
adequately explained in terms of differences in individual
ability. The premise adopted here is that, while these
differences certainly are important, it may prove more
useful to examine the characteristics Of the technological
and economic framework within which undercommitted farmers

Operate.1 The economic terms and conditions under which

modern technology-bearing inputs are developed and

 

1There exists a popular assumption that part-time
farmers, who in 1964 Operated perhaps one-third Of the
total number of Class VI farms, are for the most part in
process of exit or barely managing to survive in farming.
However, in a survey Of farmers acquiring land in Thumb
and South Central Michigan through purchase or rentals,
between 1959 and 1963, it was found that nearly half Of
the part—time farmers but only one-third of the full-
time farmers acquired land. In industrial Michigan, where
part-time farming is becoming a common practice, a large
proportion of part-time farmers have no intention of be-
coming full-time Operators, but modern farm equipment
allows them to handle increasingly larger-sized farms
(31). In another study covering 74 Michigan farmers, no
sIEhificant difference with respect to the adoption of
approved agricultural practices was found between those
who reported no Off-farm work and those who spent one-half
or more of their time in such work (78:17).

72

acquired constitute extremely dynamic features of that
framework; and terms and conditions relating to the serv-
ices Of farm machinery appear particularly significant in
their influence on the prevalence, magnitude, and per-
sistence of undercommitment.

In the pursuant discussion some mention is made
of various aspects of small-farming as such, because in-
creasing returns are Often (though not necessarily) asso-
ciated with small-scale Operations. Nevertheless, the
central issue is that Of identifying, understanding, and
evaluating conditions that may tend to encourage or ex-
tend the incidence Of increasing returns, or to reduce

the magnitude of the problem in an inefficient manner.

Differences and Variabilipy

in Managerial Adequacy

The requirements imposed on a manager's ability
in modern agriculture are large and increasing. An effi—
cient total system of farm machinery services, it will be
argued here, can and should promote the capability, and
facilitate the tasks, Of management as it relates to ma-
chine use.

Up tO scale-limits substantially exceeding eco-
nomically adequate sizes, it would appear, the relative

importance of managerial ability to survival and

73

prosperity in the farming business has been inversely re-

2 An Ob-

lated to Operating scale and financial ability.
vious corollary--putting aside the financial-ability
factor for later discussion--is that the adequacy Of a
farm-manager's ability depends on (1) the 1gy§1 of his
ability and (2) the level of difficulty associated with
the task Of managing an Operation Of viable size.

In a static framework, managerial ability is
conceived Of as a dimension which varies between individ-
uals but is fixed for each individual. Similarly, the
scale of viable operation and the difficulty Of managing
Operations Of viable scale are regarded as given quanti-
ties. It follows that the relative inability of some in-
dividuals to manage farms of viable size under prevailing
conditions must be explainable in terms Of their inherent
inadequacy as managers. By attempted extrapolation, it
might be thought that inducing such individuals to exit
from farming is, pgp‘gg, a contribution toward improved
efficiency in agriculture.

If the exercise Of managerial functions and the
environmental conditions under which they exercised are

conceived of as a dynamic system, however, a complex Of

 

2The bias of governmental policies and programs
toward subsidization of large-scale Operations, partly
at the expense of smaller ones, provides much Of the
factual basis for this argument.

74

interacting variables can be identified. Practical mana-
gerial capacity in the individual Operator varies as a
function of experience, knowledge and acquired skills,
hopes and expectations, apperceptions of what is both at-
tainable and worth striving for, etc. These internal
variables, in turn, are dynamically influenced by the
presence or absence Of (1) incentives and rewards, and
(2) assistance toward managerial self-improvement and Ob-
jective accomplishment. A farm Operator tends to become
more able to meet the requirements imposed on his mana-
gerial effort as the level, quality, and practical rele-
vance Of incentives and assistance are increased.

Whether the level Of an operator's managerial
ability is adequate is determined also by the qualitative
and quantitative dimensions of the farm-management task.
These dimensions are important variables. There is a
persistent tendency for managerial tasks to become quali-
tatively more complex and quantitatively larger in scale.
As the pace, direction, costs, and benefits of technolog-
ical change are affected by private as well as public de—
cisions, however, it is evident that the character and
rate of change in complexity and scale are not autonomous-
ly determined. The qualitative requirements Of complexity
and the quantitative burdens Of scale are strategic vari-
ables in the sense that they can be and are modified by

strategic choices in the economic and political spheres.

75

It is to be expected that undercommitment will be
more prevalent and persistent, involving greater impair-
ment Of overall economic efficiency in agriculture, to
the extent that any or all Of the following conditions
result in excessive managerial burdens being carried by
smaller Operators:

. Unnecessarily rapid increase in minimum viable
farm-size, reflecting the magnitude and major
emphasis of R & D expenditure and related merchan-
dising effort by the farm-machinery industry, and
the prices of its products.

. Unjustifiably inferior assistance received by
smaller as compared with larger operators, with
respect to selection Of equipment and modes of
acquiring equipment-services, planning for effi-
cient equipment use, prompt and efficient main-
tenance and repair service and information, etc.

. Inequitable new-machinery Operating returns for
smaller as compared with larger Operators, re-
flecting (l) biased allocation of governmental
incentives and rewards for efficient (or ineffi-
cient) Operation, and (2) bias in farm-machinery
price structures, and in terms for sale Of ma-
chine services, favoring purchasers Of larger
equipment.

The first Of these three general conditions has
already been discussed in some detail, as has also the
incidence Of bias in the allocation Of benefits from
government programs. Reasons for believing the other
hypothesized conditions also exist in reality will be ad-
vanced subsequently.

Illustrating the possibilities that exist for en-
hancing managerial adequacy, one method by which manager-

ial capacity may be better matched with requirements has

76

been reported by Larson:
One large vegetable-shipper in this country is Oper-
ating 2,500 acres without owning a single piece Of
agricultural equipment. All his work is contracted
and he sticks to administration only, since he be-
lieves this is the farm manager's real function
(95:24).

In the immediate context it is relevant to con—
sider, if such an arrangement is expedient and worthwhile
for a large Operator, whether it might not be even more
advantageous for a great many smaller ones. There are
Obvious implications with respect to burdens, require-
ments, assistance, and, derivatively, even incentives.

This idea merits careful exploration and will be examined

more fully farther on in this section.

Financial Ability and Conditions

 

Of Firm Growth

 

Much Of the difference between success and fail-
ure in farming Operations can be accounted for by the
relative adequacy or inadequacy of resources owned or
controlled by the farm firm. Moreover, financial require-
ments have both static and dynamic dimensions. Resources
which are sufficient today will not suffice for tomorrow's
needs.

Capital requirements per farm and per worker have in-
creased to the extent that it is becoming increasing-

ly difficuly for an individual, during his productive
years, to accumulate a sufficient amount to finance

77
an economically sized operating unit. This will be
still more true in the decades ahead (21:383).
According to one prediction, by 1975 the "average

level of investment per farm will skyrocket from the
present $100,000 to $250,000" (12). .Average assets per
Michigan farm have been projected to increase from about
$42,000 in 1959 to about $130,000 in 1980 (1112). This
prospect presents the two rather distinct problems of (1)
how a would-be farmer can acquire control of sufficient
resources to enter commercial farming on a viable scale,
and (2) how an existing Operation can be develOped and I
expanded at a rate sufficient to maintain viability as
costs rise and scale-requirements increase. The former
problem is not germane tO the purpose of this study, but
the latter one is highly relevant. Dynamism in the pat-
tern Of farm ownership and organization implies the need
for dynamism in the individual farming unit, and is im-
portantly affected by the dynamics Of technology and
economics in the development and application of farm ma-

chinery.3

 

3Results from a study Of "what would have hap-
pened if a typical livestock feeder in the cornbelt had
continued to farm (with exactly) the same (inputs)", be-
tween 1957 and 1967, indicated his costs would have risen
20 percent and his net income would have dropped 19 per-
cent. The largest item Of cost-increase was taxes, fol-
lowed closely by machinery. Machinery costs, represent-
ing 17 percent of total costs excluding taxes in 1957,
accounted for 39 percent of the increase in that total to
1967 (Q1).

78

Small farming Operations are particularly handi-
capped by their relative inability to generate capital
savings.

A part-time farmer in a low-farm-income area Often
receives little or no cash in return for his invest-
ment. Commonly he settles for the rental value Of
his dwelling, the value Of home-produced food, and
increase in land value as returns for his consider-
able investment in land, labor and capital. . . . In
seeking the best alternative uses for the farm re-
sources employed (by such operators, ERS researchers
in a northeast Texas study) found choice Of enter-
prise more limited by capital than by land or

labor (121).

The handicap is only less acute in farming on a
scale large enough to generate cash that may be used al-
ternatively for consumption or for farm inputs.

In farming there is a strong interdependence between
the business firm and the household, since the farm
family is both a producing and a consuming unit. If
income is insufficient to make farm investments and
expenditures because of the necessity or the family's
decision to make home and family expenditures, this
will have an impact on future farm production and in-
come. On the other hand, decisions tO make major in-
vestments in the farm business may prevent the farm
family from moving to higher levels Of living in the
short run (109:51).4

 

4In a terminal survey assessing the results Of a
township-extension experiment conducted in Michigan,
farmers in the experimental and control samples were
asked if they could recall instances of having to choose
between making an expenditure for the farm and one for
the home during the last five years. Sixty percent Of
the total experimental sample and 43 percent of the total
control sample cited such conflicts. Conflicts between
purchases of farm machinery and various home items--
usually basic home equipment such as ranges, refrigera-
tors, and washing machines--were mentioned most frequent-
ly (109:51).

.2. M .hfihfl “Fifi

79

Bailey has listed the necessary conditions for

growth Of the farm business firm as follows (2):

. Minimum starting size

. Excess managerial capacity

. Profitableness of the business

. Some unused resources

. Added resources procurable.

An 2_priori case can be made for the proposition

that patterns relating to the develOpment and distribu-

tion of farm-machinery services may have an important

bearing on each one of these necessary conditions. Their

relevance to the conditions regarding minimum starting

size and level Of managerial capacity have been indicated,

directly or indirectly, in previous discussion; and their

relationship to the other three conditions can be con-

ceived as follows:

. The condition Of business profitableness has two
significant aspects--

(1)

Of primary importance is the requirement of
basic growth strategy, to minimize the
short-run cost per unit of production serv-
ices, one production period at a time (222).
This means that cash receipts on the average
must exceed cash disbursements. The rate Of
firm growth is slowed, to cite Bailey's ex-
ample, if cash expenses for family living
are $3,000 annually instead Of $2,400. Sim-
ilarly, if machine services cannot be pur-
chased as they are used, and large additional
amounts Of cash must therefore be used, in
effect, to buy future machine services, less
cash will be avEIIESIe for expenditures

80

Offering more favorable MVP's and greater
growth potential.5

(2) Likewise fundamental is the requirement that
MVP's on expenditures for different inputs
should be as nearly as possible equalized,
and in no case less than marginal cost.

This condition is violated where losses
through more-than-anticipated Obsolescence

or physical depreciation reduce farm-machin-
ery MVP's below marginal costs. As discussed
earlier, Operators who buy used machinery are
likely to suffer such losses under the pre-
vailing pattern of rapid technological change
and used-machine trading.

. The ownership or control of unused resources can
contribute to growth-potential only (1) if these
unused resources are liquid or in a form which
lends itself to economically efficient use, and
(2), provided they are liquid, if they are suffi-
cient for acquiring additional inputs that are
required for significant growth. It appears
quite possible for a farmer to be overcommitted
on Obsolete machinery, in a resource-allocation
sense, and at the same time to be in a position
Of potentially increasing returns with respect to
new-machine inputs. In such a situation, unless
liquidation of the Obsolete equipment would en-
able him to acquire modern machine services, his
resource-excess is of little if any value for
growth purposes. To the extent that liquid re-
sources are required for acquiring additional
productive resources, this condition is linked
with that regarding procurability Of added re-
sources.

. Added resources are procurable in a practical
sense only if they are procurable in fully usable

 

5"Farm Operators with limited capital must con-
sider the interest cost that could be earned by investing
money in tile, fertilizer, lime, better breeding stock,
labor-saving equipment, or for debt retirement. On many
under-financed farms, capital invested in alternatives
other than additibnal equipment capacity could yield 25
percent or more" (121).

81

form, at an immediate outlay which is within
reach Of the growth-seeking firm. Large, modern
farm equipment is by far the most expensive cate—
gory Of resources used in farming (on a per—unit
basis), with the exception Of farmland Operating
acreages and, possibly, permanent structures.
Furthermore, "the purchase of big equipment usu-
ally causes a chain reaction. The farmer who
buys a big, self-prOpelled combine, for example,
will usually require drying facilities or high-
moisture storage facilities as a result" (2).
The critical importance of being able to buy ma-
chine services as they are used is Obvious, a-
gain, in this connection. Prospects for firm
growth are significantly affected by the rate of
increase in prices that must be paid to procure
machine services;6 and the immediate impact Of
these increases is much heavier if machine serv-
ices must be purchased as machine units.

Availability Of Hired-Machinernyervices

Reference has been made to a need for greater
availability of machine services on a leased, rental,
custom, or contract basis. This problem will now be
examined more directly.

Doane's Farm Management Guide (36:343) recommends
three alternative approaches to reducing the costs and

financial burdens of machine ownership:

 

6Strickler points out that by 1965 the Bureau Of
Labor Statistics wholesale price index for farm machinery
and equipment had risen 60.7 points above a 1953 base,
compared with a 55.2-points rise for all machinery and
automotive products (138:19). The ascent of prices has
continued subsequently, notwithstanding highly vocal farm-
er complaints (54; 122) and moderately disappointing sales
in 1967 (147). _Ih FEEruary, 1968,it was predicted that
further ifiEEeases would follow the new labor contracts, as
soon as dealers could work down inventories (49:11).

82

. Consider group ownership Of some seasonal equip-
ment with neighbors.

. Buy a good used machine tO save on interest and
depreciation costs.

. Hire or rent machinery which is needed but which
is unprofitable to own.

The first two of these approaches undoubtedly af-
ford distinct advantages, as compared with sole owner-
ship Of new equipment, to many Operators (122). Never-
theless, they represent distinctly sub-Optimum solutions

7

to problems Of obsolescence , managerial burdens, and re—

liability or timeliness Of Operation, in relation to
which machine-hire or rental arrangements appear to be
potentially more satisfactory.

Machine-hire and —exchange practices are most
common, and apparently becoming more prevalent, in har-
vesting Operations (2).

Of the 153 million acres of all crops harvested by
the combine in 1964, 28 percent . . . was harvested
with custom or exchange machines. Machine rental or
leasing, on the other hand, is still relatively unim-
portant, but farmers, machinery dealers, and others
in the industry are becoming increasingly interested
in these methods. The four machines most Often rent-
ed Or leased were tractors, trucks, fertilizer dis-
tributors, and sprayers (2).

 

7In comments on a judicially-decided requirement
that the United Shoe Machinery Corporation Offer sale Of
its machines as an alternative to the lease terms which
alone had been.offered previously, some shoe manufacturers
reportedly voiced concern, Observing that "when shoe fac—
tories own their own machines, there is a possibility that
they may be less rather than more interested in replacing
them with better ones" (171:144).

83

If, as postulated here, rental, leasing or con-
tract arrangements could fulfill farmers' needs more ade-
quately than custom or exchange work, relatively greater
prevalence Of the latter practices indicates a less—than-
satisfactory situation from an aggregate-efficiency
standpoint. Conditions Observed in Michigan are illustra-
tive. Although complete custom hiring has been increasing
in some Michigan areas, single or joint ownership and
ownership with selected custom harvesting are the two
methods most commonly used. "Renting or leasing of ex-
pensive harvesting equipment is presently not possible in
many areas of Michigan. A recent survey of Michigan farm
equipment dealers indicated that very few dealers present-
ly have rental or leasing programs" (22).8

Presumably, the availability and utilization Of
rental, leasing, or contract services would become much
more widespread and popular if strongly backed by farm-
equipment manufacturers, and merchandised with their

active participation.9 Some Of them, it has been

 

8Similarly, but in a broader geographic context,
Vermeer and Black report that "In many communities rental
machines are not available" (162:345).

9During 1955, the first year during which the
United Shoe Machinery Corporation was required to Offer
its machines for sale (on terms not substantially less
advantageous to a shoe factory than its lease terms),
"almost no newly built machines were purchased . . . Shoe
factories do apparently prefer to lease. This was the

84

reported, do provide leasing arrangements (138:20), and
Allis-Chalmers is said to have established a wholly-owned
subsidiary for this purpose (22). It would appear, how-
ever, that the major manufacturers are basically reluctant
to enter the field with vigor, if they are willing to en-

ter it at all (114:1180-81), and that the plans so far

 

instituted have rather limited applicability to the broad
problem Of promoting efficient machine use throughout
American agriculture.

The Ford Motor Company, for example, in 1962 re-
portedly had under consideration a proposed plan for
leases covering a l- or 2-year period on a fixed or pre-
determined-charge basis. This plan (concerning the even-
tual disposition of which there appears to be no published
report) was appropriately described by the information
source as designed to Offer "a very practical solution for
larger farm Operations to obtain their equipment require-
ments" (112). Larger Operations, implicitly, could util-
ize equipment rather fully over a l- or 2-year period,
whereas smaller ones would be less able to do so.

Much better adapted to the needs of many under-

committed, smaller-scale Operators (and particularly to

 

sentiment of 'virtually all' Of the 15 manufacturers who
testified at the trial and the 45 who answered a ques-
tionnaire sent out by the court" (171:133, citing 110 F.
Supp., at 349).

85

those Of part-time and semi-retired farmers) would be
provisions for furnishing services on a contractual basis.
Services could be rendered against payment covering actual
work accomplishment as measured in relation to stipulated
volume requirements and specified standards of care, ef-
fectiveness, and timeliness. (An analogy with highway or
building contracting is both Obvious and apt.) Such pro-
visions, where properly drawn and priced, would reason-
ably relate farmers' costs of services purchased to their
fair market value, and would tend to maximize their en-
joyment of the following customer—benefits which have

been ascribed to leasing arrangements (114:1180; 112; 117;

 

160):
. Tax savings.

. Conserving capital for growth and profit—promoting
purposes.

. Protection against financial risks Of Obsoles-
cence.

. Elimination Of maintenance, service, and adminis-
trative (i.e., trading and record-keeping) prob-
lems.

. Obtaining needed equipment when other financing
is not available.

. Regular use of efficient, up-to-date equipment.

. Flexibility for changing to enterprises or methods
Of Operation that require different equipment.

. Flexibility for either expanding or contracting
Operations.

. Avoidance of storage problems.

86

Contractual arrangements, Of course, are likely
to have narrower appeal to full-time farm operators, since
they need to obtain labor-returns on their own services.
If they are efficient as managers and machine-Operators,
however, short-term rental or leasing arrangements—-pro-
vided that such are available--may enable them to enjoy
most Of the above-listed benefits even more fully than
can the farmers buying contract services.

In summary, it appears that making adequate,
flexible pay-as-you-go machinery plans generally available
would contribute importantly toward overcoming the inef-
ficiencies Of undercommitment or increasing returns on

modern machine services.

Biased Tendencies in Machinery

and Parts Pricipg

There is evidence which appears to indicate a sig-
nificant bias, favoring users or larger or newer machinery
at the expense of those who use smaller or Older equip-
ment, in the pricing behavior Of machinery manufacturers
as well as in that of dealers.

Some support for such an inference is found in the
following comparisons Of the percentages by which average
retail prices on smaller and larger tractor and combine

models increased from 1957-59 average levels up to 1965:

87

Table 8.--Percentage increases in average retail prices
of selected farm machines and machine sizes,

1957-59 to 1965

 

 

Machines and Sizes Larger Smaller
Models Models

Tractors: Wheel, 60-69 belt hp. 13.1%

Wheel, 30-39 belt hp. 19.9%

Crawler, 35-49.9 db. hp. 13.5

Crawler, under 25 db. hp. 24.1
Combines: Self-propelled, 12-ft. 20.1

P.T.O. 5-6—ft. 33.9

 

Source: égricultural Statistics, 1966, p. 480.

An Obvious argument Opposing the inference Of

pricing bias might be based on the fact that certain

costs--notably in the assembly, handling, and merchan-

dising categories--are more a function Of unit volume

than Of material costs or quantities. This argument,

however, rests on an implicit cost-plus pricing premise,

and possibly overlooks the fact that allocations Of other

important costs, of a distinctly overhead nature, are

somewhere between largely and entirely arbitrary.

If, employing a more market-oriented philosophy,

it is assumed that price changes should be related to

changes in MVP of the equipment-unit to the average

88

customer, it might be reasonable to expect that prices Of
larger units should have advanced more rapidly than those
of smaller ones. This rests on the suppositions that (l)
more money is expended, per unit, for product-improvement
on larger than on smaller models, and (2) increasing scale
economies in farming Operations tend to enhance MVP's of
larger relative to those Of smaller models.10
Regardless Of whether more—rapid price increases
on smaller models seem economically justifiable from the
manufacturer's standpoint, however, a pattern of this
nature would appear to have significant implications re—
garding purchase-incentives as these relate to changes in
agricultural efficiency. With some oversimplification,
it can be broadly asserted that the purchase of larger
equipment is more frequently associated with overcommit-
ment (at least in the collective-efficiency context),

whereas the purchase of smaller equipment is more common-

ly associated with movement from an undercommitted toward

 

10Under a different type Of market-oriented phil-
OSOphy, however, the pattern of relative price trends
would resemble that which appears actually to have devel-
Oped. If smaller equipment is thought of as being bought
for replacement, by a diminishing class Of customers,
then its sales may be regarded as captive business in a
declinipg,market-segment. These cons1 erations might
underlie decisions to price smaller models less competi-
tively than larger ones. The latter may be thought Of as
being bought for expansion; and their sales may be re-
garded as " lus" business, in a growth-market-segment
wherein eac competitor is anxious to maintain or if
possible improve his share.

 

89

a more optimally committed position. To the extent that
this generalization has basis in fact, if prices rise
faster on small machines than on larger ones the incen-
tives for correcting undercommitted conditions are there—
by made less favorable in comparison with the incentives
for further overcommitment.

Any adverse influence Of new-machinery pricing
trends on the persistence Of undercommitted conditions is,
Of course, additional to that of other factors discussed
in this section. Under the influence Of all these factors,
farmers who are long on used equipment and short on finan-
cial resources tend to continue such equipment in use over
long periods Of time and, eventually, to replace it with
equipment that is newer but likely also has received heavy
use.11 Since repair-requirements are positively related
to time-in-service and accumulated use, these operators,
who are not customers for new machinery, are steady cus-
tomers for repair parts and service labor. In this re-
spect they are, to a large extent, captive customers, sig-
nifying that their demand for repair parts and labor has

relatively little negative price-elasticity.

 

11"In recent years, according to a study conduc-
ted in South Dakota, there is some indication that used
machinery sales are gaining in importance as prices of
new machinery increase" (33:35).

90

Manufacturers' profit margins on farm machinery
parts and repairs business, according to Standard & Poor's,
are higher than on original equipment (135:M-10). Cro-
marty reports, on the other hand, that manufacturers
assert the relatively high prices of repair parts are
due rather to the costs of handling small orders, Of main-
taining patterns to produce parts, and of storing parts
for several years. They suggest, furthermore, that pro-
visions tO cover these Special costs may be included in
parts prices, or some portion may have to be recovered in
the prices of new machinery (33:34-5).

At the dealer level, heavy reliance on repair
parts and service labor as a profit source is indisputa-
ble. Analysis of composite-average 1966 Operating sta-
tistics for all farm-equipment dealers discloses that the
combined gross margin on parts and labor accounted for
43.8 percent Of the total Operating margin, whereas re-
pair-parts cost represented only 13.2 percent of total
cost Of sales (2222). As at the manufacturer-level, it
might be contended that much of the return on parts sales
went to cover the costs Of handling, storage, and invest—
ment in parts inventory; but the gross profit Obtained on
parts sales alone was equivalent to 71.1 percent Of the
value of 1966 year-end parts inventory (29:6z 12).

Conceivably, an attempt at defense of the dealers'

high margins on parts and service might be made on the

91

grounds that (1) average dealer net returns are, after
all, rather modest,12 and (2), unless narrow margins on
other lines are amply compensated through parts and labor,
many dealers will fail. This argument appears to reflect
a lack Of concern about efficiency, however, to the extent
that it rests on assumptions that (1) prices Of new ma-
chines must be kept low enough to maintain high selling
rates, and (2) the existing number Of dealerships (in-
cluding the least efficient among them) must be main-
tained.

Finally, putting to one .side any question Of
excessive profit margins, it might be claimed that high
parts prices are necessary in any case because the special
service-parts-availability costs increase with length Of
storage period (22222), and many rather Old units have
to be serviced. But, if the farm-machinery industry had
to bear all costs Of maintaining Older equipment in
service and had the power to retire units that could no
longer be used efficiently, it seems very doubtful that
such high costs would be incurred. If not, then, to the
extent the actual costs exceed those that a totally re-

sponsible industry would tolerate, the existing system

 

127.54 percent return on total assets, in the
highly successful 1966 sales year (29:14).

92

involves avoidance Of responsibility, and shifting of
penalties, for undercommitment.

There is yet another field of economic contact,
between the machinery industry and its undercommitted
customers, wherein it might be found that the industry
has a pecuniary interest in the persistence of undercom-
mitment. Phillips quotes one large company, on the sub-
ject Of its motives for setting up a credit company, as
declaring "We have been driven to this decision, rather
than to seek it out as a money-making venture" (115:351).
Abrahamsen, however, Observes that

. . . there are many who would disagree (with the
prOposition that manufacturers gladly would relin-
quish the credit arrangements they have developed).
This is because the granting of credit has become a
profitable activity for those manufacturers who pro-
vide it (1:1184).

As noted by Phillips, "the lending policies Of
most banks have proved to be not readily adaptable to the
particular needs of large—scale farm machinery credit,
leaving the industry little practical alternative to as-
suming the credit load itself" (115:350). In practice,
it seems not unlikely, this often means that customers
‘whose credit ratings do not command access to bank credit
(at bank rates) can find no better alternative than fi-
nancing by a manufacturer's credit subsidiary (at consid-

erably higher cost)--because the services of new machines

can be Obtained only by buying the machines. Assuming

93

that large, adequately capitalized farmers usually pay
out of accumulated cash or borrow from banks, in this
light the manufacturers' retail financing activities
might be seen as profitable ventures tO which they are
driven by their reluctance to sell machine services as

such.

Direction of Technological Change

If technological develOpment of farm machinery is
oriented toward expanding the scale of farming Operations,
with relatively little consideration Of the efficiency-
needs Of smaller units, then the direction Of that devel-
Opment tends to contribute toward maintaining or even
increasing conditions Of undercommitment.

The needs of smaller Operators are importantly
concerned with both costs and design considerations.
Vermeer and Black, among others, have called attention to
the significance Of cost factors:

One way to reduce costs of machinery is to develop
cheaper machines that will perform the same volume of
work as the machines now in use. Perhaps tOO little
emphasis has been given to this aspect Of machine de-
sign. In order tO reduce fixed costs, or the costs
of owning them, the new models would need to be sold
for less money than their predecessors (162:341).

Scoville, who also recognizes that costs must be

supportable, points to a need for machinery that is

94

designed to fit the requirements of smaller farmers, re-

ferring especially to part-time operators:
The peculiar equipment needs of part-time farmers
should be taken into account. Their places usually
are small; equipment therefore should be adapted to
small acreages. But they tend to value their time at
off-farm wage rates; equipment capacity therefore
should be high. Since the total amount of work done
in a year is low, investment in machinery and struc-
tures must be kept down. These contradictory needs
suggest that special study should be made of kinds of
equipment and buildings that would come nearest to
meeting requirements of part-time farmers. There are
about one half-million part—time farmers, and improve-
ment in their facilities should be worth-while
(129:395).

Notice may be taken of a caveat entered by Ruttan,
concerning cost-reduction as a major orientation of tech-
nological development:

It is difficult to conceive of an innovation that
successfully lowers costs which does not also expand
output (and hence lower prices) under free market
conditions (123).

This objection is undoubtedly valid as against a
dominant emphasis on cost-reduction throughout the field
of farm-machinery research and development--at least
while farmers' economic behavior continues atomistic.
What is suggested by Scoville, however, is not a gener-
ally dominant emphasis on lowering costs, but cost-reduc-
tion as one special yet essential feature of a movement
toward better serving the technological needs of smaller
farmers, and thereby redressing the balance of effort
that long has weighed heavily against them. Granted that

lower costs would help smaller operators to expand their

 

iEuMWH.N....u:Mhmfln€ll~

95

outputs, the resulting incremental effect would surely be
minor by comparison with overproduction on the part of
overcommitted firms. Vigorous survival and productive
participation on the part of formerly-languishing small
farm businesses might well exert a modest salutary braking
influence against further overcommitment tendencies in the

industry as a whole.13

The Rational Conditions for

 

Equipment Replacement

 

A large share of aggregate machinery-undercommit-
ment, in the sense employed in this study, is accounted
for by farmers who own considerable rather old machinery.
One way of gaining an overall perspective on their prob-
lem is to review the necessary conditions for a rational
decision to dispose of an old machine in exchange for a
new one.14

The following proposed list of necessary condi-

tions for a rational replacement decision constitutes a

 

13There is, of course, also a broader question of
whether sound public policy is well served by relying, in
effect, on undisciplined self-interest within the farm-
machinery oligopoly for the regulation of farmers' ma-
chinery costs or of any other factor bearing significantly
on their efficiency.

14Cf. P. B. Jones (86); Paris (22); The Ford 1968
Almanac (140:162); Larson (55:79-89); and sources cited
By Larson.

 

96

synthesis of some prescriptions offered by other writers,
with the addition of some constraints:

. Present value of anticipated net revenue from the
new machine must exceed present value of alter-
natively anticipated net revenue from the old
machine.

. Present value of incremental net returns on in-
cremental investment required to obtain and use
the new machine must not be less than present
value of anticipated returns from alternative uses
of the same capital.15

. The incremental net-return effect must not be
compromised by eventualities such as inability to
obtain suitable complements, or losses on comple—
mentary resources already owned.

. That portion of the price not coverable by trade-
in allowance must not exceed the firm's total
cash and credit resources as reduced by require-
ments for higher-priority uses and after allowing
for any required complementary inputs.

Admittedly, this set of rules is rather complex.
Even so, the full measure of complexity in the decision-

16 Thus,

making problem is implicit rather than explicit.
the economic desirability of trading an older machine for
a newer one is closely hedged about with conditions--con—

ditions which in general have increasingly negative

 

15Larson estimates that it is normally more eco~
nomical to trade for a second-hand-tractor--up to and in-
cluding one six years old, with a three-year-old tractor
showing the lowest average cost--than for a new one
(95:82-3).

15Also, there is the possibility that a trading
decision may be forced, even though uneconomic in terms
of these criteria, because of problems of reliability,
labor availability, etc., affecting the existing machine.

97

effects with increasing differences between the respective
machines as to age, price, size, and technological fac-
tors. Modestly capitalized owners of older, smaller ma-
chines would seem to have hardly any incentive for obtain-
ing the services of modern equipment through acquiring
ownership of it. To the extent that they do become owners
of expensive modern equipment, moreover, the probability
appears high that their purchase decisions are economi-
cally irrational.17 These decisions are difficult; the
customer needs expert, responsible advice and assistance;
but it would appear that the professional advice received

may in too many instances be incompetent or irresponsible.

Barriers to Exit

All previous discussion in this section has been
concerned with barriers to upward adjustment from the
condition of undercommitment. It is, however, not those
barriers but barriers to exit that are relevant to the
situations of many Operators who--for reasons of age,
disability, or other limitations or personal reasons--

are incapable of or indifferent toward upward adjustment.

 

17A decision to dispose of the old machine out—

, right and substitute leased or contracted machine ser-
vices, if such services were available on sound and at-
tractive terms, would exemplify a simultaneously rational

and efficient decision.

98

Barriers to exit, moreover, are important not
only to those who would like to leave agriculture, but
also to those who wish to remain.

Farm operators are cognizant of the need to increase
the scale of their operation and to become more ef-
ficient. . . . But the demand for land for individual
farm expansion will need to be satisfied primarily by
farmers going out of agriculture. . . . Retirements
and transfers out of agriculture probably will not be
rapid enough to avoid upward pressure on land prices
(31) .

Inadequate employment-qualifications among farm
people, as related to declining or inelastic demand for
relatively unskilled labor--outside as well as inside of
agriculture--have been identified by Hathaway and Perkins
as major factors in the overall farm-nonfarm mobility
problem (12). For the purpose of this study, however,
the most relevant question is how off—farm migration de-
cisions by owners and operators may be affected by the

status of their investment in the farming business as

such.18

 

18Boyne has suggested that, during inflationary
periods, farmers who are net debtors vis-a-vis the non-
farm sector receive important real-wealth gains (l£)°
(Real-wealth gains are capital gains adjusted for the
purchasing power of money (12:6).) In general, however,
it appears unlikely that smaller farmers being pressed to
leave agriculture can realize capital gains that would go
far toward compensating the opportunity costs they have
accumulated, as determined by inferior operating returns.
If they own land, the fact that their holdings are small
or low in value indicates either that they had little
capital when they began farming or that their earnings
have been poor over the years. In either case they have
not been able to command much credit; and, excepting

99

The farm price and cost relationships in the future
will be important factors in the rate of retirement
and the number of people who completely move out of
agriculture (El).

If current price and cost relationships constitute
a situation that would seem to encourage withdrawal from
farming operations, it should be remembered that the
present situation bears a legacy from the past. Over the
years, four observable tendencies, all identified in
earlier discussion, appear to complement each other in
making liquidation of machinery investment in small-farm
businesses economically difficult:

. Historically, the hiring of machine services has
involved considerable difficulty, risk, or incon-
venience, to avoid which most farmers invest--in
many cases to excess--in expensive machines.

. Machinery prices tend to rise faster than the
labor returns which their owners are able to earn
either inside or outside of agriculture.

. Rapid technological change tends to accelerate
used-machine obsolescence, as well as deprecia-
tion of labor-returns associated with the use of
older machinery.

. The first three factors tend to produce the com-
bined effect of "trapping" capital investment in

machinery, and therewith the associated owner-
labor (127; 84:19-20).

 

 

__'

those who may have succeeded in obtaining government-sub-
sidized loans, it is improbable that they could have in-
curred large debts except at relatively high interest
rates. Furthermore, in an empirical investigation of in-
vestment returns on farm and non-farm equities, Kost has
found that the stock market has been a better place in
which to speculate than the land market (93).

VI. COSTS AND HANDICAPS OF

OLIGOPOLISTIC DUPLICATION

It will be argued, in the section following this,
that the economic behavior of members of the full-line
farm-machinery oligopoly follows naturally from the fact
that they are compelled to persist in competing against
each other, with mergers precluded.

Preliminary to taking up that argument, the pres-
ent section is devoted to consideration of the most ob-
vious major consequence of the compulsion to compete.
This is the necessity for each firm to provide itself with
a complete, competitively adequate set of all of the kinds
of facilities, product designs, personnel, business sys-
tems and arrangements, operating schedules and routines,
financial resources, services, inventories, and elements
of administrative and executive superstructure that would
be required by a firm exercising monopolistic control.
Significant implications of this requirement are that, as
compared with operations controlled by a single firm,

. Many variable costs are likely to be higher, even
if optimally controlled within the limits imposed
by scale disadvantages;

. Many fixed costs will be multiplied;

100

101

. Losses through waste will tend to be multiplied
because of scale disadvantages, lack of industry-
wide coordination in planning and control, and
mutual cancellation of the intended benefits of
competitive effort;

. Fixed costs, investment, and waste-losses will
tend to be further inflated by overcommitment re-
sulting from individual efforts to maintain or
improve competitive positions, particularly during
cyclical periods of strong demand;

. Aggregate profit-targets will likely be higher be-
cause of greater investment in resources;

. Pressure to increase sales--regardless of probably
unfavorable effects on farmers' efficiency--will
be higher because of resource-overcommitment in
the industry;

. Probably more product-offerings will be poorly-
designed, under-designed, or over-designed rela-
tive to the requirements of agricultural effi-
ciency;

. There will be needless proliferation of product
designs, adding to the customer's already diffi-
cult problems of rational, well-informed choice;
and

. Service to customers in the forms of product-in-
formation, technical advice and assistance, and
product-repair and -maintenance will tend to be
less adequate, efficient, and uniform, because of
divided responsibility and conflicts between the

goals of adequate, responsible service and reason-
ably-related cost.

Engineering, DesignLiand Tooling Costs

Agricultural economists many years ago pointed
out that important savings on machinery could be achieved
through standardization of designs, based on engineering

determinations of what is required, rather than on farmers'

102

whims and geographic preferences (£2§)° The costs from
which such savings could be made have increased tremen-
dously over the years.1 Although new-model tooling costs
are doubtless considerably less significant for farm ma-
chines than for passenger cars, an indirect indication of
their growing importance may be seen in the reported fact
that the cost of new-model tooling for automobiles ad-
vanced 200 percent between the immediate postwar years and
1955, as compared with an advance of only 35 percent in

production-workers' wages (170:475).

Manufacturing Costs

"Costs of production are an important structural
element bearing upon market conduct, since these condition
price policy and in turn affect the nature of competition.
In the farm machinery industry, the so-called overhead
costs are particularly significant" (115:332). A striking

historical illustration of the relationship between unit

 

1The Ford Motor Company, which as of 1963 was one
of the world's two largest manufacturers of wheel-type
tractors for farm and industrial use (58), acted to real-
ize some of these savings in 1964 and I965 by eliminating
duplication of engineering and design in the tractors it
produces in the United States, England, and Belgium
(60). Obviously, if worthwhile savings can be achieved
ifi_this way by one manufacturer, much greater savings
could be realized by eliminating the duplication involved
in parallel efforts of all full-line companies.

103

Table 9.--Manufacturing overhead costs, selected farm ma-
chines, 1932 and 1937

 

Representative Average Factory Overhead Cost per Unit

 

 

 

Equipment Models 1937

1932 (or 1936)
Row—crop tractor $486.00 $ 91.59
Eight-foot binder 53.30 31.62
Thresher 343.16 193.22 (1936)

 

Source: Report onAthe Manufacture and Distribu-
tion of Farm Implements, Federal Trade CommiSsion, Wash-
ington, 1918. (Cited in Phillips, 115:333).

 

sales volume and overhead cost per unit is implicit in
the above comparison drawn from a report of the Federal
Trade Commission (see Table 9).

High overhead costs are generally indicative of
underutilized capacity. "The leading power machinery and
implement firms were among the first in this country to
embark on a policy of diversification in order to assure
continuing full use of their resources" (22:370). Ob-
viously, the phrase "continuing full use" is employed

here in a relative (and perhaps optimistic) sense.2

 

2Cromarty quotes a 1957 report that "makers of
tractors, combines, and harrows have taken to turning out
such varied products as baby buggies, fertilizer, and
boat motors" (33:53, footnote). To the extent that pro-
duction of added lines requires conversion from normal

104

Scale requirements for low unit-cost have in-
creased greatly in recent years with the introduction of
automated manufacturing processes, which contribute to
fuller plant-utilization and savings in labor cost but
impose heavy additions to fixed investment, as well as
reductions in flexibility of operations and model changes
(41:158). Automation has been more widely employed in
the production of passenger-car components than in farm-
machinery manufacture, presumably because of wide differ-
ences in production volumes. In the farm-machinery
field, it appears the most important economically feasible
application is in producing engines. High fixed costs
related to engine manufacture have contributed to devel-
opment of the family concept of engine design, i.e., a
high degree of interchangeability of parts between several
models and between gasoline and diesel engine types (91).3

All available economizing expedients notwith-

standing, high volume-requirements evidently continue to

 

operations, it would appear that extraordinary cost
penalties associated with the learning curve--reflecting
gradual normalization of high start-up costs--must be

borne.

3Some compromise of efficient design in particu-
lar assembled products may result: "Some parts may be
overdesigned, but the idea cuts down on the manufactur-
er's tooling requirements, reduces parts inventory, and
reduces the service-stock requirements" (91).

105

represent an obstacle to farm-machinery applications of
some highly promising technology. It is expected, for
example, that "the gas turbine will . . . be commercially
available as an optimal power plant for tractors (but)
this will depend to some extent on development of addi-
tional vehicular markets for the engine, with attendant
economies of mass production" (82). Patently, the ob-
stacle of high volume-requirements could most effectively
be overcome if one company commanded the entire market-

volume now shared among several firms.

Dealer Organization

 

A fundamental characteristic distinguishing the
full-line from the short-line manufacturer is that of
distribution through dealers, often served through branch
houses, in all localities where farmers buy implements,
instead of through higher-cost channels. This kind of
arrangement depends on the ability to command a dealer's
full efforts for the company's products by making it un-
necessary for him to carry those of any other maker (112:

238Lj240). The farm-machinery market, as Phillips points

 

out, is made up of a tremendous number of relatively
small enterprises scattered over a vast rural expanse.
This characteristic, together with diverse requirements

of soil and terrain and unpredictable geographic variations

106

in farm income trends, explains the "urgency, from the
producer's point of view, of being represented in every
segment of the market, and the consequent building up,
in the early decades of this century, of a large and un-
wieldy organization for retail distribution"(ll4=ll72).
During the last several years considerable cri-
ticism has been voiced to the effect that, although deal-
ers' numbers have been declining fairly steadily4, there
is still substantial over-representation in view of (1)
increasing dealer-financial requirements, and the attendant
need for larger sales-potentials, (2) declining customer-
numbers, associated with diminishing geographic density,
(3) slower growth or actual decline in demand for some
important types of machines, with larger but fewer units
sold, and (4) improved roads and better communications
(115:347; 172:246; 111; 114:1173-5; 1:1183-4).
"Manufacturers reportedly agree there are too
many dealers in the market and most are said to be think-
ing in terms of fewer, stronger outlets" (111). This at-

titude presumably reflects their understandable concern

 

4Dealers handling mainly farm machinery reported-
ly totaled 16,362 at the end of 1963, compared with
19,008 only 5 years earlier. According to subsequent
counts (possibly employing a slightly different defini-
tion), there were 16,297 dealers in 1965 and 15,165 in

1967 (138:20).

107

with problems of business operating efficiency.5

It may
be doubted, nevertheless, whether their individual com-

petitive interests in maintaining strong, separately

 

aligned, and sufficiently well-diSpersed local represen-
tation can be reconciled with the interest of farmers in
being served adequately and at minimum economically justi-
fiable cost.6
Obviously, a farmer who owns a machine is in a
position to benefit satisfactorily only from the service

that can and will be provided him by a dealer who repre-

sents the machine's manufacturer. The service received

 

5Such concern was manifested in the Ford Motor
Company's program, completed in 1964, aimed at streamlin-
ing the firm's distribution system by marketing its pro-
ducts directly to Ford tractor dealers rather than
through distributors. The program consolidated 28 ware-
-houses and distribution points into 7 district offices and
10 depots (59).

6"A Canadian parliamentary committee (in 1937) re-
ported that 'un1ess some outside agency or competition
forces them to do so, it is unlikely that the companies
will initiate a more economical policy, as each fears the
loss of identity of its own organization'" (114:173).
Abrahamsen has noted an "inclination of manufacturers to
'hang on' to dealers in the hope that future volume will
justify their existence . . . (Moreover) the strong credit
ties between manufacturer and dealer place the latter in
what some pe0ple describe as a 'captive' position" (1:
1183). "Since 1948, dealers' need for help in financing
inventories and sales has increasingly been met by manu-
facturers, some of whom also provide leasing arrangements"
(111). Dealers have complained about the system of annual
contract orders (111); and the practice of "full-line
forcing" (insistence that a dealer carry the manufactur-
er's full line) has drawn complaints not only from many
dealers but also from several short-line competitors (112:
241).

108

from such a dealer will likely prove inadequate to the ex-
tent that, because he must share local business with (and
compete for it against) dealers selling other makes, he

is (l) financially too weak to be effective, (2) geograph-
ically too remote to give prompt, economical service, or
(3) competitively motivated to attend to the needs of
larger or more densely clustered farm operators while ne-
glecting those of smaller or more dispersed ones.

From this reasoning it seems to follow that, ex-
cept for losing the questionable benefit of being able to
choose among brands and local dealers, the farmer would
be better served if his dealer were the sole local repre-
sentative of the only manufacturer of the only national
full-line machinery brand. Such a dealer would, in all
likelihood, be (1) financially stronger and at the same
time less burdened with inventory7, (2) located closer to
the average farmer, (3) relatively free of incentive to
discriminate among classes of customers, and (4) unencum-
bered by a need to engage in expensive, economically un-
productive competitive effort. He would, consequently,
be better able to concentrate upon providing efficient,

equitably-allocated service effort, and responsible,

 

7Aggregate dealer-inventory requirements, as com-
pared with those relating to the present market structure,
would be reduced both by (l) the economizing effect of
centralization, and (2) progressive elimination of prob-
lems of parts interchangeability.

109

objective economic and technical advice on the acquisi-
tion and use of machinery services, at substantially

lower cost.

Planning and the Flow of Information

If every indicator of private (individual or
firm) economic advantage or disadvantage were removed
from the equation, the economic inefficiency herein iden-
tified with the development and application of farm-ma-
chinery technology would appear simply as a result of in-
credibly poor planning. Certainly such poor planning
would not be tolerated if these processes were operated

8 Good planning is vitally

under an integrated system.
dependent upon good and timely information; and giant
enterprise now has at its disposal previously-undreamed-

of capabilities for swiftly gathering, digesting, and

interpreting information required for effective planning.

 

3A3 Galbraith has observed, "The market is super-
seded by what is commonly called vertical integration,"
and "industrial planning is in unabashed alliance with
size" (64:27, 31). Elsewhere, it has been remarked that
"technological change makes long—range planning riskier--
and more necessary. The new stress on long-range brain-
storming is changing the role of top management 'from ad-
ministrator to anticipator'" (165).

 

9"A behind-the-scenes partner in the engineering,
manufacturing, and selling of trucks is an elaborate in-
formation network which has its headquarters at Interna-
tional Harvester's Electronic Processing Data Center . .

9

110

Planning, however, and the information upon which
it depends, can be no better than the objectives they are
designed to serve. These objectives, within the farm-ma-
chinery industry as now constituted, are not (1) to im-
prove farmers' efficiency, consistent with reasonable
profits on the Operation of an efficient system for devel-
oping and supplying machine services, but (2) to trade on
the development of potential agricultural efficiency-
improvements, within a framework of Oligopolistic market-
rivalry. Certain kinds of informational problems that
would seem highly relevant to the former purpose might
well appear completely irrelevant to the latter. The fol-
lowing hypothetical examples, though crudely stated, may
serve to illustrate:

. How does next year's projected new-tractor demand
at this year's prices compare with a sales volume
that would maintain farm power-supply at an effi-
cient level (or adjust toward it); and what price
changes would serve to moderate or stimulate de-
mand for efficient adjustment?

. What shifts within the internal balance of the
existing price-structure are needed to compensate
for exogenous forces that tend to stimulate over-

commitment or hamper correction of undercommit-
ment?

 

Customer orders from the districts, material require-
ments, vendor schedules, engineering changes and specifi-
cations . . . all these and other end uses are the day-
to-day work load for these computers. Within a 24-hour
period, International Harvester can locate any truck with-
in the United States, determine what changes have been
made to it since its initial manufacture, and what war-
ranty charges have been applied against it" (82).

lll

. What advance order-commitments would prospective
new-machine purchasers be able and willing to
make, and against what incentive discounts, for
cooPerating toward the common objective of better
produciaon-planning as a means of reducing
costs?

. What are the projected costs of obsolescence next
year on machines now in use? and how can the own-
ers most efficiently be idemnified and the costs
most efficiently be recovered in the pricing of
new machines and machine services?

- What average annual rate of R & D expenditure can
be efficiently absorbed by the agricultural sys-
tem during the next five years?--i.e., what
economic-efficiency limits are imposed by the
magnitude of potential losses from obsolescence
on serviceable equipment?

. What should be the balance of R & D expenditure,
over the next five-year period, as among programs
oriented toward labor-saving, soil- or water-
conservation or yield-improvement, machinery-cost
reduction, and greater safety or convenience?11

 

10One executive is quoted as saying the industry
does not produce to fill signed orders but "for orders we
estimate we will receive just shortly before field use. "
(Statement by W. A. Scholl, Executive Vice-President,
Allis-Chalmers Corp., reported in Implement & Tractor,
Oct. 1,1961. Cited in 111. ) Results of a survey re-
ported in 1964 indicate Eh_t (1) the strength of a farm-
er 's intent to buy is stronger as the time of planned pur-
chase approaches, and (2) likelihood of actual purchase is
positively related to the strength of intent to buy (118).

 

llQuestions such as this, of course, have implica—
tions with regard to political choice as well as economic
efficiency. In the system as it now exists, relevant de-
cisions are made which should reflect consideration of
such questions; but the questions (if directly considered
at all) tend to be considered within a framework of cor-
porate competitive strategy (including public relations)
rather than of public policy.

112

The competitive structure of the industry appears
to rule out not only questions such as those just listed,
but also questions designed to reduce the magnitude of
business errors (hence of waste and overcommitment of re-
sources) attributable to imperfect knowledge, insofar as
the answers might have any bearing on competitive activity
as such.12 Thus, the efficiency-promoting potential of
information-gathering and planning activities, already
circumscribed by the limitations of competitive business-
purpose as such, is further restricted by the rules of

the competitive game.

Transportation Costs and Decentralization

of Production

 

The full-line farm-machinery companies found it
necessary to centralize their operations in order to
realize maximum economies of scale in production; and all
of them established themselves in the North Central

States because the economic center of gravity of the

 

12At least one short-line manufacturer has com-
plained that the Farm Equipment Institute's preoccupation
with avoiding any suspicion of antitrust-law infringement
"hampers it from performing or improving certain construc-
tive services (such as) acting as a clearing house for
its members price lists and collecting operating statis-
tics direct from members rather than merely circulating
Census data" (172:244).

113

nation's agriculture is in that region. "There has been
a limited amount of decentralization, though the Midwest
is still the center of (the industry's) productiod'(112:
g3).

It seems highly probable that large savings in
transportation cost could be realized if manufacturing
operations for some or all types of widely-employed pro-
duct types were dispersed regionally. The aggregate a-
mount of any such savings, however, would surely be far
exceeded by attendant increases in manufacturing costs,
if decentralization were effected by subdividing the
operations of individual companies. Another hypothetical
alternative, regional division of the national market a-
mong the different full-line firms, not only doubtless
would be opposed by the Antitrust Division, but appears
unattractive from the companies' own viewpoint, because
of higher risks related to weather conditions and other
factors affecting variations in farmers' incomes.

The economies of decentralization, evidently,
could best be realized by a monopolistically-organized

industry.

Inventories

 

In discussing dealer-organization, it has already

been pointed out that the aggregate inventory-burden could

114

be much smaller if there were only one full-line brand,
sold through only one dealer network. The same principle,
of course, carries all the way back through the manufac-
turers' finished-goods inventories (equipment and parts)
to raw-materials stocks.

A further substantial opportunity for inventory
cost-savings is implicit in the difficulties which indiv—
idual manufacturers encounter, and the errors they make,
in trying--with imperfect knowledge of the actions of
other manufacturers and their dealers--to maintain ade-
quate yet economical stocks on hand.

The only known information covering inventories is
the estimated change in inventories at the manufac-
turers' level. This estimate is the difference be-
tween the published data on the value of production
and manufacturers' shipments. As such, it ignores
the buildup of inventories at the dealer and whole-
saler levels. If manufacturer and dealer inventories
moved in opposite directions, this could represent a
serious error.13 In any case, it treats the dealer
as a passive element in the market or, at best, as-
sumes that his market actions follow a pattern similar
to those of the farmer. . . . Shipments of machinery
by manufacturers become known only as the year pro-
gresses since planned shipments may not be realized
if the market demand weakens, or it may be an under-
estimate of actual shipments if demand is underesti-
mated (33:37).

 

13An industry spokesman was quoted as observing
that "retail U.S. sales advanced 43 percent while factory
sales advanced only 34 percent in 1966. Inventories were
leaned sharply by that kind of imbalance. Most manufac-
turers moved into 1967 determined not to repeat the error
of 1966, when inventories . . . were cleaned out" (10).

115

In order to minimize the risk of losing sales be-
cause of inadequate supply, manufacturers tend to carry
stocks large enough to allow for considerable error; and

carrying costs are consequently greater than they would

be if requirements could be determined more accurately.14

Logically, it could be expected that a monopolis-
tic producer, possessing more nearly perfect knowledge
concerning demand and inventory situations at both plant
and dealer levels, would be able to achieve significant

cost savings based on better inventory control.

14It should be noted also that, when substantial
inventory-imbalance occurs because of cumulative estimat-
ing errors, production-cost penalties result from the
changes in output—rate that are required for inventory
adjustment. This is because labor-cost per unit tends to
rise when extra shifts, overtime labor, or temporary addi-
tional workers are utilized, or when workers are laid
off. Such penalties may in part account for the fact
that Deere & Company's 1967 earnings were some 26 percent
lower than those of 1966, on a 1.2 percent gain in sales
(141). If, however, an industry under single management
proved itself better able to moderate fluctuation in
production rates, this ability might well provide a basis
for additional savings based on more peaceful labor rela-
tions. On the one hand, a guaranteed-annual-wage arrange—
ment might not appear unacceptable, as the price of labor
peace, to a company which maintains a fairly stable labor
force in any case. Alternatively, a profit-sharing ar-
rangement--which would tend to be less costly to the
employer than an annual-wage guarantee, except in years
in which higher labor costs could most easily be support-
ed (ll9)--might be more attractive to a union if offered
by a-Eompany which also provides a relatively high degree
of employment-security based on effective planning.

VII. THE OLIGOPOLY TRAP AND THE

SPONSORSHIP OF INEFFICIENCY

In sections IV and V, major causes of agricultur-
al inefficiency were examined, with particular attention
to the dynamic influences of farm-machinery technology
and economics. This section is addressed to the problem
of why those influences seem to be oriented more toward
increasing inefficiency than toward improving efficiency.
The problem is visualized as being centered upon the
olig0polistic market-structure of full—line farm-machinery
manufacturing.

In orthodox academic treatment of oligOpoly prob-
lems, the breaking-up of large firms into smaller ones
ordinarily is conceived of as the only possible construc-

1 It is generally presumed that contin-

tive alternative.
uance of an existing oligopoly would be socially and

economically less inefficient than its replacement by a
monopoly. In this study, by contrast, it is assumed to

be largely self-evident, or implicit in the argument pre-

sented, that breaking up the full-line farm-equipment

 

1Cf., for example, Lanzilotti (91).

116

117

oligOpoly would lead to even greater impairment of effi-
ciency among farmers and in the overall national economy.
The question for which an answer is sought is that of
whether objectives of efficiency-improvement might be
better served by the industry under a monopolistic (or
analogously coordinated) market structure than within the

established oligopolistic framework.

The Frustrated Impulse toward Monopoly

There are persuasive reasons for supposing that,
absent governmental interference, a monopoly would fairly
soon develop in the manufacture of those farm-equipment
lines in which the full-line companies are dominant.
Foremost among these reasons is the relationship between
trends with respect to efficient operating-scale require-
ments and the size of the market.

The traditional explanation of concentration change
emphasizes market size and minimum efficient scale;
that is, the scale of operation needed to obtain the
minimum cost per unit. . . . If the scale required
for efficient operations grows faster than the market,
we would expect concentration to increase (151:733z
testimony of Leonard W. Weiss).

Farm machinery companies have many of the same prob-
lems that the automobile companies have-~national
distribution, maintenance of supply parts and service,
and so on. But unlike automobile manufacturers, they

118

do not have as large a mass marketz, and they are
dealing with a shrinking, rather than an expanding,
number of customers. They are also burdened with a
greater variety of supporting machines and with a
large overlay of used equipment. Much farm equipment
has longer life than automobiles, and obsolescence
may be a more difficult problem (153:iv).

As in the automobile industry, because of the
importance of overhead, differences in cost levels among
farm-machinery makers are often related to differences in
production volume (115:335).3 Conant reports that the
largest plants in the industry have consistently recorded
the lowest average costs per unit of output (115:335;
27:31). Among experts cited by Edwards, the concensus is
that 200,000 units per year is the absolute minimum

volume requirement for low unit cost in passenger-car

production (41:155-64).4 Granted that an analogous stand-

 

ard for tractor, combine, or corn-picker manufacture might

be much lower, it appears to be an open question whether

 

2Total 1960 domestic wheel-tractor output of
146,500 units was equivalent to only 7.8 percent of the
number of Chevrolet automobiles produced in the same
year (Phillips, 115:334, Table 13.4).

3Referring to 1967 operating results: " . . .
blessed with economies of truly volume production in its
basic tractor lines, Deere has easily outpaced Massey-
Ferguson not only in Return on Capital but in Growth as
well" (991).

4Whitney observes that "it is on the whole the
economy of size, rather than the process of merger, which
has reduced the number of passenger-car assemblers to
five (as of 1958). In fact, the need for enlarging the
capital base to make production more efficient has been
behind every merger" (170:472).

119

any of the farm-machinery producers commands sufficient
volume for reasonably full realization of scale economies

in manufacturing alone. The range of volume bringing

 

additional scale economies in R & D, advertising, market-
ing, inventory management, transportation, financing, and
general administration, of course, reaches much higher.5 r-‘

Consideration of these economic factors--along

with those of barriers to entry, which Bain found "very

—-.—- —‘~“.' 1‘

high" in the case of tractors, and "substantial" for

 

other large, complex machines (19919)--1eads to the ques-
tion of why there has been no further reduction in the
number of full-line companies since the White Motor Com-
pany's acquisitions between 1960 and 1963.6 Although con-
firmatory evidence is somewhat circumstantial, it would
appear that the most important explanation is to be found

in the obstacles and discouragements presented by the

 

5One indication of the relative burdens of over-
head in the respective industries is found in the per-
centage relationships of non-production employees' pay-
roll to production-workers' aggregate wages. In 1966,
these were 42.2 percent for farm machinery and equipment
manufacturers and 27.3 percent for manufacturers of motor
vehicles and equipment (999).

6Oliver Corporation and Minneapolis-Moline, Inc.,
are separate full-line subsidiaries of White Motor Com-
pany. The J. I. Case Company suffered low returns in
the late 1950's and large losses in the early 1960's,
pursuant to which it was acquired by the Kern County Land
Company (1964) and has since led a hopeful yet precarious
business existence, with a particularly sharp downturn
of earnings in 1967 (99}; 911).

 

120

antitrust laws and related enforcement policies and in-

vestigative activities.7

As an oligopolistic supplier of capital goods ex-
clusively to agriculture, the industry attracts the
attention of sincere reformers and political oppor-
tunists alike. Especially prior to 1940, public in-
quiries were made into virtually every aspect of the
industry's operation by governments in the United

States and Canada. These have been directed both at f;
individual firms and at the industry as a whole (115:
339-40).

"To some extent," in Phillips' View, a slow,

steady decline in International Harvester's market share,

 

and its eventual replacement by Deere and Company as the 1
largest domestic seller, might be attributed to "the

company's protracted antitrust experience (which) may

have caused it consciously to retrench" (115:352).8 Both

Whitney and Phillips have remarked on the great care

which is taken by the Farm Equipment Institute, the

 

7Whitney asserts that "the influence of the anti-
trust laws on this industry has been relatively slight,"
but the context of this remark indicates that it refers
to such influence as would affect the general competi-
tive behavior and economic performance of established
participants (172:256).

8"After 1945, according to one 'highly placed
official' of the (International Harvester) company, its
entry into refrigeration and power equipment was partly
motivated by reluctance to strengthen its position in
the implement market and possibly draw antitrust atten-
tion" (172:235, citing 130:309-10). "It is notable that
neither of tHe two top companies acquired any of the
small ones which came up for sale after 1950. Thus the
reduction of competition was less than it might have
been" (115:354).

121

industry's trade association, "not to give even the
appearance of violating the antitrust laws" (172:244;
115:329).

It seems evident that merger is ruled out as an
approach toward monOpoly or duopoly in the industry, at
least for the foreseeable future.9 The other conceivable
approach, that of Darwinian competitive struggle to the
death, seems equally unlikely, for two general reasons:

. None of the smaller full-line firms possesses
resources sufficient to justify any hope of a-
chieving success by an attempt to force competi-
tors to abandon the business.

. Every full-line firm, on the other hand, has
such a heavy commitment (overcommitment, probably)
of fixed resources, more or less specialized in
the farm-machinery business, that it can be ex-
pected to resist strenuously any attempt to force
its liquidation or conversion. Because each
company has so much to lose, that is, it cannot
afford to give up. Therefore, an attempt to ex-
pel other companies by competitive means would be
too costly, even for such a leader as Deere &
Company (which has done well enough, ordinarily,
without making such an effort).

The following significant inferences may be drawn
at this point:

. The full-line farm-machinery industry is, prac-
tically speaking, prevented from (1) reorganizing

 

9Markham wrote in 1963 that "antitrust policy has
been greatly strengthened in recent years, especially
antimerger policy" (102). Bringing the situation up to
date, Attorney GenerEI—Ramsey Clark reported in August,
1968, that a record number of suits challenging business
mergers were filed by the Justice Department in fiscal
1968 (32).

 

122

itself into a single-management structure, or (2)
otherwise establishing a high degree of industry-
wide managerial coordination.

. This being the case, each company in the industry
is compelled to compete as best it can in an oli-
gopolistic milieu, which’is shaped by government-
aI policy, consonant competitor—behavior, and
the economic characteristics of the market.

 

 

Affirmative Implications of Oligopolistic

 

Market Power

 

 

If the farm-machinery industry is obliged to
function within an oligopolistic framework, it is quite
natural for its participants to take full advantage of
the market power conferred upon them by that framework.
The nature and degree of market power may be said to con-
sist in a set of relationships between the situation and
characteristics of a supplier group and those of a buyer
group. Based on this definition, it is ventured here
that probably no other American industry supplying durable
producers' goods possesses market power comparable with

that of the full-line farm-equipment makers.10

 

10As Lanzilotti has observed, "The structural
features of agriculture, i.e., the size distribution of
farms, level of managerial skill, exit barriers, demand-
supply elasticities, etc., are conducive to an inferior
bargaining position for farmers vis-a-vis both buyers
and suppliers. This structural inferiority means that
under short-run price fluctuations during the crOp year
the farmer is not in a position to engage in the well-
ordered marketing . . . typical of large manufacturers

123

The essence of market power, as conceived of in
this study, is the ability to control as "decision vari-
ables" (99999) factors which are essentially "market
variables" in a more purely competitive environment. To
an extraordinary degree, for an industry that supplies
producers' goods, the farm-machinery makers appear to be
in a position to treat as decision variables the follow-
ing factors:

. The rate, direction, and cost of change in pro-
duct technology.

. Product-differentiation (115:328-30, 331, 345;
172:251).

. Price- and service-discrimination, based on mar-
ket separation.ll

m: IKI’ I .‘

 

 

and processors. Also, much as farmers would like to,
they are unable to escalate cost increases forward in the
administrative fashion of manufacturing industries. A
price universe with such a cleavage inevitably produces
inequities, with the flexible price sector bearing the
brunt of the price disparity . . . The structural super-
iority and market power of food processors and agricul-
tural supply firms constitute an aggravating influence to
adjustments in prices and incomes in agriculture (93).

11Exercise of this capability has been discussed
under the heading, "Biased tendencies in machinery and
parts pricing" (Sec. V). Theoretically, it is a capabil-
ity attributed to monopolistic power, and is conditioned
on (1) the ability to keep two or more markets separate
from each other, and (2) differences in demand elastici-
ties among the different markets (96:l97-8). Both condi-
tions appear to be satisfied in this case (the former
condition by differences in product-Specifications). It
would appear that oligopolists can exercise the equiva-
lent of monopolistic power in any matter in which they
can arrive at agreement based on common interest, and can
devise or develop practical means of cooperating to
implement such agreement.

124

. Price adjustment,.as related to demand-fluctua-
tion and to prices of competitors' products (115:
339-46; 172:252; 33:30-36).

 

Significantly, the industry's market power weighs
much more oppressively on the weaker, generally smaller
and undercommitted, than on the stronger, in many cases
overcommitted, farm operators. In turn, it seems not 7‘
unlikely that a study of differences in the industry's
conduct in the farm-machinery market, as compared with
its behavior in the industrial-equipment market also

served by it, would disclose that users of the industrial

 

products are in a less unfavorable market position than
most of the stronger farm operators.12 If such is the
case, it lends some support to the view that farmers are

more vulnerable to exploitation than any other class of

 

12The following reported remarks by an Interna-
tional Harvester official, to the 1967 National Farm &
Power Equipment Dealers Association convention, may be
indicative: "There are distinct differences between the
customers in industrial and unicultural markets. The
industrial salesman must be the type of person who can
call on purchasing agents in large manufacturing compar
nies. He needs to have intimate knowledge of contractors'
problems and should be a member of their associations in
the community. He needs to keep track of the going
labor rate in your area and the productivity cost (sic)
of your equipment in replacing hand labor, if he is to
serve the real needs of his customers." Dealers were
urged not to overlook the opportunities in rental and
leasing of tractors and equipment for the industrial mar-
ket. The further observation was made that in some a-
reas 50 percent of the larger equipment is rented, and
that this is an increasing trend (11).

125

durable-goods users.13

It is not asserted here that the market power ex-
ercised under the industry's existing structure is great-
er than that which an unrestrained monopoly would possess.
A hypothetical judgment on that issue would be somewhat
beside the point, in any case. If the alternative were
conceived to be one of unrestrained monopoly, it would be
relevant to consider whether its exercise of market power
would be more exploitative, or less so, than that of the
present oligOpoly. The fact that a monopoly would not
have to engage in competitive struggle for desired market
and profit shares, or for economic survival, suggests
that it would be under much less compulsion to behave ex-
ploitatively with respect to its market, hence that much
of its power might go unused.

This proposition would seem rather persuasive
even if it were assumed a monopolized industry would

operate under no public restraint. Such an assumption,

 

13According to E. B. Weiss, "Consumer exploita-
tion has been replacing labor exploitation as the real
problem of our times. We would not permit the things to
be done to people as workers that we allow to be done to
them as shoppersl"(1§1L' In signifiCant respects, farm-
machine services appear to be developed and merchandised
as luxury goods for a consumer market rather than as pro-
ductive inputs for an industry (Cf. 191). The Kennedy
Administration's initiatives in consumerism awakened a
broad public concern about the consumer's plight, but few
peOple seem.to have noticed the fact that the user of
farm equipment may have his economic independence at
stake.

 

 

126

however, seems altogether unrealistic. The nature of a
recommended alternative assumption will be made clear in

the discussion that follows.

Limitations on Market Power--Exemption

from Responsibility

In projecting the wider social and economic con-
sequences of oligopolistic market structure in an indus-
try, it is useful to keep in mind the familiar saying,
“When everyone is responsible, no one is responsible."
Contrariwise, whether or not the point is enforced in any
practical way, there is probably quite general awareness,
when a monopoly misbehaves, that it is the monopolist who
is responsible. Responsibility is a personal attribute;
and the legal concept of corporate personality helps to
maintain this element of order in the world of economic
affairs. An industry, however, while it does have struc-
ture, does not have personality; and a company which is
only a part of that structure cannot be responsible for
the consequences of that structure as a whole.

It is proposed to assume a quite flexible model
of the monopolistic enterprise which conceivably could
supplant the full-line farm-equipment olig0poly. One
characteristic of this model, however, is regarded as

both indispensable and inevitable: the monopolist is not

127

unrestrained. This should follow logically from the fact
that the monOpoly will be regarded as responsible for
consequences of the actions it takes--and even, with not
too long a jump in reasoning, for some of those it fails
to take. (The dividing line is necessarily somewhat arbi-
trary.) Responsibility for negligence implies that

restraints may be coupled with constraints--positive obli-

 

gations to do certain socially necessary or desirable
things because ample power to do them is present, and be-
cause power carries with it socially definable responsi-
bilities.

The minimum restraint which can reasonably be as-
sumed is that of the force of public opinion. Obviously,
if this is not matched by sufficient practical awareness
of the monopoly's responsibilities, in the minds of those
who wield its power, public opinion is likely to become
more articulate and forceful as it is given voice by in-
dividuals such as plaintiffs, reporters, economists,
judges, bureaucrats, and senatorial investigators. Even-
tually, if a well-behaved monopoly such as the United Shoe

Machinery Corporationl4 ceases behaving acceptably, it

 

14The economic relationship between the United
Shoe Machinery Corporation and its customers, and the
manner in which the customers' needs are served (report-
edly to their virtually unanimous satisfaction) afford a
number of instructive parallels suggestive of directions
which efficiency-oriented change in the farmrmachinery
industry might take. Cf. Whitney (111).

128

may well become a more-or-less thoroughly regulated busi-
ness (the equivalent of a public utility), may be broken
upls, or may be replaced by a publicly-owned enterprise.16
Possibilities such as these are a part of the everyday
consciousness of executives in monopolistic firms, and
presumably are taken fully into account in their deci-
sion-making processes.

The behavior of a company which forms part of an
oligopoly, on the other hand, is unlikely to be subjected
to any comparable restraint--much less constraint--be-
cause the oligopolist's power is assumed to be much more

limited. The limitations to which this assumption gener-

ally refers are those concerning the degree of control

 

15Galbraith quotes Kaysen and Turner's statement
that "the primary goal of antitrust policy (is) the limi-
tation of undue economic power to the extent consistent
with maintaining desirable levels of economic perform-
ance" (88:44-5). Commenting, Galbraith points out that
"this, of course, implies that higher levels of market
power are associated with higher levels of economic per-
formance. Market power, in other words, is socially ef-
ficient" (64:185, footnote).

 

16In Donald Dewey's view, "Without the discipline of
antitrust, we can safely predict that many large corpora-
tions will grow even larger, and that they will come to
look like monopolies, however much their power over price
is actually limited by the existence of substitute pro-
ducts, imports from abroad, and the ambitions of trouble-
some small rivals. The history of American politics pro-
vides every assurance that legislation will sooner or
later convert such giants into regulated public utilities.
The experience of other countries indicates that the step
from regulated public utility to public ownership is a
short and obvious one" (99).

129

exercised over output, prices, and profits; and, for an
industry in which control over changes in technology is
of major importance, there may be a general readiness to
agree on considering the oligopolist's power more limited
in this regard also.

A value-judgment, however, that an oligopolist's “A
behavior in a particular industry will likely be more

acceptable than that of a monopolist, can hardly be justi-

fied on the foregoing premise alone. Some effort, at

 

‘lll—‘-ln . 'r

least should be made (1) to identify and evaluate any
additional respects in which an oligopolist may possess
less power than a monopolist, (2) to determine whether
the presumed advantages of certain power-limitations may
be qualified or even outweighed by probable disadvantages,
and (3) to weigh the foreseeable advantages against the
foreseeable disadvantages.

In the broadest view, the superiority of the mo-
nopolist's market power, as compared with the power of an
oligopolist, consists in the ability to integrate an in-
dustry horizontally. From this power, which confers a
high degree of ability to coordinate a market vertically,
all of the other superior market-advantages of the monop-
olist are eventually derived.

Antecedent to the monopolist's superior power
over output, prices, and profits, are superior capabili-

ties for (l) controlling costs, i.e. minimizing costs

 

. fl . '53.“. I ‘1 . .‘.:>§_

130

within the entire industry, for given outputs, and (2)
planning and executing business strategies. Of these two
categories of capability--which are of course highly com-
plementary--the first has already been treated at some
length, as it might apply to the farm-machinery industry.l7
Here it is apposite that, since profits are a function of
costs, prices, and output (or sales, which correspond

fairly closely with output in a highly concentrated indus-

try), direct comparisons of profit levels or profitabil-

 

ity rates are likely to tell little if anything about :1
whether monopoly or oligopoly is socially more effi-

cient.18

If the possible influence of public opinion is

disregarded, prices and output--under either monopoly or
oligopoly--may be said to reflect decisions of business
strategy as fundamentally oriented toward profit-maximi-
zation and as conditioned by the market. But, since the
market is much more highly coordinated under a monopoly,
the monopolist's control over prices and output is much

greater--much less conditioned by the external market en-

vironment--than that of the oligopolist. The prevailing

 

17Refer to Section VI.

18Referring to the monopolistic United Shoe Ma-
chinery Corporation, Whitney declares "Certainly United's
operating cost is more important to its customers than
its profit margin, since the latter has recently been
only one-fifth of the former" (171:143).

131

academic inference is that, ceteris paribus, output will
be lower and prices and profits higher under a monopoly

than under an oligopoly.

 

The ceteris paribus assumption, although admirably
adapted to the method of comparative statics, is unac-
ceptably unrealistic where the problem addressed is that f-‘
of how the dynamics of efficiency and growth in one indus-
try are affected by the dynamics of market power in an-

other. Alternatives cannot be meaningfully compared if

 

their most significant differences are assumed away. L
Differences with regard to powers of horizontal and ver-
tical coordination beget not only differences as to the
degree but also differences as to the purposes of control
actually exercised over output, prices, and other deci-
sion variables. It is arguable that these differences as
to purpose may be more significant than differences as to
degree of control.

The purposes of an oligopolistic firm are, in
general, constrained to serve a strategy that is oriented
toward economic survival or growth through competitive
rivalry with other oligOpolists in the exploitation of
market opportunities. Such a strategy, by definition,
tends to be more short-range, opportunistic, and exploi-
tative, as compared with the strategy of a rational mo-
nopolist. The monopolist can maximize profits in the long

run by foregoing some short-run exploitative opportunities

132

and by investing time and money in the cultivation of all
segments of his market. The oligopolist cannot afford to
wait and accept the risk that any abstention from poten-

tial short-range self-aggrandizement on his part will be

exploited to the advantage of his rivals.

A priori, it does seem highly probable that farm-
machinery output (on an average annual basis, but not
necessarily in every year) would be lower if the industry
were a monOpoly than if it remained an oligopoly. In
line with the argument sketched in the preceding para-
graph, however, this probably would reflect more-effi-
cient rather than less-efficient use of resources. Rele-
vant premises are that (1) farmers in the aggregate tend
to overcommit; (2) overcommitment impairs aggregate agri-
cultural profitability and hence the capacity of agricul-
ture for balanced economic growth; and (3) restraints on
and imbalance in agricultural business growth inhibit the
optimal development of steady future demand for evolving

farm-machine technology. On these premises it would seem

consistent both with efficient resource-use and with sound

long-range business planning for an integrated farm-ma-
chinery industry to restrict output to levels required to
maintain an adequate but qualitatively improving machine-
service capability. In an oligopolistic industry, on the
other hand, imperatives of the struggle over relative

market positions virtually compel each firm to increase

'.I‘l
'3
[w

 

133

its sales (output) by all available and generally-accepted
means--i.e., as far as possible to prevail on farmers to
take long forward positions on fixed investment in ma-
chinery.

Similar considerations afford a basis for suggest-
ing that a monopolistic farm-equipment industry seems
more likely than an oligopolistic one to administer prices
in such a way as to encourage economic efficiency and
19

broadly-based growth in the market for machine services.

A coordinated pricing strategy committed to long-range

 

19In his decision in the United Shoe Machinery
Corporation case, Judge Wyzanski observed that "Under the
system, entry into shoe manufacture has been easy. The
rates charged for all customers have been uniform. . . .
United has, without charge, promptly and efficiently
supplied repair service and many other kinds of service.
The cost to the average shoe manufacturer of its machines
and services supplied to him has been less than 2 percent
of the wholesale price of his shoes" (180 F. Supp. at
340, quoted 171:139). Whitney explains that ease of en-
try resulted from the facts that no large cash outlay to
buy machines is needed, and the royalty per shoe produced
is no higher for a small than for a large manufacturer.
But, "had there been competition in shoe machinery, dis-
counts would probably have been offered to the larger
customers, who would thus have obtained an advantage over
smaller competitors" (171:139-40). Further, "The gross
income of United may be compared with the factory value
of all shoes produced in the United States. In the first
years for which both series are available, 1934-38,
United's gross income was 9 or 10 percent of factory
value; for the next 6 years it was 6 or 7 percent; and
since 1945 it has been only 4 or 5 percent . . . During
the 25 years period 1925-49, United's average return of
10 percent on invested capital was approximately equal
to the return of 72 other producers of durable equipment"
(110 F. Supp. at 325, quoted 171:140).

 

avg!“ 7"} " ‘ "

 

134

profit maximization might be reflected in a balance be-
tween discouragement of overcommitment and encouragement
of adjustments to correct undercommitment. The monopo-
list's capability of pursuing such a strategy, without un-
acceptable heavy sacrifice of short-range profitability,
would be indirectly but importantly enhanced to the extent F5

that cost-reductions could be achieved through integra-

tion and improved coordination.

By contrast, the oligopolist appears competitively

 

driven toward either or both of (1) short-range profit- 1-
maximization, supported by product-differentiation as a
partial defense against the varying pressures of price
competition, and (2) conditional pricing-restraint as an
adjunct to the tactical pursuit or defense of market-
share objectives. The role of pricing strategy, however,
may be overshadowed by that of costs. In an oligopolis-
tically-organized industry in which the prospective bene-
fits of crushing one member seem smaller than the probable
cost, the price at which the least efficient firm can
survive may in effect constitute a floor, supporting the
profitability of other members at higher rates dependent
upon their different levels of cost-efficiency and pro-
ductr and service-differentiation.

Regardless of any evaluation of the consequences
of limitation on the oligopolist's market power, however,

the fact remains as stated before, that relatively little

135

social restraint is imposed upon the exercise of the
power he has. Since he lacks the power required to con-
trol behavior of the industry in the aggregate, obviously
he cannot be considered responsible for it. Moreover,
since his conduct is presumed by and large to reflect the
pursuit of legitimate self-interest within a competitive F“

environment, he is substantially exempted from responsi—

——n—l'? .

bility for the effects of his own contribution to the

industry's total performance. Competitive behavior is

 

cloaked in a mantle of presumed virtue--and limitations 7
on the power to perform well become, in effect, the basis

of an unrestricted license to perform poorly.

Motivation for Alliance with Inefficiency

 

In order to explain why the oligopolist uses his
limited but socially unrestrained and non-accountable
market power in the way he does, it is possible to inter-
pret his motivational structure in terms of rational
imperatives underlying a tolerable adjustment between his
limited-power status and the threats and opportunities of
his environment. Following is a comparative catalog of
motivational characteristics which, it is proposed, dis-
tinguish the oligopolist from the monopolist (see page

136).

THE OLIGOPOLIST
Leads from weakness

Has some power 19 the
market

. must think in terms
of market opportunity

Power constantly chal-
lenged by rivals

. must compete with them
for support by the
strongest economic

allies to be found with-

in the market (Allies'
aims become his, so al-
so their values, vic-
tims, vested inter-
ests)

Long-range future lies
over the horizon, if
anywhere

. present action dic-
tated by present needs,
threats, opportunities

Technology: a tool for
contriving, cultivating
and exploiting short—
range opportunities; a
selling point; a sales
accelerator

Farmer: a man who is able
and willing to invest in
machinery

Small Farmer: a market
for second-hand machin-
ery; an inefficient
loser

136

THE MONOPOLIST

 

Leads from strength

Has power over the market

. can think in terms of
market develOpment

Power unchallenged

. needs make no deals,
curry no favor, cater to
no special interest

Long-range future grows out
of the present

. present action consis-
tent with long-range
needs, dangers, oppor-
tunities

Technology: a tool for
building from the present
toward the future; a
source of important econ-
omies if properly managed

Farmer: a man who uses ma-
chine services in agri-
culture

Small Farmer: another user
of machine services

Implicitly, the oligopolist's motivational struc-

ture has a strong bias toward overcommitment; and the

137

only way to escape the penalties of overcommitment is to
acquire a larger market for the company's products. As
all firms in the industry share this bias, and because it
is cumulative in tendency, pressure builds up on all sides
to move products into the market at a faster rate. The
farm market as a whole, however, appears already substan-
tially overcommitted in farm machinery.

The machinery-manufacturer--oligopolist or monop-
olist--may be presumed to be aware that the market has
both overcommitted and undercommitted segments, and that
these two segments display significantly inter-related
tendencies toward disequilibrium. Further overcommitment
in the overcommitted segment is facilitated and encouraged
by deeper undercommitment in the undercommitted segment;
and the latter tendency is exacerbated by the former.

This farm-market situation, of course, is largely
if not entirely explainable in terms of market imperfec-
tions--imperfect knowledge, product differentiation, re-
source-lumpiness and -fixity, biased influence of govern-
mental and corporate policies, differences in resource-
endowment and market power, etc.

The manufacturer is confronted with three major
alternatives:

. To pursue a strategy of promoting efficiency by
reducing market imperfections and otherwise op-

posing the dual tendencies toward overcommitment
and undercommitment.

138

. To follow a neutral or passive course as between
Opposing and encouraging inefficiency.

. To align the firm's strategy with the inefficiency-
promoting forces of disequilibrium and seek to
exploit them for competitive advantage by culti-
vating market-imperfections that give rise to
them.

Whether or not there is validity in the earlier
suggestion that a monopolist might be naturally disposed
to choose the first of these alternatives, it is signifi-
cant that he would be in a far better position to con-
sider it--i.e., would have far more to gain and less to
lose by it, as well as far greater power to execute it
successfully--than would the oligopolist. Realistically
speaking, it seems the oligopolistic concern must opt for
the third alternative, the dynamics of which are in
harmony with the firm's power-limitations, economic
necessities, and time-frame.

One way of verifying whether the full-line com-
panies are significantly motivated along the lines postu-
lated here is to examine their public attitudes and their
overt behavior. Pertinent observations contained in the
following paragraphs are supplemental to others, scattered
among earlier portions of the study, which have a bearing
on this question but will not be reiterated.

Various sources have noted that the trend toward

larger farms is associated with increasing sales poten-

tial for farm machinery (135:M-9; 46:19). Faris reports

139

that sellers of farm supplies (including farm machinery)
concentrate their efforts, and their price concessions,
on the larger Operators; and he foresees a growing trend
in that direction (19).

Published writings about Deere & Company, and by
its spokesmen, suggest that the firm follows a deliberate [‘
policy of market-segmentation, concentrating its efforts I
and resources intensively on the wants of relatively

large farming customers (124:118; 99). One spokesman has

 

advocated a pattern of farm-firm growth at a "rapid pace" ;,
and by "violent changes" (89:1549).

Some agricultural economists have called for
measures to relieve the distress or to promote satisfac-
tory adjustment of farmers who are disadvantaged by the
rate and direction of technological change (111; 99).

A Deere & Company representative takes issue with one
such recommendation, characterizing it as a proposal "by
legislating subsidies and special advantages to certain
farm groups, which would be most difficult to distinguish,
to forsake more of the market economy in order to save
some questionable traditional forms" (99).

Although the following quotation is not from an
industry source, it appears possible that it reflects an
industry point of view.

Smaller farms, including many part-time farms, pro-

vide a market for some new equipment, especially in
small sizes. More importantly, these farms provide

140

an outlet for used machinery. Since the number of
small farms is shrinking rapidly, there is some con-
cernngout the future market for used machines" (138:
14).

 

Agricultural economists have suggested also, in
view of farmers' inability to agree on effective collec-

tive action, that the entry of resources into agriculture

Tl

needs to be restricted by some external agency or author-
ity (83‘23'42 27-9; 125; 143). Johnson declares, however,
that "suppliers are unlikely to perform this function

well as they simply do not have incentives to control the

 

overcommitment unless they become owners of the agricul-

tural producing firms" (83:28). The following words Of a

full-line company official21 appear implicitly to lend

some support to this view:
(Machinery marketers) must accelerate the pace of
acceptance by farmers. In face of the onrushing tide
of population, the customary lag of 3 to 5 years from

"early adopter" to genegal use must be cut to a year
or two, at most (116).2

Many farm leaders are said to agree that farmers
need increasing amounts of educational and service help

(109:81-2); and research results indicate such help brings

 

 

20Abrahamsen, however--presumably with the dynam-
ics of the farm-enlargement process clearly in mind--en-
visions "a new set of marginal farmers appearing as soon
as the present ones disappear" (1:1183).

21W. L. Pringle, Vice-President-Marketing, Min-
neapolis-Moline, Inc.

22Refer also to quoted statement by a Massey-
Ferguson official, p. 10.

 

.1—

 

 

141

impressive improvement of managerial effectiveness (1921
8-14, Appendix Table l; 110:25-36). Insofar as such help
relates to selection and use of commercial products, it
should be possible for suppliers to provide it efficiently
as a marketing service, involving special requirements of
objectivity, precision, expertise, and impartiality (19; r‘
111).23 Farm-machinery industry leaders have voiced
24

strong support for this principle ; but it would appear

to receive somewhat limited application in the farm-ma-

 

lrz-—_-| “ ' 13... v «
»

chinery business. "Competitors point out that particular
farm implements are too highly differentiated as among

sellers to permit exact comparisons of prices" (l72:251)--

 

23Producers of agricultural chemicals, feeds, and
seeds have developed marketing programs along the lines
of W. R. Grace & Company's "full service selling concept,"
under which the crop-growing program embraces advice and
assistance commencing with soil tests and ending with
storing and marketing the crop (99).

24Merrit Hill (then Vice-President, Ford Motor
Company) in 1961 suggested an analogy between the farmer's
position and that of his own company when purchasing e-
quipment for its manufacturing operations: ". . . We
have little use for the . . . salesman who merely claims
his equipment is as good as or better than anyone else's,
and who then quotes us a price or offers us a 'deal'.
The men we respect are those who analyze our operations,
recommend to us the equipment we need to solve our prob-
lems, prove to us that such equipment will perform the
way they claim it will, and finally convince us that we
can make more money through the ownership of that equip-
ment than we could do without it" (11). J. G. Staiger
(Group Vice-President, Farm Machinery, Massey—Ferguson
Ltd.)., referring to the marketing role of farm-machinery
suppliers in developing countries, said, "We must reverse
the traditional adage and apply the principle of caveat
vendor" (199).

142

or, implicitly, of values. Also, as suggested previous-

25, the farmer's inferior market-power status apparently

1y
commands less educational and service effort than is re-
quired for selling in the industrial equipment market.

A 1965 study of commercial farmers' machinery—
buying habits identified brand of equipment as the lead- {—
ing determinant of place of purchase (11). Tendencies

found with respect to brand preference in an earlier

study (91) appear to have rather limited relationship

 

with rational, objectively and fully informed product-
selection.26 These patterns of farmer-behavior evidently
reflect the influence of manufacturers' product- and serv—
ice-differentiation efforts. According to Phillips, coop-
eration toward standardization of certain common compo-

27

nents and design features since World War II

 

25Footnote 12, page 124, is again apposite.

26These tendencies were as follows: (1) As in-
come of a farmer having low brand-preference increased,
his brand-preference tended to rise; (2) younger and less-
experienced farmers tended to have greater brand-prefer-
ence than older and more experienced ones; (3) as a farm-
er's exposure to radio, television, and printed publica-
tions rose, his brand preferences tended to increase; and
(4) farmers who placed higher estimates on the differences
among available dealers tended to have higher brand pre-
ferences.

27Impetus toward standardization efforts, nowadays
promoted by the American Society of Agricultural Engineers
and the Farm Equipment Institute, is said to have been
given by "the spread in the use of the power-take-off af-
ter 1924, the gradually increasing level of technical
sophistication among buyers, and the pressure of official
investigation by such public bodies as the FTC in the
1930's" (115:329).

143

has been accompanied by a resurgence of competition
in those aspects of product design not affected by
the standardization measures. Complaints, in fact,
have frequently been heard that the process of dif-
ferentiation has been carried to excess and has the
effect of simply impeding price competition rather
than Sgntributing genuinely to farm productivity (119:
329).

Referring again to overcommitment of purchased
farm inputs, Johnson suggests that "one would expect over-
use tO be curtailed mainly by structural changes that

would make contractors and vertical integrators financial-

‘3'!

1y responsible for the losses associated with overuse"

 

(99111). The introduction of comprehensive, flexible
plans for leasing or contract services of farm machines
owned by manufacturers is a possible form of vertical in—
tegration that could make the manufacturers financially
responsible for losses attributable both to overcommitment
and to obsolescence.29 As of 1958, however, according to
Phillips, leading manufacturers were generally Opposed to

the rental idea.30

 

28Phillips hedges this observation to some ex-
tent by adding that "while doubtless many of the so-
called improvements are of the 'frill' variety (and thus
expendable), the complaint has only a restricted valid-
ity" (115:329).

29Cf. Abrahamsen (1:1184).

30The National Retail Farm Equipment Association
in 1958 supported the principle of renting by dealers,
but took the position that from the dealer's standpoint
it should be limited to used and reconditioned rather
than new equipment (114:1180).

144

All have made provision for adapting their agreements
currently used in renting industrial machinery to
farm equipment, and stand ready to do so if competi-
tive conditions make it necessary. . . . But each of
the leading companies claims that it will not be the
first one to make such a move. . . . While company—
supported renting by dealers is by no means imminent
. . . in any tight market situation . . . a tempta-
tion will be present for companies to move extra ma-
chines into the hands of dealers for rental purposes
under some form of accelerated payment plan. 1 . . .
The competitive aspects of such a possibility are
interesting, since this is a situation where the
gains, though probably short-lived, would accrue to

the company which made the move first (114:1180-81).32

The Forbidden Competitive Motive

The foregoing discussion of oligopolistic motiva-
tion would doubtless be grossly inaccurate if it referred
to oligopolists free to engage in any economically ration—
al and efficient form of competitive behavior. When
oligopolists are forbidden to merge, the prospect regard-
ing possible gains from competitive conduct is modified
so fundamentally as to transform their very concept of
competition, hence, the major outlines of their competi-

tive behavior.

 

31Abrahamsen concurs: "Indications are that in-
terest in rentals will closely reflect the extent of
machinery sales and economic conditions in the industry"
(1:1185).

32The situation as it appears to exist as of this
writing is discussed under "Availability of Hired-Machin—
ery Services," Section V.

 

145

There is an interaction between structure and be-
havior which . . . has two characteristics (that) seem
to be almost totally unperceived and unanalyzed:

. The interaction is continuous. Thus, behavior
alters structure, the altered structure affects
behavior, the changed behavior in the altered
structure in turn realters structure, and so on
indefinitely . . .

. Structural changes are a form of competitive be-
havior. It is customary to think of structure in
a given industry in static terms, and thus as
different from ordinary market decisions. But in
terms of internal, economic motivation . . . they
are quite similar. Structural moves are products
of competitive forces just as clearly as, say,
price changes or product improvements.

. . . Whenever competitive behavior inducing struc—
tural change is artificially restrained, all other
competitive behavior in the industry is adversely af-
fected (104).

If it be accepted that competitive behavior ba-
sically consists in the vigorous exploitation of economic
opportunities within the firm's practical reach, the
farm-machinery manufacturer's behavior may be explained
as the result of his having rationally eliminated all but
the last of the following alternative major lines of
strategy:

. If competitors are weak, force them out.

. "If you can't lick 'em, join 'em."

. If you can't lick them or join them, don't really
fight with them. If you can't afford to fight
your competitors, effect a mildly competitive
collaboration with them in exploiting situations
of short-range opportunity in the market-place--
i.e., if horizontal struggle would bring only

pain, concentrate on using the vertical market
power you have.

 

 

146

Exploitation of opportunities in the farm-machin-
ery market, this study concludes, has consisted in making
economic alliances with tendencies toward inefficiency.
Considering, however, that the oligopolist does not re—
main an oligopolist by choice--and that he is only one of
a group of competing oligOpolists, whatever that may mean r“‘
in practice--it would be wrong to indict him for sponsor- 1
ing inefficiency. That responsibility resides in the

public policy which asserts that competitive structure

 

per §g_is more important than economic efficiency.
The adverse consequences of that policy, like
those which result in air and stream pollution, are of

course unintended.

VIII. INHERENT LIMITATIONS OF

OVERCOMMITMENT STRATEGY

In Section VII the farm-machinery industry's
oligopolistic structure was discussed in terms which
might seem to suggest that--because merger is forbidden,

and other deliberate forms of competitive elimination are I

 

too costly--the structure is immutable. Such an infer-
ence, however, cannot be seriously entertained unless
companies operating within the oligopolistic framework
can maintain viable adjustment to their changing economic
environment

The key to satisfactory adjustment is strategic
adaptation. This section and that which follows will
discuss some reasons for anticipating that sooner or
later the prevailing market strategy will prove non-vi-
able, and, because adaptive capability appears to be
limited by the oligopolistically competitive situation,
that some firms will be eliminated. In the long run,
legal sanctions cannot assure the preservation of a
structure which is not economically viable.

The individual farm-machinery-maker has little

power to influence the long-range consequences of

147

 

148

industry-wide strategy. It is therefore rational for him
to try to protect or enhance his competitive position,
upon which will depend his relative ability to deal with
any long-range eventualities. Hence, long-range strategy
tends to consist of short-range strategy projected inde-
finitely into the future. If there is a fundamental in-
consistency between the industry's consequent behavior and
the requirements for long-range viability of its present

structure, none of the companies is in a position to do a

 

much about it. 1-
The strategy of promoting farmer-overcommitment
has certain inherent limitations which suggest that even-
tually it will prove self-defeating if pursued long and
single-mindedly enough:
. Slow growth of food demand.

. Diminishing returns on the results of labor-sub-
stituting technology.

. Developments in competing technologies.

. Countervailing power of major agricultural enter-
prises.

. Potential increase of efficiency in the use of
existing machinery.

Slow Growth of Food Demand

The uncertainty of relationships between long-

range worldwide food needs and long-range export demand

149

for U.S. food output has been discussed in the first sec-

 

tion. There is much less uncertainty with respect to
domestic trends and prospects in food demand. Here the
outlook may be summarized as follows:

. The growth of food demand is more closely related
to population growth than to the significantly
faster growth of national income. As personal FT.
incomes increase, a diminishing share of the total
is spent for food products in the aggregate.

. As incomes rise, the allocation of total expendi-
tures for food favors livestock products, fruits
and perishable vegetables. Demand growth is .
slowest for those products--food grains and other g
vegetable staples--the cultivation of which re- 1
quires the mass-produced kinds of machinery that
full-line companies have found it most advané
tageous to manufacture.

 

There are basically three sources of demand for
new machinery--growth of demand for products for which
machinery is required, need for replacement of worn-out
machinery, and desire to exploit the economic (and other)
advantages of improved equipment. Obviously, if food
demand were to grow rapidly, the effects upon machinery
demand would be registered not only through farmers who
wish to add to their stock of equipment but also through
those whose equipment has significantly deteriorated, as
well as those who are prepared to capitalize on the latest
technological improvements. If, on the other hand, growth
in food demand is slow, technological improvement con-
stitutes the only available basis for a relatively strong

rate of increase in machinery demand.

150

Where, however, the main thrust of technological
development is oriented toward increasing the individual
farmer's productive capacity-—as it has been to a very
large extent--it appears possible that negative effects
on the MVP's of new—machinery expenditures eventually
will predominate. If enough farmers buy the new equip- W—
ment to make its development and production profitable
to the manufacturers, farm output is likely to grow fast-

er than farm-product demand (which as already discussed

 

is inelastic). This would precipitate a drop in aggre- :7
gate gross farm income (except to the extent that prices

may be supported) and a much sharper decline in net farm-

ing income. Whether the individual farmer's MVP of new-

machinery expenditure also declines will depend on whether

the revenue-reducing effects of lower product prices, and

the incremental fixed costs of substituting more-expen-

sive new equipment for less-expensive older equipment,

are sufficiently offset by the increase of output capac-

ity and the potential savings in variable cost.

Here it is relevant to consider what general
characteristics might reasonably be attributed to those
farm.operators, as a group, who consistently constitute
'UWe principal market for larger and more expensive new
machines--i.e., the growth-market for farm machinery:

. They have relatively heavy investment in machin-
ery and other fixed assets--implying that a

151

considerable share of any accounted profit is
required to cover returns on investment.

. They are more dependent upon relatively well-paid
hired labor than other farmers, and therefore can
less readily absorb lower returns to labor.

. The used machines which they would consider trad-
ing for new ones are in general more up-to-date
and of higher capacity than those owned by other _
farmers. This implies that at any given point of F_‘
time the average farmer in this group stands to
gain less from a trade, in terms of improved
variable-cost efficiency and increased capacity,
than would the average farmer outside the group,
upon acquisition of identical new machines.

‘3" 9'

. Many of these farmers are more or less habitually
overcommitted to expensive fixed inputs, their
profitability depending more upon high-volume
market leverage than upon economic efficiency as
such. These operators are susceptible to es-
pecially adverse effects from product-price
declines.

 

Insofar as these generalizations are valid, the
industry's efforts to maintain an upward sales trend, at
profitable selling prices, may be considered exceptionally
vulnerable to a general recession of farm prices. There-
fore, to the extent that a rising trend of machinery
sales depends upon increasing farmers' productive capacity
faster than the growth of farm-product demand, it evident—

ly cannot be maintained indefinitely.

 

1It has been argued in Section IV that farmers
'who trade early and often are intent upon avoiding costs
of future obsolescence and physical depreciation.

152

Diminishing Returns on the Results

of Labor-Substituting Technology

A major aspect of technological change, as it
impinges upon agriculture, is the manner in which it mod-
ifies productive resources, production relationships, and
production organization.

The major emphasis of farm-machinery technology

upon labor substitution has contributed very materially

 

‘9‘)?" “.7 _ ".- ,
|

to the continuing trends toward larger equipment, faster
and more powerful tractors, larger and more specialized
farms. The discussion which follows is addressed to the
problem of diminishing returns relative to these develop-
ments.

There are a number of reasons for expecting that,
sooner or later, labor-substitution will prove to have
exhausted its usefulness as a profitable basis for tech—
nological change in American agriculture. The ultimate
reason, of course, would be that the substitution process
had exhausted its supply of expendable raw material, i.e.
replaceable farm labor (99199). Eventually some minimum
force of workers will haVe to be retained in farming
operations, even if they are exclusively managers, me-
chanics, and technicians. Doubtless this is still a re-
mote prospect; and it is probably more realistic to ex-

pect that the labor-displacement effort will be largely

153

abandoned substantially short of that extreme, essentially
because-it will no longer pay for itself.

It is perhaps not premature to question whether
the farm-machinery industry will find it economically
feasible to participate in the latter stages of the labor-
replacement era. As implied in subsequent discussion with
reference to machinery-substituting technology, it is
possible to foresee increasingly keen inter—industry com-

petition based On technological rivalry for dominance in

 

the market for farm inputs. Should this condition arise,
enormous pressures doubtless would build up in the farm-
machinery industry, directed toward achieving all possible
efficiencies in its internal organization and operations
and toward maximizing the value of its services to as many
farm operators as possible.

At such a time, if indeed not sooner, the industry
would no doubt conduct a vigorous reappraisal of the
giant-tractor concept as the cutting edge of its strategy
for claiming a growing share of the farmer's income (91;
‘99). Some of the problems pointing toward future dimin-
ishing returns on the technology of increasing machine-

sizes are not hard to identify.2

 

2It is not asserted that diminishing returns are
already in evidence. Nevertheless, there is some evi-
dence that the sales trend toward larger tractor sizes
may have begun to lose momentum. In 1967, against the
background of a 5.5 percent drOp in total wheeled—tractor

154

. As equipment is made larger there are increasing
problems of soil compaction associated with
heavier weight (144).

. Increasing weight, furthermore, reduces efficiency
by using up engine power needed for doing work
(149).

. Conversely, as draft-loads become heavier, there
is a need for increased weight as an aid in over-
coming growing problems of efficiency-loss
through slippage (140:951 167).

. The objective of increasing tractor-sizes is to
increase power. This necessitates further improve-
ment of power controls (99).

. Use of greater power is associated with combining
operations formerly executed separately, and per-
forming them at higher rates of speed. These
factors necessitate the elaboration of numerous
complex mechanisms to aid the Operator in proper-
ly controlling those operations themselves (99).

. "A larger machine may reasonably be expected to
have a greater effective capacity, but it will
have a lower field efficiency than a smaller ma-
chine" (8:349; 140:166; 159:6).

. Decline in field efficiency, together with in-
creased capital investment and larger work-require-
ments per unit as machine-size increases, "will
create a financial pressure for a guaranteed per-
formance in work capacity and reliability" (111;
14.2: 19.52)-

. Assuming that a rapid rate of technical progress
will continue to affect the economic operating
life of farm machines, this too will strengthen
owners' demands for higher reliability (119).

. Projecting another trend: "Capital limitations
will encourage the expansion of rent and leasing
plans for farm machinery; and this in turn will

 

retail-unit sales, sales of 70-79 horsepower units in-
creased 52 percent, "due to the introduction of many new
models" (146) compared to a 28 percent gain on units of
100 horse§3werand over, and declines in the intermediate
size groups.

 

155

develop new pressures for machine reliability,"
accentuated by lack of direct ownership, which in
turn will encourage harder use (174).

. Hence, even though there is no reason to doubt
that technically optimum solutions always are
feasible, it seems logical to expect in general
that, as horsepower ceilings are raised, the
favorable margin between rising effective capacity
and rising cost will diminish and ultimately dis-
appear. Solutions that are feasible technically
may not be feasible economically (199).

. Further, increasing machine-size is associated
with increasing farm-unit land requirements (99:
19). "Greater demand for land has led to higher
prices of land. This is an indirect cost of
owning larger machines" (162:341).

 

 

. To the extent that the increase of machine-sizes
becomes associated also with employment of hired
operators rather than family labor, it is to be
expected that upward pressure on labor costs per
man-hour will increase markedly (75). "Increased
social and economic pressures to Ificrease wages
to hired workers are expected, and wages are ex-
pected to rise a full 75 percent (5 percent a
year) or more by 1980" (141:13).

. Yet another penalty attached to investment in
ever-larger and more expensive equipment is pro-
gressive loss of the flexibility farmers need for
adjusting to changing economic conditions without
incurring heavy depreciation and obsolescence
costs (129:395).

Another trend which has arisen in response to the
need for extracting maximum service from the costly in-
struments of labor-saving technology is that toward enter-
prise specialization. "One of the disadvantages of spe-
cialization is that work may not be provided for all
seasons and periods of the year if there are only a few

enterprises" (73:321). A further disadvantage is the

attendant reduction of flexibility, with consequently

156

greater vulnerability to market fluctuations and weather
variations, and increased exposure to problems of asset-
fixity. One approach toward overcoming these disadvan-

tages is through the acquisition of more land, so that

specialized enterprises on different large tracts can be
synchronized within a broader pattern of diversification f“
(11). Thus, the move toward specialization may be viewed
as an aspect of the trend toward enlargement of the farm

firm. It is worth noting that, to the extent different

 

portions of the total farmed area are physically separ-
ated, costly machine- and man-hours must be expended in
moving between them. The advantages, of course, may sub-
stantially more than compensate for these costs.

Future prospects regarding the farm-enlargement
trend constitute a complex and somewhat controversial
subject-field which cannot be treated fully within the
limits of this study. There is relevance, however, in
the fact that this trend thus far has been noticeably
more pronounced in animal husbandry than in crOp-raising.3
It may, furthermore, be asserted with some confidence

that technological developments have not as yet invali-

dated the proposition that larger-than-family-size farm

 

3Cf. 44:49, 51.

 

157

firms have no clear advantage over adequate family farms4,
insofar as economic efficiency is concerned (199; 111.
Trelogan foresees that such advantages will gradually ac-
crue as techniques of cybernation are brought to bear
upon the communication and control limitations of farm
operations (199). Within the horizon of ordinary busi-
ness planning, however, it appears to remain true that
legitimate scale economies in farming, while not neces-
sarily decreasing, cease to increase after family-farm
size limits are attained, except in highly specialized
farming enterprises.5 "The drive toward larger farm size
is motivated by possibilities of greater profit, not by
lower average cost" (199).

In the present context, it is significant that
reasons relating more to inefficiency than to efficiency,
in a macro-economic sense, may well have inspired the
growth of numerous very large farming firms (1911. Where
such is the case, there is probably a high degree of

vulnerability to adverse effects from termination of the

 

4The "adequate family farm" is defined as a farm
business with sufficient resources and productivity to
yield enough farm income for (1) family living; (2) farm
expenses, including depreciation, maintenance of the
livestock herd, equipment, land and buildings, and inter-
est on borrowed capital; and (3) enough capital growth
for new farm investments required to keep in step with
technological advance and rising levels of living (100:8,
footnote).

5See, for example, a description of Green Giant
Company operations (11).

 

158

conditions (such as governmental subsidies) upon which

profitability or viability depends.

Developments in Competing Technologies

The history of man's material progress is filled fig

with illustrations of the principle that, when the notion

'I'L... ' '1' n '

that "there must be a cheaper (or easier) way" occupies '

(m -l.

the minds of resourceful individuals, cheaper (or easier)

 

ways usually are found to serve human purposes. An ob-
vious corollary, which applies to the develOpment of farm
machinery as well as to any other technology, is that a
given technology is likely to be exposed to competition
from rival technologies.

One conceivable kind of technological change that
would be beneficial to the public at large would be the
develOpment of attractive, cheap ways of growing food
with relatively little or no dependence on the world's
limited supply of arable land. (Some of the directions
already foreseen in which such change might develop in-
clude intensive cultivation of marine food sources, petro-
leum-fed algae culture, hydrOponic development, etc.)
(19). If such developments were to materialize while
soil-grown food products were in plentiful supply rela-

tive to economic demand, it is obvious that the MVP's of

159

farm machinery, and of other resources used in growing
traditional crops, would be adversely affected.

Within the field of agriculture, a distinction
has often been made between technology which is primarily
labor-saving (i.e. labor-substituting) and that which is
predominantly land-saving in its effects. The principle
upon which a logical choice of either orientation has been
based is that of economizing in the use of the most
scarce, (that is, in general, the most expensive) re-
source. Thus, farm-machinery technology largely has been
directed toward economizing labor, and fertilizer tech-
nology toward economizing land. It seems possible that
in the future a new orientation may develOp, toward
economizing in the use of machinery or perhaps machinery
329 labor. The reason for such a development, if it oc-
curs, would be clearly economic in nature, based on iden-
tification of machinery (or the machinery-labor combina-
tion) as the most expensive, economically least efficient
input.

Conditions which would ultimately favor a trend
in this direction might include continuing steady machin-
ery-price increases, diminishing returns on efforts to
maintain the-pace of labor-substitution, and technological
implications of ongoing research in such fields as genet-
ics, agricultural chemicals, radiology, electronics,

ecology, agronomy, agrology, and hydrology. At the

 

160

present time there are some innovations in various stages
of development or application which might be interpreted
as pointing toward a gathering emphasis on machinery-
economization--e.g., minimum tillage, improved herbicides,
multipurpose machinery-design concepts (199)6, broadcast-
seeding of traditional row-crops, and the use of airplanes F“
in chemical dusting or spraying. Undoubtedly, such devel-
opments, where practical, are supported also by other con—

siderations. The possible adverse implication with re-

 

spect to farm-machinery MVP's is, in any case, unmistak- i

able.

CountervailingPower of Major ~

 

Agricultural Enterprises

 

Unquestionably, valid reasons of economic effi-
ciency support the replacement of a substantial number of
small farms by fewer and larger units. Economic reason-
ing also suggests, on the other hand, that efficiency
considerations place desirable limits on the extent to

which this process should be carried.7 Nevertheless, if

 

6The citation refers to a report concerning a de-
sign-concept—-proposed not by a farm-machinery company
but by the United States Steel Corporation--for "a single
tractor, Vantage, which executes the farm tasks presently
performed by a number of units" (199).

7A Minneapolis-Moline official, taking note that
"a 5,000 or 10,000-acre farm is not necessarily more

161

the farm—enlargement process is systematically stimulated
and encouraged by the farm-machinery industry as well as
by the federal government, it seems unlikely to stop
where efficiency criteria are satisfied. A plausible
hypothesis is that the trend might continue until that
market strategy is bankrupted by its own effects upon r”
market-power relationships.

Factual and logical grounds for anticipating such

a course of events are contained in developments described

 

by Paris:

In many areas quantity discounts are available for
farm inputs such as fertilizer, insecticides, farm
machinery, fuel, etc. This may be looked upon as a
reflection of economies of selling. In addition,
manufacturers or wholesalers may give quantity dis-
counts to local suppliers. Also, they sometimes make
special discounts to local dealers in areas where the
price competition is particularly severe (43:1242).

It has long been recognized that some Operators of
larger farms purchase a sufficient quantity of some
inputs to obtain them at a price lower than the price
paid by Operators of average-size farms . . . As
(average) farm size increases, a larger share of the
factor purchases will be made by these farm operators
(43:1240).

(Thus) there is a concentration of purchasing power
in a relatively small number of buyers. It is these
buyers that the sellers concentrate upon to obtain as
customers. In the future, it appears that suppliers
will cater more and more to the large farm operators
(43:1243).

 

efficient than a 500 or 1,000-acre farm," has expressed
the view that "the number of farm units will most likely
stabilize at the point where the farmer makes a good
living through use of technology on what should be char-
acterized as a large family farm" (119).

162

A few of the larger farm operators are undertaking
some of the functions of suppliers through acquiring
small dealerships for some farm supplies.8 Also,
there is some bypassing of local retail outlets and
purchasing direct from the wholesale outlet or manu-
facturer. Although these are not common practices,
the implicit possibility of larger farm firms taking
over the function or bypassing local sellers should
improve the bargaining power of larger buyers (99:
1244).

Projecting these develOpments into the indefinite
future, it is possible to foresee (l) progressive thinning
of the ranks of dealers devoted primarily to the farm or

farm and industrial equipment business, and (2) increasing

 

pressure on manufacturers to extend deeper discounts
benefiting a larger prOportion of a diminishing total
number of customers.

The possibility, consistent with profitable opera-
tions, of granting economically meaningful discounts to
one class of customers depends upon the ability to offset
Imuch of the related cost through charging full price to
other customers. Therefore, if the market—segment repre-
sented by those other, less-powerful customers becomes
too small relative to the discount-demanding segment, an
adequately broad program of meaningful discounts will not

be feasible. The situation obviously would be further

 

8The Green Giant Company, for example, acquired
farm-implement dealerships, making its policy of early
trade-ins more economical (11).

9In the car-and-truck business, sales to such
customers are known as fleet sales.

163

exacerbated insofar as dealership-status might be held by
large machinery-users who are not particularly interested
in performing all of the functions normal to that role.

A basic challenge would be presented to the indus-
try, if matters long continued to evolve in this way, in
the form of confrontation by a more-or-less solid array of
customers armed with fairly impressive countervailing
power. With relatively few weaker customers remaining as
potential targets for diversion of that power, the farm-
machinery oligopoly might be compelled to relieve the re-
sulting pressures through changes, however painful, in its

own structure and strategy.

Potential Efficiency-Increase in the Use

of Existing Machinery

 

In much of the previous discussion concerning the
generation of increased output within agriculture, there
are tacit assumptions that (l) the contribution made to
output by equipment already present on farms is not vari-
able, and (2) that costs associated with its ownership
and operation cannot, or will not, be reduced. These as-
sumptions are useful for studying numerous aspects of
variation in new-machine investment, but additional light
can be shed on the problem at this point if they are

relaxed.

"W .i LIT-I"
I \

 

164

Major possibilities are in fact apparent, in
principle at least, for more economically efficient owner-
ship and use of a given stock of machinery. As the conse-
quences of the farm-machinery industry's postulated market
strategy progressively unfold, such possibilities may con—
ceivably become a significant factor tending to inhibit
continued pursuit of that strategy. The reasoning which
appears to support this speculation may be outlined as
follows:

. Overcommitment has a fundamental connotation of
overinvestment in a given resource or enterprise,
relative to the opportunity-cost yardstick. This
is, of course, inefficient er 92 but even great-
er inefficiency is involved, from the individual
firm's standpoint, if the resource is fixed in
production but underutilized relative to its
capacity.

. A market strategy of inducing overcommitment to
machinery in farming tends to place more farmers
in the more-or-less overcommitted category while
at the same time gradually eliminating those in
the undercommitted category.

. As undercommitted operators diminish in number,
their obsolescence-absorbing role might be filled
to a considerable extent by a different set of
marginally viable farmers characterized by under-
utilization of more-than-adequate used-machine
capacity.

. The viability of these capacity-underutilizing
farmers would, in general, be considerably less
marginal than that of undercommitted farmers.
Instead of succumbing to the cost-price squeeze,
many of them probably would compete actively a-
gainst full-capacity new-machine users for acqui-
sition or control of any farmland coming on the
purchase- or rental market. Thus, (1) increased
pressure on land prices and rentals would make
farm-enlargement less attractive to new-machine
users, (2) capacity-underutilizers could more

 

IIIJIPI. I r5, r1. '9 ”K

165

advantageously expand Operations for fuller ma-
chine-utilization, and, implicitly, (3) an in-
creased proportion of the land which changes
hands would become associated with more efficient
use of existing machines rather than with intro-
duction of newly-purchased equipment into the
farming economy.

IX. PORTENTS OF CHANGE IN THE MARKET

FOR MACHINE SERVICES

The foregoing section was concerned with a review
of factors which appear likely to impose eventual limits
on the workability of the farm-machinery industry's pres-
ent strategy, as interpreted herein, and on the viability
of its existing structure. Discussion of the industry's
future prospects continues in the present section, but
with a nearer-range and somewhat less speculative, more
objectively-based outlook.

In effect the question is raised whether, in view
of developments already observable, the industry may en-
counter increasing difficulties in the course of the next

several years--say the coming decade.

The Diminishing Market

for Used Equipment

As the number of relatively prosperous, heavy-

users of machinery increases, there is correspondingly

increased output of used machines into the secondhand

166

 

167

market.l Paradoxically, although it has often been sug-
gested that faster exit of smaller, disadvantaged opera-
tors would facilitate adjustments including more-rapid
equipment-modernization in agriculture, there are grounds
for anticipating an opposite effect where the economics
of new-machinery purchases are concerned: 5"“
. A smaller market for used equipment implies that
it will command lower prices; this reinforces the
effect of more used items being offered on the
market.
. As anticipations of resale value decline, MVP's of
expenditures on new machines decline--tending to

result either in reduced sales, lower new-product
prices, or both.

 

To the extent that events might develOp in this
manner, the effects on the machinery industry would be

more or less severe. The impact of a long-term decline

 

1The annual turnover of nationwide average dealer
used-equipment inventory reportedly declined from 5.38
times in 1956 to 3.63 times in 1966 (Source: Cost of
Doing Business Studies, National Farm and Power Equ1pment
Dealers Association, reported in 199). This trend, how-
ever, may not adequately reflect the actual increase in
volume of used machinery accepted by dealers as trade-ins,
because (1) inventory valuations tend to reflect changing
estimates of resale values in the market, and (2) as mar-
ket conditions change, varying prOportions of the used
machinery acquired by dealers are offered for resale,
dismantled for parts, or junked. Cromarty reports that,
in a 1936 survey of dealer practices in disposing of used
equipment, two-thirds of those respondents accepting
trade-ins indicated that they dismantled from 1 to 25 per-
cent of the trade-ins, and a similar proportion indicated
that they junked from 1 to 25 percent. "In general the
rate at which used machines are reconditioned and sold is
related to the price received ... . for new and used ma-
chinery, and the cost of the necessary repairs . . ."
(33:35).

 

168

in demand would compel deep cuts to be made in productive
capacity, as well as costs of distribution and administra-
tion. Overhead would have to be distributed over a small-
er sales volume without increasing prices, or perhaps
even while reducing them.

Realistically, such sweeping changes are not to it“
be expected except under extreme economic pressure (short
of a structural realignment within the industry). There-

fore, even if the secondhand market should fall off con-

 

tinuously, it seems likely that new-machine prices will
yield only very slowly to downward pressure, so the
economic effects would be rather fully reflected in de-
preciation of MVP's on farmers' new-machine expenditures,

hence in diminished purchases.

Agricultural Policies and Programs

As discussed in Section IV, agricultural policies
and programs during the last generation or more have con-
tributed toward enhancing the MVP of expenditures on
machinery and its complements, for the individuals who
made these expenditures. At the same time, since macro-
consequences have not been faced realistically, MVP's of
the resultant expenditure-increases have been substan-
tially negative for agriculture and for the larger

society.

169

Now, however, evidence is gathering that the tide
has turned:

Present farm programs have had it . . . A major
threat to farm programs is an urban-minded Congress

. . . Less than 1/3 of House Agriculture Committee
members will be from farm districts. Rules Committee,
that decides which bills come to a vote, may have
only 1 or 2 members with a farm interest . . . The
hostile attitude of Congress toward farm programs is
even more significant. . . . It shows up in refusal
to enact LBJ's omnibus farm bill, in the near-major-
ity vote for a limit on payments per farm, and in
dozens of speeches. Newspapers and TV networks add
to the sentiment with blasts at 'huge farm subsidies.‘

Money is the basic problem . . .

First step is going to be to cut back--and then end--
big, multi-billion—dollar programs that pay for idling
cropland . . . And there'll be less money for conser-
vation cost-sharing, subsidies to electric coops, and
cut-rate loans by Farmers Home Administration. Even
farm research may be nicked. PL480 export program
will survive--but only at its scaled-down level.

Urgent need now is for a new approach to the 'farm
problem', one that an urban Congress wil go along
with.

First big change in farm program thinking to reflect
the new Washington attitude is to handle farm poverty
as mainly a poverty problem--not a farm problem.

Farm programs aven't helped the very-Iow-income
farmer. While agriculture as a whole suffers from
too much production capacity, 92 suffers from not
enough. Payments to produce less hardly solve his
income problem. He'd fare better under poverty pro-
grams than under farm programs (142:9).2

The major implication of the indicated new Con-
gressional approach to agricultural problems appears to

be that government inducements toward increasing output

 

2See also (52:9).

170

will be substantially reduced or withdrawn. Thus, the
MVP's of individual operators' expenditures on new ma-
chines will be reduced, particularly for those farmers
already overcommitted relative to unsubsidized demand
levels. In due course, however, as aggregate capacity is
worked downward toward a level commensurate with market r“
needs, MVP's should become better than before for farmers
who are not overcommitted, since their competitive posi-
tion within agriculture would be relatively improved.

In effect, the prospect is that Congress and the

 

public will progressively be less disposed to subsidize
overt actions which give rise to inefficiency in agri-

culture.3

IncreasingReturns to Expenditures

on Substitute Inputs or Under-

 

Utilized Complements

 

"The most profitable quantities and combinations

of variable resources are being used to produce a product

 

3Coincidentally, John Fisher in Harper's Mgggzine
reports that the approaching retirement of Senator Carl
Hayden, long-time chairman of the Appropriations Commit-
tee, may enable the President who enters office in Janu-
ary, 1968, to close down the Interior Department's Recla-
mation Bureau. The Bureau spends billions of dollars to
bring land into expensively-irrigated production while
the USDA spends over a billion a year to keep other land
out of production (91).

171

when their respective marginal value products are all
exactly equal to the cost of acquiring another unit of

each resource" (164:73).

Substitution between machinery and labor has been
discussed previously. Aside from labor,

The remaining inputs used in conjunction with machin-
ery . . . are the livestock, buildings, fertilizer,
seed, acreage harvested, etc., necessary in the pro-
duction process. For the most part these items are
mildly complementary with machinery, but compete for ‘
dollar expenditures on the basis of their marginal i
dollar returns. One measure of their adoption is the
index of prices paid by farmers for items used in
production . . . (33:26-27).

 

‘2‘." V.“ ‘

The MVP of expenditure on a resource is a function
of the price and the marginal value—product per technical
unit of the resource. The competitive aspect of the re-
lationship between machinery and fertilizer inputs is
accentuated by conditions in which indicated continuing
high technical productivity of fertilizer applications
(1_4_9)4 are associated with declining fertilizer prices

(44:16-18). Use of anhydrous ammonia, for example, which

 

averaged 572,000 tons yearly during the 1957-9 period,
amounted to 1,960,000 tons in 1966. The quantitative in-
crease was 243 percent, the increase of retail value only

174 percent (44:16).

 

4But, see report of a different view, in the dis-
cussion on complementary inputs, p. 174.

172

Doane's Service apparently places machinery and
equipment fairly low on its list of usually-recommended
priorities:_

Assuming that you already own farm land, another
place to invest added capital is in further develop-
ment of the farm . . . We believe that soil improve-
ments including drainage, liming to correct soil
acidity, and adequate fertilizer should be given num-
ber one priority. We would recommend this order,
drainage, liming, and fertilizer. Fertilizer needs a
properly limed soil to give full returns; and both
limestone and fertilizer need a properly drained soil
to give best returns. I think that soil improvements
should be given priority over building improvements.
The soil produces income to support the buildings,
not the other way around . . . An investment in farm-
ing machinery and equipment should also be made with

the purpose of saving labor and increasing the effi-
ciency of operation (91).

Decreasinngeturns to Expenditures

on Complementary Inputs

Problems related to complementary inputs are in a
way inversely analogous to those associated with substi-
tutes. As noted earlier, the distinction between comple—
mentarity and substitution is somewhat arbitrary, albeit
a useful one. In the final analysis, all inputs which are
in at least some degree essential for a productive re-
source-combination are complements. Assuming that they
are combined in Optimum proportions, none of them is used
profitably if their combined value product does not exceed

their combined cost.

 

173

An apposite example of decreasing returns on
complementary resource combinations is provided by the
results of the Master Corn Growers Contest conducted in
1967 in Washington County, Iowa (199). Among the 25 con-

testants, yields averaged 144 bushels of shelled corn per

 

acre; and their costs averaged $111.90 per acre, or 77.6¢ r““
per bushel. The average per-acre cost was composed thus:

Seed $ 5.90

Insecticides 1.92

Herbicides 5.08

Fertilizer 22.16

Lime (pro-rated) 1.44

Tractor-& Machinery 17.89 “

Drying 5.88

Crop or Hail Insurance 1.27

Misc. Overhead 4.50

Land Charge ($540 @ 7%) 37.80

Labor (@ $2 per hr.) 8.06

It is pertinent to consider the implications of
these cost data in the light of the trend of real estate

prices in Iowa (See-Table 10).

Table lOr-Real estate price indices, Iowa, 1962-1966
(1957-59 = 100)

 

 

Year Index
1962 106
1963 108
1964 112
1965 117
1966 131

 

1'—

Source: Agricultural Statistics, 1966, p. 439.

 

174

Discounting the fact that the index-rise acceler-
ated continuously, it seems a reasonable assumption that
its rise will continue at no less than the 5.5 percent
average annual rate for 1962—66--barring a major agricul-
tural recession. If so--and provided no other cost in-
creases occur--assuming the price of corn were to hold
steady at $1.00 per bushel, ex-farm, within less than a
dozen years the average among those 25 Master Corn Growers
would be able to show no gross profit at all, unless

. further gains in crop-yield were obtained, and
their value not cancelled out by cost increases,
or

. significant cost-savings could be effected.

Some doubt, however, has been cast recently on
the view that further sizable increases in fertilizer
application to corn, above currently recommended levels,
will prove profitable. Pending the development of more
fertilizer-responsive varieties (not now in evidence) of
major crOps such as corn and soybeans, some spokesmen in
the fertilizer industry reportedly foresee an early peak
in fertilizer consumption, followed by a gradual downward
trend (91).

On the cost side, it seems rather wishful to ex-
pect much help from further fertilizer price-reductions.
The impressive reductions effected in recent years have
reflected a combination of production-cost savings and

over-capacity in the industry (44:16). Neither of these

175

influences seems likely to persist unabated in the fu-
ture.

Furthermore, it should not be overlooked that
progressive yield-improvement based on fertilization,
etc., has had an important land-substituting function;
and, if this function is performed less effectively in
the future, the rising trend of land prices may be further Eu-
accelerated (99999).

Another significant approach to land substitution

 

is that of irrigation. Here, too, it is often found that
very high yields are accompanied by very high costs; and
large fixed-capital expenditure increases vulnerability
to unfavorable price-movements and other vicissitudes
(63:1256-59; 9(1).5

Finally, there is, of course, little realism in
the assumption of no increases in costs other than that
of land. The strong upward trend of taxes and the possi-
bility of further rises in interest rates must also be
considered. The direction and rate of change in the

combined cost of machinery and labor, of course,

 

5Among these vicissitudes, in some areas, is the
possibility that the source of water supply will prove
inadequate relative to an overwhelming surge of demand.
Toward the end of a recent, almost lyrical report on a
"Boom in the Great Plains" appears the following cryptic
observation: "It all started with irrigation, and no-
Ibody's sure where irrigation will end. Part of the huge
Ogallala formation and other reservoirs recharge, some
don't" (9) .

176

constitute a central problem to which this study is ad-

dressed.

Changing Farmer Expectations

 

Obviously, new prospects with regard to public :11
policies and programs are going to have an important im-
pact On farmers' economic hopes and expectations. What
farmers expect is continually subject to modification by

the interacting influence of many factors. Some of the

 

“III. ‘ - “at

other important developments that recently have affected
expectations in agriculture include the following:

. Bumper crOp prospects for 1968, implying probable
intensification of the cost-price squeeze (99).

. Dimming of the prospect that growth of export
demand promises near-term relief of the American
farm-surplus problem. At a recent farm forum,
Agriculture Secretary Freeman declared, "We face
an overproduction problem in the U.S. for the
next 10 years, even if we use the Food for Peace
program" (50:12).

. Higher interest rates and tighter credit (99;_91:
19; 49:11; 52:13).

The effect of change in expectations concerning
relevant market conditions is change in anticipations of
future benefits from eXpenditures of effort and resources.
Significantly, these anticipations have large subjective
elements, related to uncertainty and imperfect knowledge.
The manner in which farmers will respond to information

.on changing conditions is, therefore, exceedingly difficult

177

to foresee. Nevertheless,

It appears that the cost-price squeeze many buyers

now find themselves in will play an important part

in how price and service conscious they become. Farm-
ers may look more and more at the factor market as a
means of increasing net revenue (decreasing costs) as
their opportunities to influence prices through legis-
lative action decrease (43:1245).

The presence of uncertainty and imperfect know- FT”
ledge implies that major errors potentially exist in the
subjective anticipation of future value-products relative

to present expenditures. A large element of anticipation

 

If“ v. .. It.

appears to be reflected, for example, in the present
structure of prices paid for farmland (199). In a study
of Minnesota land-transfers effected during 1966-67, it
was found that those who acquired land to initiate farming
paid an average of $200 an acre, investment buyers paid
$214, and expansionist buyers, $228 (199). If prospective
buyers of farmland should revise downward the future-value
assumptions upon which existing values are based, the
possibility of large losses in market value would have to
be faced by many landowners who now contemplate large
as-yet-unrealized gains. Conceivably, as has happened
in the past, actions taken to avoid or minimize antici-
pated losses could precipitate a land-market collapse.
Such a collapse would no doubt be associated with a
general agricultural recession.

Growing concern about the possibility of an agri-

cultural depression, as well as continuing frustration of

178

most farmers' efforts to achieve parity returns, undoubt-
edly have contributed to their growing interest in the
develOpment and use of collective action and bargaining
power. Results of surveys conducted among Michigan farm-
ers in 1965 and among Farm Journal subscribers in 1968
may be interpreted as indicative of increasing readiness T—*
to consider action based on majority decisions to control
output (69:25-27;_99). A strong movement directed toward

this objective would probably tend to make the system of

 

agricultural production more efficient in the aggregate;
and at the same time it would substantially reduce the
MVP's of expenditures that imply resource overcommitment

in the industry.

X. CONCLUSIONS AND SIGN-POSTS

Farm-equipment manufacturers are like other farm-
input producers in that they Offer something needed by
farmers and that theyprofit from selling as much of it as
possible. They are unique in the degree of power they
possess--derived from their control over development of
and access to lumpy, durable, expensive packages of an ex-
ceedingly complex and dynamic technology--to boost sales
by means of product- and service-differentiation, promo-
tional effort, market segmentation, price- and service-
discrimination, and technological acceleration. Unique
power to increase sales on these terms implies unique
power to influence economic efficiency among farmers. To
recognize this fact is to raise the broad question whether
or under what conditions such power is or can be exercised
constructively rather than exploitatively.

What farmers, like any other goods-producers,
basically require from suppliers is not their products
but their services--the services of their products, and
the related services that make for efficient use of those
product-services. Essentially, the farmer's economic ef-

ficiency in the use of machine services depends on his

179

 

180

being treated like other users of producers' durables.
This means that products and services should be developed,
designed, produced, merchandised, and priced to fulfill
his objectively-determined economic needs, rather than to
capture his imagination, cultivate his whim, or exploit
his ignorance. —-
Statistical indications are that changes in the
use and cost of farm machinery have had a negative effect
upon aggregate agricultural efficiency in recent years.

In agriculture there is an inherent tendency toward re- l

 

source-overcommitment, which has been further encouraged
by a variety of governmental programs. The farm-machinery
industry has in effect been taking advantage of this
situation by cultivating the patronage of farm-operators
who, under prevailing conditions, find it profitable to
overcommit and overproduce relative to demand levels that
would obtain, absent subsidies. A corollary is that un-
dercommitted farmers, whose disadvantages reflect advan-
tages for Operators prone to overcommit, find it difficult
or impossible to obtain up-to-date machine services at
prices or on terms that are economically attractive. They
find themselves relegated, partly for this reason, to
roles such as those of Obsolescence-loss absorbers, high-
profit repairs customers, and, eventually, suppliers of

land to the farm-enlargement market.

181

Product-proliferation and -differentiation among
the full-line firms reflect a market atmosphere of "live
and let live," rather than one of strenuous competition.
Market conduct in all important respects appears to be
shaped by Opportunities for selective application of mar-
ket power. Such conduct is explainable not in terms of Efi
rapacity, but rather as the result of what is herein .
referred to as an oligOpoly trap. Merger is prohibited, é

vigorous price-competition is mutually unprofitable, so

 

1.1 H- ‘. "‘

co-existence is accepted. The trapped oligopolist's mar-
ket power is quite sufficient to support short-range,
exploitative strategy within the market, but wholly inade-
quate for undertaking any long-range measures to coordi-
nate and deve10p the market as a whole. Competitive con-
siderations, moreover, compel him to conform his strategy
to his power-potential.

The logical alternative to full-line oligOpoly
would be monopoly. The monopolist's much greater market
power would convey opportunity, incentive, and responsi-
bility for_dealing constructively with the farm-machinery
market as a whole, in terms of its efficient present coor-
dination and sound future development. He would, as
compared with the oligopolist, be more answerable for the
consequences of exercising his greater power.

The farm-machinery industry makes a business of

transforming its agricultural market-environment. This

182

fact underlies an urgent need of the ability to manage
strategy in such a way that its consequences will be
manageable. The trapped oligopolist, however, has com-
paratively little latitude in strategy matters; and, pro-
jecting future consequences of the prevailing strategy of
overcommitment, it is foreseeable that some of the full— 1.
line companies eventually will fall as victims of their
inability to develop viable alternatives. Thus--antitrust
laws or no antitrust laws--eventual further concentration

of market power in the industry may be expected.

 

F__n_m

If, in the long run, an unlimited competitive
struggle for survival is inevitable, it is relevant to
consider how eventual acceptance of that premise may af-
fect the strategy and conduct of farm-machinery producers.
Strategic behavior, predictably, will no longer be governed
by the conditions of the oligopoly trap, once it is recog-
nized as potentially a death-trap, rather than a device
for protective custody and mutual security.

Companies enjoying the strongest market positions
obviously would have commanding advantages in any all-out
contest based on escalation of overcommitment-strategy.

A firm not in that category would have virtually no chance
of winning a battle on these terms, unless it were finan-

cially strong enough and resolved to try to "buy the

183

market".1

The premise that overcommitment strategy is not
viable,.however, would suggest that a company which places
ultimate reliance upon that strategy can be defeated by
one which stakes its future on constructive service to the
farm market.
It is prOposed that the manufacturer who moves

soon enough, and with massive efficiency, into a compre-
hensive program of leasing and contract services, will be

the manufacturer who survives. From this as a beginning,

other essential features of a strategy oriented toward r

 

agricultural efficiency-improvement may be expected to
follow naturally.

As of now, however, there is no apparent disposi-
tion in the industry to regard a conclusive struggle as
inevitable. Thus, although the problem examined in this
paper is seen as tending ultimately to resolve itself,
significant progress may come about only after much addi-
tional damage to the farming economy, as well as needless
losses to peOple whose energies are committed to serving
companies that finally will succumb.

An earlier, less costly, and therefore better
solution probably would result if the legal obstacle to

merger were removed. A number of economists now agree

 

1The J. I. Case Company's experience in the late
1950's indicates that such an effort might prove pro-
hibitively costly (115:355).

184

that the antitrust laws are anachronisticz; and Galbraith,
for one, foresees that in due time they will be reformed
to conform with the reality of effective-planning require-
ments in the modern industrial system (64:197). It is to
be hoped that business leaders, agricultural economists,
and other public-spirited citizens will lend support

toward bringing this about.

 

2Cf. Galbraith (94:187-88, 195-97), Merkel (199),
and Dewey (35). Donald Turner, the Assi§tant Attorney
General in Efiarge of antitrust enforcement, was a member
of a committee which, after a study of the international
telecommunications industry, recently recommended "that
the Congress now . . . enact appropriate permissive merger
legislation" (Merkel, 104:57, citing the Intragovern-
mental Committee on International Telecommunications,

Re ort to the Senate and House Commerce Committees, Apr.
, 966).

LIST OF REFERENCES

 

10.

LIST OF REFERENCES

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Markets for Farm Machinery: Discussion." Journal
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Adams, J. W. "Farm Machinery: Critique." In
Whitney (172:492-3).

 

Agricultural Economics Research, October, 1966,
1437’ Abstract ofiPaul E. Strickler, Helen V.
Smith, and Wilbert H. Malther. Uses of Agricultur-
al Machinery in 1964-:Custom and Exchange Work-—
Machinery Rental. U.S. Department of Agriculture
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Ainsworth, M. T. "The Farm and Construction Equip-
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Andrew, Frank W. "Muscle is Expensive--Power is
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91.

 

 

Bailey, Warren R. "Necessary Conditions for Growth
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Bain, Joe S. Barriers to New Competition. Cam-
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Barnes, K. K., and Strickler, P. E. "Management of
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Bay, Ovid. "Boom in the Great Plains." Farm
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Bennett, K. W. "Can Farm Equipment Weather the
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Bohlen, J. M., and Beal, G. M. "Why Do Farmers Buy
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Boyne, David H. Changes in the Real Wealth Position
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Brake, John R. "Farm Machinery Financing." Michi-
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Bray, Thomas J. "Shape of the Future: Meeting
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Breimyer, Harold F. "Why Do Farmers Overinvest?"
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Witt, L., and Eicher, C. The Effects of United

States Agricultural §u§p1us Disppsal Programs on
Recipient‘COuntfies,‘Research Bulletin 2. East

Lansing: MiChigan State University Agricultural
Experiment Station & Department of Agricultural

Economics, 1964.

 

 

 

Wright, K. T. Intended §pgActual Tractor Pur-
chases, Research Report 15. East Lansing: Michi-
gan State University Agricultural Experiment Station,
July, 1964.

 

APPENDIX

 

.Hom .m .mmma .moflumaumum amusuasoanmao

 

.qu .m .mmma lama .m .mmma .moaumauaum amusuasonnman

 

.HH .d .smma .mm .>oz .lmmnmomv mammH xooauso mama .coflumsuflm pmoo sham mass

 

201

 

 

mmv.a om.m w.mm mom.n mm. vom.n mmma
omm.a om.m H.vm 5mm.> om. va.m wwma
H5N.H om.m h.- mmh.h mm. omm.m mwma
omm.a om.m m.- ~m>.> mm. omo.m Noma
H¢N.H vm.m o.m~ mmm.n mm. mnv1m Hmma
mmm.H oo.m m.- hmo.m mm. mmm.m coma
mH~.H Hm.m H.N~ avm.m om. Hom.oa mmma
mmo.H wm.m ~.o~ mao.m on. mwm.oa mmma
evo.aw ha.m N.omm mho.mm mh.w mmo.HH hmma
AmsomHHHEV Ancmoumm~ AmGOMHHmmp AmcomHHsz bmsowHHfizv
umou omcmoq 3oz nmummmm pmz umOO muonmq Umnflm Mmusomlsmz Hmmm
amoumch so mumm maoasm> Houoz was Honmq How mama momma
UOUOQEH .m>¢ Msmm humswaomz Eumm UODOQEH Manson monumbfi
pawn .pmm

 

momatwmma .ucmfiumm>ca pcmamflsvm pom myocato
use so ammumucfl How was Honda MHHEMM can Umnws How mumoo pmpsmfiw .muwfiummla.aa magma

202

 

.HH magma soumo

.umoo Hmsflmauo no: .umoo ucwEOOMHmmH usmnuso mo mayo»

 

an umsam> .mm .d .soaa .mm sass .lsomumHmv coaumsuflm msoocH swam soumn

 

.om .m .hmma .mm hash .AnomImHmv coaumsuam mEoosH Sham Eoumm

 

 

 

   

 

 

 

 

aom.ma mom.h mmv.a wvv.m oav.m mmma
noe.ma smm.s omm.a m4~.m ms~.m coma
vaa.ma mms.n H-.H saa.m ¢m~.m mama
mmm.ma mm>.h omm.a mmo.m mvm.m mmma
Ham.ma mom.h Hv~.H mvo.m mma.m Hmma
sms.ma emo.m mmm.a mmo.m mm~.m omma
mnm.ma H¢N.m mHN.H mmo.m hmm.m mmma
maa.ma mao.m mmo.a mmm.~ ema.m mmma
moa.mam mho.mm «wo.Hw mmm.mw mma.mw hmma
“cowaawzvm btowaawzwm A%GOMHAMSNM Anomaaflsz

Honmq tam oumoo oummumusH QGOflumEdmcoo msOHumuo o

wumcwnomz momma poucQEH tam comumaomummo pom whammmm Hmow

Hmuoa pmusmEH mmsomxmxwumcfisomz

 

momalnmma .mmsmmxm Hoan was mumsflsomfi Umusmfiw amuou .mHmEHMMII.mH magma

203

 

 

.mumcaaaamnmm

.mmmmucmoumm N sfidaoo an UOOH>HU mmuapsa m GEOHOUO

.v GEOHOO Eoum pm>auoom

 

.mmw .m .mmma .moaumaumpm amusuasoaumao

 

.wa .m .mmma .moaumwumum

 

 

 

 

 

 

 

 

 

 

amasuasoanmd Eoum Amuoucm>cfl ca mmsmno can .GOflumEEmsoo 0&0: .mmsaumtha Eummv ppm
luso Esau mo Opam> umxums mmmum>m mmlhmma mo mommuswouom mm mmaam> a sEdaoun
.Na manna Eoumm
mm.aaa momv.~ amaa m.mv aom.ma mama
a.aaa ma¢.m maa m.mw 58¢.ma vmma
v.aaa omv.m maa «.mv vav.ma mmma
m.moa ham.m moa a.mv mmm.ma Nmma
a.noa 5mm.m hoa m.vv aam.ma amma
a.moa mmm.m moa «.mw hMb.ma coma
m.mm mam.m moa m.o¢ mam.ma mmma
o.¢oa mam.m moa m.v¢ mma1ma mmma
¢.mm mva.~ mm wm.¢v moa.maw hmma
$389: $8232;
looaumusmmac nmmmucmuumm
m.mxm .mxm Honma nmdam> usmuso

uonma cam mam sumcaaomz looaumuemmav .m>a muemma muasosa

mamcatomz ou mecH huap ousmuso amouod mo usmoumm Hmuoa

mo Hmaaoo lasso usmuso mo mmoapca mmsmmxm Hound Ham»
mom usmuso mo Omumm tam mumcasomz
mo mmoaUsH Av sfisaouv Am GEOHOUV AN GEOHOUV Aa :Edaoov

 

Ixm HOQMa tam mascatomfi mo HMHHOO mom usmuso mo mmoapsa

momannmma .mmcmm

”coaumusmEOUIl.ma magma

   

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