; II M m III! III Illlll nu mu 1| 3 1293 ”III!” Ill” IIHI . 3490 ABSTRACT FARM CAPITAL: USE, MVPs, AND CAPITAL GAINS OR LOSSES, UNITED STATES, 1917-196h by C. Leroy Quance Previous research and characteristics of the farm sector and its environment indicate that: 1) resources are attracted into farming under conditions resulting in eventual rates of return insufficient to cover acquisition costs; 2) consequently, resources earn negative rents and are contracted only at substantial capital losses; and 3) free markets would not prevent excess commitment of capital to farming, negative rents, and capital losses. The purpose of this thesis was to provide evidence supporting or refuting these tentative conclusions. Some analyses of farm adjustment problems have contributed signifi- cantly toward understanding impacts of one or more characteristics of the farm sector and its environment, but failed to account adequately for divergencies between input acquisition costs and salvage values. This thesis combines Glenn Johnson's modification of nee-classical economic theory of the firm, which recognizes the divergence between input acquisi- tion costs and salvage values, with a Nerlove type adjustment model, to estimate equilibrium factor shares for use as elasticities of production. The resulting elasticities, along with price and quantity components of factor shares, independent estimates of product price expectations, and estimates of actual and expected overhead costs are used to estimate 1) ex post and ex ante MVPs, both gross and net of overhead costs, 2) ex ante and ex post capital values of durables, 3) capital gains from durables, and H) economic rents on expendables. C. Leroy Quance Estimates are compared with characteristics of the farm sector and employment of selected inputs to substantiate or refute the tentative conclusions of paragraph one above. In drawing final conclusions about farm capital employment, MVPS, and capital gains or losses, apparent biases in the estimates were handled in an ad hoc manner. These biases resulted from 1) limited data on input acquisition costs and salvage values, 2) specification bias involving input substitutability, and 3) inadequately known discount rates. Also, some unreasonably low adjustment coefficients resulted in wide fluctuations in estimated elasticities of production and MVPs. Despite these problems, the adjustment model proved to be a promising technique for estimating production parameters by producing results generally consistent with economic theory and U. S. agricultural history. Analyses were conducted on 28 individual capital inputs classified according to whether they were 1) durable or expendable, 2) farm produced or nonfarm produced, and 3) specialized to the farm sector or unspecialized to the farm sector. Results indicate that capital resources are attracted into farming under conditions which result in eventual rates of return less than, but sometimes greater than, sufficient to cover acquisition costs. Con- sequently, capital inputs earn rents and capital losses or gains. Overcommitment of capital to farm production has occurred in periods of both price supports and free markets. Farm and nonfarm produced expendables were adjusted quite rapidly toward rates of use which equated estimated ex post MVPs with acquisition costs. When imbalance and rents did occur for expendables, they were probably minor compared to the capital losses and gains imposed on fixed durables used to produce them. Relative acquisition costs and estimated MPPs indicated that, in expanding output, farmers have attempted to maximize profits or minimize losses by substituting mechanical power for horsepower and labor, feed for livestock, and fertilizer for land. FARM CAPITAL: USE, MVPs, AND CAPITAL GAINS OR LOSSES, UNITED STATES, 1917-196u \By \ 3 C? Leroy Quance A THESIS Submitted to Rflchigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1967 ACKNOWLEDGMENTS I gratefully acknowledge the many persons who have assisted me in my doctoral program at Michigan State University. The following persons were especially helpful: Dr. Glenn L. Johnson, for serving as major professor and thesis supervisor. Professor Johnson's guidance, con- structive criticisms, and perceptive comments on the thesis were most helpful. Dr. Dale E. Hathaway, Dr. Lester V. Manderscheid, and Dr. David H. Boyne, for reading a draft of the thesis and making helpful comments; Dr. Larry L. Boger, Chairman of the Department of Agri- cultural Economics, Michigan State University, and Resources for the Future, Inc., Washington, D. C., for the financial assistance which enabled me to pursue graduate study at East Lansing; Arlene King, Laura Flanders, and Scott Guthery, for processing thesis data at the computer center; Shyamalendu Sarkar, for assisting with numerous calculations; Barbara Larson, for editing a draft of the thesis; Marie, for typing several drafts and the final thesis, and for being a source of strength and encouragement during my graduate study; and to Marie, Tony, and Matthew, for making it all more worthwhile. ii TABLE OF CONTENTS Chapter I O MODUCT I O N O O O O O O O O O O O O O O O O O O O O O O 0 Characteristics of the Farm Sector and Its Environment Inelastic Demand for Farm Products . . . . . . . . . Atomistic Structure of the Farm Sector . . . . . . . Rapid Technological Change . . . . . . . . . . . . . Imperfect Knowledge . . . . . . . . . . . . . . . Family Farm Structure . . . . . . . . . . . . . . . Large Space and Specialized Input Requirements . . . Characteristics of the Farm Sector's Environment . A Note on Agricultural Supply Response Studies . . . . The RFF Project at MiChigan State University . . . . . Thesis Objective . . . . . . . . . . . . . . . . . Procedure . . . . . . . . . . . . . . . . . . . . . . . II 0 ECONOMIC TIE ORY O O O O O O O O O O O O O O O O O O O O 0 Economics of Resource Allocation . . . . . . . . . . . Factor Market Orientation . . . . . . . . . . . . . Dynamics in the Time Dimension . . . . . . . . Alternative Assumptions Regarding Input Prices . . . Classical Model . . . . . . . . . . . . . . . . . Johnsonian Model . . . . . . . . . . . . . . . . Lagged Adjustment . . . . . . . . . . . . . . . . . Resource Imbalance . . . . . . . . . . . . . . . . . . Economic Rent . . . . . . . . . . . . . . . . . . Capital Gains and Losses . . . . . . . . . . . . . . Aggregation . . . . . . . . . . . . . . . . . . . . III. AGRICULTURAL DEVELOPMENT IN RETROSPECT: 1917-196u . . . . World War I, 1917-1920 . ... . . . . . . . . . . . . . Wartime Demand Attracts Capital Into the Farm Sector The Exodus of Farm Labor Began . . . . . . . . . . . High Farm Prices Were Mistaken for Long Run Expectations . . . . . . . . . . . . . . . . . . . Post World War I Farm Depression, 1921-1929 . . . . . . High Wartime Demands Vanish . . . . . . . . . . . . Prices Not Supported . . . . . . . . . . . . . . . . Inputs and Output Remain High . . . . . . . . . . . Farm Prices Carried the Brunt of the Adjustment Problem . . . . . . . . . . . . . . . . . . . . . Development of Improved Technology Continued But Its Adoption Lagged . . . . . . . . . . . . . . . General Depression, 1930-1933. . . . . . . . . . . . . Monetary Collapse Worsened the Farm Situation . . World War I Build Up of Durables Partially Depleted iii Page p—s rdrdrdtd \fi-F'MOQQNN O\\J‘l 4ft» p—a O\ wwwwmmmmmr-H-I \n#?n3C>-Juordrd g i = 1 where N*is the total number of inputs. 2M. Blaug, Economic Theory in Retrospect (Homewood, Illinois: Richard D. Irwin, Inc., 1962), pp. 108-109. 22 1 | MVPny = ija = Px.s = PxJ 1 # j = 1, 21,1 I J | MVley - Pxia - les = ml 1 | 3 x10 _ _ __ _ __ _ ______ (“Z—HPP I Yo I 2 | u l ! 0 xj XJ i#j=l,2,...n FIGURE 2.1.-~The classical model TABLE 2.1.--Resource adjustments under the classical model Relation of Resource Area or Point MVP to Resource Price Resource Adjustment From HPP Point of View Xi Xj Xi Xj 1 MVPxiy< Pxi MVijy> ij Contract Expand 2 MVPxiy> Pxi MVijy > Px j Expand Expand 3 MVPx1y< Pxi MVijy < Px j Contract Contract ’4 MVPxiy > Pxi MVijy < Px j Expand Contract HPP MVPxiy = Pxi MVijy = ij None None 23 Johnsonian MOdel.-~An extension of neo-Classical theory advanced by Glenn Johnson contains more explanatory power than the unextended neo- classical theory in light of the characteristics of the farm sector and its environment discussed in Chapter I, pages 3 to 10. Legal, transporta- tion, storage, advertising and other transaction costs, including changes in interest rates, cause input acquisition and salvage prices to diverge not only between different time periods but within the same time period. In recognizing that normally, and especially so with durable resources, acquisition prices exceed salvage prices, Johnson defines a fixed asset "1 That is, an input is economically as one that "is not worth varying. fixed if its value in use (MVP) is less than its acquisition cost but greater than its salvage value. It follows from this definition that a resource is in economic equilibrium if: P313 g MVPx. < Px-a 1 -— 1 1Ricardo defined fixed inputs as being "of slow consumption" while variable inputs "require frequent reproduction." Thus be emphasized the durable nature of fixed inputs. But expendable inputs may very well be fixed. A good example of an expendable input that is often fixed is roughage such as silage. A farmer will almost surely continue to feed any silage he has on hand because its off farm Opportunity cost is near zero. Mill modified Ricardo's definition by distinguishing circulating capital "which fulfills the whole of its office in the production in which it is engaged by a single use," from fixed capital "which exists in a durable shape and the return to which is spread over a period of corresponding duration." This definition likewise equates fixed inputs with durables. Marshall follows Mill's dgfinition. (See C. W. Guillebaud, edpJ Marshall's Principles of Economics [london: Macmillan and Co. Ltd., 1961/, p. 75.) The classical definition most consistent with Johnson's is that of Adam Smith. His distinction between fixed and circulating capital depended on whether the goods "yield a profit without changing masters" or not. (Ibid.) If "greatest profit" or "smallest loss" is substituted for "profit" in Adam.Smith's definition, it is identical with Glenn Johnson's. 24 The Johnsonian model is illustrated in Figure 2.2. The equilibrium HPP of the classical model expands to form area 5 in.which both Xi and Xj are economically fixed and areas 2, h, 6, and 8 come into being in which either X1 or Xj is. economically fixed while the other is expanding or contracting. Areas 1, 3, 7, and 9 of the Johnsonian model represent areas 1, 2, 3, and h respectively of the classica; model. Resource adjustments under the Johnsonian model are delineated in Table 2.2. One characteristic of the farm sector is a tendency to over- produce, to maintain or increase investments in farm production when returns to these resources are insufficient to cover acquisition costs in the nonfarm sector. A close examination of each area of Figure 2.2 yields insight as to how such overproduction comes about.1 In Figure 2.2, yo is the output consistent with profit maximiza- tion under the classical model. That is, the iso-quant yo passes through point H where farm input MVPS are equal to input acquisition costs for all inputs. Point H produces returns to farm inputs sufficient to cover the input acquisition costs. But points other than H on yo are disequilibrium points because input MVPS are not equated with acquisition or salvage prices. Any output above iso-quant yo can be viewed as overproduction and any output below yo can be viewed as underproduction. Any point in area 3 of Figure 2.2 indicates underproduction which permits subsequent adjustments to an output yielding MVPS equal to acquisi- tion costs. Both inputs Xi and Xj have MVPS greater than their acquisition 1"Overproduction" means a level of output greater than that output represented by the iso-quant yo, where the MVPS of resources used in farm production are equal to their acquisition costs. At the same time, it must be recognized that any point in area 5 is a point of equilibrium output, maximum profit, or minimum losses. ,Y._. a y 3 xi MVPXJ IPXJ IMVij PXJ 2, ... n it I 7 s 1 l s /__MVPxiy=ij a b [k/ -_—— 5 8 MVPx.y = Ex.61 1 1 l lb 9 I yo | a I I I xJ Xj j 7‘ i = l, 2, .. n FIGURE 2.2.--The Johnsonian model TABLE 2.2.--Resource adjustments under the Johnsonian model Relation of Resource MVP to Resource Prices from Economic Resource Adjustment Area Equilibrium Point of View X1 X- I inf-1:1, 2, 0.0411 ifi=1, %, ...,n 1 xi : Xj 1 MVPxiy < Pxis MVijy> ija Contract Expand 2 9x18 3 MVPxiYg Pxia MVijy> ija None Expand 3 MVPx1y> Pxia MVijy> ija Expand Expand 11 MVPx1y< Pxis ijs f MVijy S ija Contract None 5 1’2:ng MVPxiy g Pxia ijs s MVPxJ-Yg; ija1 None None 6 MVPx1Y> Pxia ijS E MVijy S ija Expand None 7 MVPx1y< Pxis MVij 4 ijs Contract Contract 8 Pxisg MVPxiy 3::~ Pxia MVijy < ijs None Contract 9 MVPxiy Pxi“l MVijy ’1 ijs Expand Contract 26 costs at H. Their use can be increased until point H is reached at which the MVPS of both X. and Xj are equal to vauisition costs. Initial 1 organization in area 3 results in adjustments to an MVP equals acquisition cost level. Input Xi is economically fixed in areas 2a and 2b from an equilib- rium viewpoint and will not be adjusted. Xj's MVP is greater than its acquisition cost in areas 2a and 2b and the input is expanded until area 5 is reached. Then the MVijy = ija and Xj is earning an MVP equal to its acquisition cost. But Xi, while earning more in production of‘Y than it could be salvaged for, is earning less than enough to cover its acquisition cost. Underproduction exists in area 2a but adjustments in Xj carry the farm into the overproduction of area 2b. Areas 6a and 6b are similar to areas 2a and 2b with the roles of X1 and Xj unchanged. Both Xi and Xj are economically fixed in area 5. Both inputs are earning more in production than they could earn in their next best alter- native use. But neither input is earning enough to justify expanding its use. No adjustments occur when the farms are organized in area 5 although overproduction is present. Input X1 is earning less than its salvage value in area 1 while X3 is earning more than its acquisition cost. Xi is contracted and Xj expanded until the upper left hand corner of area 5 is reached. Initial positions in area 1a represent underproduction which results in the over- production of area lb after adjustments. Organizations in area lb initially involve overproduction that is increased or decreased depending on whether the initial production was respectively less than or greater than output at point S. 27 Organization in area 9 has implications similar to those discussed above for areas 1a and lb except that the relative positions of inputs Xi and Xj are interchanged. The value of X1 in its next best alternative is greater than the marginal value product of Xi in producing Y when farms are organized in area h. Input Xi is contracted, i.e., salvaged at a capital loss, until area 5 is reached. Input Xj is economically fixed in area A and is not adjusted. Initial positions in area b represent overproduction and this overproduction is but partially corrected for in adjusting Xi to area 5. Area 8 implies input adjustments and overproduction similar to area h, except that relative positions of Xi and Xj are interchanged. Both Xi and Xj are earning MVPS less than their salvage values when farms are organized in area 7. X1 and Xj are salvaged at a loss until the upper right hand corner of area 5 is reached and part of the overproduction evident in area 7 is corrected. Lagged Adjustment Though the above discussion is based on the assumptions of perfect knowledge and foresight, it will be used in the thesis in a modified form based on assumptions permitting errors on the part of managers and of consequent adjustment behavior in light of imperfect knowledge and fore- sight. This assumption implies that farmers adjust input use toward profit maximizing levels at a constant rate of the desired adjustment if the inputs were to reach equilibrium. That is, an input X1 is adjusted according to: (2.2) (F: - Fg-l) = 3; (F? - FE“) 28 t t-l where F, - F1 is the actual adjustment in the factor share of X1 from year t-l to t; (F: - F:-1) is the desired adjustment if X1 is to reach a profit maximizing equilibrium, Fi* being the equilibrium factor share of X1 in year t. The term gi is assumed constant from year to year and represents the prOportion of the desired adjustment accomplished in any year t. The estimates of the constant g, derived in Chapter IV for each input situation, are an approximation to the long run average adjustment coefficient. Due to differing degrees of imperfect knowledge over time and resulting errors of differing magnitude, it is doubtful that the true adjustment coefficient is constant from year to year. From any year t-l to year t, the empirical techniques to be employed will not use factor shares of inputs in year t that would result from the estimated adjust- ment coefficients to estimate equilibrium factor shares; rather, the estimated adjustment coefficients and actual factor shares for each previous and current year will be used to estimate equilibrium factor shares for the current year. This process assumes that managers (working under conditions of imperfect knowledge and the other characteris- tics of the farm sector and its environment discussed in Chapter 1, pages 3-10) make new mistakes each year so that they never reach the equilibrium adjustment. There is evidence to substantiate the assumption that such an adjustment process may be a reasonable approximation Of what goes on in American agriculture. Farmers do attempt to maximize profits. But due to their imperfect knowledge of change, and the excess of acquisition costs over salvage values, the adjustment is neither perfect nor instan- taneous. There are also reasons for expecting the adjustment factor g1 29 to vary in magnitude from one input category to another. Nonfarm produced expendables, as carriers of labor and land saving technology, for example, are adjusted more rapidly toward profit maximizing levels than are labor, farm produced durables or land. Also, it can be reasoned that the closer an input is to its equilibrium level, the less the incentive which is consistent with a constant proportional adjustment factor gi which results in smaller absolute adjustments, the closer the input is to its equilib- rium level. Suppose the farm economy is Operating in year t-l at point A in Figure 2.3 producing Y1 with x11 quantity of X1 and x21 quantity of X2. The desired adjustment for X1 is to dispose of (XI1 - x12) X1. Similarly, 2 - x 1) X . The combined 2 2 the desired adjustment for X2 is to acquire (x2 desired adjustment is from point A to point B in Figure 2.3 with output increasing from y1 to y2. The desired adjustment in factor shares 2 1 l 2 2 1 l P: x1 Px xl Px x2 Px x2 of X1 and X2 are 1 - l and 2 - 2 respectively. 2 l 2 l P y P y P y P y y 2 y 1 y 2 y 1 But the actual adjustment is to some point C in Figure 2.3 where actual 3 3 l - x and x adjustments in X and X are x 1 2 - 1 res ectivel 1 2 1 *2 P Y' Output increases from y1 to y3 with resulting actual adjustments in 1 l 1 l P3 x3 P x P3 x3 P x x l x l x 2 x 2 factor shares of X1 and X2 1 - 1 and 2 - 2 . l P3y P y P3y P y y 3 y 1 y 3 y 1 --|\ a p>4 MVPX1=PX1 2 4 ————— - ‘h' I l H3 | / I I 1 3 I 6 I 9 /I/ I E 3 x2b x22 x2 FIGURE 2.3.--The lagged Johnsonian-adjustment model a S MVPx 2=Px2 MVPXZ‘PXQ I I | MVPXI = le B | X2 1 X2 Resource Imbalance Much literature on U. S. farm policy concerns "overcommitment" of resources to farming, and the Johnsonian model gives a basis for defining and measuring this resource imbalance. When inputs Xi and Xj are organized at the intersection of the iso-MVP curves which equate earnings with acquisition costs in Figure 2.3, they are in balance. Note that only point H satisfies this condition for both inputs simultaneously. Earnings are equated with acquisition costs for both inputs and no over- or underproduction is present. Any organization other than at point H 31 represents an, imbalance for at least one input.1 In areas 1, 2, and 3, X1 is underutilized, but the utilization can be corrected by profitably acquiring additional units of the input. In all other areas there is an excess use of X1.2 In areas A, 5, and 6, the excess of Xi can be eliminated only slowly over time as stocks of the input are undermain- tained. In areas 7, 8, and 9, the X1 excess can be partially eliminated by salvaging Xi at a capital loss, i.e., selling it at a salvage value which is below its acquisition cost. In areas 3, 6, and 9, Xj is under- utilized while an excess of Xj occurs in all other areas. The consequences Of underutilization or of an excess of Xj are similar to those listed above for X1. In addition to mistakes of under- and overcommitment discussed above, unexpected shifts in the location of area 5 occur due to changing product prices, technology, and other factors dictated by the characteris- tics of the farm sector and its environment discussed in Chapter I, pages 3 to 10. It is easy to see that such unexpected shifts in the location of area 5 can cause further mistakes of overcommitment to occur through time. 1Even along the X1 1 balance relative to fixed factors except at point H. and X2 expansion path, X and X2 are out of 2By the term "excess," it is simply meant that in accordance with the definition of overproduction given in the footnote on page 2h, more of the capital input is being used in the aggregate farm sector than that amount which would equate earnings with those expected at the time the resources were committed to the farm sector. This capital excess represents perfectly rational behavior of individual farmers and the farm sector. 32 Economic Rent Implicit in the above statement of capital imbalance is the presence of economic rent in the case of both durable and expendable inputs and capital gains or losses in the case of durable inputs. Historically, classical economists have tended to explain rent as a return peculiar to land. But modern economists hold a more general view of economic rent. Joan Robinson, for example, defines rent as the surplus earned over and above the minimum earnings necessary to bring a factor into production.1 This definition is consistent with, but not sufficient for the concept of rent employed in the thesis as it does not permit negative rents. And as Mrs. Robinson is aware, quasi rent is not limited to land, but rather applies to any productive asset, fixed or variable, and durable or expendable. The classical concept of rent is also not sufficient because it does not Specify the method used to value assets. When asset acquisition costs are greater than salvage values and resource earnings are bounded by these prices, there can be positive, negative or no quasi rent, depending on whether salvage values, acquisi- tion costs, or MVPS are used in pricing the fixed factors. Figure 2.4 indicates the relative positions of three possible average total cost a curves computed with alternative charges, P y 3 xi, MVPxi, and Px. for 1 economically fixed factors.2 Classical rent theory defined land rent as the MVP of land minus its salvage value for the economy as a whole. Since 1Joan Robinson, The Economics of Imperfect Competition (London: Macmillan and Co. Ltd., 1961), p. 102. 2Warren Vincent, ed., Economics and Management in Agriculture (Englewood Cliffs, N. J.: Prentice-Hall, Inc., 1962), Chapter 6. 33 MC P y a \\\ ATC (using Pxi) y ‘ ,/ TC (using MVPxi) . ' /ATC (using P; ) P 1 y FIGURE 2.h.--Economic rent and the Johnsonian model land had no alternative uses, its salvage value was equal to zero and land rent was equal to the MVP of land. When acquisition costs of fixed factors are used to compute average fixed cost, negative rents represented by the "dotted" area of Figure 2.h result. If salvage values are used to compute average fixed cost, positive rents indicated by the "dashed" area of Figure 2.h result. And if the MVP:i are used to compute average fixed cost, no rents occur. Thus it is clear that in discussing rent, the method of pricing fixed factors must be indicated. In this study, acquisition costs are used to price inputs in determining rents, where rent is defined as the MVP of the marginal unit minus acquisition costs. Using the MVP of the marginal unit to com- pute rent is consistent with production relationships displaying constant 31+ returns to scale where the MVP of the marginal unit is equal to the MVP of all previous units and hence to average value product. Capital Gains and Losses Capital gains and losses have two general sources: inflations or deflations and changes within the farm sector. Also, it is important to distinguish between capital gains and losses in real terms and those in book or monetary values. According to Boyne, the net gain in real wealth of the owners of farm real estate amounted to $29 billion from l9h0 to 1960, whereas book capital gains over the same period amounted to about $90 billion.1 Interest in this thesis is focused on extending the concept of economic rent discussed above for expendable inputs to a measure of annual average capital gains or losses accruing to durable inputs over their expected life. Capital gains and losses estimated by Johnson,2 Hathaway,3 and h Grove are changes in current dollar values of farm capital. Such capital gains and loss estimates are made by adjusting current dollar values of a particular resource for quantity changes. The residual, or change in current dollar value due to price changes, is referred to as a capital gain or loss. Boyne's real wealth gains and losses are capital gains and 1David H. Boyne, Changes in the Real Wealth Position of Farm Operators, l9hO-l960. Tech. Bulletin 29h (East Lansing: Ruchigan State University Agr. Expt. Sta., 196%). 2Glenn L. Johnson, "An Evaluation of U. S. Agricultural Policies and Programs, 1956-1960," pp. ll-h9. 3Dale E. Hathaway, "Agriculture and the Business Cycle," Policy for Commercial A riculture. Joint Economic Committee, 85th Congress, lst Session, 1957, pp. 51-76. l‘tErnest Grove, "Farm Capital Gains--A Supplement to Farm Income," Agricultural Economics Research, XII, No. 2 (April, 1960). 35 losses adjusted for changes in resource prices necessary to maintain investment purchasing power.1 By contrast, the capital gains and losses in this thesis are estimates of real wealth changes due to changes in resource earning power. They measure changes in technical productivity and in real changes in product prices over the life of durable inputs. The excess of a durable input's capital value over its acquisition cost multiplied by the number of units of the durable input divided by its expected life in years is the measure of capital gains or losses employed in this thesis. This technique of estimating capital gains is unique and naive compared to estimates by Boyne, Johnson, Hathaway and Grove, but it yields estimates of capital gains consistent with the economic theory and estimates of MVPS and capital values of capital inputs used in this thesis. By contrast, conventional estimates of capital gains and changes in real wealth are based on year to year revaluations of durables and involve a considerable amount of farmers' expectations about future earnings, and whatever else causes asset prices to change. Aggregation In estimating marginal value products, this thesis utilizes aggregate measures of inputs and outputs in the farm sector. The resulting MVPS and capital values can be viewed as averages for the farm sector. Though this procedure avoids embarrassing questions about whether the concept of an aggregate production function is employed, other important questions of aggregation remain.2 1Boyne, Op. cit., p. 6. 2In addition to these theoretical considerations, some practical aspects of aggregation are discussed beginning on page 91. 36 In order for the average MVPS and capital values to have meaning, it must be assumed that individual farm managers behave in a reasonably similar way. It seems reasonable to assume that all farmers are profit ‘maximizers. If farm managers do seek to maximize profits, then the average MVPS and capital values have meaning in this respect. But Edwards concluded that farmers' production decisions are a function of their initial positions and because initial positions vary widely, so do farmers' decisions concerning input employment.1 Given similar prices, some managers contract a given input, some expand its employment, while still others hold it constant, though all are attempting to maximize 'profits or minimize losses. Thus important problems of aggregating inputs across farms which vary with reSpect to age and composition of durable factors, presence or absence of fixed inputs, geographic locations, net worth, institutional obligations and services, etc., question the validity of the aggregations carried out in this thesis. Ackley points out the positive aspect of average relationships for analysis tools in the "canceling out" of the variance in many unstudied variables explaining individual behavior.2 Production decisions of farm managers depend not only on the studied variables discussed under economics of resource allocation above, but also on many other things assumed constant. These variables include age of operator, family size, equipment age, whether inputs are owned or rented, the incidence of 1Clark Edwards, "Resource Fixity, Credit Availability and Agri- cultural Organization" (unpublished Ph. D. dissertation, Dept. Of Ag. Econ., MiChigan State University, 1958), p. 77. 2Gardner Ackley, Macro-economic Theory (New York: The Macmillan Co., 1961), p. 22. 37 sickness, and so on. To study individual farm production, these variables are very important. But for explaining aggregate behavior, the influences Of many of these variables cancel.’ The age structure of the total farm population changes very slowly, as does the percentage of owned as opposed to rented farms. Births, deaths and sickness alter production decisions of many individual farmers, but the incidence of these in the average may be predictable and stable, or change slowly over time. One way the thesis attempts to minimize the problem of aggregating across different situations is to adjust estimating procedures for the nonhomogeneities which create the aggregation problems. Where it has not been possible to adjust the estimates, conclusions are qualified -accordingly. CHAPTER III AGRICULTURAL DEVELOPMENT IN RETROSPECT: 1917-1964 The farm sector and its environment have been characterized by: 1) an inelastic product demand, 2) atomistic structure, 3) rapid tech- nological change, 4) imperfect knowledge, 5) four wars from 1917 to 1964, 6) a severe depression between World Wars I and II, 7) unstable international demand, 8) a family farm structure which results in children being born into the farm labor force, 9) large space and specialized input requirements which widen differences between acquisi- tion costs and salvage values, particularly of durables, thereby making such durables more subject to economic fixity, 10) government farm price support and other farm programs, and 11) variable weather. This combina- tion of characteristics was said in Chapter I to sometimes cause resources to be committed to the farm sector in such quantities that they earn less than their acquisition cost. Specific objectives of the thesis in studying these "roots" of the farm problem are also stated in Chapter I and encompass the estimation of capital earnings and an analysis of capital use in the farm sector from 1917 to 1964. Chapter II presents a theoretical basis for studying resource adjustment and earnings. And Chapters IV through VII contain empirical analyses of capital use and earnings in the farm sector. The importance of the characteristics of the farm sector and its environment 38 39 are manifested in their impact on resource use and earnings which is investigated in the following chapters. Because the relationships of these characteristics through time cause imperfect knowledge, mistakes in committing resources to farm production, economic fixity of inputs, and the resulting under- or overproduction and capital gains or losses, resource adjustment in the farm sector is examined from a historical perspective in this chapter. Many volumes are available on agricultural deve10pment in the United States and only a cursory chronological treatment is possible in these pages.1 The chronology is deve10ped around seven periods from 1917 to 1964: World War I from 1917-20; post World War I farm depression, 1921-29; general depression, 1930-33; recovery, 1934-41; World War II, 1942-46; post WOrld War II boom, Korean conflict and adjustment, 1947-54; and general growth and expansion, 1955-64. Within each time period, discussion encompasses the usual market determinants of resource use relative to aggregate farm inputs illustrated in Figures 3.1, 3.2 and 1See, for example, U. S. Department of Agriculture, Farmers in a Changing World--The 1940 Yearbook of Agriculture (Washington: U. S. Government Printing Office, 1940), for an over-all view of agricultural history in the United States; Gladys L. Baker et a1. Century of Service (washipgton: ‘U. s.-covemment'rtintingLOHicc,“.1563 ,.'.’for an accounting of the role of the USDA in agricultural deve10pment; and H. C. Taylor and Anne D. Taylor, The Story of Agricultural Economics in the United States, 1840-1932 (Ames: Iowa State College Press, 1952), for the economics profession's contribution. Murray R. Benedict's Farm Policies of the United States, 1790-1950 (New York: Twentieth Century Fund, 1953) is an excellent description of farm policy up to the post World War II era. And for an over-all view Of agriculture and farm policy since World war II, see Dale E. Hathaway, Government and Agriculture (New York: The Macmillan Co., 1963). 40 3.3;1 five and ten year average expected product prices compared with actual five and ten year average product prices in Figures 3.4 and 3.5; estimated influence of weather on farm output illustrated in Figure 3.6 for aggregate farm output and averaged over specified periods for aggregate farm output, corn and wheat in Table 3.1;2 capital gains and losses and real wealth changes in Table 3.2; surplus farm commodities illustrated in Figures 3.7 and 3.8; adoption of new technology; market- ing; international trade; and government farm price support policies. 1Estimates of capital inputs were aggregated by the author from data in the Farm Income Situation, FIS 199, ERS, USDA, July, 1965. The total includes: 1)vfarm depreciation and other capital consumption expenditures in Table 15H, page 63, with the exception that those changes for farm operators' dwellings and automobiles were excluded; 2) current farm expenditures on fertilizer, lime, and operation and repair of capital items in Tables 14H, page 62 and 17H, page 65, with the exception that repairs and operation of farm Operators' dwellings are excluded; 3) government payments for conservation practices found in Table 22H, page 70 (the government payments were doubled to account for matching expendi- tures by farmers); 4) expenses for purchasing livestock found in Table 14H, page 62; and 5) expenditures for feed and seed found in Table 14H, page 62. Realized net income per farm is from FIS 199, Table 9H, page 57. Prices of capital inputs are the index of prices paid by farmers for all commodities bought for use in production, Agricultural Statistics, 1965, Table 684 and 1957, Table 681. Prices received by farmers are from Agricultural Statistics, 1965, Table 683 and 1957, Table 680. Land inputs are from Statistical Bulletin No. 233, revised July, 1965, "Changes in Farm Production and Efficiency: A Summary Report, 1965," USDA, ERS, Washington, D. C. Land prices are from Agricultural Finance Review, December supplement, 1964, Table 35, page 63. Data on the labor input are from SB 233, revised, 1965, Table 17, page 31. The farm wage rate is from Agricultural Statistics, 1965, Table 649 and 1957, Table 681. 2James Stallings, "Weather Indexes," Journal of Farm Economics, XLII (1960), pp. 180-86; and updated by William E. Kost, "Weather Indexes: 1950-1963," Quarterly Bulletin of Mich. Agri. Exp. Sta., XLVI, No. 1 (August, 1964), pp. 38-42. 41 Index 1917 = 100 WW I Post WW I en. Recovery WW IIPost WW II General Growth Farm ep. I Boom, and Expansion epression p Korean Conflict 500 . and Adjustment . Total Capital 400 . Inputs (1910-1914 dollars) 300 I “I f!” / W's/ ~l ’/\, 200 ’ thealized Net Income Per Farm 100 L '7‘ ------ "I'J‘—s..-.-—u-d \./' '-'""\. .....‘md/ I 2-Prices of Capital Inputs 0 \K./i” IRelative to Prices Received by Farmers AAAAAAA 1n; aannn AALLjn -. . n...._a.a.l 41m 1920 1925 1930 1935 1940 1945 1950 1955 1960 1956 ‘ 6 Source: See footnote 1, page 40. FIGURE 3.1. --Indices of total capital inputs prices of capital inputs relative to prices received by farmers, and realized net income per farm, United States, 1917-1964 Index 1917 = 160 I Capital Relative to Land Inputs 500_ 400- Price of Farm Land 3OOI Relative to Prices Paid for Capital I t 20°F “p" S , ’,,- ”/’ 100 . \_’ ‘-— -’\ f-I’ I I I “II.” | O 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 Time Source: See footnote 1, page 40. FIGURE 3.2.--Indices of price of farm land relative to prices paid for capital inputs and capital relative to land input, United States, 1917- 1964 Index 1917 = 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 Index 42 Time lOO WW I Post WW I en. ecovery WW II Post WW General Growth Farm ep. II Boom, and Expansion . Depressio Korean Conflict I and 4 Adjust- ment I SaCapital Relative to Labor Inputs L . | arm Wage Rate Relative ' To Prices Paid For _ Capital Inputs 0.0"” -... ’. r ...”.I p ommwfl““«\u‘_~p.d-flnoc" Al 4 l L I J‘ a I 4 l l A l 1920 1925 1930 1935 1940‘ 1945 1950 1955 1960 1965 Source: See footnote 1, page 40. FIGURE 3.3.--Indices of farm wage rate relative to prices paid for capital inputs and capital inputs relative to labor input; United States, 1917- 1964 1957-59 100 110 100 90 80 7O 6O 5O 4O 3O Source: Lerohl, Op. cit. 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 - Time FIGURE 3.4.--Indices of ten year average actual and expected prices received by farmers for the current and next nine years, United States, 1917-1962 43 Index 1957-59 = 100 110 - \_ Expected Five 100 _/ . "A:\‘r1”Year Average . \ y. - \ 9o - -. :21 8 nditions were not favorable for their adoption. Prices of capital inputs increased sharply relative to prices received by farmers, and mass uIlemployment caused farm wages to decrease absolutely and relative to Prices paid for capital inputs. The index of farm labor actually increased in 1931 in a reversal of the exodus of farm labor. Growing Awareness of the Importance of Foreign Markets The Smoot-Hawley Tariff Act of 1930 established new record tariffs, and 22 English Commonwealth nations established tariffs in retaliation. Tariffs were an attempt to export unemployment, but there \ 18 IERS, USDA, Farmome Situation, FIS 199 (July, 1965), Table H. 511 was a growing awareness that freer world trade was necessary to utilize the farm sector's productive capacity. Producers of wheat, cotton, tobacco, pork and lard, depending heavily on sales abroad, attributed part of their troubles to the virtual disappearance of United States farm exports.1 The Trade Agreements Act of 19311 was designed to imple- ment a freer international trade policy.2 Farm Policy Turns to Price Supports The first major government attempt to modify farm prices ard marketings was the Federal Farm Board set up in 1929. Although Figure 3.7 indicates additions to stocks of farm output in 1930 through 1932, the Farm Board's efforts to stabilize prices by making commodity loans in the face of a complete collapse of consumer demand in the general depression were fruitless. The Board was abandoned after its $500 million capital fund was exhausted with farm prices still at rock bottom.3 While the Federal Farm Board's activities were centered around free market prices, the Agricultural Adjustment Act of 1933 introduced the parity price concept. The act's objective was to establish and ¥ 1Lawrence W. Witt, "Trade and Agricultural Policy," Annals of The Am~erican Academy (September, 1960), p. 2. Much of the material presented in this chapter on international trade is summarized from Professor Witt's 1ectures on international trade as compiled in notes by Howard Bodenhamer East Lansing: Michigan Stat-e University, 1962). 2Raymond J. Penn, "World Trade: What are the Issues?" No. 3. \Recigocal Trade Agreements. Farm Foundation, National Committee on Agricultural Policy, Agricultural Policy Institute, North Carolina State College and the Center for Agricultural and Economic Adjustment, Iowa S'tate University, p. 1. 3Dale E. Hathaway, Problems of Progress in the Agricultural Econm (Chicago: Scott, Foresman and Co., 19611), p. 38. 55 maintain such balance between the production and consumption of agricul- tural comodities, and such marketing conditions therefore, as would re-establish prices to farmers at a level that muld give agricultural comodities a purchasing power with reSpect to articles that farmers buy, equivalent to the purchasing power of agricultural commodities in the base period.1 For all agricultural commodities except tobacco, the base period specified was August, 1909 to July, 19111. For tobacco the base period was designated as August, 1919 to July, 1929. Activities to bring production and marketings of farm commodities in line with demand undertaken in administering the Agricultural Adjust- ment Act of 1933 were discontinued after the constitutionality of the act was successfully challenged by the refusal of the Hoosac Mills Corporation to pay certain processing taxes on cotton. Weather Was an Aggravating Factor While adverse weather existed on the average during the general depression with the Stallings index for aggregate farm production measuring 8 per cent below normal yields, wheat, with a very inelastic demand and low prices, showed an 8 per cent increase in yields due to Weather in the 1930-1933 period. Recovery, l93h-19hl During World War I, farmers made investments which led in many Cases to post war farm business failures. Low prices, aggravated by 'protectionists' trade policies, following World War I, caused serious g 1MIurray‘R. Benedict, Farm Policies of the United States, 1790- 1950 (New York: Twentieth Century Fund, 1953), p. 350. 56 adjustment problems and overproduction that were worked out in the free market with little direct government interference. The result was an extended period of negative rents, capital losses, low realized net income per farm and negative net investment in farm capital according to some measures. By 1931+ farmers had either gone broke or weathered the worst of the depression. But the stimulus for investing in productive capacity provided by price support programs in the period 1938 to 1911.1 brought about a reappearance of the symptoms of chronic adjustment problems in the farm sector. Pr ices Supported An alternative to the Agricultural Adjustment Act was found under the Soil Conservation and Domestic Allotment Act of 1936. This act paid farmers to divert acreage from "soil-depleting" to "soil conserving" ct‘ops. Thus income transfers to farmers were continued until more e ffective and constitutionally acceptable control programs were devised.1 The Agricultural Adjustment Act of 1938 left the main features of the Soil Conservation and Domestic Allotment Act unchanged but emphasized Price support loans and commodity purchases and authorized marketing quotas to regulate flows of farm commodities to market. The 1938 act's Provision for nonrecourse loans is the primary authority for government slipport of farm prices. \ lLyle P. Schertz and Elmer W. Learn, Administrative Controls on &aantities Marketed in the Feed-Livestock Economy. Technical Bulletin 2141 (Minneapolis: University of Minnesota Agr. Expt. Sta., December, 1962): P0 9- 57 Build Up in Durables Resumed Price support legislation provided farmers with expectations of favorable long run earnings just as did World War I. Figure 3.5 illus- trates that farmers' expectations of five year average product prices were increasing and exceeded realized five year average prices from 193M Farmers responded quickly to these unrealized expectations by to 1938. increasing investments in farm capital. The index of mechanical power and machinery (1917 = 100) increased from 1111 in 1931+ to 157 in 19111 with rapid increases in the number of tractors, motor trucks, grain combines, After corn pickers, and many other nonfarm produced durables on farms. reaching the bottom of a trough in 1938, the cattle cycle began a strong upswing. This build up in durables was accompanied by similar increases in the use of complementary expendables, especially nonfarm produced fuel, fertilizer and electricity. Table 3.2 indicates that farmers t‘eceived capital losses on livestock in three of the eight years from 1931+ to 19141 and capital losses on machinery in two of the eight years. In the other years, farmers received capital gains. The primary incentive for increasing capital inputs was to increase output in response to false product price expectations that Were induced by price supports, but considerable capit-al inputs were required to replace the exodus of farm labor which was finding more favorable employment Opportunities in the nonfarm sector. On a 1917 = 100 basis, the index of farm labor decreased from 89 in 1935 to 811 in 19111. bm' 58 Surpluses Accumulate With the exception of 1936, surpluses accumulated at support price levels in every year from 1935 to 19hl as illustrated in Figure 3.7. While freer trade policies provided some relief, the terms of trade were turning against agriculture despite price supports. Whereas farm products accounted for #5 per cent of total U. S. exports from 1910 tn) 1919, by 1930-1939 they accounted for only 32 per cent. With the farm anage rate increasing relative to the prices paid for capital inputs, and aaciequate credit facilities available, capital inputs increased both a1t>solutely and relative to land and labor. And the declining price of <:£11fltal relative to prices received by farmers encouraged the adoption of the backlog of output increasing technology. SYmptoms of Chronic Adjustment Problems Reappearing The placing of price supports on farm commodities provided eltpectations of favorable long run earnings similar to those provided 'E’IV"Wor1d War I. Farmers responded by investing in durable capital inputs that would maintain a high productive capacity up to 10 years into tillee future. Output increased and prices sagged. Government storage pro- grams bolstered prices, and surpluses began accumulating in 1937. While price supports were supposed to be part of the solution to JL<3w resource earnings and income in the farm sector, they were originally <1esigned to take up the short run Slack in supply and demand of farm products. jI31“ under rigid price supports and no effective supply restriction on t:‘lhe atomistic farm sector, price supports were transformed into favorable ]L<:ng run expectations. Also, with the elastic supply of farm products for increases in quantity supplied, surpluses accumulated in government 59 storage facilities. Surpluses lead to capital losses for farmers when public pressure leads to lower farm prices and/or to burdens of farm subsidies and surplus disposal costs on taxpayers. The index of prices received by farmers decreased from 109 in 1935 to 95 in 1939 and surpluses increased in every year from 1937 to 1991. If it had not been for the outbreak of World War II, the pressure of chronic adjustment problems in the farm sector would have demanded another outlet. World War II, 19h2-19h6 World War II provided an outlet for surplus farm products which Imaad been mounting since 1937 and for increased farm output. But wartime legislation fixing rigid price supports again provided false expecta- 1tcions of long run favorable earnings for farm resources. High Wartime Demand and Farm Prices Demands for farm produce by the United States and our allies <=£iused sharp increases in farm commodity prices. Realized net income per ifatrm.showed the largest increase of any period of similar length from :15917 to 196M. Capital input prices declined relative to prices received 1337 farmers, farm wage rates, and land prices. Use of capital inputs rose tharply, both absolutely and relative to land and labor inputs. Although ‘Zhe index of farm output increased from 133 in l9hl to 153 in l9h6 (1917 = 100), the war requirements for food and fiber were great, and :IPigure 3.7 indicates that there were net reductions in stocks of farm <=ommodities in every year from 19h3 to 1947 despite the shifting of Sgovernment farm adjustment machinery from production controls to (encouraging increased production. 60 Farmers Fearful of Repeating World War I Mistakes Considerable long run productive capacity had been built up during the recovery period of the late 1930's. Farmers were fearful of comitting durables to farm production at high wartime acquisition costs and then receiving capital losses after hostilities ceased. Figures 3.4 and 3.5 show that both five and ten year average expected farm product prices were less than actual five and ten year average farm product prices throughout World War II. The index of production inputs increased only from 97 in 1941 to a World War II high of 101 in 1943 and 1944 And while the index of mechanical power and machinery (1957-59 = 100)- (1917 = 100) increased from 157 in 1941 to 207 in 1946, much of this increase in farm capital was required to offset a decrease in farm labor. The index of farm labor decreased from 84 in 1941 to 76 in 1946 (1917 = 100). World War II followed a substantial build up in the pre-World War II But inasmuch as the build up in productive capacity during recovery period, and with the prevailing wartime legislation such as the Steagall amendment which promised high price supports until 1948, the Productive capacity on U. S. farms at the end of the war was sufficient to cause chronic adjustment problems. In addition, as Table 3.1 indicates, all>ove average weather contributed to increased farm output. Estimates of changes in farmers' real wealth position due to Qllanges in prices are available beginning in 1940. These real wealth changes for livestock and machinery are presented in Table 3.2. Generally these changes in farmers' real wealth positions indicate that the net capital gains on farm assets are not as great ‘in "real values." 61 These data also indicate that in several years, farmers have experienced decreases in real wealth as well as decreases in "current value" of 8883118. Post World War II Boom, Korean Conflict and Adjustment, 1947-1954 Farmers' expectations of a post World War II depression did not materialize. Continued price supports and World War II savings encouraged £1 build up of durable capital. Farm output increased far beyond quan- tities demanded at price support levels and surpluses accumulated. The Korean War, however, temporarily relieved the chronic adjustment problem in the farm sector. Post World War II Depression Did Not Materialize With both the cold war and U. S. efforts to feed and reconstruct Wes tern Europe immediately following World War II, farm prices continued t1) increase in 1947 and 1948. The Agricultural Act of 1948 called for flexible price supports, but subsequent amenMents prevented the flexi- l“fl-lity from becoming effective and prices for most farm commodities were s‘l‘pportmd at 90 per cent of parity. R1gid Price Supports and World War II Savings Encourage \lild Up of Durables and Specialization With prices received by farmers at a record high following World War II and indications of continued rigid price supports, farmers used “'artime savings and easily accessible credit to continue the substitution Qf nonfarm produced inputs for labor which was finding higher paying 62 opportunities in the nonfarm sector.1 Hydraulic-lift equipment on tractors, self-propelled combines, automatic self-tying pickup balers and much improved fertilizer and machinery for applying fertilizer were some of the labor and land reducing innovations being adopted due to land and labor prices which increased absolutely and relative to prices paid for capital inputs as indicated by Figures 3.1 through 3.3. Not only were farmers becoming more specialized by buying more nonfarm produced inputs but also by less diversification on farms, and among regions. The increasing complexity of farm technology, changing structure of agricultural markets, and economies of size encouraged moves toward larger farms with fewer enterprises per farm. Output and Surpluses Increased With marketing quotas defined as the actual or normal production 2 the substitution of fertilizer, insecticides and on allotted acreage, other output increasing capital inputs for restricted land was encouraged. With no effective production controls and rigid price supports, the index of farm output increased from 147 in 1947 to 169 in 1954 (1917 = 100); surpluses of dairy products, cotton, corn, wheat and other products ‘mounted as illustrated in Figure 3.8. 1For estimates of nonfarm Opportunity costs for farm labor, see Chennareddy, Op. cit. 2Wayne‘D. Rasmussen and Gladys L. Baker, "A Short History of Price Support and Adjustment Legislation and Programs for Agriculture, 1933-65," _gricultural Economics Research, XVIII, No. 3 (July, 1966). Reprinted in ERS 303, USDA, July, 1966. 63 The Korean War Prevented Chronic Adjustment Problems Prices of nonfarm inputs increased appreciably during and after World War II, and continued high farm prices were required if durables purchased in this period were to earn sufficient returns over their pro- ductive life to cover the high acquisition costs. Figures 3.4 and 3.5 show that both five and ten year average expected prices of farm products began exceeding realized five and ten year average farm product prices in 1948. As surpluses accumulated in government storage programs (Figure 3.8), public pressure caused farm prices and acreage allotments to decrease. This reduced the earnings of durables specialized in the production Of supported commodities below their acquisition costs and provided capital losses to owners of the economically fixed durables. Table 3.2 indicates that farmers received capital losses on livestock and machinery in four of the eight years from 1947 to 1954 and that these were "real wealth" losses in several years. The outbreak of the Korean War in June of 1950 again required a shift from discouraging production to securing sufficient food and fiber to meet-any eventuality in the war effort. Figure 3.8 shows a large decrease in price support holdings by the Commodity Credit Corporation in 1951 and 1952, and the index of prices received by farmers increased from 250 in 1949 to 302 in 1951. General Growth and Expansion, 1955-1964 The period 1955 to 1964 was characterized by the following: marked increases in land and labor prices relative to prices of capital inputs, increases in capital input prices relative to prices received for 64 farm commodities, continued decreases in the number of farms, a continued increase in total capital inputs, increases in farm output and surplus stocks, and freedom from any major economic disturbances. Capital is Substituted for Land and Labor Under False Expectations The public cost of maintaining price supports and disposing of farm surpluses increased from .06 billion dollars in 1946 to 3.3 billion dollars in 1957.1 Figure 3.8 indicates that farm surpluses, especially of wheat and corn, increased rapidly despite cuts in acreage allotments and price support levels. For example, wheat price supports decreased from 90 per cent of parity in 1954 to 75 per cent of parity by 1958 while the national acreage allotment for wheat decreased from 62 million acres in 1954 to 55 million acres in 1958.2 But larger tractors and implements, fertilizer, irrigation, improved seed varieties, and other forms of farm and nonfarm produced capital were profitable substitutes for the restricted land at supported price levels which farmers mistakenly interpreted as long run price expectations. Land harvested for crops decreased from 340 million acres in 1955 to 294 in 1964 while the use of principle plant nutrients increased from 4,507 tons in 1955 to 8,093 thousand tons in 1964. At the same time, the nonfarm wage rate was increasing relative to the farm wage rate and to farm income. Hired, operator, and family labor were moving out of the farm sector, and the total number of man 1Glenn L. Johnson, "An Evaluation of U. S. Agricultural Policies and Programs, 1956-1960," p. 17. 2USDA, ARS, Farm Production: Trends, Prospects, and Programs. Agricultural Information Bulletin 239 (Washington: U. S. Government Printing Press, May, 1961), pp. 94-95. HIM-l. 65 hours used for farm work decreased from 12,808 million hours in 1955 to 8,411 million hours in 1964. As emphasized earlier, the pressure of increased farm output-and mounting surpluses caused farm prices to decrease. The index of prices received for farm products decreased from 302 in 1951 to 236 in 1964, and Figures 3.4 and 3.5 indicate that neither five nor ten year average expected farm product prices were realized. International Trade and Public Law 480 Reduce Pressure of Surpluses After World War II, 21 major trading countries adopted a General Agreement on Tariffs and Trade (GATT). Now the 39 participating coun- tries account for over 80 per cent of world trade. Trade concessions include reductions in tariffs and commitments not to increase tariffs, and the participating countries agree to the most favored-nation principle.1 Another important trade deve10pment was the Agricultural Trade DevelOpment and Assistance Act, better known as Public Law 480. This act, approved in July of 1954, served as the basic authority for the sale Of surplus farm commodities for foreign currency and has proved to be of major importance in diSposing of farm products abroad.2 In supporting domestic prices of major farm commodities above world prices, the United States encourages imports and discourages exports. This necessitates import quotas and tariffs to limit imports. Then export subsidies are utilized to lower export prices. These 1Penn, op. cit. 2Rasmussen and Baker, op. cit., p. 76. 66 policies tend to insulate domestic agriculture from the world market. Domestic surpluses accumulating under price support policies are par- tially disposed of through sales for soft currencies under PL 480, gifts to food deficit countries through church and other private agencies, and domestic demand expansion programs, all at considerable expense to the taxpayer. These trade developments did not affect prices received by farmers as directly as they would have prior to the use of direct price supports. But inasmuch as they proved useful in the cold war against communism and reduced burdensome surpluses, they reduced public pressure for lower farm prices or increased production restrictions. Government Policy Assumes Many Forms While public effort to increase farm income through direct intervention in the marketplace usually receives the most attention, government policies affect all aspects of resource use in the farm sector. Minimum wage legislation increases the opportunity costs of qualified farm labor in the nonfarm economy and increases the farm wage rate. Public supported research at land-grant colleges and institutions provides subsidized research in all aspects of farm life. The federal and state supported agricultural extension service disseminates informa- tion to the farm level and provides managerial assistance at little or no cost to individual farmers. Public supported education from kinder- garten through post Ph. D. programs provides 1) opportunities for rural youth to successfully migrate from the farm sector which is over supplied with labor to nonfarm industries and professions; 2) future farmers with a degree of technical and managerial competence unsurpassed in the world, 67 past or present; and 3) a source of nonfarm human skills that provides superior research, education, marketing, production, and professional services to the farm sector. Public investments in roads, waterways, markets, dams, etc., provide complements to the natural resources of the farm sector at little expense to the individual farmer. These indirect public actions affecting the farm sector were important in all periods from 1917 to 1964. One form of direct public action in the farm sector consider- ably different from price support and surplus storage programs was the Soil Bank. Established by the Agricultural Act of 1956, the Soil Bank was a large scale effort to reduce farm surpluses by taking farmland out of production. The program involved an acreage reserve and a con- servation reserve. The objective of the acreage reserve was to reduce the amount of land planted to allotment craps-dwheat, cotton, corn, tobacco, peanuts, and rice. Farmers reducing land planted to these crops below their allotments received payments for the diversion of such acreage to soil conserving uses. In 1957, 21.4 million acres were placed in the acreage reserve.1 In addition, farmers could designate certain cropland for the conservation reserve and receive payments for putting it to conservation use. In July of 1960, 28.6 million acres were under con- tract in the conservation reserve. This aspect of the Soil Bank met with considerable Opposition when some rural communities were disrupted by ‘many farmers placing their entire farms in the conservation reserve.2 It is the withdrawing of whole farms from production which has the 1Ibid., p. 77. 2 id. Z 68 greatest output reducing impact, inasmuch as this typically takes comple- mentary labor and capital inputs out of production, too.1 When only a small portion of a farm is placed in the conservation reserve, it is the most unproductive land; and the labor and capital formerly used on the restricted land are used to farm the remaining productive land more intensely. Gradually Decreasing Farm Prices and Increased Specialization Induced Asset Fixity With increased farm surpluses despite new trade outlets, farm prices tended to decrease over the decade from 1955 to 1964. At the same time, the trend toward specialization in the farm sector has required investment in expensive durables such as large self-prOpelled grain com- bines, caged layer houses, milking parlors, feed storage and handling equipment in feed lots, and so forth. As farm enterprises moved toward specialization, the machinery and buildings involved became more specia- lized with fewer employment Opportunities in alternative enterprises. These specialized durables were purchased on expectations of high long run (10 years of more) product prices. When the increased output caused by these capital inputs accumulated in government storage programs or depressed the market, product prices fell, lowering the earnings of dur- ables such that their capital values were less than their high acquisition costs. With few alternative employment opportunities, the specialized durables remained in production, further increasing output and downward pressure on product prices. 1See Hathaway, Government and Agriculture, pp. 302-310. 69 Specialization is a Double Edged Sword One important impact of the technological revolution is that farmers now purchase a much larger per cent of inputs off the farm. Purchased inputs increased from 24 per cent of total inputs in 1917 to 57 per cent in 1964. While prices of nonfarm produced inputs are fairly stable over time, prices received by farmers fluctuate over inelastic demands for farm products. This in turn makes expendable capital inputs on farms susceptible to positive and negative rents and durable inputs susceptible to capital gains and losses. Intra sectorial specialization represents the exercising of com- parative advantage and increased efficiency. While the farmer's profit per unit is cut, he is able to produce a much larger quantity of the pro- duct for which he has a comparative advantage in producing. The nonfarm sector has exercised its comparative advantage in producing transporta- tion, processing, advertising and retailing services. Improvements in these services have succeeded in increasing consumers' expenditures as well as in cutting the farmer’s profit margin. In many cases, the additions to farm income from greater consumer expenditures add more to farm income than the reductions due to increased marketing and overhead costs. Specialization according to comparative advantage has also taken place within the farm sector between farms and among regions. Often specialization of this kind leads to increased output with no changes in inputs or technology, where technology is defined as the discovery of a new input. 70 International Food Gap and the Viet Nam War Prevent Intolerable Surpluses Again the farm sector's ability to expand output in response to favorable product prices threatened to exert critical pressure on govern- ment attempts to support farm prices. With record investments in livestock, buildings and farm machinery as well as inflated land prices, lower farm prices could have resulted in severe capital losses and a repeat of the post World War I farm depression. At any rate, in 1963 the per capita disposable personal income of the farm population was 63.1 per cent as large as that of the nonfarm pOpulation. And in the same year, the carry-overs of wheat, cotton, corn and dairy products were 1,195 million bushels, 11,216 million bales, 1,316 million bushels, and 12,691 million pounds respectively.1 The escalating Viet Nam war and concern over the international food gap make farm surpluses a valuable weapon, however, in both the hot and cold wars against communism. The United States military build up in Southeast Asia seems to indicate a determined effort to win a military victory against the Viet Cong and its communist allies in South Viet Nam. And there is constant danger that the conflict could spread to other parts of an already food deficit Southeast Asia. There is increasing concern over all food deficit areas of the world. Per capita grain production in less developed countries is now lower than it was prior to World War II, and trends in food trade indicate that underdevelOped countries are steadily losing the capacity to feed themselves. 1U. S. Department of Agriculture, Handbook of Agricultural Charts. Agricultural Handbook No. 275 (Washington: U. S. Government Printing Office, 1964), p. 34. 71 Chronological Summary of Adjustment in the Farm Sector The following is a chronological summary of the chronic adjust- ment problem in the farm sector, its symptoms, characteristics of the farm sector's environment which contribute to its development, and how the adjustment was alleviated. Period World War I 1917-1920 Post World War I Farm Depression 1921-1929 General Characteristics Spurred by wartime demands of both the U. S. and our allies whose shipping lanes to such farm commodity exporting countries as Australia were cut off, resource commitment and output in the farm sector increased mark- edly in response to high farm prices. With no virgin lands left to open, land prices and farm indebtedness greatly increased. Farmers mistook the high wartime earnings of farm resources for long run expectations, invested heavily in durable capital, and the seeds for financial disaster were sown. When the seaways were again open to Australia and other agricultural exporting countries, the world could no longer absorb our agricultural output. Farm prices were not supported by government programs, surpluses did not accumulate, and the fall of farm prices caused the large stocks of durables built up during World War I to be economically fixed in farming. A growing spirit of nationalism after World War I and the resulting trade restrictions severely limited the foreign markets for . .. I v .5 4 .41. .I 54.3........a'ioc.o~0.1'.q..vav Period General Depression 1930-1933 Recovery 1934-1941 72 General Characteristig§_ farm products, while above average weather enhanced yields and price depressing output. With no effective public action to take the burdensome production off the market, the atomistic firms in the farm sector reaped a disastrous harvest of financial losses. Manetary affairs of the economy caused a general collapse; despite meager attempts by the Farm Board to support farm prices, they continued to decline. Adverse weather worsened the farm problem and farmers began to realize what trade restrictions were doing to their foreign markets. Much of the excess stock of durables accum- ulated during World War I, however, was being used up by the end of‘l933, and most farmers had either gone broke or weathered the depression. The "New Deal" era ushered in price supports for farm commodities during a period of general economic recovery, and adequate farm credit became generally available through public action. With long run expected farm prices tending to exceed realized long run prices, farmers again began to over-invest in durables. While the 1917-1921 build up of durables was caused by wartime demand and worked itself out in free markets with serious losses to farmers, the build up in durable capital in the late 1930's was caused by price support inspired Period World War II 1942-1946 Post World War II Boom, Korean Conflict, and Adjustment 1947-1954 73 General Characteristics expectations of favorable long run product prices. When prices sagged, the federal government's surplus accumula- tion and eventually World War II prevented a repeat of the post World War I farm depression. Farmers responded to favorable product prices in meeting war needs for food and fiber. But they were fearful of over-investing after experiencing the post World War I depression. Long run farm product price expectations fell short of realized long run prices. Excessive stocks of durable capital did not build up during World War II due both to law product price expectations relative to actual prices and to production restrictions on nonfarm produced durables. Post World War II prosperity, efforts to rebuild and feed western Europe, and the Korean conflict staved off an expected depression. The Steagall amendment had extended rigid wartime price supports with no adequate supply-con- trol. This caused expectations of continued high prices, and with wartime savings and credit, the farm sector invested heavily in productive capacity, especially non- farm produced durables. Only the Korean conflict prevented growing surpluses from becoming intolerable and a farm depression. A trend toward freer world trade and PL 480 added support to the world market for farm products and reduced the pressure of surpluses on farm prices. Period General Growth and Expansion 1955-1964 71. General Characteristics Continued price supports without adequate production controls and continued investment in new productive capacity and mounting surpluses occurred. But employ- ment Opportunities in the nonfarm sector for farm youth, a decline in the number of traditional family farms, and continued government and private efforts to aid underdeveloped countries lessened the burden of low earnings in the farm sector. Another military conflict, Viet Nam, combined with a growing international food gap make farm surpluses a valuable weapon in the hot and cold war rather than a burden. Nevertheless, symptoms are present for surplus induced pressure on farm prices as well as capital losses for owners of durable farm inputs in the event a reasonable solution to the Viet Nam war is found and the world food situation improves. CHAPTER IV ESTIMATION TECHNIQUES In order to study adjustments in farm capital in Chapters V through VII, statistical techniques are required for estimating elastic- ities of production, marginal value products (MVPS), and capital values of inputs which are: 1) consistent with the economic theory of Chapter II and 2) permit dynamic variables to change over time in accordance with the historical perspective of Chapter III. The basic technique is a Nerlove type adjustment model which enables the derivation of produc- tion elasticities on an annual basis.1 Estimating Production Elasticities Underlying firm production functions are assumed of the form: b1 b2 bn (4.1) Y=boX1X2 ...xn ; where the bi’ i = l, 2, ..., n, are elasticities of production Y with reSpect to inputs Xi and are constant over the production function. Such 1Marc Nerlove, Distributed Lag§_and Demand Analysis for Agricul- tural and Other Commodities. AMS, USDA, Agricultural Handbook No. 141, June, 1958. Fred H. Tyner and Luther G. Tweeten used adjustment models in estimating agricultural production parameters in "A Mathodology for ‘Estimating Production Parameters," Journal of Farm Economics, XLVII, No. 5 (December, 1965), pp. 1462-1467. 75 76 a Cobb-Douglas production function is usually estimated directly in log form using ordinary least squares regression analysis. But frequently, due to time series clustering around the expansion path, inputs are highly correlated and yield estimates of individual bi that while un- biased, are unreliable. In other words, their probability of being the right estimates is reduced. Also, high correlations between included variables and excluded variables, while not increasing standard errors of included variables' coefficients, does bias estimates of the included variables' coefficients. And, when included variables are correlated with the error term, estimated coefficients are biased. Thus it would be bene- ficial to use estimating techniques which avoid these problems. The Adjustment-Factor Share Technique An alternative method of estimating elasticities of production is to employ a Nerlove type adjustment model on factor shares of inputs. This technique avoids correlation problems encountered in the direct least squares approach and lends itself to implementing the Johnsonian model. Input use is at an equilibrium level if its marginal value pro- duct (MVP) is bound by its acquisition cost and salvage value.1 Assuming 1While I use the term MVP for simplicity, the relevant concept for durable inputs is the present value of future net marginal value products (capital value). In order to prevent the analytical technique from yielding elasticities with respect to the total stock of durables rather than that part used up in the current production period, a linear depreciation schedule is assumed, and the factor shares of durables are obtained by dividing the stock of durables by the expected life in years. The resulting MVPS of the flow of services from durables are capitalized into present values. 77 1 Y = f(X1, X2, ... X ), the equilibrium condition for each input Xi is: s a (4.2) PigMVPig Pi , dividing through by Py . S MPP. PaP (4 3) Pi/Pys 1g i/y’ or equivalently S a (4.4) Pi/Py< 82 < P./P . _ _ 1 y 8X. 1 The elasticity of output Y, with respect to inputs Xi, i = l, 2, ... n, is given by: (#05) n1 = l 0 fi- , i = 1, 2’ .0. n 0 8X1 y a If input use is expending, i.e., MVPi>>Pi, equilibrium will be reached when MVP? = Pi, or OY = Pi/Py' Thus, in an equilibrium 1 "" 6X1 a resulting from an expansion adjustment, Pi/Py is substituted for Oy/OXi in (4.5) and the elasticity becomes: a ("'6) ”i=2- - El. 3 P Y Y which by definition is the factor share Fi of Xi in producing Y. 1In the analysis which follows, only i subscripts are used to indicate factor relationships. That is, Xis are reserved to indicate quantities. Also all prices and quantities are for a current year t. Time superscripts are added when necessary to distinguish current from lagged values. 78 Similarly, if an input reaches equilibrium from a contracting adjustment, the elasticity of production is s (’40?) Y? i = Pi 0 xi 0 P Y Y Thus, the thesis uses estimated equilibrium factor shares as production elasticities, acquisition costs to value expanding inputs, and salvage values to value contracting inputs.1 The adjustment function: t t-l _ t* t-l (4.8) Fi - Fi — gi(Fi Fi ) t* t-l is used where gi is the proportion of the desired adjustment (Fi - Fi t t'l accomplished in year t by the actual adjustment (Fi - Fi ). Further ) t* assume the equilibrium factor share Fi is some function: t* t-l t'1 t'1 (4.9) Fi - 00 +~aII +0112i +0k1>k , where t* Fi is the equilibrium factor share of input X. in year t; 1 It"1 is realized net income per farm in year t-l; PE-1 is the price of input Xi relative to prices received by farmers for the product Y in year t-l; and t-l Pk is the price of an important substitute input relative to the price of the input Xi in year t-l. Now the right hand side of (4.9) is substituted into (4.8) for * F: and the result solved for F: yielding: 1When inputs are stable or contracting at less than or equal to depreciation rates, acquisition costs and salvage values are averaged for computing factor shares. Also, all overhead costs associated with keep- ing one unit of the input in production for one year are included in the price of the input for purposes of computing factor shares. To permit a curvalinear relationship, equation (4.10) is fit in logarithm form. This requires an adjustment equation (4.8) of the form t t* gi (4.11) F1 = F1 . FF'I FF'1 1 1 In fitting time series data for each studied input to equation (4.10) in logarithm form, estimates of adjustment coefficients g1 are obtained by subtracting the estimate of the coefficient (1 - 8i) of the 1 from one. Then plugging the estimated adjust- lagged factor share F:- ment coefficients into equation (4.11), converting to logarithms, and solving for F:* yields estimated logarithms of annual elasticities of output Y with respect to studied inputs Xis: t t t* t (4.12) Log 77,1 = bi = Log Fi = 1 Log Fi .Anti-logarithms of the right hand side of (4.12) are the thesis estimates of the elasticity of production with respect to inputs Xi’ Estimates of equation (4.10) in logarithm form for studied inputs, standard errors of estimated coefficients, R s and estimated adjustment coefficients are presented in Appendix Table A.2. Sources of time series data on indepen- dent variables in equation (4.10) for studied inputs are in Appendix 'Table A.l. Appendix Table A.4 contains estimated salvage values. 80 Estimated annual production elasticities are in Appendix Tables B.l to 3.28 for studied capital inputs. Actual.MarginaIMValueJProducts"and” Ex Post Capital Values Analysis of resource flows in the farm sector requires estimates of the value of inputs in production, that is, the present value of discounted future net marginal value products.1 Given estimates of average production elasticities for farms, actual MVPS and ex post capital values are estimated using empirical techniques presented below. Estimates of actual MVPS and ex post capital values are to be found in Appendix Tables B.l to B.28. Marginal Value Products From the underlying production function (4.1), input marginal value products are given by: (4.13) MVPi = biYPy ; x 1 where b1 is the elasticity of output Y with respect to Xi, YPy the value of output, and X1 the quantity of input Xi. Net Marginal Value Products In Obtaining capital values of inputs, it is necessary to sub- tract overhead costs from gross MNPs before they are capitalized. Using 1Present values of discounted future net marginal value products are referred to in the thesis as capital values. These estimates are ex post capital values and, as such, they vary from capital values which actually existed at a point in time. The difference is that capital values which actually existed were by-necessity based upon expectations while thesis estimates of capital values are based upon annual MVPs which actually materialized. 81 estimates of overhead costs Ci, net MVPS are obtained by:1 (4.14) NMVPi = MVPi - ci . Ex Post Capital Values Ex post capital values refer to the discounted lifetime earnings of an input. Being ex pgst values, these capital values are unknown to farm managers when production decisions are made. They are useful only in retrospect to estimate the consequences of over- or undercommitment of resources to the farm sector. Ex post capital values are estimated by discounting actual net marginal value products over the life of the input to ex post capital values: to t to + n-l NMVPt 922.. t (4.15) cv.o = if CPI ; 1 t)t-to+l t=to (1+r where CV1o is the estimated actual value in year to dollars of one unit of X1 over its n year life in producing product Y discounted to year to. Multiplying each annual net marginal value product by the ratio of year to's consumer price index to year year t's consumer price index is re- quired to obtain capital values in terms of year to dollars--price weights comparable to the year to price of the input Xi. The Production Credit Association average cost of loans is used for a discount rate. This implies the Production Credit Association 1No attempt is made to determine that portion of an input's MVP which is actually the product of other studied or unstudied inputs which is attributed to this particular input due to correlation among independent variables determining input factor shares and adjustment coefficients. 82 average cost of loans is equal to the opportunity cost of farm capital or a rate of return comparable to returns of similar resources in the none' farm sector. If an input's ex post capital value is equated with its acquisition cost, the marginal efficiency of capital for the investment is equated with the Opportunity cost. If the ex post capital value of an input is less than its acquisition cost but greater than its salvage value, the investment actually earns less than enough to cover its acqui- sition cost over its lifetime, but remains in production until depreciated out of existence so long as its ex ante capital value does not fall below its salvage value. Expected Marginal Value Products and Ex Ante Capital Values Because farm managers base production decisions on comparisons between acquisition costs of inputs and their expected MVPS and ex ante capital values, estimates of expected or ex ante capital values are use- ful in determining the causes of over- or undercommitment of capital inputs to the farm sector. In obtaining estimates of ex ante capital values, farmers are assumed to expect production elasticities are constant over the life of inputs. Also, input stocks are assumed constant over the expected life of inputs at their present year to levels. It then follows that expected output remains constant and all that remains is to employ expectations of future product prices and overhead costs. Estimates of expected earnings are in Appendix Tables 3.1 through B.28. 83 Expected Marginal Value Products Actual gross MVPS are deflated by prices received by farmers and then multiplied by product price expectations to obtain expected gross marginal value product estimates:1 t EPt (4.16) EMVP. = MVPi n ; 1 "" Pt where Pt is the index of prices received by farmers for the commodity t in year t and EPn is Lerohl's expected product price for year t and the next n-l years. This yields the average expected MVP for year t and the next n-l years where n is the average life of the input. Expected Net Marginal Value Products Average expected overhead expenses for the next n years are estimated according to: 4 At _ t-l t-2 . ( .17) ECin — a0 + alci + a2Ci , A t where E01n is the average expected overhead cost for input X for the i years t to t +.n - l; n being the expeCted life of the input in years. 0:-1 and CE-2 are estimates of actual overhead costs and a0, a1 and a2 are estimated coefficients. Values of a0, a1 and a2 for specific inputs are in Appendix Table A.3. 1Lerohl's l, 5, and 10 year product price expectation series are used depending on whether the input has a 1, 5, or 10 year average life respectively. For 1963 and 1964 product price expectations, Lerohl's mechanical price expectation models were used to obtain price expectation estimates. See Lerohl, op. cit. 84 Subtracting these overhead expenses from gross MVPs yields average expected net marginal value products for the n-year period. (4.18) ENMVPin = EMVPin - ECin . Ex Ante Capital Values In obtaining ex ante capital values (ECV) of expected future net marginal value products, expected net MVPS derived by equation (4.18) are discounted according to: t to+n-l t ENMVP1° (4.19) ECVi: = :5; 9 Economic Rent and Capital Gains or Losses Economic rent and capital gains or losses are defined with respect to the relationship between the marginal factor flow and acquisi- tion costs. For expendable inputs the difference between marginal value products and acquisition costs multiplied by the quantity yields estimates of economic rent. If MVPS are greater than acquisition costs, positive rents ensue and it would have been profitable to expand use of the input. When MVPs are less than salvage prices, inputs earned negative rents that would have been eliminated by contracting the input. Economic rents are estimated by: a (4.20) ERi — (MVPi - Pi)Xi . Durable inputs with ex post capital values greater than acquisi- tion costs represent capital gains, and stocks of these inputs could have been profitably increased. When ex post capital values are less than 85 acquisition costs but greater than salvage values, owners of such durables sustained unavoidable capital losses. Durables with ex post capital values less than salvage values could have been salvaged to minimize capital losses. The capital gain or loss for a durable input is the excess or deficiency of the durable's ex post capital value over its acquisition cost. To estimate the capital gains or losses to purchasers of a durable of a specific type in a specific year, the capital gain or loss per unit of the durable in a specific year should be multiplied by the total quan- tity acquired in that year. Then, in accordance with the assumption of linear depreciation over n years, lgg_per cent of the stock of durables can be assured to be replaced each gear. Thus, if the capital gain or loss per unit of a durable is first multiplied by the total number of that type of durable on farms and then divided by the expected life of the durable, a rough estimate is obtained of the capital gains and losses eventually incurred, ex post, on the quantity of the durable acquired in that year. The actual formula used for the computation follows: (4.21) C61 = (cvi - P?) _’_‘_i . n Estimates of economic rents for expendable inputs and capital gains or losses for durable inputs are in Appendix Tables 3.1 through B.28. Data A large quantity and variety of secondary data on capital inputs, output, and prices in the farm sector provided by the USDA is utilized in .4 a i 1 via: ..iJuu. 9.»— .._... Wk.- 2 “more. . ... . .. ...... ...... 0.9.3.“... 3.0.. 86 the study. USDA publications used for specific data sources are listed in Appendix A. Problems associated with using available data are discussed below. Capital Input Series The real problem in measuring capital inputs is that physical capital assumes meaning within a given set of prices, and for a given technological and institutional framework. In the progressive United States economy, this meaning undergoes constant change. This point was amply illustrated by Alvin S. Tostlebe in his 1957 ground breaking study of durable capital in the U. S. farm sector.1 The series developed by Tostlebe provide the basis for many of the current series on capital inputs in the farm sector. Perhaps Zvi Griliches has written the largest number of artiCles criticizing capital input data. Griliches chastises the USDA for using commodity definitions in vague general terms as "most commonly bought by farmers." He estimates, for example, that "quality change" accounts for between one-third and two-thirds of the actual change in list prices of some automobiles in the periods 1937-50 and 1950-59.2 The thesis avoids the index problem so critical in measuring capital inputs in deflated expenditure series by measuring inputs where possible in numbers on farms. This makes the quality problem more explicit. In estimating machine numbers, for example, all machines, 1Alvin S. Tostlebe, Capital in Agriculture: :Its Formation and Financing Since 1870 (Princeton: National Bureau of Economic Research, Princeton University Press, 1957). 2Zvi Griliches, "Measuring Inputs in Agriculture: A Critical Survey," Journal of Farm Economics, XLII (December, 1960), p. 1411. 1 . I 1 .... ...oo-t o...¢.oo..o.#-—-c.c.60 87 large or small, new or old, those used 1,000 hours and those not used at all, count as one. Some have attempted to measure such farm machinery as tractors in horsepower units, but progress in this direction is slow. While Griliches endorses the declining balance method of depre- ciating capital inputs used by the USDA, he believes the rates of depreciation (trucks 21 per cent, tractors 18.5 per cent, and other farm machinery and equipment 14 per cent) are too high. Rather than using rates derived from used machinery prices, as Griliches suggests, the USDA decided on rates by the arbitrary criterion that the resulting rate depreciates the item to 5 per cent of its original value by the time its "useful" life is up.1 Griliches believes that the USDA underestimates stocks of tractors by about 75 per cent, and other classes of machines are underestimated by varying smaller percentages. The changing quality of capital inputs is not as critical as might be expected. Each year is, in effect, a separate study with pro- duction elasticities estimated on an annual basis. Inasmuch as the underlying Cobb-Douglas production function involves constant elasticities of production over all combinations of inputs, the annual differences in elasticities serve to shift the production function due to changing input quality. Although not the purpose of this study, a considerable contri- bution could be made to the measurement of technological advance by a careful analysis of the year to year changes in estimated production parameters. Because each year of the analysis is essentially a separate study, with a particular input of one year of different quality from the same 11bid., p. 1421. 88 input in name of another year, nominal input prices which reflect quality changes are used. Flow vs. Stock Concepts.--Expendable inputs embody a stock of services that is completely used up in one period of the production process. Thus, whether we use stock or flow concepts in the case of expendables makes no difference-~they are identical. But durables embody stocks of services that are used up or flow into the production process over more than one period of production. Durables, then, are measured either according to the annual flow of services derived from the stock, or the stock itself. There exists considerable controversy as to which concept--stock or flow--is the right one for estimating production functions. Sune Carlson argues that only flows of services should be included.1 However, Smith argues:2 The direct objects of adjustment or action parameters of the firm are (l) the current inputs to current production, and (2) the physical stocks of the various kinds of capital goods employed. The distinguishing characteristic of capital goods is Simply that their presence, in the form of physical stocks, is required in order for production to take place. Still another view is that provided by Nerlove in his treatment of both stocks and flows of durable factor services as variables in the production function.3 In any given study, one input may be measured as a stock and another as a flow. What is important is to avoid measuring 1Sune Carlson, A Study in the Pure Theory of Production (London: P. s. King and Sons, Ltd., 1939). 2Vernon L. Smith, "The Theory of Investment and Production," Quarterly Journal of Economics, LXXIII (February, 1959), pp. 65-66. 3Marc Nerlove, Time-Series Analysis of the Supply Of Agricultural Products (Chicago: Workshop, Estimating and Interpreting Farm Supply Functions, January 20-22, 1960), pp. 33-38. 89 a stock and treating it as a flow or vice versa, unless measures are taken to convert one to the other. By assuming a linear depreciation schedule, the thesis converts durable input stocks to flows of services in estimating production elasticities and derives capital values of annual flows of service fnam the durables over their expected life.1 Economic considerations important to a study of farm capital other than durability include degree of specialization and source of supply. All these factors are relevant to a classification of capital inputs initiated by Glenn Johnson and modified in the study. Table 4.1 contains the classification and the particular inputs studied in the production of aggregate farm output and specific commodity aggregates. The durable vs. expendable classification is important for reasons already discussed. Farm produced as opposed to nonfarm produced source of supply is important due to the variability in supply prices. Prices of farm produced inputs are highly correlated with farm product prices and fluctuate much more than prices of nonfarm produced inputs. This in turn, ceteris paribus, makes 1) use of farm produced expendable inputs more variable than nonfarm produced expendables, and 2) farm pro- duced durables less susceptible to prolonged capital gains or losses. 1One important problem not investigated directly in the thesis is that while the stock of durable inputs may be economically fixed, the farm.manager can change the rate of use of the input. The thesis assumes that inputs are used at a linear rate over their life span. This problem has only recently become apparent as a result of emphasis an asset fixity. Earlier analysts including J. M. Keynes and A. W. Lewis have considered "user cost" in relation to salvage values, but did not include a full analysis of the roles of both acquisition costs and salvage values. See J. M. Keynes, The General Theory of Employment, Interest and Capital (London: Macmillan and Co., 1942), pp. 23, 53, and the appendix starting on p. 66, and A. W. Lewis, Overhead Costs-~Some Essays in Economic Analysis (London: George Allen and Unwin, 1949), p. 10. n-.....-p.‘ -.,..Hn-...v ...u--..~ue .... p-..~ -11¢--u..s..-.\..1vitv. u~ .: ,.~.~u\p\~. 11.... . '1...» I n 29!..19! . .... 31‘31 .. i O pt EOE 9O .uoan vam musmcw Hmuwnmo wwvaum aww3uon coausufiumnsm mo mwumu Hmawwumfi man mo mmumfifiumm mvw>oua ou Hmuuo cw kuhamcw ma o>onm vmumHH mcowumsuwm :ofiuosuoum wnu mo some :H HOQMH “manna“ Hmufiamo wmwxu ou cowuwwwm cH H mummoflm cuoo mucuompH cuoo mwcwmmmv awmuo mucuomuH ummcs mcwxofisu :Moo huuasom wwwm umwmwm Chou m3om xuom muwWHmm >Hfimo m3oo cuoo mam xflflz xfifiz mummum mgoMflwm msoo cuoo mum vooum mwmm \Jlmwmwmwmmmmaw coma cam mmcfiwfifism mumumw>hmm mwmuom vaflm mumfimm asxoflm mwcfinaoo kufiofiuuowfim mxosuH :flmuo medz Eumm wcHHOmmo HwNHHHuumm uOuQE mucuomkH cam mmmuom wumwwuww< II. II II II II II ll II II ImusmmH mwfivam II II II II II II II II II II vaH wen“ vaH wwuw uHmwumamCD vmnwflmfiomam ufimwuwamcbfiwwnwfimfluwmm nHmHowmmCD kuflHMMUmam IHmHomamCD woNHHmflomaw vmoswoug Ehmmcoz wwosvoum Egan vmoswoug Eummcoz wmoawopm Sham coauMSuMm mmanmvcm xm menmusa :owuonvoum newumowwwmmmfio uDNCH fl audacfi Hmuwamo wwfivaum mo coaumUHmwmmmHonu.H.: MAM£3 \riewed as reappraising ex ante capital values, acquisition costs, and salvage values Of livestock from time tO time and adjusting numbers éiczczcalrdingly. It is assumed that they would not knowingly keep a horse C’IT’ <=<3mv in production over a five year period whose ex ante capital value does not cover its salvage value. Nor would farmers fail to expand an imal numbers if their ex ante capital values exceeded acquisition costs. BecaUSe dividing the number Of animals by the five year average life to 4”: .Ifl'gaj 96 obtain annual average capital gains or losses recognizes this reality in a rather superficial way, the thesis estimates may over- or underestimate the true capital gains or losses. Further, while horses and mules have few employment Opportunities in the nonfarm sector, their salvage values have never been zero, even in recent years. Thus thesis estimates Of the capital values Of horses and mules are underestimated by at least the discounted value Of the carcass at the time Of salvage. The Farm Production Credit Association (PCA) requires a large equity in assets on which loans are made. This indicates that the risk involved in financing durables is greater than that covered by the PCA interest rate. Thus, use Of the PCA rate for capitalization purposes tends to overestimate capital values. Also, when herd sizes are increas- ing, either in beef or milk production, the market prices used in the thesis as acquisition costs, are more nearly acquisition costs. But vihen.herd sizes are decreasing, the market prices are more nearly salvage \railues. Thus estimates of capital gains based on the difference Of ex 1>c13t capital values and market prices, are biased upward in periods of 11ealrd expansions and in periods Of herd contractions capital losses are biased downward. As the true discount rate, acquisition costs, and sa lvage values are unknown, these problems also have to be handled on an ad hoc basis in interpreting the estimates of capital values and capital gains and losses. On the average and somewhat superficially, the estimates indicate (in Part because Of the low PCA interest rates used) that beef and milk cows earned more over their productive life from 1917 to 1960 than farmers paid for them, forewent in not selling them, or spent in producing fi‘ .rIND 1%. ‘fl. - y Y. . , .. o .......ouo.4...c.ooko ...(I 97 them. On the other hand, horses and mules consistently had ex post capital values below acquisition costs even when the PCA interest rates were used. Attention is now directed toward examining capital values of, and adjustments in numbers of each durable livestock category. Horses and Mules Horse and mule employment on United States farms reached a peak of nearly 27 million head in 1918. Numbers then continually declined to about 3 million head in 196M as mechanical power replaced horsepower. The 1.0h estimated adjustment coefficient for horses and mules indicates that the adjustment in factor shares expressed in logarithms was 104 per cent of the desired adjustment. Resulting production elasticities and estimates Of ex ante capital values substantiate underadjustment in the ashort run. HOwever, recognition of the influence Of the PCA interest Iaate indicates even greater short run underadjustments, and perhaps, no lxang run overadjustment. The additions took place mainly through a (leacrease in acquisition with liquidation taking place mainly through aging; hence the short run underadjustment. Thesis estimates, averaged over specified periods in Table 5.1, indicate that average lifetime earnings of horses and mules for specified periods ran well below acquisition costs from 1917 to 1946 and perhaps, éit><>xv13 acquisition costs on the average for specified periods after 1916.1 This indicates farmers overcommitted horses and mules to farm production prior to l9’+6. After World War II, horses and mules were not a ¥ 1Complete time series Of thesis estimates for horses and mules are in Appendix Table 3.6. TABLE 5.l.--Horses and mules on farms: fOr specified periods, United States,-l9l761960'fi' employment and earnings statistics Average levels of: Annual Horses change and in the Acquisition Ex ante Ex post Annual PeriOd mules number Coat 0 capita} capital averag: on of horses 3 arse va lue-2. V8 1ue.2_ capitae or mule gains—- farms and mules on farms (:million head--) (-dollars per head-) (--mil. dol.--) 1917-1920 _ . _ World War I 26-40 .50 107-25 169.35 68.80 203.00 1921-1929 Post'World War 1 Farm 22-50 -67 73 uh 28#-85 58.70 68.00 Depression 1930-1933 General 18.20 -.60 62.25 3h5.20 59.51 -11.00 Depression l93h-l9hl _ _ Recovery 15-50 ~h0 90 87 199 83 76.83 11.00 19h2-l9h6 _ _ World War II 12.50 .60 85.h0 89.81 82.9h 5,00 19h7-195h Post WOrld War II Boom, 7.u0 -.79 63.25 121.75 78.35 16.00 Korean Conflict and Adjustment 1955-1960M . General Growt 3.60 -.28 81.67 260.99 91.38 26.00 and Expansion -l[EX'post:capital values and annual average capital gains are for 1955 to 1956. 21 See page 96 for a discussion of possible biases due to the use of PCA interest rates and the omission of the carcass value in the capital values. 99 significant input in farm production and estimates for that period are rather meaningless. Prior to World War II, horses and mules were apparently variable downward as their ex ante capital values fell short of acquisition costs and farmers received estimated capital losses. Offsetting the influence Of the low PCA interest rate is the omission in the capital values of the carcass value Of horses and mules to rendering plants. The data in Table 5.1 indicate that as farmers contracted the use Of horses and mules, capital losses decreased. The smaller number Of horses and mules on farms came more nearly earning ex post capital values sufficient to cover acquisition costs. Ex ante capital values were greater than ex post capital values which resulted in capital losses. It is not possible to tell whether the capital values and capital losses for horses and mules are underestimated or overestimated. But inasmuch as it would take a very large increase in the discount rate to Offset the omission of the carcass values Of horses and mules in their capital values, it is likely that capital values are underestimated and capital losses are overestimated.1 Substitution of Mechanical Power for Horsepower One Of the great phenomena in the farm sector is the virtually complete transition from horsepower to tractor power. After reaching a 1For example, if a 1,500 pound horse were worth 2 cents per pound for dog food, the carcass value discounted five years to the time Of acquisition would be $20.h2. Even if the discount rate were doubled from, say, 6 per cent to 12 per cent, the decrease in the ex post capital value Of a horse which earned an annual MVP of $20 would only be $12.15. Thus in this example the net result of these two sources Of bias would be to underestimate the capital value $8.27. 100 peak of nearly 27 million head in 1918, numbers of horses and mules continually declined to about 3 million head in l96h. The data on tractor prices and MPPs relative to horse and mule prices and MPPs presented in Table 5.2 partly explain this transformation. TABLE 5.2.--Acquisition costs and MPPs of tractors relative to acquisi- tion costs and MPPs Of horses and mules, United States average values for”Spec1£1ed'petidds,;191741960.‘TWT. Cost of the services Of one tractor MPP of one tractor Time period relative to the relative to the MPP cost Of the services Of one horse or mule Of one horse or mule (--average values for Specified time periods-) 1917-1920 World War I h.50 115'h9 1921-1929 Post World War I 6.75 40.80 Farm Depression 1930-1933 General Depression 7'55 h5.90 193h-19h1 Recovery 5.70 .l0.05 19u2-19h6 World War II 9'80 h2'69 19h7-195h Post World War II Boom, Korean 15,35 13,03 Conflict and Adjustment 1955-1960 General Growth 15.05 8.00 and Expansion 101 Average data for 1917 to 1920 indicate that the price of the services of one tractor cost the equivalent of the services Of h.5 horses and mules. But our estimates indicate that one tractor could replace 115 horses and mules in aggregate farm production without altering output. The estimates in Table 5.2 indicate that as tractors have been sub- stituted for horses and mules, relative prices decreased and relative MPPs increased. But with relative MPPs generally much larger than rela- tive prices up to World War II, it is evident that horses and mules could not profitably substitute for tractors as a source Of power. The substitution Of mechanical power for horsepower on United States farms has also led to a type of specialization. The nonfarm sector produces mechanical power units at lower costs relative to pro- ductivity than the farm sector can produce horses and mules. Thus farmers were provided with a more profitable source of power which, at the same time freed 77 million acres of cropland for producing food and fiber for human consumption. Beef Cows Beef cows present an Opportunity in this thesis effort to recognize rather fully the divergences between input acquisition costs and salvage values. Salvage values are used to value beef cows in computing factor shares when their numbers are decreasing and acquisition costs when numbers are increasing. For 1921-1929, when beef cow numbers decreased on the average, relevant statistics appear more reasonable using estimated salvage values than they would using acquisition costs. Adequate data are not available to permit analysis of beef cows prior to 102 1921. Thesis estimates for beef cows from Appendix Table B.ll are averaged over specified periods in Table 5.3. The relatively high .6h estimated adjustment coefficient for beef cows indicates that cattlemen respond fairly fast to changes in prices and productivity. In estimating that beef producers consistently earned capital gains while the total number Of cattle on farms has continually cycled, thesis estimates indicate that: 1) use of the PCA interest rate resulted in capital values being overestimated, 2) adding the discounted value Of a canner-cutter to the discounted annual net MVPS to Obtain capital values also contributes to upward bias because some aged cows die before they are salvaged, and 3) much could be gained from an analysis of beef cow capital values according to age cohorts. TO illustrate the information that could be gained from a dis- aggregation by cohorts, thesis estimates Of expected five year average net MVPS Of beef cows are discounted and summed over the expected life of a six year Old beef cow and a first calf beef heifer. These expected capital values are then compared with salvage values in the case of the six year Old cow and acquisition costs in the case of the first calf heifer and a decision recorded as to whether the farmer would sell the animal or keep it in the herd. These data on first calf heifers and six year Old cows, presented in Table 5.h, are useful in interpreting thesis estimates of ex ante capital values of beef cows in relation to acquisition costs, salvage values, and the cattle numbers cycle. The drop in beef cattle prices at the Close of World War I coincided with a peak in the cattle numbers cycle. Decreasing capital values relative to acquisition costs caused 103 TABLE 5.3.--Beef cows on farms: employment and earnings statistics for ‘Specified periods,3United States,fl92l-l96h Average levels of: Number 2:22;: Of in the A Ex ante Ex post Annual Period beef number cquisition capita capital average cows cost ) capita} on Of value— value_ gains- beef cows farms on farms {-million head::) (-dollars per head?) (--m11. dol.---) 1921-1929 Post World .War_1 Farm 10.80 -.h1 85.00 113.20 107.29 52 Depression 1930-1933 General 10.20 .58 59.25 102.22 80.91 #6 Depression l93h-l9hl Recovery 11.00 .01 80.25 109.30 12h.69 97 l9h2-l9h6 World War II 15‘00 1'25 139°20 189-50 217-81 238 l9h7-195h Post World War II Boom, 19.10 1.08 237.87 281.27 28u.99 176 Korean Conflict and Adjustment 1 1955-1961+J General Growth 26.90 .68 217.80 259.1h 287.93 366 and Expansion ' .l/Ex‘post capital values and annual average~capital-gains are fOr l955.to 1960. g/See pages 96 and 102 for indications of possible biases in capital values due to the use of PCA interest rates and the value Of canner-cutter cows as a certain final addition to the annual MVPS. 10h TABLE 5.h.--Ex ante capital values of an average six year Old beef cow,and a first calf beef heifer, United States, 1921~19661/e . Expected Six year Old cow 8] First calf beef heifer Year General 5 yr. avr. Ex ante Salvage Salvage Ex ante Sell or situation net MVP of capita} value or keep capitg} Acq. cost keep for a beef cow value—- in herd value brood cow ( ----- dol. per head ----- ) (action) (-dol. per head-) (action) 1921 ‘16 #9 56 sell 89 59 keep 1922 13 A6 61 sell 79 69 keep 1923 10 51 56 sell 76 72 keep 192A Post World 1h 65 58 keep 100 7h keep 1925 War I Farm 18 65 7h sell 110 81 keep 1926 Depression 18 53 78 sell 98 86 keep 1927 1h #1 7h sell 76 95 sell 1928 26 43 81 sell 108 118 sell 19g9__ __ +_ 22 110 82 sell 95 111 sell 1930 20 37 71 sell 87 85 keep 1931 General 17 52 50 keep 95 6O keep 1932 Depression 13 MM 33 keep 77 #8 keep 1933 12 1+5 31 keep 75 1411 keep__ 193M 6 Mb 36 keep 59 Ah keep 1935 13 5h 61 sell 86 76 keep 1936 13 26 61 sell 88 72 keep 1937 - . 1h 3 69 sell 98 83 keep 1938 .Recovery 13 6h 61 keep 97 81 keep 1939 11 68 59 keep 95 90 keep 1980 26 7O 58 keep 135 92 keep 1931 ____ 22 76 76 keep 131 10h keep 19h2 25 99 99 keep 1h9 122 keep 19h3 WOrld 28 113 109 sell 169 139 keep 19hh ‘War'II 30 129 102 keep 189 130 keep 1915 28 117 110 keep 173 1A3 keep 11116 __ __ 27 1110 132 keep 194 162 keeL 19117.P 1d 38 182 176 keep 258 201 keep 1918 °3t W°r 21 -1A9 193 sell 197 250 .Sell 1919 wgr II 32 121 167 sell 221 222 sell 1950 KO°°m’ no 130 182 sell 250 261 sell 1951 6 gig“ u9 1A9 219 sell 296 317 sell 1952 °“ :Ct L9 1A1 190 sell 288 266 keep 1953 Ad ‘“ A9 117 155 sell 29h 192 keep 1951+ _1“3ffflf_“t___ 39_ 156 152 keep __2_73 1911 keeL 1955 A1 158. 132 keep 281 192 keep 1956 General 22 129 125 keep *195 178 keep 1957 Growth 31 1&6 1A7 sell 239 201 keep 1958 and A6 165 180 sell 303 2A5 keep 1959 Expansion #1 155 168 sell. 278 2&5 ‘ keep 1960 #5 1M5 158 sell 280 231 keep A/See pages 96 and 102 for explanations Of possible upward biases in capital values due to the use of PCA interest rates in discounting and the value of canner-cutters as a certain final addition to the annual MVPS. gySix year Old cows are assumed to have been in production h years and have, on the average, .5 year of productive life remaining prior to l9h2 and 1 year remaining from l9h0 to 1960. 3/First calf beef heifers are assumed to have an average 3 years of pro- ductive life remaining prior to 1950 and h years from 19h0 to 1960. 105 a contraction of beef cows from 1921 to 1928 at an average rate Of .hl million head per year. Ex post capital values were greater than acquisi- tion costs on the average, and cattlemen received an average 52 million dollars per year capital gains on beef cows. In 1928, 1929 and 1930, however, ex post capital values were less than acquisition costs, and farmers received estimated annual average capital losses on beef-cows in these years of 17, 30, and 13 million dollars respectively.1 Table 5.h indicates that based on thesis estimates, a farmer would have salvaged six year Old cows in every year from 1921 to 1929 except in 192M when the 65 dollar ex ante capital value was 7 dollars greater than the value Of the cow as a canner-cutter cow. On the other hand, a beef heifer with an expected three year productive life would have been maintained in the herd from 1921 to 1926, but sold as a slaughter animal from 1927 to 1929. By 1929, numbers of cattle and calves on farms were at their lowest level Of any time from 1917 to 196A, and capital values of beef cows began to increase relative to acquisition costs. The cattle cycle began an upswing and from 1930 to 1933 cattlemen received an estimated #6 million dollars capital gains on beef cows as ex post capital values of beef cows averaged an estimated $21.66 greater than their average $59.25 acquisition cost. Table 5.h indicates that according to thesis estimates of ex ante capital values, a cattlemen would have been expected to keep both six year Old cows and first calf heifers in production in every year Of the general depression except six year Old cows in 1930. 1It should be remembered throughout this section that the capital gains are likely overestimated and capital losses underestimated due to biases in the ex post capital'values discussed on pages 96 and 102. 106 Estimated ex post capital values of beef cows increased from $8h.12 in 193h to $162.68 in 19h1 compared to an increase in acquisition costs from $hh.00 in 193M to $10h.00 in 1941. A short downswing in the cattle cycle occurred from 1935 to 1937 with thesis estimates in Table 5.h indi- cating that cattlemen were salvaging Older cows but keeping first calf heifers with at least three year life expectancies in the herd. In 1939, the cattle cycle began a strong upswing, and Table 5.h indicates that, according to ex post capital values, cattlemen Should have begun keeping both heifers and Older cows in the herd. With ex post capital values Of beef cows averaging 129 to 191 per cent of acquisition costs from 193% to 19hl, cattlemen received an estimated average 97 million dollars annual average capital gains per year in this recovery period. Cows and calves on farms continued to increase in number until 19h5 in response to favorable ex ante capital values Of beef cows rela- tive to acquisition costs. And from an ex post view, capital values were even greater than expected during World war II, as indicated in Table 5.3. With five year average prices received by farmers for beef cattle during the war greater than expected, estimated annual average capital gains on beef cows increased from 13h million dollars in l9h1 to #00 million dollars in l9h7, averaging 238 million dollars per year from 19h2 to 19h6. At the close of World war II, the cattle cycle took a short down- turn from 1946 to 19h8, prices received for beef cattle increased, and ex post capital values of beef cows increased from $211.25 in 1945 to an all-time high of $322.30 in 1947. The number of cattle and calves on farms began to increase in 1950 although thesis estimates indicate that capital gains on beef~cows were decreasing and were negative in 1951 and 1952 due to low MVPS and low canner-cutter prices in the mid-1950's not 107 providing discounted.capital values sufficient to cover the high acquisi- tion costs of beef cows in 1951 and 1952. On the average, ex post capital values of beef cows were $h7.12 greater than the $237.87 average acquisition cost from 1947 to l95h, and cattlemen received an estimated average 176 million dollars per year in annual average capital gains on beef cows as indicated in Table 5.3. But the reader should keep in mind the likely upward bias in the capital gains estimates. Beef cow numbers, which were increasing at an average annual rate Of .68 million head per year from 1955 to 196M, averaged 26.9 million head per year. Prices received by farmers for beef cattle were generally higher than expected and average ex post capital values of beef cows exceeded both ex ante capital values and acquisition costs. On the average, cattlemen received an estimated 366 million dollars annual average capital gains per year on beef cows from 1955 to 1960. Table 5.h indicates that according to thesis estimates, cattlemen should have kept first calf heifers in the herd every year from 1952 to 1960 while only when the cattle cycle was on a strong upswing as in 195M to 1956 was it profitable, according to ex ante capital values, to keep six year Old cows in the herd. Substitution Of Feed for Beef Cows 'Over time as feed has become relatively cheaper than beef cows, feed has been substituted for cows. Although beef cows increased in number 163 per cent from their average numbers during the post world war I farm depression to their average number during 1955 to 196k, corn fed to beef cattle increased 300 per cent over the same time periods. 108 TABLE 5.5.-€COSts and MPPs of corn relative to acquisition costs and MPPs Of beef cows, United States average'values'for-Specified periods, 1921;1964 Acquisition cost of one ton of corn relative to the acquisition cost of the services Of one beef cow (----average values for specified time periods----) MPP of one ton of corn relative to the MPP Of one beef cow Time period 1921-1929 Post WOrld War I 1.68 2.03 Farm Depression 1930-1933 General Depression 1.10 1.38 193h'19h1 1,65 2.26 Recovery 19h2-19h6 World War II 1’53 1°h7 19h7-195h Post World War II Boom, Korean 1.19 1.2h Conflict~and Adjustment 1955-19611 General Growth .95 1.05 -and Expansion - Table 5.5 illustrates the substitution of corn for beef cows. On the average from 1921 to 1929, the price of one ton Of corn could purchase the services of 1.68 beef cows. But one ton Of corn would substitute for the services of 2.03 beef cows. Thus it was profitable to breed beef 'Oattle that could convert corn to beef more efficiently'and feed more corn to fewer cattle. Over time the price of corn has declined relative to the price Of beef cows and while both inputs have increased due to demand expansion, more corn is being fed relative to the number Of beef cows. 109 From 1955 to 1969, average data indicate that while the price of corn relative to beef cow acquisition costs had decreased to .95 from its 1.68 average value in 1921-1929, the resulting substitution Of corn for beef cows caused the MPP Of a ton Of corn relative to the MPP of.a beef cow tO decrease to 1.05 from its average value of 2.03 during 1921-1929. Milk Cows Milk cows on farms reached one peak in numbers in 193k, then declined until the late l9h0's; increased to an all-time high of 27.8 million head in 1955; then decreased steadily to 18.1 million head in 196G. Although milk cows can be salvaged as slaughter animals in the nonfarm sector, their numbers do not cycle as much as beef cattle. As much more capital is required for dairy barns and milking parlors than for beef cattle, milking herds are maintained at more uniform levels than beef herds. The persistent decrease in numbers of milk cows after 19h5 is partially due to increases in the milk producing capacity per cow. The only way the increased quality of milk cows is accounted for in the thesis is through increased cow prices. Sufficient data for analyzing milk cow employment and earnings are not available prior to 1921. Thesis results for milk cows from Appendix Table 3.16 are summarized in Table 5.6. The-ex ante capital values of.a six year Old milk cow and a first calf dairy heifer are presented in Table 5.7. Estimates for milk cows are probably biased for the same reasons cited earlier in the case of beef cows. The use Of PCA interest rates in discounting,use Of market TABLE 5.6.--Milk cows on farms: 110 employment and earnings statistics for Specified periOdS, United States, l92lél96h Average levels of: Number Annual change of Annual in the Ex ante Ex post A . ...... “22:31“ we; we; are cows of value- valu ,_ 'ainsé} f on milk cows ‘ 3 arms on farms (-~mil.ion head-) (Pdollars per head?) lI-qmil. dol.---) 1921-1929 azztlwggi 22.20 .111 711.11 101.113 99.53 113 Depression 1930-1933 General 2h.ho .88 53.50 8u.72 73.73 98 Depression $221523,“ 25.30 -.06 60.00 96.36 129.03 2611 defiifégtsll 27.10 .22 121.60 158.29 190.82 375 19117-19511 Post World War II Boom 2h.00 -.32 211.00 252.57 250.00 188 ) Korean Conflict and Adjustment 1955-196w General Growth. 20.78 -.58 219.50 2h0.81 262.16 and Expansion ¥ 251 -1-/Ex". post capital values and annual average capital: gains are. 1 f0“! 1955.to 1960. g/See pages 96 and 102 for indications Of possible upward bias in caPitalvalues and capital gains due to the use Of PCA interest rates and thevalue'of canner-cutters as a certain final addition to the annual MVPS. 111 TABLE 5.7.--Ex ante capital values of an average six year Old milk cowand a first calf da’irygheifer, United States, 1921-'1%Ol/' 1 _ Expected Six year old cow Oalfidairgghgigg£_ General 5 yr. avr. Ex ante Salvage Sell or Year situation net MVP of capital Salvage or keep ' keep for a milk cow value_. va ue in herd milk COW ( ------ $ per head ------- ) (action ($ per head) (action) 1921 12 53 53 keep 77 65 keep 1922 1h 54 #8 keep 82 59 keep 1923 9 55 50 keep 73 61 keep 192h Post World 13 71 50 keep 97 61 keev 1925 war I Farm 12 68 52 keep 92 6% keep 1926‘Depression 11 55 59 3611 77 72 keep 1927 13 M7 67 sell 73 82 sell 1928 26 56 81 sell 108 99 keep .1229___ .___. ——L- 15 Ah ___.85__. 221} ___.7&__ ._lQP ..29Ll__ 1930 1h #1 67 sell 7h 82 sell 1931 General 13 57 96 keep 83 56 keep 1932 Depression 9 #7 33 keep 65 #0 keep _1233__ _ e. __7 __ i6 __ 3L keep __ 6O 36 keep__ 193h _l 5 h6 29 keep 56_— 36 keep 1935 10 57 h2 keep '77 52 keep 1936 9 58 #7 keep g2 28 keep 1937 10 66 51 keep 2 keep 1938 Recovery 19 77 51 keep 115 62 keep 1939 11 73 53 keep 95 6” keep l9h0 11 68 55 keep 90 67 keep 4211 ..1 _17 __ _8_2 _ 611. __pkee _u§__ _19 _eeee_ 19h2 19 93 81 keep 131 99 keep 19h3 World 23 108 103 keep 15h 125 keep l9hh W II 22 121 96 keep 165 118 keep 1945 ar 25 11A 100 keep 16h 122 keep -_12’+6___ __ __ ___1_l+ __ l2 _ll8___ keep ___l55__ 1111+ _lgeep___ 19h7 Post World 29 173 137 keep 231 '167 keep 1988 War II 30 155 167 sell 215 20h keep 19h9 Boom #1 130 166 sell 212 202 keep 1950 Korean #0 '130 178 sell 210 218 sell 1951 Conflict 13 1M3 222 sell .229 271 sell 1952 and 3h 126 219 sell 194 267 sell 1953 Adjustment 37 135 159 8°11 209 195 keep _1_25h___ _ _7_ __3h __ 151 _l3l_+___ keep _21L 161+ JeeL 1955 22 139 131 keep 183 '160 keep 1956 General 2h 131 138 sell 179 168 keep 1957 Growth 31 1H6 149 sell 208 183 keep 1958 and A9 ‘168 189 sell 266 1231 keep 1959 Expansion #0 16% 210 sell 23h 256 sell 1960 35 135 201 sell 205 2H5 sell l/See pages 96 and 102 for explanations of possible upward biases in capital values due to the use of PCA interest rates in discounting and the value of (tanner-cutters as a certain final addition to annual MVPS. EM 81:: year Old milk cow is assumed to have been in production ‘11 years and is expected to have 1 year Of productive life remaining. .3“ first calf dairy heifer is expected to have 3 years of productive life remaining. 112 prices as acquisition costs,1 and the use of the market value of a canner- cutter as a certain final addition to the annual MVPS cause both ex post and ex ante capital values to be overestimated, capital gains to be over- estimated, and capital losses to be underestimated. Milk cow numbers averaged 22.2 million head per year from 1921 to 1929 and estimated ex post capital values increased from $89.30 in 1921 to a period high Of $119.83 in 1925, and then decreased to $79.8h in 1929. Ex post capital values Of milk cows while, on the average, less than expected, averaged $25.h2 more than the $7h.11 average acquisition cost. Estimated annual average capital gains on milk cows were 10% million dollars in 1921, increased to 252 million dollars in 1925, and then decreased to 108 million dollars capital losses in 1929 despite the upward bias in ex post capital values. Table 5.7 indicates that ex ante capital values Of a six year Old milk cow warranted keeping the cow in the herd from 1921 to 1925 while the cow should have been salvaged as a canner-cutter from 1926 to 1929. A first calf dairy heifer could have profitably been kept in the herd in every year from 1921 to 1929 except 1927 and 1929 according to estimated ex ante capital values in Table 5.7. Capital values Of milk cows were generally lower during the general depression of 1930 to 1933 than they were in the 1921 to 1929 period as indicated in Table 5.6. But acquisition costs of milk cows were at record lows, and dairymen received an estimated 98 million dollars annual average capital gains on milk cows per year from 1930 to 1933 although 53 million dollars capital losses were estimated for 1930. 1The market prices Of milk cows were increased 10 per cent to account for the generally younger age and higher quality Of cows being acquired for the producing herd. 113 Estimates Of ex ante capital values in Table 5.7 indicate that dairymen were justified in keeping both six year Old cows and first calf heifers in the producing herd in every year of the general depression except 1930. Ex ante capital values Of milk cows were generally less than ex post capital values during the depression as indicated by the average data in Table 5.6. Apparently there was less culling of milk cows from 1930 to 1933 because milk cow numbers increased and milk production per cow decreased. The result was a decrease in the net marginal value product of an average dairy cow from $15.13 in 1930 to $6.66 in 1933. In 1935 Slaughter values began to increase and dairymen began culling Older and less productive cows from their herds. As a result milk 'production per cow began to increase as did ex poet capital values Of milk cows. By 1938 dairy herds were reduced such that the higher producing cows remaining earned capital values that were $56.60 greater than their $62 acquisition cost. Ex post capital values of milk cows were generally higher than acquisition costs from l93h to 1941 as indicated in Table 5.6, and dairymen received an estimated average 26h million dollars per year in annual average capital gains on milk cows. With capital values of milk cows staying well above acquisition costs going into World War II, milk cow numbers increased to an all-time high of 27.8 million head by 19h5. According to Table 5.7, dairymen were probably keeping Older cows in the herd as well as adding younger stock. Estimated ex post capital values Of milk cows increased from $163.19 in l9h2 to $225.63 in l9h6 compared to an increase in acquisition costs from $99 in 19h2 to $lhh in l9h6. Dairymen received an estimated average 375 million dollars per year in annual average capital gains on milk cows from 11h l9h2 to l9h6 as they increased the number of milk cows an average .22 million head per year. The most significant development in dairying after World War II was the continually decreasing number of milk cows. With dairymen breed- ing up milk producing capacity and culling low producers, milk production per cow increased steadily from h,886 pounds in 19h6 to 7,880 pounds in 1964, with total milk production also increasing. Table 5.7 indicates that dairymen's expectations about capital values of dairy cows were such that only in 19h7 and 1955 did ex ante capital values justify keeping a six year old cow in the herd another year. Also, in 5 of the 1h years from l9h7 to 1960, expectations did not even warrant the keeping of a first calf dairy heifer with an expected four year productive life. Capital gains on milk cows, according to thesis estimates, de- creased from 631 million dollars in 19h7 to 210 million dollars capital losses in 1952 as the acquisition cost of an average milk cow increased from $167 in 19h7 to $267 in 1952. Capital gains increased to hOh million dollars in 1955 and then decreased to 27 million dollars in 1960, the last year for which estimates were made. Substitution of Feed for Milk Cows The substitution of feed for livestock discussed above for beef cows is even more pronounced in milk production. By l955-l96h, the number of milk cows on farms had decreased by 2h per cent from their average 27.10 million head World War II level while corn fed to dairy cattle increased 35 per cent from its annual average 9.05 million tons during World War II. Table 5.8 illustrates the reason for and the result of the substitution of feed for milk cows. 115 TABLE 5.8.--Costs and MPPs of corn fed to dairy cattle relative to prices . and MPPs of milk cows, United States, l921~1960 Cost of one ton of corn relative to the price of the services of one milk cow (--average values for specified time periods---) MPP of one non of corn relative to the MPP of one milk cow Time period 1921-1929 Post World War I 1.96 3.09 Farm Depression 1930'1933 1.59 6.76 General Depression 193h'19ul 2.17 6.h9 Recovery 19h2-19h6 1,70 2.29 World War II 19h7-l95h Post World War II Boom, Korean 1.35 1.6h Conflict and Adjustment 1955-1960 General Growth 1.05 1,3h and Expansion Average data for 1921 to 1929 indicate that the price of one ton of corn could purchase the services of 1.96 milk cows. But one ton of corn could replace 3.09 milk cows with output of milk held constant. Thus in the post World War I farm depression it was profitable to sub- stitute corn for milk cows. Over time, as the price of corn has decreased relative to the acquisition cost of milk cows, the incentive to breed animals that are more efficient at converting feed to milk and to substitute corn for milk cows increased. By 1955-1960, the price of 116 corn relative to the acquisition cost of milk cows had decreased to 1.05 and the MPP of.a ton of corn relative to the MPP of a milk cow had de- creased to 1.3h as corn was substituted for milk cows. But relative MPPs still greater than relative prices indicates the process of substitution will continue. This concludes the analysis of farm produced durable capital except for the summary and conclusions in Chapter VIII. Chapter VI focuses on analyzing employment and earnings of nonfarm produced durable capital. CHAPTER VI NONFARM PRODUCED DURABLE CAPITAL Farmers must base their decisions concerning the purchase of'farm machinery, motor trucks, and buildings on long run expectations about product prices and other important variables. Since estimates of farmers' 5 and 10 year average product price expectations presented in Chapter III were greater than actual 5 and 10 year average product prices received by farmers from 1917 through the general depression and after World War II, even under price support programs, the incentive was present for farmers to overinvest in nonfarm produced durables. Whereas several farm produced durables, although subject to adjust- ment problems, have employment Opportunities in the nonfarm economy, nonfarm produced durables, with the exception of motor-trucks, are specialized to the farm sector. Once a piece of farm machinery is committed to farming, its employment Opportunities in the nonfarm sector are usually limited to scrap iron. The machine will remain in farming, although its rate of use and capital value may be quite low in periods of unrealized expectations, with owners receiving capital losses. The average farmer may buy new or used machines and may pass on potential capital losses to other farmers or machinery dealers by selling used machines. But the farm sector cannot escape potential capital losses in 117 118 farm machinery. Aggregate numbers of farm machines increase only through a flow of new machines from nonfarm industries that more than offsets the number of scrapped machines. In the case of buildings, considerable expense may be involved in clearing buildings that-are no longer in use. Tractors in aggregate farm, corn, and wheat production; grain combines in aggregate farm and wheat production; corn pickers in corn pro- duction; and pickup balers, field forage harvesters, buildings and motor trucks in aggregate farm production are the nonfarm produced durable in- puts studied in the thesis. Nonfarm produced durables show average employment increases during each specified period with the following exceptions: tractors in corn production from 1955 to 1964; tractors in wheat production from l93h to 19hl; and buildings from 1917 to 1920, 1930 to l9h1, and l9h7 to 195k. A combination of factors make it difficult to estimate capital values of farm machinery and buildings. In addition to aggregating across inputs of different age and across farms with different asset and man- agerial restrictions, the ability to change the productive life span of nonfarm durables through changes in rate of use and maintenance are particularly important. Technical relationships such as the substitution of machinery for labor and the complementarity between different types of machines, are not fully-accounted for in estimating elasticities of pro- duction, as constant annual elasticities of production are assured with respect to inputs. This, for reasons given on page 129, should cause the MVPs of labor and land substitutes to be underestimated, at least in the early stages of their introduction. Also, the upward bias in estimates of capital values caused by the use of PCA interest rates (which are lower than the true discount rate) in capitalizing annual MVPs, discussed on 119 page 96 with reSpect to farm produced durables, is also present in the estimates of capital values of nonfarm produced durables. The estimates do not adequately account for these and other problems, and results for nonfarm produced durables are subject to errors. However, when the estimates are interpreted carefully on an ad hoc basis they are con- sistent enough with economic theory and characteristics of the farm sector to warrant certain significant conclusions about the use and earnings of these important inputs. Tractors In Chapter V, MPPs and acquisition costs of tractors in aggregate farm production relative to those of horses and mules indicated that horses and mules can not profitably compete with tractors as a source of farm power. While horses and mules were an important source of power, their ex postcapital values were consistently less than their acquisition costs. In providing a superior source of farm power, tractors have consistently had ex ante and realized ex post capital values greater than acquisition costs and provided capital gains. Tractors are very complementary with plows, harrows, grain drills, and other implements. Thus, general excess of ex post capital values of tractors over their acquisition costs is logically attributable to the productivity of complementary machines being attributed to tractors. The use of PCA interest rates in discounting would also contribute to upward bias in estimated capital values of tractors. Estimates for tractors from Appendix Table B.l are averaged over specified periods in Table 6.1. Average data for specified periods in Table 6.1 illustrate the impact which unrealized expectations have on the number of tractors on 120 TABLE 6.l.--Tractors in aggregate farm production: employment and earnings '”"7 statiStics for specified periods,.United States, 1917-196% ‘f “ Average levels of: Change in , Annual Period Number of the number Acquisition Ex ante Ex post average tractors f t tor cost of a capizz} capitg} ca it on farms oon f::ms S new tractor valu value— gainsé} {-million tractors--) (--dollars per tractor---)(mil. dol;) wifig'52301 .1h .06 966 27,h61 11.626 128.0h 1921-1929 Ezitlw;::: .57 .06 980 5,6u3 3,550 111.17 Depression 1930-1933 D General .99 .05 931 6,6h8 2,187 120.92 epress1on :22:;:3:1 1.31 .08 1,020 1,861 2,897 2u8.71 19u2-19h6 2 18 16 1 66A 5 135 2 592 19h.6o World War II . . , ’ , l9h7-195h Post World War II Boom, 3.u8 .22 1,862 3,59h 2,377 1h7.3h Korean Conflict and Adjustment 1955-19641/ Gagegal Grgwth n.61 .Oh 2,391 2,256 1,918 -h7.10 an xpans on l/Ex post capital values and annual average capital gains are for 1955 only. g/See page 119 for explanations of possible upward biases in the estimates of capital values and capital gains. These biases would cause capital losses to be underestimated. Negative capital gains are capital losses. 121 farms and their earnings. If estimates of tractor capital values are biased upward, as the discussion on page 119 indicates, then capital gains for tractors are overestimated and capital losses underestimated. In World War I, both ex post and ex ante capital values for tractors were greater than acquisition costs. HOwever, the capital gains estimate of 128.04 million dollars per year on tractors in aggregate farm production is undoubtedly much too high. In the post World War I farm depression, ex post capital values decreased more than ex ante capital values, then stayed higher than acquisition costs while annual a average capital gains decreased to an overestimated average of 11h.l7 million dollars. The number of tractors on farms increased an average .06 million tractors per year from 1917 to 1929. During the general depression, ex post capital values were less than ex ante capital values but greater than acquisition costs. Though the excess of ex post capital values over acquisition costs decreased, the increasing number of tractors on farms caused capital gains to increase to an average $120.92 million dollars per year; in 1932, capital gains decreased to a low 1h.6 million dollars. This figure may be overestimated so much that the true value may be negative. In the recovery period of l93h to 19hl, ex ante capital values of tractors were, on the average, less than ex post capital values due to high MVPS during World war II discounted to ex post capital values. Capital gains, however, increased sharply to an overestimated average of 2h8.7l million dollars per year from l93h to l9hl. World War II caused ex ante capital values of tractors to increase sharply to an average $5,h35 from l9hl to l9h6, and the number of tractors on farms increased .16 million tractors per year. Low MVPS in the later years of World 122 War II and after the war discounted to capital values during World War II caused ex post capital values to average only $2,592 per tractor. This, however, was considerably greater than the average $1,66h acquisi- tion cost, and capital gains averaged an overestimated $19h.6 million per year from l9hl to l9h6. After World War II, price support programs, the cold war, and the Korean conflict kept ex ante capital values from decreasing as fast as ex post capital values, when increasing surpluses caused farm prices to decrease following the Korean conflict. Even as estimated, herein, capital gains decreased to an average $1h7.3h million from 19h7 to 1954. In 1955, when the ex post capital value of a tractor in aggregate farm production was $1,918 compared to an ex ante value of $2,256 and an acquisition cost of $2,391, farmers received an estimated $h7.10 million capital losses on tractors on farms. This loss is probably underestimated significantly. Tractors in Corn and Wheat Production By assuming that tractors are perfect complements to land, the number of tractors used in corn and wheat production were estimated. The resulting employment and earnings estimates from Appendix Tables B.25 and B.27 for tractors in corn and wheat production respectively are averaged over specified periods in Tables 6.2 and 6.3. These estimates indicate that ex post and ex ante capital values of tractors in corn and wheat production behave similarly to those of tractors in aggregate farm production, except that capital values of tractors in corn production are generally lower than those in aggregate farmvproduction and capital values of tractors in wheat production are 123 TABLE 6.2.--Tractors in corn production: employment and earnings statistics 4 for specified periods, United States,'19175196h'f Average levels of: Number of Change in Annual tractors the number Acquisition Ex ante Ex post average Period in corn of tractors cost of a capita} capital capita} production in corn new tractor value—- value. gains— production K--million tractors---) IF-dollars per tractor--4) mil. dol.) 1917-1920 World War I .ou .02 966 23,755 8,276 27.1h 1921-1929 Post World War I FSrm .16 .02 980 5,275 2,683 26.56 Depression 1930-1933 General .33 .03 931 6,5723 2,276 l+2.53 Depression 193h-19h1 l9h2-l9h6 world war II .58 .02 1,66h 1,959 2,7)4'h 62.26 19h7-195h Post World War II Boom. .70 .03 1,862 1,075 2,796 60.12 Korean Conflict and Adjustment 1 1955-1961+- General Growth .83 -.01 2,391 2,083 2,099 5.8M and Expansion l/Ex post capital values and annual average-capital gains are for 1955 only. 2/ estimates of capital values and capital gains. See page 119 for explanations of possible upward biases in the 12h TABLE 6.3.--Tractors in wheat production: employment and earnings statistics for specified’periods,.United,States;.1917*196%.w. U Average levels of: Change in Period Numb::oo: the number Acquisition Ex ante Ex post 2:22:18 ra r of tractors cost of a capita} capita} g in Wheat ' h t t t 1 2 a1 e capit } roduction in w ea new rac or va ue—- v u —- gains- p production (---l,000 tractors----)(--dollars per tractor--:7(mil. dol.) 1917'1920 25 10 13 966 h 059 3 177 5 72 World War I ° ’ ’ ' 1921-1929 Post World War I Farm 101.80 13 980 2,728 1,697 7.09 Depression 1930-1933 General 201.60 33 931 h,222 1,321 6.76 Depression 193h-19h1 Recovery 299.30 -7 1,020 1,232 1,135 3.32 1 h2-1 u6 Worfid We: II 225.90 10 1,66u 1,15u 1,530 -2.78 19h7-195h ' Post World War II Boom, 330.h0 0 1,862 2,119 2,109 8.18 Korean Conflict and Adjustment 1955-196W General Growth 337.h0 8 2,391 2,215 2,306 8.76 and Expansion 1 -/Ex post capital values and annual average capital gains are for 1955 only. 2 -/See page 119 for explanations of possible upward biases in the estimates of capital values and capital gains. 125 generally less than those in corn production. Capital values of tractors in corn and wheat production which are less than those of tractors in aggregate farm production emphasize the importance of utilizing the versa- tile farm tractor in several farm enterprises. The lower capital values of tractors in wheat production reflect the larger overproduction of wheat. If it were not for differinggclimate and soil requirements for corn as Opposed to wheat, farmers in the wheat belt would grow more corn ‘ and less wheat. Substitution of Tractors for Labor1 While the total index of inputs committed to farming has not changed much from 1917 to l96h, the composition of farm inputs has changed drastically. The index of farm labor decreased from 223 in 1917 to 79 in 1964 while the index of mechanical power and machinery increased from 28 in 1917 to;101 in 196M; both indices are on a 1957-59 = 100 basis. Acquisition costs and MPPs of tractors in aggregate farm produc- tion relative to the farm wage rate and MPPs of labor for specified periods from 1917 to l96h averaged over specified periods in Table 6.h illustrate both the reason for, and result, of this substitution of tractors for labor on United States farms. Relative prices presented in Table 6.8 indicate that during World War I, the price of 1,000 hours of labor would purchase the serVices of 3 tractors. Relative MPPs, however, indicate that only .20 tractor 1The substitution of tractors for horses is examined in the previous chapter. 2Labor MVPs were estimated using the same techniques employed by the thesis in estimating capital MVPS and are presented in Appendix Table A.5. 126 TABLE 6.h.-eAcquisition costs and MPPs of labor relative to acquisition costs and MPPs of tractors in aggregate farm production, United States _ average vatues far specified -pei1aaa,.£917.-196lx Time Period Cost of 1,000 hours of labor relative to the cost of the services 49f one tractor MPP of 1,000 hours of labor relative to the MPP of the services of one tractor 1917-1920 World War I 1921-1929 Post WOrld War I Farm Depression 1930-1933 General Depression 193h-19h1 Recovery 19h2-19h6 World War II l9h7-l95h Post World War II Boom, Korean Conflict and Adjustment 1955-19611 General Growth and Expansion (--average values for specified time periods---) 3.00 2.83 2.08 1.93 3.1M 3.95 h.01 .20 2.02 6.89 1.50 2.32 services were required to replace 1,000 hours of labor in production with output remaining constant. Thus, it was profitable for farmers to substitute tractors for labor. Since 1917, the farm wage rate has increased relative to the acquisition costs of tractors, as indicated in Table 6.h. As tractors have been substituted for labor, the MPP of labor has been increasing 127 relative to the MPP of tractor services. In the period 1955 to 196h the MPP of 1,000 hours of labor relative to the MPP of a tractor's services in aggregate farm production had increased to 2.32. But the cost of 1,000 hours labor relative to the cost of the services of a tractor had increased to h.01. Thus the profit incentive to substitute tractors for labor remained. Ex post realized capital values of tractors relative to the acquisition cost of tractors, however, indicates that the tendency is not toward more tractors. Rather, the move is toward fewer but larger tractors. Tractor data indicate this tendency is underway with tractors on farms decreasing in number every year since 1961 and horsepower per tractor increasing from 3h.8 in 1961 to h2.2 in 1965. The increased size of tractors is a form of substitution of tractor power for labor, as fewer Operators are required to Operate a given level of tractor horsepower. Prices and MPPs of other farm machines relative to the farm wage rate and MPPs of labor also indicate profitable substitution of nonfarm produced durables for labor. In terms of the economic model presented in Chapter II, "area 5" of the factor-factor diagram in Figure 2.3 on page 30 has Shifted toward zero with reSpect to labor and away from zen) with respect to tractors over the respective time periods considered in Table 6.h. Area 5 has shifted toward zero with respect to labor due both to 1) the higher acquisition and salvage values of labor equating with a lower quantity of labor on a given MVP schedule, and 2) the MVP schedule of labor decreasing as more substitute tractors are employed. Area 5 has shifted away from zero with respect to tractors due to increases in the MVP schedules of tractors from both 1) increased quality and size of tractors and 2) the employment of less tractor-substituting labor. 128 Generally, in each of the specified time periods, the average farm has been organized in area 9 of Figure 2.3, page 30. Labor has been variable downward, and tractors variable upward. Here, the farm wage rate, used to price labor in this thesis, is viewed as the salvage value of labor inasmuch as a wage much closer to the industrial wage rate would have to be paid to attract a net flow of labor into the farm sector. However, during World War I, the general depression, and World War II, it appears that the average farm was organized in area 6 as on the average, the discounted MVP of labor, while certainly less than the industrial wage rate, was greater than the farm wage rate. In 1931 during the depression, labor on farms increased due to large scale unemployment in the nonfarm sector. Data for 1955 indicate that the average farm was organized in area 8 with labor variable downward and tractors economically fixed. Grain Combines Whereas versatile tractors are employed in many different land preparation, planting and harvesting Operations for all crOps, grain combines are specialized in harvest Operations for a few crOps. Mbst of the year combines sit idle. Grain combines are labor saving much more than horse- or mechanical power saving. Though the thesis estimates indicate superficially that the brief annual employment does not justify numbers of combines on farms from a profit maximizing viewpoint for the 1 average farm, these estimates must be interpreted with care. The 1Of course, the thesis estimates do not account fully for such factors as timeliness of Operation, utility gained from owning nice machinery and other subjective factors. 129 estimates from Appendix Table B.3 for combines in aggregate farm pro- duction and from Appendix Table B.28 for combines in wheat production, in Tables 6.5 and 6.6 respectively, are averaged over specified periods. Ex post capital values of combines consistently less than acquisition costs for specified period averages in Tables 6.5 and 6.6 are to be expected from a specification error in the-estimation Jif-factor shares for labor saving machines, such as grain combines. Because of the large range of substitutability between labor saving machines and labor, these machines should be measured in terms of a common denominator such as a "labor equivalent." The MVP of a labor equivalent would then be equal whether it was derived from a combine or from labor. When the two substitute inputs are measured separately, the factor share of the one used is unbiased only when none of the other input is used. In the case of combines gradually being substituted for labor, the factor share and the resulting capital values of combines depend not only on the labor equivalents derived from combines, but also on the labor equivalents pro- vided by labor. For the earlier years of the study when few combines were employed relative to labor, the factor shares were small, and derived MVPs and capital values of combines were underestimated. The downward bias has likely been reduced, as the potential for substituting -combines for labor has tended to be exhausted to a point at which labor and combines are more complementary. In earlier years, this downward bias is thought to have been so great as to more than offset the upward bias in capital values of combines caused by using PCA interest rates in discounting MVPs. This reasoning and these comments also apply to other 'labor saving machines discussed later in the chapter. 130 TABLE 6.5.--Grain combines in aggregate farm production: earnings statistics for specified periods,rUnitedéstanggf‘1917L196h employment and Average levels of: =Ghange in Pe iod Numbe: Of the number Acquisition Ex ante Ex post iszgile r gra n gafggrain cost of'a capit§}‘capita}' ' 3 combines combines new combine value— 'valueg-rcapi‘ farms gains- on on farms (--l,000.combines--) (--dollars per-combine4:)(mil. dol.) 191 -l 20 1921-1929 Post World war 1 Farm 32.20 6 1,729 2,761 1,737 +.05 Depression 1930‘1933 General 80.50 11 1,6h6 3,009 1,510 ~l.3h Depression 1931-1911 Recovery 160-50 16 1,719 1,939 1,319 -6.h2 19h2-1 A6 World Wag ‘11 31700 39 1.959 1.526 1,851+ -3. 13 19h7-195h Post WOrld War II 300m, .7u0.80 68 3,122 2,950 2,710 -37.73 Korean Conflict and Adjustment 1955-196W General Growth 1,020.50 5 h,l93 3,292 2,772 -7h.22 and Expansion 1955 only. lJEx post capital values and annual average capital gains are for g/See page 129 for possible doanard bias in estimates of capital values and upward bias in estimates of capital losses. TABLE 6.6.--Grain Combines in wheat production: 131 1.statistic3'for specified periods, United States,‘l9l7-196h employment and earnings Average levels of: Change in Number Of the number Acquisition Ex ante Ex post Annual d combines of grain cost of a ca it capit average Perio in wheat . p 2} 2} capital combines new combine value- value- production gains. in wheat production ‘ ?--l,000 combines---) (-dollars per combine--)(mil. dol.)— 3 1917-1920 3 1921-1929 Post World War I Farm 5.80 .95 1,729 1,520 1,h01 .18 Depression 1930-1933 General 1h.00 2.15 1,6h6 2,517 1,350 -.h3 Depression 1931-1911 . Recovery 28.00 2.17 1,719 1,536 1,255 -1.32 19u2-19h6 ' World War II 55.80 5.u6 1,959 1,201 1,619 1.85 1917-1951 Post World War II Boom, 111.30 10.00 3,1h2 2,026 2,529 -7.39 Korean Conflict and Adjustment 1 1955-196W General Growth 167.00 2.80 h,193 2,59h 2,800 -10.91 and Expansion l/Ex post capital values and annual average capital gains are for 1955 only. g/See page 129 for possible downward bias in estimates of capital values and upward bias in estimates of capital losses. 132 Only during World Wars I and II, for grain combines in aggregate farm production, and World War II, for grain combines in wheat production, were ex post capital values of grain combines estimated' to be greater than ex ante capital values. The estimates, thought too low for reasons given above, indicate that only during World War I and the post World War I farm depression (for combines in aggregate farm produc— tion) and during World War I (for combines in wheat production) did ex post capital values cover acquisition costs. Careful interpretation indicates, however, that these estimates of capital values of combines which are consistently less than acquisition costs for Specified period averages in Tables 6.5 and 6.6 do not necessarily indicate irrationality on the part of farmers: 1) With the exception of the two world war periods, the ex ante capital estimates were such that the true ex ante capital values could easily have been large enough to cover acquisition costs. 2) From 19h6 to 19h8 when combine numbers increased sharply, realized ex post capital values of combines in aggregate farm production were estimated to be greater than acquisition costs. Large commercial farms and custom operators could employ combines on enough acres that their realized cap- italvalues are sufficiently larger than those enjoyed by the average farm, making the purchase of new machines from the nonfarm sector profit- able while capitalvalues of combines on average and below average farms do not cover acquisition costs. Given the apparent downward bias in ex post capital values caused by the input specification bias in measuring factor shares of good sub- stitutes, interpretation of estimates for combines indicate the following. II-d 133 Ex ante capital values during World War I are underestimated and were approximately equal to acquisition costs. With the slight increase in the number of combines on farms, ex post capital values exceeded acquisition costs during World War I, and farmers received some capital gains. In the 1921-1929 period, average product price expectations were not realized, ex ante capital values on grain combines exceeded acquisi- tion costs, and the number of1combines on farms increased at an average L rate of 6 thousand machines per year. Ex post capital values fell short , of those expected, but were slightly higher than acquisition costs, with 4 small capital gains resulting. Actual product prices continued to lag expected product prices during the general depression from 1930 to 1933. Ex ante capital values exceeded acquisition costs and the average rate of increase in the number of combines on farms increased to 11 thousand machines per year. Ex post capital values may have fallen short of acquisition costs by 1932 with some capital losses resulting. As the economy recovered from the depression, expected capital values exceeded acquisition costs and the number of combines on farms increased an average of 16 thousand machines per year. Ex post capital values fell short of expectations, and farmers received some capital losses on combines that were probably less than those estimated. During World War II, with the strong substitution of machines for labor, both the ex ante and ex post capital values of combines are underestimated. The number of combines on farms increased sharply, and ex post capital values were probably sufficient to cover acquisition costs. The estimated capital losses may actually have been zero or possibly small positive values. 1311 Following World War II, farmers increased the number of combines sharply in response to ex ante present values that, if corrected for apparent downward bias, likely exceeded acquisition costs. Actual product prices received by farmers, however, fell short of expected product prices, and ex post capital values of combines probably failed to cover acquisition costs. This situation prevailed from 19h7 to 1955, the last year for which estimates of ex post capital values were possible. Some underestimation of capital values of combines since World War II may have occurred due to the input specification bias. By the early 1950's, labor and combines probably enjoyed more of a complementary relationship and the capital loss estimates for grain combines since World War II appear more reasonable. Corn Pickers Corn producers consistently increased investments in corn pickers from 1917 to the present from an average 7 thousand corn pickers on farms during World War I to an average of 772.3 thousand pickers on farms in 1955-196h. (See Appendix Table B.26 and Table 6.7.) Hewever, the large increases in numbers of corn pickers on farms began to occur during WOrld War II. Table 6.7 also illustrates that viable commercial farms or custom Operators can profitably purchase new corn pickers from the nonfanm industry. With no employment Opportunities in the nonfarm sector, corn pickers, once purchased, remain in farming. In 1920, 1921, 1931, 1937 and 19h9, the estimated ex ante capital values of corn pickers were larger than acquisition costs. TABLE 6. 7. --Corn pickers: 135 employment and earnings statistics for speci- fied periods, United States, 1917-196h Average levels of: Change in Number Acquisition Annual Period of corn th; number cost of Ex :zte Ex EZSt average pickers 0 corn a new corn cap 2} cap 2} capita} on farms pickers picker valuk valuk gains— on farms (-1,000 machines-é) (--dollars per machine--)(mil. dol.) wi§i§'$2301 7.00 2.00 666 826 531 -.09 1921-1929 agitlwgzig 30.00 2.00 673 56h 562 -.31 Depression 1930-1933 General 59.00 5.50 6M3 93A 518 -.76 Depression :23:;:2:1 95.50 6.50 670 608 A89 -l.7u Weiggéaighgl 157.00 16.60 762 u18 681 -1.17 l9h7-195h Post World War II Boom, 170.10 57.12 1,227 833 1,027 -10.96 Korean Conflict and Adjustment 1955-196hl/ . General Growth 772.30 17.78 1,630 1,097 1,097 -19.lh and Expansion l/Ex post capital values and annual average capital gains are for '1955 only. g/See page 129 for possible downward bias in estimates of capital values and upward bias in estimates of capital'losses. 136 Estimated ex post capital values consistently less than acquisition costs, except for l9h6 and 19h7, resulted in corn producers receiving capital losses on corn pickers ranging frOm a low of .06 million dollars in 1917 to a high of 19.1h million dollars in 1955. Hewever, when the estimates of capital values are interpreted in view of the specification bias for substitutes discussed on page 129, it appears that: 1) corn pickers were employed at levels approximately equating acquisition costs with ex post capital values up to, and including most of World War II; 2) in the latter part of World War II and the early post World War II period, ex ante capital values lagged ex post capital values, and ex post capital values were sufficient to cover or exceed acquisition costs with small capital gains resulting; 3) after World War II, ex post capital values of corn pickers were slightly less than acquisition costs, with some overcommitment of corn pickers and capital losses following. Pickup Balers and Field Forage Harvesters Pickup balers and field forage harvesters represent recent advances in farm machinery technology. While the modern farm tractor maintains a design and method of Operation roughly similar to the tractor of the 1920’s, pickup balers and field forage harvesters did not begin to realize their potential until shortly before and after World War II, with important improvements in design and function still forthcoming. Data on pickup balers are available beginning.in l9h2 and on field forage harvesters in 19h5. Thesis estimates for pickup balers from Appendix Table B.h are averaged over specified periods in Table 6.8, and estimates for field forage harvesters from Appendix Table B.5 are averaged over specified periods in Table 6.9. 137 TABLE 6.8.--Pickup balers in aggregate farm production: , _ earnings statistics for specified periods, United:stameg;7[9&331964i employment and Average leve 18 of : Change in . Number of Acquisition Annual Period pickup Ege number cost of a E: :zte E: :38: average balers p c up new pickup p 2} p 2} capita} balers value— 'value- . 2 on farms baler gains- on farms (--l,000 machines--) (--dollars per machine--)(mil. dol.) W62128W286II 40.30 8 1,260 2,131 6,186 20.33 1947-1954 Post WOrld War II Boom, 220.50 43 1,994 10,643 5,676 53.12 Korean Conflict and Adjustment 1955-19641/ General Growth 641.30 38 2,656 3,382 2,892 729.23 and Expansion .1./ Ex post capital values and annual average capital gains are for 1955 only. g-/See page 138 for possible biases in the estimates. TABLE 6.9.--Field forage harvesters in aggregate farm production: ment and‘earnings statistics for specified periods,‘United States,'1947r‘ employ- ,1964 Average levels of: Change in . Number of the number Acquisition Ex ante Ex post Annual Period 3 cost of average harvesters of capita capit a new 5 capital on farms harvesters value—- value— 2 harvester gains_. on farms (--l,000 machines--4) (--dollars per machine--é)(mil. dol:) 1947-1954 Post World War II Boom, Korean Conflict and Adjustment 1955-19611l/ General Growth and Expansion 95.60 278.00 19 17 1,558 2.075 90,445 4,761 31,119 4,149 159.16 48.45 l/Ex post capital values and annual average capital gains are for 1955 only. gE-ISee page 138 for possible biases in the estimates. 138 The specification bias for substitute inputs discussed previously with respect to labor and other machinery inputs was evidently not present to a significant degree in the cases of pickup balers and field forage harvesters. Labor has enjoyed a more complementary relationship with machinery in recent periods in which data are available on pickup balers and field forage harvesters. Estimates of capital values for pickup balers and field forage harvesters are overestimated rather than under- estimated. A very low .09 estimated adjustment coefficient for field forage harvesters causes the derived MVPS, capital values, and capital gains to be high. Use of PCA interest rates also caused the capital values of both pickup balers and field forage harvesters to be over- estimated. Even after admitting these sources of large upward bias, the estimates still indicate that despite significant increases in the number of pickup balers since 1943 and field forage harvesters since 1947, these machines have had ex post capital values exceeding acquisition costs and resulting capital gains for their owners through 1955. According to estimates of prices and MPPs of labor relative to those of farm machines, similar to those estimated in Table 6.4 for tractors, pickup balers and field forage harvesters, as well as grain combines and corn pickers, have been profitable substitutes for labor. Buildings In the rapidly changing structure of American agriculture, there is perhaps no better example of the occurrence of economic fixity than the case of farm buildings. Methods of depreciation and measurement pro- vide only rough estimates of the value of buildings on farms. Further, part of the buildings on farms may be abandoned or used as nonfarm 139 dwellings or enterprises, although remaining in the estimated stock of farm buildings. Because buildings may last an indefinite period, the techniques used in this thesis are not capable of yielding good estimates of ex post MVPs, capital values, and capital gains and losses. As a 10 year planning horizon is reasonable, ex ante 10 year average MVPS and capital values may be reasonable indications of the profitability of investments in buildings. Unlike the case for shorter lived investments, the PCA interest rate is not considered to be too low a discount rate for use in obtaining ex ante capital values of investments in farm buildings. Thesis estimates of elasticities of production, expected MVPs, and ex ante capital values of investments in farm buildings from Appendix Table B.7 are averaged over specified periods in Table 6.10. In response to favorable farm prices during World War I, farmers increased their investment in farm buildings. The value of farm buildings averaged 5.53 billion in constant 1910-1914 dollars from 1917 to 1920, increasing an average .09 billion in constant 1910-1914 dollars per year. The ex ante capital value of a dollar invested in buildings averaged $1.20 during this World War I period which is consistent with this expansion in investment.. According to Lerohl's estimates, expected 10 year average product prices did not decrease in this period as fast as actual product prices. 0n the basis of estimated ex ante capital values of a dollar invested in farm buildings of $1.80 per year from 1921 to 1929, farmers increased investments in farm buildings. During the depression, from 1930 to 1933, farmers decreased investments in farm buildings an estimated .226 billion TABLE 6.10.--Bui1dings in aggregate farm production: ;1ngs.statistics.for.specified periods,~United:States,'1917;1964 140 employment and earn- Average levels of: Constant Change in Period constant Ex ante 1919;:fiit 2:11ar 1910-1914 dollar capital farm buildin S value of value 3 farm buildings ( ---------- million dollars ------ ----4) ($ per $) 1 1 -l 20 WOEIZ Wir I 5,528 +94.67 1.20 1921-1929 Post World War I 7,303 256.33 1.80 Farm Depression 1930-1933 . General Depression 8,169 '226'00 2’68 1934-1941 _ Recovery 7,131 47-12 .56 1942-1946 World War II 7,159 246.60 ‘A3 1947-1954 Post World War II Boom, Korean 6,821 -l3l.l2 .74 Conflict and Adjustment 1955-1964 General Growth 6,867 34.80 .53 and Expansion dollars per year. Due to unreasonably large estimates of production elasticities from 1930 to 1932, the estimated ex ante capital values of investments in farm buildings are unreasonably high and are inconsistent with a decrease in investment. 141 Ex ante capital values of investments in farm buildings seldom justified investments after the general depression. Investments in terms of constant 1910-1914 dollars have not been large, with averages for specified periods in Table 6.10 being negative in the recovery period of 1934 to 1941 and in the 1947 to 1954 period, but positive during World War II and from 1955 to 1964. Only in 1938, 1944, 1950, 1952 and 1954 was the ex ante capital value of a dollar invested in farm buildings greater than one dollar. In each of these years, except 1950, there was an increase in the constant dollar value of buildings on farms. Motor Trucks Farm trucks are nonfarm produced durable capital not specialized to farming. Farmers may purchase new or used trucks from the nonfarm sector and if farm earnings drOp below used truck prices, they can sell used trucks in the nonfarm sector. Versatile motor trucks are used in almost all farm enterprises and in a variety of different Operations within many enterprises. Thesis estimates for motor trucks in aggregate farm production from Appendix Table B.2 are averaged over specified time periods in Table 6.11. From 1931 through 1939, in 1947, and after 1948 the ex post capital value of a new motor truck was less than its acquisition cost. But in 1931, 1932, 1934, 1936, 1938, 1949 and from 1952 to 1955, the ex ante capital value of a new truck exceeded its acquisition cost. This leaves the years 1933, 1935, 1937, 1939, 1947, 1950, 1951, and after 1955 in which new trucks were not profitable either from an ex post-or an ex ante viewpoint according to estimated capital values of new trucks. TABLE 6.112rrMbtor trucks in aggregate farm production: earning statistics for specified periods,:United:States,1917:1964 142 employmenteand Averaggglevels of: Period Number of tgzazfigbig Acquisition Ex ante Ex post trucks 'of trucks cost of a 'capital capital on farms on farms new truck value value (----l,000 trucks----) (------dollars per truck ------ ) 1917-1920 world War I 99'8 26 1:042 1-821 1,723 1921-1929 Post World War I Farm 891-30 78 831 2,223 1,068 Depression 1930-1933 DGeneral. 898.8 6 772 1,802 645 epress on 1 4-1 1 Rigovegg 985°3 729 827 1:0h3 757 194221946 ,, World War II 1,373.0 ,91 1,231 951 1,280 1947-1954 Post World K'War I: 321?, 2,221.5 133 1,900 1,951 1,720 orean on ct and Adjustment 19558-19641/ General Growth 2,806.8 31 2,413 71,912 1,647 land Expansion l/Ex post capital values are for 1955 only. Table 6.12 indicates that assuming a used truck remained productive four years, its ex ante capital value would cover its acquisition cost in all of the years in which new trucks appeared unprofitable except 1935, 1939, 1951, 1958 and 1961. In 1935, the number of trucks on farms only increased 143 TABLE 6.12.--Ex ante capital values and acquisition costs of used motor ’ trucks, United States, 191721964 ' Acquisition Acquisition cost of a Ex ante capital cost of a Ex ante capital Year used motor value of:a Year usedeotor value of a truck used motor truck truck used motor truck ( ----- dollars per truck----;) (-----dollars per truck---4:) 1941 298 186 1917 233 419 1942 316 127 1918 298 768 1943 322 1, 136 1919 304 928 1944 334 699 1920 316 1,463 1945 334 405 1921 304 5,041 1946 346 408 1922 275 823 1947 394 555 192 3 280 339 1948 460 1, 074 1924 298 499 1949 519 1,396 1925 292 493 1950 531 786 1926 292 899 1951 573 518 1927 298 618 1952 591 1,008 1928 292 700 1953 597 1,002 1929 292 338 1954L 597 1,013 1930 292 1,287 1955 597 1,042 1931 286 1,604 1956 621 948 1932 275 548 1957 657 1.071 1933 263 87 1958 680 505 1934 275 471 1959 710 *1,130 1935 280 113 1960 728 853 1936 286 502 1961 746 578 1937 292 334 1962 764 941 1938 304 1,206 1963 776 826 1939 298 70 1964 794 1,222 1940 292 1,056 2 per cent and in 1939 the number of trucks on farms decreased by 2 per cent. In 1951 the ex ante capital value of a used truck would have covered its acquisition cost if its expected life were extended to 5 years and in 1958 and 1961 if its expected life were extended to 6 years. Thus, while thesis estimates for farm trucks are crude, they are generally consistent with changes in the number of trucks on farms, especially when . 144 Lerohl's product price expectations are employed to estimate ex ante capital vadues. Ex post capital values of used trucks were not estimated because the proportion of farm trucks purchased as used trucks each year is not known. And since farmers often purchase used trucks, it is not possible to use thesis techniques in estimating capital gains and losses for farm trucks. Table 6.11 illustrates the impact that World War I, the general depression, World War II, and the decade from 1955 to 1964 (with mounting farm surpluses and gradually decreasing farm prices) had on capital values and employment of motor trucks in farm production. During World War I, ex ante capital values of new trucks were greater than acquisition costs and the number of trucks on farms increased an average 26 thousand trucks per year from 1917 to 1920. In the general depression from 1930 to 1933, ex ante capital values of new trucks de- creased but remained greater than acquisition costs. The rate of increase in trucks on farms decreased to 6 thousand trucks per year with total truck numbers actually decreasing in 1932 and 1933. World War II caused the ex post farm capital value of trucks to exceed acquisition costs although the ex ante capital values averaged less than acquisition costs. Inconsistent with this price relationship, the number of trucks on farms increased an average 91 thousand trucks per year. Since World War II, mounting farm surpluses and the resulting lower farm prices have caused ex post capital values of farm trucks to fall short of ex ante capital values and acquisition costs. From 1947 to 1954, the $1,720 average ex post capital value of.a new truck in aggregate farm production was $231 less than the average ex ante capital value and $180 less than the average 145 acquisition cost. Increases in the number of motor trucks on farms have continually decreased from 1948 to 1964 such that the stock of motor trucks on farms is stabilizing. This concludes the analysis of nonfarm produced durables except for the summary and conclusions found in Chapter VIII. Marginal value products and employment of expendables are discussed in Chapter VII. CHAPTER VII EXPENDABLE FARM CAPITAL The term expendable as used in this thesis refers to those farm and nonfarm produced capital inputs that are generally "used up" in one production period when committed to the production process. Some expendables are specialized to farm production while others have employ- ment Opportunities in the nonfarm sector. Expendables may also be stratified according to whether they are farm produced or nonfarm produced, and whether they are storable or nonstorable. There are two important differences in the economics of farm produced as Opposed to nonfarm produced expendables. First, prices of farm produced expendables fluctuate rather closely with prices received for farm products, whereas, prices of nonfarm produced expendables tend to be independent of farm prices. This tends to lessen the occurrence of rents for farm produced expendables. Second, nonfarm produced expendables are typically purchased as they are used, while the use of farm produced expendables is more dependent upon the quantity produced. This second consideration makes farm produced expendables more susceptible to rents than nonfarm produced expendables and overshadows the lessening of rents on farm produced expendables due to their acquisition costs fluctuating with product prices. This observation is substantiated by the generally higher estimated adjustment coefficients of nonfarm 146 147 produced expendables (simple average of .90) than of farm produced expendables (simple average of .49). It is also supported by more widely fluctuating estimates of rents, positive and negative, on farm produced expendables. Nonstorable expendables are not subject to economic fixity inasmuch as their services are either used or lost. The flows of service from some kinds of durable capital or family labor are of this nature. None of the inputs studied in this thesis fit this definition exactly, but some of the livestock inputs come rather close. Feeder pigs, for example, must be fed in a relatively short period after they are weaned or they lose much of their potential as feeder pigs. Storable expendables are more susceptible to economic fixity and rents, especially when they are also specialized to the farm sector such as in the case of hay. The simple average of .55 for the estimated adjustment coefficients for studied expendables indicates farmers' ability to adjust their use rapidly in response to economic change. When estimated adjusunent coefficients are high, the estimated MVPS, by the nature of the calcula- tion, must be close to acquisition costs. As shall be seen later, not all estimated adjustment coefficients for expendables are large. Durable inputs were found in Chapters V and VI to be very sus- ceptible to adjustment problems and resulting capital gains and losses. But according to thesis results, farmers apparently adjust the produc- tivity of fixed durables by (1) feeding fixed livestock close to profit maximizing (or loss minimizing) quantities of feed and (2) adjusting the rate of use of machinery by using close to profit maximizing (or loss minimizing) quantities of expendable complements such as gasoline. In 148 short, they carry out the loss minimizing adjustments to the edge of area 5 as discussed in Chapter II on theory. Estimated MVPS of most studied expendables are generally quite close to acquisition costs. There is a slight, but rather consistent excess of acquisition costs over ex post MVPs which are discounted for six months. This excess, and the resulting small to moderate negative rents estimated for many expendables may be due to: 1) the failure of farmers to discount expected MVPs of expendable inputs in making production decisions,1 or 2) the practice follOwed in the thesis of using market values, which include marketing charges, as acquisition costs of expend- ables which are used on the farm or in the locality where produced. Estimates for some expendables do yield MVPs that fluctuate around acquisition costs and are apparently subject to positive and nega- tive rents. For these inputs, it appears to be a combination of (1) unreasonably low adjustment coefficients and (2) the lack of available data on acquisition costs versus salvage values which forced the use of a single price. Expendables such as hay have widely different acquisi- tion costs and salvage values and are subject to economic fixity. The finding of rents for some expendables may also indicate that expendables are under- or overcommitted with complementary durables which were out of adjustment. Differences in the relative movements of acquisition costs, discounted expected MVPs, and discounted ex post MVPs of expendables 1MVPs of expendables are discounted for six months, which is a reasonable estimate of the time farmers have expendable capital tied up in the production cycle. The PCA interest rate is used in discounting, and whether or not it is the true discount rate makes little difference in the estimates. 149 over respective time periods were small. Average levels of estimated MVPs and rents, over specified time periods, for expendables, similar to the data presented in tabular form in the previous two chapters for durables, would not add significantly to the discussion. Rather, the-estimates for expendables, from Appendix B, are interpreted in summary fashion. Farm Produced Expendables Steers, heifers, corn and hay in beef production; heifers, corn and hay in milk production; sows, feeder pigs, and corn in hog production; and chickens and corn in poultry production are the farm produced expend- ables studied in the thesis. Hay is specialized to the farm-sector and thus its nonfarm Opportunity cost is zero. The other farm produced expendables studied have Opportunities in the nonfarm and export markets. While thesis estimates indicate that most farm produced expendables are quite variable, fluctuating rents, both positive and negative, estimated for corn and hay fed to dairy cows, hogs and poultry indicate that corn and hay are often economically fixed within their production cycle. This tendency of farm produced expendables to be variable tends to shift the incidence of price changes on rents and capital values back to the durable inputs with widely different acquisition costs and salvage values-~mainly land, buildings, machinery, operator and family labor, and such farm produced durables as orchards. Farm Produced Expendables in Beef Production Steers and Beef Heifers.é-Estimates for steers and heifers in beef production from Appendix Tables B.12 and B.13 respectively indicate that 150 these inputs are subject to fewer adjustment problems than are beef cows. The estimates of discounted MVPs for these inputs were nearly equated with acquisition costs from 1917 to 1964. Numbers of steers fluctuate slightly over the cattle numbers cycle and trend upward as the demand for beef increases over time. But the depression of 1930 to 1933, World War II, the post World War II boom, and the post Korean conflict slump in farm prices caused major fluctuations in steer prices and MVPs. Ex post dis-MVPs of steers decreased from $82.26 per head in 1928 to $26.12 per head in 1933 and then increased to $249.71 in 1951 during the Korean conflict. In the decade from 1955 to 1964, acquisition costs and MVPS of steers were generally lower than those of the Korean conflict peak, fluctuated somewhat and were higher when more corn was fed to fewer steers. Yearling beef heifers have potentials as (1) feeder livestock, (2) brood cows, or (3) slaughter animals. Cattlemen adjust the number of beef heifers among these alternative employment possibilities according to the expected MVPs and capital values in each alternative. Thesis estimates of MVPs and consequent capital values for beef heifers were very similar to those for steers, except that heifer acquisition costs and dis-MVPs were slightly less than those for-steers. Corn Fed to Beef Cattle.--The estimates in Appendix Table 3.14 indicate that cattlemen are successful in feeding close to Optimal levels of corn to beef cattle. World War I caused acquisition costs and dis-MVPS of corn fed to beef cattle to increase. But ex post dis-MVPS of corn fed to beef cattle dropped from $52.91 per ton in 1919 to $19.29 in 1921 as the end of hostilities brought falling farm product prices. Corn fed to 151 beef cattle began to decrease and ex post dideVPs rose to $35.07 per ton in 1924 compared to an acquisition cost-of $37.86. With low corn and livestock prices in the general depression from 1930 to 1933, the number of cattle and calves on farms increased, beef cattle were fed more corn, and ex post dis-MVPs of corn fed to beef cattle decreased from $20.43 in 1930 to $11.45 in 1931. After some recovery adjustments following the depression, estimated ex post dis-MPPs of corn fed to beef cattle increased from $17.47 per ton in 1938 to $77.44 in 1947, keeping within 1 per cent of acquisition costs, on the-average, during World war II. After World war II, MVPB end acquisition costs of corn fed to beef cattle went through an adjustment period from 1946 to 1951 and then began a slow decrease with estimated ex post dis-MVPS decreasing from $57.63 per ton in 1951 to $38.09 in 1963. From 1947 to 1964, ex post dis-MVPs of corn fed to beef cattle on the average kept within 3 per cent -of acquisition cost. As acquisition and salvage values for corn on farms where corn is produced differ mainly by shelling and hauling costs, these Ismall percentage differentials were to be expected and are consistent with the theory presented in Chapter II. As much corn is fed to beef on the farm which produced the corn, the MVP of corn-should be expected to. fall between off-farm acquisition costs and salvage values. <§§yfiFed to Beef_Cattle.--Thesis~estimates for hay fed to beef cattle from Appendix Table B.15 indicate that acquisition costs, MVPs, ,and quantities of hay-fed to beef-cattle behave similarly to those of corn fed to beef cattle from 1917 to§1964with.dis-MVP8 of hay fluctuating arsund-the price of hay more than in the case of corn. It is difficult 152 to make valid comparison between MVPs and acquisition costs and hence to compute economic rents for hay as (1) published hay price data tend to be near off-farm acquisition costs in years of short hay-crOps and nearer off-farm salvage values in years of long crOps and (2) data on off-farm acquisition costs and salvage values are unavailable. Whereas rents on corn fed to beef cattle were usually negative and of a magnitude compar- able to discounting or marketing costs, estimated rents for hay fed to beef cattle fluctuated widely and were both negative and positive as the theory in Chapter II would imply given the poor available data on hay prices. This indicates that MVPs of hay fed to beef-cattle were more dependent on quantities of hay produced and cattle prices than in the case of oorn where the MVPs are rather closely bound by off-farm acquisition costs and salvage values. Farm Produced Expendables in Milk Production Although a slight upward trend in output of dairy products from 1917 to 1964 coincides with an upward trend in employment, acquisition costs and MVPs.of farm produced expendables used in producing milk, considerable fluctuations in prices received for dairy products due to World War I, the depression and World War II have caused shorter run fluctuations in employment, acquisition costs, MVPS and economic rents of inputs in milk production. Dairy Heifers.--Whereas milk cows were found in Chapter V to be subject to considerable economic fixity, dairy heifers, while not actually-expendable inputs, have better Opportunities as slaughter 'animals, are not committed toea producing cow herd, and are not subject to prolonged economic fixity as heifers in milk production. Ex post 153 dis-MVPs of dairy heifers are~a1ternatély lower and then higher than acquisition costs according to thesis estimates in Appendix Table B.17. Acquisition costs were estimated as 80 per cent of the market value of a dairy cow. As the market value of a dairy cow can be presumed to be nearer acquisition costs when herds are expanding and nearer salvage values when they are contracting, relationships between MVPs and market prices must be interpreted with great care. During the post World War I farm depression, nondiscounted ex post MVPS of dairy heifers were less than 80 per cent of dairy cow market values in 1921, 1922, 1923, 1925 and 1929, but were greater in1924, 1926, 1927 and 1928. On the average, ex post dis-MVPs-of dairy heifers were 92 per cent of market values and dairymen received an estimated negative 17.85 million dollars rent per year on dairy heifers in this period with respect to market values. The use of market prices in lieu of acquisition costs and salvage values causes positive rents to be over- estimated and negative rents to be underestimated (that is to be estimated as less negative than they were). The general economic collapse triggered in 1929 and the resulting drop in milk prices resulted inxa fall of ex post dis-MVPS from $95.76 in 1928 to $18.07 in 1934. With dis-MVPS averaging 86 per cent of market prices and still less of acquisition costs, an average 5.02 million head of dairy heifers per year suffered an average of over 26.92 million dollars of negative rents per year from 1930 to 1933. In the recovery period of 1934 to 1941, ex post dis-MVPS of dairy heifers were on the average 3 per cent greater than market prices. When milk prices increased rapidly in the early part of World War II, ex post dis-MVPs of dairy heifers moved above market prices. However, milk 154 prices leveled off in 1944, and ex post dis-MVPswof heifers drOpped below market prices. 0n the average, ex post dis-MVPs of dairy heifers were 97 per-cent of market prices from 1942 to 1946. Dairymen received more than an estimated average 21.4 million dollars negative rent per year on dairy heifers in this period. Ex post dis-MVPS of dairy heifers continued to increase after WOrld War II as did market prices of dairy heifers and prices received by farmers for dairy products. Reaching a peak during the KOrean conflict in 1951, ex post dis-MVPS of dairy heifers were 112 per cent of their $217 market price. Then, prices received by farmers for dairy products decreased and ex post dis-MVPS of dairy heifers fell to 83 per cent of their $141 market price in 1954. As both expected and ex post dis-MVPS of dairy heifers were generally lower than market prices after 1955, the number of dairy heifers on farms decreased from 5,786 thousand head in 1955 to 4,558 thousand head in 1964. In 1964, with the $148 expected dis-MVP $35 less than the market prices for dairy heifers, there was incentive for dairymen to further reduce the number of dairy heifers on farms. In this period negative economic rents were at least 144.7 million dollars. Corn Fed to Dairy Catglg.--Estimates of the elasticities of pro- duction and MVPs for corn-and hay fed to dairy cattle-are less stable than those for beef cattle. Rather high estimated adjustment coefficients (.81 for corn and .62 for hay) for these inputs in beef production in contrast to low-adjustment-coefficients for these inputs in milk production are the main cause of the more stable results for-corn-and hay fed to beef cattle. Estimated adjustment coefficients for corn and hay in milk 155 production were .17 and .24 respectively. Inasmuch as fluctuations in milk prices or input employment do not substantiate the strong fluctua- tions in MVPS of corn and hay fed to dairy cattle, the adjustment coefficients for these inputs are probably underestimated and the fluctua- tions in elasticities of production and MVPs overestimated. The technical advances which increased the productive capacity of cows plus aggregation problems involving kind and size of dairy farms as well as cohorts of different age groups of cows of steadily increasing capacity probably reduced the reliability of the adjustment coefficients for corn and hay fed to dairy cows. For this reason, average levels of MVPs are more realistic than estimates for individual years. Thesis estimates for corn fed to dairy cattle from Appendix Table B.18 indicate that generally dairymen fed close to profit maximizing (or loss minimizing) levels of corn during World War I and after World War II up to 1954. But generally, based on averages, dairymen underutilized corn from 1921 to 1941, and from 1955 to 1964. Hay Fed to Dairy Cattlé.r-Estimates fOr hay3fed”t06dairy cattle: from Appendix Table B.19 generally indicate underutilization and positive rents relative to market prices for hay fed to dairy cattle prior to the general depression of 1930 to 1933, during the recovery from 1934 to 1941, and after World War II. During the general depression and World War II, hay was overutilized in milk production and negative rents relative to market prices resulted. As market prices for hay can be presumed to be nearer off-farm acquisition costs in short hay-crop years and near salvage values in long crOp years, economic rents relative to acquisition costs are less positive than with respect to market prices in favorable years; conversely they-are even more negative in unfavorable years. 156 It is interesting to note that while thesis estimates for individual inputs in milk production were estimated independently, the conclusion reached after studying milk cows--that it was profitable to substitute feed for cows--is substantiated by the estimates for corn and hay fed to dairy animals. It has been profitable to increase the total quantities of corn and hay fed to dairy cows although the number of milk cows on farms has been decreasing since 1945. Farm Produced Expendables in Hog Production The general level of MVPs of sows, feeder pigs, and corn fed to hogs rises and falls with major economic disturbances such as wars and depressions, but they also fluctuate from year to year as farmers' adjust- ments in hog numbers and feed inputs lag hog prices. Sow, feeder pig and corn MVPs, dependent on both the level of inputs and prices received for hogs, sometimes exceed and at other times are less than acquisition costs.1 Hog production cycles with inputs and their MVPs tend to behave in the following fashion. When hog numbers are on the increase, farmers are having more sows bred. With fewer hogs on feed, the quantity and MVP of corn fed to hogs decrease while the MVPs of sows increase. As the larger numbers of pigs.are placed on feed, the quantity and MVP of corn fed to hogs increase and the MVPS-0f sows decrease. When the fed hogs, including sows, begin flowing to market, the quantity of corn fed and number of hogs on farms decrease as well as the MVP of feeder pigs. During 1917 and 1918, more sows were bred in response to favorable price expectations for hogs. Quantities of corn fed to hogs had been low 1Thesis estimates for sows, feeder pigs, and corn fed to hogs are found in Appendix Tables B.20, B.2l, and B.22 respectively. 157 and remained so during the initial expansion. The adjustment coefficient for corn fed to hogs is based on annual data despite the two crap nature of hog production. This tends to cause the adjustment to be underestimated which, in turn, makes the MVP estimates unstable. Beginning in 1918, hog numbers began decreasing as more hogs were fed and placed on the market, and from 1917 to 1921, hog production had completed a four-year cycle. In the next hog cycle, from 1921 to 1927, more sows were kept for breeding and the number of sows on farms increased from 25,h83 thousand in 1921 to 29,037 thousand in 1923. Fed hogs, including sows, began flow- ing to market in larger numbers in 1924, and ex post dis-MVPS of sows increased from $15.21 per head in 192M to $29.81 in 1927. In the heavy feeding and marketing phase of the 1921 to 1927 hog cycle, corn fed to hogs did not increase as much as in the previous cycle due to low corn production which was down from 3,070 million bushels in 1920 to 1,860 million bushels in l92h. The result was an increase in the ex post dis- MVPs of corn fed to hogs from 1925 to 1927. The next hog cycle occurred from approximately 1927 to 1931 in the general depression. Hog numbers increased from 52,105 thousand in 1926 to 61,873 thousand in 1928. Corn fed to hogs decreased from 30.93 million bushels in 1927 to 24.83 million bushels in 1930. With unfavorable hog-corn price ratios from 1929 to 1931, fewer hogs were fed and placed on the depressed market. Hog numbers did not ‘decrease as much as in the previous cycle. In 1932 and 1933, the failure of hog numbers to contract sufficiently on the downswing of the previous cycle provided breeding stock and pig crops far in-excess of what market conditions warranted. But dis-MVPS of sows and feeder pigs remained 158 depressed through l93h. Hog supply reduction programs of the federal government in 193k and 1935 aided in reducing hog numbers from 58,621 thousand head in 193% to 39,066 thousand head in 1935. The cycle in hog numbers from 1935 to 1941 found hog numbers expand- ing much more than they contracted in the previous cycle due to expected dis-MVPS of sows and feeder pigs generally above acquisition costs during the recovery period from l93h to l9hl. The entry of the United States into World War II caught the hog cycle just as hog numbers were starting a downswing. With large numbers of breeding animals available, the down- swing of the recovery period hog cycle was aborted and hog numbers increased to 83,7hl thousand head by 19hh. Sow and feeder pig dis-MVPS decreased from their World War II peak in l9hh and l9h5 respectively, but with the large number of hogs on farms, the quantity of corn fed to hogs remained high after moderate decreases in l9h3 and 19hh. Hog numbers and MVPS of inputs in hog production moved through four more cycles from l9h8 to 196A of three to-seven years length. But generally, hog numbers have leveled off in the last decade and dis-MVPS and prices of feeder pigs and corn in hog production have stabilized somewhat with dis-MVPS of sows still fluctuating. Farm Produced Expendables in Poultry Production Thesis estimates for chickens and corn fed to poultry are in Appendix Tables B.23 and B.2h respectively. Generally, the upward trend in output of poultry is associated with lower costs of production and the growth of the U. S. pOpulation. The MVPs of chickens and poultry corn have trended upward while the 159 market price of corn decreased from l9h6 to 196R. This has caused more corn to be fed to poultry and the dis-MVP of corn fed to poultry to decrease. Estimated dis-MVPS of chickens and corn fed to poultry have fluctuated around the acquisition cost Of chickens and the market value of corn, moving up as wars caused prices received for poultry and eggs to increase and down when prices received for poultry and eggs decreased sharply. The estimates for chickens and corn fed to poultry indicate that up to the World War II period, generally too little corn was fed to too many chickens from a profit maximizing viewpoint. In the latter part of World War II, as the numbers of farms began to decrease and specializa- tion in the poultry industry-~including caged layer houses and broiler factories--began to replace family farm flocks, farmers began to decrease the number of laying hens and increase the quantity of corn fed to poultry. The number of chickens on farms decreased from 582 million birds in l9hh to 369 million in 1964, and corn fed to poultry increased from 9.2 million tons in 19h7 to 15.01 million tons in 196k. Technology in poultry pro- duction has changed such that while the total number of chickens on farms, not including commercial broilers, has decreased, the turnover of broilers is much more rapid and a much greater number of broilers are produced each year. Corn and broilers have been substituted for laying flocks. As a result of feeding more Optimal levels of corn to poultry, the estimated EX‘pOSt dis-MVP of corn fed to poultry relative to acquisi- tion costs decreased from an average level of 1.h7 during WOrld War II to 1.12 in the 1955-196% period according to thesis estimates. Average farm dis-MVPs of chickens remained slightly less than acquisition cost on the average for specified periods. 160 Nonfarm Produced Expendable Capital In addition to nonfarm produced durable capital inputs discussed in Chapter VI, expendable capital inputs from the nonfarm economy are being used increasingly and are replacing farm produced inputs. Some expendables such as gasoline and electricity complement farm machinery in replacing farm produced horses and mules and labor. Others such as fertilizer provide, within limits, an effective substitute for scarce land. Still other nonfarm produced expendables such as insecticides, pesticides, and feed additives serve both as complements and substitutes for farm produced seed, feed, and livestock. In general, nonfarm produced expendables embody more superior technology than the inputs they have replaced. Also, the replacing of farm with nonfarm produced inputs represents a large movement toward specialization. The nonfarm sector is exercising its comparative advantage in providing fuel and oil,‘ chemicals, building materials, and processing services, thus freeing the farm sector to exercise its comparative advantage in producing raw food and fiber. The nonfarm produced expendables studied in the thesis are gas- oline, electricity, and fertilizer in aggregate farm production. Gasoline As mechanical power has replaced horses and mules on farms, more and more gasoline is used to fuel the machines. The estimated adjustment coefficient of .78 for gasoline indicates that farmers adjust gasoline quite rapidly toward profit maximizing or loss minimizing levels. Thesis estimates for gasoline are found in Appendix Table 3.10. 161 Farm machinery, a durable with few employment Opportunities in the nonfarm sector, was found in Chapter VI to be very susceptible to adjustment problems and resulting capital gains and losses. But farmers apparently adjust the rate of use of durable machines by using profit maximizing or loss minimizing quantities of gasoline. This involves a movement to the edge of area 5 in the factor-factor diagram in Figure 2.2, page 25, where the durable machine is economically fixed but its rate of use is adjusted by uSing more or less gasoline. For example, the general depression from 1930 to 1933 was associated with a decrease in the quantity of gasoline used in farming from 1976 million gallons in 1930 to 1773.8 million gallons in 1933 even though the number of tractors on farms increased from 920 to 1019 thousand over the same period. Thus farmers adjusted the rate of use of some economically fixed tractors downward in response to low product prices and ex post dis-MVPs of gasoline which decreased from 18 cents per gallon in 1930 to 1% cents in 1933. And during WOrld War II, the quantity of gasoline used in farm production tended to increase faster than the index of mechanical power and farm machinery. Thus within rationed limits, available machinery was used more intensely as the ex post dis-MVP of a gallon of gasoline increased from an estimated 16 cents in 1942 to 20 cents in l9h7. In the decade from 1955 to 196k which was free of major disturbances, the index of mechanical power and farm machinery leveled off as did gasoline use, prices, and earnings. Electricity The very low .02 estimated adjustment coefficient for electricity resulted in very erratic and unreasonable elasticities of production and 162 MVPS for electricity in aggregate farm production. Estimates from Appendix Table 3.9 result from arbitrarily using an adjustment coefficient of .5 which is more in line with estimated adjustment coefficients of other expendable inputs. The results for electricity-are not discussed here in great detail due to the arbitrary selection of a reasonable adjustment coefficient. But generally the estimates indicate that as electricity used on farms increased from 861 million kw-hrs in 1927 to 21,0h6 million kw-hrs in 1955, both prices and ex post dis-MVPs remained at about 3 to h cents per kw-hr from 1927 to 1955. Fertilizer An estimated adjustment coefficient of 1.02 for fertilizer in aggregate farm production illustrates the variability of fertilizer. Because farmers typically purchase fertilizer either spread on the field by fertilizer dealers or in bags just before using it, salvage values are ignored, though actually salvage values of fertilizer would probably be negative. Thesis estimates for fertilizer are in Appendix Table 3.8. Fertilizer use, measured in tons of principle plant nutrients, remained fairly low prior to World War II, ranging from a low of .79 million tons in 1921 to a high of 1.6 million tons in 1937. But ex post farm diseMVPs of fertilizer increased from $266 in 1917 to a WOrld War I high of $377 in 1919, then decreased throughout the post World War I farm and general depression to a low $125 per ton in 1933. Following the general depression of 1930 to 1933, dis-MVPs of fertilizer increased through the World War II period. The strong increase in fertilizer use beginning in 19h0 continued through l96h-and was associated with fertilizer prices which after reaching 163 a peak of $368 per ton of principle plant nutrients.in l9h5 have since continually declined to $206 per ton in 196%. Ex post dis-MVPs of fertilizer ranged from 96.5 to 99.7 per cent of fertilizer acquisition costs from 1917 to 1964. This indicated small excess use of fertilizer may be only the result of difficulties in the data and calculating methods. Small annual negative rents on fertilizer increased from a low of 1.15 million dollars in 1919 to a high of 5h.93 million dollars in 196M with values for specified periods averaged in Table 7.15. Substitution of Fertilizer for Land.--As was pointed out above, use of fertilizer remained low until World War II. The reason for the continual increase in the use of fertilizer since early in World War II concerns the availability and prices of land. The average value of all farm land increased from $32 per acre in l9hl to $137 per acre in 1961;.1 Over the same period, fertilizer prices generally decreased after increas- ing during World War II. The result was a decrease in the price of fertilizer relative to the price of land from 12.77 in 19h2 to 2.26 in 1962. On the average during World War II, the price of a ton of fertilizer could purchase the services of 11.0 times the value of an acre of land. But an investment in land only 10.56 times the value of an acre of land was required to replace a ton of fertilizer in production 1Agricultural Finance Review, XXV (December supplement, l96h), Table 35, p. 63. 16h (see Table 7.1).1 Thus, it was slightly profitable year by year for farmers to substitute land for fertilizer, yet over time it was profitable to substitute fertilizer for land. With limited land, land prices were bid up rapidly while fertilizer prices were decreasing. By 1955 to 1962, the price of fertilizer relative to land prices had decreased to an average 3.05. But the continual substitution of fertilizer for land caused the MPP of a ton of fertilizer to decrease relative to the MPP of land investments to an average level of 2.93 per year from 1955 to 1966. Thus in recent years, as in every year for which estimates were made, fertilizer seems to have been slightly overcommitted relative to land; although, since World War II, decreasing fertilizer prices relative to land prices justify the substitution. The apparent short run overcommitment of fertilizer is indicated by the 1.02 adjustment coefficient of fertilizer and, if real, may be caused by both: 1) acreage allotments restricting the number of acres a farmer can plant but not the amount of fertilizer he can use; and 2) insufficient land being available at recorded market prices in the vicinity of individual farmer's current land holdings. This concludes the analysis of expendable farm capital except for the summary and conclusions in Chapter VIII, which follows. 1The marginal value products of land from.Appendix Table A.5 used to calculate the relative MPPs of fertilizer and land were estimated by Shyamalendu Sarkar, Dept. of Agri. Econ., Michigan State University. Sarkar estimated land MVPs using the current value of land as a measure of land and the farm mortgage interest rate as the acquisition cost of land investments. Estimating techniques were identical to those employed in this thesis. 165 TABLE 7.l.--Acquisition costs and MPPs of fertilizer relative to the acqui- sition costs and MPPs of land, average values for specified periods, United States, 1917 to l96h Acquisition cost of‘a ton MPP of a ton of fertilizer of fertilizer relative to relative to the MPP of a land Time period the acquisition cost of investment equivalent to the an acre of land _ value of an acre of land ( ------- average ratio for specified time periods ------- ) 1917-1920 World War I 7'18 6'75 1921-1929 Post World War I 5.58 5.16 Farm Depression 1930-1933 General Depression 5'6h 5'31 l93h-l9hl 9,0h 8.46 Recovery 19h2-19h6 World war II 11.00 10.56 1947-195a Post World War II Boom, Korean 6.25 6.03 Conflict and Adjustment 1955-195h General GrOWth 3.05 2-93 and Expansion CHAPTER VIII SUMMARY AND CONCLUSIONS The chronic adjustment problem in the United States farm sector is usually attributed to: 1) an inelastic demand for farm products, both with reSpect to price and income; 2) atomistic structure; 3) rapid technological change; and h) imperfect knowledge. To this list must be added 5) a family farm structure which results in children being born into the farm labor force, 6) large space and specialized input require- ments which widen differences between acquisition~costs and salvage values, thereby making inputs more subject to economic fixity. The following characteristics of the farm sector's adjustment and institutional environment~are also important: 7) four wars from 1917 to l96h; 8) a severe depression between World Wars I and II; 9) unstable international demand; 10) government farm price support and other farm programs; and 11) variable weather. While several past attempts to analyze the "farm problem" con- tribute significantly toward understanding impacts of one or more of the above characteristics, past efforts fail to account adequately for resource fixity. An analysis of adjustments in the farm sector should recognize the combined impacts of the several characteristics presented above. 166 167 This thesis, while recognizing past contributions on agricultural supply analysis, also employs a more recently advanced modification of classical economic theory to more adequately account for the divergencies between acquisition costs and salvage values of capital inputs in the farm sector. A Nerlove adjustment model was employed to estimate equilibrium factor shares which were used as parameters in assumed underlying Cobb- Douglas production functions in lieu of the more conventional method of obtaining production parameters from a direct least squares estimating procedure. This adjustment-equilibrium factor share model lends itself to implementing the modification of neo-classical theory which recognizes the divergence between input acquisition costs and salvage values. Estimated salvage values were used to value durable inputs in computing factor shares when durables were contracting at rates greater than warranted from normal depreciation; and acquisition costs were used when durables were expanding. In the absence of appropriate values for durable inputs that were stable, implying that the inputs' present values were bounded by acquisition costs and salvage values, averages of acquisition costs and salvage values were employed in computing factor shares. In reality, adjustment coefficients probably change over time rather than remaining constant as assumed in the thesis. But the results obtained from assuming that actual annual changes in factor shares are a constant prOportion of desired adjustments are generally consistent with economic theory. Adjustment coefficients were estimated from.logarithmic values of studied variables to permit a curvalinear relationship. The resulting estimates of elasticities of production along with price and quantity components of factor shares; Lerohl's estimates of 168 product price expectations, and estimates of actual and expected overhead costs from this thesis were used to estimate the following actual or ex post and expected or ex ante: l) MVPS, both gross and net of overhead costs; 2) present values of discounted future net MVPs; 3) annual average capital gains from durable inputs; and h) "economic rents from expendable inputs. Advantages of Estimating Techniques Used in the Thesis The Nerlove adjustment model offers a promising new approach to estimate production functions and adjustments. Its advantages over traditional direct least squares estimation of Cobb-Douglas production function parameters are: 1) the multicollinearity problem encountered from time series clustering around expansion paths is avoided; 2) while the direct least squares estimated production parameters are constant over time and different input combinations, the adjustment-factor share technique yields different elasticity estimates for each observation, thus yielding a dynamic model in the time dimension; 3) the adjustment-factor share technique lends itself to incorporating the Johnsonian modification of neo-classical economic theory in the analysis which recognizes the diver- gence between input acquisition costs and salvage values; and h) estimating techniques are related directly with the underlying economic theory whereas the traditional direct least squares technique is more dependent on statistical procedures. The resulting Johnsonian-adjustment-factor share model more nearly approximates farm managers"resource adjustment decisions than the alternative neo-classical model in which by assumption farm managers can instantaneously adjust resources to a single high profit point without receiving rents and capital gains or losses. 169 Shortcomings of Estimating Techniques While the theoretical model used in the thesis realistically explains farm managers’ behavior in allocating resources at the farm level, there are serious aggregation problems involved in applying the Johnsonian- adjustment-factor share model at the aggregate farm sector level. While most farm managers can be assumed to attempt to maximize profit, they are in very different initial situations of resource ownership and control, which makes a greater difference when.acquisition costs exceed salvage values than when the two are equal. In adjusting to new high profit positions in response to changing economic environment, some farmers expand employment of a given resource, others contract it and still others hold the resource constant. Thus an aggregate farm sector production function concept is of questionable applicability. The thesis estimates of production elasticities and input earnings are construed as estimates of the average of elasticities and earnings on individual farms. Adjustments in aggregate resource use are viewed with respect to their average earnings in the farm sector and their acquisition and salvage prices for the farm sector. Another serious problem is encountered in aggregating across durable inputs of different characteristics, quality and life expectancies. With durables Specialized to the farm sector such as farm machinery-and buildings, productive life is a function not only of the initial stock but also of the rate of use and maintenance. But the only way the farm sector can obtain such specialized machines as grain combines and pickup balers is to buy new machines from the nonfarm sector. Once committed to farming, these machines will remain in farm production as long as their 170 expected future MVPs net of overhead costs are greater than their value as scrap iron. And while an individual with superior managerial ability may pass on any inherent capital losses in the machine over its produc- tive life to a used machinery dealer or another farmer, someone in the farm sector will sustain any inherent capital losses, or for that matter capital gains. On the other hand, future expected MVPS of durables not specialized to the farm sector such as beef cows, milk cows, and motor trucks may be compared with salvage values on a periodic basis as the input moves through its productive life and potential capital losses may be cut short by salvaging the inputs in the nonfarm sector. A brief investigation into the expected capital values of two different ages of beef cows, dairy cows, and motor trucks indicated that expected and realized capital values, acquisition costs, salvage values, and use'of these durables not specialized in farming would be more realistic if estimated according to cohorts than for the average input on the average farm. The latter had to be done in this thesis due to the absence of data by cohorts. Because research in agricultural economics has been oriented around an economic theory of the firm which has not stressed acquisition costs and salvage values, available data on resource prices are not specific as to whether they represent acquisition costs or salvage values. With most price data at the farm level, it is not clear as to whether they-represent acquisition costs, salvage values, or marginal value pro- ducts. Thus the author had to resort to (l) the crude approximations of acquisition costs and salvage values indicated in Appendix Table A.l, and (2) ad hoc interpretations of the relationships among estimated MVPs, acquisition costs, reported market prices, and capital gains and losses. 171 Another weakness is the use of a logarithmic adjustment equation to estimate production.elasticities; iWith current factor shares usually correlated with lagged factor shares, the estimated coefficient of the lagged factor share in the equation predicting the current factor share is often overestimated. The estimated adjustment coefficient, which is equal to one minus the estimated coefficient of the lagged factor share, would then be underestimated. An unusually small estimated adjustment coefficient results in extreme fluctuations in estimated elasticities of production, MVPs and capital values. Also a large percentage change in the factor share from year t-l to year t can cause large fluctuations in the results. Fortunately, only a few such cases are encountered in the thesis and the extreme fluctuations are usually averaged out over specific time periods. World Wars I and II and the Korean conflict produced economic shocks which should be reflected in thesis estimates. Following these major disturbances, realized product prices, less than those expected, caused ex post capital values of durables to fall short of values expected at the time of acquisition, thus contributing to low returns and capital losses. In some cases, thesis results do agree; in others, they do nOt. Part of the disagreement is due to the following: when the estimated elasticities, which are assumed constant over the life of a durable for purposes of estimating expectations, also fluctuate unreasonably due to underestimated adjustment coefficients and/or high percentage changes in actual factor shares, estimates of ex ante capital values are subject to wide distortion. Actually, it-appears that Lerohl's five and ten year 'average expected product price series relative to actual five and ten year average product prices are a more consistent indication of ex ante relative to ex post capital values than are the estimates provided in this thesis. 172 In studying the estimates of MVPs, capital values, capital gains and losses, and employment data for farm inputs, two possible sources of bias are apparent. First, the PCA interest rates, which were used in discounting annual MVPs, may be lower than the true discount rate for expendables and short lived durables but too high for buildings. This contributes to overestimation of capital values for some farm and nonfarm produced durables. Second, input specification bias between labor and labor saving technology such as grain combines and corn pickers caused the capital values for these inputs to be underestimated, even when low PCA interest rates were used in discounting. These suspected biases were accounted for in an ad hoc manner in interpreting the estimates. Conclusions for Farm Capital Earnings and Adjustments Despite the above shortcomings, the thesis provides much new information on capital earnings and adjustments in the farm sector. While the occurrence and disappearance of asset fixity is not entirely accounted for, the author recognizes this important phenomenon of the farm sector and in attempting to account for it goes much further in this direction than most previous empirical work. Though the thesis results are as crude as the data used in their construction and are more gross than their detailed appearance implies, they do provide sufficient evidence especially when suSpected biases are carefully interpreted, ad hoc, to support the following conclusions about farm capital employment and earnings. Traditional methods of imputing returns to farm labor and management have indicated that if investments in land and capital were paid a going rate of return, residual returns to labor and management would very often be low and often negative on typical farms. This thesis provides 173 substantial evidence that investments in farm capital in many cases do not earn a going rate Of return and account for much of the negative rent, capital losses, and low income in the farm sector. Conclusions substan- tiated by thesis estimates concerning the use and earnings Of the major capital categories delineated in the thesis are presented below and encompass the objectives of the thesis stated in Chapter I, page 15. Durables Durable inputs are subject to considerable adjustment problems because they: 1) last more than one production period, 2) must be committed to farm production on the basis of expected product prices and input earnings which usually either fall short Of, or exceed realized product prices and input earnings, and 3) characteristics Of durables, the farm sector, and the farm sector's environment can cause the diver- gence between acquisition costs and salvage values of durables to be large. Problems of adjusting durables toward equilibrium levels and toward levels at which the durables earn ex post capital values that cover acquisition costs vary in severity, depending mainly on whether the durables are farm produced or nonfarm produced, and whether they are specialized to the farm sector or have-competing employment Opportunities in the nonfarm economy. Farm Produced Durables.--Prices of farm produced durables are correlated closely with prices received by farmers while prices paid for nonfarm produced durables are fairly independentfof prices received. This tends to make farm produced durables less subject to extended fixity and adjustment problems than are nonfarm produced durables. Adjustment 17h coefficients for farm produced durable livestock are generally larger than those for studied nonfarm produced durables, thus substantiating this conclusion. But, within the farm produced category, durables may be more or less subject to adjustment problems because they are specialized or nonspecialized to the farm sector. The responsiveness of acquisition costs and salvage values Of farm produced durables to changing conditions tends to shift the inCidence Of capital losses or gains to land, buildings, farm and Operator labor, orchards, etc. Farm Produced Durables Unspecialized to the Farm Sector.--When there is a competing demand for farm produced durables in the nonfarm sector, their ex ante capital values in farming may be compared to their nonfarm Opportunity cost and their use adjusted accordingly; thus ex post capital values of these durables are kept more in line with acquisition costs and a reasonable rate of return. The two inputs studied in the thesis which fall in this classification--beef and milk cows--have tended to earn more over their productive life than the economy valued them at when committed to farm production. While trending upward, cattle numbers continue to cycle and the Opportunity to sell unproductive cows in the nonfarm sector as canner-cutters tends to place a floor under the profit- ability Of beef and milk cows. However, during the depression, and in the early 1950's, estimated ex post capital values of beef and milk cows were not sufficient to cover acquisition costs, and capital losses resulted. Considering the likely upward bias in ex post capital values Of beef and milk cows, the true capital losses in these periods were probably more numerous and severe than the estimates indicate. Underutilization, and capital gains for beef and milk cows tend to exist during periods Of high 175 consumer demand such as during World War II, and in the nonfarm expansion of the mid- and late 1950's. Farm Produced Durables Specialized to the Farm Sector.--Due to lack of data, some interesting inputs in this category (fruit trees, for example) were not studied in the thesis. Inputs in this category Often have long productive liVes and remain in production many years despite ex post earnings that fail to cover acquisition costs simply because farmers minimize losses by keeping the durables in production rather than salvaging them. A durable in this situation can contribute significantly to the production of farm commodities in excess of that level which yields input earnings equal to acquisition costs. Hbrses and mules are one studied input-category qualifying as a farm produced durable specialized to the farm sector- As anticipated, estimated ex post capital values Of horses and mules were consistently less than acquisition costs.1 Farmers have continuously decreased the number of horses and mules on farms since WOrld war I, but given inaccurate expectations, the lack of off-farm Opportunities, and durable nature Of horses and mules, thesis estimates indicate that horses and mules were a source of capital losses from 1917 to l9h9. The capital losses may be overestimated due to the omission of the carcass value of horses and mules in the capital values more than Offsetting the upward bias in capital values caused by the low PCA interest rates. LThesis estimates indicate that after WOrld War II, horses and mules earned ex post capital values in-excess Of acquisition costs. But by this time, horses and mules were a very-insignificant input. 176 NOnfarm Produced Durables.--Farmers must base their decisions concerning the purchase of farm machinery, motor trucks, buildings, and other nonfarm produced durables on long run expectations about product prices and other important variables. Since farmers-cannot-forecast future product prices with a large degree of accuracy, they encounter considerable adjustment problems with nonfarm produced durables. In addition, acquisition costs Of nonfarm produced durables are generally independent of prices received by farmers. This causes the divergence between acquisition costs and salvage values, on one hand, and the MVPs, on the other, of nonfarm produced durables to fluctuate more and thus increases adjustment problems for these important inputs. But, as with farm produced durables, the severity Of adjustment problems for nonfarm produced durables varies, depending on whether the durable is specialized to farm production or has employment Opportunities in the nonfarm economy. Nonfarm Produced Durables unspecialized to the Farm Sector.-- Farmers may purchase new or used nonfarm produced durables, such as motor trucks, which have employment Opportunities in the nonfarm sector; and if the ex ante capital values of these durables in farm production drop below their net opportunity cost in the nonfarm sector, the inputs may be salvaged in the nonfarm sector. Thus, these unspecialized durables are less subject to adjustment problems than are durables which do not have competing demands in the nonfarm sector. In studying the use and earnings of motor trucks on farms, limited data prevented the estimation of ex post capital values Of used trucks and therefore capital gains-and losses for motor trucks. But estimates of ex post and expected MVPs of motor trucks in aggregate farm production tended to justify the continual increase in the number of motor trucks on 177 farms from 1917 to 196% except during a few years in the general depression when the number of trucks on farms decreased and in the early 1960's when the number of trucks on farms appeared to be stabilizing. While the pre- ceeding comment generally applies to used motor trucks, estimates of expected capital values Of new motor trucks justified their acquisition from 1917 to 1955 except during the years 1933, 1935, 1937, 1939, l9h7, 1950 and 1951. Nonfarm Produced Durables Specialized to the Farm Sector.--Nonfarm produced durables such as farm.machinery and buildings, which are special- ized to the farm sector, are more susceptible to asset fixity and capital losses than are nonfarm produced durables such as motor trucks which have employment Opportunities in the nonfarm sector. And the more specialized a durable is within the farm sector, the more likely its ex post capital value will fall short of its acquisition cost for the farm sector. Versatile tractors in aggregate farm production have Often had estimated ex post capital values greater than acquisition costs while more special- ized machines such as corn pickers and grain combines were Often subject to economic fixity and capital losses, even when apparent biases in the estimates were considered. In the rapidly changing structure of the farm sector, there is perhaps no more pronounced example of economic fixity at work than farm buildings. Thesis estimates indicate that ex ante capital values Of investments in farm buildings seldom covered acquisition costs from 1933 to l96h. And the constant dollar value (l9lO-l9lh = 100) of buildings on farms decreased from 8,799 million dollars in 1931 to 7,188 million dollars in l96h, despite an expanding farm sector in terms of productive capacity. 178 With the exception of buildings, nonfarm produced durables specialized to the farm sector have generally increased in use from 1917 to the present. Expendables Expendable inputs are "used up" in one production period when committed to farm production and farmers can base their decisions on the luse of expendables on expectations Of one year or less. These factors tend to make expendables in farm production less susceptible to economic fixity and rents. The simple average .55 of estimated adjustment coefficients for studied expendables indicates farmers' ability to adjust their use rapidly in response to economic change. But other characteris- tics, such as source Of supply and nonfarm employment Opportunities, bear upon adjustment problems for expendables. Farm Produced Expendables.--Major economic disturbances cause the prices, use, and MVPS of farm produced expendables to fluctuate and increased demand for livestock products (and therefore for feed inputs) have caused the use of farm produced expendables to trend upward over time. But prices of these expendables are closely correlated with prices received for farm products. This tends to lessen the occurrence of imbalance and rents for farm produced expendables. Estimated rents on farm produced expendables are usually quite small, especially on a per unit of input basis, and are sometimes caused by computational error. When the estimated rents are real, they may be Of'a sizable amount when small per unit rents are multiplied by the total quantity of the input. But their impact is small compared to the capital losses which can occur on economically fixed durables used to produce the expendables. When changes occur in the acquisition costs and salvage 179 values of the expendables, the capital values Of the durables can change significantly. But adjustment problems for farm produced expendables may exist, depending largely on whether or not theeinputsshave:emplbymentt opportunities in the nonfarm sector. Farm Produced Expendables Unspecialized to the Farm Sector.-- Steers, heifers, sows, feeder pigs, and chickens have enjoyed estimated ex post diseMVPs that generally fell short of market prices by not more than the cost of discounting or marketing charges. These inputs all have employment Opportunities in the nonfarm sector which tend to keep their farm earnings at or above slaughter market prices.l Use of these expendable livestock inputs have trended upward as nonfarm demands for livestock pro- ducts have increased due to rising per capita income and population increases. The expendable inputs in beef and pork production fluctuate over their respective cycles while dairy heifers and chickens on farms at a point in time have decreased in number since World war II due to the substitution of feed for heifers, broilers, and laying hens. Farm Produced Expendables Specialized to the Farm Sector.--Inputs such as hay and corn are storables and quite specialized to farm produc- tion.1 Use, MVPS and prices of these inputs are more dependent upon quantities produced than are the use, MVPs and prices of other farm produced expendables. The generally lower estimated adjustment coefficients, fluctuating MVPs, and rents for these farm produced expendables specialized to the farm sector support this conclusion. 1This ignores the demand for corn for food and industrial uses which is relatively minor, and the export demand for corn which was rather minor until after World War II. 180 NOnfgrm Produced Expendablg§,--Whereas prices of farm produced expendables fluctuate with prices received for farm products, prices of nonfarm produced expendables tend to be independent of farm prices. This would tend to make nonfarm produced expendables more susceptible to adjustment problems, imbalance, and rents than farm produced expendables. But this factor is more than Offset by the fact that nonfarm produced expendables are typically purchased as they are used. And whether nonfarm produced expendables are specialized to farming (such as with fertilizer) or have competing nonfarm Opportunities (such as with gasoline), thesis estimates indicate that these inputs are not subject to large adjustment problems or rents. Conclusions About Substitution and Relative Input Prices While the total index of inputs committed to farm production has not changed much from 1917 to l96h, the composition of farm inputs has changed drastically. The index of farm labor decreased from 223 in 1917 to 79 in l96h while the index of mechanical power and machinery increased from 28 in 1917 to 101 in 196M. Similarly, the index of land used for crOps remained about level in decreasing from 100 in 1917 to 9h in 196k while the index of fertilizer and liming materials increased from 12 in 1917 to 155 in 196A. (All indices are on a 1957-59 = 100 basis.) Estimates Of relative MPPs can be compared with relative prices to show the causes and results of this changing composition of farm resources. Substitution of Nonfarm Produced Capital for Labor.--Estimated MPPs of labor relative to MPPs of tractors in aggregate farm production increased from an average .20 in the World War I period to an average 2.32 in the l955-l96h period as tractors were substituted for relatively 181 more expensive labor. As the nonfarm economy has expanded, the salvage value of farm labor (farm wage rate) has increased relative to the acquisition cost Of tractors' services from an average 3.00 during World War I to an average h.01 during the 1955-l96h period. Since tractors remain a relatively cheaper source of productivity than labor, which continues to increase in value, the substitution Of tractors for labor will likely continue. Estimates of prices and'MPPs of labor relative to those of other types Of farm machinery indicate a similar incentive to substitute capital for labor as did tractor MPPs and prices. Substitution of Mechanical Power for Horsepower.--One of the great phenomena in the farm sector has been the virtually complete transition from horsepower to tractor power from 1917 to World War II. After reaching a peak of nearly 27 million head in 1918, numbers Of horses and mules continually declined to about 3 million head in 1960. Average estimates for 1917 to 1920 indicate that the price of the services Of one tractor cost the equivalent Of the services of A.5 horses and mules. But estimates of relative MPPs indicate that one tractor could replace 115 horses and mules in aggregate farm production without altering output. As tractors were substituted for horses and mules, relative prices decreased and relative MPPs increased. However, with relative MPPs of tractors generally much larger than their relative prices up to WOrld War II, it is evident that horses and mules could not profitably be substituted for tractors as a source of power. The substitution of mechanical power for horsepower on United States farms has led to a type of specialization. The nonfarm sector produces mechanical power units at lower cost relative to productivity 182 than could the farm sector produce horses and mules. Thus farmers were provided with a more profitable source of power which, at the same time, freed 77 million acres of cropland for producing food and fiber for human consumption. Substitution of Feed for Livestock.--The development of new inputs which profitably substitute for older inputs and labor has been more dramatic in the production of crops than in the productihn of livestock. The demand for many crOps is for feed inputs in the production of live- stock. Livestock products have enjoyed increases in demand due to increases in per capita income and in pOpulation. Feed prices have decreased relative to acquisition costs Of livestock inputs. This has provided incentive to breed livestock that are more efficient-at converting feed to livestock products and to feed fewer animals more feed. In comparing MPPs and prices of corn relative to MPPs and prices Of livestock inputs, the author found this incentive to substitute corn for livestock in beef, milk, hog, and poultry production. This development has been very dramatic in milk production where the number of milk cows decreased 2h per cent from their World War II level to the present, and corn fed to dairy animals increased 35 per cent over the same period. Substitution of Fertilizer for Land.-~As was pointed out earlier, the use of crOpland remained fairly constant from 1917 to l96h despite large increases in the productive capacity of the farm sector. This phenomenon involves the use, relative prices, and MPPs of land and fertilizer. The use Of fertilizer remained relatively low until WOrld ‘Wfir'II. Since then the continual increase in the use of fertilizer is influenced by the unavailability of and increasing price of land. 183 On the average during WOrld War II, the acquisition cost of a ton of fertilizer nutrients (elemental N, P and K) could purchase the equiva- lent of 11.0 acres. But a land investment equivalent to only 10.56 acres of land was required to replace a ton of fertilizer in production. Thus, it was slightly profitable for farmers to substitute land for fertilizer. With limited land, the acquisition cost of land was bid up rapidly, while acquisition costs of fertilizer were decreasing. By 1955 to 1962, the acquisition cost Of a ton of eiemental fertilizer nutrients relative to the acquisition cost of land had decreased to an average 3.05. But the con- tinual substitution of fertilizer for land caused the MPP of a ton of fertilizer to decrease relative to the MPP of land investments to an average level of 2.93 from 1955 to 1962. Thus, fertilizer seems to have been overcommitted relative to land in the short run, although, since World war II, decreasing fertilizer costs relative to land costs have justified the use of fertilizer in lieu Of land. The apparent short run overcommitment of fertilizer relative to land probably resulted from 1) acreage allotments restricting the number of acres a farmer could plant but not the amount Of fertilizer he could use, and 2) insufficient land being available at recorded market prices in the vicinity of individual farmers’ current hOldings. Technological Advances.--Much controversy surrounds the discussion of technological advances and their impacts on adjustments in the farm sector. In estimating different elasticities Of production for each-year for each studied input, the thesis recognizes technological advances embodied in studied inputs over time, along with other factors which might cause changes in the elasticities Of production. Changes in input 184 quality and productivity due to technological advances are recognized through changes over time in an input's earnings relative to its own acquisition cost and relative to earnings and acquisition costs of substitute inputs. There are many-sources of technological advances in capital inputs not studied in the thesis. These include hybrid seeds, insecticides, pesticides, and great advances in farm service facilities. Impact Of Errors in Committing:Resources to Farm Production.-- Thesis estimates of ex post MVPs and capital values Of durable inputs indicate that considerable errors have been made in committing resources (especially durables) to farm production. In accordance with the theory presented in Chapter II, these errors result in: 1) expansion in resource use, positive rents and capital gains, and an increase in output to that level where discounted input earnings cover acquisition costs, in those cases where resources were undercommitted; 2) stabilized resource use, negative rents and capital losses, and a stabilizing of output at-a level where discounted input earnings are less than acquisition costs in those cases where resources became economically fixed; and 3)rcontracting resource use, negative rents and capital losses, and decreases in output to a level where the discounted earnings of resources are sufficient only to cover salvage values. It is rather simple to conclude which Of the above three cases most nearly describes the situation for Specific land, labor and capital inputs for specified periods from 1917 to l96h. But it is the combination of situations for the many different inputs combined that determines output for the farm sector, net farm income, and capital gains and losses for farmers. Because considerable evidence in the thesis indicates that 185 several important capital inputs in aggregate farm, beef, milk, pork, poultry, corn and wheat production have been overcommitted to farming with resulting earnings that failed to cover acquisition costs, it is reasonably safe to conclude that the average farm is, and has been since 1917, organized at a level of input use and output that fails to provide returns sufficient to cover acquisition costs of all inputs. Thus farmers have often received low incomes and capital losses. Two additional factors which contribute significantly to the over- commitment Of resources to farming are l) unforeseen (by individual farmers) price consequences of aggregate increases in output resulting from individual farmers reacting to apparent profit incentives often have repercussions on farm prices and adjustment problems, and 2) large viable farms may profitably acquire nonfarm produced durables which are specialized to farm production. But the specialized inputs which they replace often remain in farming for lack of off-farm Opportunities, earning low returns and capital losses for their owners. Impacts of Major Disturbances Part of the blame for adjustment problems in the farm sector can be attributed to World War I, the farm and general depressions, WOrld war II, and the Korean conflict. Although the capital gains are likely over- estimated and the capital losses underestimated, these data serve to summarize the impact Of major economic disturbances on adjustments in the farm sector. Estimates are not available for beef and milk cows during WOrld war I; but estimated capital gains for machinery were high as the wartime demand provided MVPs and ex post capital values for farm machinery above 186 acquisition costs. At the close of World war I, farm prices fell sharply. There were no price supports or government storage programs and capital values of durable livestock and machinery decreased as did capital gains. Farm prices recovered somewhat in the mid-1920’s, capital gains on durable livestock increased through 192h, and on machinery through 1930. Low ex post capital values relative to acquisition costs caused substantial capital losses on beef and milk cows in 1929. Farm machinery, a profitable substitute for labor as well as for horses and mules, continued to increase in use despite decreases in capital gains. Five and ten year average product prices expected by farmers were not realized in the period 1917 to 1933. These adjustment problems were worked out in the free market with farmers receiving the full brunt in the form of low prices. By l93h, farmers had either gone broke or weathered the adjustment problems that far. From 193k through World War II, actual five and ten year average product prices received by farmers were approximately equal to or greater than expected five and ten year average product prices. Capital values of durables generally increased relative to their acquisition costs and capital gains increased, remaining high through World war II. Following World War II, realized five and ten year average prices received by farmers began to fall short of those expected as l) the number of machines on farms increased, 2) ex post capital values decreased relative to but remained higher than acquisition costs, and 3) capital gains began to decrease. Capital losses for beef and milk cows reached an estimated high of 2&5 million dollars (which is probably underestimated) in 1952. Following.the Korean conflict, low MVPs did not provide ex post capital values sufficient to cover high acquisition costs during the Korean 187 conflict. Capital gains on machinery began to decrease from their over- estimated hh5.7l million dollar peak in l9h7, and by 1950 had become capital losses. Beef and dairy cows earned significant capital gains in the mid- 1950's which decreased from an overestimated 865 million dollar peak in 1957 to 31h million dollars in 1960. Ex post capital values of beef and milk cows were prevented from falling by strong salvage markets for canner- cutter cows, especially in the last decade for which estimates were made. Capital losses on machinery increased from 2.11 million dollars in 1950 to lhO.h6 million dollars in 1955. During the post World War I farm and general depressions, the farm sector had only partially accomplished its potential mechanization. In these earlier years, horses and mules and labor made up a much greater portion, relative to later years, of farm inputs than did such machines as tractors, grain combines, and corn pickers. Thus horses and mules, labor, land, and livestock took more Of the brunt of the adjustment problems during the 1920's and early 1930's than did the farm machinery inputs studied in the thesis. By the early 1950's, however, tractors had replaced horses and mules as a source of farm power and the labor input had decreased to almost half its World War I level. According to thesis estimates, tractors and other farm machinery, which are specialized to farming, accounted for a large share of the low returns and capital losses due to adjustment problems of the late 1950's. Evidence in the thesis indicates that conditions in the farm sectorthave been such, in the 1950's and early 1960's, that most durables were fixed in farming on the basis Of their 1) average ex post capital values, 2) acquisition costs, and 3) salvage values for the farm sector. 188 Mbst durables, except beef cows which still cycle, stabilized in number or decreased as higher capacity units replaced lower capacity units which were salvaged. The ex post capital values of nonfarm produced durables were generally less than acquisition costs for the farm sector in the late 1950's and early 1960's. With the huge stock of productive capacity presently on farms, changes in public farm policy, the world food situation, and the cold and hot wars against communism, can increase or decrease the pressure and worsen or improve the consequences of adjustment in the farm sector. Concluding Comment Although the above conclusions are consistent with a priori expectations based on a historical perspective of characteristics of the farm sector and its environment, and economic theory, the conclusions follow from a basically partial analysis. Empirical analyses in the thesis are primarily concerned with the markets for one Of three major categories of farm resources--capital. Land and labor inputs were given only passing -attention. The estimates of capital earnings andreohclusions about capital use presented in this thesis will achieve their full usefulness only when integrated with major studies of farm land and labor markets in the over- all Resources for the Future study at Michigan State University. BIBLIOGRAPHY Ackley, Gardner. Macro-economic Theory. New York: The Macmillan Co., 1961. Baker, Gladys L. et a1. Century of Service. Washington: U. S. Govern- ment Printing Office, 1963. Benedict, Murray R. Farm Policies Of the United States, 1790-1950. New York: Twentieth Century Fund, 1953. Blaug, M. Economic Theory in RetrOSpect. Homewood, 111.: Richard D. Irwin, Inc., 1962. Boyne, David H. Changes in the Real Wealth Position of Farm Operatorg, 19h0-1960. Technical Bulletin 29h. East lnnsing: Michigan State University Ag. Exp. Sta., 196h. Brandow, G. E. Interrelations Among Demands for Farm Products and Implichtions for Control Of Market Supply. Bulletin 680. University Park: The Pennsylvania State University Ag. Exp. Sta., August, 1961. ‘ Carlson, Sune. A Study in the Pure Theory Of Production. London: P. S. King and Sons, Ltd., 1939. Chennareddy, Venkareddy. "Present Values Of the Expected Future Income Streams and Their Relevance to the MObilithdf Farm Workers." Unpublished Ph. D. dissertation, Department of Agricultural Economics, Michigan State University, 1965. Cromarty, William A. The Demand for Farm Machinery and Tractors. Technical Bulletin 275. East Lansing: Michigan State University Ag. Exp. Sta., November, 1959. Economic Statistics Bureau of Washington, D. C. Handbook of Basic Economic Statistics, XX, No. 1 (January 15, 1966), p. 22h. Edwards, Clark. "Resource Fixity, Credit Availability and Agricultural Organization." Unpublished Ph. D.'dissertation, Department of Agricultural Economics, Michigan State University, 1958. Griliches, Zvi. "Measuring Inputs in Agriculture: A Critical Survey," Journal of Farm Economics, XLII (December, 1960), p. lhll. Grove, Ernest. "Farm Capital Gains--A Supplement to Farm Income," Agricultural Economics Research, XII, NO. 2 (April, 1960). Guillebaud, C. W. (ed.). Marshall's Principles of Economics. London: Macmillan and Co., Ltd., 1961. 189 190 Hathaway, Dale E. "Agriculture and the Business Cycle," Policy for Commercial Agriculture. Joint Economic Committee. 85th Congress, lst Session, 1957. . Government and Agriculture. New York: The Macmillan Co., 1963. . Problems Of Progress in the Agricultural Economy. Chicago: Scott, Foresman and Co., l96h. Heady, Earl O. et a1. Agricultural Adjustment Problems in a Growigg Economy. Ames: Iowa State University Press,.l958. . Roots of the Farm Problem. Ames: Iowa State University Press, 1965. Hicks, J. R. Value and Capital. London: Oxford University Press, l9h6. Johnson, Glenn L. et al. A Study of Managerial Processes of Midwestern Farmers. Ames: Iowa State University Press, 1961. . "An Evaluation of U. S. Agricultural Policies and Programs, 1959-1960." A Background Paper for the Committee for Economic DevelOpment. East Lansing: Michigan State University, 1960. . "Supply Functions--Some Facts and Notions," Agricultural Adjustment Problems in a Growing Economy. Ames: Iowa State University Press, 1958. . "The Labor Utilization Problem in European and American Agriculture," American Economics Journal, XIV (June, 1960), p. 82. . "The MOdern Family Farm and Its Problems," Proceedings, International Economic AssoOiation, Association Of Economic Sciences, 1965. . "The State of Agricultural Supply Analysis," Journal of Farm Economics, XLII (May, 1960), pp. h35-h52. . "Project Statement for the Resources for the Future Project at Michigan State University." Jones, Bob F. "Farm-Non-Farm Labor Flows, 1917-1962." Unpublished Ph. D. dissertation, Department of Agricultural Economics, Michigan State University, 196M. Keynes, J. M. The General Theory of Employment,,Interest and Capital. London: Macmillan and Co., 19h2. Kost, William E. "Weather Indexes: 1950-1963," Quarterly Bulletin of Michi an State University Ag. Exp. Sta., XLVI, No. 1 [August:— 1961'- , pp. 38")4’20 ' 191 Larsen, Arne. "Changes in Land Values in the United States, 1925-1962." Unpublished Ph. D. dissertation, Department Of Agricultural Economics, Michigan State University, 1966. Leftwich, Richard H. The Price System and Resource Allocation. New York: Holt, Rinehart and Winston, 1965. Lerohl, Milburn L. "Expected Prices for United States Agricultural Commodities, 1917-1962." Unpublished Ph. D. dissertation, Department of Agricultural Economics, Michigan State University, 1965. Lewis, A. W. Overhead Costs--Some Essays in Economic Analysis. London: George Allen and Unwin, 19h9. Loomis, Ralph A. and Barton, Glen T. Productivity Of Agriculture, Epited States, 1870-1958. USDA Technical Bulletin 1238, April, 1961. Manderscheid, Lester V. "Incorporating Durable Goods Into Consumption Theory." Paper read before meeting of the Econometric Society, New York, December 28, 1965. Nerlove, Marc. Distributed Lags and Demand Analysis for Agricultural and Other Commodities. AME, USDA, Agricultural Handbook No. lhl, June, 1958. . Time-Series Analysis of the Supply of Agricultural Products. Chicago: WorkshOp, Estimating and Interpreting Farm Supply Functions, January 20-22, 1960, pp. 33-38. Nerlove, Marc and Bachman, Kenneth L. "The Analysis Of Changes in Agricultural Supply: Problems and Approaches," Journal of Farm Economics, XLII (may, 1960), pp. 531-53h. Penn, Raymond J. "World Trade: What are the Issues?" No. 3. Reciprocal Trade Agreements. Farm Foundation, National Committee on Agri- cultural Policy, Agricultural Policy Institute, North Carolina State College and the Center for Agricultural and Economic Adjustment, Iowa State University. Popular Mechanics (February, 1952). Rasmussen, Wayne D. and Baker, Gladys L. "A Short History of Price Support and Adjustment Legislation and Programs for Agriculture, 1933365," Agricultural Economics Research, XVIII, NO. 3 (July, 1966 . Robinson, Joan. The Economics of Imperfect Competition. London: Macmillan and CO. Ltd., 1961. Rossmiller, George E. "Farm Real Estate Value Patterns in the United States, 1930-1962." Unpublished Ph. D. dissertation, Department Of Agricultural Economics, Michigan State University, 1965. 192 Samuelson, P. A. "Parable and Realism in the Theory of Capital: The Surrogate Production Function," Review of Economic Studies, XXIX (June, 1962), pp. 311-317. Schertz, Lyle P. and Learn, Elmer W. Administrative Controls on Quantities Marketed in the Feed-Livestock Economy. Technical Bulletin 2&1. Minneapolis: University of Minnesota Ag. Exp. Sta., December, 1962. Schultz, T. W. Agriculture in an Unstable Economy. New York: MtGraw- Hill Book Co., Inc., l9h5. Smith, Vernon L. "The Theory of Investment and Production," Quarterly Journal of Economics, LXXIII (February, 1959), pp. 65- . Stallings, James. "Weather Indexes," Journal of Farm Economics, XLII (1960), pp. 180-186. Taylor, H. C. and Taylor, Anne D. The Story of Agricultural Economics in the United States, 1840-1932. Ames: Iowa State College Press, 1952. Tostlebe, Alvin S. Capital in Agriculture: Its Foundation and Financing Since 1870. Princeton: National Bureau of Economic Research, Princeton University Press, 1957. Tyner, Fred H. and Tweeten, Luther G. "A Methodology for Estimating Production Parameters," Journal of Farm Economics, XLVII, NO. 5 (December, 1965), pp. 1h62-1h67. U. S. Department of Agriculture. Agricultural Financial Review, XXV (December supplement, 196A):p. 63. . "Agricultural Prices, 196A Annual Summary," CrOp Reporting Board, Pr 1-3 (65), June, 1965. . Agricultural Production and Efficiency, Agricultural Handbook NO. 118, Vol. 2. . Agricultural Statistics, 1957, 1962, 1965. . Changes in Farm Production and Efficiency, A Summary,Report, 1963. Statistical Bulletin No. 233. Washington: U. S. Government Printing Office, July, 1963. . Consumption of Feed by Livestock, 1909-56 and l9hO-59. Production Research Report Nos. 21 and 79. . Current DevelOpment in the Farm Real Estate Market. ARS h3-101, May, 1959. . Dairy Situation. DS-310, may, 1966. 193 U. S. Department of Agriculture. Farm Income Situation No. 16A, July, 1957. . Farm Income Situation No. 199, July, 1965. . Farm Production: Trends, Prospects,,and Programs. Agricultural Information Bulletin 239. Washington: U. S. Government Printing Press, May, 1961. . Farmers' Expenditures for MOtor Vehicles and Machinery With Related Data, 1955. Statistical Bulletin No.f2h3. . Farmers' Expenditures in 1955 by Regions for Production and Farm Living. Statistical Bulletin NO. 22h. . Farmers in a Changing World--The 19h0 Yearbook of Agriculture. Washington: U. S. Government Printing Office, 19h0. . Handbook of Agricultural Charts. Agricultural Handbook NO. 275. Washington: U. S. Government Printing Office, 196h. . Handbook of Basic Economic Statistics, January 15, 1966. . Livestock-Feed Relationships: 1909-1963. Statistical Bulletin NO. 337. . Poultry and Egg Situation. ERS 232, May, 1966. . Prices Paid by Farmers for Commodities and Services, U. S., 1 10-1 0. Statistical Bulletin No. 319. . Statistical Bulletin Nos. 230 and 333 with l96h Supplement, "Livestock and Meat Statistics." Vincent, Warren (ed.). Economics and Management in Agriculture. Englewood Cliffs, N. J.: Prentice-Hall, Inc., 1962. Witt, Lawrence W. "Trade and Agricultural Policy," Annals Of the American Academy, CCCXXXI (September, 1960), p. 2. APPENDICES APPENDIX A IDENTIFICATION AND SOURCES OF SECONDARY AND ESTIMATED DATA USED TO ESTIMATE ADJUSTMENT COEFFICIENTSKWPRODUCTION ELASTICITIES, AND EARNINGS OF FARM CAPITAL. UNITED STATES FARM SECTOR, 1917-1964 A large quantity and variety of secondary data on capital inputs, output and prices in the farm sector provided by the USDA is utilized in the study. UsDA publications used for data sources include: A) For capital input series: (1) Agricultural Handbook NO. 118, Vol. 2, (2) (3) (4) (5) (6) (7) "Agricultural Production and Efficiency" (AH 118) ' Statistical Bulletin NO. 253, "Changes in Farm Production and Efficiency: A Summary Report," Annual revisions released in July (SB 255) Farm Income Situation NO. 164, July, 1957 and FIS No. 199, July. 1965 (F13 164. 199) Statistical Bulletin Nos. 250 and 555 with 1964 Supplement, "Livestock and Meat Statistics" (SB 250, 555) Production Research Report Nos. 21 and 79, "Consumption Of Feed by Livestock, 1909-56 and 1940-59," and SB No. 557, "Livestock-Feed Rela- ships: 1909-1965" (PRR 21, 79) Agricultural Statistics, 1957, 1962 and current issues (AS, 1957, 1962, 1965) Current Development in the Farm Real Estate Market, ARS 45-101, May, 1959 (co-52) 195 196 B) For product prices and output: (8) (9) (10) Number (6) above "Agricultural Prices, 1964 Annual Summary," Crop Reporting Board, Pr 1-3 (65), June, 1965 (Pr 1-5) Poultry and Egg Situation, USDA, May, 1966 (ERS 252) C) For input prices and overhead costs: (11) (12) (13) (14) (15) (16) (17) Numbers (6) and (9) above Statistical Bulletin No. 319, "Prices Paid by Farmers for Commodities and Services, U. S. 1910-1960" (SB 519) Statistical Bulletin No. 244. "Farmers' Expendi- tures in 1955 by Regions for Production and Farm Living" (SB 224) Statistical Bulletin No. 243, "Farmers' Expendi- tures for Motor Vehicles and Machinery with Related Data. 1955" (SB 245) Agricultural Finance Review, Vol. 25, Supplement, December, 1964 (APR) Handbook of Basic Economic Statistics, January 15. 1966 (HBES) Dairy Situation, DS-SlO, USDA, May, 1966 197 Uwscflucoo m magma .mmmd 6cm mmmfi .mmm mm .mcwom m>ma m9 owafimuno mummsmxu03 «amp Eoum mw mump .mmma Hmumd .mmaanaasn 6am saws mo 05Hm> an pmflamfluasfi mmaasaasn 6cm mama mo msam> mo mmmucmoumm mm mmGHUHHSQ Enmm mo mSHm> so mump ummm mam udvo mo coflumHomumucfl ummcaa .omma ou uoaum ma mama .m magma .mmuao m magma .mmm mm .m mflnmu.omm mm ma magma .mmmfi .mmN mm ma mHQmu .mmmd .mmm mm ma magma .mmma 6am mama .mmm mm ma magma .mmmfi Ucm mmma .mmm mm ma magma .mmma 6cm mama .mmm mm Amucmflnu Isa unmam mamflocflum mo maou ooo.fiv .m .3 .6mm5 HmNHHHUHmm Amumaaop .HHEV .w .3 .mEHmw co mmcwpaflsm Avmmn .HHEV .m .D .mEHmm co mmHSE paw mmmnon mo anEdz Amnmumm>umn ooo.av .m .D .mEumm co mum lumm>ums mmmuom UHmHm mo Hmnfidz Awumamn ooo.av .m .D .mEumm co mumamfl QSMUHQ mo Hmnadz AmGCHQEOU ooo.fiv .m .D .mEumm co mmCHQEOU aflmum mo Hmnfidz Amxosuu ooo.av .m .o .msumw co wxosuu HODOE mo umnadz Amuouomuu ooo.ao .m .D .mEHmm GO mHOUUMHU MO HOQEDZ Hmuflafluumm mmaauaasm mmasz paw mmmnom mumumm>umm mmmuom UHmHm mumamm msxoflm nonfinfiou aflmuw mxosua HODOE muouomua GOHuUSUOHm Eumm muflmmummm mmflumm udeH mUCQEEOM . 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I AHHmImoq uHmmHIHHmH ..m .9 .Hoan II IIPII h,” I“ UGDGHUGOUII.NI< BEE NHQmemAN 217 APPENDIX TABLE A-3.--Regression equations for estimating expect- ed overhead costs of specified capital inputs, United States farm sector, 1917-1964 _2 a0 a1 a2 R Tractors 4.808310 .702725 .364650 .784 10 year avg. life (4.5619) (.2195) (.2238) Trucks -10.652719 2.025049 -.804069 .826 10 year avg. life (11.0702) (.4799) (.5147) Grain Combines -4.152855 1.887058 -.688190 .852 10 year avg. life (7.8233) (.4943) (.5280) Buildings .002451 .587271 -.012846 .192 10 year avg. life (.0005) (.1821) (.1824) Corn Pickers -1.540475 1.770900 -.571590 .825 10 year avg. life (3.1017) (.4810) (.5146) Pickup Balers 33.579702 .968238 -.206645 .895 10 year avg. life (4.8916) (.3817) (.3942) Forage Harvesters 35.464550 .518983 .109073 .939 10 year avg. life (2.8438) (.2380) (.2368) Horses and Mules 40.631824 1.365793 -.621029 .699 5 years avg. life (13.0625) (.2561) (.2618) Beef Cows .185631 .911794 -.078590 .702 5 year avg. life (.0758) (.2322) (.2382) Milk Cows 1.511235 .876998 -.055858 .701 5 year avg. (.6532) (.2261) (.2321) Beef and Dairy Heifers .073399 1.168730 -.242271 .890 1 year avg. life (.0467) (.1461) (.1473) 1The coefficients are for the equation Ptn = a0 + alPt-1 + agPt_2 where fitn is the expected average overhead cost assoc1- ated with using one unit of the capital input in the current and next n-1 years with n the expected life in years of the in- put. Overhead costs for studied inputs not listed above are assumed zero. See Lerohl, op. cit., chapter 4 for a detailed explanation of the expectations model. 2K3 APPENDIX TABLE A-4.—-Salvage values of specified capital inputs, United States farm sector, 1916-1964 Z“: * General Salvage Price (dollars); Year Situation Motor Trucks Beef Cows Milk Cows 1916 201 64 55 1917 197 94 65 1918 World War I 215 109 75 1919 257 110 83 1920 _______________ 211 ______ 92_________§0___ 1921 220 56 53 1922 201 61 48 1923 187 56 50 1924 Prosperity in the 182 58 50 1925 Nonfarm Sector 173 74 52 1926 178 78 59 1927 173 74 67 1928 187 81 81 1929 _______________ 1 87 ______ 8 _2_ _ _ _ _ §5_ _ 1930 183 71 67 iii; The Big Depression 168 g? g? 1933 _______________ 1 68 ______ 3 _1; _ _ _ _ §0_ _ 1934 168 36 29 1935 168 61 42 1936 173 61 47 1937 Recover 178 69 51 1938 Y 192 61 51 1939 197 59 53 1940 201 58 55 1941 _______________ 2 15 ______ 76 _ _ _ _ §4_ _ 1942 225 99 81 1943 267 109 103 1944 World War II 285 102 96 1945 285 110 100 1946 _______________ 3 _2_8__ _ _ _ _ 13g _ _ _ _118__ _ 1947 370 176 137 i323 Post World War II :33 i2: $3; 1950 Boom 9nd Korea“ 416 182 178 1951 Conflict 440 219 222 1952 463 190 219 1953 459 155 159 1954 463 152 134 1Studied durable inputs not listed above are specialized“ to the farm sector and their salvage values are assumed zero. Salvage values of expendable inputs are assumed equal to acquie sition costs in computing factonsshares, and are in Appendix Tables B-1 through B-28. continued 219 APPENDIX TABLE A-4.--Continued ::== General Salvage Price (dollars) “ Year Situation Motor Trucks Beef Cows Milk Cows 1955 468 132 131 1956 477 125 138 1957 510 147 149 1958 General Economic 534 180 189 1959 Growth and Expansion 562 168 210 1960 562 158 201 1961 562 160 202 1962 580 167 198 1963 585 155 193 1964 608 145 -187 _ .Ucma mo muom cm mo wuaum may ha mm>2 maumxumm UmaamauasE mocusm one .UcmH ca Umumm>ca Hmaaop m mo umoo may mm ummumusa mo mumu papmuu mommuuoa Eumm mnu Ucm usmca map mm mmumum Umuacb may ca UGMa Eumm mo moam> ucwuuso map mcaummuu cam mammcu wasp Ga boxcamfim mmsvasnumu mcaumEaumw mnu mcamd muamum>aso wumum Comanuaz mo meumm spamamEmmnm >9 UmudeOUH 220 mm.mm ma. oama mm. amma mm.mm ha. mmma mm. mmma am.nm om. mmma om.aoa am. mmma am.mm mm. wmma mm.mm mm. amma am.mm ma. mmmm aa.mm am. omma am.mm ma. mmma so.am ma.a mmma mm.mm mo. amma ma.m> mm. mmma ma.mm mo. mmma mm.m> ms. nmma oa.mm ma. mmma ma.mm Os. mmma mm.am mm. amma am.am aw. mmma ma.mm ma. omma om.am as. amma am.>m mm. mmma om.am mm. mmma m>.mm mm. mmma ao.mm mm. mmma mm.mm am. smma m>.mm mm. amma am.oa an. mmma oo.>a ma. omma om.ma mm. mmma mm.oa mm. mama mm.ma mm. amma mo.>a mm. mama os.ma mm. mmma mm.aa am. aama mm.mm ma. mmma mm.mn aa. mama mm.am mm. amma mm.mm mm. mama am.mm ma. omma mm.om mm. aama ma.ma mm. mama am.>m ma. mama mm.ma mm. mama mm.mm an. mama am.ma ma. mama aa.mm om. aama A IIIIIIIIII manaaow IIIIIIIIII v A IIIIIIIIII mumaaOU IIIIIIIIII V UCMH mo muom HOQMa mo H503 HUCMH mo muom HOQMH mo H50: no mo w5am> am wo m>2 ummw cm mo Gdam> cm mo m>2 Hmmw mnu m0 m>z Umucsooman mnu mo m>2 Umucsoumaa Umucsoomao @mucsooman ammalmama .mmumum Umuacs .UCMa ou m>au0amu HmNaaauumw mo mmmz pcm Honda ou m>aumHmu muouomuu mo mmmz muSQEOU 0» 6mm: HOuUmm Emma on» ca UCMa paw HOQMa mo muospoum Gdam> amcamumzll.mld mqmde NHQmem< APPENDIX B THESIS ESTIMATES ....Nnn ...nwn ...... c..oo~ ....on a...oc~ ...... ......c .... 3.2.. 2...... 2.3» ....3 .....u ......u ...... 3.2.... n... 3.33 3...... 3.2» .....N ......» ......N ...... .32.. ~03 3.2a: ...nom om...» 3.03 3......» ...»..m ...... 2.3.... 33 vn.~v~.n ov.omm ov.mmn ov.cnm 01.0Nn 09.novm c.vocv nncvo... oooa SHWQE 3......» ...... ...... 3...... 3.3. 8...... ...... 3...... ..3 82 .566 o~.naoa no.~.a no.on~ ~0..n. .o..n~ c...n.~ ...~c. a..~..c a... .danza. 3:33 ...»... ...... 3...... 3.3. ......N... ...... 5...... ...3 a»...«» ....u. ...... as...» ...... oo.n~«~ ...... ......c a... ...... 3.33 3.... 8.... 3.33 3...... 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