INSTITUTIONAL CREDIT AND THE EFFKIENCY CF SELECTED DAlRY-FARMS Thocis for tho Dogroo of Ph. D. MlCHIGAN STATE UNIVERSITY Gerald ion Trant 1959 THES‘S Hy/ll/L 1/211 guy/Ill! film mull/1111mm” ‘ 3888 This is to certify that the thesis entitled INSTITUTIONAL CREDIT AND THE EFFICIENCY OF SELECTED DAIRY-FARMS presented by Gerald Ion Trent , has been accepted towards fulfillment of the requirements for Ph.D. degree in Agricultural Economics Major profeéor Date Jilly 2, 1959 LIBRARY Michigan Stats University INSTITUTIONAL CREDIT AND THE EFFICIENCY OF SELECTED DAIRY-FARMS AN ABSTRACT Submitted to the School of Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics by Gerald Ion Trant 1959 Approved by %%K Gerald Ion Trant ABSTRACT Institutional Credit and the Efficiency of Selected Dairy-Farms ‘ The purpose of this study was to appraise the adjustment possibilities facing selected dairy farms within the credit restrictions imposed by formal credit institutions. It was believed that such an appraisal of adjustment possibilities would serve as a useful basis for delineating and evaluating problem areas in a rapidly changing segment of Michigan Agriculture. Criteria of efficiency suitable to use with both intra-functional and inter-functional types of adjustment were develOped. These economic criteria/were presented in conjunction with ethical criteria,that the author considered relevant in appraising the possible adjustments of the studied farms. Intra-functional adjustment possibilities for the studied farms were explored in conjunction with a statistically fitted production function of the "Cobb-Douglas" type. It was found that more efficient adjustment on the statistically estimated production function,would force the farms out of dairying and organize them as fairly typical cash crOp enterprises. More efficient adjustments for the studied farms,that would maintain them as dairy enterprises were indicated to be possible,if the farms were to be shifted to a new labor efficient production function. In this instance budgeting was the technique used to make the hypothetical adjust- ment on the individual farms. The coefficients in the modified budgets subsumed a labor efficient technology. Gerald Ion Trant The tentative results of the study were as follows. I. Enough credit was available from institutions to permit more efficient adjustment of the studied farms, and at the same time maintain them as dairy enterprises. 2. Labor saving technology was required to make the farms both more efficient, and at the same time continue them as dairy enterprises. 3. Earnings of labor and income levels were found to be low, relative to wage rates of industry. A. The budgeted adjustments on the studied farms implied large increases in milk production, even with land and labor fixed at their initial levels. 5. If the milk production increases implied in the modified budgets are generalized for a large segment of the Detroit milk shed, important reductions in milk prices, and hence in efficiency are implied. 6. Inadequate communications between lenders and borrowers have resulted in credit problem situations for many farm borrowers. In the light of these results, it was concluded that the consequences of generalized increases in efficiency in the dairy industry, that involved shifting to the production function assumed in the modified budgets, would tend to be self defeating, unless control of production were also to be established. Consequently, in the recommendations, a hypothetical program was formulated that would appear to result in the joint attainment of increased efficiency, and equality of treatment for farm Operators, in the dairy industry. INSTITUTIONAL CREDIT AND THE EFFICIENCY OF SELECTED DAIRY-FARMS by Gerald Ion Trant A THESIS Submitted to the School for Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1959 AC KNO‘IEBDGl-IB‘J T3 The author wishes to express his obligations to the many peOple who inSpired and assisted in the develOpment of this work. Special thanks are due Dr. G.L. Johnson for his continuous guidance and inspiration. The constructive help of the following professors was greatly appreciated Dr. Richard Rudner, Dr. Lawrence Witt and Dr. Lewis Zerby. Many thanks are also due Dr. L.L. Boger, head of the department of Agricultural Economics, who provided the assistantships to the author which made this project possible. TABLE OF CONTENTS CHAPTER I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 0 Organization of The Thesis . . . . . . . . . . . . . . . Orientation of Study to Dairy Farms . . . . . . . . . . II. CRITERIA USED FOR EVALUATING ADJUSTHENTS OF FIRMS AND INSTlTUTIONcocoooooooooooooooooeoo The Criterion of Efficiency . . . . . . . . . . . . . . Assumptions and/or Basis Used in Defining Efficiency . . Definitions and Restrictions . . . . . . . . . . . . . . Implications of Definitions and Restrictions . . . . . . Relation of Efficiency to the Problem of Farm Adjustment Institutional Changes, Economic Theories, and Normative Judgmentsoooooooooooooooooooooooo III. EMPIRICAL PROCEDURES AND CONSIDERATIONS . . . . . . . . Selection of Analytical Techniques . . . . . . . . . . Functional Analysis . . . . . . . . . . . . . . . . . Budgeting . . . . . . . . . . . . . . . . . . . . . . The Selection of Functional Form . . . . . . . . . . . Further Empirical Considerations . . . . . . . . . . . Location of Study . . . . . . . . . . . . . . . . . . The Samples . . . . . . . . . . . . . . . . . . . . . Field Techniques . . . . . . . . . . . . . . . . . . . IV. FUNCTIONAL ESTIMATION OF VALUE PRODUCTIVITY OF INPUT CATEGORIES . g g 0 g o g o g o o O o O O O o O O o 0 O O TheFirStFit.ooooooooooooooooooo Procedures for Grouping Input Categories . . . . . . . PAGE \I‘QU‘U‘ IO 12 2h 25 26 28 31 3h 34 37 CHAPTER PAGE Evaluation of Fitted Functions . . . . . . . . . . . . . 39 Aggregative Considerations . . . . . . . . . . . . . . . A5 Assignment of Individual Value Productivity Estimates . 46 Special Problems Associated with Livestock-Forage Investments and Labor . . . . . . . . . . . . . . . . . A9 Summary of Assigned Values of Regression Coefficients . 50 V. CREDIT REQUIRED FOR EFFICIENT ADJUSTMENT . . . . . . . . . 52 Types of Adjustments Considered . . . . . . . . . . . . 52 Functionally Estimated Efficiency . . . . . . . . . . . 53 Budgeting and Inter-Functional Adjustment . . . . . . . 58 Sources and Modifications of Data Used in Budgeting . . 59 Initial and Modified Budgets . . . . . . . . . . . . . . 63 Appraisal of Budget Estimated Credit Requirements . . . 9A VI. ADJUSTMENT POSSIBILITIES . . . . . . . . . . . . . . . . . 99 Determination of Institutionally Available Credit . . . lOO Adjustment Possibilities . . . . . . . . . . . . . . . . lO2 Aggregate Consequences of Adjustment . . . . . . . . . . lOA VII. CONCLUSIONS, IMPLICATIONS AND RECOMEENDATIONS . . . . . . 112 Summary of Important Results and Conclusions . . . . . . ll2 Appraisal of Conclusions . . . . . . . . . . . . . . . . 113 Possible Implications . . . . . . . . . . . . . . . . . 117 Recommendations . . . . . . . . . . . . . . . . . . . . 119 APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 A - Supplementary Tables . . . . . . . . . . . . . . . . . . . . 127 B - Supplementary Tables . . . . . . . . . . . . . . . . . . . . 131 C - Questionnaires . . . . . . . . . . . . . . . . . . . . . . . 135 BIBLIOGIIAPILI . . o o o o o o o o o o o o o o o o o O o 0 O O O 0 0 179 TABLE II. III. IV. VI. VII. VIII. IX. XIII. LIST OF TABLES Regression Coefficients (bi's), Their Standard Errors ( ) and Associated MVP's at Geometric Mean Organization . . . Simple Correlations Between Input Categories (First Fit) . Regression Coefficients (bi's), Standard Errors (bi), bi's, a values, and Associated MVP's at Geometric Mean Organization Five Adjusted Functions Simple Correlations Between Input Categories (Second Fit) . Simple Correlations Between Input Categories (Third Fit) . Simple Correlations Between Input Categories (Fourth Fit) . Simple Correlations Between Input Categories (Fifth Fit) . Credit Available from Institutional Sources for Individual Farm Adjustment . . . . . . . . . . . . . . . . . . . . . Credit Available from Institutional Sources, Credit Required for More Efficient Adjustment of Fanns, and Adjustment Possibilities . . . . . . . . . . . . . . . . . . Summary of Adjustment Possibilities . . . . . . . . . . . . Summary of Initial and Modified Budgets . . . . . . . . . . Profit Maximizing Organization of Studied Farms, Labor and Livestock—forage Fixed at Initial Level for Each Farm, with.MVP of Labor-livestock-forage Computed at Profit Maximizing Level of Other Inputs . . . . . . . . . . . . Profit Maximizing Organization of Studied Farms, Labor and Livestock-forage Fixed at Initial Level for Each Farm, with MVP of Labor-livestock-forage Computed at Profit Maximizing Level of Other Inputs.' PAGE 35 36 40 Al Al A2 AZ 106 107 108 109 127 128 TABLE XVI. Profit Maximizing Organization of Studied Farms, Labor F Fixed at Initial Level for Each Farm with MVP of Labor Computed at Profit Maximizing Level of Other Inputs . . . Profit Maximizing Organization of Studied Farms, Labor Fixed at Initial Level for Each Farm with MVP of Labor Computed at Profit Maximizing Level of Other Inputs . . . Summary of Credit Sources and Conditions for Making Loans . 129 130 131 1. Outline Map of Rich LIST OF i w ,4 C) a \ 1 PL: Ff‘ b J V1 J 7:. L'IL-JS 1 Showing Location of Sanilac County PAGE 29 CHAPTER I INTRODUCTION Productive resources in agriculture may be controlled and owned by different sets of individuals. In some instances a formal credit insti- tution stands between the resource owner and the farmer, in other cases there is no intermediary between the borrower and the lender. This thesis, which is directed towards situations in which credit institutions exist as intermediaries between resource owners and resource users, attempts to do two separate but related tasks. The first of these is to determine whether or not the resources available to farm.businesses from credit institutions are adequate to admit efficient organization of dairy farms in Sanilac county, Michigan,while the second is to appraise some of the consequences of institutional changes that would increase the availability of credit and perhaps increase efficiency. Organization of the Thesis In the last section of Chapter I, the author's reasons for orienting this study to credit problems of the dairy industry, will be presented. The criteria to be used for evaluating adjustments of firms and institutions will be deveIOped in Chapter II. Special attention will be devoted to a deveIOpment of limited, but Operational, definition of efficiency. The interrelationships of ethical and conditionally norma- tive criteria will also be discussed in the same chapter. Chapter III will present the empirical procedures and techniques to be used. In the first portion of Chapter III, the selection of _analytical techniques and functional forms will be discussed. The second portion of the same chapter will deal with relevant character- istics of the area sampled,and specific field techniques used. The procedures used in deriving estimates of regression coef- ficients and value productivity of input categories will be presented in Chapter IV,with procedures for grouping inputs and reorganizing inputs categories receiving special emphasis. Procedures used in calculating credit requirements for more efficient adjustment of the studied farms will be included in Chapter V. The relevance of adjustments involving,and not involving_technological change,will be discussed in conjunction with the use of functional and budgeting techniques. Estimates will be presented of the credit requirements for the more efficient adjustments secured from budgeting individual farm situations. The chapter will be completed with an appraisal of the budget-estimated credit requirements for the more efficient adjustment of the studied farms. Chapter VI Will appraise the possibilities of securing more efficient adjustment on the dairy farms studied with the credit available from institutions. In the same chapter, the nature of some of the aggregative adjustment problems will be discussed. Chapter VII includes a summary and evaluation of factual con- clusions deriving from the body of the thesis. In the same chapter implications of the conclusions are discussed and elaborated. The final section of the chapter presents some possible institutional adjustments in the dairy industry,that appear consistent with certain criteria of efficiency and even-handed justice. Orientation of Study to Dairy Farms Since this study is one of a number of studies on problems in the general area of agricultural credit,currently being undertaken under the supervision of Dr. Glenn Johnson of the Department of Agricultural Ebonomics at Michigan State University, its scOpe can be more restricted than might otherwise be the case. It is directed toward dairy farms in particular for a number of reasons. For one, the problems of getting and using resources seem to be particularly important in the dairy industry. Recent studies of the value productivity of labor on.Michigan farms have indicated,that typically such farms appear to be organized so that the value productivity of labor is low. The socio-economic conse- quences of this situation appear to be that most dairy farms in the State are not able to compete with industry for hired labor. Earl Fuller, in his thesis (Some Michigan Dairy Farm Organizations Designed To Use Labor Efficiently), indicates that it requires an investment in excess of $100,000 to make earnings on such farms competitive with industry. Along with estimates of the amount of resources required to permit Michigan dairy farms to compete for labor with Michigan industry, are certain other more subtle,and less easily measured items to be considered. These include the level of technology required and the amount of cash expenditures necessary to maintain such farms as pro- ducing units. Though a complete list of the new technologies available, and a full discussion of their application in the Michigan dairy indus- try is beyond the sc0pe of this thesis, it seems worthwhile to indicate the nature of technical changes germaine to the issue of credit and efficient adjustment. These changes include artificial breeding, milking parlors, self-unloading wagons and silos, bulk tanks, and h loose-housing. It is interesting to note that almost all of these changes are,or purport to be of a labor—saving characterl, and with the exception of artificial breeding,require important capital outlays for their initi- ation on a farm. A further consideration of great importance is that Hany of these new develOpments are not good complements with old technolo- gggbut can be productive only if they are associated with other new deveIOpments. This situation may be illustrated in the following example. If a farm Operator wants to acquire a pipeline milker,he finds that it is as cheap or cheaper,to build a milking parlor in which to use it,than to install the pipelines in a stanchion barn. Furthermore, if he has a stanchion barn his investment in stanchions becomes unproductive and useless when he uses the milking parlor. Another complication is that although the milking parlor and its ancillary equipment enable the farmer to complete his milking more rapidly than before,it is difficult to increase net income unless he is thereby enabled to get rid of some of his hired labor, milk more cows or add some other enterprise. Consequently, most changes to milking parlor and pipeline milker are associated with more cows, more forage, more equipment, and more storage capacity. Such increases in the farmer's investment may easily be more than $30,000 on fairly modest-sized farm Operations. 1 Not only are these changes of a labor-saving nature, i.e. they tend to make possible an increased earning capacity for labor, but some of them are also of a land and feed saving character. Thus their adOption on a wide scale has important consequences for the supply of milk produced from a given quantity of land and feed. In making recommendations to adopt such technologies,the resultant increase in production and its effect on milk prices cannot be neglected. CHAPTER II CRITERIA USED FOR EVALUATING ADJUSTMENTS OF FIRMS AND INSTITUTIONS Although economic theory may be used in a manner that implies the subsumption of ethical norms its design is more apprOpriate to handle situations in which it is used as a normatively neutral instrumentality for appraising the use of means to achieve more ultimate goals than it is capable of appraising. There is a fairly long list of criteria that economists qua economists have used to judge the use of means by economic entities. This list includes productivity, utility, efficiency, and profitability. The author chose efficiency as his main but not exclusive criterion, since it embodies many of the connotations of the others for general welfare, as well as some characteristics of its own. That certain aSpects of utility (as an instrumental goal) are included in a concept of efficiency will become evident as the author presents his definition of efficiency. In this chapter, the definition of efficiency is treated initially; subsequently a set of normative doctrines that appear relevant to problems of institutional adjustments are presented. The normative doctrines are included because the author believes it is his responsi- bility to make explicit his point of view, and at the same time to point out what he considers a fruitful approach to problems arising out of situations involving interpersonal utility comparisons. The Criterion of Efficienqz Although the science of economics is concerned with questions of efficiency, there is a dearth of conceptual material on efficiency in the literature of economics. Furthermore, there appears to be little consensus on the meaning of the word efficiency. Many past work have1 dealt with efficiency in abstract, static equilibrium states of perfect or pure competition. The definitions of efficiency used in economics have in common,the notion of a comparison of one set of inputs and out- puts with another set. Questions of efficiency do not arise if there exists only one factor2 combination to produce a given output. Cuestions and problems of efficiency arise when there are more ways than one,of attaining an end or where there is more than one end to be attained with the same set of resources. This concept of an end or goal is related to another characteristic of efficiency, often omitted from its formal definitions, namely that it is meaningless to speak of a ratio of input and output,un1ess some value may be assigned to both output and input.3 With these foregoing considerations in mind the author has taken the liberty of attempting to present a concept of efficiency in a way that avoids some of the difficulties mentioned above. For the purposes of the present study,efficiency will be handled as the following framework indicates. 1 See for example: Boulding, K.E., Economic Analysis, Harper and Brothers, New York, New York, 1948, p.h9h, 5L8 ff. Scitovsky, Tibor, Welfare and Competition, Richard D. Irwin, Inc., Chicago, Illinois, 1951, pp.lA8-l79. Stigler, G.J., The Theory of Price, (Revised Edition), Macmillan Co., New York, New York, 1957, pp.lOl-106. For example: factor combination Xa on page 7 of this chapter. 3 Knight, Frank, RiskLUncertainty and Profit, Kelley and I-Eillman, Inc., New York, New York, 1957, p.61. 0.. Assumptions and/or Basis Used in Defining Efficiency 1. Prices are assumed to be given to producers in the industry. 2. Costs are computed on an Opportunity cost basis if market prices are not applicable. 3. Only factor product relationships are treated. h. The law of diminishing returns or variable prOportions is used. Though the author does not attempt to defend these assumptions and/or basis as the best or most realistic for the purposes at hand, he finds them sufficiently restrictive to render the problem of defining efficiency manageable and, at the same time, adequate to yield a useful Operational concept. Definitions and Restrictions Ya . amount of Y produced by factor combination Xa: Xa - (Xla’XQa’ ..., Xna); Xia _ amount of Xi in factor combination k : Xia is exhausted in the production of Ya: P = price of Y: Va = (Py°Ya) = value of Ya: Ca Y = (Xla.Px + X2a.P a + ... + Xna.PXha) = cost of producing Ya of Y. la X2 Similarly Yb 2 amount of Y produced by factor COmbination Xb, etc. A As the empirical material and analytica techniques are discussed and deveIOped in the following sections, it may appear that a problem of handling multiple products with a single output function has apparently been neglected. This omission, however, is more apparent than real. Combining inputs into categories such that there exists between cate- gories of inputs, neither good complimentarity nor good substitutability produces a situation in which the principal problems of adjustment exist between categories of inputs. In this study output of the pro- duction function is measured in terms of dollars of gross income pro- duced by joint and supplementary products. It seems not unreasonable to assume that fairly good adjustment exists at this point, and that the principal adjustment problems as previously indicated lie between input categories. 8 Given that X3 and Xb are both attainable factor combinations, X3 .. will be said to be efficient relative to Xb if for (Va = Vb) or (Ca .. Cb) the following inequality holds: I Va Vb * ca Cb X3 will be said to be equally or less efficient than Xb if II holds: Inequality I is implied by any of conditions 1, 2, and 3 which follow: 1. Va) vb and 0,11 -_- Cb 2. Va : Vb and Ca< Cb 3. va > v]D and Ca < Cb In the event that factor combinations Xa and X5 are such that relations A or 5 hold, 1.. Va > Vb and Ca > Cb 50 Va< Vb and Ca < Cb then Xa will be said to be more efficient than Xb if the result of multi- plyingtxntlnumerator and denominator of Va or Vb by a positive integer Ca Cb conforms to condition 1, 2, or 3 provided such conditions are also capable of realization. If an existing state is represented by Xb and an attainable state by Xa, and Xa and Yb together with apprOpriate prices produce 1, 2, or 3 then an inefficient state will be said to exist. For a given production function each of the following inequalities indicates inefficiency: 2/ O. ILL PX. (Y) PIFCV. :1. £ j 1 £ Ai . —-———_ l = l, 2, ..., n 3 j j 8 l: 2: 0-0: n T a 17' e o c 7. hPPxi(Y) A hPPxi(Y) for and pair of firms produCing Y i : l, 2, ..., 1'1 é/ 2/ §/ 8. dTVP . TC £ 1 dTC TVP 5 If product (Y) depends upon inputs X1, X2, X3, ..., Xi’ ..., Kn i.e. Y a f(xl, X2, X3, 00., xi, 00., K1) then I‘Ippx. (Y) = DY i E’Xi 6 TVP or total value product is defined as Y o Py 7 TVC where prices of inputs are fixed is defined as d Z «P here mug xi) w X1, X2, ..., Xd are variable inputs. 8 To maximize the ratio Va : TVP set the first derivative of the ca TC ratio equal zero and solve thus: d(TVP) dSTVP) — dgTC) TC a TC dY TVP dY dY (TC)£I multiplying through by (T02)dY yields I O TC . d(TVP) - TVP . d(TC) = o or TC .d(TVP) - l TVP . d(TC) since TC : TVC + TFC .°. d(TC) e d(TVC) + d(TFC) and since d(TFC) e o .'. d(TC) = d(TVC) .'. TC . d(TVP) = TC . d(TVE)_ : l TVP . d(TC) TVP . d(TVC) l t 10 Implications of Definitions and Restrictions Condition (6) implies that the same output can be produced for a lower cost and that a higher output can be produced for the same cost; thus, it implies the existence of inequality I in four (1) or (2) and, inovided that the proportions of X1 and Xj can,in actuality be varied, so that the inequality can be removed, then there exists a new state more efficient than the existing state. Condition (7) implies that a larger total value of output can be gubduced at the same cost to an industry,if adjustments can be made between firms that permit those having higher MPP XiOOO> 1 >00. > r To To TC TC f f f. f 1 2 i r and for consecutive ratios, condition 1 or 2 or 3 hold or may be made to hold by multiplying either of the consecutive ratios by 9_ where q q is a positive integer. If the resulting multiples of input and output are attainable, statements about the relative efficiency of any two production functions can be made as follows: 10. If for all levels of output TVPf TVPf then fi 1 :> i+l TCf TCf i i+l Will be said to be more efficient than fi+l° 12 11. Furthermore, if for at least one level of Output on f1 and for all levels of output on fi+l’ TVPf. TVPf. then fi will be said i :, i+1 TCf TCf i i+l to be more efficient than f. . 1+1 12. If at the profit maximizing output on fi, and at the profit maximizing output on fi+1’ TVPf TVPf then fi will be said to i :> i+1 TC TC f. f. 1 1+1 be more efficient than fi+l‘ However, if the profit maximizing output is for short run competitive equilibrium, it is unlikely to be the most efficient output as previously discussed under section 8. 13. Finally, if at the lowest average total cost of fi and fi+l’ TVPf TVPf 1 1+1 then f. will be said to be more efficient than f. . > ----—- 1 1+1 TCf TCf i i+l It should be noted that the lowest point on the average total cost curve corresponds to the equilibrium output under perfect long competition adjustment where profits are maximized and equal to zero. Relation of Efficiency to the Problem of Farm Adjustment The concepts and criteria of efficiency presented in this chapter will be applied to individual farm situations, to indicate the direction and nature of more efficient resource combinations in a later section of this thesis. This will be done in conjunction with estimates of the value productivity of different resource combinations for the farms studied. The amounts of credit required on individual farms to achieve 13 the relevant pattern of efficient adjustment will be compared with the amounts Of credit available from the credit institutions serving the area. Differences between the amounts and forms of credit available , and those required to attain the patterns of adjustment considered to be more efficient than those extant will be used as one basis for making recommendations concerning changes in credit institutions. fig i wever, it would be counterfactual to assume that only criteria of :3 h efficiency are important when recommending changes in institutions, particularly when these changes usually involve interpersonal utility comparisons that are not capable of being handled by most economic ... theory. Consequently it seems apprOpriate to consider criteria that involve both economic and ethical considerations. ‘V‘Iith the end in view that, appraisal of changes in credit institutions may be more complete than if. these additional criteria were to be omitted. Institutional Changes, Economic Theories, and Normative Judgments When changes are made in the institutional framework of a society, the result may be regarded as consisting of infinite sequences of conse- quences extending into the future.9 It is often impossible to determine the net effect of such a series of changes. A course Of action WhiCh a'ppears fruitful and practicable in this case,is to consider those ConSequences which appear to be important in the relatively near future to those influenced. Though it is almost undeniably true that the COnSequences of the more distant future, become of less and less importance for present generations, it may not be the case for the \ See: Moore, G.E., Principia Ethica, Cambridge University Press, Cambridge, 1951., pp.l52-153o lb, .future generations affected. In any event, the present discussion will handle what the author considers most important when dealing with changes in economic institutions. This section will attempt to deline- ate some consequences that might result when economic institutions are changed. These consequences will be treated from the standpoint of means and of ends. Though the treatment is incomplete, it still seems worthwhile. Before discussing the role of economics in appraising institutional change, it is necessary to point out some of the assumptions underlying the relevant portions of economic theory, and to indicate fairly explicitly how these affect their capacity to serve as criteria of institutional adjustment. As the theories of welfare economics are closely related to the pI‘Oblem at hand,it is important to discuss the assumptions which under- 1y them. Two of these assumptions are as followszlO (l) asset ownership patterns are fixed and given (2) utility functions of individuals are independent In addition, interpersonally valid utility measurements do not exist. The restrictive nature of these two assumptions, and our inability to measure utility adequately, will be considered on an individual basis. The assumption of fixed asset ownership patterns,serves to simplify the problem of welfare economics ,and eliminates changes requiring inter- per‘Sonally valid utility measurements for evaluation.. Thus it is difi'icult to use welfare economics to judge the preferability of different asset ownership distributions. It is worthwhile to note that \ 10 See: Reder, M.W., Studies in the Theory of Welfare I~3conomic_sJ COlumbia University Press, New York, 1951, chapter I. 5"; A I 15 mere relaxation of the assumption of a fixed asset ownership distri- bution,would result in a wide range of asset distribution situations which could not be judged by the tools of welfare economics, so long as the problem of maidng valid interpersonal utility comparisons remained. The second assumption of the independence of individual utility functions,restricts the capacity of welfare economics to evaluate changing institutions. Its inclusion in a sense absolves welfare econo- .'!-.Y‘.. 3‘3”“ _ ... mics from a consideration of the effects of jealousy,or desire for imi- tation,that may result when some peOple believe that they are made relatively worse off when others are made relatively better off in a W "Pareto-better" sense. What are the capacities of welfare economics then in judging insti- tutional changes? Briefly, they appear to be of the following nature. When changes in the institutional matrix in which an economic system is imbedded are prOposed, there are six possible classes of consequences for the persons involved. These possible resultant situations are as fellows: l. Situations in which some people are made better off and no one is made worse off. 2. Situations in which some people are made better off and some people are made worse off. 3. Situations in which no one is made better off and no one is made worse off. 1.. Situations in which no one is made better off and someone is made worse off. 5. Situations in which everyone is made better off. 6. Situations in which everyone is made worse off. l6 Welfare economics discriminates among these situations, and the no change situations to which they are being compared as follows. In situ- ation l, welfare is said to be increased; the same is true for situation 5. In situation A and 6 welfare is said to be decreased. Welfare eco- nomics may be taken as regarding situation 3 as unchanged in terms of welfare from a previously existing state. However, case 2 is a different matter; here some peOple are made better off, and some peOple made worse off, and since interpersonally valid utility comparisons are not available, welfare economics cannot be used to discriminate between such a state and a previously existing one. Although by utilizing the "Compensation Principle" it may be possible to evaluate such a situation in terms of Welfare economics. Thus a given economic reorganization results in increased, decreased, or unchanged welfare, if the algebraic sum of Compensating taxes and bounties (levied on all affected persons) is respectively positive, negative or zero. However, even though it is possible to apply the welfare criterion unless it is actually applied, Welfare economics cannot judge the reorganization. It has been admitted that certain types of situations involving a COni‘lict of interest cannot be resolved by welfare economics, nevertheless in general economics (not welfare economics) has an important place when it is used positivistically to describe the nature of conflicts at issue when economic institutions are changed, and to predict consequences of alternative institutional arrangements. When used in SUCh a manner, it SeI‘Ves as a framework of analysis, for predicting consequences resulting from solutions reached with applications of other criteria to the problem at hand. Then, too, if a new type of asset ownership pattern for example i , , . . S DI‘Oposed, economics describes a new fairly non-controverSial type of J: i Q“, 1’? optimality without which the full consequences of the ownership pattern advocated could not be determined. The argument which follows, indicates that the Optimality implied by economics, resembles in consequence if not in intent one of the results of applying Kantian ethics to problems of decision making for society. The "Pareto-better" optimality of welfare economics is held to exist when no one may be made better off without making someone worse off. Because of the absence of techniques for making valid inter- personal utility comparisons, states that involve making some persons better off and others worse off, are not yet capable of being handled by welfare economics. Kantian optimality would be similar in consequences to "Pareto-better" Optimality but for a different reason. Faintll held that no individual should be treated as a means alone,since as a ration- a]. being he is an end in himself. Thus, application of Kantian ethics I~"ejects prOposals to make someone better off if another individual were to be used as a means alone (i.e. made worse off) of achieving this end. The remaining portion of this section is devoted to a discussion of pessible ways in which ethical systems can be used to bridge the gap between the feasible applications of welfare economics on one hand, and the more difficult problems involving interpersonal utility comparisons on the other. that is proposed is a discussion of Kant on consistency and humanity, Plato on value scaling and Bentham on consequences. Before entering into the more detailed aspects of the problem, a few prefatory remarks of a more general nature are required. Although from an external vantage point economic theory may appear to involve the \ ll .POlicy Decisions, Englewood Cliffs, New JGI‘SGY, Prentice Hall Inc., 1951, Chapter 5. In the discussion that follows Leys' interpretation of Kantian ethics is used. For a brief discussion of Kantian Ethics see Leys, W.A.R., Ethics for HIV ; c 5 ...-gm, it. _ l 18 subsumption of certain ethical norms, it is primarily directed tox-rard the instrumental questions of productivity and efficiency in attaining more ultimate ends. Hence in studies involving questions and consider- ations of a more ultimate normative nature, it is apprOpriate to move directly and explicitly into the area of ethics. This is not to say ~| that ethics is capable of providing universally adequate answers to the a I _ 4? Huh..- complicated problems involved in institutional Chango,but rather that a consideration of questions raised by ethical systems :.1ay result in re com'iendations which are in the author‘s view,more consistent than those made without such considerations. .9 In choosing which ethical systems to use as criteria for the ap- praisal of an institutional change, it would appear reasonable that the relevant ethical systems should of themselves be capable of meeting Certain conditions. Not that these conditions would stand as value Systems for value systems,(except in a very restricted sense) but IHillier that they would serve to indicate the admissibility of practical applications to the problem situation at hand. These conditions which would have to be met would be clarity, consistency, and applicability. To be more explicit, the requirement of clarity is necessary to deline- ate, specifically and unambiguously, the range of human behavior or activity which is regarded as being the universe of discourse treated by the ethical system in question. Thus those sorts of behavior to be inc=luded and those to be excluded are to be clearly stated. With regard to the criterion of consistencyfwhat is sought by the inclusion of this requirement,is the avoidence,within an ethical system of Criteria,\-fnich in concerted application yield norms incapable of joint 3*) ~ . . . . . . , . 1pllcation. The third of these requirements for an ethical system is 19 .that of the applicability of the ethical system, or its resultant norms to the problematic situation under consideration; thus an ethical system such as casuistry12 would be inapplicable to many aspects of institution- al change, since the basic idea of casuistry involves adherence to prece- dent for guidance in decision making. Situations involving changes without precedent could hardly be expected to yield to a casuistic r»- approach. Nevertheless casuistry might be of use in determining the . acceptable formal structure of such changes. This incomplete consideration of ideas of Kant, Plato, and the ,_ Utilitarians, indicates that one of the important criteria developed by E," Kant13 for determining whether a decision is good or not,was what might be called the consistency of the decision. Kant indicated that the way t0 test whether or not this criterion was being met,was to ask whether the decision was capable of being willed as a universal law for all people. In case it is not possible to so will it, then it is not I‘egeerded as good. Thus, Kant would have decried dishonesty for if it Were willed to be universal then the original advantage (if there had been any) would be lost by its universal adeption. With respect to the operation of credit institutions, an application of the Kantian princi- ple of consistency might be made to the practice of many lending agen- cieS, of making loans if and only if the loan is so secured that were a disaster to occur the lending agency would not lose by it, and its depositors would be thereby protected. The Kantian question in this \ 12 Where casuistry is defined as the art of applying authoritative rules 1 and precedents to present cases. 3 Leys, W.A.R., Op. Cit., chapter 5. It should be emphasized that since Olily Leys' interpretation of Kantian ethics is used, the discussion is t-<> be regarded as a paradigm of how Kantian ethics might be used rather than as an application of Kantian ethics. ’20 instance might be that if the lenders are to be protected in such a situation why shouldn't the borrowers also be protected from loss? This becomes of particular relevance when the loss causing situation is external to the control of borrower and lender. As previously noted toward the end of the first portion of this section, Kant also believed that peeple were ends in themselves and as F‘- such they should not be treated as means alone. It is interesting to i apply this criterion to the situation obtaining in the usual contract curve indifference map diagram ,between a single buyer and a single seller.lh Adjustments of a "Pareto-better" type appear to be admitted ; by this type of criterion, but non "Pareto-better" adjustments along the Contract curve are not, since at least one of the parties is treated as a means alone by the other. This situation might be particularly true if the bargainers were of unequal power.15 One characteristic which all systems of ethics appear to have in COTTLmon is that they tend to raise questions rather than to provide neat anSWers to questions. The question of how a society scales or orders its values,is one of the important ones raised by platonic ethics.l6 The application of value scaling to a situation involving institutional Change, would appear to yield a more consistent ordering of values than non reflective choice. Consequently some sort of deliberative value .\ LL. 15 Stigler, G.J., o . cit., p.92. Power itself may be regarded as a "status quo" asset not to be redistributed, which thus may complicate the problem further. J owett, B., The Dialogues of Plato, New York, New York Random House, 1937. 21 'scaling helps obtain consistency. It should be noted however that this is not a recommendation that a value scale be deterrined empirically for society which will serve in all situations. Some of the problems that would arise out of an attempt to form such a value scale,appear to be insoluable to a large degree. The principle of value scaling like most forms of idealism can be of most practical use in solving problems that involve conflicts of values when the interested parties are of approxi- mately equal bargaining strength}7 This is held to be the case since the advantage of an appeal to abstract principle may otherwise be only unilaterally apparent. However, given that both sides of a dispute consent to such a procedure then a deliberative, considered scaling of Values may result in the discovery of a mutually admissible principle of a higher order of abstraction than those in conflict, which may in turn be used to resolve the conflict in question. Although utilitarians such as Bentham18 are usually associated with a. hedonic calculus of pleasure or pain ,V..r‘;1at is often overlooked is the Simple fact that they were concerned with the consequences of actions, decisions, or changes as they affected the lives of human beings. Thus ”EU—ls the idealism of Kant or Plato seeks to determine the intrinsic meI‘its of acts having moral implications, the utilitarian is concerned witvh its consequences for human welfare. And although utilitarinism is Lu"likely to resolve conflicts of interest in the way that idealism may be used, the idealistic solution can hardly be regarded as complete until the consequences of its application have been thought out. \_ 1'? Leys, W.A.R., o . cit., chapter 5. Bentham, J., An Introduction to the Principles of Morals and Legislation, Oxford, The Clarendom Press, 1907. CHAPTER III EMPIRICAL PROCEDURES AND CONSIDERATIONS Selection of Analytical Techniques As indicated at the onset, one of the principal objectives of this thesis is to determine whether or not Michigan dairy farms are currently . i' u .' ‘qu . able to make efficient adjustments using the formal credit institutions “‘ available to them. Several techniques of determining efficient farm organizations are available including functional analysis, budgeting, ' 'e linear programming, and the techniques of traditional farm management. In the case of the present study functional and budgeting approaches were decided upon for several reasons. Functional Analysis First it seemed essential to consider at least two types of adjust- ment namely, adjustments on an existing production function, and adjust- ments involing a shift from one production function to another. Functional analysis is more adequate than some other techniques to handle the former type of adjustment while budgeting, linear programming, and traditional farm management techniques may be better suited to handling the latter type of adjustment. It must be borne in mind of course that Em£h 0f the techniques may be used to handle both types of adjustment albeitwith difficulty in some instances. Second in selecting functional analysis to estimate intra-functional adjuStIDents on the studied farms, the following considerations were r egarded as being of Special relevance. Several functional analyses of 23 selected groups of Michigan dairy farms have been completed1 in recent years. These studies are available for comparison with similar intra- functional estimates derivable from this study. This is not to say that estimates using the other techniques would not be comparable, but rather that a more direct comparison of estimates of marginal value productivi- ties could be accomplished. In addition, both linear programming and its less sephisticated, more forthright and realistic cousin, budgeting, require a priori determination of coefficients of productivity before the actual processes involved in the techniques can be undertaken. Conse- quently the resultant estimates of productivity are dependent upon coef- fi cients of productivity derived independently of these techniques. In View of this consideration, such checns as to reasonableness of estimates of productivity must be external to the actual programming or budgeting PI‘OCedures. This disadvantage is not possessed by functional analysis Since an integral part of the procedure yields estimates of value produc- tivity from data and further steps give some idea of their reliability. Although this latter problem has yet to be adequately resolved for functional analysis, it is rarely if ever even considered in budgeting and programming studies. Neither budgeting nor linear programming at their present levels of deveIOpment are as capable as functional analysis of measuring the effects of interaction of different levels of inputs on their reSpective value productivities. \ 1 For example: Trant, Gerald L, A Technique of Adjusting Marginal Value muctivity Estimates for Changing Prices, unpublished M.S. Thesis, Department of Agricultural Economics, Michigan State College, 1951+; and Wagley, Robert Vance, Marginal Productivities of Investments and L enditures, Selected Ingham County FarmsL 1952, unpublished 1.1.5. heSis, Department of Agricultural Economics, Ivlichigan State College, 53, r. : “:Ii" V i 21; Budgeting The reasons for selecting budgeting for indicating the nature of cleanges from an existing to a new production function,are in some ways sxilnilar to the reasons for selecting functional analysis to indicate the zieiisure of intra-functional adjustments. Individual budgets possess the axixrantage over linear programs produced to date,in that they admit the axiallysis of fixed conditions for individual farms. In the present iiisstance a series of general budgets for dairy farms in Southern Michigan . . , 2 , , \df3176 available from the work of Earl Fuller. These budgets had been (icessigned with the particular end in view of ascertaining effects of new ILEitKn'saving technology on various sized dairy farm Operations in SSCNithern Michigan. As a result, they were almost ideally suited to the ‘tEisk:of indicating the nature of adjustments from one production function ‘t<3 Eniother for the studied farms. In a sense the budgeting procedure is Slimilar in method to the comparative techniques in farm management analy- sliS in that it often, but not necessarily, deals with residuals and aver- aéiEfiS. However, in the present study,budgeting was regarded as being pr‘eferable to the comparative technique of farm management since it sub- S‘Unfki new rather than old or existing technolng. This section has indicated the reasons for selecting functional ahelx ° dbd t' n °L ° ,e - ' .- .fSlS,an u ge ing,as appropriate techniques to use in the determi- 1"1'3 ° . . . . . . . ‘JtlJJn of intra and inter-functional analySis. The following section treat 0 o u o o '9' 8 some of the important conSiderations in selecting the SpeClllC ifiir1c1;- . . ional form used in the analySis. \ 2 E?UJ;ler, Earl Inman, Some Kichigan Dairy Farm Organizations Designed to Ef§£1_§abor Efficiently, unpublished M.S. Thesis, Department of Agri- Lthllral Economics, Michigan State College, 1957. _ . " ream-I . . I ‘1- 0141 fTIYIL‘I-t Al ‘4'.- '1 ‘_______—_________ 25 The Selection of Functional Form There have been many attempts to determ'ne the nature of a mathe- matical function which would best estimate the relevant economic vari- ables in empirical studies in economics. Up to the present, the main consensus appears to be that such functions have not been discovered. Consequently when undertaking an empirical economic study, it is neces- sary to choose among functional forms none of which have universal acceptability. Thus a strong element of arbitrariness is involved when selecting from a group of functions, each having some idiosyncratic characteristic which distinguishes it from the others but which does not affirm or deny its complete adequacy for the job at hand. L'ith these remarks in mind, the nature of the problem involved in selecting a. function may be more fully appreciated. In this study a Cobb-Douglas fuI‘iction was selected,because previous experience had indicated that it was fairly adequate for the purpose ,in that it is capable of delineating interaction,and at the same time is easy to work with and modify. A fur"Sher consideration of importance was,that the functional studies of the l~Iichigan - dairy industry had employed the Cobb-Douglas function,and thuS almost direct comparability of estimates of value productivity would be available for the various input categories studied. Probably the most important weakness of the Cobb-Douglas function in the present study,is its inability to admit other than constant elas- ticity for single and multiple categories of inputs thou-eh if this 0 ' D were known to do serious damage it mav be easilv avoided bv usinn a L) 9 d d d (J modification of the function which destroys the constant elasticity.3 3\ girter, Harold 0., Modification of the Cobb-Dopglas Function to Destroy want Elasticity and Symmetry, unpublished M.S. Thesis, Department A NAgricultural Economics, Michigan State College, 1955; and Halter, Pltoé’ Carter, H.C., and Hocking, J.G., A Note on the Transcendental \uction Function, Journal of Farm Economics, Vol.39, 1957, pp.90 -97l+. 26 Further Empirical Considerations The estimating problems of this study also involve ascertaining mfliether or not efficient adjustments could be made on the various farms 111 the sample. TO do this required information about the amount of money tile individual farm Operators could borrow. It was decided after consul- ‘tartion with members Of the Department of Agricultural Economics that seaveral types of specific information would be acquired to answer this quiestion. These included for each farm business: 3 1. net worth 2. percentage equity ‘ili. ‘ 3. sources of borrowed funds A. interest rates, repayment schedules 5. form in which capital resources are held 6. farm Operator's estimates of value productivity 7. non credit restrictions to borrowing 8. personal characteristics of farm Operator 9. net farm income 10. farmers' estimates of internal credit rationing. TO estimate the amounts Of credit available to individual farm buftinesses, complementary types of information were required about the :Leruiing policies Of credit institutions. These included information on: 1. personal characteristics of borrower Of relevance in making loans 2. collateral requirements of relevance in making loans 3. loan periods and interest rates for various types Of loans h. the relevance of net income of borrower in making loans 5. amounts that would be loaned to Operators under various equity and net worth conditions 27 6, examples of loans which approached the maximum that agency would be willing to loan. A field survey using two questionnaires was decided upon as the appropriate method of Obtaining the information. One questionnaire which was used with the dairy farmers consisted of two parts. The first which has been discussed at length in the literature of agricultural economics, was designed for the purpose of getting data necessary for estimating value productivities of input categories;l+ the second portion dealt with considerations of credit as previously indicated. The other questionnaire was designed to be used in interviews with personnel of credit agencies. Since information on loans made is Of a confidential nature and therefore difficult to secure for an individual borrower,a less direct method of getting the amounts of credit available was used. The schedule included QUGStions on the amounts that each lending agency would be willing to loan On Various classes of collateral,and the interest rates and periods for which they would be willing to make loans. A series Of six tables showing three different equity positions for each of six different sized dairy farms was also included. In each of the 18 Situations the representative Of the lending agency was requested to indicate the total amount that he would be willing to lend the farm oper- ator. Additional questions concerning examples Of maidmum loans made by Liv \ See for example: Toon, Thomas, Marginal Value Productivities Of Inputs, &estments and Expenditures on Upland Grayson County Farms During 1951, unpublished ILA. Thesis, University Of Kentucky, 1952. r“ake, L.S., Problems and Results in the Use of Farm Account Records to Elfiive Cobb-Douglas Value Productivity Functiops, unpublished 1311.1). :flgsis, Department of Agricultural Economics, Michigan State College, 3. BI‘adford, Lawrence A. and Johnson, Glenn L. , Farm Elanaggient Analysis, J9hn Wiley and Sons, New York, New York, 1953, p.143. TILntner, Gerhard and Brownlee, D.H., Production Functions Derived from Earm Records, Journal of Farm Economics, Vol.26, 19141.. 28 tlie institution and notions of institutional adjustment, were also iJIClUded. Both questionnaires are in appendix C Of the thesis. Location of Study Sanilac County was selected for this study for several reasons. Ffiirst, it has led the counties of Michigan in dairy-cow numbers and rniLLk production for many years.5 Second, it is totally within the [hstroit fluid-milk market. Third, there are relatively few commercial 'bauiks serving the county; it is served by one Production Credit Associ- aixion, one Federal Land Bank Office and one Farmers' Home Administration lefice, and is fairly homogenous with respect to service from credit iiistitutions. The credit problems encountered there can be regarded as Ssnnptomatic Of the situation in an important segment of the Michigan Dairy industry. Relevant Characteristics of Sanilac County Sanilac County is the largest county in the southern peninsula of iiiichigan, it is located in the mid-eastern portion of the "thumb" (see Quip fig.1). The soils of Sanilac County are characteristically heavy Cliyys. Surface and sub-surface drainage are required in most of the CCNlnty, and crOps generally respond favorably to tilling. Sanilac County iiS primarily agricultural, although some industry has located in MaI‘lette in the south-western portion of the State. The tOpOgraphy is generally flat with.some gently rolling land toward the southawestern portion of the county. \ -¥ichigan, United States Department of Agriculture, Agricultural Market— }ng Service COOperating. Michigan Agricultural Statistics, Lansing, Michigan, 1950 and 1957. . s wanna; ,c in... :J Wu 5 FIGURE 1. ,I’ ‘1 l , OUTLINE MAP OF MICHIGAN SHOWING LOCATION OF SANILAC COUNTY 29 Wank. 30 _ The Samples The problems encountered in designing samples for use in functional ana ysis have been discussed at some length in the work of Toon, Ziagley, Johnson and others. Briefly, part of the critical problem to be solved is that of mafiinizing the precision of estimated coefficients of produc— tivity, or the "bi's" of the prediction equation. Although, unfortunately, Po t is not known whether this maximizes the precision of the estimates of the marginal value products, precise estimates of regression coefficients appear to be a necessary first step in obtaining precise estimates of marginal value productivities. Several techniques are available I-rhich J may be used to increase the precision of these estimates. Since they are l n w n 6 p 1 ' C Osely related to the iormula ior the standard error of tne regreSSion Coefficients, it seems worthwhile to include the formula at this point. g2 6b 1023 4.. n 12. ... 3h n rw0’22 (1 _ R2 2.34 ... n) An inspection of the right hand member of the formula shows the sorts of 4- ‘ C D V O I Sbeps that may be underta1~:en empirically to reduce tne magnitude of the Standard errors of the regression coefficients. They are: increase the mlI-“Lber of observations (n), increase the range over which observations 0 “31‘ "independent" variable 2 are taken, reduce intercorrelation among l'irldependent" variables R: and reduce variation (82 ) 031+ .00 n 1023 ’0. n Que to non random, non studied variables. As a consequence a "purposive" Sample is more efficient than a representative non-stratified sanple for \ Ezekiel, Mordecai, Methods of Correlation Analysis (2d ed.), New York, JOhn Wiley and Sons, Inc., 19139, p.508. 31 obtaining estimates of regression coefficients. In the present instance, the problem was further complicated by the conjoint requirements of wide variation,and low intercorrelation for input categories,and also a typical range of credit situations. With the assistance of the county agents, farm businesses were selected which had the following characteristics: 1. Dairy products and sales of dairy cattle were their main sources of income. 2. All were shipping fluid grade A milk to the Detroit Market. 3. All were located on heavy Brookston type soil. A. All were in Sanilac County. Ccillectively, the farms represented a wide range of levels of inputs for enach of the following input categories, tillable acres, months of labor, lnivestock-forage investment, productive cash expenses, machinery invest- Inent, and buildings. Partial control of climatic and price variation was Eichieved by collecting records for the calendar year 1957 only. With reference to the sample of credit institutions the problem was isomewhat less complicated. Representatives of commercial banks, govern- Inental lending agencies, the Production Credit Association and Insurance Companies were interviewed. One commercial bank in the area was not included, but since the largest bank in the area had been visited,and Since there was considerable agreement among the commercial banking personnel interviewed,it is believed that the exclusion of the one bank does not change the results in any important way. Field Techniques The confidential nature of the information required in the study created certain field problems. To insure establishment of trust between 32 the enumerator and the farmers to be interviewed, the following procedure 'was adopted. Each farmer was contacted personally on a farm visit at ‘which time the purpose and nature of the study was explained and a tenta- tive appointment was scheduled. The farmer was requested to call the county agents office in Sandusky if unable to keep the appointment. If the farmer requested to see the questionnaire or wished to know more about the nature of the study, the information was given to him. At the ‘time of the first visit and later during the schedule taking visit, the Ikirmer to be interviewed was told that some of the information requested MKDuld be personal, but that his answers would be held in confidence, arui that only a number would identify his schedule. Before undertaking tile actual interview, the questionnaire was Opened at the sections on <3redit used and net worth. The farmer being interviewed was then given a chance not to start the interview unless he believed he was willing to Complete all parts of the questionnaire. None of the farmers contacted refused to give an interview, although a few changed the original time Of their interview because of other commitments. The time for completing an interview ranged from 2 to 6 hours depending on whether tne respon— dent had good farm records or not. Information elicited from banks and other credit agencies, supported the answers given by the farmers sur- Veyed. Three out of three instances checked, gave almost direct confir- mation. In no case was information received which did not substantiate answers given by farmers. It is the author's professional belief that the answers to the questions on credit used, and net worth, represent a true and accurate picture of the credit situation on these farms. An additional reason for believing this, stems from a comparison of the ratios of net worth to assets controlled by ownership obtained in his 33 study and in the Interstate I-lanagerial Survey. In this study the pro- portion of higheridebt to asset ratios was greater than in the Inter- state Managerial Survey7, which is consistent with the fact that the 1.11.8. farms were smaller and involved more part-time farming, and with the conviction on the part of I.1-i.S. workers that the I.1-I.S. data on debts are biased dov ward. Hence it would seem reasonable to assume that the I.1~'I.S. farmers would have a smaller average debt to asset ratio than the fairly large, full-time dairy farms studied in this 1‘ fi‘.1&".1‘nl'l“ thesis. In appraising the data on credit institutions, the following con- Sideration is relevant. The amounts of money that the various credit agencies would extend ,under situations embodying unique interpersonal relationships between a borrower and a lender, have not been adequately measured; however, these types of situations are believed to be suf- ficiently unimportant that their exclusion will have no important effect on the general discussion and conclusions. 7 Epp, A.1‘J., et.al., Progress and Problems in Decision Making Studies (with Reference to th North Central Farm I-Ianagement Research Cox-imittee's Interstate Managerial Study), Journal of Farm Economics, Vol.37, 1955, pp. 1097-1125. 3h CHAPTER IV FUNCTIONAL ESTIIATIOH OF VALUE PR“ UCTIVITY OF INPUT CATEGORIES As the literature contains many discussions of general techniques .for using the Cobb-Douglas function for estimating value productivity (Df input categories on farms, the present section is limited to expla- ruation of attempts to solve problems unique to this study. Six separate findctions were fitted to the data obtained from thirty-one farms. In eaxzh instance, somewhat different estimates of value productivity Iwesulted for the various categories of inputs, and each fit provided iliformation that could be used in evaluating the overall picture of 'Value productivity. For expository purposes, it seems most apprOpriate ‘tO discuss each fit separately pointing out the considerations indi- cating that more information is required. The First Fit The dependent variable was the logarithm of gross income, and the independent variables were the logarithms of tillable acres of land, man months of labour, dollars of machinery investment, dollars of livestock- forage investment, dollars of cash expenses, and buildings measured in animal units of housing capacity. The resultant regression coefficients, their standard errors, and associated estimates of marginal value produc- tivities for these input categories at their geometric means appear in Table I. ' v-«Iz' ‘1»; v . -. Table I 35 Regression Coefficients (bi's), Their Standard Errors (6) and Associated HVP'S at Geometric Kean Organization Input Category bi (yb. Estimated MVP Igind .177 ,1h3 $1h.51 / tillable acre leflaor .2h7 .230 206.A3 / man month lkachinery .156 .ll3 .25 / dollar Linrestock—Forage .083 .186 .113 / dollar Camsh Expenses .306 .lhl l.02 / dollar Bldkg. A. Units .111 .122 27.58 / animal housing unit E: bi .9lh g. It could be readily seen that the standard errors of the regression ‘3Oefficients were fairly high. As has been noted previously, they are IVOsitive functions of the intercorrelation of input categories; hence 3th was necessary to inspect the simple correlations among th various ileut categories. These appear in Table II. b) 0\ Table II Simple Correlations DOV-£8011 Input Categories (First Fit) Input ategory L.S. A.U. Land Labor Each. Forage Expenses Bldg. 35:52:... h; Land 1 . 66 .61. .65 .73 .59 I lefloor 1 .68 .75 .66 .70 a - bkaclu 1 .66 .63 .58 E? L . S . Forage l .63 .56 , quoenses 1 .57 Bldg. A.U. l 'The simple correlation between labor and livestock forage is fairly hijh, and as a result their reapective standard errors may be expected to be high; an expectation borne out in Table I. In drawing inferences about (in he probable magnitude of the bi's and their associated estimates of marginal value productivity, it is necessary to be extremely careful. Since both labor and livestock-forage investments are highly correlated, their regression coefficients may reasonably be expected to be in error and in Opposite directions. Such would appear to be the case in the present study. The estimate of value productivity of labor appears to be high, and that associated with livestock-forage Imam-{hen both are com- pared with similar studies of the l-Iichigan dairy industry. The problem with which one is confronted in such a situation,is the determination of methods or techniques x-rhich will extract a mas-11mm of information from the data at handgrithout being inconsistent with statistical practice, eaconomic theory, or external sources of evidence. Various lines of ftuther investigation were Open and were used in an attempt to derive Inore meaningful estimates of value productivity. Procedures for Grouning_lnput Categories The procedures adepted may be grouped into roughly two classes. TThe one type of procedure involved is, in essence, a process for com- txhning highly correlated input categories. The argument in favour of Stuzh a technique is that standard errors of regression coefficients IWesulting were less than before; hence more faith may be placed in the Iflasultant value productivity estimates for the combination. Further, iJiformation about the productivity of the separate input categories is rurt lost,since it is still available from the previous work. Though “this technique of combining input categories was used in the fourth, fifth, and sixth fits attempted, its use was complicated by the fact 'that the various input categories were sometimes measured in different . . , l ufuts. The following procedure was adepted to by-pass this hurdle. EJach item in the categories to be combined was converted to standard units by dividing it by its respective geometric mean quantity, and a new variable was constructed which consisted of the minimum standard- iZed quantity of the input categories being combined. Thus in the case Of the fourth fit,the new variable was the minimum or limiting standard- ized quantity of labor or livestock-forage. The estimate of marginal A value productivity associated with this new variable,might be regarded Brooke, M. David, Marginal Productivities of Inputs on Cash Crop Farms in the Thumb and Saginaw Valley Area of Michigan, unpublished M.S. Thesis, Department of Agricultural Economics, Michigan State University, 1958. - 1 I . u ‘1’ .‘b J ‘5 L. ammu- \i) C) £18 the marginal value product of a month of labor and associated live- ] {I ' O 2 stbcx-iorage inputs. The other type of procedure adepted may be most charitably described 218 a re-evaluation of the data. Two similar but different procedures vasre used for the second and third fits. In the case of the second fit, Inilldng cows were revalued according to their av rage production: A cow vnis ric ced at two hundred and fiity dollars if she produced ten thousand gxminds of milk, and twenty-five dollars was added r subtracted for every trkmisand pounds of production over or under ten thousand pounds. This prxbcedure .’as adepted because dairy cow prices varied widely duri% 1957 anti it was the author's belief that farmers had not yet settled on a EIPice for their dairy cattle. The dis dvantag e of using this technique lrawever is fairly obvious since it uses a measure of output (production INBr cow) as a measure of input (livestock investment); furthermore, prrmnction per cow is also a function of feed fed,and forage investments which are included in other ian t categories. In the case of the third fit, productive cash expenses were broken down into two categories one being livestock expenses, the other crop expenses. The fifth fit was Obtained by conibining the more detailed inputs of th e third fit with new input categories. The minimum of land, crOp expenses, or machinery in Standardized form became a new variable,which was used in the fifth fit, along with labor wh ich was left unchanged,and a second new variable which Ins made up of the limiting factor of livestock- forag e invest ‘.ent, live- stock expenses, or animal housing units. The sixthi it was secured by aking the standardized value of the limiting factor of land, labor, This would be the case ift he b of the limiting factor multiplied by echected gross income is divided by the quantity of labor. :H' 39 Inachinery, livestock-forage, production cash expenses, or building animal liousing units. Discussion of the various functions fitted can best be 11ndertaken in conjunction with reference to Tables III, IV, V, VI, VII, and VII I . Evaluation of Fitted Functions It may be noted by comparing the second fit with the results of the ffiarst,(Table I) that revaluing livestock served to render the bi of live- stxack-forage positive; however, the standard errors of the bi's of live- stxack-forage and labor remained high. It thus appeared that the problem OI? high intercorrelation had not yet been solved. The third adjusted fit Cfiitained by separating productive cash eXpenses into two parts, livestock e}qsenses and crop expenses, resulted in negative regression coefficients .for both livestock-forage and labor, since a negative regression coef- o“ I) -ficient may be regarded as being meaningless in an economic sense) the ‘third fit was considered to be less in accordance with reality in this rGSpect than either of the two previous ones. Apparently, the problem aITme from an attempt to extract more information than the data con- tained. The fourth fit was achieved by combining labor and livestock- fOrage investments into a new variable which consisted of the factor individually limiting in each farm as previously discussed in this Section. Statistically the resulting fit appears superior to the first three in the sense that the standard error of the regression coefficient Of the new labor-livestock-forage variable is a much smaller than the standard error range existing previously for them both (Table I and Table III) first, second and third fits. Although the fourth function 3 Tintner, G., and Brownlee, D.H., o . cit., p. 568. ‘] Vila. . 1 I Table III Regression Coefficients (bi's), Standard Errors ({bi)’ Zbi's, a values, and Associated Mean l‘lb’i "VP's at Geome Organization Five Adjusted Functions tric Input Category 2nd Fit 3rd Fit lith Fit 5th Fit 6th Fit Iiand bi .169 .3h5 .152 (w (.139) (.157) (.111) MVP $111.13 4:28.28 912.116 Lab or bi o 20]. o 03 8 o 093 (6') (.223) (.2 8 (.214) MVP Q7167 . 99 £371. 72 I-iachinery bi .131 .177 .137 (cr) (.122) (.098) (.109) ___ MVP $.21 $.29 5.223 Livestock b. .057 .195 Forage (t (.231) (.172) MVP $.03 Cas h bi . $382 . 301 Bmenses (cr (.147) (.136) MVP £5.91. {$1.01 Building bi .097 .151 .127 A. Units (0') (.123) (.120) (.114) .._ MVP 3224. 10 3537i52 €531.55 Livestock b . . 286 E3‘5.0enses (P) (.079) ‘ MVP $2.47 CI‘Op b. .034 Eernses (t (.127) I-‘IVP $318 Limiting Factor of bi .217 Liv. Forage 0r (0’) (.200) Labor MVP £518L36 t Limiting Factor of b. .1411? Land, Crop Expense (3," (.1110) glviacmnem MVP 3536.611, 1m Limiting Factor of 1)1 .300 L.S. Forage, L.S. (0') (.155) Expense or Bldgs. MVP 3.49 m Limiting Factor bi .830 of 1111 Six (a (.103) _7 MVP $6931§9 fifififi {bi .937 .750 .934 .81+O .830 log a 1.593248 2.253076 1.992528 11.195250 1+.3L1793981 t MVP of a. month of labor and associated livestock-forage investment. fl MVP of an acre of tillable land and associated inputs of crop expense and machinery. an MVP of a dollar invested in livestock-forage and associated inputs of livestock expenses and buildings. m MVP of a month of labor and all associated inputs. ' o I )nmeE’ .1: L \ I ..., . I Table IV Simple Correlations Between Input Categories (Second Fit) hl Input Category L.S. Bldg. Land Labor Mach. Forage Exp. A.U. Input (Sategory Iaand l .66 .6h .68 .73 .59 Labor 1 .68 .80 .66 .70 1'18. Ch. 1 o 79 o 63 o 58 I..S. Forage l .75 .70 quaenses l .57 Bldg. A.U. 1 Table V Simple Correlations Between Input Categories (Third Fit) Input Category L.S. C. Bldg. g Land Labor Mach. Forage Exp.v Exp. A.U. ‘ input @enom Land 1 .68 .65 .66 .13 .81 .60 Labor 1 .70 .75 061+ 058 068 Mach. 1 .67 .52 .55 .59 L.S. Forage 1 .63 .A7 .55 1" Exp. OLPO 038 C. Ea . l .58 Bldg. A.U. l AZ Table VI Simple Correlations Between Input Categories (Fourth Fit) Input Category Limiting Factor Bldg. Land of Labor or L.S. hach. Exp. A.U. Input Forage Categpry Limiting Factor of Labor or L.S. Forage 1 .70 .67 .oo nach. l .63 .53 5 Exp. 1 . 57 ‘ 9' . 3' Bldg. A.b. 1 Table VII Simple Correlations Between Input Categories (Fifth Fit) In ut Limitinfr Factor Linitinn Factor C) L) ategory of Lani, Labor of L.S. EXpenses, Cr0p Expenses L.S. Forage, or Input or Machinery Bldg. A.U. Categogy Limiting Factor of 1 / Land, CrOp pr. 1 .73 ~09 Or mach. Labor 1 '81 Limiting Factor of L.S. Expenses, L.S. ' l Forage or Bldg.A.U. ‘ ...,‘l .M.‘. .,,‘ .‘x a. H- _ ...: .“ In, -'~ b. ~ \‘~ 43 yields little information about livestock-forage and 1abor,in terms of their separate value productivities, it seems Open to question in view A of the high simple correlation between them, and the relatively large standard errors of the regression coefficients of livestock-forage and labor,whether the results of the first three fits provide a more ade- quate base for further inference about the separate value productivities f? of livestock-forage and labor. g I_ In considering the fifth and sixth fits to the data, the following g considerations seemed to be of relevance. When two new variables of the : fifth function were constructed (one the limiting factor of land, crop j expenses, or machinery the other the limiting factor of livestock-forage investment, livestock expenses or buildings), while labor was left unchanged, the standard errors of the regression coefficients were quite low for the new variables as might have been expected. However, a high simple correlation between the second new variable and labor may be considered as a cause of the high standard error of the regression coef- ficient of labor. Furthermore though the new variables have more pre- cision than those previously fitted,a good deal of information about interaction between input categories is available from the other fits to use in the overall evaluation. However, it should be borne in mind that they serve in an important way as a check on the aggregative esti- mates derived from the other functions. The decision to combine all the input categories in the sixth function,was an attempt to extract more information about the aggregate value productivity of inputs, and in addition to ascertain whether or not a functional analysis was more -_ A See Tables IV, V, VI, and VII. I'd 4A apprOpriate than linear programning (as usually carried out) for analyti- cal purposes. The regression coefficient for the limiting factor was significantly different from one (at the 10 percent level): this was interpreted as an indication that the assumption of linear relationships in programming would be inapprOpriate in the present study. By combining the information resulting from the six fitted functions, F“ the emergent pattern of value productivity was developed as follows. The 7% aggregate earning capacity of all inputs was fairly low on the group of dairy-farms studied. This relationship may be inferred from a consider- ation of the sum of the regression coefficients of the various fitted functions which were found to be: First fit Z bi . .91A Second fit §:t5_ - .937 II o .q O\ 0 Third fit bi 5 Fourth fit {bi = .931. Fifth fit zbi = .8AO .830 Sixth fit bl It was noted previously that the regression coefficient in the case of the sixth fit had a value estimated to be .830 and that it was found to be significantly different from one at the ten percent level of signifi- cance, using a one tailed "t test", which may be interpreted to mean that '.-vl -- .. - ‘v- 5,. .‘A 1 . .n‘ 45 there was only one chance in ten that it would not be different from one for similarly drawn samples from the same pOpulation. This result is slightly reinforced by the fact that the sums of the regression coef- ficients were found to be less than one for the other five functions fitted. Aggregative Considerations F7 In evaluating the results obtained from fitting a regression s 'm I... marl equation to limiting factors that have been standardized by dividing individual items by their respective geometric mean quantities; certain ‘ 4 possibilities of error of this technique have to be taken into account. 5’ It is assumed that the geometric mean quantities of the input categories are a close approximation of those considered to be optimal. In addition in combining inputs into categories, good complements are grouped in the same input category and the assumption is made that these good comple- ments are combined in relatively fixed prOportions. However, if such is not the case,and one input which is complementary with another is in excess of the proportions implied by the complementary relationship, the value productivity of such an input category will be estimated to be lower than that which would result if the optimal combinations obtained. In view of these considerations, it would seem reasonable to employ some caution in interpreting the meaning of the value assigned to the re- gression coefficient of limiting factors. In the present study the possibility of an underestimate of the regression coefficient of limiting factors has to be taken into consideration. Since the aggregate earning capacity of the combined input cate- gories was most probably low, high assigned earnings for individual cate- gories of inputs could be achieved only if low values were imputed to the A6 other input categories. For example, if high earnings were attributed to labor a low earning would have to be assigned to capital investments. In the first and second fits, regression coefficients were tested against bi's that would have been required to yield reservation price equivalence for their respective associated marginal value products. Using a "t test", there was no basis for rejecting the hypothesis of such regression coefficient equivalence up to the 50 percent level of signi- ficance for all input categories with the exception of livestock-forage, which was found to have a regression coefficient different from the "reservation price" regression coefficient at the 10 and 50 percent levels of significance for equations one and two respectively. If the reservation price regression coefficient were to be assigned to each input categoryb(neglecting for the moment, the inapprOpriateness of doing this for livestock-forage investment) the resultant sum of re- gression coefficients would be found to equal 1.23 which is signifi- cantly different from the .830 computed as the regression coefficient of limiting factors. Thus it would appear that the restriction imposed by the low sum of regression coefficients would not admit the simul- taneous assignment of reservation price value productivities to all input categories. lgssignment of Individual Value ProductivitygEstimates Having dealt, at least partially, with the problem of the aggregate value of the regression coefficients, it seemed worthwhile to treat individual input categories in some detail, bearing in mind the nature of the aggregative restrictions on regression coefficients. In the case of land, four different estimates of value productivity resulted from the first four fits; however,the bi's of the first, second and fourth A7 fits were not found to be significantly different from selected numbers equal to the values of the other regression coefficients. The associ- ated estimates of value productivity from these three questions ranged from.twelve and a half to fourteen and a half dollars approximately; at an assumed interest rate of five percent this would imply a range in land values of from about two-hundred and fifty to about two-hundred and ninety dollars per acre of bare tillable land,which would be fairly close to the author's personal experience with land values on Brookston soils in Sanilac county,when land taxes are taken into account. ‘Within this range of values, the selection of one is somewhat arbitrary; however, a consideration of the third fit and its estimate for land value productivity indicated that the earnings of land tended to be high fer this fit. Consequently the upper end of the range was selected and a regression coefficient of .177 was considered to be most reasonable for this input category. The comparatively high land values are also supported by the statements of farmers interviewed. Twenty out of thirty-one indicated that they would buy land under favourable credit situations. The assignment of an estimate of value productivity for machinery presented a problem similar to that for the land productivity estimate. The range in estimated value productivity as indicated by the first four fitted equations was from 21 percent per dollar invested,to 29 percent per dollar invested. Again the highest estimate was associated with the third equation. In this instance the additional information available did not permit as much discrimination between the various regression coefficients. No bi was found to be significantly different from arbi- trarily assigned values equal to the other bi's at the 50 percent level 48 of significance using a "t test". Equation five indicated that the combined input categories of land, crop expenses and machinery had a regression coefficient of .hh7. Since this estimate had a higher pre- cision that the others separately, and agrees with the bi breakdown of Table III unless equation 3 is taken into account, it was a useful, aggregate limit for the component bi's. Considering that the estimated value productivity of crop expenses5 was of a low order or precision, and that to a lesser extent the same was true of the estimated bi of land, it seemed to be most apprOpriate to assign a value to the bi of machinery that was consistent with the value productivity for machinery obtained from similar studies. Consequently a value of .131 was assigned as the regression coefficient for machinery. At the geometric mean, this implied an MVP of $.20 per dollar invested in machinery. The estimated value productivity of productive cash expenses was very close to $1.00 per dollar of expenses at the geometric mean. In each equation the regression coefficient of cash expenses (when tested against the bi required to yield $1.00 per dollar of cash expenses) was not found to be significantly different from it. A regression coefficient of .301 was assigned to this input category. The decision to assign this value in this instance rather than another not significantly different from .301 was arbitrary, although equations 1, 3 and A yielded regression coefficients closer to this value than to the .282 of equation two. 5 It is interesting to note that the low regression coefficient of crop expenses is consistent with the estimated value productivity of live- stock expenses and all cash expenses. Livestock expenses which are about one third of total cash expenses had an estimated value produc- tivity of $2.h7 for every dollar while crOp expenses were estimated to earning $.18 on the dollar thus for every dollar of total cash ex- penses,livestock expenses would return about $.99 and other crOp ex- penses about $.11 for a combined return of $1.10 per dollar of produc- tive eXpenses. Wagley, Robert V., o . cit. #9 Special Problems Associated with Livestock-Foragg Investments and Labor At the onset of this section, the problem of assigning value produc- tivity estimates to the separate input categories of livestockpforage and labor was brought out. To recapitulate, the high simple correlation among these input categories,combined with high standard errors for their respective regression coefficients to prevent inferences from being drawn concerning their individual earning capacities. Hence, it was decided to unite both categories to form a new variable. By calculation the corresponding regression coefficient is .217 which means, in terms of marginal value productivity, a return of $181 for each month of labor and associated livestock-forage investments or, viewed from the standpoint of livestock-forage, a marginal return of 3.30 for every dollar invested in livestock-forage together with the associated labor. The low estimated return for livestock-forage was substantiated by equation five's third variable which was the limiting factor of livestock-forage livestock-exr penses and animal housing units. The estimated MVP in this case was ascertained to be $.49 for every dollar invested in livestock-forage together with associated inputs of livestock expenses and buildings. When this estimate was examined in conjunction with individual estimates of value productivity for the associated quantities of building animal units and livestock expenses, the negative residual resulting for live- stock-forage reinforced the low value productivity determined for it by the other equations (i.e. 1 and 2). Consequently it was concluded that there was insufficient evidence to warrent adjusting the estimate of value productivity for labor and livestock-forage upward. It was stated at the beginning of this section,that equation six had yielded what might be regarded as an aggregative restriction on the 50 sum.of the respective regression coefficients of the various input cate- gories. In addition it was indicated that this implied that if high value productivities were assigned to some input categories, it would be necessary to assign lower values to another,if the aggregative restrictions were to be considered. In view of this situation and the fact that the rejression coefficients for building animal housing units were not significantly different from assigned values equal to the other regression coefficients calculated for this variable, the lowest of the estimated bi's was selected for animal housing units. Although this choice among the computed values for this regression coefficient was arbitrary it is nonetheless consistent with them and with the aggregative restriction. Summary of Assigned Values of Regression Coefficients In summary the regression coefficients and their reSpective marginal value productivities were assigned to the various input categories as follows: LandOOOOOOOO00.000.000.000... be $1AC5Opera'cre l .177, MVP Laborblivestock forage ...... b .217, MVP : $181 per month of labor and ($612) invested in live- i stock-forage) Machinery ................... bi = .131, MVP = $.21 per dollar invested in machinery Productive expenses ......... b 3 .300, MVP = $1.01 per dollar of produc- l tive expenses Building animal units ....... b- l .097, MVP = $24.10 per animal unit of housing capacity. The sum of these regression coefficients was .922; thus it met the conditions of either diminishing,or constant returns and it was not significantly different from the regression coefficient of equation six, 51 furthermore did not appear to be significantly different from the sum of the regression coefficients of equations 1, 2, and h which were .9lh, .937, and .934 respectively. The "a" value was determined by setting gross income (I) and the xis at their respective geometric mean values, and then solving the resultant equation for the constant term, which was determined to be 2.01257A in its logarithmic form. A few further remarks of a qualitative nature may be made regarding the separate value productivities of labor, livestock-forage, cr0p ex? penses, and livestock expenses. It seems reasonable that the MVP of livestock-forage although low is most likely positive, possibly of the order .057. Livestock expenses are indicated to be the most profitable component of productive cash expenses,and a changed prOportion of produc- tive cash expenses in favour of livestock expenses would seem indicated for most of the farms studied. 52 CHAPTER V CBEDIT REQUIRED FOR EFFICIENT ADJUSTMENT Types of Adjustments Considered In the first chapter in the section on the criteria of efficiency, two distinct types of adjustment that could result in increased efficien- cy were indicated. The first group of adjustments were those involving changes in the levels of inputs on the same production function. The second group of adjustments were those that involved changes from one production function to another. To handle both kinds of adjustments two analytical techniques were considered more adequate than one. Both types of adjustment were con- sidered for each farm. Adjustments on the empirically determined produc- tion function were regarded as an apprOpriate basis for estimating credit required to attain an efficient farm organization,to a technology similar to that existing on the studied farms. Furthermore, it was decided that budgeting was a satisfactory technique to determine credit requirements involved in adjustments from one production function to another with a different technology. A series of budgets for labor efficient dairy- farms for Michigan conditions were available from the work of Earl Fuller} These were singularly apprOpriate for the present study,in that he had stressed technological change when he designed his budgets. Therefore, they may be regarded as representing a technology different from that existing on the studied farms. Consequently budgeting was chosen in preference to linear programming. The procedures adopted in l Fuller, Earl, 02, cit. 53 using both techniques are presented in the material which follows. Functionally Estimated Efficienqy In functional analysis of the type carried out in the present study, each farm may be represented by a series of points on a many di- mensioned production function. Under a given set of price conditions, and if no inputs are fixed, there is a single combination of inputs which may be regarded as the most profitable organization on that production function. The marginal relationships which obtain under such circump stances are: “few _ mam , . mm . i le Px2 Pxn When this relationship holds for all firms, its attainment simultaneously eliminates the two sorts of inefficiency which exist when conditions 62 and 7 are appropriate to characterize a situation. In fact, when dealing with a continuous production function, conforming to the law of diminish- ing returns all that is required to achieve a similar result is the equality' MVPxi(Y)3 for all Xi and all firms producing Y.h Fri Conditions 6 and 7 were respectively MPP MPP i £ 3 "an ,5 x30!) i l 2 ————_——— _ = , 3000,11 P P : l 2 to. n MPP é MPP k - firm.no k 0 o Y - Xi(Y)k x1( )k+1 k . l,2,..., L i = l,2,...,n 3 In those instances where inputs are fixed it is of interest to note that when the principle of Opportunity costs and capitalized.values are used M” (Y) xi 2 1 i : l,2,...,n for all fixed inputs. P Xi A Assumes stage 2. 5h So far, the discussion has dealt only with those instances where it was apprOpriate to assume that all inputs (i.e. input categories) were variable. If, however, the assumption of variability cannot reasonably be made for all factors of production, the foregoing discussion is inadequate to handle the situation. If a factor of production is fixed at some certain level for a given farm, the apprOpriate adjustment of input levels would have to take the input fixity into account. When, as in the present study, a group of farms have been purposely selected for a wide range of imperfect adjustment, neither the assumption of the fixity of the same input at the same level for all farms, nor even the assumption of the fixity of the same input for all farms seems justi- fied without testing its apprOpriateness. Consequently, it appeared necessary to determine which inputs were fixed for individual farms, and the nature of adjustments that would both increase efficiency and take account of input fixity. The concept of input fixity as develOped by Hillet,5 Johnson,6 and Edwards,7 and employed here, involves two limits, he salvage value, and the replacement cost of the services of an input. The MVP of a fixed input lies between these limits. In the present study, it appeared worth- while to explore this concept further to include what was termed unilateral 5 In a statement G.L. Johnson of the Department of Agricultural Economics, Michigan State University, made to the author he indicated that he had received the idea of input or asset fixity from J. Millet, a student in one of his courses at the University of Kentucky. Johnson, G.L., and Hardin, L.S., Economics of Forage Evaluation, Station Bulletin 623, Purdue University, Lafayette, Indiana, pp.5-13. Edwards, Clark, Resource Fixity, Credit Availability and Agricultural Organization, unpublished Ph.D. Thesis, Department of Agricultural Economics, Michigan State University, 1958. 55 fixity of inputs. In the event there is a wide range between salvage value and replacement cost of an input, and the marginal value produc- tivity of the input closely approaches either its replacement cost or its salvage value, the input will be considered to be fixed in one direction and variable in the Opposite direction. Since unilateral input fixity is a less demanding restriction than input fixity, it is useful under more circumstances. Specifically, it may be impossible to de- termine whether an input category is fixed, but possible to ascertain whether or not it is unilaterally fixed. In the present study, the concept of unilateral fixity is used to deal With upward fixity of labor. In.view Of the fact that many non-monetary factors enter into the farm Operator's decision to stay in farming, the lower limit may be more difficult to ascertain than the upper one. The procedure adopted to determine whether or not the labor input was fixed upward on each farm was the following: Labor was held fixed on each farm at the levels existing in 1957 as determined by the survey. At the same time, all other inputs on the farm were adjusted in accordance with the profit maximizing conditions Of xi : l i . l,3,A,5,6§ If at the profit maximizing level of other xi inputs the MVP of labor was less than its acquisition price, it was regarded as fixed and the Optimal organization was considered to have been determined for the farm. However, if the estimated MVP for labor was found to be greater than its acquisition price at the most profitable level for other inputs,then the new Optimum computed for the farm included Labor it will be remembered was the second input and since its fixity is being tested does not enter into this particular computation. 56 MVPX varying labor until for all inputs 1 = l i : l,2,3,h,5,6. It is to P xi be noted that when reservation prices are the same as Opportunity costs, the resultant Of profit maximization is an efficient9 adjustment within and between firms for those factors Of production that are varied. In working with the Cobb-Douglas function the technique for profit maximization may be carried out as follows: A Since MVPX. g silo = biY I 1 3X1 Xi and the profit maximizing condition is that b A MVP - P = O i.e. iY - P : 0 II x x. '——- x. i 1 xi 1 . . X. . b I . . and multiplying II by __g' yields i - Xi = O which on solv1ng for PXi PX1 . b if A b. X. results in X1 = i g K‘Y (where Ki : 1) III 1 P i 13" Xi xi substituting this value in the original Cobb-Douglas production function 3? . axiblxzb2 . . . xnbn yields ’1? = a(K1?)b1(K2/Y‘)b2 . . . (Kn?)bn which.may be readily solved for I at the profit maximizing level Of output. 3? may then be substituted in III which may be solved for xi. Repeating the last step yields the profit maximizing level for all inputs. ‘When an input was being tested for fixity a procedure similar to that just out- lined was followed with the modification that A was substituted for the b constant in the equation (where A ; axf f, and xi is the input category 9 According to criteria 6 and 7 of Chapter II. 10? ab b2 bn- .. . = x1 1X2 . . . xh is assumed to be a value productIVIty function i.e. Y’is predicted gross income. 57 being tested for fixity). The MVP of xf was then computed at the profit maximizing level for all other inputs in the usual way. Ebtimating credit requirements functionally involved the following steps. The combined category, labor and livestock-forage, was assumed fixed,and other input categories were adjusted in the manner indicated to maximize profit for each input category in relation to its reservation price. The marginal value productivity of labor and livestock forage for the resulting modified farm organizations was then computed. An alterna- tive adjustment was also considered; it was based on a modification of the equation presented in the last chapter. The principal modifications in this equation were,(l) the separation of cash expenses into two comp ponents, livestock-expenses and crOp expenses and,(2) the separation of labor-livestock-forage into the two categories labor and livestock- forage. In this instance, labor was assumed fixed and the profit maxi- mizing adjustments were made for the other input categories. The margin- al value productivity of labor was then calculated to determine the reasonableness of the assumption of upward fixity. Both the attempted adjustments indicated that the assumption of fixity was reasonable for labor and labor-livestock-forage,in the sense that their respective marginal value productivities remained below their acquisition prices. The interesting result yielded by a consideration of the Optimal farm organizations from both these equations,was that livestock-forage investments were forced downwards to levels beyond the range of the original data for most farms, while generally both machinery and land were forced upwards. The typical adjustment for buildings was an increase.11 The new adjustment for most farms may be regarded as being 11 See appendix tables XII, XIII, XIV, and XV. 58 apprOpriate for cash crOpping with a little dairying on the side. Certain of the results involved extrapolations beyond experience into physical impossibilities. For example, livestock expenses are high enough to imply that for many farms the Optimal adjustment would be to feed cows at a level that is roughly equivalent to four times their capacity to consume. At the same time barns and storage space for more cows would be built, to provide superfluous housing capacity for non- existent cows. The results should be interpreted as follows. The best adjustment on these farms was to shift out of dairying into a typical cash crop organization involving more land and machinery so long as only the existing technologies are employed. This conclusion is generally reinforced by the results Obtained by other workers.12 Before accepting this dismal conclusion, however, it is necessary to consider adjustments involving new technologies. Still further the estimates indicate that emphasis should be placed on new labor saving technologies. Budgeting and Inter-Functional Adjustment It was noted at the beginning of this chapter that at least two types of adjustment that result in an increase in efficiency are possible for a given farm firm. Adjustments on a function were termed intra- fhnctional,while those involving a shift from one production function to another were called inter-fhnctional. In the preceding section the 12 Dean McKee Of the Department of Agricultural Economics, Michigan State University, indicated in a statement to the author that results he had Obtained from an unpublished linear programming study indicated that dairying would not, even under fairly favourable conditions, be capable of competing with cash crOps in a similar area in Michigan. 59 nature of the intra-functional adjustments on the estimated production function were delineated. It was concluded that the type of adjustment which would admit a more efficient organization of the studied farms, would not, at the same time admit their continued existence as dairy farms. Since this study is directed towards credit problems of dairy farms, qua dairy farms adjustments, implied by a consideration of the extant production function, were regarded as being inapprOpriate for the purpose 13 at hand. Consequently, a different approach to the problem of more efficient adjustment Of the studied farms as dairy farms was decided upon. An attempt was made to find for each farm a new organization, that was both a dairy organization, and superior in terms of efficiency, to the initial organization. The procedure followed to attain these ends, was that Of working out an individual budget for each Of the studied farms. A detailed description of the procedures follows. Sources and Modifications of Data Used in Budgeting The budgets carried out in this study were based on the work of 14 . . . . Earl Fuller. They involve organizations and technologies that do not exist in complete sets on the typical farm studied. They may be regarded as examples of the form of organization necessary for survival in the dairy industry in coming years. In general, the basis on which the individual budgets were built was the amount of full time Operator and family labor 13 Although as pointed out previously in this thesis cash crOpping may be the most efficient use of farming resources for this area. 14 Fuller, Earl J., op. cit. 60 available on the individual fann under consideration. Those modifi- cations of Fuller‘s assumptions which are of general applicability follow: 1. Land was assumed to have 1.1 times the productivity assumed by Fuller for corn, oats, and hay. This seemed to be apprOpriate in view of the high quality of the land in Sanilac county rela- tive to that considered by Fuller. 2. Certain modifications in prices were also made, for instance. Cows producing l0,000 pounds of milk were valued at $250 per head instead of $200, with a $25 increase or decrease in price for every 1000 pounds of milk produced above or below the 10,000 pound mark. Cattle sold were given prices 50 percent above those assumed by Fuller, while cattle inventory increases were assumed to have a 25 percent greater value than in his budgets. These changes were believed to be necessary, to reflect accurately, the higher values of sales and inventory changes encountered on the farms studied in Sanilac county. 3. In addition to the changes mentioned above, one of two crop enterprises was included on some of the farm budgets presented here. Field beans were assumed to yield a net of $27 per acre, and sugar beats a net of $54 per acre; credit requirements equivalent to the non land costs of producing these crops, were assumed to be $54 and $10h for beans and sugar beets respectively. Specific modifications for individual budgets were made on the basis of interviews and schedules taken, for example, where the farm Operator was unable to obtain more land, or when a Specific piece of land was available for purchase, the modified budget was adjusted to fit the circumstances. In the following section, the initial farm situation, the modification 61 and the credit required for adjustment, are included along with a commen- tary on conditions peculiar to the particular farm, and of relevance in making the budget. In some instances, it will be noted that a modified budget is not included; this implies that the farms as organized appeared to be as well, or better adjusted than those attainable with the budgeting procedure discussed above. The criterion of efficiency in this comparison between existing and budgeted states is different from that used in the previous section. For Operational purposes, the ratio of value of total product to total costs for the initial farm organization is compared with the corresponding ratio for the modified budget. The larger of the two ratios is taken to indicate greater total short run efficiency. Since diminishing returns to scale were indicated for the farms as studied, it seemed reasonable to assume that movement along the production function, in the direction of increased output, would yield a smaller ratio of value of Output to cost of input, while Fuller's work often involved linear relationships that prevented (as handled) changes in efficiency, as scale Of enterprise was changed. In as much as the postulation of downward fixity seems a reasonable assumption for most farm inputs;15 the Operational criterion of efficiency suggested above would appear to be an appropriate empirical application of criterion 10 of Chapter III. The credit required for efficient adjustment was determined by sub- tracting the investments,16 and costs, for the original organizations of The exception in the budgets is farm labor, which was determined to be fixed upward, and variable downward. 16 The organization shown is assumed to be after one year's Operation, hence no credit requirement is shown for additional feed and supplies that would be required. In some instances it might appear to the individual Operator to be more profitable to buy these rather than to grow them, and then to purchase the additional livestock. In any event this method of handling the feed inventory probably underestimates the credit requirements. 62 a farm from investments,and costs,for budgeted reorganization for that farm. The initial organizations and modified budgets are presented, farm by farm, in the sections which follow. Initial and Modified Budgets Farm No.1 Initial Modified Number Full-Time Men 1 1 Number of Cows 22 40 Number of Tillable Acres 101 160 Land & Improvements $.h,000 $34,000 Dairy Cattle 8,650 13,520 Machines & Equipment 5,906 13,5h0 Feed Inventory 810 5,268 Cash & Liquid Assets 200 1,000 Total Investment 29,566 57,328 Total Expenses A,820 11,525 Total Receipts 7,A20 19,935 Net Income 2,600 8,411 Interest on Investment @ 5 percent/yr. 1,478 2,866 Labor & Mgt.Earnings 1,122 5,5h5 Salaries A,800 h,800 Profits -3,678 7&5 Credit Required 38,659 63 The principal changes here were an increase in land from 101 tillable acres to 160 tillable acres. This involved a purchase of 80 acres of tillable land since the Operator originally owned only 80 tillable acres. Ibairy cattle were increased by 18 head (for which there is housing already available). A crop enterprise (2h acres of beans) was also included in the new budget. In the event it would be possible to secure a long term rental contract,or lease,on the additional 80 acres of tillable land, the credit requirements could be reduced substantially on this farm reorganization plan. However, it is doubtful whether the Operator would be willing to undertake other investments in livestock, machinery, and cows unless he had secure control of the additional land for several years. Farm No.2 Initial Modified Number of Full-Time Men 1 1 Number of Cows 22 30 Number of Tillable Acres 97 97 Land & Improvements $40,250 $41,250 Dairy Cattle 15,600 17,600 Machines & Equipment 7,365 11,885 Feed Inventory 1,017 5,268 Cash & Liquid Assets 2,000 1,000 Total Investment 68,582 77,003 Total Expenses 7,073 10,197 Total Receipts 14,100 17,933 Net Income 7,027 7,736 Interest on Investment @ 5 percent/yr. 3,429 3,852 Labor & Mgt.Earnings 3,598 3,884 Salaries 4,800 4,800 Profits -l,202 -916 Credit Required 6,520 64 It is difficult to attain an efficient adjustment on this farm’since land in the adjacent area is not available for purchase or rental. Con- sequently increase in scale of Operations in this case was considered to be restricted. The Operator's present method Of farming has involved the sale of considerable purebred livestock at better than average prices. The large amount of individual care per animal required would,most likely, serve as a further deterrent to increased size of Operation. Credit problems on this farm are less important than land restrictions. Income and efficiency could be increased.by the addition of a crOp enterprise at some distance from the home farm; however, even this alternative seems unlikely to increase efficiency in view Of the distance machines would have to travel on the road. Farm No.3 Initial Modified Number of Full-Time Men 1 1 Number Of Cows 22 40 Number of Tillable Acres 116 156 Land & Improvements $20,000 $31,000 Dairy Cattle 7,300 12,700 Machines & Equipment 10,167 13,540 Feed Inventory 2,415 5,268 Cash & Liquid Assets 600 1,000 Total Investment 40,482 63,508 Total Expenses 6,384 11,773 Total Receipts 12,501 25,950 Net Income 6,117 14,177 Interest on Investment @ 5 percent/yr. 2,024 3,175 Labor &.Mgt.Earnings 4,093 11,002 Salaries 4,800 4,800 Profits -707 6,202 Credit Required 22,582 65 This farm as organized is fairly efficient. The modifications in the budget include an increase in cows from 22 to 40. Current produc- tion is 13,000 pounds.The budget assumes 12,000 pounds with 40 cows. Twenty acres of beans provide additional income. Both buildings and land investments have been increased. No particular restrictions appear to prevent the adjustment indicated. Farm No.4 Initial Modified Number of Full-Time Men 2 2 Number of Cows 42 80 Number of Tillable Acres 165 300 Land & Improvements $100,000 $140,500 Dairy Cattle 19,425 28,925 Machines & Equipment 15,762 17,255 Feed Inventory' 2,918 10,931 Cash & Liquid Assets 1,600 2,000 Total Investment 139,705 199,611 Total Expenses 9,846 20,087 Total Receipts 16,973 37,423 Net Income 7,127 17,336 Interest on Investment @ 5 percent/yr. 6,985 9,980 Labor &.Ngt.Earnings 142 7,356 Salaries 7,100 7,100 Profits -6,958 256 Credit Required 58,531 66 The changes indicated on this farm appear to be more in the nature Of changes in scale,than on most of the others. Increases are implied for land, livestock, and buildings. Salaries total $7,100 instead of the usual $9,600 for a two man farm, since $2,300 is what the Operator is paying his hired man. No restrictions to change appear obvious in this case. The Operator is currently getting 10,000 pound production from his cows. It is assumed that he would be able to maintain this level of production with the increased number Of cows. The modified cropping program includes 27 acres of beans. Farm No.5 Initial Modified Number of Full-Time Men 3 3 Number Of Cows 30 120 Number of Tillable Acres 255 414 Land & Improvements $30,000 $100,000 Dairy Cattle 16,000 43,000 Machines & Equipment 15,039 20,505 Feed Inventory 6,309 16,563 Cash & Liquid Assets 400 3,000 Total Investment 67,748 183,068 Total Expenses 11,846 27,955 Total Receipts 21,974 64,258 Net Income 10,128 36,303 Interest on Investment 4 @ 5 percent/yr. 3,387 9,153 Labor & Mgt.Earnings 6,741 27,150 Salaries 12,169 12,169 Profits -5,428 14,981 Credit Required 107,218 67 The modified budget indicates very heavy capital requirements necessary with new technology,to provide an adequate level of earnings for a three man dairy Operation. The Operator currently is milking 30 cows,producing an average of 13,000 pounds of milk per cow. The budget assumes a 12,000 pound average for 120 cows which may be Opti- mistic. This budget does not include a separate crOpping program in addition to that assumed sufficient to provide feed for the livestock. 68 Farm No.6 Initial Modified Number of Full-Time Men 1 Number of Cows 40 Number of Tillable Acres 204 Land & Improvements $45,000 Dairy Cattle 10,300 Machines & Equipment 11,529 Feed Inventory 5,985 Cash & Liquid Assets 600 Total Investment 73,414 Total Expenses 10,542 Total Receipts 23,704 Net Income 13,162 Interest on Investment @ 5 percent/yr. 3,671 Labor & Mgt.Earnings 9,491 Salaries 4,800 Profits 4,691 Credit Required none As this farm is organized,it is more efficient than the budgeted modification for it would be. Cattle sales are greater than on the budgeted 40 cow farm as are cattle and crOp inventory increases. A good portion of the buildings and equipment on this place are new,and of a labor saving type. Thus such a farm indicates that the budgeted modifications are attainable under some circumstances. 17 This farm's gross income is 7,968 dollars above that predicted by the functional analyses which also indicates that it is on a production function superior to those for the typical farm studied. Farm No.7 Initial Modified Numer of Full-Time Men 1 1 Number of Cows 30 40 Number of Tillable Acres 190 190 Land & Improvements $30,540 $41,540 Dairy Cattle 8,903 13,520 Machines & Equipment 7,932 13,540 Feed Inventory 1,076 5,268 Cash.& Liquid Assets 800 1,000 Total Investment 49,251 74,868 Total Expenses 7,437 12,696 Total Receipts 10,861 20,496 Net Income 3,424 7,800 Interest on Investment @ 5 percent/yr. 2,462 3,743 Labor & Mgt.Earnings 962 4,057 Salaries 4,800 4,800 Profits -3,838 -743 Credit Required 26,835 69 This Operation, as currently managed, is characterized by inadequate housing, storage and an almost complete lack of labor saving devices. The modification recommended here,inc1udes a switch from a herd of 30 Jersey cows to a herd of 40 Holsteins. Milk production averages 6000 pounds per cow. ‘Nith larger cows Of greater productive capacity, the Operator should be able to achieve 10,000 pounds of 3.6 percent milk per cow per year. Major investments in buildings and storage are indicated for this farm. Fifty-four acres of beans are included as a cash crOp. In view of the low price of cull Jersey cows,the increase in inventory value of livestock was not modified upwards,as in the case Of the other farms budgeted. This farm has serious technical and credit problems. Farm No.8 Number of Full-Time Men Number of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines &.Equipment Feed Inventory Cash & Liquid Assets Total Investment Total Expenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor & Mgt.Earnings Salaries Profits Credit Required The modifications indicated for this farm are similar to those suggested for farm 1. The purchase of 50 acres Of tillable land is suggested for the same reasons,but might be omitted if suitable long term rental or leasing arrangements could be made. 145 $22,000 8,385 11,827 2,689 44,901 7,025 6,035 2,245 3,790 4,800 -1,010 Modified 1 40 145 $34,500 9,385 13,540 5,268 1,000 63,693 11,845 19,381 7,536 3,185 4,354 4, 800 20,711 in size of Operation might be possible under improved management conditions; however, it is the author's personal Opinion that this Operator should continue on a small unit. 70 A greater increase Farm No.9 Initial Modified Number of Full-Time Men 2 2 Number of Cows 33 80 Number of Tillable Acres 190 290 Land & Improvements $45,278 $98,278 Dairy Cattle 11,450 23,200 Machines &.Equipment 8,642 17,255 Feed Inventory 3,386 10,931 Cash & Liquid Assets 200 2,000 Total Investment 68,938 123,664 Total EXpenses 10,362 21,903 Total Receipts 15,419 38,145 Net Income 5,093 16,242 Interest on Investment @ 5 percent/yr. 3,447 6,183 Labor & Mgt.Earnings 1,646 10,059 Salaries 9,600 9,600 Profits -7,954 459 Credit Required 84,876 71 Large amounts of credit are required to attain an efficient comp bination of resources on this enterprise. The important changes in investment include increased land, buildings, and livestock. Serious breeding problems have been encountered on this farm,that have resulted in a drop in milk production of nearly 1500 pounds per cow. The modi- fication includes a change of breeds to aleviate this problem. The first few yearS'would probably be required to build up the herd to the 10,000 pound level used. Current production averages 8500 pounds,but the Operator has demonstrated the capacity to handle high producing cows. A cash crOp of 19 acres of beets are included,since the Operator has the equipment available,and is experienced in growing them. Farm No.10 Initial Modified Number of Full-Time Men 2 2 Number of Cows 53 100 Number of Tillable Acres 400 _ 400 Land & Improvements $100,000 $112,000 Dairy Cattle 24,000 35,750 Machines & Equipment 15,325 17,655 Feed Inventory 3,201 13,330 Cash.& Liquid Assets 551 2,500 Total Investment 143,077 181,235 Total Expenses 12,768 23,937 Total Receipts 23,030 51,509 Net Income 10,262 27,572 Interest on Investment @ 5 percent/yr. 7,154 9,062 Labor & Mgt.Earnings 3,108 18,510 Salaries 9,600 9,600 Profits -6,492 8,910 Credit Required 43,468 72 No particular Obstacles appear to prevent the changes indicated in the modified budget from being initiated and completed. The modified budget includes a cash crOp Of 59 acres of beets. The 10,000 pound average production per cow at present,is assumed attainable for the increased herd. On this farm, as on most of the others studied, cash crOpping is an important alternative to dairying. /i Farm No.11 Initial Modified Number of Full-Time Men 13,; 1%,- Number of Cows 25 40 Number of Tillable Acres 301 301 Land & Improvements $48,500 $48,500 Dairy Cattle 13,200 16,950 Machines & Equipment 11,571 13,540 Feed Inventory 3,229 5,268 Cash &.Liquid Assets 500 1,000 Total Investment 77,000 85,258 Total Expenses 7,869 11,725 Total Receipts 17,435 25,889 Net Income 9,566 14,164 Interest on Investment @ 5 percent/yr, 3,850 4,263 Labor & Mgt.Earnings 5,716 9,901 Salaries 7,200 7,200 Profits -1,484 2,701 Credit Required 14,549 73 The interview held with the Operator of this farm indicated that he was not yet ready to expand fully his farming Operations,but would rather wait until his sons decide whether or not they wish to farm. Conse- quently only a minimal livestock program is outlined in the modified budget while important emphasis is placed on cash crOp production. Part of the 1and.will remain in the soil bank program,whi1e the remainder, not used for feed production, will be devoted to sugar beets. Milk produce tion per cow is at the 9000 pound level; however, 10,000 pounds per cow is used in the modified budget. Farm No.12 Number of Full-Time Men Number Of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines & Equipment Feed Inventory Cash &.Liquid Assets Tbtal Investment Total EXpenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor &.Mgt.Earnings Salaries Profits Credit Required Another 80 acres of bare land is available for purchase by the Initial 2 33 268 $35,000 10,550 8,956 2,190 2, 000 58,696 8,469 18,600 10,131 2,935 7,196 9,600 ~2,1401+ Medified 2 80 348 842,500 22,300 17,255 10,931 2,000 94,986 19,829 42,278 22,449 4,749 17,700 9,600 8,100 39,801 74 Operator at 37,500. As currently Operated, the farm includes important crop enterprises of cucumbers, wheat and beans. The modified budget ‘would retain a cash crOpping program,although less extensive than the original. Current average production per cow is better than 9700 pounds. 10,000 pounds is used in the modified budget. Farm No.13 Number Of Full-Time Men Number of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines & Equipment Feed Inventory Cash & Liquid Assets Total Investment Total Expenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor'&,Mgt.Earnings Salaries Profits Credit Required Initial 1% 33 302 $21,500 11,800 17,453 8,152 1,375 60,280 10,108 22,093 11,985 3,014 8,971 7, 200 1,771 Modified none 75 With 33 cows producing an average of 10,500 pounds Of milk and a cash crOp program, this farm has a superior organization to that attainable under a modified budget,assuming 12,000 pound production per cow and devoted exclusively to dairying.18 suggested for this enterprise. No modifications were Gross income is 2,991 dollars above the income predicted by the Cobb-Douglas function indicating that adjustment is currently superior to the typical farm studied. Farm No.14 Number of Full-Time Men Number Of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines & Equipment Feed Inventory Cash &.Liquid Assets Total Investment Total EXpenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor & Mgt.Earnings Salaries Profits Credit Required Changes suggested in the modified 120 acres of land now being rented for cussed for farm 1 and 8. Initial 2 27 255 $40,000 11,100 9,588 5,078 7,500 73,266 6,79 14,667 7,869 3,663 4,206 9,600 “5,390 Modified 2 80 255 $49,600 24,350 17,255 10,931 2,000 104,136 21,666 37,802 16,136 5,206 10,930 9,600 1,330 37,375 76 budget,include the purchase Of reasons similar to those dis- is included for this farm business,not enough feed is produced to support the livestock carried. purchased. dajor investment changes include adding 53 more cows and housing. Despite disease problems in the herd and attendant diffi- Consequently, additional feed is However, even though no cash crOp enterprise culties, production has been maintained at more than 10,000 pounds per cow and the 10,000 pound rate is continued in the modified budget. Farm No.15 Initial Modified Number of Full-Time Men 2 2 Number of Cows 58 80 Number of Tillable Acres 295 . 295 Land & Improvements $75,000 $82,000 Dairy Cattle 22,500 30,500 Machines & Equipment 39,136 39,136 Feed Inventory 9,826 10,931 Cash & Liquid Assets 7,000 2,000 Total Investment 153,462 164,567 Total Expenses 12,976 20,087 Total Receipts 26,941 40,220 Net Income 13,965 20,133 Interest on Investment @ 5 percent/yr. 7,673 8,228 Labor & Mgt.Earnings 6,292 11,905 Salaries 9,600 9,600 Profits -3, 308 2, 305 Credit Required 14,836 77 Rapid changes have characterized the develOpment of this farm enterprise during the past five years. The herd has been increased by 30 cows, new buildings, a pipeline milker, milking parlor and bulk tank have been purchased. The additional investments of the modified budget are comparatively small, the largest being for the purchase of 23 more cows. Current milk production is 9000 pounds per cow while the modi- fication assumes a 10,000 pound rate Of production. This enterprise appears very similar to that indicated by the Fuller budget for 80 cows. 78 Farm NO.16 Initial Modified Number of Full-Time Men 1 Numer of Cows 16 Number of Tillable Acres 175 Land & Improvements $35,000 Dairy Cattle 8,400 Machines & Equipment 6,411 Feed Inventory 2,718 Cash & Liquid Assets 735 Total Investment 53,264 Total Expenses 4,645 Total Receipts 13,530 Net Income 8,885 Interest on Investment @ 5 percent/yr. 2,663 Labor & Mgt.Earnings 6,222 Salaries 4,800 Profits 1,422 Credit Required none High producing cows (12,125 pound average) and a good crOpping program,appear to be some of the reasons for a high gross income on this farm. As the Operator buys all used.machinery which he repairs himself, he is able to keep machinery investments and repairs low. Cattle are on controlled rotation grazing during the summer. The principal cash crOps are wheat, beans, and pickles. The farm as currently organized,has profits comparable to those that might be expected frothuller's 40 cow 12,000 pound budget modification, consequently no changes in this . 1 Operation are suggested. 9 19 The farm's gross income is 3,873 dollars above that predicted by functional analysis indicating an adjustment superior to the typical farm studied. Farm No.17 Initial Modified Number of Full-Time Men 1 Number of Cows 24 Number of Tillable Acres 110 Land & Improvements rented Dairy Cattle 8 7,050 Machines & Equipment 3,677 Feed Inventory 2,227 Cash & Liquid Assets 100 Total Investmeaa 13,054 Total Expenses 3,872 Total Receipts 10,343 Net Income 6,471 Interest on Investment @ 5 percent/yr. 653 Labor & Mgt.Earnings 5,818 Salaries 4,800 Profits 1,018 Credit Required none 79 Although the total investment on this farm is comparatively modest, it is a more efficient Operation than that attainable under the 40 cow 10,000 pound modified budget. NO changes to increase efficiency on this Operation were suggested. Fairly low milk yields (7525 pound average) are compensated for by a good cash crOp program, and expenses are kept down telninimal levels. This Operator has been producing beets for sale and buying forage with the beet receipts. 0 Includes rental payment. 21 The functionally predicted gross income of this farm is 530 dollars less than current gross income indicating a better than typical adjustment for this farm. Farm No.18 Initial Modified Number of Fu11-Time Men 1 1 Number of Cows 21 40 Number of Tillable Acres 229 229 Land & Improvements $50,000 $50,000 Dairy Cattle 7,175 11,925 Machines & Equipment 5,729 13,540 Feed Inventory 2,931 5,28 Cash & Liquid Assets 3,850 1,000 Total Investment 69,685 81,733 Total Expenses 7,151 11,396 Total Receipts 12,913 22,050 Net Income 5,762 10,654 Interest on Investment @ 5 percent/yr. 3,484 4, 08? Labor & Mgt.Earnings 2,278 6,567 Salaries 4,800 4,800 Profits -2,522 1,767 Credit Required 15,653 Adequate land and buildings to support a fairly large dairy enterprise are present on this farm. However, the Operator indicated he was strongly considering cash crOps as an important alternative to dairying. Consequently, the dairy program sketched out in the modified budget is a minimal one in relation to the land available. A fairly large cash crop program is included with it. Credit requirements to make the modification indicated are fairly modest. 1‘ Farm No.19 Initial Modified Number Of Full-Time Men 2 2 Number Of Cows 35 80 Number of Tillable Acres 200 280 Land & Improvements $50,000 8 5,800 Dairy Cattle 16,300 29,800 Machines & Equipment 19,511 19,511 Feed Inventory 4,140 10,931 Cash &.Liquid Assets 1,985 2,000 Total Investment 91,936 120,242 Total Expenses 9,870 19,199 Total Receipts 21,515 38,433 Net Income 11,645 19,234 Interest on Investment @ 5 percent/yr. 4,597 6,012 Labor & Mgt.Earnings 7,048 13,222 Salaries 9,600 9,600 Profits -2,552 3,622 Credit Required 29,671 81 Eighty acres of tillable land with a house are available to the Operator of this farm at a price of 88,000. One member of the informal partnership prOposes to retire within the next few years. Consequently the available 80 acres may be purchased as housing for a hired.man. Machinery investment on this farm is high and.most of the equipment is in good condition. Consequently the repair item in the modified budget was reduced from the usual level assumed for second hand machinery. With the increased livestock program there is still some land available for a cash crop of beans. However, this land might be put to better use in the production of emergency feed or pasture Farm.No.20 Initial Modified Number of Full-Time Men 3 NUmber Of Cows 75 Number of Tillable Acres 367 Land & Improvements $100,000 Dairy Cattle 26,412 Machines & Equipment 26,376 Feed Inventory 5,726 Cash & Liquid Assets 5,000 Total Investment 163,512 Total Expenses 22,778 Total Receipts 41,375 Net Income 18,597 Interest on Investment 0 5 percent/yr. 8,175 Labor & Mgt .Earnings 10, 422 Salaries 8,307 Profits 2,112 Credit Required none 82 As it is presently organized,this 75 cow dairy herd is as efficient as the organizations attainable under the modified budget for 80 cows that Fu11er presents. Hired labor in this instance is receiving less than the $4,800 per man,assumed necessary by Fuller. If the same quality of labor were used on this farm used in the modified budgets, it would be underemployed and would yield a less efficient adjustment than that now existing.22 Current milk production is 10,500 pounds per cow. 22 Functional analysis predicts a gross income for this farm 5,713 dollars less than its current gross income. This is evident to ' support the conclusion that current adjustment on this farm.is superior to adjustment on the typical farm studied. Farm No.21 Initial Modified Number of Full-Time Men 1 1 Number Of Cows 21 40 Number of Tillable Acres 77 157 Land & Improvements , $20,000 $30,000 Dairy Cattle ‘ 5,900 10,650 Machines & Equipment 6,853 13,540 Feed Inventory _ 973 5,268 Cash & Liquid Assets 1,100 1,000 Total Investment 34,826 60,458 Total Expenses 3,892 11,525 Total Receipts 5,652 18,132 Net Income 1,760 6,607 Interest on Investment . @ 5 percent/yr. 1.741 3,023 Labor & Mgt.Earnings 19 3,584 Salaries 4,800 , 4,800 Profits ‘ -4,781 -l,216 Credit Required 27,972 There is some doubt whether the chief difficulty on this farm is a technical problem,or a shortage of resources. A relatively large increase in capital outlays and cash expenses,would not appear capable Of making a much more efficient adjustment on this farm. Milk produc- tion currently is low, land appears to be less than adequate although 80 acres additional land are available. Operator is currently doing part time work away from the farm, it seems doubtful that an efficient adjustment can be readily attained on this farm. Farm No.22 Number of Full-Time Men Number of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines & Equipment Feed Inventory Cash & Liquid Assets Total Investment Total Expenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor & Mgt.Earnings Salaries Profits Credit Required Seventeen COWS'Were sold the accounting period used in this study. Initial 1 35 220 348,000 12,875 16,398 4,606 2,100 83,977 10,717 12,527 2,310 4,199 -l,889 4,800 -6,689 16,398 5,268 1,000 84,791 11,525 21,406 10,154 4,240 5,914 4,800 1,114 3,350 out Of the herd on this farm during Disease control and rebuilding the herd appear to be the chief problems facing this Operator. The change indicated in the modified budget are small, and may be construed as being of minor importance,re1ative to the disease control problem facing the Operator. 84 85 Farm No.23 Initial Modified Number Of Full-Time Men 1 Number of Cows 22 Number of Tillable Acres 144 Land & Improvements $25,000 Dairy Cattle 8,000 Machines & Equipment 10,436 Feed Inventory ' 2,925 Cash.& Liquid Assets 3,000 Total Investment 49,361 Total Expenses 7,351 Total Receipts 15,208 Net Income 7,857 Interest on Investment @ 5 percent/yr. 2,468 Labor & Mgt.Earnings 5,389 Salaries 4,800 Profits 589 Credit Required none By combining a high production per cow,(better than 13,000 pounds) with a fair sized cash crOp enterprise,this operator has achieved an efficiency equivalent to that Of a modified budget Of 40 cows producing 10,000 pounds on the average. No modifications on this Operation are suggested to increase its efficiency.2 23 Functional analysis predicts a gross income for this farm that is 2,066 dollars below that actually attained. Farm No.24 Initial Modified Number of Full-Time Men 2 2 Number Of Cows 51 81 Number of Tillable Acres 303 303 Land & Improvements 861,800 $75,800 Dairy Cattle 17,475 24,725 Machines & Equipment 14,584 17,255 Feed Inventory 5,768 10,931 Cash.& Liquid Assets 10,000 2,000 Total Investment 109,627 130,711 Total Expenses 13,301 19,093 Total Receipts 24,477 39,054 Net Income 11,176 19,093 Interest on Investment @ 5 percent/yr. 5,481 6,535 Labor & Mgt.Earnings 5,695 13,426 Salaries 9,600 9,600 Profits -3,905 3,826 Credit Required ‘ 21,443 86 Despite the fact that this farm Operation has a stanchion barn without a gutter cleaner, its overall efficiency of Operation compares fairly favorably'With that of the modified budget for 60 cows with limited land, although less well with the other budgets for 60 and 80 cow herds. The changes suggested to increase efficiency are as a consequence relatively small. Included in the modifications are 29 more cows, additional barn space, and some more machinery. Current milk production is better than 11,000 pounds per cow,and the modification assumes a 10,000 pound level of production. A minor cash crop program remains after the feed requirements of the livestock have been met. Farm No.25 Initial Modified Number of Full-Time Men 2 2 Number of Cows 25 80 Number Of Tillable Acres 320 g 320 Land & Improvements $54,000 860,000 Dairy Cattle 9,255 23,005 Machines & Equipment 18,277 18,277 Feed Inventory 4,213 10,931 Cash & Liquid Assets 12,940 2,000 Total Investment 98,685 114,213 Total Expenses 13,564 20,057 Total Receipts 22,333 40,782 Net Income 8,769 20,725 Interest on Investment @ 5 percent/yr. 4,934 5,710 Labor>& Mgt.Earnings 3,883 15,015 Salaries 9,600 9,600 Profits -5,767 5,415 Credit Required 19,121 Currently carrying on an extensive cash crOp program,this farm has about the right size for a two man Operation; however, if dairying is to be the main source Of income, 55 more cows would have to be milked twice a day to bring this farm up to the organization implied by the 2 man 80 cow budget modification. Some fairly extensive changes would be required for housing the increased herd, but none are suggested for increasing machinery,which already is more than adequate for the size of Operation. Farm.No.26 Number of Full-Time Men Number of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines & Equipment Feed Inventory Cash & Liquid Assets Total Investment Total Expenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor & Mgt.Earnings Salaries Profits Credit Required This farm Operation is almost identical in organization to the Initial 1 56 275 390,000 17,450 26,934 9,719 1,680 145,783 11,282 25,267 13,985 7,289 6,696 4,800 1,896 Modified none budget modification for a 60 cow herd,a1though only 56 cows are carried. NO modification is suggested for this Operation, however, it is interesting to note the way in which it substantiates the budgeted possibilities of a farm Of similar size and organization. 24 88 The superiority of the present adjustment on this farm relative to the adjustment for the typical farm studied,is indicated by a gross income at present that is 1,448 dollars above that predicted by functional analysis. Farm No.27 Initial Modified Number of Full-Time Men 1 Number of Cows 24 Number of Tillable Acres 173 Land & Improvements $28,000 Dairy Cattle 7,993 Machines & Equipment 4,742 Feed Inventory 3,034 Cash & Liquid Assets 1,305 Total Investment 45,074 Total Expenses 10,109 Total Receipts 17,850 Net Income 7,741 Interest on Investment @ 5 percent/yr. 2,253 Labor & Mgt.Earnings 5,488 Salaries 4,800 Profits 688 Credit Required none The comment on the preceding farm can be applied almost directly to this one. Although only 24 cows are being milked, additional enter- prises on this farm including laying hens,and some cash crOps combined With the dairy enterprise,to yield a more efficient Operation than the 40 cow 10,000 pound modification.25 Fairly Old and inadequate buildings would most likely inhibit extensive expansion on this farm. 25 Cross income on this farm is 2,732 dollars more than the functionally estimated gross income for a typical farm studied. This result supports the superiority Of the modified budget over that of the typicalIy organized farm studied. Farm No.28 Initial Modified Number of Full-Time Men 1 1 Number Of Cows 23 40 Number of Tillable Acres 230 230 Land & Improvements $50,000 $60,200 Dairy Cattle 9,400 14,500 Machines & Equipment 8,161 13,540 Feed Inventory 1,470 5,268 Cash & Liquid Assets 2,500 1,000 Total Investment 71,531 94,508 Total Expenses 7,659 11,388 Total Receipts 11,372 23,831 Net Income 3,731 12,443 Interest on Investment @ 5 percent/yr. 3, 576 4,725 Labor & Mgt.Earnings 137 7,718 Salaries 4,800 4,800 Profits -4,663 2,918 Credit Required 22,062 90 Currently this farm Operator is producing better than 14,000 pounds of milk per cow from 23 cows. The modification assumes a 12,000 pound level of production,although this might be bettered under the particular circumstances on this farm. Included in the modified budget is a fairly large cash crOp of beans. Farm No.29 Initial Modified Number of Full-Time Men 2 2 Number of Cows 46 80 Number of Tillable Acres 302 302 Land & Improvements $77,700 $77,700 Dairy Cattle 17,600 26,100 Machines & Equipment 11,466 17,255 Feed Inventory 1,775 10,931 Cash 6: Liquid Assets 2,400 2,000 Total Investment 110,941 133,986 Total Expenses 8,928 19,309 Total Receipts 15,915 35,496 Net Income 6,887 16,187 Interest on Investment @ 5 percent/yr. 5,547 6,699 Labor & Mgt.Earnings 1,340 9,488 Salaries 7,715 9,600 Profits -6,375 -112 Credit Required 24,909 91 Even with nearly $25,000 of additional capital, adjustment on this enterprise still falls short of that attained on most of the other budget modifications. A 9000 pound level Of production per cow is assumed in the budget,which exceeds the current rate of production by nearly 1500 pounds. Bang's disease,and the comparative inexperience Of the Operator,are partly the causes of the low level of production. The best current adjustment on this farm might well be an increased crOpping program,to provide a learning period for the Operator to acquire experi- ence in the care and handling of a high producing herd of dairy cows. Farm NO.30 Initial Modified Number of Full-Time Men 2 2 Number of Cows 50 80 Number Of Tillable Acres 362 362 Land & Improvements $80,000 $80,000 Dairy Cattle 15,875 23,375 Machines & Equipment 14,459 17,255 Feed Inventory 3,048 10,931 Cash & Liquid Assets 5,250 2,000 Total Investment 118,632 133,561 Total Expenses 15,613 19,309 Total Receipts 19,781 37,089 Net Income 4,168 17,780 Interest on Investment @ 5 percent/yr. 5,931 6,678 Labor & Mgt.Earnings -l,763 11,102 Salaries 9,600 9,600 Profits -ll,363 1,502 Credit Required 17,556 92 Quantitatively there is little difference between the initial and modified budgets on this farm. Qualitatively the difference is more pronounced. Current production per cow is at the 8000 pound level while in the modified budget a 9000 pound level is assumed. The princi- pal difficulties Of adjustment on this farm appear to be of a technical nature. Farm No.31 Number of Full-Time Men Number Of Cows Number of Tillable Acres Land & Improvements Dairy Cattle Machines & Equipment Feed Inventory Cash & Liquid Assets Total Investment Total Expenses Total Receipts Net Income Interest on Investment @ 5 percent/yr. Labor & Mgt.Earnings salaries Profits Credit Required Despite a fairly low level of production per cow of about 8000 Initial 28 118 925,000 10,705 6,076 2,193 750 44,724 5,509 12,250 5,509 2,236 4,505 4, 800 -295 Modified none pounds,this farm has achieved a more efficient adjustment than the modified budget for a 40 cow herd producing 10,000 pounds of milk. 93 This has largely been achieved through thrift in keeping cash Operating expenses down. Possible adjustments include purchase of higher pro- ducing cows. The gross income on this farm is 536 dollars less than that predicted for it by functional analysis. 94 Appraisal of Budget Estimated Credit Recuirements In appraising credit requirements as revealed by the above budgets, it is necessary to consider the nature and consequences Of the assumptions and restrictions imposed in the budgets. 1 Initially, it was decided to work out budgets that would continue the farms in the dairy business. Thus, although minor cash crOp enter- prises were appended to many of the dairy-farm businesses in their respective modified budgets, the pure cash crOp alternative was not thoroughly explored. Consequently, although the presented modified budgets are more efficient than the initial ones, it is not possible to conclude on this basis, that dairying is the most efficient type of production for the resources of these farms. The functional analysis as presented in the first part of this chapter, indicated that returns from dairy-livestock and forage investments, could be expected to be low for farms organized with Old technology. Other workers have presented results that support a conclusion of a low level of productivity for dairy farms producing less than 12,000 pounds of milk at a price of $4.00 per cwt. A recent unpublished linear programming study, that included27 dairying and cash crops as alternative enterprise, yielded no Optimal input combination that included dairying. It would seem reasonable to infer from the evidence, that dairying for many of the farms studied, may not represent the most efficient long-run adjustment. However, in many cases because of the downward fixity of inputs, particularly those of a specialized nature, that are fixed for individual farms as well as for the dairy industry, many of the farms will most likely continue to 27 McKee, Dean, op. cit. 95 Operate as dairy enterprises for some time to come. There are other reasons which may be considered as important deterrents to movement out of the dairy industry. Some farmers are simply misled by erroneous reasoning of their own or of others. For many farm operators, dairying is part of a way of life they wish to pursue. The consequent subjective value that they attach to working with dairy livestock, in many cases outweighs the subjective value of higher expected money incomes, from other types of enterprises. Another consideration of importance in some farm situations, stems from the fact that if land resources are limited, cash crOpping, even under the best known technology, may not yield an income high enough to satisfy the farm Operator. In many cases, income may be increased by adding a livestock enterprise to the limited land available; farm no.2 of the presented budgets appears to be a case in point. In light of the foregoing, it seems worth-while to budget more efficient dairy farms, even though cash crOp production might be the most efficient use of an uncomitted set of resources. Certain other assumptions made, and procedures used in detennining the credit requirements by budgeting, have to be considered prior to any general evaluation of the estimated credit requirements. As noted in the discussions of the various individual budgets, it was assumed that land could be acquired by outright purchase only. In many instances such may be the actual situation; however, in some instances, the possi- bility of securing long-term rental agreements, or land contracts, may exist which give the farm Operator close to the security he would have as a direct owner. In any event, the assumption of outright ownership by purchase was made, because it was believed to be unlikely that farm $6 Operators would make the associated changes in buildings, storage, live- stock and machinery, unless they had secure tenure. To the extent that alternative ways of getting secure control of land, without direct purchase exist, the credit requirements indicated may be regarded as being overestimated. A further source of upward bias in credit requirements resulted from the procedure of handling cash Operating expenditure requirements. The aggregate estimate of annual cash Operating expenses for the initial, and modified budgets, served as the basis for determining credit requirements for this category, but since many of the expense items would not be concurrent, the maximum operating credit required for any month for example, would probably be about a fifth or sixth Of the total indicated. Both these tendencies to overestimate credit requirements were offset to a considerable degree, by the assumption of new technology in the modified budgets. One of the characteristics of the new labor saving technology in the dairy industry, is the complementarity of new labor saving techno- logy with other new technology. Furthermore, the initiation of new technologies Often make the value productivity of investments in the technolOgy replaced almost zero. Consequently, a dollar invested in Old technology in the initial budget, would substitute for considerably less than a dollar invested in the new technology, assumed in the modified budget. Thus, for most of the farms over- and underestimation of credit requirements tend to be compensatory. In comparing the initial and modified budgets, it may be readily seen, that total eXpenses in the modified budgets are prOportionately higher than for the initial budgets. Individual Operators capable of keeping their Operating expenses relatively low at present, should also 97 be able to reduce their operating expenses to a lower level than assumed in the modified budgets. Using the criterion of efficiency presented at the beginning of this section, this means that the efficiency of the modified budgets tends to be underestimated. Since, neither the initial nor the modified budgets include farm produced products for home use, this omission tends to underestimate the total value of receipts in both instances. However, it is not unreasonable to assume that roughly equiva- lent amounts would be produced in both instances and that, hence, their effects would cancel out. On nine farms, the initial adjustment was considered to be as good or better than that attainable under a modified budget. An inspection of these farm budgets indicates several interesting relationships. Only two of these more efficient farms had more than one full time man, while fifteen of the thirty-one farms studied had more than one full time man. This would tend to support the hypothesis that not only are larger enter- prises less readily adjusted than their smaller counterparts, but that it requires a level of management not frequently found,to make the management decisions on a larger enterprise. This indicates the existence of an upper limit on size of enterprise that can be efficiently Operated, or alternatively,that the size of enterprise can be increased only by a large increase in wage payments. The assumption in this latter instance is,that more competent and efficient labor required on these farms could command a high wage elsewhere. The source of efficiency on the nine farms mentioned above varied considerably, although all of the nine did have a supplementary cash crop enterprise that could have resulted in more efficient use of labor. In .general,cash Operating expenses on these nine farms were lower than those 98 occurring on other farms of similar size. High levels of milk production per cow were usually,though not always associated with these more efficient farms. The following seem acceptable tentative conclusions that may be drawn from a consideration of the initial and modified budgets on the thirty-one farms studied. The increased efficiency indicated by the budget modifications for most of the farms studied,represent attainable goals,in the sense that nine of the thirty—one farms studied have demon- strated equivalent or superior adjustments. Although it should be borne in mind that the method Of adjustment was different for many of the farms, the budgets support a hypothesis of low-managerial capacity of hired labor,relative to the managerial ability Of owner Operators. Conse- quently it may be tentatively concluded that the number of large increases in farm size,will be restricted by the lack of adequate sources Of mana- gerial ability on most of the farms studied, which is in accordance with the comparatively small increase in size of enterprise suggested by the modified budgets. In the following chapter some of the important aggregate conse- quences of the modified budgets are considered,in addition to the main theme of admissibility of adjustment within the institutional restrictions on credit. 99 CHAPTER VI ADJUSTMENT POSSIBILITIES In the last chapter two types of efficient adjustment for dairy farms studied were explored. To recapitulate, the first type was that yielded by varying the quantities of the several input categories,to determine an efficient adjustment on a statistically estimated produc- tion function for each farm; the second type of adjustment was that Obtained by shifting each farm from a place on the original production function,to one on a more efficient production function. In the latter instance budgeting was used to determine the adjustment for the indi- vidual farms studied. In the present chapter, adjustments on the sta- tistical production function are not considered as the new organizations on the statistical production function were cash crop enterprises and not dairy farms. Since the central problem studied in this thesis,con- cerned efficient adjustment of dairy-farms within institutionally imposed credit restrictions, crop-farm.types were not considered, although crop farming may be a more efficient long run adjustment for some of the farms in the area studied. From the standpoint of the level of living that they will permit, it is important to note that many of the budgeted modifications are of a minimal nature. Although they are superior in this regard to the Justification for concentrating on "non-economic" dairy enterprise was presented in the last portion Of the preceding chapter. However, until someone develOps a value system for value systems the choice of what one should study.will contain an element of arbitrariness. lOO initial budgets presented, the problem of how many resources are required to produce levels of living, and working conditions, similar to those in industrial work, is beyond the sc0pe of the present study. Nevertheless, if that is the direction in which agricultural policy makers wish to go, the present study indicates that much more resources are required than indicated in the modified budgets. Under such circumstances very large amounts of credit would also be required to make the adjustment. This general area of adjustment involving norms, is discussed in more detail in the concluding chapter of the thesis. Determination of Institutionally_Available Credit The lending rules of the various institutions2 were applied to the individual farm situations, to determine the amounts of credit that could be extended to the individual farm business. From the interviews with representatives of commercial banks, the Federal Land Bank, and insurance companies, the various amounts of new money that these entities would be willing to lend, on the basis of various classes of collateral were determined. In general, it was found that loans would be made up to fifty percent3 of the current market value of land and buildings, machinery, and livestock. NO agency interviewed indicated that it would make loans on the basis of feed and supplies on hand, since such assets would be consumed during the year and, hence, would be unsuitable as a basis for At the onset of this thesis it was pointed out that the study upon which it is based, is only one of a set currently underway at the Department of Agricultural Economics of Michigan State University. Consequently its focus is narrower than might be reasonable under different circumstances. The author is well aware that other types of credit were, and are availa- ble to the farms studied. However, as believed that the study of credit from formal credit institutions to be a useful, important segment of the general credit problem. See Appendix B, Table XVI. lOl collateral. It was further determined, that the insurance company would lend up to sixty percent of the current market value of land and buildings, only if the loan was for more than $5,000, and the insurance company could get the first mortgage. Although the value of household equipment was estimated for each farm studied, it was not used as a basis for collateral. Thus with the exception noted above for land and buildings, the amount of new money borrowable by collateral, was found by subtracting the amount of money owed from fifty percent of the value of land and buildings, machinery and livestock. Stocks, bonds, paid up insurance, cash and accounts receiva- ble were regarded as being equivalent in terms of borrowable funds to their face values. In the case of production credit associations, and the Farmers' Home Administration, the amount of funds borrowable was determined in a differ- ent manner. These agencies do not consider collateral to be their princi- pal criterion. The production credit association lends, in part, on the basis of the earning capacity of the borrower. Thus, generally speaking, the maximum amount borrowable from a production credit‘association,would be equivalent to from one, to five times the amount of the Operators anti- cipated net income, as indicated by his past performance and present plans. In the case of heavy equipment or bulk milk tanks, the maximum loan period was found to be five years, for Operating expenses one year and, for other machinery, livestock and equipment, with the exception of land and buildings, three years. Since most of the non land purchase expenditures indicated by the modified budgets, were a combination of these types of expenditure, the three year period was considered to be most appropriate, to indicate the amount of money available from the Production Credit Association. The actual calculation was made for the individual farms, by subtracting cash 102 expenses, including an estimate Of family living costs from the cash receipts, and subsequently multiplying the resultant net income figure by three. Since the Farmers' Home Administration makes loans primarily on the basis of the character, and ability of the individual farm operator, and not on the basis Of available collateral, the problem of ascertaining the credit available to an individual dairy farm Operator, in this instance could not readily be determined by applying general rules. This difficulty was handled by going over the individual farm situations with the local representative Of the Farmers' Home Administration, and recording his opinion as to the amount of credit available to the indi- vidual farm Operators, in addition to that available from the previously discussed sources. Thus, for each farm the amount Of institutional credit available, was determined by taking the sum of the amounts of credit avail- able, from the various collateral sources, and that available in addition from the non collateral sources. Adjustment Possibilities When the amounts Of credit available, and credit required for adjust- ment, on the studied farms were compared, possibilities Of more efficient adjustment were found to be the following, as shown on tables VIII, IX, X. Within the limitations Of credit from institutions, 22 farms could achieve, or have already achieved an organization, as good as, or better, than that implied by their reSpective modified budgets. Of the remaining 9 farms, adjustment would not be possible with available institutional credit if all land had tO be purchased; however, 3 Of the 9 could attain efficient adjustment, if their additional land requirements 103 could be met by rental or land contract purchase. It seems fairly safe tO assume,that the other 6 farms could not achieve efficient adjustment by using only the available institutional credit. In appraising the adequacy Of available credit, an incomplete picture results, if only institutional sources of credit in the area are considered. However, it appears reasonable to conclude that even without taking into account credit available from other sources, most dairy farmers in the group studied,are capable Of making the type of adjustment indicated for their respective farm Operations,as indicated in table X. When other sources Of credit such as, elevator companies, feed dealers, machinery dealers, friends and families are also taken into consideration, there seems to be considerable reason to believe that for the large majori- ty of the farms studied.(i.e. at least 25 out of 31)h available credit is not currently the important deterrent to more efficient adjustment. Although it was mentioned earlier in this chapter that the problem of how many resources are required to produce earnings,and fringe benefits, from dairying that are comparable to those in industrial work,is beyond the SCOpe Of the present study, but it seems useful in the interest of completeness,to attempt an answer to the question at this juncture. However, it should be kept in mind that the statements of this section are of a very tentative nature,indicating direction Of adjustment rather than amount. Initially an adjustment on the studied farms competitive with industry3would require a highly labor efficient technology,it seems A Two of the six Operators not currently able to achieve efficient adjust- ment with institutional credit have good private sources available to . them. 104 reasonable to assume that it would need to be more labor efficient, than the technology assumed in the modified budgets presented in the last chapter. In view Of the rapid technological advances in the dairy industry during the past few years, it seems reasonable to expect that such a technology is an attainable goal. In appraising the credit requirements of such a technology, one is faced with the problem that it is as yet of an unknown cost. A very rough approximation Of the credit required, might be Obtained from Fuller'ss work. He estimates that about 170,000 dollars would have to be invested in dairying, before earnings, and working conditions, could be made comparable to those attainable by labor in industry. If this figure is used as a "bench mark", then only 5 of the 31 farms studied would be able to make such an adjustment, if One prefers the 100,000 dollars mark, then thirteen farms would be capable of making the adjustment with credit from institutions. Aggregate Consequences of Adjustment Since there is a relatively large number of dairy farms in the Detroit milk-shed, (or in Sanilac county for that matter) recommendations for adjustment Of an individual dairy-farm may be made almost without regard to their effect on aggregate production of milk. However, when such recommendations are applied to a large number Of dairy farms, aggre- gate consequences Of such adjustment become a vital part Of the basis for making recommendations. Consequently it appears to the author to be Fuller, Earl I., Some Labor Efficient Dairy Farm Organizations Designed for Michigan Conditions. Mimeograph 690, Department of Agricultural Economics, Michigan State University, 1957, p. 123. 105 useful to delineate fairly carefully some of aggregate changes in Output and input that would result were the adjustments presented in the modified budgets Of the preceding chapter to be initiated generally on the studied farms. Table XI summarizes certain adjustments in milk production, land utilization, and changes in crOpping patterns that would be capable Of initiation on the studied farms under various sets Of assumptions. For milk production the aggregate adjustment possibilities appear to be as follows. First, if all the adjustments indicated on the studied farms were tO be initiated on all the 22 farms, where such adjustments were indicated, a 93 percent increase in milk production could be expected. Second, if adjustments permitted by available instituional credit and long term rental, were to be untertaken, a 57 percent increase in milk production would be the expected result. Third, institutional credit alone would currently permit adjustments that could increase milk produc- tion by 51 percent. Furthermore it is important to note that none of the three adjustment situations mentioned above include production increases on the 9 farms found to be more efficient than their respective budget modifications. Hence, it may be concluded that even larger increases in milk production than those enumerated above are possible in the farms studied. Even if land is held fixed for all farms at current levels, a 75 percent increase in total milk production could result, if the changes indicated by the modified budgets were initiated on the 22 farms, where they were considered to be relevant. Tillable acres of land would have to be increased by ll percent, if all the adjustment possibilities budgeted are to be initiated. Cash crOp production as might be expected would also be affected by 106 Table VIII Credit Available from Institutional Sources for Individual Farm Adjustment Other Credit’1 Farm Credit Available Total Credit Number on Collateral Available from Available from from Institutions Institutions Institutions 1 3 9,200 $11,000fl $20,200 2 38,000 -- 38,000 3 15,200 19,000 34,200 4 59,700 --- it 59,700 5 20,700 -—- it 20,700 6 10,300 22,000 32,300 7 none none none 8 7,600 10,000 17,600 9 7,000 6,000 13,000 10 79,000 --- t1 79,000 11 22,800 --- in 22,800 12 none none none 13 1,300 15,000 16,300 14 A0,900 --- It h0,900 15 48,500 --- It £8,500 16 19,600 --- it 19,600 17 1,100 --- At 1,100 18 13,500 6,000 19,500 19 17,800 6,000 23,800 20 81,900 -- ‘tt 81,900 21 1,000 21,000 22,000 22 43,900 --— mt 16,900 23 22,h00 --- It 22,h00 25 53,700 --- it 53,700 26 44,900 --- t: Ah,900 28 33,630 --- mt 33,630 29 none none none 30 38,600 --- it 38,600 31 8.700 20.000 28,700 ‘1 Farmers' Home Administration. Includes credit available from Production Credit Association and ‘1 Money would be available to these Operators in case Of disaster, at present they are beyond the SCOpe Of the Farmers' Home Administration. 107 Table IX Credit Available from Institutional Sources, Credit Required for More Efficient Adjustment of Farms, and Adjustment Possibilities Farm Total Credit Total Credit Adjustment Remarks Number Available from Needed for Possibility Institutions Adjustment 1 $20,200 .358,659 no - Could adjust with long 2 38,000 6,520 yes term rental of land 3 34,200 22’582 yes 4 59,700 58,531 yes 5 20,700 107,218 no 6 32,300 none 1 yes 7 none 26,835 no 8 17,600 20,711 no - Could adjust with long 9 13,000 84,876 no term rental Of land 10 79,000 A3,h68 yes 11 22,800 14,5h9 yes 12 none 59,801 no 13 16,300 none 1 yes 1h h0,900 37,375 yes 15 48,500 14,836 yes 16 1A,600 none t yes 17 1,100 none‘t yes 18 19,500 15,653 yes 19 23,800 29,671 no 20 81,900 none‘t yes 21 22,000 27,972 no - Could adjust with long 22 h3,900 3,350 yes term rental Of land 23 22,h00 none t yes 2h h9,900 21,hh3 yes 25 53,700 19,121 yes 26 hh,900 none‘t yes 27 6,585 none‘t yes 28 33,630 22,062 yes 29 none 2h,909 no 30 38,600 17,556 yes 31 28,700 none A yes These farms are already more efficienty organized than the budget modification would permit; consequently no further adjustment is suggested for them. TflfleX Summary of Adjustment Possibilitiest Adjustment Situation of Farms A. Already as efficient or more efficient than respective budget modifications Not as efficient as reSpective budget modifications, but sufficient institutional credit available to permit more efficient adjustment Not as efficient as respective budget modifications, but more efficient adjustment possible with long term rental of land3and credit available from institutions. Not as efficient as respective budget modifications, and more efficient adjustment not possible with credit available from institutions. Total number of farms 108 Number of Farms 13 31 t. This table summarized the results of tables VIII and IX. 3. A. 109 Table XI Summary of Initial and Modified Budgets Milk Production (per year) Change a) (all farms) Initial Modified 8,811,000 lb. 17,030,000 lb. 93 % increase b) (includes modifications permitted by creditI and long term rental of land only) Initial Modified 8,811,000 lb. 13,867,000 lb. 57 % increase c) (includes modifications permitted by creditt one) Initial Modified 8,811,000 lb. 13,339,000 1b. 51 % increase d) (all farms) Change in milk production permitted when land is held fixed at initial level 75 % increase Land Requirements to permit 93% increase in milk production 11 % increase Cash Crop Production Change in crOp production required to permit it 93% increase in milk production 36 % decrease Gross Income a) (all farms) Initial Modified $5hl,086 $899,113 66 % increase b) (all farms, land fixed at initial level) Initial Modified $5h1,086 $812,655 50 % increase Institutional credit only. Decrease in crOp production is from initial position; it underesti- mates the reduction in land devoted to cash crop production, in the area studied, resulting from 11% increase in land, which may be partly in cash crops at present. Modified gross income estimates do not include effects of price changes, resulting from production increases, and low price elasticity of demand. 110 prOposed budget modifications. As table XI indicates a 36 percent decrease in cash crops could be expected, if milk production were to increase by the 93 percent indicated, by including modifications on all farms where budget modifications were suggested. Before generalizing any of the results from the sample of farms studied, it is important to give special consideration to problems present when an attempt is made to generalize results from a purposive sample. It will be remembered that the studied farms were chosen in such a way, that they were typically on the same general production function, and typically out of adjustment. Furthermore, since the help of the county agent was used in selecting farms, it may be expected that they are above average in many respects. Hence, in view of these non- random elements, in sample selection the universe to which one can gener- alize these results would be to similarly selected farms from the same population. Nevertheless, to the extent that the p0pulation of similar farms represents a considerable portion of the Detroit milk-shed, it is useful to make such generalizations. Several important consequences of the adjustment possibilities are almost immediately evident. The potential increase in milk production, under any of the situations enumerated in table XI could be expected to bring about reductions in milk prices, if they were made general in the . ‘ . . . 6 , studied area. The resultant decrease in milk prices would cause It is difficult to give an adequate appraisal of the quantative decline in milk price, that would result under such circumstances, in view of the fact that neither the price demand elasticity of milk, nor the total population from which the studied farms were drawn, are known with any degree of precision. However, if milk production were to be increased by 75 percent and the price demand elasticity of milk is assumed to be -.30 then the resultant price of milk would be negative, unless a large increase in elasticity is present in the lower segment of the relevant demand curve . 111 reductions in the relative efficiency of the studied farms and in many instances would impair or destroy their ability to survive. Other consequences of initiating the pr0posed adjustments on the studied farms include a slight increase in land and a reduction in cash cr0p acreage. Both of these changes in turn would have the effect of increasing the marginal costs of milk production. Since both types of changes would increase the marginal factor costs of inputs used in milk production, the increased land would have to be bid away from its current use, and the decrease in cash crop production would serve to increase the Opportunity cost of forage grown on the land taken over from cr0p production. It is important to remember at this point that the changes in the budget situations from initial to modified positions included only changes that would result in increased efficiency, while it is equally important to consider other criteria in appraising the adequacy of such modifications. If for example levels of living and working conditions equivalent to those attainable from industrial production are considered the relevant criteria for appraising adjustment, then the changes indi— cated in the modified budgets are,in most cases,too small to permit the attainment of such levels of living and working conditions. In view of these considerations relative to the adjustment possibilities on the studied farms, additional analysis of the two problems of efficiency and income levels is required. In the chapter following such an appraisal is undertaken. 112 CHAPTER VII CONCLUSIONS, IMPLICATIONS AND RECON? WDATIONS There are several results of this study which appear to be important enough to consider in more detail than was done in preceding chapters. Although not all of those considered here deal directly with the adequacy of institutional credit and efficient adjustment of dairy farms, they are so closely related,that even a modest attempt at completeness requires their inclusion. The results are discussed at length subsequent to their initial listing which follows immediately. Summary_of Important Results and Conclusions 1. There appears to be enough institutional credit available to permit more efficient types of adjustment on most of the dairy farms studied. 2. Although enough credit for more efficient adjustment appears to be available, many farmers are unaware of the types of services and inter- est rates that are available from some credit institutions. 3. Most of the farms studied are faced with a low marginal value productivity for labor,and a rising marginal factor cost for it. A. New technology is required for more efficient adjustment of the dairy farms studied. 5. Several of the existing farm organizations indicate that superior adjustments using new technology are possible. 6. Income levels on the studied farms were generally found to be low. 7. Cash cropping appears to be a very important alternative to dairy- ing on many of the farms studied. 113 8. A large increase in milk production and the danger of price' declines are implied by the modified budgets. Appraisal of Conclusions The initial item listed above is in essence,the answer to one of the first questions posed by this study. The results of the preceding chapters, especially chapter VI, do in fact indicate'that enough insti- tutional credit exists to permit more efficient adjustment on the large majority of the farms studied. .Hence it is neither concluded nor recom- mended that additional credit be supplied by the institutions studied, when only the criteria of efficiency are used in judging the amount of credit required for the adjustment of the studied farms. In one way, the credit available for adjustment has been underestimated by the exclusion of non-institutional credit. As a result larger adjustments than those indicated would be attainable on most of the farms studied. Some of the further sources of credit for these additional adjustments,wou1d include land contracts with private individuals, dealer financing, and private loans. Despite the conclusion that enough credit is available for more efficient adjustment on most of the farms studied% nevertheless many farm Operators did appear to be facing credit problems. This situation appeared to stem from a lack of information on the part of the farm 1 It is important to note that the adequacy of institutional credit used here refers only to the credit required for more efficient adjustment of the studied farms. It is not concluded that enough credit is available to permit working conditions,and earnings comparable to those attainable in industrial employment. Such adjustments would apparently require a new technology as yet unknown and of an unknown cost. 11A operators concerning credit and services available to them from existing credit institutions. Thus many Operators were using higher cost dealer credit, when lower cost institutional credit was available to them. Although the amounts of dealer credit used were comparatively unimportant in some instances, in others they constituted the major portion of credit used and could have resulted in important losses to the Operators con- cerned, if there had been only small reductions in debt repayment capacity. Another area of the credit picture that seemed to be unclear to many of the farm Operators interviewed, concerned interest rates. Many of the farm Operators did not know the interest rates that they were paying nor was it clearly marked on the credit instruments in many cases. Item three in the summary points up one of the major problems facing the farm Operators of most of the farms as they are currently organized. From a consideration of the functional analysis carried out, it would appear that the marginal value productivities of labor and of livestock are low, whether considered separately or in conjunction. At the same time industrial wage rates are high and might be expected to increase With the development of the St. Lawrence seaway and the consequent increase in industrial growth in the area studied and those areas adjacent to it. Farm Operators wishing to enlarge their farms or keep their hired help, will, as a result, face serious organizational difficulties if they attempt to adjust their farms using extant technology. For whether they enlarge their scale of Operations or not, so long as they have to nploy hired help, they will be faced with the dilemma that its marginal value produc- tivity is low, relative to its Opportunity costs. This problem of low value productivity for labor, in juxtaposition with a high marginal factor cost does not appear to admit solution on 1,115 the studied farms, so long as they remain on the same production function. Thus, as noted in item four of the suamary, new and/or better technology than typically used appears necessary to achieve increased value produc- tivity for labor. This conclusion is borne out by a consideration of the functionally estimated Optima, in conjunction with the presented budgets. It seems reasonable to infer from the budgets, that the average productivity of labor may be increased by the application of large amounts of labor saving technology, in conjunction with highly efficient farm labor. There dds not appear to be available at present a technology which would permit efficient adjustment in the dairy business, with only average or low quality farm labor. As a consequence, adjustments on many of the studied farms would involve a shift to higher quality labor. The type of adjustment involving existing labor on many farms, would conse- quently involve costs as yet unknown. A priori consideration would tend to support the hypothesis that both competent labor, and labor saving tech- nology, are required for the attainment of reasonably competitive levels of productivity for labor, on dairy farms in Michigan. It will be remembered, that one of the more important reasons for basing the modified budgets in this study on the work by Earl Fuller, stemmed from the fact that in his develOpment he stressed new labor saving technology. It is of fundamental importance to note that the budgets assume the joint attainment of new technology and highly productive well paid labor. One difficulty that exists in any budgeting procedure, prior to trans- lation into corresponding reality, is that there usually exists some doubt as to the practibility of the physical relationships implied by the budget. This is of special concern when the implied organization repre- O sents a type of organization and technology that is relatively new. In 116 the present study,considerable justification for believing the modified budgets to represent attainable reality exists. Several of the farms indicated organizations that were as efficient,or more efficient than their respective modified budgets. The sixth farm budgeted is of particular interest in this regard,since it is almost a pure dairy enter- prise on which large numbers of technical labor saving innovations have been made. Furthermore,the organization of farm six as indicated by its initial budget implies that an organization much superior to its modified budget in terms of efficiency has already been attained on this farm. It is concluded therefore, as noted in item five of the summary,that the budget modificationsdo in fact indicate an attainable reality on some of the farms studied. Despite the fact that the modified budgets, in those cases where they are relevant, indicate a higher level of income than that included in the initial budgets, it seems safe to say that the level of incomes indicated is still low on most of the studied farms. This is particup larly true when they are considered in relation to industrial wage rates, that include fringe benefits in addition to cash wages. Fuller has noted that he estimates for dairy farms in Southern I"‘1:'Lchigan that it would require an investment in excess of $100,0002 to achieve wages comparable to those in industry)and that at the same time most fringe benefits would still not be included. 2 This scale of adjustment would not be permitted by the institutionally available credit on the majority of the studied farms. Furthermore it is a moot point whether any of the studied farms could, within the restrictions of institutional credit, make adjustments that would provide wages and fringe benefits comparable to those available in industry. 117 Although the cash crOp alternative to dairying has only been partly explored in this study, there appears to be supporting evidence from external sources to indicate the tentative conclusion that for many of the farms studied,cash crOpping may represent more efficient use of resources than dairying. (This of course involves relaxing the assumption that only dairy enterprises are to be considered). Possible Implications Up to the present point,the discussion in this chapter has dealt largely with factual results and conclusions that have support in the body of the thesis, as yet little has been said concerning the impli- cations or consequences of this factual material. The present section represents an attempt to remedy this situation. In the summary at the beginning of this chapter the last item stated that the modified budgets implied a considerable increase in milk production over the initial situation obtaining in the unmodified or initial budgets. Furthermore, it was pointed out in the last chapter,that the consequence of such a large increase in milk production would, if made general in the Detroit milk-shed, have a seriously depressing influence on milk price. However, these are not the only prices that would be affected by such an increase in milk production, for securing the additional inputs required for the additional production indicated would involve bidding up the prices of factors of production such as cows, forage, and feed grains, since before the transfer from current to alternative use can rationally be made the alternative must indicate some return in excess of that from current use. The nature of some of the changes that would be required to make the adjustments on the studied farms would include the following. An increase in the production of forage, an increase in the production of corn for ll8 ensiling and for grain, an increase in oat production, and an increase in numbers of heifers held for breeding purposes. The changes in the use of land resources would result in reduced acreage available for cash crOps,such as beans, beets, and wheat. A result which might reasonably be expected to raise cash crOp prices,and consequently require, through the working of the principle of opportunity costs, further factor price increases for the dairy industry. Hence it seems, that were the indi- cated adjustments on the studied farms to be generally initiated, decreasing profitability as a result of increases in factor prices and decreases in product prices,would initially be a more effective deterrent to completing the adjustment than a shortage of credit. 'Hhat is implied by the foregoing analysis is,that generalized applications of the indi- vidual recommendations for more efficient adjustment of dairy farms,is a self defeating program if it does not also embody some sort of production control. The summary of aggregate adjustment possibilities presented in the preceding chapter supports such a conclusion. In table XI it was shown that increases in milk production ranging from 51 to 93 percent, were implied by the modified budgets, depending upon the restrictions assumed. This matter will be discussed at length in the last section of this chapter,where it is proposed to treat in some detail questions of recommendations. It has been mentioned previously in this chapter,that generally speaking the income levels on the studied farms, whether considered in 3 Although the impact of such a decrease in the earning capacity of dairy enterprises would doubtless reduce the amounts of credit that insti- tutions would be willing to lend to borrowers engaged in the dairy business. However, it seems reasonable to believe that the decline in profitability would precede any such action On the part of insti- tutional lenders. 1.19 their initial states or as they are represented by the modified budgets, are low3relative to the earnings of industrial labor. This is the case deepite the fact that the modified budgets embody new and labor saving technology. It was mentioned before that Fuller has estimated that it would require an investment in excess of $100,000 and the use of new tech- nology,to yield wages comparable to those of industry and at the same time provide something like equivalent working conditions. Even with such an investment it would still not be possible to provide the fringe benefits of industrial work. To the best of the author‘s knowledge there does not yet exist a technology directly applicable to the Michigan dairy industry,which would permit the earnings of dairy farm labor to compete with industrial working conditions,and wage rates that include fringe benefits when low price elasticities of demand are considered. This implies that if the Michigan dairy industry is going to attain and main- tain the ability to compete with industrial concerns for high quality labor,a great deal of rapid technological advance will have to be made, and applied on Michigan dairy farms. Recommendations Several criteria that might be used in appraising modifications in farm firm organizations and changes in institutional adjustments were delineated in the second chapter of this thesis. It was noted at the time,that the use of efficiency as sole criterion of adjustment,would result in recommendations which might,most charitably,be regarded as incomplete. To avoid this incompleteness a section sketching out what the author regarded as being some important ethical criteria was included in chapter II. Up to the present only the criterion of efficiency has been used to indicate the nature of adjustments on the studied farm firms. 120 The purpose of this section is to bring both economic and ethical criteria to bear upon problems of dairy—farm adjustment. For expository reasons, it appears to be useful to recapitulate the consequences implied by the rapid simultaneous initiation of the modifi- cations required for more efficient adjustment of dairy-farms. 1. Milk production would be substantially increased. 2. As a consequence of increased milk production and low demand elas- ticities,important decreases in milk prices could be expected. 3. The acquisition of the additional inputs to make the initial adjustment would raise the price of these inputs. 4. The consequences of item 2 and 3 would be to reduce the efficiency of the adjustment indicated in the modified budgets,and at the same time reduce the income of the farm families involved. If the adjustments indicated were carried out the consequences could yield a lowered price of dairy-products for consumers,and an unimproved level of living for dairy-farmers. Under such circumstances the dairy-farmers might well be considered as being treated as a meansh alone,of increasing the real level of living of consumers. As indicated previously in the second chapter of this thesis,a situation, where one group of persons is made better off and another group is made worse off, is not capable of being handled in terms of welfare economics, but rather must be treated as an ethical problem. What is preposed is to ask some of the relevant questions raised by The situation engendered would not yield treatment of farmers as means alone,to the extent that they are also consumers of dairy products; however, it would closely approximate treatment as a means alone, unless it were possible to apply the principle of compensation. l2l Immanuel Kant,5 about the consequences of the adjustments indicated. Among the questions he raised the following seem to be applicable to the present situation. 1. Is any person being treated as a means alone and not as an end in himself? 2. Is it possible to will that the maxim should be applied to all men? Kant maintained that an undesirable situation obtained, if the first question were to be answered in the affirmative, or the second in the nega- tive. Application of the first question to the adjustments indicated and their resultant consequences, indicates that the situation would not admit a negative answer to the first Kantian question, since dairy-farmers would in fact be treated very nearly as a means alone and not as ends in them- selves. Hhat sort of situation would yield the preferred answer to this question and at the same time maintain connotations of efficiency? Although a very large number of types of means and mechanisms for attaining an adjustment that would yield both the preferred answer the question above, and at the same time maintain connotations of efficiency could be explored, only one means and one mechanism are treated in the following section. In brief a hypothetical means of attaining such a preferred adjustment of dairy farms might involve a program that includes following conditions. 1. Technical advice would be provided to farmers concerning labor saving technology in the dairy industry. 2. Credit would be provided under the same program that would permit dairy—farm Operators to: (a) shift into a more efficient labor saving technology, and (b) develOp a scale of enterprise such that earnings of Leys, W.A.R., o . cit., Chapter 5. Once more it seems worthwhile to point out that Leys' interpretation of Kantian ethics is being used as a paradigm of what might be done. 122 labor in conjunction with new technology,would be comparable to earnings of industrial workers of similar capacities. 3. Production con rols would be instituted to counteract the price depressing effects that could result from a generalized increase in scale 6 of individual dairy enterprises. The inclusion of the first recommendation stems as a logical conse- quence from the body of the thesis,where it has been demonstrated that efficient marginal adjustments on the extant production function are not capable of attainment in conjunction with maintaining the farms as dairy enterprises. At the same time it was demonstrated that greater efficiency (in an average sense) was attainable by shifting the farms onto a produc- tion function,that subsumed a labor efficient technology. Thus it appears that new labor efficient technology is a necessary condition to increase the efficiency of these farms. The first item in the recommendation3~ indicates one of the ways in which farmers may be made aware of the nature of these technical developments. It would seem that this is a required step in making such adjustments,since there is little reason to believe that farmers will make efficient adjustment unless they are first made aware of the nature of these adjustments. In order to initiate changes implied by the technical advice aspect of the program,it seems necessary to combine both the technical and credit aSpects,so that efficient complementary sets of inputs are purchased. Such joint handling of technical and credit problems may be expected to General problems of adjustment in the Michigan dairy industry are presently being studied at Michigan State University by James Bonnen, and Dean McKee as their contribution to the Lake States Dairy Adjustment Study. 123 provide efficient combinations of inputs,and at the same time avoid the problems associated with purchases that alone are neither cost reducing nor income increasing. But perhaps a more important service which could be provided by the credit portion of the programmould be the rapid build up of the farms on a new technical production function, and on a scale that tvould permit earnings of agricultural workers to be competitive with earnings of industrial workers. This would provide a set of conditions that would more nearly yield an affirmative answer to the second Kantian question, in the sense that similar groups of people would be receiving Similar remuneration for comparable work. Further,neither group would then be treated as a means alone. However in order that the gains in efficiency and income levels are not all squandered in a price depressing flood of excess milk.some type of pr‘Oduction control is required to take care of the aggregate effects on increases in scale and efficiency of enterprise. In View of the fact that increases in milk production are (under an existing new technolog') requi- Site to the attainment of earning levels comparable to those in industry Short run adjustments would require a reduction in number of dairy-farm enterprises. This reduction in the number of dairy-farm enterprises repre- sents one of the more critical ethical and economic aspects of the preposed Program. From the standpoint of increasing earnings of farm labor to leVels comparable with industry, it is as essential as the shift to a new teel’mology. However the problem of deciding which persons should be a‘llmhred to continue in or enter the dairy business does not readily admit of Scblution. One possibility that seems worth considering would be to make a r andom selection among farm Operators that have indicated the capacity 12A and willingness to adopt new technology in the dairy business.7 These randomly selected Operators would then develop their farms under the program. The remainder could be given compensatory payments that would be similar to those received by prOperty owners during a condemnation procedure. They could then continue farming if they so wished but in some other enterprise. Entry into the dairy business could then be under- taken by permitting a random selection from those capable of handling technological and managerial problems involved. Rate of entry would be governed by the rate of change in demand for milk. One of the important features of this program is,that it permits a high proportion of increases in labor efficiency to be translated into income for the dairy-farmers. Milk prices could at the same time be reduced to levels that would compensate consumer tax payers for the cost of initiating the program. The principle of random selection of operators, from a group capable and x-rilling to make tecnological and managerial adjustments, has an even handed justice in it and compensatory payments, if adGQuate, could avoid the problem of treating anyone as a means alone. Whether or not such a program would in fact be capable of meeting the Criteria of efficiency, and even handed justice for all,would depend upon the Quantitive and value relationships involved in making the preposed Changes. Other recommendations, of a less. comprehensive nature than the fore- Cr C “01115; hypothetical preposal, but which nevertheless appear of importance \ 7 suCh a random selection has been accepted fairly generally in the United té“~tes,as an equitable method of selecting people to serve in the armed cfrees. From a casuistic standpoint then, it has a precedent in a sltuation where much more than the selection Of a type of work may be at, stake for the individual involved. 125 8x3 fruitful lines of investigation of problems related to the efficient axijustment of the dairy-farm studied in this thesis,include the following: 1. The development of more labor efficient technOIOgy for the dairy industry. 2. The study and analysis of the comparative advantage of cash crops and dairying in the area. 3. The develOpment of a labor saving technology that complements Old technology in the dairy industry. A. The establishment of better communication between lending agen- cies and potential farmer users Of credit. Again the word technology and what it may imply for the dairy indus- 'txjy enters the discussion. As indicated previously on several occasions, leibor efficient technology and its application on dairy farms appears to bee a necessary condition for any increase in efficiency in the dairy- incinstry. Despite the fact that the modified budgets subsumed new and :Lalaorfsaving technology,it was pointed out that even with such modifi- caixions, working conditions and earnings comparable to those of industry ‘MGQFe not attainable on the studied farms. However, these modifications irTVTilving new labor saving technology did represent a move in that dimaction. Consequently it seems reasonable to assume and important to $13813e that further technological develOpment in the dairy industry is a musl3,if its labor is to achieve and maintain equality with industrial lilENDr. In a very real sense this may be regarded as being one of the mck3t> important recommendations of this thesis. Along with the develop- menuil of this new technology that has been advocated,there also appears tc’ the an important place for the parallel develOpment of technology that is . , . . (Homplementary With the extant set of productive resources. Sucn 126 develOpnents could provide a way of increasing the efficiency of farms incapable of making the set of purchases required when only a self com- plementary new technolozi‘y is available. Any analysis of the dairy-farn‘L business which claims to be complete must include a fairly close evaluation of the alternative Opportunities available in the area under study. In this study the comparative advan- tages of cash crops and dairying have been explored at a minimal level. The indications appear to be that cash cropping has an important place on many dairy-farms, and in fact that on the existing production function a. cash crOp adjustment is more efficient and profitable than daimring. With regard to efficient adjustment between dairying and cash cropping, it seems that further study is needed of the current and new technologies as they influence the comparative advantage of those two systems of enterprises. It is the author's personal belief that technological adVances will do more to enhance the advantage of crOps over dairying in the studied area for some time to come. If comprehensive adjustments of the dairy industry are to be made a necessary first step must include a Study of the comparative advantage present and future of crOps and dairy. APPENDIX A Table XII 127 Profit Maximizing Organization of Studied Farms,t Labor and Livestock-forage Fixed at Initial Level for Each Farm, with MVP of Labor-livestock-forage Computed at Profit Maximizing Level of Other Inputs Farm. Acres of Dollars of Dollars of Animal Unit MVP of Labor & Number . Land Machinery Cash Expenses Capacity of Livestock- Investment Buildings forage l 131 12937 hhhh 68 $189 2 1A3 1hlhh 6859 75 207 3 11h 11281 3875 60 224 A 167 16523 5676 87 196 5 196 19315 6635 102 133 6 122 12028 AlBl 64 187 7 115 113h6 3898 60 224 8 117 11519 3957 61 187 9 156 15433 5301 82 160 10 185 18228 6262 96 189 11 145 1A29h A910 76 187 12 157 1552h 5333 82 161 13 167 16523 5676 87 196 lb 185 18228 6267 96 189 15 220 21713 7A6? 115 177 16 111 10916 3760 58 226 17 119 11731 #030 62 182 18 12h 12221 4198 65 179 19 170 1676A 5759 89 158 20 265 26153 898A 138 162 21 107 105hh 3622 56 177 22 137 13527 46h7 72 210 23 132 130h1 #480 69 191 2A 218 21A80 7379 11h 178 25 11.1 13887 6770 ‘ 73 128 26 182 17979 6176 95 179 27 12h 12188 #187 6A 189 28 160 13837 #753 73 208 29 185 18228 6262 96 189 30 212 209h9 7196 111 180 31 113 14111. 4859 75 297 I'Prediction equation was: Log 7 = 2.01257h + .217 X2 + .177 ( 2177 + log I) + A log 20 .300 ( .300 + log Y) + .097 ( .021 + log 97 log 1.00 log 21 where: X2 a limiting factor of labor and livestock-forage on each farm; X1 = A acres of land g .111 Y; x3 . dollars of machinery . ,121 ?; xA a dollars of 20 .15 cash.expenses - ‘300 7} X5 . animal units of housing capacity = :027 I} 1.00 21 ----_- Jenn-AHA A 11! Table XIII 128 Profit Maximizing Organization of Studied Farms, Labor and Livestockpforage Fixed at Initial Level for Each Farm, with MVP of Labor-livestockrforage Computed at Profit Maximizing Level of Other Inputs Farm .Acres of Dollars of Dollars of .Animal Unit MVP of Labor & Number Land Machinery Cash Expenses Capacity of Livestock- Investment Buildings forage 1 232 16024 5504 85 $234 2 254 17519 6018 93 256 3 202 13972 4800 7h 278 4 296 20466 7031 108 242 5 346 23924 8218 127 165 6 216 14899 5118 79 231 7 203 14054 4828 71+ 277 8 207 14268 4906 75 232 9 277 19117 6567 101 198 10 327 22578 7756 119 234 11 256 17705 6082 94 232 12 278 19229 6605 102 199 13 296 20466 7031 108 242 11+ 327 22578 7756 119 234 15 390 26932 9251 142 219 16 196 13559 4658 72 281 17 210 14531 4992 77 226 18 219 15137 5200 80 221 19 300 20764 7133 110 196 20 469 32394 11128 171 201 21 189 13061 4487 69 219 22 243 16756 5756 89 260 23 234 16153 5549 85 236 24 385 26606 9140 141 220 25 249 17200 5909 91 158 26 322 22270 7650 118 221 27 219 15096 5186 80 234 28 248 17139 5888 91 258 29 327 22578 7756 119 234 30 376 25949 8914 137 222 431 254 17519 6018 93 256 ‘1 Prediction equation was: Log‘? 3 2.012574 + .217 X2 + .177 (log .177 + log I) + A 14 .131 (10g .131 + log Y) + .300 (10g .200 + log 8) + .097 (10g .021 + log 7) .15 1.00 21 where the Xi's are the same as in the preceding table with the exception of Xl'which has a value of .izz I. .Table XIV t 129 . Profit l’iaximizing Organization of Studied Farms, Labor Fixed at Initial Level for Each Farm with MVP of Labor Computed at . Profit Maximizing Level of Other Inputs - Farm Acres Dollars of Dollars of Dollars of Dollars of Animal unit MVP of 2 Number of Machinery Livestock- Livestock Crop Capacity of month of Land Investment forage Expenses Expenses Buildings Labor Investment 1 130 12848 2096 3089 1206 68 8173 2 130 12848 2096 3089 1206 68 173 3 106 9994 1630 2403 938 53 184 4 155 15271 2491 3572 1433 81 167 5 240 23721 3879 5703 2227 125 151 6 124 12228 1995 2940 1148 65 175 7 102 10059 1641 2418 944 53 183 8 119 11788 1923 2834 1106 62 177 9 173 17030 2778 4095 1599 90 163 10 173 17030 2778 4095 1599 90 163 11 143 14071 2296 3383 1321 74 170 12 173 17030 2778 4095 1599 90 163 13 155 15271 2491 3672 1433 81 167 14 173 17030 2778 4095 1599 90 163 15 210 20714 3379 4980 1944 110 156 16 98 9667 1577 2324 907 51 185 17 124 12228 1995 2940 1148 65 175 18 130 13848 2096 3089 1206 68 173 19 186 18352 2994 4412 1723 97 160 20 262 25851 4218 6216 2427 137 148 21 116 11473 1872 2758 1077 61 178 22 124 12228 1995 2940 1148 65 175 23 130 12848 2096 3089 1206 68 173 24 207 20436 3334 4914 1918 108 156 25 190 18750 3059 4508 1760 99 159 26 178 17609 2873 4234 1654 93 162 27 124 12228 1995 2940 1148 65 175 28 127 12538 2045 3015 1177 66 174 29 173 17030 2778 4095 1599 90 163 30 201 19879 3243 4780 1866 105 157 31 130 12848 2096 g3089 1206 68 173 ‘1 Prediction equation was: Log Y - 1. 65520 + .201 x2 + .177 (10g .111 + log 7) + .131 (log ,151+ 10g Y) + .057 (10g 3 052 + log Y) + .210 (log 2100 + log Y) + .15 1. 00 .082 (log .082 + log ?) + .097 (10g , 092 + log 13 where X2 : labor on each 1. 00 21 farm; X1 3 acres of land a :199 Y; YB - machinery investment : :151 Y; .15 X4 : livestock-forage investment 3 , 052 Y; X5 _ livestock expenses 3 .210 Y; .40 1.00 X6 : crOp expenses . 2082 Y; X7 : animal units of housing capacity. . 099 Y; 1 00 A O Y a gross income. Table XV 130 .Profit Maximizing Organization of Studied Farms,‘t Labor Fixed at Initial Level for Each Farm with MVP of Labor Computed at Profit Maximizing Level of Other Inputs .Farm ~Acres Dollars of Dollars of Dollars of Dollars of Animal Unit MVP of 2 Number of Machinery Livestock- Livestock Crop Capacity of month of Land Investment forage Expenses Expenses Buildings Labor Investment 1 240 16604 2709 3992 1559 88 $224 2 240 16604 2709 3992 1559 88 224 3 187 12918 2107 3106 1212 68 237 4 286 19739 3220 4746 1853 104 216 5 444 30661 5002 7372 2878 162 196 6 229 15806 2579 3800 1484 83 227 7 188 13003 2121 3126 1220 69 237 8 221 15238 2486 3664 1430 81 229 9 319 22013 3591 5293 2066 116 211 10 319 22013 3591 5293 2066 116 211 11 263 18189 2967 4373 1707 96 220 12 319 22013 3591 5293 2066 116 211 13 286 19739 3220 - 4746 1853 104 216 14 319 22013 3591 5293 2066 116 216 15 388 26775 4368 6438 2514 142 202 16 181 12496 1038 3004 1173 66 239 17 229 15806 2579 3800 1484 84 227 18 240 16604 2709 3992 1559 88 224 19 343 23722 3870 5704 2227 125 207 20 484 33415 5452 8035 3137 177 192 21 215 14830 2419 3566 1392 78 230 22 229 15806 2579 3800 1484 84 227 23 240 16604 2709 3992 1559 88 224 24 382 26416 4310 6351 2480 140 202 25 351 24237 3954 5827 2275 128 206 26 330 22762 3714 5473 2137 120 209 27 229 15806 2579 3800 1484 84 227 28 235 16207 2644 3897 1521 86 226 29 319 22013 3591 5293 2066 116 211 30 372 25694 4192 6178 2412 136 203 31 240 16604, 2709 .3992 1559_1 88 2241 t Prediction equation was the same as in preceding table with the exception that the third item in the right hand member of the equation is .177 (logglzz A + log Y). 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EdEdeE amonop:H on pHdoz :mog mmmHO dang 134 .:0:9 meH uv «a. .:d:9 n0980nm An 9 Ir. 0mmn09m mn0900MmH9mm :H 09 90:5 OOH 09 as mono :099009Hm h0:0wn0s0 :0 :H 2d: 00xond: 09 mm: 0w0m9nos 0:0000 0 9:9 :00H 0: Hmn0:0w :H 0:09 w:H>HH mHflsmm 05:85 0600:H Enmw 90: m0fiH9 m 09:0Em0d0n thmoh no m 09 a: 0008 H8500 9:090 :9H2 0:00H Hmn0:0m :H mnm0h m 09 a: mo 09 a: 0H99mo OOquA 0030:0n 09 .44me OOH\OH. 0:00H H0n0:0m :9 OOO.m “9:0EQH060 09 OOO.H :00H h9HHH90 9:0Ehmd0n an 30:.h>00: 9:0adH500.h>00: 30: OOH\mN. 09 :0H99000 :fi 00:n0>0m mH mH:9 9:9 non .mnh m no 00000 :H OOH OO«H 9mnHm 9:m:09 09 90:8 0n0: 0:00H w:n90n0a0 09 as H0n0:0m :H mm.ww 90090 9:00n0a m :0H90Hn9m0n 0: :9H3 nwmh H 0HdEHm mo Om hn0:Hnowz .¢.O.m 7m:H>HH MHHamn 8:0 H0n090HH00 IL 000% .mmm .0000 mun 09 0H:9 no 09009 0:9 OOOaOmw 09 a: 0008 0:00H :0 0008 0:00H 0: wdono mnwmm ON m4 0:00H:0n90>n00:00 n0903 @ Hfiom Amm:flpHH59.Ho:Hv mn00h mm 4 OOH 09 a: m:Hw:0: Enmm A:mn090>v OOH A:wn090> :o:v 05H0> 0:00H OOmabmm mn00a OJ $9 00090ndd0 Om 000:0ndd snmm 000:Hm:m Enmm m:m 09 8:0H UHdoz :00H n00» 00Hnm 90xn02 h0:0w¢ ch9 no n02 9:0on0m 9:0nnso no 9:00n0m H0n090HHoo mo:0w< momnmzo 0:0H9H0:oo 0nflm 9H00no H0909 00Hn0m 090m mHn9 09 as 0008 no no m:H0H>n0m HOH00dm :009 ESEmez 8:5fi802 900n09:H 09 0H503 :moH mmeO 0Qha APP 1‘! ‘_J 35le C 135 CONFIDENTAL Farm No. SIZE OF FARM Total Acres Owned Rented Tillable Acres Owned Rented Woodlot Acres Soil type Crop Acres Total Yield Method of Harvest LAQOR: MONTHS ON FARM Operator Months Family Months Hired Months GROSS INCOME 136 Amount Date Agguantity Price Received Livestock and livestock products sold: Milk Other dairy products Eggs Cattle Hogs Sheep Poultry Other livestock Other livestock income (wool, breeding fees, steal Crops sold: Wheat Oats Corn Sugar beets Hay Seed Other Custom work or machinery rented _1 Land andgpasture rent Other income from farmfgpurces (inc.PMA) __, Other income TOTAL CASH INCOME GROSS INCOME (CONT'D) VALUE OF FAMILY LIVING FURNISHED BY FARM 137 Farm Product Amount Price Total Value Milk 3 $ gutter Eggs (doz .) Poultry (lbs. or number) Beef Pork Mutton Fruit Eggetnbles Wood Other Total Value of Family Living Furnished by Farm $ Total Cash Income from page 136 Livestock Inventory Increase or Decrease (from page 141) Feed & Seed Inventory Increase or Decrease Milk production per cow lbs. (from page 140) TOTAL GROSS INCOME 138 FERTILIZER AND LIME Kind Use Amount Price Cost Check for FARMS MAKING MAJOR LIME AND FERTILIZER INVESTMENTS Residual Value N, Total lbs. x ___Z = x ___¢ - $ P205, Total lbs. x ____7. - x _¢ '- K20, Total lbs. x ___Z . x.___p - TOTAL RESIDUAL VALUE $ Total cost of fertilizer from which residual is computed $ Minus residual value CURRENT FERTILIZER COST Residual fertilizer value $ Total lime cost Total cost of fertilizer applied to grasses, legumes, and other perennials seeded during year. TOTAL FERTILIZER INVESTMENT $ 139 SEEDS AND PLANTS Used in 1957 Purchased in 1957 Perennial seed and plants (grasses, Annual seed and plants (corn, small legumeslifruit) 4grainggbeetngcover crops, garden etc.) lbs. Acres Cost or Cost or Kind seeded seeded value Kind Amount value Garden seeds Total (Carry total to perennial plant inventory) (Carry total to other expenses) Beginning Inventory of Perennial Plants Hay and Pasture Age and Value Total Date Prop. Kind Acres conditiongAper acre Value destroyed credit Totals Fruit Kind Acres Value per acre Total value Totals Total beginning value of perennials ‘Minus proportionate credit of perennials destroyed Plus machinery hired for land reclamation Plus cost or value of perennial seed purchased & used Plus total fertilizer investment Total investment OTHER EXPENSES 140 Item Quantity Cost Custom.work or machinery hired Labor Gas and oil for farm use (less refund) Livestock expense: Peed Spray Veterinary and medicine Breeding feesgilessgpatronage refund) Feedersgpurchased: Cattle Hogs Lambs Baby chicks purchased Automobile Operation (farm share) Electricity_(farm share); Telephone Lfarm share) §gpplies (baling_yireLsackspstrainer pads, etct), Beginning inventory of feeder animals Beginning inventory of broilers Annual seed and plants purchased Perennials destroyed during year (value) Other expenses Total expenses _I?_EED AND SEED INVENTORY 141 Kind stem Corn Oats Wheat Hay Beginning inventory Quantity Value Quantity $ $ Ending inventory Value Straw Commercial feeds Annual seed Wheat seeding; seed Perennial grass & legume Total Inventory increase $ Inventory decrease $ LIVESTOCK INVENTORY 142 Add Subtract Kind Beg. inventory» No. No. No. No. Bnd. inventory No. Value born bought sold and died No. Value butchered Dairy Cows Bred heifers Unbred heifers galves Bulls Beef Cows Bred heifers Unbred heifers Bulls Feeders Calves Hogs Sows Boars Kiss Feeders Bitters farrow flees Ewes Rams Bambs Feeders Poultry Hens & roosters Broilers Otherrpoultry Other i_19ta1 Beginning inventory: Breeding stock Feeders Broilers Ending inventory: (total) Breeding stock Value of purchases Beginning inventory Increase or decrease 143 LIVESTOCK INVESTMENT (DOLLARS! Breeding Stock Bought During Year Breeding Stock Sold During Year Date What bought Cost Prop. cost Date What sold Rc'vd. Prop.c£edit Total Total Beginning Inventory (Breeding Stock) Plus Total Proportionate Cost Minus Proportionate Credit Total Breeding Livestock Investment MACHINERY AND EQUIPMENT INVESTMENT (Inventory beginning of year) 144 Item Tractor and outfit 'Bgchinery,& equipment not included in tractor outfit ‘éutomobile (Farm share) Truck Trailer and wagons Number Value Tillage Eguipment Plows Harrows (spring & spike tooth) Disks Cultipacker or roller Cultivator Planting Eguipment Grain drill Seeder Seeder (Hand) Corn planter Harvesting Eguipment Hay rake Mower Hay loader Binder Combine Field chopper Hay baler Hay forks or slings Mow dryer Cornrpicker Ensilage cutter (stationary) Lime spreader Manure spreader Barn cleaner Feed grinders Blevators Blower ngines and motors Welder Milk cans Milk coolers BgBk tank Cream separator Milking machine Wash tank, can rack, & other milk house egpipment Water heater (milk house) General farm tools forks shovels car enter sho 9gp tank Irrigation equipment fence) chers ’TOtaI S 145 MACHINERY AND EQUIPMENT INVESTMENTrigontinued) Burchases Sales Date Item. Total cost Prop.add. Date Item Total value Prop.ded. $ $ $ $ Beginning inventory $ Prop. add. Prop. ded. Total machinery investment IMPROVEMENT INVESTMENT Item and description CL “City Dairy barn (type) Stanchiony Other Animal Cash crop storagg mdlkingrparlor Other barns flog house ‘farrowing, "AP typey_etc.) Poultry houses (laying, broiler, brooder range, fighelters, etc. granary Corn crib fiilo type and gigs Other 146 one some one «unannosH ”uuouuuaoo pong uncommon: usuaaHmumcH "mudflouud £003 flfl "mouoo nauseous: \ "mono: monsoon "nommuuuoa Houuuno Nuwulwom omommam one Ooomaun 0U“ Huaod< panama .mcmom OUQH o uaH oua .wwuo v.00“ OUE snag MO 92” H< muHHHAHmas mm‘ nonuo m N 338 mm axmauomm“ mm nonuo mm mm comm mm WWfiWNmO hm mono Honuo mmr mm voom mm I I. I mm Guam puwvouo «0 smog so>wo owam 00H30m mfifiu 553 MO OOHDOM hawhfluwm umUHQUQH HOW mugh uflva Oudn hHHflflUUJV avgh GdOA N0 fifiHM mo unsoa< mo mousom nhumom uouoa< aura mo usuoa< unannma 2H numb HHQMMU 148 NET WORTH STATEMENT (As of December 31, 1957) Assets Liabilities Land $ Farm mortgage $ Buildings Other mortgages Machinery Bank notes Livestock Personal notes Feed, seed, supplies Other notes Household equipment Accounts payable Stocks, bonds Taxes, rent, ins. due Cash on hand Other debts Cash in bank Total 3 Accounts receivable Net Worth Total $ Total $ 149 FARMING EXPERIENCE Years on this place ; years operated for yourself Years of experience in dairy business Age of operator Age of son or sons if operator is planning or has a father-son agreement Health of operator: Good Fair Poor (check one) Insurance carried (a) Life ; (b) property ; (c) farm liability (d) other insurance Do you plan on making any adjustments in your farm Operations this year that you think would change the amount of farm products that your farm produces? 01' Any that would not change production but which might lower your costs? or Would both change the amount of products produced and at the same tbme reduce your costs of production or do you propose to make any other changes? What are the changes that you would make? In each case specify (a) the nature of the change in what kind of thing; (b) how much; (c) expected cost or price; (d) expected result on a firms cost structure. 150 If planned purchases are indicated in the previous question, what method of payment do you plan on using? 1. Pay cash 2. Mortgage 3. Installment 4. Dealer credit 5. Get cash from bank 6. " " " P.C.A. 7. " " " F.H.A. 8. " " " Federal Land Bank 9. " " " friends 10. Other -- Be specific Have you made any major changes in your farm operations in the last five years? Labor Land Machinery Livestock Forage Buildings Labor (how much, what kind, wage, expected result) Land and land improvements except portable irrigation (how much, what kind, where, buy?, rent?, other, what price, expected result) 151 Machinery and equipment (what kinds, how much, prices?, purpose, expected result) Buildings and permanent improvements to buildings (what kind, how much (capacities), prices, purpose, expected result) Cash operating expenses (include here feed, fertilizer, fuel, etc.) Livestock (include number, quality, and way to be obtained, price, etc.) 152 Changes in scale of Operations involving more than one input category (include here proportions of various categories, expected cost of making the changes and expected results in terms of income and cost change) So far, we have talked about changes that you might make if you were given the right conditions. To help us in this study, we need to know what conditions, if any, you think actually prevent you from making part or all of these changes? (a) (b) (c) (d) (e) (f) (s) (h) (1) (j) (k) . (1) (m) (n) (0) Satisfied with present income Prices are uncertain (i.e.) Not possible to get the kind of land wanted Not possible to get kind of livestock wanted Not going to stay in farming much longer Non-farm investments are more profitable Need more information before making a decision and taking action Labor not available at rate Operator is willing to pay Change may be too risky Prices too high at present Cash not available Don't want to use credit under any circumstances Cost of borrowing money is too high Present debt repayment schedule already high relative to income Other reasons -- specify 153 Of the reasons that have been listed for not making changes in a farm business, which do you consider to be the limiting ones in your case? (a) Most important ; (b) next important ; (c) least important . If respondent has indicated that he will make input changes, then continue with this one. You have indicated that you plan on making certain investments, now suppose you could borrow all the money that you wanted to at the following rates of interest, could you give an estimate of how you would change your investment in: Land - If you could borrow all that you wanted to at the following rates of interest, assuming that the repayment schedule could be adjusted to your convenience. Interest Expected return Rate Amount Period Required of Investment 0 Z \DQNO\U\#MNWH 10 154 Babor & Operating Erpenses - If you could borrow all that you wanted to at the following rates of interest, assuming that the repayment schedule be adjusted to your convenience. Interest Expected return Rate Amount Period Required of Investment c: as \Doowmmwan-‘I 155 'Bryestock & Machinery - If you could borrow all that you wanted to at the following rates of interest, assuming that the repayment schedule could be adjusted to your convenience. Interest Expected return Rate Amount Period Required of Investment Z O scooNONLn-t-‘ri-I 156 Now interest isn't the only thing that you think about when you borrow money. Let's see what percent you would change your estimate of the total amount of money you would borrow if you had to renew your note at Change in Land Purchase Bstimate Loan to be renewed Loan to be Maturity at terms agreed reappraised by Period upon when loan made lender before renewal 90 days lryr. 2 yrs. 3 yrs. 4 yrs. 5 yrs. 6 yrs. 7 yrs. 84yrs. 9ryrs. LL28- .1_5_xr_s- Am- Ms- 40yyrs. Change in Labor and Operating Capitar:gurchases Maturity Period 90 days lryr. 2 yrs. 3 yrs. 4 yrs. 5 yrs. 6 yrs. 7 yrs. 84yrs. 94yrs. 10 yrs. 15 yrs. 20 yrs. ngyrs. 30 yrs. 40 yrs. Loan to be renewed at terms agreed upon when loan made 157 Loan to be reappraised by lender before renewal 158 Change in Livestock & Machinery PurchaseyBstimates Loan to be renewed Loan to be Maturity at terms agreed reappraised by Period upon when loan made lender before renewal 90 days lryr. Zyyrs. 3 yrs. 4 yrs. 5 yrs. 64yrs. 7cyrs. 8 yrs. 9ryrs. lOryrs. 15 yrs. 20 yrs. Bjryrs. 30ryrs. 404yrs. What is the largest proportion of your current income that you would be willing to use for debt repayment? Do you think that this proportion would remain constant as your income changes? Do you believe that you should keep your debts in a fairly fixed ratio to your assets? Why, and in what ratio? What proportion of the total resources that you use in farming do you think that you should own outright? 159 If you were able to secure a long term rental contract for your farm that would give you the same security of tenure that you have as an owner, would you be willing to rent your farm instead of owning it? If this would mean that you might be able to Operate a larger enterprise than you do at present? Yes No ; Why? Can you recall any important purchases that you would have made but were not able to make during the last five years because you were not able to get the credit you wanted? GET AS COMPLETE AN ANSWER HERE AS POSSIBLE INCLUDING: causes, interest rates, terms, etc. 160 CONFIDENTIAL Schedule No. Location Name and type of lending agency 1. Experience of lending agency with agricultural loans What percent are ag. loans of total value of loans made? What percent are ag. loans of total number of loans made? 2. Do you have an agricultural specialist to handle technical aspects of farm loans made by this institution? 3. Aside from collateral, what information about a potential borrower would you consider essential before making a loan to him? 4. In what way, if any, would you regard the following characteristics Of farms or farm operators as important to have information about before making a loan to the farm Operator a. Age b. Health c. Martial status d. Experience in farming 161 e. Time lived in this area f. Credit rating g. Established plan for making a change in farming operations h. Loan experience of lending agency with borrower 1. Net cash income and net inventory changes j. Insurance (life and property) k. Off farm job held by farm Operator 1. Potential cosigners 162 4. m. Purpose of loan n. Type of farming 0. Soil productivity p. Other considerations 5. Following are a series of questions about hypothetical situations that you might meet in making loans to farmers. 163 ooon «\a flu abaaxmfi omoH mo moauom mama mowuoso wsaoa>uom pmowuwovo moowuo> woman no snag a woaxoa uuomOb msowuaouou Houoomw has ouwnvou so» made: sawmouaokwufiauo m.u0uouomo osu mo uoouumm can no mood and» aosaxu8_m\a on .33 Oman 858.288 M\~ 3v coca Oman 8:8flxa8 any can now owumso no» o~oo3 oumu umououow mans smoosamsn anew www.0u Oxo8 vaooa so» use» once mo ones auawx a Ono ow unnz hoses wood 30% oases osao> noxuofi unouuoo Hauou mo ucoouom use: Ou a: No .2: .BN “31m N3 «on Now Now Now Nom pHOHOOOaHou was» no «womb can so consensuoo Show «any 0» mood o oxoa so» pesos NooH mooammxuoxuoa unouuso um wmmszodz oaao> noxuoz unouuau mo unmouom o G“ shad—JUN Ouhouflhflmm Edm— adhOuoHHoo mo omoao 164 No Nod NON Non Noe New Now Now Now Nom NooH 03Hu> uoxuuz acouuao mo unmouom o ouJNUwamm m.u0uouomo 896m ooon ~2 m\~ asawxoa mood mo ooauoa OEHH Nauguwovo nooHuo> among us ouo~ m wouxoa «scams mooauwoaoo Hmwoomm mom oufiovou so» vauoz «mwwmmnu magnum m.u0uouumm can «0 uuouuom on» no sooH ouwm anwxos ~\~ on coca Oman asefixua m\~ any mood Oman abafixo8.Amv may now owuonu no» oases Oman umouousfl nuns «uncommon Show oso cu mama oasoa 30% menu coca no mean 8:8«xu8.osu mu unnz «wocoa wood 90% vaso3 oaau> Oaxaca usonuoo HquO «O usouuom uoaz 0u a: «Honouamwoo mafia mo wanna use so omuuQuOOoo swam «ago on good a 0318 30% odooz nooauo noxmmmflusouuoo um Mooamm>HA auscuuaaoo mo nonao 165 coca» «\a mxm eoaaxoa coca mo ooaaom Oaaa wuoauaswo nsoauu> moon» on so0a a wuaxwa «woman ouoauaooou aoauomm and ouaovou :om oasos was some gas 0 n.90uouo o on» no unmouon on» no :u0a ouau asaaxoa «\a any coca Onau afiaaxqa M\~ Anv coca swan aaaaxda Adv onu wow owuoao so» made: musk umouOusa nun: ~omosamsn.anow one On axes vasoa so» none sooa mo Oman 8:8au88 one «a 233 No Noa RON ,Non Noa Non illi Noe Nah Mom Nom «muaoa mama noN.oaoo3 cease Oaxaca usoausu auuou mo uoouuom saga On a: pauHOuOHaou masu mo wanna use no OuaHQHOOso swam oaau ou sOOa a «#98 so» oaaos mmaa nooauo,uoxuaa usouuou us mUZHaAHDm a :24A moau> nexus: usouuao mo uaouuom o no Nuaomm o.u0uouomd Show annouuaaoo mo ouoao 166 occaw a: m\u 8:8axm8 smOa mo ooauom QBaH ~moauaovo osoaao> woman no soOa u wsaxma cacaoa msoauaocoo aoaoomo has oaaovou so» oaooz No Rea '1‘l4 NON Non No¢ xom Now New Now Nom NOOH snowsmno muasdo o.uououomo man no ucouuom on» no :mOa ouam 8:8axo8 «\a on cuoa onam 8:8axo8 M\N Any su0a ouao_8=8axo8_fimv «no How owumno :ox capo: moon umououea nos: Nmmosawan show one cu mama oaooa 90> menu coca mo onam Eaaaxoa on» ma own: NNOGQE mama :mN,oaoos Onao> noxuos uaouuou aduOu mo usouuom uses Ou a: «annouoaaoo manu mo cause one so «mandamuso Show masu ou cooa m oxua so» oases mooaaoiuoxuoe acouuao um mmomu Osao> noxuuz acouuso mo uaouuom a on amazon m.u0uouomo show annouuaaoo mo momflm Farm No. I Dai INVESTMENTS Land Cattle Machinery Feed & Supplies Total Net Income $10,000 4,000 7,000 2,000 $23,000 $3,500 100% 100% 100% 100% 100% Operator's Equity B (70%) $4,000 4,000 6,000 2,000 $16,000 $3,000 C (57%) $8,000 2,000 2,100 1,000 $13,100 $2,700 How much would you lend this operator given that his equity is: Situation A 167 Situation B A Situation C 168 Farm N0:i;I (Dairy) Operator's Equity INVESTMENTS A B C (73%) (58%) Land $20,000 100% $ 8,000 $16,000 Cattle 10,000 100% 10,000 5,000 Machinery 14,000 100% 12,000 4,200 Feed & Supplies 7,000 100% 7,000 3,500 Total $51,000 100% $37,000 $29,700 Net Income $4,900 $4,000 $3,500 How much would you lend this operator given that his equity is: Situation A Situation B Situation C Farm No. III (Dairy) INVESTMENTS Land Cattle Machinery Feed & Supplies Total Net Income How much would you Situation A $30,000 16,000 13,000 11,000 $70,000 $7,000 lend this operator given that his equity is: 100% 100% 100% 100% Operator's Equity B (56%) $12,000 6,000 10,000 11,000 $39,000 $5,100 C (59%) $24,000 8,000 3,900 5,500 $41,400 $5,000 169 Situation B Situation C L Farm NO. IV (Dairy) INVESTMENTS Land Cattle Machinery Feed & Supplies Total Net Income How much would you lend this operator given that his equity is: Situation A $50,000 16,000 15,000 11,000 $92,000 $12,000 100% 100% 100% 100% Operator's Equity B (71%) $20,000 16,000 13,000 11,000 $60,000 $10,000 C (60%) $40,000 8,000 4,500 5,500 $58,000 $9,000 170 Situation B Situation C Farm No. V (Dairy) INVESTMENTS Land Cattle Machinery Feed & Supplies Total Net Income How much would you lend this operator given that his equity is: Situation A $60,000 33,000 20,000 22,000 $135,000 $26,000 100% 100% 100% 100% 100% Operator's Equity B (71%) $24,000 33,000 17,000 22,000 $96,000 $23,600 C (60%) $48,000 16,500 6,000 11,000 $81,000 $22,000 171 Situation B Situation C 172 Farm No. VI (Dairy) Operator's Equity INVESTMENTS Land $300,000 100% $120,000 $240,000 Cattle 100,000 100% 100,000 50,000 Machinery 50,000 100% 42,000 15,000 Feed & Supplies 60,000 100% 60,000 30,000 Total $510,000 $322,000 $335,000 Net Income $90,000 $79,000 $77,000 How much would you lend this operator given that his equity is: Situation A Situation B Situation C 173 Could you outline the history of 4 or 5 loans that your institution has made to dairy farmers in the last two years in which the amounts of the loans made were close to or at the maximum that you would lend? (i) a. Amount of loan b. Period of maturity c. Interest rate d. Purpose Of loan e. Security f. Net income g. Personal characteristics of borrower of relevance in making this loan h. Why do you consider that this loan was close to the maximum that you would lend this operator? 174 Could you outline the history of 4 or 5 loans that your institution has made to dairy farmers in the last two years in which the amounts of the loans made were close to or at the maximum that you would lend? (ii) a. Amount of loan b. Period of maturity c. Interest rate d. Purpose of loan e. Security f. Net income g. Personal characteristics of borrower of relevance in making this loan h. Why do you consider that this loan was close to the maximum that you would lend this operator? 175 Could you outline the history of 4 or 5 loans that your institution has made to dairy farmers in the last two years in which the amounts of the loans made were close to or at the maximum that you would lend? (iii) a. Amount of loan b. Period of maturity c. Interest rate d. Purpose of loan e. Security f. Net income g. Personal characteristics of borrower of relevance in making this loan h. Why do you consider that this loan was close to the maximum that you would lend this operator? 176 Could you outline the history of 4 or 5 loans that your institution has made to dairy farmers in the last two years in which the amounts of the loans made were close to or at the maximum that you would lend? (1V) a. Amount of loan b. Period of maturity c. Interest rate d. Purpose of loan e. Security f. Net income g. Personal characteristics of borrower of relevance in making this loan h. Why do you consider that this loan was close to the maximum that you would lend this operator? 177 Could you outline the history of 4 or 5 loans that your institution has made to dairy farmers in the last two years in which the amounts of the loans made were close to or at the maximum that you would lend? (V) a. Amount of loan b. Period of maturity c. Interest rate d. Purpose of loan e. Security f. Net income g. Personal characteristics of borrower of relevance in making this loan,__ h. Why do you consider that this loan was close to the maximum that you would lend this operator? 178 Do you believe that your institution could profitably and safely loan more money under certain circumstances to individual farmers than it is presently able to do because of restrictions imposed which are in addition to its own regulations? What are some of these restrictions? What do you believe would be more appropriate regulations? 179 BIBLIOG APHY Bentham, J., An Introduction to the Principles of Morals and Legislation, Oxford, The Clarendom Press, 1907. Boulding, K.E., Economic Analysis, New York, Harper and Brothers, 19h8, p.494, 6&8 ff. Bradford, Lawrence A. and Johnson, Glenn L., Farm Management Analysis, New York, John Kiley and Sons, 1953, p.143. Brooke, M. David, Marginal Productivities of Inputs on Cash Crop Farms in the Thumb and Saginaw Valley Area of Michigan, unpublished M.S. Thesis, Department of Agricultural Economics, Michigan State University, 1958. Carter, Harold 0., Modification of the Cobb-Douglas Function to Destrgy Constant Elasticity and Synnetry, unpublished M.S. Thesis, Department of Agricultural Economics, Michigan State College, 1955. Edwards, Clark, Resource Fixity, Credit Availability and Agricultural Organization, unpublished Ph.D. Thesis, Department of Agricultural Economics, Michigan State University, 1958. Epp, A.N., et.a1., Progress and Problems in Decision Making Studies (with Reference to the North Central Farm Management Research Committee‘s Interstate Managerial Study), Journal of Farm Economics, Vol. 37, 1955, pp. 1097-1125. Ezekiel, Mordecai, Methods of Correlation Analysis (Second Edition), New York, John Ailey and Sons, Inc., 19h9, p.508. Fuller, Earl I., Some Labor Efficient Dairy Farm Organizations Designed for Michigan Conditions. himeograph 690, Department of Agricultural Economics, Michigan State University, 1957, p.123. Fuller, Earl I., Some Michigan Dairy Farm Organizations Designed to Use Labor Efficiently, unpublished M.S. Thesis, Department of Agricultural Economics, Michigan State College, 1957. Halter, A.N., Carter, H.O., and Hocking, J.G., A Note on the Transcendental Production Function, Journal of Farm Economics, Vol.39, 1957, pp. 966:974. Johnson, G.L., and Hardin, L.S., Economics of Forage Evaluation, Station Bulletin 623, Purdue University, Lafayette, Indiana, pp. 5-13. Jowett, B., The Dialogues of Plato, New York, The Random House, 1937. 180 Knight, Frank, Risk,rUncertainty and Profit, New York, Kelley and Millman, Inc., 1957, p. 61. Leys, N.A.R., Ethics for Policy Decisions, Englewood Cliffs, New Jersey, Prentice Hall, Inc., 1951, Chapter 5. McKee, Dean, Department of Agricultural Economics, Michigan State University. Michigan, United States Department of Agriculture, Agricultural Marketing Service Cooperating. Michigan Agricultural Statistics, Lansing, Michigan, 1950 and 1957. Moore, G.E., Principia Ethica, Cambridge University Press, Cambridge, 1954, PP. 152-153. Reder, M.N}, Studies in the Theory of Welfare Economics, Columbia University’ Press, New York, 1951, Chapter 1. Scitovsky, Tibor, Nelfare and Competition, Chicago, Illinois, Richard D. II‘Wln, InCQ, 1951, pp. 1118-179. Stigler, G.J., The Theory of Prior, (Revised Edition), New York, Macmillan Co., 1957, pp. 101-106. Tintner, Gerhard and Brownlee, D.H., Production Functions Derived from Farm Records, Journal of Farm Economics, Vol. 26, 19AA. Toon, Thomas, Marginal Value Productivities of Inputs, Investments and Expenditures on Upland Grayson County Farms During 1951, unpublished M.A. Thesis, University of Kentucky, 1952. Trant, Gerald I., A Technioue of Adjustipg Marginal Value Productivity Estimates for Changing Prices, unpublished N.S. Thesis, Department of Agricultural Economics, Michigan State College, 195A. Nagley, Robert Vance, Marginal Productivities of Investments and Expenditures, Selected Ingham County Farms, 1952, unpublished H.S. Thesis, Department of Agricultural Economics, Michigan State College, 1953. var; fleAR,5 1..., ‘. 3".) kid‘warf “Vllllllllllllll