Agriculture, Technology and the Economy
Federal Reserve Bank of Dallas

Technology and Prosperity When I was about 10 years old, I picked a little cotton on Billy Joe Hopper's farm about three miles up the road from my house in North Georgia. My ambition was to pick 100 pounds in a day. At three cents a pound, I would earn three whole dollars. As I recall, the adults, who knew what they were doing, could pick 300 pounds or more in a day. They could make $10. The money doesn't sound like much today, and I guess it really wasn't much then, either, but it sure gave me some good memories. The best is the memory of total exhaustion, with my back hurting so badly I could hardly stand up, as I rode home at dusk on top of a load of cotton. Billy Joe is retired now, and he quit using human cotton pickers many years ago. In fact, I think he got out of cotton altogether and devoted his energies to raising chickens. But when I moved to Texas a while back, I made a new farmer friend. His name is J. B. Cooper. J. B. produces more cotton in Texas than Billy Joe ever did in Georgia. It is to J. B. that I want to dedicate this publication. J. B. is completing his sixth year as a member of the Dallas Fed's board of directors, including the past four years as chairman of its Audit Committee. Before his service on our Board, J.B. served for six years on our Small Business and Agriculture Advisory Council. He has been our principal source of firsthand information on agricultural trends, developments and conditions in the Eleventh Federal Reserve District. His hands-on experience and his expertise have been invaluable to us over many years. We will miss him when he retires from our board this year. This publication was inspired by J. B., who also made significant contributions to it, including some of his original photography. This publication highlights the profound technological changes that have occurred in agriculture over the past 50 years. As J. B. has often reminded us, agriculture is alive and well. We don't talk or hear as much about farming and ranching as we used to because its employment base has declined so much over time. But that decline is a sign of its success rather than its failure. Fewer and fewer people are producing more and more because of astounding gains in productivity. With just under 3 percent of the total workforce, American farmers and ranchers are feeding our country and much of the rest of the world. In 1994, the output of the agricultural sector was equal to about 1.5 percent of GDP. When all economic activities from the farm to the consumer are counted, however, the food and fiber system directly and indirectly affects 17.1 percent of the total domestic economy, according to USDA estimates. This figure encompasses a wide range of activities—such as machinery repair and fertilizer production, food processing and manufacturing, transportation, wholesale and retail distribution of food and apparel products, and eating establishments. The Dallas Fed has devoted several years of research to understanding the great economic changes caused by technological innovation. Our goal is to remind our readers that such change brings prosperity and that technology is driving great productivity increases in our economy. In few places have these changes been more evident than in agriculture. From the Global Positioning System to fiber optics to computer-driven harvesters, U.S. farmers and ranchers use the highest level of technology and are among the most efficient producers in the world. For consumers, this technology means higher quality food at a lower cost. So, to J. B. and Billy Joe and all their friends who help put affordable food on our tables, we say thank you and look forward to all the agricultural innovations of the future. —Bob McTeer, President and CEO, Federal Reserve Bank of Dallas

Innovation in Agriculture

Since 1948, agricultural production has doubled, while total input use, including labor, land and machinery, declined slightly. Overall, agricultural productivity increased 1.8 percent annually—roughly 80 percent—compared with a 1.1 percent increase in total nonfarm productivity and a 1.3 percent increase in manufacturing productivity growth. Technological change is bringing about one of the most dynamic periods in American agriculture. Between 1948 and 1996, agricultural labor productivity increased more than eightfold. The number of people fed by one farmer has jumped from 15 in 1950 to 128 in 1995, including 34 outside the United States.

In the first half of this century, rapid improvements of machinery enabled fewer farmers to work more land. Productivity gains were dramatic between 1930 and 1960. But as America's rising productivity began to level off in the 1970s, many feared the technological revolution in American agriculture was coming to an end. Those fears proved unfounded.

Today, productivity increases center on rising yield per acre and per animal. Farmers have improved control over their farming operations, spending more on management services and efficiency-producing inputs, such as chemicals and irrigation, and less on traditional inputs, such as machinery. Today's farmers produce higher valued products as a result of technological improvements in agricultural production and food processing systems, as well as better information on changing consumer preferences.

Technological advances are most beneficial to larger farms, driving changes in American farming structure. Overall, the number of farms and farmers continues to decline, while the average size of each farm is expanding. In 1950, just over 12 percent of the labor force worked as farmers, but by 1990, that figure had fallen to just under 3 percent. Medium-sized farms are disappearing. Smaller farms are managed by part-time operators who supplement their household income with off-farm employment. In 1992, the Census Bureau estimated that the average large farm, with sales over $100,000, was just over 1,500 acres. Slightly less than 18 percent of all farms are large, but they produce 83 percent of farm products.

Larger farms are able to adopt technology more rapidly than are smaller farms, particularly new management methods to gain efficiencies in production. While the U.S. Department of Agriculture (USDA) estimates that over one-fourth of all commercial operators use computerized bookkeeping, almost 60 percent of operators from the largest farms use computers. Other technologies-such as computer-aided chemical application, growth hormones, online marketing services, drip irrigation, and computerized feeding, milking and waste management systems are used mainly by operators of large farms.

New technologies continue to emerge. Today's stronger intellectual property rights for agricultural innovations have spurred private-sector research, which has increased to nearly $4 billion annually. The USDA estimates that public support for agricultural research has remained roughly constant at $2.5 billion annually (in real terms) since 1979. About $1.5 billion of this support comes from the federal government, and the rest comes from the states.

As growing world demand encourages U.S. farmers to expand production, constraints on land, water and energy will compel them to rely on science and technology for increases in production and on entrepreneurial skills to manage the technology. Technology is not an option. Advances will allow greater production at lower prices, and producers must adopt these technologies to remain competitive.

Today's technology gives farmers with thousands of acres of land the same information and control backyard gardeners have at their fingertips. Each plot of land can receive ample water, seed and fertilizer to maximize yield, without excess. Computers, satellites and microchips are giving farmers better information and making machinery smarter and more powerful to get the most from every input. Technology is dramatically increasing the amount of land each farmer can work effectively.

Today's tractors are easier to use and can do more for the farmer. Tractors have better visibility, including improved lighting systems for nighttime work and sophisticated fingertip controls that allow farmers to adjust quickly to changing field conditions. Farmers are making tractors smarter by equipping them to utilize the Global Positioning System (GPS). Originally developed by the military to navigate U.S. submarines, the GPS uses 24 satellites orbiting 12,000 miles above the Earth's surface to calculate a tractor's exact position in the field.

Using the GPS locational device and sensors in the field, farmers can harvest, along with their crops, detailed digital maps of their fields, plotting slope, soil type, moisture, historical yield, and weed and insect problems. Information is collected on portions of the field as small as 18 inches. Farmers use these maps to program computers attached to variable rate equipment that modifies the application rate of all inputs such as tillage, seeds, fertilizer, herbicides and irrigation water. Precise application reduces waste and improves yield. Future innovations will extend the use of the GPS. For example, a computer-driven harvester will use the GPS, wheel sensors and a video camera to "see" a crop line so it can harvest a field without a driver or a remote operator.

Livestock producers are also using computers to get better information about their operations. Computer chips imbedded in the ear of an animal can be used to monitor growth and production. A farmer with 5,000 dairy cows can easily monitor milk production and health records, scanning the chip as a cow enters the milking facility to automatically weigh and deliver an individually formulated ration of feed.

Computers help producers monitor and respond to weather variability on a day-to-day basis. Solar-powered weather stations in the field can be hooked up to a farmer's computer to relay information about current air and soil temperature, precipitation, relative humidity, leaf wetness, soil moisture, day length, wind speed and solar radiation.

The Internet is increasing communication and business opportunities within the agricultural community, which previously operated in the relative isolation of rural areas. Farmers, agricultural researchers, cooperatives, suppliers and buyers use the Internet to exchange ideas and information, as well as to conduct business with each other. Machinery, seed, chemicals and other types of agricultural products can be purchased and sold online. People can search for jobs and employees. Producers use the Internet to monitor prices quickly and as often as they like. Farmers from around the world can exchange ideas, post questions and get answers about specific topics, ranging from marketing and investing to tips on "no-till" farming.

Computers increase the amount of information farmers can process, from details on day-to- day operations to the latest research on new chemicals or biological breakthroughs. The computer allows farmers to study alternate management decisions.

What are the benefits of more irrigation? Is it cost-effective to apply additional chemicals? When is the best time to sell crops or buy inputs? With improved record-keeping, more detailed cost analysis and more sophisticated marketing strategies, farmers are making better decisions and earning higher profits.

Increasing Management Choices

As more information and technological choices become available, and as farm size increases, the challenge for farmers to manage all facets of the business—from financing to marketing to production—multiplies as well. Management innovation is helping farmers deal with the many choices and risks of farming—from production risks, such as weather and insects, to market risks, such as volatile production and prices, and financing risks, such as interest rates and the availability of credit. New management systems are becoming more valuable to farmers with passage of the Federal Agricultural Improvement and Reform Act of 1996. The act is bringing about a new era for agriculture by allowing freedom in crop production, potentially creating a higher level of economic risk in marketing.

Organizations such as the USDA, the University Extension Service and cooperatives help farmers manage risk by bringing broad expertise to support the development of strategies best suited to a particular farm situation. Since the late 1800s, USDA research and the Land Grant University Extension Service have been equipping farmers and ranchers with the tools to compete and survive in production agriculture.

Researchers help synthesize and analyze the overwhelming mass of information available to farmers. The extension service makes recommendations and teaches farmers to use a broad range of production practices and modern risk management tools, such as crop selection and fertilization practices, use of cooperatives, irrigation scheduling, livestock feeding programs, biological control of insects, futures markets, and financial analysis and planning. Cooperatives are helping farmers work together to increase efficiency and get better prices for the products they buy and sell. The United States' 4,000-plus cooperatives transact nearly $100 billion of business for farmers annually. Cooperatives help individual farmers gain the benefits of vertical integration that typically are available only to large corporations. Farmers can increase market power by marketing their crops together in a seasonal pooling effort.

Cooperatives provide processing services, making it easier for individual farmers to add value to their products. Cooperatives also provide transportation, storage, grinding, locker plants, credit and financing. One of the largest regional cooperatives, Farmland Industries, headquartered in Kansas City, is owned by about a half-million U.S. farmers and ranchers in 22 central states. The cooperative produces its own fertilizer and energy and owns a majority share in the fourth-largest livestock packer in the United States.

Private companies or individuals are helping farmers by sharing the risk of farm production, giving operators more stable income from year to year. Farm operators contract with private companies to provide a commodity, such as corn or hogs. Depending on how contracts are written, processors can take price and weather risks and may also take some of the financial risk by providing feeder pigs or cattle and feed up front. Processors may also provide specific guidance on feeding rates and production practices, or determine when to harvest. More operators may choose to share investment risk as reduced government intervention exposes them to market forces. Currently, these types of management arrangements are being used most in the production of poultry, hogs, fruits and vegetables, markets in which producers have not been protected from crop price swings through government programs.

Improving Mother Nature

The science of biotechnology is developing specialized seeds and breeding stock to give farmers and ranchers increased profits through improved control over their production. For many years, producers have been using conventional propagation and breeding to cultivate beneficial attributes. This process can be very time consuming and expensive, particularly with crops. While embryo transplants facilitate the breeding of livestock, the matching of parents can be used only on observed genes and can produce unexpected results. Genetic engineering promises more precision, helping scientists examine the entire spectrum of genes from all organisms for potential improvements to crops and livestock.

Scientists are making great advancements mapping crop DNA, hoping to develop higher value traits that produce improved yield with fewer inputs. Today's crops are becoming more drought-resistant. Fruits and vegetables are being developed with improved immunity to killing frost. Cotton is being engineered to remain unharmed by herbicides. Insect-resistant crops will reduce the need for chemicals, which are costly and can be harmful to the environment. The development of genetic diversity will also reduce the spread of disease because large tracts of relatively identical plants make fields more vulnerable to catastrophic outbreaks.

Genes are being developed to protect poultry and cattle from specific diseases. Dairy farmers are boosting milk production by injecting cows with a synthetic growth hormone that is equivalent to one that occurs naturally in a cow's pituitary gland. A similar hormone in hogs has been used to pack more muscle onto pigs. Goats have been genetically altered to produce specific proteins in their milk that help control bleeding in hemophiliacs or break down blood clots during heart attacks.

Genetic technology is more complicated in livestock than in crops, but scientists are pinpointing markers to guide them to genes that will someday revolutionize the meat industry. Scientists believe they will be able to control growth rate, milk yield and quality, fat-to-lean ratios, tenderness, disease resistance, heat and cold tolerance, and dozens of other traits important to producers of beef, dairy products, sheep, poultry and fish. Technicians hope to improve species by transgenics—insertion of a desirable gene or set of genes from one species of animal into another. Researchers believe genetically altered pigs may eventually provide replacement organs and blood for humans.

Controlling genetic traits could bring great change to the marketing of agricultural products. Producers will be able to use a sample of blood, tissue or hair to determine the quality and value of an animal, facilitating both breeding and sales. The pork industry is already using ultrasound equipment to evaluate a carcass for the percentage of muscle and overall quality. Producers who apply the technology are getting paid an additional $4 to $12 per head based on the value of the carcass. Ultrasound equipment is also helping researchers, who previously had to slaughter animals and process the carcass to get data on body composition.

Biotechnology will help producers meet consumer demands, shifting the way we breed and manage commodities. Tomorrow's eggs might have less cholesterol. Pigs could produce low-fat spareribs. Specialty corn and soybeans will be bred for the specific needs of the end processor. For example, corn will be custom designed to be white for tacos, have a high oil content, be high in protein for animal feed or be high in starch for industrial use.

Working With the Environment

Farmers are obtaining higher yields at lower cost by getting the most from their soil and water. Less tillage, better chemicals and more efficient irrigation are keeping plants and soil healthier, helping sustain high crop yields into the future.

For 10,000 years, farmers controlled weeds through fallow and tillage, which expose the soil to wind and water erosion. Today, 26 percent of U.S. planted acres use low-till methods that leave 15 percent to 30 percent residue coverage after tilling, and 35 percent use conservation tillage, which leaves at least 30 percent of the soil covered by crop residue. Conservation tillage reduces soil erosion by 65 percent to 95 percent compared with traditional methods. Farmers save fuel, reduce chemical runoff and increase soil nutrients and organic matter, which improves the soil's water-holding capacity.

Better chemicals help farmers plant a cover crop following harvest of the primary crop to protect the land from wind and water, suppress weeds, and feed organic matter and, in some cases, nitrogen to the soil. Use of cover crops has increased partly because today's herbicides let farmers kill the cover crop fully so it will not compete with the primary crop.

Today's farmers know more about applying chemicals and fighting pests. Farmers are careful to avoid excess applications of fertilizer and pesticides, timing applications for sensitivity to local conditions, such as rainstorms, and for controlling runoff. A combination of methods is used to combat pests, including natural enemies, pest-resistant crop strains, crop rotations and pesticides. Computers predict when bugs will lay eggs and the best time to spray.

Farmers are getting the most from every drop of water. Surge flow irrigation reduces water loss in gravity systems by alternating the flow of water between two sets of pipes with a timed valve. Improved sprinkler systems discharge the water at low pressure evenly across the field to reduce evaporation. Drip irrigation uses surface or buried lines and emitters to apply water to only the soil around plant roots. Plastic strips—three to five feet in width—are often used in conjunction with drip irrigation to help maintain soil moisture, prevent weeds and allow the soil to retain heat for speedy growth and production.

Lower Costs and Value-Added Processing

Technology is increasing processing speed, reducing production costs and improving processing in ways that add value and convenience to products.

Manufacturing facilities are operating closer to full capacity and at lower unit costs, thanks to better farm production methods and vertical integration. In the past, food packaging and processing facilities were forced to maintain excess plant capacity to accommodate the uncertainty of the biological production process. Today, managers can more accurately predict and control facility use because technology is helping farmers control production levels. Vertical integration is also helping reduce the risk of uneven input flows because decision-making can be coordinated at two or more stages of production. For example, hog-finishing capacity is better matched with packing-plant kill capacity, as is turkey grower space with processor dressing capacity.

Technology is providing increasingly sophisticated processing techniques that add value to products and increase marketing alternatives. Today's processors have better access to information about their customers and are better able to provide products that meet customers' needs. Processing can produce better fibers, such as cotton that will not bleed color and is wrinkle-resistant. Baby carrots are bred specifically to be processed into bite-sized morsels. Meat can be processed ready to heat and eat, stimulating consumption and bringing greater profits. Consumers will pay more for products that are marketed with specific attributes, such as free-range chickens and fruits, vegetables and meats grown chemical-free.

Agricultural products, considered beneficial because they are a renewable resource, are being processed for new industrial uses. Crops are being used to produce oils, inks, glues, films, cosmetics, pharmaceuticals, paints, currency, dynamite and biodegradable plastics. Gasoline containing ethanol and methanol made from corn is considered better for the environment because it burns much cleaner than fossil fuels.

Expanding Markets

Quick, reliable transportation is enhancing the value of farmers' rising productivity. In today's grocery, food is just as likely to come from around the world as from a farm in the next county. Higher quality products are produced at lower cost when farmers specialize, growing the most appropriate products for their particular soil and climate, and then ship the goods to wider markets. Shipping goods has become cheaper and easier thanks to changing technology in the industries that transport, store and distribute agricultural products.

Today's trucks, barges and other vessels can make the same number of trips at lower cost. Lighter and more fuel efficient trucks have cut fuel consumption by more than half in the past 20 years. Tugboat captains can push barges over the most efficient route at the optimal speed by using satellites and computers to analyze historical shipping patterns, weather and currents. More powerful locomotives are carrying as many as 120 cars, reducing the number of crews needed.

Better scheduling and transfers increase transportation speed and reduce spoilage. The transportation industry has been transformed by the use of regularly scheduled containerized shipping. Products such as grain can be put in containers that are quickly and easily transferred from truck to train, barge or ship. Shipments are monitored using geosynchronous satellites, bar codes or a new rail car identifier system that allows shippers to use radio waves to identify contents from a crystal inside each car. Improved insulation and air conditioners keep modern containers cool at a lower cost and without a lot of maintenance. Better packaging techniques and postharvest pest and disease control help maintain quality and safety. Improved infrastructure is alleviating bottlenecks at ports and at locks and dams along the Mississippi River.

Cheaper, more reliable transportation has led to improvements in the food processing and packaging industry because lower shipping costs make it feasible to ship products to one large processing facility.

Improved shipping techniques and infrastructure have also helped U.S. agriculture become an international business. Agricultural exports grew from $8 billion in 1972 to $54 billion in 1995. Trade flows are increasing with the help of the General Agreement on Tariffs and Trade, the North American Free Trade Agreement and a series of bilateral trade agreements that have resulted in much less protection against U.S. products since 1985. Today, nearly one-fifth of total U.S. crop output is exported. Forty percent or more of the wheat, soybean, corn and cotton crops are sold in other countries, and sales of value-added consumer products like meat, fruits, vegetables, processed foods and beverages are growing rapidly.

Acknowledgments These individuals contributed helpful comments: Jerry Fruin, University of Minnesota Noel Gollehon, Mitch Morehart and John Reilly, U.S. Department of Agriculture These Federal Reserve Bank of Dallas employees contributed valuable research assistance: Michelle Burchfiel Sheila Dolmas Written by: J. B. Cooper and Fiona Sigalla Fall 1996