Despite commodity price downturns, why do some farms excel, while others exit the industry?
Farmers must manage risk through production choices and expense decisions. They can do little for risk management through marketing because most crop prices are determined by the market’s whims. In this position a farmer is called a price-taker.
How did the farmer end up in the position as price-taker in the first place? At the FoodTank Summit in Seattle a few months ago, farmer and Washington State Representative JT Wilcox said something that provided insight to this question:
“I grew up in the 60s and 70s as a dairy farmer and my family was also in eggs as we are now and mainly in pure-bred Holsteins. That was kind of the golden age of farming in a lot of ways. People were able to milk 50 or 60 cows and put their kids to college on that. [Then] my generation decided that their mission in life was to feed the world and they would do that by producing as much as they could as cheaply as possible and they would let somebody else sell it for them and generally that took the form of large agricultural cooperatives. It was a disaster for the farmers in my generation.
Is this true? Upon inspection this makes sense.
First, historical trends document the consolidation of farms. Family farms must get bigger or exit farming. From 2011 to 2016, the number of Washington farms decreased by 9 percent. Larger farms increased in number with large and very large family operations showing 52 percent and 115 percent increases over five years, respectively. All other farm sizes experienced decreases.
Second, farmer cooperatives continue to grow, despite decreasing memberships. There are many benefits for farmers to join a cooperative but sometimes the priorities of the various members can diverge. For example, a farmer-owned cooperative is designed to decrease expenses and increase income for its farmer members by buying supplies and selling products in larger quantities, giving the cooperative more market power than the farmer can have individually. However, a cooperative is also incentivized to sell all the product its members produce, especially if it is perishable. The best way to clear the product is to cut the asking price and sell it fast at a low cost. Differentiation and branding are less influential.
From 1951 to 2012, cooperative revenue grew from $268 million to $4.5 billion. Washington cooperative market share peaked in the 1970s at 73 percent of the total crop marketed, though this has dropped to 50 percent in 2012 and was at 37 percent in 2007. The reliance on cooperatives has both helped and hurt farmers’ ability to survive.
Finally, research suggests that farmers who are directly involved with their consumers were more likely to have survived from 2007 to 2012. Profits are higher for direct-to-consumer farms, though total sales are lower. However, most experienced farmers are unlikely to adopt a direct-to-consumer marketing strategy, choosing to remain price-takers. In Washington State, 89 percent of farms reporting direct-to-consumer sales were small farms. Notably, wheat growers face more challenges to move out of the position of price-taker due to the commodity nature of their product.
Unfortunately, from 2007 to 2012, most Washington counties experienced a decrease in direct-to-consumer sales, though the region remains a national hub for consumers wanting to buy directly from farms. Despite this potential, only 1,654 farms reported marketing their product to restaurants, grocery stores, schools, and other intermediated market channels.
For Washington’s small farmers to survive, they must be more proactive and leave behind the uncertain position of price-taker by marketing directly to consumers instead of leaving the marketing to other entities. Policy makers can help small farmers who are already helping themselves by eliminating excessive regulatory pressure and aiding a predictable business climate for farmers. However, for farmers who “want to do nothing more than farming” they will find that this strategy is a relic of the past and soon their business will also be history.
Madilynne Clark is Washington Policy Center’s Agriculture Initiative director.