Wednesday, July 18, 2007

The new Farmer Market...

I used to get upset when I read articles like this one from sober university professors about how I should analyze risk in the cash rent market.
Farm Management Specialist Gary Schnitkey at the University of Illinois has completed a thorough study of how to quantify those market risks, to guide farmers and landowners toward the type of lease that will be fair to both owner and operator and allow both sides to share in the premium prices offered by the market. In his latest newsletter Schnitkey says today’s high commodity prices will be offset by higher production costs and lower government support payments. As a result, farmers will have to find a way to retain a larger share of the revenue stream to protect against the risks of the marketplace and the higher cash rent agreements that will have to be paid out. [More]
Now I simply chuckle. Take a look at the spreadsheet. Note there are no entries for factors like:
  • the farm is also your home
  • Moody Farms is bidding on it
  • you farm on 2 (or 3 or 4) sides of the property, making one larger efficient tract
  • it represents 18% of your farm income
  • without it you will have to leave farming
  • you have farmed it for 40 years
  • your mailbox sits on it
  • you compete by blind sealed bid without negotiation
  • your operating time frame is generations, not years
  • landowners who don't know or care what is "fair"
While thoughtful and certainly well-meaning, dispassionate academic number crunching by disinterested economists only goes so far. Economists might be surprised by how much of this type of work many of us already do. We know we are adding risk and pushing the envelope, but unlike advisers we also know first-hand the consequences of winning - and especially losing - the land.

The analysis is also constrained by the data source. FBFM data may not be representative of industrial ag, since very few large operations use the service and share their numbers. In short, economists could be pooling their ignorance.

In some sense, these types of models are therefore simply incomplete - dealing data that is easily accessible and manipulable. Truly useful economic analyses would find ways to quantify the above factors, and indeed that is where cutting edge economic work is going.

I have an idea that might help. Let's eliminate tenure and pay ag economists by the classroom hour or research paper. They would bid for their classes every 2-3 years against all comers, including foreign grad students willing to work for much less and competitors from other colleges.

Then let's see how much risk they accept as reasonable. While this seems caustic, what all these clever spreadsheets ignore is how our brain reacts to risks. Research indicates it is not simply controlled by our rational prefrontal cortex. In fact, we decide it with our emotions and justify it later. And unless the risk is actually real for you, it is unlikely you will understand how such decisions are really made - and more importantly, made to work.

Such analyses are not useless of course, but they only represent the first step in deciding. It has also been my experience that those who focus on the current numbers don't hang around long in the cash rent market. They may have been correct in economists' eyes, but they aren't farming.

Industrial agriculture is outgrowing many ag economics texts, I believe, for the same reason it is commanding the bulk of farm assets and outputs. The practitioners have devised ways to address factors like these and blow careful conventional thinkers out of the water.

[via Farmgate]

9 comments:

Anonymous said...

I just read G Schnitkey column linked to this comment. As an Ag Econ grad who works in the real work (not academia)IMHO his failure is trying to go from the macro to micro. While his numbers support the thesis it does not follow that the numbers support each (or any) real world enterprise. Each successful operation will know its cost and be able to bid for ground based on actual costs. As to your suggestion that Econ Profs bid for their jobs: when I attended the U of I we students used to say that every Ag Prof should be required to farm once every 7 years.

Anonymous said...

John,
Very well said. You have put into words what has been sequestered well back in my mind for a long time. The true economist's mindset is not found in many farmers. Rather it is a blend of emotions,commitments,and other factors which drive our decision making process. I wish it were as simple as they portray.

John Phipps said...

All: RE-reading my post, it can be seen as academic-bashing (typical "poster-regret"). What I think of as sly wit too often can be read as cutting sarcasm. I could have chosen my words more carefully - always an issue with blogging - and toned down the zingers.

Still, what I see happening in the field of economics by leaders such as Greg Mankiw, Tyler Cowen, and Brad deLong are serious efforts to quantify those strong instincts farmers use to counterbalance spreadsheet numbers.

And I see no evidence in ag economics of any attempt at including behavioral economics. These schools risk becoming irrelevant as a result, useful only for scoring farm bills, not helping farmers make decisions.

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