Historic Trends and Strategic Issues
For Illinois Agriculture

Steven T. Sonka¹

Introduction

The purpose of this briefing paper is to highlight key trends and identify some of the strategic issues facing Illinois agriculture. This paper is intentional brief and, therefore, will address only a sampling of the trends and issues that are important to Illinois agriculture.

Over the last 50 years or so, Illinois agriculture has gone through profound technologically and institutional changes. And, as will be detailed later in this paper, it appears likely that the pace and scope of change may be accelerating, not diminishing. Change, especially rapid and significant change, causes stress for decision makers. That stress does not necessarily mean that change is good or bad but it does suggest that the impacts of the stress need to be accommodated. Often public policy, at local, state, and federal levels, can be useful in reducing those negative impacts of change. Careful analysis is needed, however, so that public policies can weigh the societal benefits of change against the stress that the change causes.

A feature of Illinois agriculture of considerable public interest, for example, is the family farm. The family farm over the last 100 years in Illinois has been a surprisingly resilient aspect of Illinois agriculture, even in the face of dramatic forces for change. That resiliency has several sources, but a key factor has been the willingness and capability of individual farm families to change what a family farm is and does. If public policies had restrained the ability or necessity of family farms to change, the long-term effect of those policies might have actually weakened the institution they purported to protect.

In the next section of this paper, a few key trends describing the changing nature of Illinois agriculture since the 1950s will be discussed. Then current forces for change will be linked to key strategic issues facing Illinois agriculture today. The paper's last section will provide a few concluding comments.

Key Historic Trends

Four charts will be presented in this section to provide supporting documentation of the rate and nature of change in Illinois agriculture. All these contain data from readily available government reporting agencies.

Figure 1 visually documents the decline in farm numbers that has been a constant feature of Illinois agriculture since 1949. In 1949, there were more than 200,000 farms in Illinois but by 1997 slightly less than 80,000 farms were in operation. Whether the net effect of this trend is positive or negative is subject to debate depending upon the criteria one chooses to employ. From the perspective of economic efficiency, the steady movement of resources from agriculture - while simultaneously increasing output dramatically - fueled national economic growth and certainly contributed to material well being in the nation. From social or other perspectives this transformation might be viewed as having negative consequences. While this issue can lead to interesting philosophical discussion, the data of Figure 1 vividly demonstrate how the people who actually faced this choice made their decision.

Declining farm numbers have been the norm for American agriculture throughout this century, except for a brief return-to-the-farm migration in the 1930s. Figure 2 illustrates this trend by showing the proportion of the nation's and of Illinois' population who live on farms. In 1920 almost one in three people in the nation resided on farms. In Illinois, one in six people lived on farms at that time. Both nationally and in Illinois, that proportion had precipitously declined to values that were less than 2% of total population by 1997.

Figure 3 shifts our perspectives from the state and national level to parameters that are measured on a per farm basis. Per farm, both gross value added and net farm income have increased significantly, particularly since the mid-1970s. By 1997, gross value added exceeded $74,000 and per farm income was nearly $29,000. Three caveats should be noted about the information depicted in Figure 3. First, the data shown are in nominal dollars and have not been deflated for changes in purchasing power over this time. Second, a bimodal population of farms exists in Illinois, as for much of the United States. This means that there are many relatively small farms (in terms of gross sales) and relatively few large farms. For example only about a third of all farms in Illinois in 1997 had gross sales that exceeded $100,000. Nearly 75 % of the acreage in farms, however, was in farms that had sales of more $100,000. Of course, average net farm income would be considerably higher for those farms than is the average value shown in Figure 3. Third, farm incomes were considerable lower in 1998 than the values shown for 1997 due to low commodity prices that have plagued global agriculture in 1998 and 1999.

Figure 4 provides evidence of one of the more profound historic trends in Illinois agriculture. This documents the sharp increase in the proportion of gross value added in the sector that is provided by purchased manufactured inputs (fertilizer, equipment, chemical inputs, and seed). For example, during the 1950s purchased inputs averaged about 13 % of gross value added. Conversely, during the 1990s that proportion had jumped to nearly 35 %. Again, the implication of this change might be viewed positively by some and negatively by others. If one's view is that the essence of a family farm is that the family provides nearly all the inputs needed to produce the farm's output, a nearly three-fold increase in the proportion of inputs purchased off the farm is a negative development. Conversely, one would have a very different perspective if they viewed the farm more as a business and focused on the result that commercial farmers had incomes on a par or exceeding that of non-farm citizens during the 1990s. Similarly, one who remembers that the physical work of farming in the 1950s was physically demanding and dangerous is likely to view the increase in the use of non-farm inputs as a positive factor.

Some Strategic Issues

Today if we ask the typical Illinois farmer what the key issue is for Illinois agriculture, they would immediately refer to the low commodity prices in the market. Of course, net income per farm was at historically high levels in 1996 and 1997. Hopefully we can rebound from these low prices as rapidly as they fell.

Government regulations,

Political acceptance of agricultural biotechnology,

Structure change in the input supply and marketing sector,

Impacts of adoption of biotechnology,

Rental value of farmland,

Attracting new entrants into farming, and

Adoption and implications of precision agriculture and the Internet.

This list certainly is not all-inclusive, however, it does demonstrate the diversity of issues that exist. Simply discussing each issue individually would be lengthy and is not likely to capture the interrelations that exist among these and other issues. Therefore, the following two sections will address strategic change at levels that integrate across the specific issues. The first level will address development of a knowledge-creating agricultural system. The second will evaluate the transition away from total reliance on a commodity marketing system for farm output.

A Knowledge Based Agriculture: Historically control of assets was an important means by which individual farmers and large agribusiness firms achieved success. Decision makers, therefore, learned to become proficient with tactics to acquire and exploit the traditional assets of land, labor and capital. Today, a fourth type of asset, knowledge, is increasingly being recognized as a critically important source of value.

Knowledge is not a new asset for farming or for the sector as a whole. However, the roles of explicit and tacit knowledge² were very different historically than they will be in the future. Explicit knowledge was discovered and validated in research labs and experimental plots. That explicit knowledge was then communicated to farmers. Farmers combined that explicit knowledge with experience, judgment and insight to make decisions. Historically the cost of capturing, communicating and analyzing explicit data from field operations exceeded the benefits of conducting these activities. Therefore explicit information about actual field operations was only rarely available.

The technologies of precision agriculture and electronic communications via the Internet offer the potential to make available explicit information about actual farming operations. If this were to occur, agricultural production will become even more like the manufacturing component of non-farm economic sectors.

Figure 5 describes the food and agricultural system in terms of three "knowledge bases" that could be sources of new value in tomorrow's sector. As sources of value, they have the potential to earn "profits or excess economic rents". The traditional assets of land, labor and capital will continue to earn returns but they will be minimal; what the economist calls zero profits.

In Figure 5, three knowledge bases are depicted. One knowledge base refers to biotechnology and the use of genetics to create value. At the other end of the sector, a consumer and customer knowledge base is depicted to reflect the value that can be earned by identifying and responding, with ever increasing precision, to consumer and customer demands in the marketplace.

The middle segment of Figure 5 refers to a production agriculture knowledge base. This knowledge base would be augmented each time a crop or livestock production cycle occurs. However, the truly effective ag production knowledge base must be much more than just a huge data file compiled from the operations of precision agriculture. Instead the knowledge base needs to integrate research in the lab, field trial results, and data from actual farm operations. In doing so, the knowledge base is enhanced and continually creates new value.

An Evolving Marketing System: A key challenge facing managers in the US commodity agriculture system is how to respond to the potential for fundamental change in the nature of the marketing system. We have been very successful producing output for very large, homogenous commodity markets. In the future we may need to operate in a marketing system that is multi-faceted. A setting, for example, where there is a large homogenous commodity market, several smaller, but growing multi-attribute commodity markets, and numerous small, niche markets. Further, the make-up of that multi-faceted system will be constantly changing.

The sector's historic success in providing abundant supplies of low cost, safe and nutritious output is impressive. However, as the Austrian economist, Schumpeter, notes, success only sows the seeds for "creative destruction" in the marketplace. Within agriculture, one type of creative destruction is change in the fundamental nature of the relationship by which output is marketed from the farm.

The essence of any commodity market is that very small amounts of transaction data (prices and quantities) can effectively coordinate the market. To achieve this coordination, no differentiation of output is allowed. In a commodity world, a bushel of corn is a bushel of corn—no matter what farmer produced it, the nature of the production process, or the location (allowing for transportation costs) of that bushel. This characteristic of the commodity marketing system allows it to operate efficiently and provides valuable flexibility to the downstream users.³

The Role of Information Economics

One of the lessons we are learning because of the Internet's effect on the economy is that information economics plays a fundamental role in determining the most effective market structure in all markets. The effectiveness of a commodity market versus a more differentiated product market can be determined by comparing the benefits and costs of acquiring, analyzing and communicating information.

Historically, the benefits of acquiring information beyond that needed for commodity transactions were relatively low and information costs were very high. As we look at the many changes facing tomorrow's agriculture, the impact of those changes can be better understood by focusing on their impact on this benefit/cost ratio. Forces that are likely to increase the benefit from transmitting more information in the market system include:

• Agricultural commodity users have to design and operate their systems to accept a wide range in the levels of the attributes important to processor efficiency. Typically manufacturing systems can gain substantial improvements in productivity when the variability of input attributes is reduced (Deming). Although users have developed sophisticated systems to respond to variability, experience in other industries suggests that processing systems can be more finely tuned if variability is reduced or if the systems can effectively anticipate variability.

• With scientific advances, new benefits/uses for products made from agricultural commodities are being discovered. For example, considerable interest has been generated by discoveries that consumption of soy may reduce or retard diseases. To the extent that these benefits are linked to specific soybean attributes (for example, the level of isoflavines), there might be value in producing varieties that have unusually high levels of that attribute. However, capturing the benefits of doing so generally requires identification of those soybeans prior to processing.

• Biotechnology offers means to more effectively propagate varieties that have specialized characteristics such as those described in the preceding paragraph. Again, in many cases, the full value of those characteristics cannot be captured in a commodity marketing system.

• Some consumer segments are increasingly interested in selecting food products, at least in part, based upon production practices at the farm level. Regardless of the attribute of interest or the rationale for that interest, a commodity system cannot serve this type of need unless all farmers follow the specific practice of interest.

• Farmers' societal responsibilities relative to environmental and food safety concerns have been increasing and are likely to continue to expand. Measurement and documentation are typical means to satisfy such consumer concerns. Often, the resulting information will need to be linked to the physical output, increasing the flow of information in the farm to market system.

At the same time that forces expanding the benefits of increased information transfer in the marketing system are building, the costs of doing so have declined substantially and are poised to continue to decline. Forces that are operating on the cost side of the information benefit/cost ratio include:

• Precision agriculture is an entire suite of technologies that focuses on detailed capture and analysis of information associated with agricultural production. Discussion of precision agriculture generally has focused on improving farm operations at the sub-field level. However, key elements of the information captured within precision agricultural operations can be used to enhance marketing relationships.

• Electronic communication via the Internet has made substantial impacts in society in general. These same technologies can be (and are being) used to foster communications in the agricultural marketing system. For example, production contracts for identity preserved grain are being communicated and executed over the Internet via the OSCAR (Optimum Sales Connection And Resource) system (Optimum Quality Grains).

• The technological capabilities to non-destructively measure agricultural output within the marketing/processing system are becoming more effective and less costly. In particular, NIR-based measurement systems are increasingly being employed. This development furthers the trend away from a commodity system based upon only a few attributes.

From a single structure to a system of multiple structures

The preceding section has documented that several important forces are acting to move the sector from one characterized by commodity transactions between farmers and the market to "something else". But the nature of the "something else" also is uncertain. Traditionally non-commodity coordination of agricultural markets required that firms move to what economists call "administrative coordination". In the case of turkey production, integration of the farm to processor linkage was required. Financial ownership of both the production and processing phases of the business is one means to achieve this integration. A second means to achieve administrative coordination is through production contracts and identity preservation of output. This approach, for example, can be found in the broiler, seed corn, and vegetable sectors of the United States.

Is it likely then that the agriculture will rapidly evolve from being dominated by commodity marketing to being dominated by administrative coordination (identity preserved contracting or financial integration)? Possibly, but not probably. Whereas commodity marketing provides considerable flexibility to the processing sector, administrative control restricts flexibility for downstream marketers. An alternative is to expand the specificity of the commodity system by increasing the number and nature of the attributes valued in the market. Implicitly this means more information must flow with the physical output in the marketing channel. However, the declining cost of information capture and communication alluded to previously will make this option more viable over time.

Historically, and today, agricultural marketing can be accurately depicted as a single system characterized by commodity based transactions. In the future, it seems likely that this single system will not be replaced by another single dominant system. Instead tomorrow's marketing system is likely to be both complex and dynamic. It will be complex because alternative systems are likely to coexist. It is conceivable that an individual farmer may market some output in a commodity system, some in an identity preserved structure or in a system integrated through ownership, and some in a commodity channel where the interaction of several attributes determines value. These alternatives can coexist if each best serves the distinctive needs of different consumer segments.

In addition to being complex, this future system of structures is likely to be dynamic. The share of output marketed through each alternative will shift over time. In a capitalistic economy, continual pressure exists to either improve quality (the specificity of the output delivered) or to reduce cost. Therefore, new niche, identity preserved markets are likely to arise in response to the opportunity to better serve the unique needs of market segments. At the same time, pressure will exist to reduce cost by shifting from identity preserved to commodity-based transactions. This latter force is likely to characterize niche markets as they become successful and the volume they handle increases. As they do so, their status as a niche market is likely to disappear. Overlaying these natural market forces, information-based technologies are likely to continue to advance, shifting the cost side of the market's information benefit/cost ratio in unpredictable ways.

Concluding Comments

In my conversations with Illinois farmers, they discuss both the opportunities and challenges that are part of their strategic future. Sometimes they suggest that it would be desirable to stop or, at least, just slow down the forces for change affecting them. In that respect, they're views are strikingly similar to non-farm citizens dealing with state of turbulent change that globalization, technology, and other social forces are inflicting on all of us. However, stopping change also is recognized as generally being a non-productive exercise. Therefore, we need to focus on insuring that all participants in Illinois agriculture have access to the understanding and tools that will allow them to adapt and exploit those forces for change.

¹ Steve Sonka holds the Soybean Industry Chair in Agricultural Strategy, is Director of the National Soybean Research Lab, and is a Professor in the Department of Agricultural and Consumer Economics and in the Department of Business Administration at the University of Illinois at Urbana-Champaign.

² Explicit knowledge is formal, repeatable knowledge; that which can be written down. Tacit knowledge refers to the informal, experience based insights, judgment and experience that decision makers employ.

³ I recognize, that for several years, niche markets for identify preserved crops and livestock with relatively high value characteristics have existed. However these efforts were very small relative to total volume.