The universe of farmers and their communities will shrink severely in the next decade unless agriculture’s stakeholders chart a new course. That’s because U.S. agriculture remains largely focused on commodity production, where rewards accrue to those who can grow crops the cheapest and in the largest volumes anywhere in the world. While perhaps the top tier of U.S. farmers can compete effectively by adopting low-cost technologies and economies of scale, many of today’s family-owned, commercial farm operators will find profit margins too thin to sustain a full-time living from farming in the future.

For example, South America’s entrance into world markets assures a steady supply of cheap commodities competing head to head with U.S. exports. USDA expects Brazil to capture much of the increased demand for oilseeds over the next decade and significantly temper world prices in the process. Another threat is that the U.S. farm safety net faces budget and trade challenges. Federal deficits and World Trade Organization negotiations already are pressuring U.S. lawmakers to downsize support levels by the time the 2002 Farm Act expires.

Even without these outside influences, farm policy faces new challenges. Farm price supports alone have proven to be only partially effective as rural development policy. During the 1990s, rural counties dependent on agriculture for the bulk of their income suffered serious setbacks relative to nonfarm communities. Three out of every four farm-based counties experienced sub-par economic growth and half lost farm population, some as much as 37% [Kansas City Federal Reserve]. The erosion occurred despite a record $104 billion spent on farm payments targeted at individual producers. While it is clear that the government farm safety net succeeded in keeping farm operators in business during chronic low prices, it has not been as successful in stemming the economic erosion in farm supply businesses or Main Street storefronts.

Many of these distressed rural economies have been concentrated in Plains states, far from urban centers or in regions lacking recreational amenities. However, analysis of eight Midwestern states by Iowa State University’s Center for Agricultural and Rural Development finds that the higher a county’s dependence on farm income, the lower its per-capita income growth during the 1990s. Moving from a dependency of 10% of county income from farming to 20% from farming decreased growth 8%. The general rule applied to counties in Illinois, Wisconsin, Minnesota, South Dakota, Iowa, Missouri, Nebraska and Kansas.

Some economists believe that grain producers and their communities would benefit from developing markets for value-added processing and new value chains for differentiated agricultural products. For example, federal environmental and tax policies have encouraged ethanol producers to more than double capacity since the year 2000, a factor that already has extended oil supplies, boosted national corn prices by 20¢ to 40¢ per bushel and drastically reduced federal outlays for farm price supports. As an industry, ethanol will add $15.3 billion to gross output in the American economy in 2004, including almost 12,000 jobs to the beleaguered manufacturing sector. Those workers typically earn about $35,000 a year on average, good jobs for low-cost rural areas.

One of the most significant changes since 1996, however, is that farmers now own more than 40% of the ethanol industry and stand to benefit from its profit stream as both shareholders and suppliers of a raw commodity. In the past five years, those returns have been so robust that shareholders in an average Iowa plant could have earned a 23% annual return on investment, according to Iowa State University’s index of ethanol profitability. However, equity ownership poses risk as well since ethanol returns have been far more variable than commodity prices.

Manufacturing plants provide welcome jobs and economic activity in any rural community. But local ownership provides the added benefit of recirculating profits nearby. A typical 40-million-gallon ethanol plant spends about $35 million for annual corn purchases in the community and $1.5 million in payroll. But a plant owned by farmers and local investors could also return an additional $4 million (assuming a 20% return on equity) to hometown bank accounts, if recent profit levels can be maintained.

Rural-based processing and manufacturing is only one route to boost farm incomes. Specialty markets, where growers are closely aligned with each step in the food chain, may offer another opportunity for some individuals. In the last decade, experts had expected designer grains to account for a much larger share of today’s commodity industry, but forecasters underestimated the high costs of grain segregation and transportation in a system designed for speed and bulk handling. Many growers experimented with these niche markets, only to be disappointed when premiums for crops like high-oil corn, popcorn or tofu-grade soybeans narrowed or vanished after several years. However, new information technologies are lowering the transaction costs of source identification from the farm gate to the dinner plate (see Chapter Four).

America’s growing affluence also will build demand for relatively expensive lifestyle foods. As European producers discovered, most success stories have been in branded products like Parma ham, Gruyere cheese or geographically designated wines, not intermediate products like corn or ethanol. In the 1970s, farmers and communities in Brittany benefited from large French government investments in distribution and transportation infrastructure, research and food processingple choices exist for farmers and policy leaders to dramatically improve outcomes for rural residents. The key is to develop blueprints for change. companies. Income levels and the number of jobs in Brittany expanded dramatically.Clearly, multiple choices exist for farmers and policy leaders to dramatically improve outcomes for rural residents. The key is to develop blueprints for change.