Technology revolution in agriculture

This article uses three photos to make an important point about agriculture: during the past century technology has driven massive productivity gains. It then uses a chart of 125 years duration to make an important point about agriculture in the context of investment: productivity gains support capital growth and increasing investment income.

The three photos were taken during the US Dust Bowl, the period of drought in the US, where crops failed, topsoil eroded and 3.5 million people were forced to move in one of the biggest migrations of mankind. These are powerful photos that capture the pathos of this environmental and economic tragedy.

Photo 1: The Dust Bowl. Photographer unknown. Caption reads: “Buried machinery in barn lot, Dallas, South Dakota, during the Dust Bowl, an agricultural, ecological and economic disaster in the Great Plains region of North America in 1936.” 13 May 1936.¹

Photo 1 shows buried machinery and illustrates how the combination of over ploughing and drought brought about an environmental catastrophe. Looking closely at Photo 1, it is possible to gauge the depth of the windblown soil that has enveloped the farm yard of this anonymous and now ruined farm, located in one of the States occupying the Great Plains of the USA. It is also possible to see the scale and power of the machinery used during that period. There are horse drawn carriages buried in more than a metre of sand and in the background a pasture mower and a tiny seeder probably two metres in width. What is not visible is the cause of this catastrophe: the tractor.

Tractors represent one of the greatest technological revolutions to occur in agriculture. Labour shortages during World War One drove the emergence of these machines. Sales then exploded in the 1920’s when Henry Ford discounted his Fordson tractor from $625 to $395. Ignorance combined with over-ploughing powered the destruction of soil structure over the Great Plains. This caused the vast wind erosion that came with the inevitable onset of drought in 1934.

Photo 2: Economic Refugees. Photo by Dorethea Lange. Her caption reads: “On Arizona Highway 87, south of Chandler. Maricopa County, Arizona. Children in a democracy. A migratory family living in a trailer in an open field. No sanitation, no water. They came from Amarillo, Texas. Pulled bolls near Amarillo, picked cotton near Roswell, New Mexico, and in Arizona. Plan to return to Amarillo at close of cotton picking season for work on WPA” [Works Progress Administration, a New Deal government agency]. November 1940

Photo 2 provides an image of children and the raw poverty confronted by families burdened by the low commodity prices of the depression and a drought that lasted six years. This image and the third, were taken by Dorethea Lange, a woman who revolutionised photo journalism through powerful photos of the plight of the poor. A biographer of Lange used these words to capture her art and the character of these bankrupt American farmers: “Lange saw America as a worthy work in progress, incomplete and capable of better. By portraying her subjects as nobler than their current conditions, she emphasized the strength and optimism of our national character.”²

The children in Photo 2 are a reminder of just how much we have all prospered since those times. These kids probably had a similar life expectancy to all kids born at that time in countries like Australia, the United Kingdom and Western Europe - today’s developed economies. These kids, like our parents, survived infant mortality rates that were higher than those of third world countries today. Though they were unlikely to starve, they had to survive numerous life threatening illnesses that have today been virtually eradicated due to technologies such as immunisation.

Photo 3: The Migrant Mother. Photo by Dorethea Lange. Her caption reads: “Destitute pea pickers in California. Mother of seven children. Age thirty-two.” February/March 1936

Photo 3 is an image of Florence Owens Thompson, a refugee from Oklahoma, taken in California when as a mother of seven she worked picking vegetables and cotton. This photo became an iconic image of America’s rural depression, and is known as the ‘Migrant Mother’. It is probably its subtle suggestion of the future that most appeals to that optimistic nation. And in the case of its agricultural economy, this was not misplaced.

Since these photos were taken, vast improvements have occurred in agriculture that will ensure the mistakes so clearly depicted will not reoccur. Soil conservation farming techniques quickly emerged to prevent erosion and while tractors have increased in size, they are used with GPS precision. But improvements in agriculture have not been limited to a recovery from drought or a cyclical depression. Other technological strides have occurred such as the introduction of fertilisers, plant breeding and genetic modification to reduce the use of pesticides. These three productivity revolutions have in turn contributed to vast improvements in the prosperity of farmers so as to ensure the cause of the mass bankruptcies of the 1930’s will not be repeated.

Technology feeds into the farming economy in more subtle ways as well. The children in the photos today would be immunised, literate and healthy. Their parents would have access to the internet, cars that travel faster and with fuel consumption ten times greater. Their family farming business has now been stable for several generations due to better access to credit, the ability to hedge their production and the tertiary educations they have received in farming practices. Technology then, has driven continuous gains in the productivity of their businesses and like us, the quality of our lives.

Figure 1: 125 years in farming³

The chart presented as Figure 1 measures the economic impact that these productivity improvements have brought for the business of farming. It provides three data series over the past 125 years: inflation, agricultural commodity prices, and the change in farm values. The data is from the US because Australian data over such a long period is not available - though it displays similar correlation since records began in 1978. Finally the chart presents rolling ten year periods, so that it is easier to see the major trends.

The chart shows that there is a high correlation between each of the three data series over the period. A chart characterised by three great waves, with inflation and agricultural commodities increasing and then feeding an increase in land values. Each of these waves is followed by a period of slower growth and occasionally decline, as economic factors conspire to prevent either uncontrolled inflation or unaffordable food prices. At the right of the chart there is evidence that we are now well into a fourth wave of increasing prices and perhaps now a period of slower price growth.

There is some hard data that should be highlighted from this chart. Firstly, during the 125 year period, US inflation rose at an average rate of 2.9% per annum while agricultural commodity prices rose by 2.6% - therefore marginally declining in real terms. Secondly, US farm land values rose by 4.3% per annum during the period.

A surprising feature of this data is the much greater increase in farm values compared to commodity values. If you bought $1 worth of say wheat in 1890, it would be worth around $25 today. But if instead you had bought $1 of agricultural land, it would be worth $192 today. What caused the big difference between commodity prices and land values?

Technology. The innovations discussed above have fed through to higher crop yields, faster animal growth rates, and higher quality produce that has enabled farm businesses to realise greater profits despite declining real commodity prices. They have then used the proceeds of these increased profits to acquire additional farm land that became intrinsically more productive and hence valuable.

Productivity gains from new technology, have a significant investment implications for those of us who invest in farmland: over time, productivity powered by technology, has increased income and capital at a faster rate than inflation.

If you are an investor in farmland through the Rural Funds Group (RFF), you will be able to observe the benefits of any productivity gains through the long term increase in RFF’s underlying assets. Because these assets are leased, you may also experience an increase in your income due to indexation clauses in the lease agreements. Clauses that are underpinned by the productivity gains of the lessee.

Productivity gains then, are a critical element in the success of your investment. They drive the year by year growth in your income and ultimately drive the long term capital value of your nest egg. So if history is any guide, it is right to be optimistic that farming is capable of better and that productivity gains will continue to drive income growth for careful investors.

‍