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Big Farm, Big Tractor, Big Debt—Big Mistake!

By Jean Hagerbaumer, PhD
Ag Research Consultant

Conventional wisdom would have everyone believe that you must get big or get out—well don’t bet the farm on it! Research simply doesn’t support this way of thinking. That farms can be run like factories is a misguided idea which has long out-stayed its welcome.

Before we examine the effects of big farms on individual farmers, let’s look at what they mean for rural communities. For years, proponents of concentrated animal feeding operations (CAFOs), more aptly known as factory farms, have attempted to justify their philosophy with the following—big farms: 1) create more jobs, 2) stimulate the local or regional economy, 3) increase the tax base, and 4) are more efficient. Some have even gone so far as to claim that small farms are directly responsible for all the starvation found world-wide. None of these things is true.

Research conducted at the University of Missouri (1994) found that for every job directly created by a hog CAFO, three independent hog farmers were put out of business. That does not take into consideration how many more jobs are indirectly displaced because fewer farmers in the community means fewer workers are needed at the local auction barn, feed mill, and farm supply store. Another point is that corporations may initially employ local people to work on their farms and in their plants, but the pay is so low, the working conditions so poor, and the management decisions so irresponsible that many workers soon quit. Eventually, only immigrants will fill those jobs. “Large-scale operators concentrate jobs [they] created in one place and call it economic development while the larger numbers of jobs lost elsewhere are ignored or denied.” (John Ikerd)

It may sound like a good business decision to increase profits by cutting jobs and replacing those people with high-tech equipment, but that depends on your perspective. Employees pay local, state and federal taxes; employees buy goods and services; equipment does neither. These economic losses are compounded by the fact that 100% of the profits leave the local community, often leave the state, and sometimes even leave the country when they are sent to corporate headquarters.

Corporations are always looking for vendors who will give them the lowest prices. Increasingly that means they import their supplies from somewhere else. When problems arise, they often fly in the company veterinarian, the company environmentalist, or the company spokesman. Multi-nationals minimize their use of local talent.

Economic development corporations are fond of talking about the benefits of “multipliers”—for each dollar an employee makes at a CAFO, that same dollar will get circulated “X” number of times within the community. Multipliers only take effect if the employees both live and shop in the community. If there is nowhere to live or shop locally, their salaries leave the area. Local economies also need businesses that spend money in the area. Researchers at the University of Minnesota (1994) found that farms with gross incomes of $100,000 shopped locally 95% of the time, while farms grossing in excess of $900,000 did so less than 20% of the time. In another study that considered 1106 rural communities with nearly identical growth rates, Gómez and Zhang (2000) found that areas which retained traditional hog farms had 55% more economic growth than those that switched to hog CAFOs. The latter also had larger population losses.

Because of odor issues, pollution and resulting health problems, CAFOs tend to locate in remote regions—which automatically means they need to import most of their supplies and services. Even when their locations are not so remote, factory farms’ first thought is how to help their bottom lines, not how to help their neighbors. There is no loyalty—they will buy wherever they can get the lowest price.

An Ohio State University study (2003) found that state dairies only bought about 1% of their grain locally. Feed represents roughly 70% of the production costs for both hogs and poultry. Wilmington Bulk LLC is a North Carolina consortium of six hog and poultry companies (one of which is Murphy Brown—a division of Smithfield). According to the group’s president, Jimmy Kissner, the group needs 26,000 tons of soybean meal each week, 130M bushels of corn each year, and 25M bushels of wheat. The consortium was formed with the intent of importing about 50% of their feed needs from South America and the U.K.

Some may think that simply building the facilities for factory farms will help at least some local businesses. Again, the large corporations behind the CAFO movement require that barns be built to their exact specifications and filled with certain equipment. They will present farmers with a list of pre-approved contractors, from anywhere in the nation, and anyone hoping to grow for them must choose from that list. It is doubtful that anything at all will be spent locally.
CAFOs are specifically structured to minimize the amount of local taxes they pay (Weida, 2000). Not only do they not contribute much, if anything at all, to tax revenues, but they often are indirectly responsible for lowering the amounts already being received.

CAFOs tend to promote emigration because neighbors do not want to continue living next to them and most newcomers will not move next to an existing CAFO. Sometimes the fear of having a factory farm move next door at any time in the future is enough to discourage people or businesses from locating in a particular region. Depending on distance and direction from a CAFO (upwind vs downwind), neighboring property values may be reduced 10-35%. With its ag exemption, the CAFO is not going to generate enough tax revenue to replace what is lost.

Factory farms affect tax revenues in several other ways. Regardless of livestock species, CAFOs create significant truck traffic. In rural Paulding County, Ohio, 75% of the tax revenues generated by large dairies have to be used for road maintenance. (Motavelli, 2004) One Iowa community estimated that their gravel costs increased 40% ($20,000/year) due to hog CAFO truck traffic. Costs associated with a 20,000 head feedlot have been estimated at $6447/mile. (Weida, 2000) I live in an area with one chicken integrator. My county commissioner said that one year the chicken traffic was responsible for an additional $40,000 in road repairs just in his precinct. In addition, our county receives no offsetting revenue from the trucks because they are all registered in a nearby county where the processing plant is located.

Because CAFOs are overwhelmingly staffed with immigrant labor, they cause other drains on local and state revenues. A 1996 University of Iowa study reported that areas with large hog farms experienced increased poverty rates, and a greater dependence on government welfare programs. Numerous studies indicate that rural communities’ prosperity depends on the number of farmers and not the number of animals being raised.

Economist William Weida attended a 2004 Midwest multi-disciplinary conference concerning the effects of CAFOs on rural communities. “Of 31 different academic reports on the impacts of [CAFOs], all 31 have shown the impact of concentrated hog operations on rural economies has been negative.” On average, from the 1940s to the present, hog CAFOs have caused a 15% reduction in local jobs, a 17% drop in tax revenues, and a 20-30% devaluation of neighboring properties. “If you are losing employment and tax revenue, is it economic development? Don’t mistake economic activity with economic development.” (Williams, 2004)

CAFO supporters claim that larger farms are more efficient because of economies of scale. But if getting larger means automatically getting more efficient, then eventually one could reach a size where goods could be produced for free. Obviously size is only part of the equation.

Initially, as an operation increases in size, it will make better use of fixed assets such as barns and equipment. However, that efficiency quickly slows (diminishing returns) and eventually stops. If expansion continues, efficiencies turn the other way and become diseconomies of scale.

It is impossible to concentrate assets without also concentrating their associated liabilities. Crowded animals mean stress—which suppresses their immune systems and makes them more susceptible to disease and parasites. Crowding animals also makes it easier for diseases and parasites to spread. More animals also means more manure, but on the same number of acres, and that quickly becomes a liability too.

The only way large farms can stay in operation once they go past the top of the efficiency curve is to either cut corners on expenses, make someone else pay for their expenses, or both. An ever-increasing pile of complaints, violations, lawsuits, and tax subsidies indicates that factory farms do both. So while many agribusinesses accumulate record profit upon record profit, taxpayers directly and indirectly pick up more of the tab. That means Wall Street, which exhibits little ability for understanding what it takes to run a farm or a ranch, keeps investing in large farms and bragging about all the “cheap” food they produce. There is a big difference between a “cheap” product and an inexpensive one. With the latter, you get your money’s worth. In 1996, the U.S. government spent $68.7B on ag subsidies which equates to $259/consumer and even more for each taxpayer. (Harrington, et al., 2002)

Kansas State University researchers (Feedstuffs, 5-21-2001) say that production costs account for 65% of the differences in net profits between producers, and that farmers need to maintain at least 50% equity in order to survive when prices fall. Improvements don’t always pay for themselves. This is particularly true when farmers work under contracts and are forced to live with decisions made by someone else—someone who has their own best interests at heart and not those of the farmer.

In recent years, researchers have tended to focus on technology and capital. One issue they have ignored, but which still affects the bottom line, is labor. “Animal husbandry and stockmanship have been lost. Labor problems can wreck havoc on the bottom line even in the most technologically correct production system. System failures are typically discussed in terms of equipment breakdowns when they frequently have more to do with people factors.” (Mike Tokach, KSU)

In Iowa, one farm lost 377 pigs, weighing 65-70 lb each, when employees deactivated medicators but then forgot to turn on the drinking water again. In spite of routine inspections, no one noticed the problem for ten days. Estimated loss was $49,000. In Wyoming, 2000 head of 25-lb pigs drowned when an employee failed to turn off the flush water. Estimated loss was $250,000. In Texas, a dairy was experiencing a calf mortality rate exceeding 70% before someone decided that maybe it was time to do something about it. It was mostly a matter of sanitation. Immigrant laborers, coming from vastly different cultures and with little education, have difficulty understanding that attention to detail can often be the difference between a successful operation and one that fails.

Industries that depend on immigrant labor have notoriously high turnover rates. That means personnel managers spend excessive amounts of time trying to keep caretaker positions filled. Because they are dealing with living creatures, caretakers need to be vigilant and to recognize what are sometimes subtle clues that everything is not right with an animal. “The [confinement] system is taking the biology out of raising animals. When farmers start pushing past what’s natural, the costs add up. Nature always bats last.” (Joel Salatin)

Wells Fargo Bank V.P. and ag economist Michael Swanson, Minneapolis, says, “You’ve got to be big enough,” but no bigger He also says many farmers make the mistake of buying more land to make full use of large machinery instead of downsizing the machinery to fit the acreage. Although most small farms may no longer be profitable, neither are most large farms. According to an Illinois study, when it comes to row crops, the point where economies of scale peak is around 1200 tillable acres.

The promotion of factory farms is “dated”; the modern trend is toward grass-fed animals. Mariola, et al. (2005) have published an annotated bibliography of 275 studies that either evaluate graziers and other small, sustainable farms, or which directly compare small farms to CAFOs. Dozens of studies include surveys, testimonials and analyses of graziers who switched from conventional systems of livestock production. All reported they are better off economically, environmentally and have an improved quality of life.

How do small dairies fare? Two small dairy grazing operations—one with 41 cows using organic methods, one with 141 cows, but not organic—had net annual incomes of $57,000 and $83,000 because they kept their expenses and overall debts low. The larger of the two farms was slightly less productive in milk/cow, but more than compensated for that by culling fewer cows and receiving higher prices for its premium milk quality. The organic farm received a 14% premium. That premium could drop by more than half before this farm would lose its competitive edge. Both farms’ net milking incomes were 1.5-3 times higher than that of similar regional dairies, and their other enterprises (replacement heifers, hogs, organic soybeans) were also more profitable in spite of lower yields/acre.

The same study compared the economics of 46 grazing dairies to those of 231 more conventional farms (all were in Minnesota). The graziers had a 34% higher net profit for their milking operations, and a lower culling rate for their milk cows. Another Minnesota project found that rotational grazing yielded a small reduction in milk volume but a much larger reduction in production costs. Net profits were $64.05/cow (1991) and $88.66/cow (1992) higher than those of confinement dairies.

Thirty-eight studies (one beef, one pork, 36 dairy) compared grazing farms to CAFOs in the Northeast and Upper Midwest. There was not much consistency in methodology, yet, with the exception of three studies, there was a great deal of consistency in their conclusions. Grazing farms produced less milk/cow (lower gross income), but they had significantly lower costs so their net profits were better than those of the CAFOs. These results were found in 35 of 38 studies. Eleven additional studies evaluated computer models and reached similar conclusions.

Looking at both hogs and dairies, several studies noted improved health for animals that were pastured. Another plus was the savings on utilities.

In 1998, the University of Wisconsin conducted a survey among ag professionals in 18 occupations to assess their knowledge and support of Management Intensive Rotational Grazing (MIRG). Eighty percent of the respondents said they had to see a new farming practice working for farmers before they would recommend it. Only 37% said they were actively seeking and using MIRG information. Business consultants and lenders (Wall Street) were the least likely to do so.

Eight other studies, ranging from Alberta, Canada to Ecuador, found that herd size had little if anything to do with efficiency and profitability. One even found a negative correlation. El-Osta and Johnson, 1996, studied per unit returns for dairies with advanced, capital-intensive milking parlors. They found that investment in this type of technology didn’t pay off. Several factors, including continued support from taxpayers, allowed dairies to keep getting larger. None of these factors included improved efficiency or higher per unit profits.

Dr. William Weida says far too much emphasis is placed on milk production and not enough on net return per cow or per acre. “There is no support in the literature for large increases in efficiency as the size of dairy herds grows beyond 200-300 [cows], and there is no support for any claims of efficiency for dairy sizes of the kind found in the new, large dairy CAFOs…. In fact, all of the research conducted thus far on efficiency has been done on herd sizes that are so small that the waste generated by the herd should be easily manageable on a farm of normal size.” (Weida, 2000; emphasis added)

Now let’s look at hog studies. Nebraska’s Center for Rural Affairs re-evaluated research conducted to promote the “advantages” of hog CAFOs over small producers. The study compared four groups: twenty-three 150-sow farms; eleven 300-sow farms; three 1200-sow farms; and one 3400-sow farm. The original authors either didn’t mention the statistics from the smaller operations, or they presented them in such a way as to make the CAFO appear to be preferable. (This tactic of misrepresenting data or hiding unfavorable data is a key reason why elected officials are so supportive of CAFOs.) The complete, re-evaluated data showed that the twenty-three 150-sow operations produced 34% more jobs, 23% more employee income, 23% more total local revenue, 20% more net state revenues, and 7% more property taxes than the largest CAFO. The eleven 300-sow farms produced 37% more jobs, 30% more total local revenues and 25% more net state revenue.

Studying hog production records, Kansas State University found that one third of the smallest farms (those with fewer than 100 litters/yr) had below average costs. The farm with the lowest cost had about 75 sows. A comparable study in Nebraska found similar results. Emmett Stevermer, Iowa State University swine specialist reported that the most profitable sow herds in his state generated a profit of $12.32/cwt while the most profitable small herds generated a profit of $12.93/cwt. All three states were using data from the 1990s.

There are lots of ways to define “large” farms (number of acres, number of animals, gross income…). There are as many different ways to define efficiency. People with a vested interest in how a research project turns out tend to cherry-pick the definitions and data they present. What is quite evident from all the research is that efficiency and economies of scale are reached far more quickly than most people realize. Most swine record analyses show greater variation within size groups than between them because low production costs can be achieved in many ways. (Duffy, 1997)

Agribusiness management has often promised to “chickenize” the hog industry. It therefore seems logical to study what has happened in the poultry industry in order to gain insight into where hog and other ag enterprises are headed. John Morrison uses personal experience to help write about the following.

As an example he presents the economic projections for Tyson’s Holdenville, Oklahoma swine finishing farm. The farmer would be required to invest $224,000 in two fully equipped confinement hog houses. In return, the farmer could expect an annual cash flow of $55,000 (if everything goes exactly right) and a net profit of approximately $13,000. This is analogous to building two tunnel ventilated poultry houses which would require similar investments and produce nearly the same cash flow and net figures.

Pig contractors can expect problems similar to those for chicken growers because most of the major players in both industries are the same ones. In addition, the swine industry is quickly becoming vertically integrated, and the contract terms offered in the two industries are nearly identical. Just exactly what types of problems might those be? I have been following the poultry industry for six years. In that time, I have spoken with several growers, and seen some of their paperwork.

The companies use bait-and-switch tactics. They present a financial forecast of what the grower can expect in the way of income and expenses. One of their pre-approved bankers will make a property appraisal and loan based on those figures; but once the farmer’s signature is on the loan’s dotted line, suddenly everything changes. Then the company, with the bank’s full knowledge, will present the “official” contract—with different numbers and terms.

The bank will call in the loan any time the company tells it to; and that can be any time the integrator decides the farmer is asking too many questions and giving them too much trouble. CAFOs are built for the sole purpose of supporting a processing plant. Once the company has enough growers in an area to keep things running, they may suddenly present yet another new contract with terms even less favorable for the farmer.

For one thing, they will introduce the ranking system. Growers are placed in groups, and everyone within the same group ships their chickens during the same week. Members within each group are ranked against one another on the basis of such things as pound of gain per pound of feed. It doesn’t matter how good a grower may be, by definition, half within each group will be below average. I have heard that one company pays its top broiler grower a $5,000 bonus—but not using the company’s money. It comes out of the check of the grower at the bottom of the ranking. Second high gets a $3,000 bonus that comes from the grower who is next to bottom, and so on.

A grower’s ability to raise chickens is influenced by many things other than knowledge and hard work. The company decides when a farmer gets chicks, how many there will be, and how long they will be kept. They also provide all feed and medication without letting the growers know what is in either. If the company needs to make an example of someone, they can send them sick chicks or poor quality feed. These things have a serious impact on how much the farmer makes off that flock. A few growers get better treatment than the rest. After all, the companies have to have somewhere to send potential growers, government officials and the media whenever they need a favorable report.
Loan payments are taken off the top of the grower’s pay and sent directly to the bank; whatever may be left goes to the grower. Few growers receive any type of statement from the bank as to when payments are applied or how large they are. Keep in mind that some of these companies also own their own banks, so the opportunities for financial abuse are endless—and yet the government insists there are adequate checks and balances.

Why don’t these growers sell their farms and get out? Because the company controls who buys the farm and when they do it. Until the company has someone lined up to take over—someone who will work hard, not ask questions and take whatever they are given (these days that often means Vietnamese or Laotians)—they won’t let the farmers sell. All they have to do is refuse to give anyone else a contract for chickens.

As long as they can keep their contractors in debt, the companies stay in control. They see to it that the debts continue by requiring frequent barn and equipment updates. Any time a company decides that’s it’s to their advantage, they can abandon an area and leave the farmers stranded with loan payments, but no income. It has happened to both poultry and swine producers.

It doesn’t have to be that way. Joel Salatin’s Polyface Farm in Virginia is an example of a profitable alternative. His grazing operation ranges chickens on 95 of his 550 acres, and nets about $25,000 from them each year. He only raises broilers for half of the year. His technique is to let his 50 head of beef cattle graze the grass down to a few inches (1-2” is best). Then he brings in the chickens. His broilers are housed 100/pen, five pens/acre. The pens are easily and quickly moved a few feet each day. The birds eat grass, insects, and a few pounds of supplemental grain. They also scratch around in the cow manure, working it into the soil. Once the chickens are removed, the grass is cut for hay. Birds are only placed on the same soil every other year which helps to eliminate diseases. Salatin doesn’t need, or use, chemicals of any type. Using sustainable methods, the farm produces broilers, eggs, turkeys, beef, rabbits and pigs and brings in $200,000 each year.

Auburn University’s ag economist C. Robert Taylor says that returns above operating costs are not indicative of profitability because they do not include charges for family labor or economic depreciation. He says that records for Alabama contract poultry growers for the years 1996-2001, adjusted for inflation, showed average returns of $67,465/year for a farm with four poultry houses. Taking into account depreciation, a minimal labor charge of $6.50/hr with no benefits, and a 9% return on equity, the net return came to a negative $7,006 for all four houses.

He further states that the silent and slow killer for profitable poultry production is economic depreciation. Little equity is earned because the houses and equipment have limited salvage value. They also tend not to last as long as industry depreciation schedules suggest. Due to their specialized design, the buildings have few alternative uses. Contamination of facilities by pathogens, hormones, medications, heavy metals, herbicides, insecticides, chemical cleaning agents and highly concentrated manure impose further limitations.

Let’s talk about the manure. Industry and university officials rave about how good CAFO manure is for its fertilizer value. However, nutrients are in such low concentrations that it often costs more to store and apply them than they are worth as fertilizer (Zering, 1999). Yes, CAFO wastes contain nitrogen (N), phosphorus (P), and potassium (K), but they also contain comparatively high levels of arsenic, selenium, copper, zinc and salts. Try to get officials to talk about that and they simply change the subject.

Manure is actually the largest liability CAFOs have. William Weida has found that waste disposal costs increase sharply once the ability of the land to absorb it has been surpassed. Like economies of scale, that point is quickly reached. He feels that one of the most important indicators of dairy profitability is cost of waste handling. A 1996 comparison of eight grazing to eight confinement dairies in Wisconsin found that the grazing dairies saved an average of $24/cow just on waste disposal.

Agribusinesses are getting all kinds of government grants (taxpayer money) to find environmentally friendly ways of getting rid of their fertilizer. Many are promoting it as “organic”, even though it certainly doesn’t qualify as organic due to all of the heavy metals and chemical residues. Methods that filter liquid wastes (from dairy or hog lagoons) through man-made wetlands and then recycle the liquid portion for flush water add approximately $146/cow/yr to operating costs. Weida feels that is enough to wipe out any possible economic advantages a CAFO might have. Should the CAFO decide to economize on waste disposal, it then has the capability of polluting a large neighboring area—an area likely to have originally been assessed at a much higher value than that of the CAFO.

Water pollution, air emissions, contact with chemicals and heavy metals, highly concentrated pathogens—many of which become multi-resistant—none of these bode well for farmers, their families, their hired help, or the surrounding communities. From North Carolina to Utah, and at numerous points in-between, medical studies have repeatedly verified that CAFOs cause a variety of serious health problems. Iowa State University researchers (2002) estimated that nearly 70% of swine confinement workers in the U.S. exhibit symptoms of respiratory illness.

One 3000-sow farrow-to-finish farm in the Texas Panhandle can use 254M gallons of water each year. On a nitrogen-basis, it takes 3200 acres of land for waste disposal; on a phosphorus basis, it takes 10,000. Even with the use of phytase, a feed additive that reduces the P content in manure, it still takes 7400 acres. If that land is being used to raise crops, then an even greater amount of water use can be attributed to that farm. (Weida, 8-24-2001) Agriculture accounts for two thirds of all worldwide water use. (Harrington, et al., 2002)

In its proposed CAFO rules, the EPA stated that “all lagoons leak.” South Carolina found that it costs taxpayers $42,000/surface acre to clean up abandoned lagoons. Because of all the feed additives and chemicals, and because livestock waste is 200 times more concentrated than human waste, those lagoons technically qualify as toxic waste dumps. Therefore, not only do CAFOs use exorbitant amounts of water, but they are likely to contaminate what little is left in arid regions.

It is common to hear contract growers talk about propane, electricity, and water bills that run into thousands of dollars each month. The average U.S. farm uses three times as much fossil energy as it produces in food energy (for feedlot beef the ratio is 35:1) This does not include energy used to process and transport food. The food production system accounts for 17% of all fossil fuel useage in the U.S. (Harrington, et al., 2002) (These figures are undoubtedly strongly influenced by this country’s large number of factory farms.)

Agribusinesses point out that small farms need niche markets to survive. And their point is…? This is a country of countless niche markets. Neighbors and families are niche markets. Consumers who want only locally-grown or organic products are niche markets. Each minority group is a different niche market. For example, because of the increasing Hispanic population, some farmers have suddenly found it quite profitable to raise goats. The name of the game is flexibility—something that is not available to CAFO operators. A niche market only has to be large enough to meet the needs of one producer to be viable. A niche market too large to be served by one producer might be handled through a cooperative. The trick is for each producer or each coop to be unique. Focus on what is original or different about your product, establish a relationship with customers, and collaborate with like-minded producers.

“Small farms can compete, but not by trying to farm the same way large farms do. Nor can they compete or survive if the majority of the research that is done continues to look at ways to put them out of business.” (Michael Duffy) Research on sustainable farming has been underfunded in recent years. In 1995, of 30,000 ag research projects on the USDA’s list of current research, only 34 were oriented toward organic farming.

“We have become a society where the pursuit of short-run economic self-interest is treated as a God-given right.” (John Ikerd) Smaller farms are forced out of business not because they can’t compete financially, but because they are losing access to markets. As large multi-nationals put auction barns out of business, independent farmers have nowhere to sell their animals unless they have established a niche market; and that takes time and planning.

In a recent Feedstuffs Magazine article (4-11-2005), University of Missouri Ag Economists John Ikerd and Ron Plain discussed the controversy about small, independent farms versus CAFOs. Plain was willing to concede that the top 10% of hoop houses or pasture-based farms could probably be as efficient as the average or bottom one third of the larger operators. (See all the previously-mentioned research in this article.) “To say, ‘I’ve got to be in the elite of one group to compete with the average of the other group’ isn’t a very appealing business strategy…. The key problem I have with what {Ikerd] espouses is that you’re asking too much of the manager. The manager of a diversified farming operation has to know an enormous number of things about all sorts of different stuff, and it’s just tough to gain the knowledge and expertise to implement it on a timely basis.” The only way I can see to interpret that statement is to say that if you are intellectually challenged and/or incompetent when it comes to farming, then CAFOs are the way to go. How appealing is that as a business strategy?