The Roots of Agricultural Productivity Growth

By Debra Skodack

Each year, the agricultural sector continues to evolve, grow and adapt.

Meeting the food needs for a global population has meant the industry must be capable of overcoming everything from weather and climate-related risks to fluctuations in commodity prices. This is in addition to underlying changes in the nature of demand for agricultural products.

As agriculture responds to emerging needs and challenges, improvements in productivity have been a primary outcome. That’s the focus of the Federal Reserve Bank of Kansas City’s annual Agricultural Symposium titled “The Roots of Agricultural Productivity Growth.” The virtual event is being presented in a webcast format May 24-25.

“Productivity is key to both maintaining farm income and maintaining the affordability of the world’s foodstuffs,” said Joe Gruber, Kansas City Fed executive vice president and director of economic research. “By increasing production with the same amount of land and labor, farmers are able to increase their incomes even if prices do not increase.”

The symposium is part of efforts by the Bank and the Federal Reserve System to provide research, studies, surveys and data to those connected to agriculture in various ways. For those in attendance, the event also will provide perspective.

“The symposium is a program where we take a step back from the week to week, month to month, or even year to year, and try to consider bigger-picture issues that we think will be most relevant over the long term,” said Nathan Kauffman, vice president, Omaha Branch executive and host of the symposium.

Productivity is key to both maintaining farm income and maintaining the affordability of the world’s foodstuffs.

Productivity certainly is one of those bigger, long-term issues. And while challenges have evolved over time, farm production has continued to rise as producers utilize technology and modernized practices, ensuring that the needs of a growing global population are met.

Gruber said agriculture’s significance as one of the core pillars of the global economy is undisputed, and that developments in the sector have wide-ranging spillovers across national borders and industry sectors.

“While the economy of the Tenth (Federal Reserve) District is diversified across many industries, agriculture maintains an important role,” he said. “The importance for the Tenth District comes not only from the direct production of farms, but also related industries that provide inputs to farmers and producers as well as those that process the District’s agricultural output.”

The seven state Tenth District, which spans all of Colorado, Kansas, Nebraska, Oklahoma and Wyoming, along with western Missouri and northern New Mexico, covers some of the nation’s most productive farmland. And beyond putting food on the table, Gruber said the Tenth District’s agricultural sector plays a vital role in the nation’s trade balance. A significant portion of the District’s agricultural production is exported and forms a crucial part of the United States’ overall exports to the world.

“This is particularly true because the sector is able to remain competitive as a low-cost and efficient producer. However, the importance of exports also means that global developments have an outsized effect on the District’s agricultural sector relative to other parts of the economy,” he said.

Context on ag productivity

Gruber said each of the symposium’s four papers provides important research-based context for understanding agricultural productivity, how productivity will evolve in the future and connections to other segments of our economy.

“On the first day of our program, for example, the papers shed light on how productivity has advanced in the past, and how factors such as technology will shape productivity in the future,” he said. “On the second day, the papers seek to identify how this productivity may, or may not, relate to other segments of the economy, in addition to environmental factors that will be important for agricultural production going forward.”

The four research papers include:

• “The Drivers of U.S. Agricultural Productivity Growth,” by Philip Pardey and Julian M. Alston, concluded that investments in research and development are key determinants to future increases in productivity and innovation.
• “Interacting with the Next Wave of Farm Operators: Digital Agriculture and Potential Financial Implications,” by Terry W. Griffin, LaVona S. Traywick and Elizabeth A. Yeager, pointed out the powerful role technology plays in productivity, a role that is likely going to increase productivity as younger, technology-minded operators grow.
• “An Empirical Investigation of Productivity Spillovers along the Agriculture Supply Chain,” by Sergio H. Lence and Alejandro Plastina, examined how changes in productivity on the farm could affect productivity in other segments of the economy.
• “Environmental Drivers of Agricultural Productivity Growth and Socioeconomic Spillovers,” by Wolfram Schlenker, examined the environmental factors that are important contributors to the future of agricultural productivity.

Shocks, disruptions and bottlenecks

Kauffman said discussion of how developments in other segments of the economy are affecting agricultural production and supply chains is especially relevant given events of the past year related to the COVID-19 pandemic.

“Throughout the pandemic we have heard a lot of anecdotes about economic disruptions, potential shortages of various products, and bottlenecks in supply chains,” Kauffman said. “Things that happen in the supply chain can happen on farms and, vice versa, things that happen on the farm can affect decisions made elsewhere in the supply chains.”

Kauffman said the agricultural sector will always be faced with the unanticipated.

“At the same time, these types of shocks may also give rise to opportunities for the sector to respond and position differently for the years ahead.”

Kauffman said there is a uniqueness to agriculture that sets it apart from other industries.

“It is one of those rare types of industries that starts from something of very basic value – sunlight, water and land, for example, and ultimately gets value added to it all along the supply chain from that point on,” Kauffman said. “There are not a lot of other industries that start from basic things like that and produce something of substantial value from it.”

"These types of shocks may also give rise to opportunities for the sector to respond and position differently for the years ahead.”

Agriculture has perhaps the longest history as an economic sector in the world economy.

“There is an abundance of data on the agricultural sector, much of which is publicly available given a public need for transparency in a sector with so many independent operators,” Gruber said. “The sector also has a rich history of research, particularly in regard to the pricing of commodities and the interaction with financial markets.”

The research and the discussion on agricultural productivity is just a start.

“The questions are far from being answered,” Gruber said. “This is an exciting and dynamic area for future research.”