John Carney on Crop Rot Fever

John Carney at CNBC has been doing yeoman's work on the annual crops-rotting-in-the-fields scam:

If farms were truly struggling to find enough workers, their labor costs would be skyrocketing. But that isn’t what’s happening. 

The costs of workers hired directly by the farms didn’t grow at all between 2010 and 2011, according to the latest data from the Department of Agriculture. It contracted 3.8 percent, from $23.5 billion to $22.6 billion. Next year it is forecast by the Department of Agriculture to shrink by another 2.1 percent. In light of the rising revenues and profits of farms, this is not a labor market experiencing a worker shortage. 

What’s more, the total cost of hired labor on farms nationwide is still below pre-crisis levels, while farm profits are well above pre-crisis levels. This implies that far from farms seeing a labor shortage, there’s something of a farm labor glut going on. 

I would imagine that the Housing Bubble in California lured many farm laborers into construction work who have since gone back to the fields.

In California last year, despite all the talk of a farm labor shortage, hired labor costs dropped from $6.2 billion to $5.4 billion—a 12 percent fall. This isn’t what happens in a labor shortage. 

There has been some wage inflation in a far smaller segment of the farm labor market: the contract labor market. This is the market for workers employed by third-party operators who supply labor to farmers, mostly for seasonal work such as harvesting. 

Farms nationwide saw contract labor costs rise from 3.9 billion in 2010 to 4.5 billion in 2011, a rise of 15 percent. That might put some farmers off a bit, having to pay the guy supplying workers 15 percent more. But revenues were rising even faster, which is why profits grew so explosively. 

In California, contract labor costs grew 19 percent. While that seems astounding, it growth pales in comparison with the growth of profits at California farms. There may be fewer laborers than farmers would like, but this isn’t a crisis by any means. The farm owners are doing quite well for themselves and shouldn't be shocked that the migrant laborers are also demanding to share in the bounty.

The sheer effrontery of laborers hoping to share in the bounty!

Anyway, a general point to keep in mind is that there are always going to be some crops rotting in the fields. This is, apparently, a difficult point for most non-farmers to grasp. A lot of journalists tend to think about raising food the way parents try to get their small children to think about eating food: clean your plate because there are starving children in wherever!

Now, most journalists understand perfectly well that a sizable percentage of all printed newspapers, magazines, and books "rot on the shelves" and wind up being pulped or thrown away unread. In fact, writers approve of larger, more wasteful printings of their own works. They'd rather have a printing of 50,000 copies of their new book and 20,000 rot on the shelves unsold than a printing of 5,000 and only 200 go unsold. 

But, when it comes to growing food, rationality goes out the window for everybody ... except farmers.

I don't know anything about the farming business, but let me just try to make up a stylized example. Say you are a California farmer. You raise two kinds of fruit -- one that grows abundantly if the weather is warmer than average and one that grows abundantly if the weather is cooler than average. This strategy diversifies away some of your weather-related risk. 

It turns out to be a hot year and you get a huge crop of the warm weather fruit. Sounds great, right? But, here's the catch, your competitors (who are your neighbors) have the same abundant crops of the same fruit. So, the market price of the fruit drops (supply is up and demand is steady, so price goes down). Conversely, the harvest of the cool weather fruit is small, so its price goes up.

(This is an apparently difficult point for journalists churning out crops-rotting-in-the-fields articles to grasp: that the phrase "a good year for whatever" usually has two opposite meanings: it can be a good year for a particular crop climatically or it can be a good year for a particular crop economically, but quantity grown and market price are usually negatively correlated. So, it's not some unique and tragic irony that the government Must Do Something About when a good growing season leads to too much product to be harvested economically: it's just normal supply and demand at work.)

Now, fruits growing even in the same farmer's field or orchard ripen at different times. In an average weather year, you normally schedule, say, three sweeps of pickers through your property for each fruit. The first harvests the first 10% of the crop that ripens early (for which prices are highest because supply is lowest), the second sweep gets 50%, and the third sweep gets 30% that ripens late when prices are not as high because so much has already been produced. It's normally not worth it to you to pay for a fourth sweep, so you normally let 10% of your crop rot in the fields. 

But, in this hot year with a giant crop of the first fruit and accompanying low prices, the first sweep gets 20 percent of that crop, the second sweep 60%. You are then left wondering: is it worth paying for the usual third sweep of the hot weather fruit, for which prices are very low this year, or should you instead use that labor expense to do a fourth sweep of the cool-weather fruit for which prices are very high this year? It may well make sense in a hot year to let 20% of the currently low-priced hot weather fruit rot in order to harvest 98% of your currently high-priced cool weather fruit.

Or, with a particular crop, you might just do one sweep through the field, and then the timing of when to pull the trigger to start the harvest is crucial. If you start a little ahead of your competitors, you'll likely get a higher price per pound, but leave a higher percentage of the crop to rot in the fields. Or if you go late, you'll get a higher percentage yield but a lower price per pound. An interesting decision, no?

Farming is kind of a fun gambling-like business if you are a big grower who spends a lot of time playing around with models in Excel spreadsheets. It's like fantasy football, except you get real money when you make smart decisions. (If you are a stoop laborer, farming is, eh, less fun.)

Now, from your point of view as a farmer, it's perfectly economically rational to let crops rot in the fields. Yet, it's easy to imagine ways the government could help you make even more money by having a cheaper workforce that could glean a higher percentage yield. For example, the government could fail to enforce laws against illegal immigration or it could subsidize the incomes of your illegal immigrant workers by mandating they get free health care at emergency rooms and free education for the illegal aliens' kids. (Oh, wait, the government already does that.)

Or, let's think big, the government could repeal the 13th Amendment. The sky's the limit! We could have permanent agricultural internships. They would be Good for the Economy. And for Diversity. Never forget Diversity!