Ag Productivity Drives Output Growth

Increased use of inputs (such as capital, land, labor, and materials) has typically been the dominant source of economic growth for the U.S. economy as a whole and for most of its producing sectors. Agriculture is one of the few exceptions. Agricultural output in 2002 was 2.6 times as high as it was in 1948, but input use actually declined over the past half century. Increased productivity accounts for the difference. In recent years, however, productivity growth appears to have slowed, raising questions about future trends.

The singularly important role of productivity growth in agriculture is made all the more remarkable by the dramatic contraction in labor input in the sector since the end of World War II. Capital input increased initially but declined after 1981 as interest rates rose (raising the cost of capital). Land used in agriculture also declined over the period. Materials input, by contrast, increased over 1948-2002. But this positive contribution was not sufficient to outweigh the declines in land, labor, and capital inputs. The net contribution of all four inputs to growth in agricultural output was slightly negative, leaving output growth over the 1948-2002 period entirely attributable to productivity growth.

Increased use of agricultural inputs did contribute to output growth in some periods. Increases in materials fueled rapid output growth in the 1990s, and increases in both materials and capital boosted output growth in the 1970s. Growth in capital and materials inputs reduced the share of output growth derived from increased productivity during these periods. In spite of these anomalies, productivity growth was truly extraordinary over 1948-2002, averaging 1.8 percent per year. (By contrast, growth in private nonfarm business productivity averaged 1.2 percent per year over the same period.)

While agricultural productivity has bounced up and down from year to year, typically driven by weather, it has generally trended upward over time. But productivity growth appears to have slowed since the mid-1990s. Does this reflect a change in trend? Productivity growth can arise from improvements in efficiency and technology as well as changes in the scale of production. A key source of productivity growth has historically been public investments in research. But those investments have been flat in real terms since the 1980s, raising questions about prospects for continued agricultural productivity growth in the future.