I suppose they could tweak the farming income a little so that progressive farming upgrades give successively more. Currently each upgrade gives exactly the same amount but the cost to make higher upgrades increases and so does the time to build them, which makes it not economically favorable to get them if there are better choices.
I agree that the increased growth and squalor problem from farm upgrades is also an important factor which deters players from getting them. That happiness boost you suggested sounds good. I can't really see how such a change could be exploited and it would balance up the squalor problem just like the health buildings.

I think Red Harvest mentioned something about being able to upgrade to the next town level only after if you had gotten all available farming upgrades, as a house rule. Perhaps a tad extreme IMHO, but I like the idea of having adequate agriculture and food for a town before it can expand. I might stagger it a little and say no town level upgrade till you had gotten the farming upgrade the level before. Until CA decides to tweak anything, I suppose the best we can do for now is to apply a few house rules on stuff that we think logical.