xt71zc7rpg94 https://exploreuk.uky.edu/dips/xt71zc7rpg94/data/mets.xml   Kentucky Agricultural Experiment Station. 1957 journals 055 English Lexington : Agricultural Experiment Station, University of Kentucky Contact the Special Collections Research Center for information regarding rights and use of this collection. Kentucky Agricultural Experiment Station Progress report (Kentucky Agricultural Experiment Station) n.55 text Progress report (Kentucky Agricultural Experiment Station) n.55 1957 2014 true xt71zc7rpg94 section xt71zc7rpg94 Progress Report 55 April 1957
• •
S1ze-of-Farm Problem 111
' •
Eeonomm Area 5
Department of Agricultural Economics

By Harald Jensen and Luther Keller
Farm families 0n small farms in Economic Area V are not getting much
income for the time spent in farming. This fact, together with other evi-
dence which follows, suggests that farm size has a lot to do with size of in-
come from farming. Farm size is related to income in these ways: (1) The ·
amount of income depends on the size of farm. For example, within a group
of farms where neither cost advantages nor disadvantages exist for farms of (
various size, large farms will have, under usual price relationships, higher
incomes than small farms, (2) the amount of income in relation to the amount
of resources used depends on the cost advantages or disadvantages for farms
of various size. For instance, if costs per unit of farm product decrease
with increases in acre size (acres is only one of a number of measures of
farm size), a 2.00-acre farm will have a net income more than twice as large .
as that of a lOO—acre farm.
Increase in size of farm alone, however, does not guarantee larger
incomes. Some farms are operated so inefficiently that a larger volume of
business might mean lower incomes or even losses. Using more land and
capital to operate a larger unit can increase incomes for many small farms
only if management level is increased along with land and capital.
This study was made (1) to deterznine the relationship between farm
size and income and (2) to outline alternative adjustments which are basic
for increasing incomes of families on small farms, In order to study the
relationship between farm size and income, we need to compare income,
costs, investments and resource combinations for farms of varying size.
Thc classification of farms in the 1950 United States Census of Agriculture _
makes such comparisons possible. The Census first divided farms into
two large groups: (1) commercial and (2) other, which includes part—time,
residential and unusual, such as institutional farms. In general, all farms
that sold $1, 200 or more of farnu products were classified as commercial `
farms. In addition, farms with farm product sales, of $250 — $1, 199 were ,
also classified as commercial farms, provided the farm operator worked
off the farrn fewer than 100 days and that the income of the farm operator
and his family from nonfarrn sources was less than the total value of farm
products sold. The Census then divided all commercial farms into six
classes on the basis of the total value of products sold. These classes are
as follows: `
1/ This study is based primarily on data frorn the United States Census
of Agriculture, 1950. Econoniic Area V includes Lincoln, Rockcastle,
Pulaski, Casey, Adair, Russell, Metcalfe, Cumberland, Clinton, Wayne,
Ivlonroe and Allen counties,

Class Value of farm products sold
l I $25, 000 or more
II $10, 000 to $24, 999
III $ 5,000 to$ 9,999
IV $ 2, 500 to $ 4, 999
V $ 1,200 to$ 2,499
` VI $ 250 to $ 1, 199
Hence, in studying the size-of—farm problem in Economic Area V we can
compare income, costs, investments, and resource combinations for six dif-
ferent size of farm groups, for volume of sales is a measure of size. There
‘ are other measures. For example, acres are often used as a measure of size.
Total capital investment or the total dollar value of all inputs or resources
used during the year is also sometimes used. Acres, since they represent
only one of the resources (land) used in farming, do not always accurately
measure farm size. In most instances, however, acres, volurne or value of ,
output, total capital (land included) invested and dollar value of all inputs or
‘ resources used during the year go hand in hand (Table l).
Table 1. - The Number of Commercial Farms in Size Classes,
Economic Area. V, Kentucky, 1949 (Source: U.S. Census and Estimates)
` Acres Total Total inputs N0. Percent
Class of per Gross Sales capital used during of Farms in
Farm farm invested the year Farms each class
I 402 $25,000 G over 37,770 31, 112 22 0.. 1
H . 372 10, 000-24,999 49,857 14,523 182 .9
HI 236 5,000- 9,999 26,365 6,983 719 3.7
IV 142 2,500- 4,999 14,568 4,103 2,405 12.4
V 92 1,200- 2,499 7,619 2,533 6,879 35.5
VI 65 250- 1,199 4,240 1,757 9,200 47.4
V According to the 1950 Census, most of the commercial farms in
Economic Area V fell into Clvss VI, with sales of only $250 to $1200 (last
two columns, Table l). But a large proportion also fell into Class V, with
sales of only $1200 to $2500. Class IV farms with sales of $2, 500 to $5, 000
ranked third in number. Thus, about 95 percent of all commercial farms
9 in Economic Area V had sales of less than $5, 000, which leaves only 5
` percent with sales of $5, 000 and above.
With this general background, let us take a closer look at incomes
h and costs on these farms of varying size. (Table 2)

to management, Class VI farms had a negative return of -$658; they were
short this much after paying cash farm expenses plus reasonable charges
for labor and capital investmenti Even Class IV farms (farms with gross ·
sales of $2, 500 - $5, OOO or an average product valued at $3, 887) had a nega-
tive return of -$Zl6. These positive and negative returns are important in
our analysis; To really see their importance requires a graphic picture
(Fig. 1). Here the ratio of the value of the total product to the value of
the total input is plotted against the value of the total inputs for the six
classes of farms. A ratio of 1.0 on the vertical axis represents the break-
even point or where the value of the total product is exactly equal to the value
of the total input. Thus, the horizontal line drawn at 1. O has special signifi-
cance. All farms below this line show a loss while the farms above the line
show a profit. i
In Table 2, Class VI,. V and IV farms (farms with gross sales of less
than $5, OOO) show negative returnst These are also the ones below the hori-
zontal line at 1.0 (Fig. 1), and they represent 95 percent of all commercial
farms in Economic Area V. The fact that these farms show losses does not _
mean they are going into debt or that the families are starving., It does mean
that they failed to make cash farm expenses together with the conservative
wage ($947 per mature worker) and investment costs which were charged
against their labor and capital`.?] if the farm families on these small farms
(Classes VI, V and IV) were entirely motivated by profit? they would either
increase the size of their farming operations or transfer their labor and
capital into employment other than farming..§/ Economically, the losses
on these farms mean that the labor and capital employed here did not earn
as much as it could either in industry or on larger farms. The positive re-
turns or the "plus 1. O" ratios on the larger farms (farms with gross sales of
$5 OOO or above) mean that these farms not only earned enough to pay for all
inputs but had something left over. ·
Economies are associated with increased size
By connecting the values for the various classes of farms (Fig. 1) with · .
a broken line, one can more readily visualize the economies of size avail-
able to farms in Economic AreaV. As shown, the economies of size (aver- I
age efficienc_y)increase sharply from Class VI (with gross sales of $250 -
$1, ZOO) to Class III farms (with gross sales of $5; OOO - $9; 999)., Classes I
and II farms show about the same efficiency as Class III farms. The eco-
Bl The $947 was the annual average wage for hired farm labor in Kentucky- i
4/ Of course, money income and the goods and services it will buy is only
one of the goals which make up the complex of family satisfactions

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nomies • size illustrated here have important implications in long—run
planning particularly as such planning relates to the size of farm which can _
be expected to be most profitable.
Labor on small farms returns less than a conservative wage
In the short run, of vital importance in farming is whether out—of—
pocket costs can be met. When a farmer cannot pay out-of—pocket cash costs
he must sooner or later quit farming. To see whether returns were large
enough to pay all out-of-pocket costs and a conservative wage to operators
and family labor, total costs were broken down to show returns after paying
all out—0f-pocket costs and to show residual returns to operator and family
mor (Table 3.) All size groups of farms were able to pay out-of-pocket ‘·
costs and have something left over. What wa s left over was insufficient
to pay the overhead cost and the conservative wage charged to operator and
family labor on Class VI, V and IV farms (farms with gross sales of less
than $5, OOO).
Table 3. - Income and Costs for Commercial Farms in Economic Area V, Kentucky, 1949.
(Source: U.S. Census and Estimates)
Class of farm VI V IV III II I Average _
1. Total product $1099 $2163 $3887 $7101 $14,846 $32,482 $2209
2. Total inputs 1757 2533 4103 6983 14,523 31,112 2671
a. Out—of-pocket
costs>•< 213 557 1326 3435 8811 26, 901 703
b. Overhead costs
other than
operator and
family labor 334 643 1224 2156 3966 3289 658
c. Operator and
family labor 1211 1334 1554 1392 1748 921 1309
3. Returns after paying
out-of-pocket costs 886 1606 2561 3666 6035 5581 1506 `
4. Residual returns A
to operator and
family labor 552 963 1337 1510 2069 2292 848
* Incluies cash farm expenses plus hired labor costs.
Before we examine the reasons why incomes are much lower in rela- i
tion to inputs on small farms than on large farms, let us see what the dif- ·
ferent size groups of farms produce and what resource combinations are
used to get this production.

Field crops most important source of income on small farms
_ The two most important sources of income on commercial farms in
Economic Area V are field crops and livestock products other than dairy
and poultry. However, on Class VI farms field crops and home-consumed
products were the two most important income sources while on Class I farms
poultry sales were more important than field crops sales (Fig. Z).
Income from field crops for size groups of farms varied 5 to 45 percent
on the total and tended to decrease with increases in size of farm. The rela-
tive importance of income from dairy products varied from approximately 4
y to 8 percent among the classes of farms. The percentage contribution of home-
V. consumed products to gross income declined steadily with increase in size of
farm. Poultry sales were a relatively unimportant income source except on
Class I farms .
Income from livestock other than dairy and poultry increases with increase
_ in farm size I
The relative importance of livestock and livestock products (other than
dairy and poultry) as a source of income increased steadily as size of farm
increased. On Class VI farms livestock and livestock products accounted
for only 15 percent of the gross income, whereas on Class I farms they made
up over 67 percent of the income.
To get the complete picture, we need to know what resources are re-
quired to get the production for different classes or sizes of farms (Fig. 3).
The percentage contribution of each input or resource item was based on
I the estimated annual use value of these inputs or resources. Thus, the annu-
al contribution of land was estimated at   percent of the total land investment.
The annual contribution of labor was the number of mature workers times thé
going wage in agriculture. Capital includes cash farm expenses, interest on
buildings, machinery and livestock and depreciation on buildings and machinery.
4_ Percentagewise, land was about equally important on all farms, irre-
A spective of size. For all size groups it made up a relatively small portion
(7 percent) of the total annual inputs.
_ Labor inputs rank highest on small farms while capital inputs rank highest
L on large farms
` Labor inputs were relatively more important on the smaller farms
than on the larger farms. In fact, on Class VI farms labor inputs were more
important than all other inputs combined. In contrast, on the larger farms
(Class IV, III, II and I) capital is by far the most important input item.

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The decreasing importance of labor and the increasing importance of
capital as farms increase in size is clearly illustrated in Fig. 3. This _
means that the amount of capital used per worker increased as farm size
increased. This is one reason why incomes are much higher in relation to
inputs on large farms than on srnall farms. For any one input or resource
to be productive) it must have enough of other inputs or resources to go with
it. Land by itself is not productive. Neither is labor by itself, nor capital
by itself. Let us see how productive labor, land and capital are on farms of I
different size.
We said earlier that operators on many small farms are not getting
much return for the time they spend farming. In other words, on many small
farms labor is not very productive. We have already talked about residual
returns to labor. We defined residual returns to labor as what is left after
subtracting all inputs (including a fair return to land and capital), except
labor inputs, from gross income. This gives a rough estimate of what labor
is worth. Heretofore, we have either figured the residual return to all labor ·’
or to all operator and family laboijpr diffegt class _ farms. Sin`ETz—_'_
large farms employ more workers thafi-_s—n——;all farms, we need to compute the
residual returns to labor per worker to find out how productive labor is on _
farms of varying size. We first coniputed the average number of workers
per farm and the residual returns to labor per worker for the six classes of
farms (lines 1 and Z, Table 4).
Returns to labor per worker is low on small farms
Notice that the residual to labor per worker increases steadily from
$441 on Class VI farms to $1356 on Class I farms. Part of this difference ·
in returns among the size groups can be explained by the amount of other re- I
sources used along with labor. For instance, notice how acres and total in-
vestment per worker increased from Class VI up through Class II farms
and land and capital inputs per worker increased without exception from I
Class VI through Class I farms. Actually, land and capital inputs per worker »·
gives a more accurate picture of the resources used along with labor. These
inputs included cash farm expenses which ran high on the larger farms, par-
ticularly in the form of feed and feeder livestock purchases. ’
Total product per worker increases as capital and land per worker increases
In order to determine how much land and capital add to total production?
total product per worker was compared with land and capital per worker ·
(Fig. 4). This comparison gives a rough idea of what one farm worker pro-
duced with various amounts of land and capital. Total product per worker
increased from $843 on the smallest farms to $9667 on the largest (Class I).
At the same time time, land and capital inputs per worker increased from
$40:5 to $8311. Notice that total product per worker increased throughout as
land and capital inputs per worker increased.

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cash farm expenses, interest on land, buildings, livestock and machinery,
depreciation on buildings and machinery plus a charge for hired, operator
and family labor. On Class ll, it cost about $0. 97 to produce $1 of pro-
duct while on Class III farms the cost was $0. 98. On Cla s s IV, V and
VI farms it cost more than $1 to produce $1 of product; costs on those
farms were $1. 06, $1.17 and $1.60, respectively, for $1 of product.
For these small farms, these figures indicate losses.
Small farms had the lowest cash costs per $1 of product
Of c 0 ur s e, we know that these small farms did not pay operator and
family laoor and their investment inputs at the going rate of return. For
farms that do not have to pay for their own labor and their investment inputs,
cash farm expenses per $1 of product may be more meaningful, at least in
the short run. It is when cash farm expenses cannot be met that farm families
sooner or later rnust give up farming. Data shown in Fig. 5 help to explain
why many small farmers are able to stay in business, even when total product
may not be great enough to cover all costs. Since only cash costs have to be
gaid in the short-run, all classes of farms (including the small farms) have
some income left over for themselves. However, when considering all inputs,
the small farms definitely come out short. This fact becomes very apparent
when we compare the returns in farming with those in industry.

To compare the returns of labor and investment in capital and land in
farming with the opportunity return for these resources in industry, we
first need to arrive at suitable wage and interest rates as a basis for figuring
the opportunity returns. An annual wage of $2, 900 was figured as a reason-
able wage opportunity for farm labor in nonagricultural employment, and 5
percent was chosen as a fair interest rate on capital.?] The top line (Fig. 6)
shows the opportunity returns to Kentucky farm labor and capital as figured
on the basis of these rates. The opportunity returns for one man without any
capital (only his labor) in industry is $2, 900. The opportunity return in indus-
try for one man with $6, 000 of capital invested and earning 5 percent is $2, 900
plus $300 or $3,200, etc. Thus, the top line represents the real cost (oppor-
tunity returns) of using labor and capital in farming.
Dollar costs of using labor and capital on small farms appear high
These opportunity returns are then compared with the value actually
added per worker by these resources when used on the various classes of
farms (the broken line, Fig. 6). Note that the value added per worker when
employing his resources in farming falls below the "opportunity-returns-
in-industry line" for all classes of farms. Value added as computed does
not include any allowance for rental value of farm dwelling. Even if this had
been included the value-added-per—worker line would still be below the op-
portunity-returns—in—industry line even for Class II farms. (Class II farms
had the highest average value added per worker of the six classes). The
crucial point to observe is how far the value added per worker on the small
farms is below the opportunity line (i.e. , for Classes IV, V and VI). In
terms of income only, families on these small farms would be much better
off working for wages in industry and letting their capital out at 5 percent.
Such a change represents one of the alternative solutions to the size of farm
problems in Economic Area V. L e t u S ta k e a further look at alternative
· actions which small farm families might take to solve their low income prob-
r- lem.
5/ $2, 900 was computed as a simple average of the mean weekly wage
Tn nianufacturing in Michigan, Indiana, Illinois and Tennessee times 52.
· (From U.S. Dept. of Labor, Bureau of Labor Statistics, Monthly Labor
I ( Rev., Vol. 70, 1950, Table C-5). Earnings were given only for selected
states. Ohio would have been preferred over Indiana and Illinois, and Ken-
tucky over Tennessee, but the opportunity for exercising these preferences
was not available.

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First of all a study such as this can provide no blanket answers or
solutions which apply to each and every farm. Each individual farm family
situation differs and the way in which each farm farnily solves its problems
depends on the relative value placed on income, security, independence,
companionship, community prestige and other goals. Moreover, the con-
clusions which can be drawn from this study are based on average returns
and average costs for various classes or size groups of farms. Each group
is likely to include numerous deviations from the average, Nevertheless, a
study such as this points up some very important farm problems together
with some possible answers.,
For example, from this study we conclude that operators of small
farms have either relatively low or negative returns to their labor., Now,
if these operators wish to increase their returns, here are some possible
alternatives. lf they want to stay in farming, they must somehow or other
increase their land and capital per worker; in some instances, management
will also have to be increased, Possible alternatives for getting control of
more land and capital are renting more land, borrowing money, buying a
larger farm, or doing custom work for others, lf the operators are willing
to work partly in farming and partly in industry, part mtime farming may
be an alternative. Part ·-time farming can serve to increase resources per
worker in farming and thereby increase returns to labor on small farrns.
If small-farm fa.rnili.es are willing to move completely out of farming, full
off—farm employment is a way of increasing returns to their labor,
lt is quite clear then that many operators of small farms are not get-
ting very much return for the time they devote to farming, To increase
their incomes, obtaining off—farm ernployment and/or increasing their land
and capital per worker appear as the most effective alternatives, Lf these
alternatives are unavailable or· appear unsat:is£actorj4, then farm families
on small farms will have to contintue to use mostly labor in their farrning
. activity and the returns from their labor will continue low,
A The extent to which these alternatives are unavailable and/or unac cept -
able suggests other aspects of the low income problem as it relates to size
of farm. This study has emphasized rnainly one aspect, namely, the relation—
ship between income on the one hand and capital, labor and other inputs and
product combinations on the other, But an integrated approach to the problem
requires study and understanding of other aspents as well,

Moving from farm into off-farm employment requires mobility. Farmi-
lies on small farms may be immobile for a nuniber of reasons. Some may
value "life on the farm" so highly that the added income in off-farm employ-
ment is considered worth less than the happiness experienced from living
and working on the farm. Some stay on the farm perhaps because they lack
or believe they lack the necessary skills and training for off—farm employ-
ment. Some remain on the farm perhaps because they lack knowledge of
off-farm employment opportunities or because they fear to move. Others
remain on the farm, perhaps, not because they would not prefer to move i
but because they do not have enough money to get established elsewhere.
Until causes for immobility are understood and until steps are taken to over-
come immobility wherever it is considered as an obstacle to greater human
satisfactions, off—farm employment can hardly be considered as a realistic
alternative for solving the income problem on small farms.
The analysis of this study suggests that if families on small farms
want to stay in farming that they must somehow or bother increase their
land and capital per worker if they desire to increase their incomes. Some
of the se families may very well be seeking ways of attaining more land and
capital. Some may be held back because they can find no land to rent. Some
may be held back because they can‘t borrow money with which to buy land,
machinery, livestock, fertilizer or other inputs. Still others may hold them-
selves back because they consider expansion of operations with. borrowed
money too risky. Until the reasons why families on small farms fail to in-
crease land and capital per worker are clearly understood and until steps S
are taken to facilitate such increases, increasing land and capital per worker
can hardly be considered as a real alternative for solving the income problem
on small farms,
Increasing land and capital per worker to increase incomes on small
farms would be a poor practice in instances whe re managerial skills are
inadequate for profitable use of additional land and capital. A large farm ‘
business nowadays requires considerable skill and know—how in manage-   '
ment and decision—making for financial success. Until more is known about
the managerial skills and capacities existing on small farms and until steps I
are taken to improve these skills where they are lacking, increasing size of ,
farm can hardly be considered as a realistic alterna