xt737p8tc96t https://exploreuk.uky.edu/dips/xt737p8tc96t/data/mets.xml   Kentucky Agricultural Experiment Station. 1953 journals 009 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.9 text Progress report (Kentucky Agricultural Experiment Station) n.9 1953 2014 true xt737p8tc96t section xt737p8tc96t y THE EARNING POWER  
OF IN PUTS AND I NVESTM ENTS ON
MONTGOMERY COM MUN ITY FARMS
E; TRIGG COUNTY, I95I
i By Glenn L. Johnson
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FARSIGHTED MANAGERS SEE ——
FORAGE AND LIVESTOCK--
T AN EXCELLENT COMBINATION
Progress Report 9
A · Morch, l953
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Kentucky Agriculturol Experiment Stotion
University of Kentucky with
Tennessee volley Authority Cooperating i

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)

 THE EARNING POWER .
I OF INPUTS AND INVESTMENTS ON
MONTGOMERY COMMUNITY FARMS
T TRIGG COUNTY, I95I
. INTRODUCTION
As part of a study designed to estimate the earning power of different
investments and inputs on western Kentucky farms, financial records from 30
eastern Trigg county farms were gathered and analyzed. The records were
for the calendar year 1951 and the farms involved were upland farms located
mainly on Decatur and Hagerstown silt loam soils in or near Montgomery
community in the eastern part of the county. As these farms are more or less
representative of Pennyroyal Plains farms on Decatur and Hagerstown soils,
this report should be of interest as far east as Bowling Green.
Farm business records can be analyzed in several different ways. For
instance, individual enterprises such as the beef. hog and tobacco enterprises
could. be examined separately and in detail. Or, individual inputs such as
combines, milking machines, silos, and ladino clover seed could be studied:
Still another important way to think about farm organizations is to think
about the earning power of major groups of inputs or types of investments.
This is the method followed in this report. Farmers are thinking in such terms
when they speak of investing in livestock, grass land farming or machinery.,
They are also thinking in such terms when they speak of a particular farm being
"over-built" because they feel the farm they are thinking of has too much in-
vested in buildings. Similarly. the "land-poor" farmer is conceived to be one
who has over-extended his land~holdings in relation to other investments such
as those in livestock and machinery. Bankers, P. C.A. officials, F. H. A. offic-
‘ ials and other people extend ing credit to farmers also think about groups of
inputs and investment. One loan is extended for the purpose of investing in
machinery, another for establishing forage stands, another for purchasing live-
  stock —- still another for operating expenses, etc.
Farmi leaders, legislators, etc , also think in such terms. Thus, the Ken-
I tucky "Green Pastures" program came into being in order to point out the
profitability of investments in forage production. Similarly, the Federal Land
Banks were established to deal wit.h investments in land while the Soil Con--
servation Service was set up to deal with the preservation and maintenance of
the soil resources. In Montgomery community, the U. K. Extension'Service ·
and T. V. A. have been cooperating in a Test Demonstration program designed
to acquaint farmers with the profitability of fertilizer and associated seed and
livestock investments.

 Nlethods Used
A modern method of analyzing the records from the 30 farms was used in
estimating the earning power of land, labor, forage -livestock investments, ma;
chinery investments and other expenses. This method, which was partially de.-
veloped by the present Senator Douglas from lllinois,,`.iis referred to as the
Cobb-Douglas method. Cobb was the mathematician who aided Douglas. This
method has four main advantages over older methods of farm—record( analysis.
These advantages are as follows:
(1.) It permits diminishing returns due to size of operation and
lack of balance ina farm business to be reflected in the _
estimates of earning power. .
(Z) The estimates of earning power refer to the gross income pro- .
duced by the last unit of the input used; such estimates are
particularly useful because a farmer considers the earning power _
of what he is going to add or subtract instead of the
average earning power so commonly estimated.
(3) It permits the earning powers of the separate inputs and in- __
ve stments to be estimated simultaneously without assuming the
earning power of the other inputs. In short, data from actual
farm businesses determine the earning power estimates, rather »
than having the estimates partially determined by the assumed
earning power of the other inputs in investment.
(4) Lastly, the methlod yields estimates reflecting the effect of
changes in the earning power of one investment or input on the .
earning powers of other investments and inputs.
The Date Secu1f_d_
On Each Farm Business
The 30-farm survey records from the -Mon‘tgomery·community were analyzed in
the over—all terms previously discussed and by the Cobb—Douglas technique. Six l
figures were secured for each farrn:
(1) Gross income includes the value of all products produced on
the farm including the value of products consumed in the home.
The rental value of the farm home, however, was not included.
(2)   were measured in acres. All land was included l
whether or not developed, as it is difficult to distinguish in
a non—arbitrary way between land capable of being developed for
crop or forage production and land completely unfit for grain or · “
forage production.
(3) Labor inputs were measured in months of labor on the farm per
year which was available for productive use regardless of the
efficiency with which it was used. One object of the study was
to find out how efficiently labor was being used. As in the
case of land, the distinction between idle labor and productively
employed labor is somewhat arbitrary and difficult to make.
-2..

 (4) The forage -livesto‘ck inve:stme‘nt includes the replacement
I waluei of a1IipE·EHYEa1 pasture and hay stands, plus the ,
value of the beginning livestoclcinventorywith proper-
tional credits for livestock sold off the farm and pro- ·
portional charges for livestock purchased during the year.
(5) The machinery investment was the current value of the ma-
chinery, tools and equipment on hand at the beginning of the ~
  year, plus proportional additions and deductions for ma-
chinery purchased and sold during the year. Each farmerl _
. was asked to evaluate his items of machinery separately.  
(6) Other expenses include the amounts actually paid for annual
seeds; gas'; oil; fertilizers whose values are consumed in
one year; fee; supplies; custom work; and negative changes`
in the inventory value of purchased feed, seed, etc. Expend-
itures on maintenance of land, machinery investments, and
the forage -livestock investments were not included; neither
were depreciation charges on these items.i/
KINDS OF FARMS STUDIED
In general, the farms studied were large productive farms comparing favor--
ably with the best in the nation. Gross incomes on these farms ranged from a
high of $49, 677 down to a low of $1, 852. The acreages involved ranged from a
low of 41 to a high of 860 acres. One farmer used only 6 months' labor while `
another used 96 months. sl-7`orage-livestock investments, among the farms
studied, varied from a low of $838 to a high of $42, 115. Machinery investments
. also varied widely, the smallest being $1.00 and the largest being $28, 782..
Similarly, other expenditures ranged from $483 to $8, 561. ‘
The "usual" farm among those studied can be described better with geomet-
. ric rather than common averages. This is so because a geometric average gives
proportionally less weight to the few large farms included in the sample and
thus tends to be more representative of the majority and in the sample. Geomet-
ric average amounts will be referred to as "usual" amounts, and a hypothetical
farm having usual amounts of investments and inputs will be referred to as the
usual farm studied.
· M Due to the difficulty of determining correct depreciation rates as maintenance
expenses are varied, it is thought best to eliminate these charges. This
means that the earning power of machinery, land, and forage -livestock
investments must cover such charges.
-3-

 The "Usual"Farm ` . I _
Studied _
t The usual farmistudied had the following input and investment pattern:
Land -——----—-------—-—----~—-- - —-—- 231. 5 acres A
' »
4 Labor ·············-············ -1-- 24.6 months _ A
Forage -livestock investment ~----—-- ·· $8, 996. ‘
Machinery investment --—-—--—————-—- -$·3, 109. ‘
_, A Other expenditures —---——-- - -—-- ---— $2, 596 A
l . EARNING POWERS ON
THE USUAL FARM STUDIED A M
The usual-bombinationof inputs and investments described in the preceding
section produced a gross income (excluding the rental value of the farm home ·
and the cost of feeder stock purchased) of $10, 259. _ `
It is not enough to know the over-all earning power of a group of invest- _
ments. IE farm organizations are to be appraised and profitably replanned, in- .
formation on the earning power of groups of separate inputs and investments are
¤€€d€d`·. Still further, a special type of estimate is needed. The earning power
ofethe last unit_used of each group of investments or input needs to be known.
Estimates of average earning power.ai1‘€'ina.deq`uate.=`- azfarrneir mightaxgerage $200 ,
·a month for all labor used, yet the last month used might add only $25 to gross
income. In adding or subtracting inputs and investments, it is the earning power _ ,
,_ of the last unit used which counts. The question is, ¥‘Does the earning power of `
the last nunit used exceed its cost?" As long as it does, profits can be increas-
· ed by adding more of the input even if, as is generally the case, the addition
lowers the earning power for the next unit to be added. iThr.oughout this report,
the term, V"earning power," refers to the earning power of the last unit used-—aver—
age earning powers are usually higher. »
The Earning Power _
Of Labor on the Usual Farm ` A
Additional labor beyond the 24. 6 months of labor used, it is estimated, _
would have earned about $66 a month when used in connection with the amounts of ‘
other inputs and investments usual for the farms studiedr A reduction in the '
amount of labor used to 15 months, it is estimated, would increase its earning
power to over $100 a month. This increased earning power would result from the `
necessity for using labor more effectively as the amount is reduced.
As the large farms in this community are productive, labor has worthwhile
things to do a`nd its marginal earning power can be increased by saving it. Farm
work simplification techniques, therefore, should be expected to be more helpful
in reorganizing these farms than in reorganizing less productive farms, i. e. ,`it
pays to save labor when labor-has productive alternative uses.

 The Earning Power of
Land Inputs, Forage- _
Livestock Investments .
‘ Andi Other Expenditures .
These three inputs and investments were yielding good returns when con-
sidered jointly and when used in the combinations usual among the farms
studied. An additional acre of land, an additional $40 investment in seed- l
ing, an additional $150 investment in livestock, and an additional $20 in current
expenses, it is estimated, would add around $150 to gross income. When it came
I to estimating the separate earning powers of these investments and inputs, how-
‘ ever, some difficulty was encountered. This difficulty arose because the amounts
of land, forage -livestock investment_and other expenses used tended to change
·, together from farm to farm. This close relationship increased the chances of
L error in the computations and made it necessary to interpret the estimates rather
l _ carefully.
The estimated earning power of the forage -livestock investment is 69 per- `
centper dollar per year. The chances are one out of three that in a given year
there might be an error in this estimate as large as 12 percent above or below
this figure. The estimated earning power of raw land is a minus $3. 09 per acre
l per year, with a one in three chance of an error as large as $8. 00, above or below
this estimate, occurring in a given year. It is the judgment 'of the author that the
earning power of land is under-estimated; part of its earning power appears to be
reflected in the estimated earning power of the forage -livestocl< investment. It
I is concluded, therefore, that the earning power of forage -livestock investments
p was actually between 50 and 60 percent in 1951 and that the earning power of
‘ raw land was actually between $2 and $7 per acre. .
6 The earning power of other expenses was estimated at $1.06 per additional
j dollar Spent in the usual farm organization. As noted before, other expenses
l wgms used jlqamounts rather closely related to the land inputs and forage -livestock
investments. This close relationship increases the chances of error in the estimate;
however, .ho zreason apptéars for suspecting that a bias exists in this estimate. Thus,
V the $1.06 estimate is accepted as far as the forage -livestock investment and land inputs
’ are concerned. However, as will be seen later, the estimated earning power of other
expenses may reflect some of the earning power of machinery. Therefore, it is
it concluded that the earning power of other expenses was about a dollar for a dollar
_ ‘ in 195l for the usual farm studied. v
A The Earning Power -of ·
Machinery Inve stmeiiti
The earning power of machinery was estimated at 2. 7 percent per dollar
invested, the chances of an error as large as   12. 5 percent occurring in a
t given year being one out of three. Though the amount of machinery used was not
closely related to amounts of other inputs, it appears that the 2. 7 percent estimate
” is lower than the actual earning power of machinery in 1951. Probably some of the
earning power of machinery was reflected in the estipmated earning power of other
expenses, labor, and land. Of the estimates for these three inputs, only the estimated
j earning power for other expenses appears high. It is concluded that the actual earning
power of machinery was probably higher than the 2. 7 estimate -- a reasonable range
I appears to be from 5 to 15 percent.
E -5-

 A Summary Statement
Concerning the Earning Power _,
Of Different Investments and Inputs I
Conclusions from the above discussions can be summarized in specific
terms as follows: I
Investment or Usual Conclusions as to the Earn- ;
Input Arnount ing Power of Last Unit Used ·
 
Land 231. 5 acres $2 to $7 anacre  
Labor 24. 6 months $66 a month ,
Forage -livestock $8, 996 50 - 60 percent
Machinery $3,109 5 - 15 percent _
Other expenses $2, 596 $1.00 per dollar I
  -
I
SIZE OF OPERATION AND EFFICIENCY `
One advantage of the estimating methods used in analyzing these records is L
that it permits diminishing returns as actually encountered by farmers to be re-
flected in the estimates. For the 30 farms studied, the estimates indicate that
a doubling of all inputs and investments would not result in a doubling of gross
income. To state this same thing differently and more specifically, the estimates »
indicate that a 100 percent increase in the use of all inputs would increase gross 5
income by 96. 7 percent. I
The usual farm studied was a relatively large one involving 232 acres of land I
and capable of producing over $10, 000 worth of products at 1951- prces with `
relatively high returns to each investment or input. Thus, the law of diminishing
returns is not imposing serious limitations on size of farms in the upland Mont- {
gomery community of Trigg county.
For a farm one half as large as the usual farm, but similarly organized, esti-
mated gross income was $5, 215 as compared with the usual farms' gross income of
$10, 259. A farm four times as big as the usual farm and similarly organized would
be expected to earn only $39, 631. All of these estimates, of course, apply to 1951
prices and weather conditions. _
I
-6- J

 $39,63l -< --—-—-—— ··-—— ————-·-—-———- ·· ————-—·- |
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O $|O,259 —————-— I I
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$5,‘2|5 """ I. j: 1
1 1 1
1 I 1
Jé (Usuul 2 4
_ Form)
FARM ORGANIZATION
ORGANIZATION AFFECTS EARNING POWER
OF LABOR AND FORAGE - LIVESTOCK
INVESTMENTS
Though most of the farms studied had good over—all organization from a »
long-run standpoint, gross and net incomes from many of the individual farms
studied could have been increased by reorganization. Under the favorable beef
prices which prevailed in ];95l, most `of thecfarms did not have enough money
investedin forage and livestock and many of them probably used too much labor.
Even if favorable 11951 beef prices are discounted, several farms were long on
labor and short on forage -livestock investments.
The earning powers of both labor and forage—livestock investzrients depend
on both the amounts ami proportions used. The following charts   are helpful
in seeing the nature of these relationships:
lj These charts are based on the raw unadjusted estimates and hence may over~
estimate the earning power of forage and livestock invesizrnents by as rnuch
as 10 percent. NO reason exists for suspecting that the earning power of
labor is biased.
-7..

 THE EARNINGQPOWER OF LABOR
(Dollars Per Last Month Used)
The Forage-Livestock Investment
Q $6,000 $11,000 $16,000 $21,000 $26,000 $31,000
[rl
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D -
M 6 $170. 26 $244. 99 _ `
  N
3 12 95.03 136.75 $171.27 $201.66 $229.24 _ r
A _.
3 18 67.57 97.23 121.77 143.38 163.01 $181.17
(E 24 53.04 76.34 95.61 112.57 127.98 142.23
H ,,
g 36 37.72 54.28 67.98 80.04 90.99 101.13
E
42 33.13 47.68 59.71 69.92 79.93 88.83
The important thing to note is how the earning power of labor changes 4
(1) as the amount of 1ab.or used changes and (2) as the amount of supporting ·
forage-livestock investment changes. ·
THE EARNING POWER OF FORAGE·L1VESTOCK
INVESTMENTS
(Percent Gross Return on Last Dollar Used) .
The Forage—Livestock Investment
$6,000 $11,000 $16,000 $21,000 $26,000 $31,000
Q
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U)
D 6 64940 50%
M I
g 12 71.84   56. 39 48. 55% 43. 56% 39. 99%
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