xt795x25cb6q https://exploreuk.uky.edu/dips/xt795x25cb6q/data/mets.xml   Kentucky Agricultural Experiment Station. 1957 journals 052 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.52 text Progress report (Kentucky Agricultural Experiment Station) n.52 1957 2014 true xt795x25cb6q section xt795x25cb6q Progress Report 52 April 1957
SOME ASPECTS OF THE `
S' f F P °
lZ€-O - &I‘I]] I'Obl€[I1 ll]
_ O
Ee0110m1c Area 3A
By HARALD R. JENSEN and LUTHER KELLER
Department of Agricultural Economics
AGRICULTURAL EXPERIMENT STATION
UNIVERSITY 0I` KENTUCKY
LEXINGTON

 SOME ASPECTS OF THE SIZE-OF-FARM PROBLEM
IN ECONOMIC AREA III A 1/ _
By Harald Jensen and Luther Keller _
Farm families on small farms in the Economic Area III A are not get-·
ting much income for the time spent in farming, This fact, together with
other evidence which follows, suggests that farm size has a lot to do with
size of income from farming. Farm size is related to income in these ways;
(1) The amount of income depends on the size of farm, For example, with- V
in a group of farms where neither cost advantages nor disadvantages exist
for farms of various size, large farms will have, under usual price rela-
tionships, 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 200-acre farm will have a net in-
come more than twice as large as that of a 100-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 determine 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.
The 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 partstime,
residential and unusual, such as institutional farms, In general, all farms
that sold $1, 200 or more of farm 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 farm fewer than 100 days and that the income of the farm operator .
and his family from nonfarm 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:
11 This study is based primarily on data from the United States Census
of Agriculture, 1950. Economic Area III A includes the following counties:
Breckenridge, Butler, Caldwell, Crittenden, Edmonson, Grayson, Hancock,
Hopkins, Livingston, Lym, Muhlenberg and Ohio(location shown on cover),

 ,3-
Class Value of farm products sold
I $25, OOO or more ‘
II $10, 000 to $24, 999
III $ 5, 000 to $ 9, 999
IV $ 2, 500 to $ 4. 999
V $ 1,200 t0$ 2,499
VI $ 250 to $ 1,199
Hence, in studying the size··.of-gfarm problem in Economic Area. III A
we can compare income, costs, investments and resource combinations
for six different 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 on the total dollar value of all
inputs or resources used during the year is sometimes used. Acres, since
they represent only one of the resources (land) used in farming, do not ale
ways accurately measure farm size, In most instances, however, acres,
volume 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
1),
Table 1. =· The Number of Commercial Fm by Size Classes
Economic Area IHA, Kenmcky, 1949 (Source: U.S. Census amdEstjmates)
Acres Total Total inputs N0. of Percent
Class of per Gross sales capital used during . farms farms in
farm farm invested tbeyear eachclass _
H 448 $10,000 —· $24, 999 $36,279 $12,957 234 1.8
H1 307 5,000-— 9,999 24,479 7,169 700 5.5
IV 196 2,500 ·= 4,999 1.4,006 4,2773 1960 15.3
V 133 1,200·» 2,499 7,702 2,725 4066 31..7
QVI 98 250~ 1,199 4,684 1,820 5827 45.,5 ___ '
According to the 1950 census, most of the commercial farms in Eco-~
nomic: Area III A fell into Class VI, with sales of $250 to $1, 199 (last two
colurnns, Table 1). A large percentage of the remaining farms fell into
Class V, with sales of only $200 to $2, 499. Class IV farms with sales of _
, $2, 500 to $5, 000 ranked third in number, Thus, about 93 percent of all I
commercial farms in Economic Area III A had sales of less than $5, 000,
which leaves only '7 percent with sales of $5, 000 and above.
With this general background, let us take a closer look at incomes
and costs on these farms of varying size (Table 2),
2/ Since there were so few Class I farms in Economic Area III A (30 farms)
this report will not include any data relative to Class I farms, The other
five income classes include 99,8 percent of all the comrnercial farms in
this area,

 -4-
Table 2. - Income and Costs fos Commercial Farms in Economic Area III A, Kentucky, 1949
(Source: U. S. Census and Estimates)
Class cf farm VI V IV III H  
1. Total product $1,056 $2,129 $3,908 $7,445 $14,456 $2,490
2. Total inputs 1,820 2,725 4,2.73 7,169 12,957 3,064
a. Cash farm .
expenses·l/ 285 718 1,441 3., 036 7, 465 939
b. Iutereston
buildings
and livestock 162 276 514 870 1,296 318
c. Interest on
land 105 168 297 537 721 195
d. Depreciation .
onbujldings
and machinery 133 216 409 660 859 248
e. Labor costsgl 1,135 1,347 1,612 2,066 2,546 1,363
3. Income above cash i
farm expenses 771 1,411 2,467 4,409 6,991 1,551
4. Residual to labor 371 751 1,247 2, 342 4,045 789
5. Residual to manage-
ment -764 -596 -365 276 1,499 -574
_1_/ Includes all cash farm operating expenses escept hired labor costs. ~
2/ Includes operator, family, andhized labor.
3/ The average values in this column and in subsequent tables include those for all commercial farms in
the area including Class Ifarms.
INCOMES AND COSTS
The income or value of total product figures include the value of all
farm prod17cts sold as well as the value of those used in the home (line 1,
Table 2),.% These incomes ranged from $1, 056 on Class VI farms to
$14, 456 on Class ll farms.
Inputs higher relative to incomes on small farms
The total input figures (line 2) included both out-of-pocket and over-
head costs., Total inputs ranged from $1, 820 on Class VI farms (which had
incomes of $1, 056) to $12, 957 on Class ll farms (which had incomes of
$14, 456.,) The large farms not onlyhad much larger incomes than the small
farms, but their inputs were lower in relation to incomes. The main rea-
son for this was that the larger units could spread their fixed or overhead ·.
costs over more acres and animals. The resulting gain is the most impor-
tant one which comes from having larger operating units,.
Labor is the largest single input on small farms
Total inputs (Table 2) were broken down to show the amounts for cash
farm expenses; interest on building, machinery and livestock investments;
3/ The rental value of the home has not been included,

 -5-
interest on land investment; depreciation on buildings and machinery and labor
costs. Of all the inputs included here, actually only cash farm expenses and
hired labor costs involved a cash outlay. A charge for operator and farnily
labor and interest on investment were included as inputs to show how net farm
inconie compares with the returns which could be realized were the operator
to put all his capital (land included) out at the going rate of interest and to hire
out all his labor.
Cash farm expenses include cash outlays for such items as niachine hire
and repair, fuel and oil, seeds, fertilizer, and feed, livestock and poultry pur-
chases. Cash farm expenses are by far the most irnportant cost: on the large
farms; on Class l farms they totaled up to $24, 637.
Interest on buildings, machinery, livestock and land shows what the
farm operator could make if he could reinvest the money tied up in these re-
p sources and earn 5 percent on what he has tied up in land and buildings and
7 percent on what he has tied up in livestock and rnachinery. Th.e se interest
values or "costs" show that they are relatively unimportant "cost" items for
any of the size of farm groups. For any of the size of farm groups the largest
single input is either for cash farm expenses or for labor; cash farm expenses
1 is the largest input item on the large farms while labor is the largest item on
the small farms. Notice that the increase in labor inputs from Class V1 to
Class I farms was not nearly so large as the i.ncrease i.n total inputs. Labor
inputs increased less than 3 times while total. inputs increased about 18 times.
Depreciation on buildings was charged at 5 percent of the estimated
_ 1949 value, while machinery depreciation was charged at 10 percent. De -—
’ preciation costs thus represent the estimated dollar value of buildings and
( machinery used up each year i.n the production process.
Only large farms show returns to management
· Before interest, depreciation and labor inputs were subtracted, all
size groups had some income, which ranged from $906 on Class VI farms
to $7, 845 on Class l farms (Table 2). These income figures indicated that
all size groups were able to pay "cash farm expenses" and have somethi.ng
left over for interest, depreciation and labor returns.
Likewise, before labor inputs were subtracted (but after all other in-
put items have been subtracted) all size groups had some income. As indi-
cated by "residual to labor" these amounts ranged from $573 on Class VI
farms to $4, 555 on Class QI, farms (Table 2). The amounts listed represent
what is left as payment to labor and management.
A fre r· labor and all other input items except management were sub-
tracted, only Class lll, H and I farms showed a profit or a positive return

 -5-
to management, Class VI farms had a negative management return of $764; ‘
they were short this much after paying cash farm expenses plus reasonable
charges for labor and capital investment, Even Class IV farms (farms with
gross sales of'$2, 500 - $5, 000 or an average product valued at $3, 908) had
a negative return of $365. These positive and negative returns are imporc
tant 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
five classes of farms. A ratio of 1., 0 on the vertical. axis represents the I
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 l., 0 has
special significance. All farms below this line show a loss while the farms ( A
above the line show a profit.,
In Table 2, Class VI, V and IV farms (farms with gross sales of less
than $5, 000) show negative returns, These are also the ones below the
horizonal line at 1. O (Fig. 1), and they represent 93 percent of all com- ·
mercial farms in the Economic Area III A, The fact that these farms show
losses does not mean. they are going into debt or that their families are
starving, but it does mean that they failed to make cash farm expenses to—
tether with the conservative wage ($947 per mature worker) and investment
costs which were charged against their labor and capital,i If the farm
families on these small farms (Classes VI, V and IV) we.re entirely moti-»
vated by profit they would either increase the size of their farming opera:-
tions or transfer their labor and capital into employment other than farm-
ing.?] Economically, thelosses on these farms mean that the labor and
capital employed here did not earn as much as it could either in industry .
or on large farms. The positive returns or the "plus 1, O" ratios on the
larger farms (farms with gross sales $5, OOO or above) mean that these ,
farms not only earned enough to pay for all inputs but had something leftover.
Economies are associated with increased size
By connecting the values for the various classes of farms (Fig, l) V
with a broken. line, one can more readily visualize the economies of size
available to farms in Economic Area III A. As shown, the economies of
size (average efficiency) increase sharply from Class VI (with gross sales
of $250   $1., 200) to Class II farms (with gross sales of $10, 000 ¤ $24, 999); ’
however, there are logical rea.son.s for believing that the value of the total .
product/value of total input ratios (Fig., l) underestimates the average effi~
ciency of the large, specialized farms in relation to the smaller, more
diversified farms., For this reason we show the relation between value
added/value of fixed inputs ratios and the total. value of fixed. inputs used
42 The $947 was the annual average wage for hired farm labor in Kentucky,
1949.
5/ 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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(Fig. Z). Fixed inputs or costs are the annual inputs in the form of dec-
preciation on buildings and machinery, interest on land, buildings, machin~
ery and livestock investments and charges for opera.tor and family labor.,
These costs go on even if nothing is produced, Value added is computed as »
the value of the total product minus cash farm operating expenses. Thus,
the value added/value of fixed inputs ratio shows the net returns to the re-»
latively fixed factors in farrning.,
Figure 2 shows economies of size (increasing average efficiency) for
farms from Class Vl to ll as does Fig., 1, but the rate of interest; in aver- .
age efficiency is more constant in Fig., 2.., The ec:ono>mies of size illustrated
here (Figs. l and Z) have important implications in longsrun planning., par-— t
ticularly as such planning relates to the size of farm which can be expected
to be most profitable.,
Labor on small farms returns less than 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
operator and family labor, total costs were broken down to show returns
after paying all out-of-pocket costs and to show residual returns to operator
and family labor (Table 3). All size groups of farms were able to pay outs
of-pocket costs and have something left over. But what was left over was .
insufficient to pay the overhead cost and the conservative wage charged to p
operator and family labor on Class VI, V and fl"! farms (farms with gross
sales of less that $5, OOO),
Table 3.   Income and Cont; frm Commercial.   ln Economic Area TEA, Kentucky, 1949 .
(Source: U,S.. Census and Estimates)
 ogjgmq  ——_____gg_ rr __ in n Average.
1. Total product $1.,056 $2,129 $3,908 $7,445 $14,456 $2,490
2. Total inputs 1,820 2,725 4,273 7,169 12,957 3,064
:1.. Out~0f-pocket
coma}-! 307 791 1, 661 3,, 570 8, 654 1, 067 i
b. Overhead costs
other than op--
errator and fa.mU.y L
labor 400 660 1, 220 2, 067 2, 946 761
c. Opera!;or and
family labor 1, 113 1, 274 1, 392 1, 532 1, 357 1, 235
3. Returns after
paving out.-of--
pocket cost; 749 1, 338 2,247 3, 875 5,802 1.,423
4. Residuxlrermus
to operator and
ta,mL!.v__Jg.bor 349 678 g 1,027 1,,808 2.856 66_2__
_j/ Include.: cash farm expenses plus hiced labor cos';.

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PRODUCTION AND RESOURCE COMBINATIONS
Before we examine the reasons why incomes are much lower in rela-: “ _
tion to inputs on small farms than on large farms let us see what the difs
ferent size groups of farms produce and what resource combinations are
used to get this production,
Field crops and home·»consumed products most important sources of incorne
on small farms
The two most important sources of income on commercial farms in
the Economic Area III A are field crops and livestock and livestock products
other than dairy and poultry, except on Class Vl farms (farms with gross
sales of $2.50 -i $1, 200) where field crops along with homemconsumed pro¤
ducts are the two most important sources (Fig, 3),,
lncome frorn field crops for size groups of farms varied from about 2,0
to 30 percent of the total., The relative importance of income from dairy
products varied from approximately 4 to 9 percent arnong the classes of
farms., The percentage contributions of poultry sales and homescconsumed
products to gross income declined steadily with increase in size of farm,
Income {rom livestock other than da.iry and poultry increases with increase
in size of farm
On. tzhe other hand, 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 liver-
stock products accounted for only Z5 percent of the gross income, whereas
on Class ll farms they made up about 65 percent of the income.,
To get the complete picture, we need to know what resources were res
quired to get. the production for different classes or sizes of farms (Fig, 4),,
The percentage contribution of each input or resource item was based on
the estimated annual use value of these inputs or resources, Thus, the annu-
al contr ibuiinn of land was estirnated at 5 percent of the total land investment,
The annual contribution of labor was the number of mature workers times the
going wage in agriculture. Capital included cash farm expenses, interest
on buildings, machinery and livestock investments, and depreciation on .,
buildings and machinery.
Pe rrentagewise, land was about equally important on all farms, irrem
spective ofsize, For all size groups it rnade up a relatively small portion.
(6 percent) of the total annual inputs.

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 -13- C
Labor inputs rank highest on small farms while capital inputs rank highest
on large farms
Labor inputs were relatively more important on the smaller farms than
on the larger farms, ln fact, on Class Vl farms labor inputs were more
important than all other inputs combined, In contrast, on the larger farms
(Class IV, III and ll) capital was by far the most important input item.
The decreasing importance of labor and the increasing importance
of capital as farms increase in size is clearly illustrated in Fig. 4, This
means that the amount of capital used per worker increases as farm size
increases, This is one reason why incomes are much higher in relation
to inputs on large farms than on small farms., For any one input or re-
source 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,
not capital by itself., Let us see how productive labor, land and capital
are on farms of different size,
PRODUCTIVTTY OF LABOR, LAND AND CAPITAL
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 re-
turn to all labor or to all operator and family labor for different classes
of farms, But since l e workers than small 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 computed the
average number of workers per farm and the residual returns to labor
per worker for the six classes of farms (lines l and 2., Table 4),
Returns to labor per worker is low on small farms
Notice that the average number of workers per farm increased about
( 2 times from Class Vl to Class II farms, while the residual to labor per
worker (net returns per worker) increased about 5 times. The last column
in table 4 shows an average net return per worker for all farms of $548,
_ Classes VI and V farms had less than this amount. Class VI farms had
only $309 return while Class H farms had $1,504, or a difference of
$1, 195a

 -14-
Table 4. — Resource and Product Ratios for Productivity of Labor, Land and Capital,
Economic Area III A, Kentucky, 1949 (Source U. S. Census and Estimates)
 
Classes of Farms VI Y IV III H Average
Number of workers
(man—yea1·s of all p
labor) 1.20 1.42 .1.70 2..18 2.69 1.44
Residual to labor
per worker $ 309. $ 529. $ 734,, $1074. $1504. $ 548.
Acres per worker 82 94 115 141 166 100
Total investment
per w¤rker£/ $3903. $5424. $8239. $11229. $13487. $6199.
Land and capital
inputs per w¤rke1·;/ $ 571. $ 970. $1565. $2341. $3870. $1181.
Total product per
worker g 880. $1499. $2299. $3415., $5374, $1729.
_1/ Insludes investment in land, buildings, livestock and machinery.
2/ These are the annual inputs, not the investments themselves, and includes cash farm expenses, interest
on land, buildings, machinery, and livestock together with depreciation on buildings and machinery.
Part of this difference is explained by the amount of other resources
used along with labor. For instance, notice how acres per worker increased
from Class VI up through Class Il farms as did investment per worker and
land and capital inputs per worker. (Table 4),, But note also that the rate of
increases in acres p