xt7cz8929f1n https://exploreuk.uky.edu/dips/xt7cz8929f1n/data/mets.xml   Kentucky Agricultural Experiment Station. 1957 journals 050 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.50 text Progress report (Kentucky Agricultural Experiment Station) n.50 1957 2014 true xt7cz8929f1n section xt7cz8929f1n Progress Report SO April 1957
SOME ASPECTS OF THE
• • *
S1ze-of-Farm Problem m
•
Eeonomu: Area 1
By HARALD R. JENSEN
Department of Agricultural Economics I
AGRICULTURAL EXPERIMENT STATION
UNIVERSITY OF KENTUCKY
LEXINGTON

 
 A
SOME ASPECTS OF THE SIZE—OF—FARM PROBLEM
IN ECONOMIC AREA I
(THE PURCHASE)_Il
By Harald Jensen
Farm families on small farms in the Purchase are not getting much —
v 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 relation-
ships, higher incomes than small farms, (Z) The amount of income in rela-
tion to the amount of resources used depends on the cost advantages or dis-—
advantages 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 income
more than twice as large as ttiat 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 la_rger 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 incomes,
costs, investments and resource combinations for farms of varyingsize.
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 part- time,
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; ·
1/ This study is based primarily on data from the United States Census
of Agriculture, 1950.,

 ..3-
Class Value of farm products sold '
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 the Purchase we can (
compare incomes, 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 mea-
sure of size. Total capital investment or the total dollar value of all in-
puts 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, t
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 Farms in Size Classes,
Economic Area I, Kentucky, 1949 (Source: U., S. Census and Estimates) A
Acres Total Total imputs No. of Percent
Class of per Gross sales capital used during farms farms in
farm farm invested the year each class
I 630 Over $25, 000 $86, 724 $36, 118 54 0. 5
II 356 $10,000 — $24,999 39,474 12,857 292 2.9
III 179 5,000- 9,999 21,901 6,646 861 8.5
IV 128 2,500- 4,999 13,447 4,105 2,097 20.6 _
V 88 1,200- 2,499 8,818 2,668 3,678 36.3
VI 67 250 — 1,999 5,306 1,827 3,160 31.2
Total 10,142
According to the 1950 census, most of the commercial farms in the
Purchase fell into Class V, with sales of $1, 200 to $2, 500 (last two columns,
Table l). But nearly as many fell into Class VI, with sales of only $250 to
$1200. Class IV farms with sales of $2, 500 to $5, 000 ranked third in num-
ber. Thus, about 88 percent of all commercial farms in the Purchase had
sales of less than $5, 000, which leaves only 12 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),

 'L
..4- ·
Table 2. - Income and Costs for Commercial Farms in Economic Area I, Kentucky, 1949
(Source: U.S. Census and Estimates)
Class of farm VI V IV HI H I Average
1. Total product $1,035 $2,158 $4,006 $7,582 $14,414 $43,725 $3,225
2. Total inputs 1,827 2,668 4,105 6,646 12,857 36,118 3,511
_ a. Cash farm
expenses>l< 336 685 1, 428 2, 863 6,420 23, 171 1, 199
b. Interest on .
buildings,
machinery and
livestock 157 279 433 677 1, 195 2, 334 344
c. Interest on ”
land 137 215 323 545 999 2, 378 274
d. Depreciation
on buildings
and machinery 138 246 365 547 957 2, 150 293
e. Labor costs>l<* 1,059 1, 243 1,556 2,014 3,286 6,085 1,401
3. Income above cash
farm expenses 699 1,473 2,578 4,719 7,994 20,554 2,026 I
4. Residualto labor 2.67 733 1,457 2,950 4,843 13,692 1,115
5. Residualto manage-
ment -792 -510 -99 936 1, 557 7, 607 -286
* Includes all cash farm operating expenses except hired labor costs. .
** Includes operator, family and hired labor. - '
INCOMES AND COSTS
The income or value of total product figures include the value of all
farm products sold as well as the value of those used in the home (line 1,
_ Table 2).E/ These i-ncomes ranged all the way from $1, 035 on Class VI I
farms to $43, 725 on Class I 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, 827 on Class VI farms (which had
incomes of $1,, 035) to $36,118 on Class I farms (which had incomes of $43,
725). The large farms not only had 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 I
costs over more acres and animals. The resulting gain is the most impor-
tant one which comes from having large 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 buildings, machinery and livestock; interest on
2/ The rental value of the home has not been included.

 -5-
land; depreciation on buildings andmachinery; andlabor costs. Of all the
inputs included here, actually only cash farm expenses and hired labor
costs involved a cash outlay. But a charge for operator and family labor `
and interest on investment were included as inputs to show how net farm
income compares with the returns which could be realized were the opera- .
tor to put all his capital (land included) out at the going rate of interest and r
to hire out all his labor.
Cash farm expenses include cash outlays for such items as machine
hire and repair, fuel and oil, seeds, fertilizer, and feed, livestock and
poultry purchases. Cash farm expenses are by far the most important cost
on the large farms; on Class I farms they totaled up to more than $23, OOO.
Interest on buildings, machinery, livestock and land shows what the
farm operator could make if he could reinvest the money tied up in these
resources 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 machinery. These in-
terest 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 is the largest input item on the large farms while labor is
the largest on the small farms., Notice that the increase in labor inputs
from Class VI to Class I farms was not nearly so large as the increase in
total inputs. Labor inputs increased only about 6 times while total inputs
increased about 20 times. A
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 in 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 $699 on Class VI farms
to $20, 554 on Class I farms (Table 2). These income figures indicated that
all size groups were able to pay "cash farm expenses" and have something
left over for interest, depreciation and labor charges.
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 $267 on Class VI
farms to $13, 692 on Class I farms (Table 2). The amounts listed represent
what is left as payment to labor and management.
But after labor and all other input items except management were sub-
tracted, only Class III, Il and I farms showed a profit or a positive return

 -6.. ·
to management. Class VI farms had a negative return of -$79Z.; 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 $4, 006) had a
negative return of -$99. These positive and negative returns are impor-
tant in our analysis. To really see their importance requires a graphic
picture (Fig. l). 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 l. O 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 significance. All farms below this line show a loss while the farms
above the line show a profit.
In Table Z, 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 l. 0 (Fig. 1), and they represent 88 percent of all com —e.—
mercial farms in the Purchase., The fact that these farms show losses does
not mean they are going into debt or that the families on them are starving.
But 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. E If the farm families on
these small farms (Classes VI, V and IV) were entirely motivated by pro-
fit they would either increase the size of their farming operations or trans-
fer their labor and capital into employment other than farming.g/ Econom.-
ically, the losses on these farms mean that the labor and capital employed
here did not learn as much as it could either in industry or on larger farms.
The positive returns or the ·"plus l. O" ratios on the larger farms (farms
with gross sales of $5, 000 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
available to farms in the Purchase. As shown, the economies of size ·
(average efficiency) increase sharply from Class VI (with gross sales of
$250 - $1, ZOO) to Class III farms (with gross sales of $5, 000   $10, OOO);
the increase beyond Class III farms appears less sharp. However, there
are logical reasons 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
3/ The $947 was the annual average wage for hired farm labor in Kentucky,
T949.
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.

 -7-
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PRODUCTION AND RESOURCE COMBIQNATIONS
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 dif-.
ferent size groups of farms produce and what resource combinations a.re
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 (
the Purchase are field crops and livestock and livestock products other than
dairy and poultry, except on Class VI farms (farms with gross sales of $250 -
$1, 200) where field crops along with home-consumed products are the two
most important sources (Fig. 3). ~
Income from field crops for size groups of farms held fairly constant
at about 40 percent of the total, except on Classes ll and lll farms where the ‘
percentage contributions are closer to 30. The relative importance of field
crops as a source of income on all commercial farms, irrespective of size,
undoubtedly reflects the wide~spread production of tobacco.
` 'Income from dairy products increased. in relative importance from
Class VI to Classlll farms; for farms with gross sales of $10, 000 or more it
decreased in relative importance.
The percentage contributions of poultry sales and home-consumed
A products to gross income declined steadily with increase in size of farm. [
Income from livestock other than dairy and poultry increases with increase
A in farm size _
l On the 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 Cla.ss VI farms livestock and l1ve·
stock products accounted for only 18 percent of the gross income, whereas
on Class I farms they made up about one~half 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. 4).,
The percentage contribution of each input or resource item wa.s based on
t the estimated annual use value of these inputs or resclurcesi Thus, the annu— `
al contribution of land was estimated 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 and depreciation on buildings and
machinery.

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Percentagewise, land was about equally important on all farms, irre-
spective of size. For all size groups it made up a relatively small portion I
(7-8 percent) of the total annual inputs. ‘ ‘
Labor inputs rank highest on small farms while capital inputs rank highest
on large farms
On the smallest farms (Class VI and V) labor inputs, relative to other
inputs, were the most important. 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 was by far the most important 4
input item. A
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 resource to be pro-
ductive 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 different
size.
PRODUCTIVITY 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 I
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 _
 r 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 I ·
to all labor or to all operator and family labor for different classes farms.
But since large farms employ more 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). L
Returns to labor per worker is low on small farms °
Notice that the average number of workers per farm increased about
6 times from Class VI to Class I farms, but the residual to labor per worker
(net returns per worker) increased about 9 times. The last column in the ’
table shows an average net return per worker for all farms of $1, 487. Some
people might consider this as a fair return for one year. But five of the six ,
classes had less than this amount. Class VI farms had only $238, while
Class I farms had $2,129, or a difference of $1, 891.

 ..14-
Ai Table 4. - Resourses and Product Ratios for Productivity of Labor, Land and Capital,
Economic Area I, Kentucky, 1949 (Source U. S. Census and Estimates)
Classes of Farms VI V IV III II I Average
Number of workers ‘
(man-years of all
·— labor) 1. 12 1. 31 1. 64 2. 13 3.47 6.43 2. 68
Residual to labor "
' per worker $ 238 $ 560 $ 888 $1,385 $1,396 $2,129 $1,487
Acres per worker 60 67 78 84 103 98 89. 9
` Total investment
per worker* $4,737 $6,731 $8,199 $10,282 $11,376 $13,487 $10,911
Land and capital
inputs per worker** $ 687 $1,087 $1,554 $2,175 $2,785 $4,671 $3,042
- Total product per
worker $ 924 $1,647 $2,443 $3,560 $4,154 $6, 800 $4,529
* Includes investment in land, buildings, livestock and machinery.
** These are the annual inputs, not the investments themselves, and include 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 II farms and investment per worker in-
creased throughout all classes as did land and capital inputs per worker
(Table 4). But note also that the rate of increase in acres per worker and
in total investment per worker was much lower than the rate of increase in i
net returns per worker. Actually, land and capital inputs per worker gives
I a more accurate picture of the resources used along with labor. These in-
puts included cash farm expenses which ran high on the larger farms, par-
ticularly in the form of feed and feeder livestock purchases.
l Total product per worker increases as capital and land per worker increases
l In order to determine how much land and capital add to total produc-
tion, total product per worker was compared with land and capital per work-
er (Fig. 5). This comparison gives a rough idea of what one farm worker
¤ produced with various amounts of land and capital. Total product per work-
·— er increased from $924 on the smallest farms to $6, 800 on the largest. At
the same time, land and capital inputs per worker increased from $687 to
$4, 671. . Notice that total product per worker increased very consistently
as land and capital inputs per worker increased. Such consistency or re-
gularity could not continue for any amount of land and capital per worker.
t The farm operator on Class I farms had a more difficult job of managing
$4, 671 per worker in other resources than the operator on a Class VI farm
who managed only $687 per worker in other resources. U

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