xt7ht727bx01 https://exploreuk.uky.edu/dips/xt7ht727bx01/data/mets.xml   Kentucky Agricultural Experiment Station. 1957 journals 057 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.57 text Progress report (Kentucky Agricultural Experiment Station) n.57 1957 2014 true xt7ht727bx01 section xt7ht727bx01 Progress Rep0rt 57 April 1957
. SOME ASPECTS OF THE
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By HARALD R. JENSEN and LUTHER KELLER
Department of Agricultural Economics
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 SOME ASPECTS OF THE SIZE-OF-FARM PROBLEM
IN ECONOMIC AREA VII 1/
By Harald Jensen and Luther Keller
Farm families on small farms in Economic Area VII are not getting much l
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 farrn, For example, within a group of farms
where neither cost advantages not disadvantages exist for farms of various size,
large farms will have, under usual price relationships, higher incomes than
small tarms, (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 income 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 in-
creasing incomes of families on small farms. In order to study the relation-
ship between farm size and income, we need to compare incomes, costs, in-
vestments and resource combinations for farms of varying size., The classifi-
cation of farms in the 1950 Census of Agriculture makes such comparisons
possible. The Census first divided farms into two large groups; (l) commer-
cial and (Z) 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, pro-
vided 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 thc total value of farm products sold. The Census then divided all com- ·
meiwial farms into six classes on the basis of the total value of products sold,.
These classes are as follows;
TTFNIS study is based primarily on data from the United States Census of
Agricultiire, 1950.. Economic Area VII includes Clark, Jessamine, Fayette,
llarrison. Scott, Woodford, lwiercer and Bourbon counties, This area is gener-
ally referred to as the lnner Bluegrass Area,

 ..3-
Class Value of farm products sold
I $25, 000 and more
II $10, 000 to $24, 999
III $ 5, 000 tO $ 9, 999
IV $ 2, 500 t0 $ 4, 999 ,
V $ 1,200 to$ 2,499
VI $ 250 to $ 1,199
· Hence, in studying the size-of-farm problem in Economic Area VII 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 measure of
size, Total capital investment or the total dollar value of all inputs or resources
u.sed 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, 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. ·- Number of Commercial Farms in Size Classes,
Economic Area VII, Kentucky, 1949 (Source: U.S. Census and Estimates)
Acres Total Total inputs N0. of Percent
Class of per Gross sales capital used during farms farms in
farm farm ' invested the year each class
I 682 $25,000 and Over $235,574 $49,513 305 3.0 '
II 241 10,000 — 24,999 74,537 13,314 1, 148 11. 1
III 118 5,000 - 9,999 32,930 6,648 2,294 22.2
IV 81 2,500- 4,999 ` 18,291 4,026 3,055 29.6
V 59 1,200 — 2,499 10,734 2,802 2,216 21.4
VI 42 250- 1,199 8,246 2,313 1,310 12.7
 
According to the 1950 Census more of the commercial farms in Economic
Area VII fell into Class IV with sales of $2, 500 to $5, 000 than into any other
U group (last two columns, Table l)r Class III and V (with sales ranges of
$5, 000 to $10,000 and $1, 200 to $2, 500 respectively) were about equally pre-
» valent and in numbers ranked next in importance in the area., About 13 pers
cent of the farms were Class VI farnns (sales of only $250 to $1, 200,) Approx-
imately 64 percent of all commercial farms in Economic Area VII had sales
of less than $5, 000 which leaves only 36 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),

 -4..
Table 2. - Income and Costs for Commercial Farms in Economic Area VII, Kentucky, 1949
(Source: U.S. Census and Estimates)
Class of farm VI V IV HI II-. I .. Average
1. Total product $1,111 $2,304 $4,176 $7,504 $14,818 $56,145 $6,844 »
2. Total inputs 2,313 2,802 4,026 6,648 13,314 49,513 6,471
a. Cash farm
expensesl/ 747 877 1, 106 1, 952 4,526 21, 642 2, 184
b. Interest on
buildings,
machinery and
livestock 209 282 503 880 1, 821 5, 751 796
c. Interest on
land 234 299 495 907 2, 161 6, 834 867
d. Depreciation on
buildings and
machinery 173 222 427 782 1 , 583 5 , 080 688
e. Labor costsg/ 949 1, 122 1,496 2,127 3,222 10,206 1,936
3. Income above cash
farm expenses 364 1,427 3,070 5,552 10,292 34,503 4, 660
4. Residual to labor -253 624 1,646 2,983 4,726 16,838 2,309
5. Residual to magage-
ment -1, 202 -498 150 856 1, 504 6, 632 373
_l/ Includes all cash farm operating expenses except hired labor costs.
2/ 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 l, Table 2)..2;/
These incomes ranged all the way from $1,111 on Class VI farms to $56, 145
on Class I farms.
Inputs higher relative to incomes on small farms
The total input figures (line 2) included both out-of--pocket and overhead
costs. Total inputs ranged from $2, 313 on Class VI farms (which had incomes ’
of $1, lll) to $49, 513 on Class I farms (which had incomes of $56, 145). The
large farms not only had much larger incomes than the small farms, but
their inputs were lower in relation to incomes. The main reason 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 important 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
al The rental value of the home has not been included,

 -5-
land investments; 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 family labor
and interest on investment were included as inputs to show how net farm in-
come 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. ,
i Cash farm expenses include cash outlays for such items as machine hire
and repair, fuel and oil, seeds, fertilizer, feed, and livestock and poultry
I purchases, Cash farm expenses are by far the most important cost on the
large farms; on Class I farms they totaled up to $21, 642,
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
I on what he has tied up in livestock and machinery. These 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 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 ll times while total inputs increased about 21 times.
Depreciation on buildings was charged at 5 percent of the estimated 1949
value, while machinery depreciation was charged at IO percent. Depreciation
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 $364 on Class VI farms to $34,
503 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 input
items have been subtracted) all size groups had some income except Class VI
farms. As indicated by "residual to labor" these amounts ranged from $2.53
on Class VI farms to $16, 838 on Class I farms (Table 2), The amounts listed
` represent what is left as payment to labor and management.
A fte r labor and all other input items, except management, were sub-
tracted, only Class IV, III, II and I farms showed a profit or a positive return

 _6..
to management. Class VI farms had a negative return of —$l202; they were
short this much after paying cash farm expenses plus reasonable charges for
labor and capital investment. Class V farms (farms with gross sales of $1, 200
to $2, 500 or an average product valued at $2, 304) had a negative return of
-$498. 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 V
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 to-
tal product is exactly equal to the value of the total input. Thus, the horizonal
line drawn at l. 0 has special significance. All farms below this line show a
loss while the farms above the line show= a profit.,
In Table 2, Class VI, and V 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, l), and they represent 34 percent of all commercial farms in
Economic Area VII, The fact that these farms show losses does not mean that
they are going into debt or that their 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 and V) were entirely motivated by profit, they would either increase the
size of their farming operations or transfer their labor and capital into em-
ployment 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 large farms. The positive returns or the "plus l.0" ratios
on the larger farms (farms with gross sales of $2, 500 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 I
broken line, one can more readily visualize the economies of size available
to farms in Economic Area VII, As shown, the economies of size (average
efficiency) increase sharply from Class VI (with gross sales of $250 - $1,200) _
to Class III farms (with gross sales of $5, 000 to $10, 000); efficiency on Class
II and I farms was about the same as on Class III farms. However, there are ’
logical reasons for believing that the value of the total product/value of total
input ratios (Fig. l) underestimates the average efficiency of the large, spe-
cialized farms in relation to the smaller, more diversified farms. For this
  The $947 was the annual average wage for hired farm labor in Kentucky,
1949.
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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reason we show the relation between value added/value of fixed inputs ratios
and the total value of fixed inputs used (Fig. 2). Fixed inputs or costs are
the annual inputs in the form of depreciation on buildings and machinery, in-
terest on land, buildings, machinery and livestock investments and charges
for operator 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 operat- ’
ing expenses. Thus, the value added/value of fixed inputs ratio shows the net =
returns to the relatively fixed. factors in farming.
FigureZ shows economies of size (increasing average efficiency) for farms
from Class VI to I. The economies of size illustrated here (Figs. l and 2)
have important implications in long—run planning particularly as such plan-
ning relates to the size of farm which can be expected to be most profitable.
Labor on small farms returns less than a conservative wage
ln the short run, of vital importance in farniing is whether out»·of—pocl Ei
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 -10-
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 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 VII 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, ZOO) where field crops along with home··consumed products are the
two most important sources (Fig, 3)t
Income from field crops for size groups of farms varied from 37 to 62
percent of the total and was highest on Class IV and III farms. The relative
importance of income from dairy products varied from approximately Z to 6
percent among the classes of farms. The percentage contribution of home-
consumed products to gross income declined steadily with increase in size
of farm. Poultry sales were relatively insignificant except on Class I farms
where they contribute about 7 percent of the total income,
Income from livestock other than dairy and poultry increases with increase
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 20 percent of the gross income, whereas on Class Ifarms they made up ~
over 60 percent of the income.
To get the complete picture, we need to know what resources were re-
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
annual contribution of land was estimated at 5 percent of the total land in- v
vestment, 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 c·n buildings and niachinery.,
Perccntagcwise, land was about equally important on all farms, irre-
spective of sizec For all size groups it made up a relatively small portion
(li uercent) of the total annual. inputs.

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Labor inputs rank highest on small farms while capital inputs rank highest
   
Labor inputs were relatively more important on the smaller farms than
on the larger farms. ln contrast on the larger farms (Class IV, III, Il and
I) capital was the most important input item
L 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
U size
PRODUCTIVITY OF LABOR. LAND AND CAPITAL
We said earlier that operators on many small farms were not getting `
much return for the time they spent 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 labor for different class farm
Since large farms small farms; we need to
compute the residual returns to labor per worker to find out how productive
labor is on farms of varying sizes, 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 from
· 1. OO to 10.78 from Class VI to Class lfarms; and the residual to labor
 ' per worker (net returns per worker) increased from $253 to $l_ 562. The
last column in the table shows an average net return per worker for all
farms of Eil. fl.32 Classes VI, V and IV had net returns per worker less
‘ than this amount
Part of this difference in net returns per worker between the different
size groups can be 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 ll farms. investment per worker increased up
through Class ll farrns and land and capital inputs per worker increased
without exception from Class V through. Class lfarms. Note also that

 -14-
the increase in acres per worker and in total investment per worker was much
lower than the rate of increase in net returns per worker., Actually, land and
capital inputs per worker give a more accurate picture of the resources used
along with labor. These inputs include cash farm expenses which ran high on ·
the larger farms, particularly in the form of feed and feeder livestock pur-
chases.
Table 4. Resource and Product Ratios for Productivity of Labor, Land and Capital, lv
Economic Area VII Kentucky, 1949. (Source: U. S. Census and Estimates) .
VI V IV III II I Average
Number of workers
(man-years of all
labor) 1.00 1.18 1.58 2.25 3.40 10.78 2.04
Residual to labor
per worker $ -253 $ 529 $1,042 $1,326 $1,390 $1,562 $1,132
Acres per worker 42 50 51 53 71 63 56
Total investment
per workery $8,246 $9,097 $11,577 $14,636 $21,923 $21,853 $15,113
Land and capital
inputs per workerzf $1,363 $1,424 $ 1,601 $ 2,009 $ 2,968 $ 3,646 $ 2,223
Iptal product EI worker $1,111 $1,953 $ 2,643 $ 3,335 $ 4,358 $ 5,208 $ 3,335
jflncludes investment in land, buildings, livestock and machinery
Q/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.
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.
5). This comparison gives a rough idea of what one farm worker produced
with various amounts of land and capital, Total product per worker increased
from $1, lll on the smallest farms (Class VI) to $5, 208 on the largest, (Class
I), At the same time, land and capital inputs per worker increased from
$1, 363 to $3,646. Notice that total product per worker increased throughout
as land and capital inputs per worker increased. '
From the figures, one might surmise that any one farm operator could
take $3, 646 in land and capital inputs (annual inputs) and produce $5, 2.08 in
product., This notion may be entirely wrong. To illustrate, we have already
seen that Class I farms had nearly ll workers per farm and produced $56,145
in product with $39, 307 in input of other resources (other than labor); but one
farm operator with $39, 307 in other resources and ernploying l0 men is a
different situation than ll men each with about $3, 646 in other resources.

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Net returns to labor per worker were also compared with land and capital
per worker (Fig. 5). Net returns to labor per worker increased up through
Class I farms with increases in land and capital per worker. The rate of in-
crease is sharper from Class VI through Class`III than from Class III and ‘
beyond (Class V1 farms actually showed negative returns). A small farm , i
realizes a larger increase in returns than a bigger farm from adding a given
amount of land and capital inputs. **
On small farms the total costs of producing $1 in product was more than $1
High profits in relation tocosts is a measure