xt7jm61bmn2k https://exploreuk.uky.edu/dips/xt7jm61bmn2k/data/mets.xml   Kentucky Agricultural Experiment Station. 1957 journals 054 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.54 text Progress report (Kentucky Agricultural Experiment Station) n.54 1957 2014 true xt7jm61bmn2k section xt7jm61bmn2k Progress Report 54 April 1957 _
SOME ASPECTS OF THE
S1ze-of-Farm Problem 111 L
•
Eeo11om1e Area 4
By HARALD R. JENSEN and LUTHER KELLER
Department of Agricultural Economics
A  
» é
S AGRICULTURAL EXPERIMENT STATION
UNIVERSITY OF KENTUCKY
V LEXINGTON

 SOME ASPECTS OF THE SIZE -OF—FARI\/LPROBLEM
IN ECONOMIC AREA llV_il/
By Harald R. Jensen and Luther Keller
Farm families on small farms in Economic Area IV are not getting much
income for the time spent in farming. This fact, together with other evidence
which follows, suggests that farm size has a l.ot to do with size of income from (
farming. Farm size is related to income in these ways: (1) The amount of
income depends onthe 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 arnount of re-
sources 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 l00—acre farm.,
Increase in size of farm alone, does not guarantee larger incomes.
Some farms are operated so inefficiently that a l.arger 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 th.e 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 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 (Z) other, which include part ·—time,
residential and unusual, such as institutional farms, `lin 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;
}_/ This study is based primarily on data from the United States Census
of Agriculture, 1950. Economic Area IV includes Christian, Logan, Barren,
Warren, Simpson, Trigg and Todd counties.

 ..3-
Class Value of farm products sold
I $25, 000 or more
II $10, 000 to $24, 999
I 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 IV we can
compare incomes, 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 exarnple, _ acres are often used as a measure of
size. Total capital investment or the total dollar value of all inputs or re-
sources used during the year is also sometirnes used. Acres, since they re-
present only one of the resources (land) used in farming, do not always ac-
curately 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. —  he Number of Commercial Farms in Size Classes,
Economic Area IV, Kentucky, 1949 (Source: U. S. Census and Estimates)
Acres Total Total inpum Percent
Class of per Gross sales capital used during No. of farms in
farm farm ingested the year farms each class
I 700 $25,000 8 over $100, 217 $35,984 115 . 8
_ II 349 10, 000-24, 999 46, 012 12, 934 602 4. 2
III 200 5,000- 9,999 24,635 6,492 1437 10.0
IV 132 2,500- 4,999 14,988 4,031 3191 22.1
V 90 1,200- 2,499 8,612 2,588 4917 34.2
VI 64 250- 1,199 5,079 1, 850 4130 28.7
According to the l95OCensus, most of the commercial farms in Eco-
, nomic Area IV fell into Class V, with sales of $1, 200 to $2, 500 (last two
columns, Table 1). 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 nunqber. Thus, about 85 percent of all commercial farms in Economic
Area IV had sales of less than $5, 000, which leaves only 15 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 IV, Kentucky, 1949
(Source: U.S. Census and Estimate)
Class of farm VI V IV lll H I Average _
1. Total product $1,134 $2,219 $3,944 $7,300 $15,305 $42,125 $3,663 I
2. Total inputs 1,850 2,588 4,031 6,492 12,934 35,984 3,789
a. Cash farm
expenses 1/ 338 665 1, 260 2, 602 6, 374 21, 358 1, 301
b. Interest on ·
buildings,
machinery
and livestock 160 273 475 766 1, 367 2, 882 402
c. Interest on
land 124 210 355 610 1, 180 2, 630 321
d. Depreciation
on buildings .
and machinery 146 237 407 627 1, 063 2, 245 339
e. Labor costs Q 1087 1,203 1,524 1, 887 2,951 6,868 1,426
3. Income above cash
farm expenses 796 1,554 2,678 4,698 8,931 20,767 2,362
4. Residual to labor 367 834 1,437 2, 695 S, 322 13,009 1,300
5. Residual to
management -715 -369 -87 808 2, 371 6, 141 -126
1/ 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 includes the value of all g
farm products sold as well as the value of those used in the home (line 1,
Table 2). ;_/ These incomes ranged from $1, 134 on Class VI farms to ·
$42, 125 on Class I farms.
Inputs higher relative to incomes on small farms _
The total input figures (line 2) included both out—of—p0cket and over-
head costs. Total inputs ranged from $1, 850 on Class VI farms (which had
incomes of $1, 134) to $35, 984 on Class I farms (which had incomes of $42, 125).
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 investments;
interest on land investment, depreciation on buildings and machinery and
2/ The rental value ofthe h  •· •. •• •·~• . •·• _

 -5-
labor costs. Of all the inputs included here, actually only cash farm ex-
penses and hired labor costs involved a cash outlay. But a char ge for opera·—
tor 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
A 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 machine hire
and repair, fuel and oil, seeds, fertilizer, and feed, livestock and poultry pur-
chases. Cash farm expenses are by far the most important cost on the large
farms; on Class I farms they totaled up to $21, 358. .
Interest on buildings, machinery, livestock and land investment shows
what the farm operator could make if he could reinve st the rnoney 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 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 item on the small farms.
Notice that the increase in labor inputs from Class VI to Class lj farms was
not as large as the increase in total inputs. Labor inputs increased less than
7 times while total inputs increased about 9 times.
Depreciation on buildings was charged at 5 percent of the estimated 1949
value, while machinery depreciation was charged at l0 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 mangeriienig
Before interest, depreciation and labor inputs were subtracted, all size V
groups had some income, which ranged from $796 on Class VI farms t·;·$20, 767
on Class I farms {Table 2). These income figures indaczated that all s? ze groups
were able to pay "cash farm expenses" and have something left over for lnter—
` est, depreciation and labor returns.
Likewise, before labor inputs were subtracted {but after all other in-
put items have been subtracted) all srze groups had some inconie. As indi-
` cated by "residual to labor" these amounts ranged frorn $367 on Class VI farms
f to $13, 009 on Class I farms (Table 2). The arnounts listed represent what is
left as payment to labor and management.
But after labor and all other input items except rnanageme nt were sub-
tracted, only Class III, ll and I farms showed a profit or a posative return to
management. Class VI farms had a negative management return ot ·$7 I5;
they were short this much after paying cash farm expenses plus reasonable

 -6..
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, 944) had
a negative return of —$87. These positive and negative returns are impor-
tant in our analysis. To really see their importance requires a graphic pic-
ture (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. 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, V and IV farms (farms with gross sales of less
than $5, 000) show negative returns. These are also the ones below the hori-
zontal line at 1. O (Fig. 1), and they represent 85 percent of all commercial
farms in Economic Area IV. The fact that these farms show losses does not
mean they are going into debt or that the families are starving. But it does
mean that they failed to make cash farm expenses together with the conserva-
tive wage ($947 per mature worker) and investment costs which were charged
against their labor and capital. 2./ If the farm families on these small farms
(Classes VI, V and IV) were entirely motivated by profit,they would either in-
crease the size of their farming operations or transfer their labor and capital
into employment other than farming. 2/ 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 returns or the
"plus 1. 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 I
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 Economic Area IV. As shown, the economies of size (average
efficiency) increase sharply from Class VI (with gross sales of $250 —$l, 200) V
to Class II farms (with gross sales of $10, OOO — $24, 999). Class I farms are .
actually not quite as efficient as Class II farms. However, there are logical
reasons for believing that the value of the total product/value of total input
ratios (Fig. 1) underestimates the average efficiency of the large, specialized
farms in relation to the smaller, more diversified farms. For this reason _
2/ 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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we show the relation between value added/value of fixed inputs ra`tios 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, inter-
est 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 farm
operating expenses. Thus, the value added/value of fixed inputs ratio shows _
the net returns to the relatively fixed factors in farming. (
Figure 2 shows economies of size (increasing average efficiency) for
farms from Class VI to I and the rate of increase in average efficiency is (
more constant in Fig. 2 than in Fig. 1. The economies of size illustrated
here (Figs. 1 and 2) have important implications in long—run planning,partic—
ularly 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 opera-
tor and fanoily 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 la-bor (Table 3). All size groups of farms were able to pay out—of—
pocket costs and have something left over. But what was left over was in-
sufficient 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, 000).
Table 3. - Income and Costs for Commercial Farms in Economic Area IV, Kentucky, 1949
(Source: U.S. Census and Estimates)
Class of farm VI V IV Ill II I Average —
1. Total product $1134 $2219 $3944 $7300 $15,305 $42,125 $3663
2. Total inputs 1850 2588 4031 6492 12,934 35,984 3789
a. Out-of-pocket
costs _1/ 374 740 1458 3125 8,075 27,166 1551
b. Overhead costs
other than
omrator and
family laboc 430 720 1247 2003 3, 610 7, 757 1062
c. Operator and
family labur 1046 1128 1326 1364 1,250 1,060 1176
3. Returns after pays
ing cut·of·-pocket
com 760 1479 2486 4175 7, 230 14, 959 2112
4. Residual Returns
to operator and
family labur 330 759 1239 2172 3,620 7, 202 1050
L1' Includes cash farm expenses plus hired labu cosis.

 -9-
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 -10-
PRODUCTION AND RESOURCE COMBINATIONS
Before we examine the reasons why incomes are much lowe r 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 l
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 IV are field crops and livestock and live stock 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)..
Income from field crops for size groups of farms varied from 22 to 45
percent of the total and tended to decrease (as percentage of total) with in-
creases in size of farm. The relative importance of income from dairy pro-
ducts varied from approxirnately 9 to 13 percent among the classes of farms.
The percentage contribution of poultry sales and home—consurned products to
gross income declined steadily with increase in size of farm up to Class I
farms where the percentage contribution of poultry sales was more important
than for any of the other size groups.
Income from livestock other than dairy and poultry increased with increase
in size of farm
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 Class VI farms livestock and live- r
stock products accounted for only 15 percent of the gross income, whereas
on Class I farms they made up over 57 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. 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 an-
nual contribution of land was estimated at 5 percent of the total land invest-
ment. 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.

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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
(8 percent) of the total annual inputs. . V
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. In fact, on Class VI farms labor inputs were more im-
portant than all other inputs combined. In contrast, on the larger farms
Class IV, III, II and I 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 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.
‘ PRODU