xt7jws8hg911 https://exploreuk.uky.edu/dips/xt7jws8hg911/data/mets.xml Kentucky Agricultural Experiment Station. 1957 journals 051 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.51 text Progress report (Kentucky Agricultural Experiment Station) n.51 1957 2014 true xt7jws8hg911 section xt7jws8hg911 I Progress Report 51 April 1957 _
SOME ASPECTS OF THE
S1ze-of-Farm Problem 111
ECOIIOHIIC Af€& 2
By HARALD R. JENSEN and LUTHER KELLER
Department of Agricultural Economics
AGRICULTURAL EXPERIMENT STATION
UNIVERSITY OF KENTUCKY
1 LEXINGTON
SOME ASPECTS OF THE SIZE-OF-FARM PROBLEM
IN ECONOMIC AREA II
(THE PURCI-IASE)__I7
By Harald Jensen and Luther Keller U
Farm families on small farms in Economic Area II 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 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-
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, (Z) 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 l
of farm product decrease with increases in acre size (acres is only one of
a number of measures of farm size), a 2.00-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 tha.t a larger volume
of business might mean lower incomes or even losses. Using more land
l 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 (l) to determine the relationship between farm I
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 I
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: (I) commercial and (2) other, which includes, part-time,
residential and unusual, such as institutional farms, In general, all farms
that sold $1, 2.00 or more of farm products were classified as commercial
farms. In addition, farms with farm product sales, of $2,50 - $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 J
` products sold, The Census then divided all commercial farms into six
_ classes on the basis ofthe 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. Economic Area II includes Daviess, Union, Hender-
son, McLean and Webster counties.
,.4.,
Class Value of farm products sold ·
It $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 Economic Area II
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 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,
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,
I ¤ · Economic Area II, Kentucky, 1949
Class Acres Total Total imputs Number Percent of
of per Gross sales Capital used during of farms in
Farms Farm Invested {die year Farms each class _
I 834 $25,000 and Over $116,709 $40,520 94 1.5
Il 419 10,000 - $24,999 51,030 12,376 412 6.5
III 222 5,000- 9,999 27,433 6,828 767 12.1
IV 148 2,500- 4,999 16,474 4,467 1,401 22.1 p
V 96 1,200- 2,499 10,175 2,869 1,915 30.2.
VI 75 250 - 1,199 5,921 1,916 1,756 27.6
Source: U.S. Census and estimates.
According to the 1950 census, most of the commercial farms in
Economic Area II 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 number. Thus, about 80 percent of all commercial farms
in Economic Area II had sales of less than $5, 000, which leaves only Z0
percent with sales of $5, 000 and above. i
With this general background. let us take a closer look at incomes _
and costs on these farms of varying size (Table 2).
-5.. ‘
Table 2. - Income and Costs for Commercial Farms in Economic Area II, Kentucky, 1949
_ Class of farm VI V IV IH II I Average
I 1. Total Product $1,056 $2,096 $3,927 $6,945 $14,801 $45,102 $4,261
2. Total inputs 1,916 2,870 4,467 6,827 12,376 40,520 4,613
a. Cash farm
expenses* 394 787 1, 515 2, 823 5, 186 21, 985 1, 685
b. Interest on buildings
machinery and
livestock 189 334 55 1 823 1, 500 3, 534 524
c. Interest on land 144 241 383 698 1, 319 2,950 412,
d. Depreciation on
buildings and
machinery 172 307 494 700 1, 220 2, 682 453
e. Labor costs** 1,017 1,201 1,524 1,783 3, 151 9,369 1,539
3. Income above cash
fami expenses 662 1,309 2,412 4, 123 9,615 23, 117 2,576
4. Residual to labor 157 427 984 1,901 5,576 13,951 1, 187
5. Residual to management -860 -774 -540 118 2,425 4,582 -352
Source: U.S. Census and estimates.
*Includes all cash farm operating expenses except hired labor costs.
**Inclndes 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)u&/ These incomes ranged all the way from $1, 056 on Class VI ·
farms to $45,102 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, 916 on Class VI farms (which had
incomes of $1, 056) to $40, 520 on Class I farms (which had incomes of $45,
102). 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 unitslclould spread their fixed or overhead
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 investment;
2/ The rental value of the home has not been included.
.:6...
interest on land investment; depreciation on buildings and machinery; and
labor costs. Of all the inputs included here, actually only cash farm ex-» »
penses and hired labor costs involved a cash outlay. But a charge for
operator and family labor and interest on investment were included as in-
puts to show how net farm income compares with the returns which could s
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 machine
hire and repair, fuel and oil seeds, fertilizer, and feed, livestock and V
poultry purchases. Cash farm expenses are by far the most important cost
on the large farms; on Class I farms they totaled up to $21, 985. ’
Interest on buildings, machinery, livestock and land investments
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 interest values or "c:osts" 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 ex-
penses 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
9 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 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 $662 on Class VI farms
to $23, 117 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 indis l
cated by "residual to labor" these amounts ranged from $157 on Class VI
farms to $13. 951 on Class I farms (Table 2). The amounts listed represent _
what is left as payment to labor and rnanagernent.
But after labor and all other input items except management were sub-
tracted, only Class Ill, II and I farms showed a profit. or a positive return
Q7-
to management, Class V1 farms had a negative return of $860; they were
short this much after paying cash farm expenses plus reasonable charges
for labor and capital investment, Even Class lV farms (farms with gross
sales of $2, 500 - $5, 000 or an average product valued at $3, 927) had a
negative return of -$540, These positive and negative returns are impor-
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
l six classes of farms., A ratio of 1, 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., 0 has
special significance, All farms below this line show a loss while the farms
above the line show a profit.
ln Table 2, Class Vl, V` andlV farms (farms with gross sales of less
that $5, 000) show negative returns, These are also the ones below the
horizonal line at l., 0 (Fig. 1), and they represent 80 percent of all com-
mercial farms in Economic Area ll. The fact that these farms show losses i
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 invest-
ment costs which were charged against their labor and capital., 2/ lf the
farm families on these small farms (Classes Vl, V and IV) were entirely
motivated by profit they would either increase the size of their farming
operations or transfer their labor and capital into eumployment 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 in--
dustry or on larger farms, The positive returns or the "plus 1. 0" 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 some-
thing left over.,
Economies are associated with increased sine
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 ll, As shown, the economies of size
(average efficiency); increase sharply from Class V1 (with gross sales of
$250 - $1, 200) to Class lll farrns (with gross sales of $5, 000- $10, 000);
1 · the increase beyond Class Ill farms appears less sharp. 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
the annual average wage for hired farrn labor in Kentucky,
T949,
4/ Of course, money income and the goods and services it will buy are
only one of the goals which make up the complex of family satisfactions.,
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farms. For this 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, interest on land, buildings, machinery and live ·-
stock 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. y
Figure 2 shows economies of size (increasing average efficiency)
for farms from Class VI to I as does Fig. 1, but the rate of increase in
average efficiency is more constant in Fig. Z. The economies of size
illustrated here (Figs. l and Z) have important implications in long—-run
planning particularly as such planning relates to the size of farm which
can be expected to be most prof‘itab‘le,.
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. Whe_n 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 g_r011pS·0f farms were able to pay out-
of-pocket costs and have something left over. But what was left over was I
insufficient to pay the overhead, cost and the conservative wage charged to
operator and family labor on,.6lass`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 II, Kentucky, 1949
Class of farm VI V' IH II I Average
1. Total product $1,056 $2,096 $3,927 $6,945 $14,801 $45,102 $4,261
2. Total inputs 1,916 2,870 4,467 6,827 12,376 40,520 4,613
a. Out-of—pocket
costs1/ 415 864 1,702 3,300 7,027 30, 171 2,053
r b. Overhead costs
other than op-
— erator and family
labor 505 882 1, 428 2, 221 4, 039 9, 166 1, 389
` c. Operator and
family labor 996 1, 124 1,337 1,306 1,310 1, 183 1, 171
3. Returns after paying out-
of—pocket Costs 641 1,232 2, 225 3, 645 7, 774 14,931 2, 208
4. Residual Returns to
Operator and Family
Labor 136 350 797 1, 424 3, 735 5,765 819
Source: U.S. Census andllstimates.
1/ Includes cash farm expenses plus hired labor costs.
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PRODUCTION AND RESOURCE COMBINATIONS
I Before we examine the reasons why incomes are much lower in re-
° lation 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 II 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. Class I farms where the per-
centage contributions was about 2.5., The relative importance of income
from dairy products varied from approximately 3 to 5 percent among the
classes of farms.,
The percentage contribution of poultry sales and home consumed
products to gross income declined steadily with increase in size of farm,
Income from livestock other than dairy and poultry increases 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 increasedc On Class Vi farms livestock and live-
stock products accounted for only &2 percent of the gross income whereas
on Class I farms they made up over 65 percent of the income., A 1
To get the complete picture, we need to know what resources are
, required 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 resourcest Thus, the
annual contribution. of land was estimated at 5 percent of the total land in-
` vestmentt, 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 machineryt
Percentagewise, land was about equally important on all farms, irre-
spective of size., For all size groups it made up a relatively small propor-
tion (8 percent) of the total annual inputs.,
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Labor inputs rank highest on small farms while capital inputs rank highest
on large farms —- `
Lab_or inputs were relatively more important on the smaller farms
than on the larger farms. In fact, on Class VI farms, labor inputs were
more important than all other inputs combined. In contrast on the larger
farms (Classes IV, III, II and I) capital was by far the most important in- _
put 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 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, 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
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 la.nd and capital),
except labor inputs from gross income. This gives a rough estimate of
what labor earns. Heretofore, we have either figured the residual return I
to all labor or to all operator and family labor for different classes of farms.
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 1 and 2, Table 4).
Returns to labor per worker is low on small farms
Notice that the average number of workers per farm increases about _
3 times from Class VI to Class II farms, but the residual to labor per work-
er (net returns per worker) increased about ll times. Returns per worker V
were slightly lower for Class I farms than for Class II farms. The last
column in the table shows an average net return per worker for all farms of
$728, Classes VI, V and IV had net returns per worker less than this
amount. Class V1 farms had only a $147 return while Class II farms had
$1, 674 or a difference of $1, 527.
-15-
Table 4. ·~ R€S¤u1‘C€ and Product Ratios for Productivity of Labor, Land and Capital
Economic Area II, Kentucg, 1949.
Class of Farms VI V IV III II I Average
Number of Workers
(Man—yea.1·s of a.LlI.abor) 1.07. 1.27. 1.61. 1.88. 3.33 9.89. 1.63
V Residual to labor per
worker $ 147 $ 337 $ 611 $ 1,011 $ 1,674 $ 1,411 $ 728
Acres per worker 70 75 92 118 126 84 91
Toml investment
per worker_1/ $5,534 $8,012 $10,232 $14,592 $15,324 $11,801 $10,267
Land and capital
inputs per w¤rker_2/ 840 1,314 1,828 2,683 2,770 3, 150 1,886
Total product per
worker 987 1, 650 2,439 3, 6.94 4, 445 4, 560 2, 614
Source: U.S. Census and Estimates.
1 Includes investment in land, buildings, livestock and machinery.
_2/ 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.
P