xt7pk06wzb1p https://exploreuk.uky.edu/dips/xt7pk06wzb1p/data/mets.xml   Kentucky Agricultural Experiment Station. 1957 journals 053 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.53 text Progress report (Kentucky Agricultural Experiment Station) n.53 1957 2014 true xt7pk06wzb1p section xt7pk06wzb1p Progress Report 53 April 1957
A S1ze-of -F arm Problem 111
Econonue Area 3B
Department of Agricultural Economics

By Harald Jensen and Luther Keller
Farm families on small farms in Economic Area IIIB are not getting
much income for the time spent in farming. This fact, together with other A
evidence 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 relationships, 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 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 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 income 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: (1) com-
mercial 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 com-
mercial 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. Economic Area IIIB includes Bullitt, Green, Hardin, Hart,
Larue, Meade and Taylor counties (location shown on cover).

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
t V $ 1,200 to$ 2,499
VI $ 250 to$ 1,199
Hence, in studying the size -of—farm problem in the Economic Area IIIB
we can compare incomes, costs, investrnents and resource combinations for
six different size of farm groups, for volunie 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 re-
sources used during the year is also sometimes used. Acres, since they repre-
sent) 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 by Size Classes,
Economic Area IIIB, Kentucky, 1949. (Source: U.S. Census and Estirnates)
Acres Total Total inputs N0., Percent
Class of per Gross Sales capital used during of farm in
Egm farm invested · the year farms each class
I 515 $25, 000 — over $66,204 $34,602 22. .2
I II 348 ` 10,000 — 24,999 42,230 11, 689 173 1. 7
III 202 5,000- 9,999 24,684 7,294 729 7.3
_ IV 135 2,500- 4,999 14,570 4,060 2117 21.1
V 96 1,200- 2,499 8,084 2,615 3776 37.6
VI 70 250- 1,199 4,532 1,733 3225 32.1
According to the 19-50 census, most of the commercial farms in Eco-
nomic Area IIIB fell into Class V, with sales of $1, 200 to $2, 500 (last two
colurnns, 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
1 third in nurnber. Thus, about 91 percent of all commercial farms in Eco-
nomic Area IIIB had sales of less than $5, 000, which leaves only 9 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).

Table 2. — Income and Cosz for Commercial Farms in Economic Area IIIB, Kentucky, 1949 .
(Source: U. S. Census and Estimates) I
Class of farm Vi V N IH II I Average
1. Total product $1185 $2311 $4100 $7406 $14, 969 $37,708 $2992
2. Total inputs 1733 2615 4060 7294 11,689 34,602 3200 A
a. Cash farm
expenses _1/ 267 635 1303 3143 6,109 25,172 I 988
b. Interest on ·
and livestock 137 262 489 834 1, 356 2, 427 334
c. Interest on
land 115 193 338 569 1, 018 1, 405 241
d. Depreciation
on buildings
and machinery 107 210 388 650 929 1, 854 262
e. Labor costs 2/ 1107 1314 1542 2098 2, 277 3,745 1374 _
3. Income above cash _
farm expenses 918 1676 2797 4263 8, 860 12,536 2004
4. Residual to labor 559 1010 1582 2210 5,557 6,551 1166
S. Residual. to
mmaganggt -548 _____;§04 40 112 3, 280 2, 806 -208
1/ Includes aLl cash farm operating expenses except hired labor costs
2/ Includes operator, family and hired labor
'l`he income or value of total product figures include the value of all
farrn products sold as well as the value of those used in the home (line 1,
Table 2). 2/ These incomes ranged all the way from $1,185 on Class VI
farms to $-37, 708 on Class I farms.
Inputs higher Ielative to incomes on small farms
The total input figures (line 2) included both out·of—pocket and over-
head costs. Total inputs ranged from $1,733 on Class VI farms (which had
incomes of $1,185) to $34, 602 on Class I farms (which had incomes of
$37, 708). 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
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 singleinput 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;
§f_The rental value of the home has not been included.

interest on land investments; 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 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
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,feed, and livestock and `
poultry purchases. Cash farm expenses are by far the most irnportant cost
on the large farms; on Class I farms they totaled up to $25, 172.
Interest on building, 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 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
item 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 less than 4 times while total inputs increased about 20 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 estirnated 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 $918 on Class VI farms
to $12, 536 on Class I farms (Table 2). These income figures indicated that
all size groups were able to pay "cash farni expenses" and have something
left over for interest, depreciation and labor charges.
1 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 $559 on Class VI
farms to $6, 551 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 IV, III, II and I farms showed a profit or a positive return

to management. Class V1 farms had a negative management return of $548; t
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 — $2, 499 or an average product valued at $2, 311) had a
negative return of $304. 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 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 draw.n 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 and V farms (farms with gross sales of less than
$2, 500)show negative returns. These are also the ones below the horizontal
line at 1.0 (Fig. 1), and they represent 70 percent of all commercial farms
in Economic Area IIIB. 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 l
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. 3/ 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. 4/ Economically, the losses on these farms
mean that the labor and capitalzmployed 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 $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 broken line, one can more readily visualize the economies of size available
to farms in Economic Area IIIB. As shown, the economies of size (average
efficiency) increase from Class VI (with gross sales of $250 - $1, 200) to
Class ll 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 we _
2/ The $947 was the annual average wage for hired farm labor in Kentucky,
j/ 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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 -3- 1
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 an- `
nual inputs in the form of depreciation on buildings and machinery, interest
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 op-
erating 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 ll as does Fig. 1, but in average efficiency the big
farms show up relatively better in Figure 2 than in Figure 1. The economies
of size illustrated here (Figs. l and 2) have important implications in long-
run planning particularly 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 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 out-of-pocket costs and
have something left over. But what was left over was insufficient to pay the
overhead cost and the conservative wages charged to operator and family
labor on Class Vl and V farms (farms with gross sales of less than $2, 500).
Table 3. - Income and Costs for Commercial Farms in Economic Area IIIB, Kentucky, 1949
(Source: U.S. Cmsus and Estimates)
Class of farms VI V IV IH II I Average --1
1. Total product $1185 $2311 $4100 $7406 $14, 969 $37, 708 $2992
2. Total inputs 1733 2615 4060 7294 11,689 34,602 3200
a. Out-of—pocket
costs _1/ 286 718 1479 3558 6,915 27,210 1112
b. Overhead costs -
other than
operator and
family labor 359 665 1215 2053 3, 303 5, 686 837
c. Operator and
family labor 1088 1231 1367 1683 1, 371 1, 707 1250
3. Retums after
paying out·of—
pocket costs 899 1593 2621 3848 8, 054 10,498 1880
4. Residual returns
to operator and
family labor S40 928 1406 1795 4, 751 4, 812 1043
  Includes cash farm expeuse= plus hired labor costs.

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Before we exarnine 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 IIIB are field crops and livestock and livestock products other
than dairy and poultry, except on Classes VI and V farms (farms with gross
sales of $250 - $2, 499) 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 about 42
percent of the total on Class V farms to about 20 percent on Class II farms,
the percentage tending to decrease with increasing size of farm. The relative
importance of income from dairy products varied from approximately 5 to ll
percent among the classes of farms. The percentage contributions of poultry
sales and home-consumed products to gross income declined steadily with in-
crease in size of farm.
Income from livestock other than dairy and poultry increases with increase
in farm size
On the other hand, the relative importance of livestock and livestock
products (other than dairy and poultry) as a source of income increased as
size of farm increased. On Class VI farms livestock and livestock products
accounted for only 15 percent of the gross income, whereas on Class I farms
they made up nearly 64 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 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, i·
interest on buildings, machinery and livestock investments, and depreciation
on buildings and machinery.
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.

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From the figures one might surmise that any one farm operator could .
take $7, 812 in land and capital inputs (annual inputs) and produce $9, 546 in
product. This notion may be entirely wrong. To illustrate., we have already
seen that Class I farms had nearly 4 workers and produced $37, 708 in product
with $30, 857 in other resources (other than labor);but one farm operator with
$30, 857 in other resources and employing 3 other men is a different situation
than 4 men each with about $7, 812 in other resources.
Net returns to labor per worker were also compared with land and cap- A
ital inputs per worker (Fig. 5). Net returns to labor per worker increased
up through Class II farms with increases in land and capital per worker. Net
returns per worker were slightly lower on Class I farms than on Class II farms.
Possibly the labor—capital combination on Class I farms was not in as balanced
proportion as on Class II farms. Land and capital per worker increased about
100 percent from Class Il to Class I farms while number of workers per farm 3
increased from 2. 40 to 3. 95.
On small farms the total cost of producing $1 in product was more than $1
High profits in relation to costs is a measure of over-all efficiency or
productivity. For farms to show a profit, the cost of producing $1 in product t
must cost less than $1. Our study shows that Class II farms produced a $1
of product with only $0.77 (Fig. 6). This $0.77 included all inputs - cash
farm expenses, interest_on land, buildings, livestock and machinery invest-
ments, depreciation on buildings and machinery plus a charge for hired, opera-
tor and family labor. On Class I farms, it cost $0. 92 to produce a $1 of pro-
duct while on Class III farms the cost was $. 97. But on Class V and VI farms (
it cost more than $1 to produce a $1 of product; costs on those farms were
$1.11, and $1.46, respectively, for $1 of product. For these small farms,
these figures indicate losses.
Small farms had the lowest cash costs per $1 of product
But. of course, we know that these small farms did not pay operator and
farnily labor and their investment inputs at the going rate of return. For
farms that do not have to pay for their own labor and their investment inputs,
cash farm expenses per $1 of product may be more meaningful, at least in
the short —run. It is when cash farm expenses cannot be met that farm fami-
lies sooner or later must give up farming. Data shown in Fig. 6 help to
explain why many small farmers are able to stay in business even when total
product may not be great enough to cover all costs. Since only cash costs
have to be paid in the short-run, all classes of farms (including the small
farms) had some income left over for themselves. However, when consider-
ing all inputs, the small farms definitely come out short. This fact becomes
very apparent when we compare the returns in farming with those in industry.

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To compare the returns to labor and investment in capital and land
' in farming with the opportunity return for these resources in industry, we
first need to arrive at suitable wage and interest rates as a basis for figuring
the opportunity returns. An