xt7tdz030t16 https://exploreuk.uky.edu/dips/xt7tdz030t16/data/mets.xml Kentucky Agricultural Experiment Station. 1953 journals 007 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.7 text Progress report (Kentucky Agricultural Experiment Station) n.7 1953 2014 true xt7tdz030t16 section xt7tdz030t16 THE EARNING POWER OF INPUTS,
INVESTMENTS, AND EXP ENDI TURES ON
` UPLAND GRAYSON COUNTY FARMS
DURING I95I
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N
Thomas G. Toon
‘i
Progress Report No. 7
(R 8i MA GO)
Kentucky Agricultural Experiment Station
University of Kentucky with
Tennessee Valley Authority Cooperating
January I953
CONTENTS
AGRICULTURAL INTERESTS ¤............=... 1 U
THIS STUDY .,.,...... . ..,¤¤.......... 2. l
THE EARNING POWER OF LAND .....“......... 3 A I
THE EARNING POWER OF LABOR .....n...¤.... 4
THE EARNING POWER OF THE FORAGE—LIVESTOCK 6.
INVESTMENT .....A......°., . .°¤..... 4
THE EARNING POWER OF MACHINERY INVESTMENTS. . . 6
THE EARNING POWER OF CURRENT OPERATING _
EXPENDITURES ................v....... 6
POSSIBLE REORGANIZATION OF THE USUAL SIZE FARM. . 7 I
SCALE OF OPERATION ............... . ..... . 9
GENERAL CONCLUSIONS ..¤................. 11
f
_ THE EARNING POWER OF INPUTS,
INVESTMENTS, AND EXPENDITURES ON UPLAND
GRAYSON COUNTY FARMS DURING I95_I
The basic problems which Grayson county farmers face are not as new J
and revolutionary as those faced by farmers in other areas of Kentucky. Gray-
" soncounty is close to Louisville and Fort Knox, where farmers have been able
to obtain off-farm employment and still live on their farms. Thus, they are
_ continually confronted with the problem of choosing between:
1. Working full—time on their farms.
2. Working part time on their farms and seeking part-time employment
off their farms.
3. Seeking full-time employrnent off their farms.
Farmers who choose to work full-time on their farms are confronted with
the problem of using the resources available to them to produce and market the
products which will net the highest income. To do this farmers must:
l. Use efficient production techniques.
Z. Raise those crops and livestock which can be produced and marketed
to return the highest earnings to the inputs, investments, and expen-
ditures necessary for their production.
3. Combine the quantities of inputs, investments, and expenditures in
the proportions which will return the greatest income for the cost
involved in using them.
4. Sell their products in the most profitable existing markets.
5. Choose the size of farm operation which may be operated most
profitable with the capital available to the individual farmers.
AGRICULTURAL INTERESTS
, Farmers, agricultural leaders, real estate and loan agencies, and others
are always interested in the earning power of inputs, investments, and expendi-
tures in farming. They want to know whether investments in such things as
’ livestock and forage or machinery are paying off, and whether land is returning
enough to pay for using it in certain farm production. Farmers are interested
in whether family labor is earning as much when used on the farm as it could
earn in industrial work. They are concerned with how the earning power of a
particular input is affected by changes in quanitity of other inputs and investments
when they are used together. One of the primary questions in upland Grayson
county farming is how investments in forage—l1vestock farming pay off, because
the rather hilly lands of the county seem better adapted to a forage-livestock
farming program than to more intensive row-crop cultivation.
THIS STUDY
Financial records from account books and by interview were taken from
thirty upland Grayson county farms for the calendar year, 1951. These records
were analyzed to get estimates of the following: `
1, The earning power of groups of inputs, investments, and expenditures
used in farming, such as land, labor, forage -livestock inve stxrients, ;
machinery investments, and current operating expenditures,
2, How the earning power of other inputs change when used in combination ‘
with more of the inputs which are earning high returns.
3, The ways of reorganizing a farm to get higher income from the farm I ·
business.,
Total Earnings and Earnings of "
The Last Input Unit are Estimated
In this study two types of estimates were made: (1) total earnings of
the farm business, and (2) amount of change in total earnings caused by using ,
one more unit of certain groups of inputs, such as, 126. 9 acres instead of
125. 9 acres of land; 15, 82 instead of 14, 82 months of labor; a forage -livestock
investment of $3, 608 instead of $3, 607; a machinery investment of $1, 381 `
instead of $1, 380; or $1,162 in other expenditures instead of $1,161. In
other words estimates were made of (1) gross income, and (2) how much was
added to gross income because one more unit of a particular input was used,
In fact, most units of the inputs and investments were present for the _
entire year, Farm size did not change during the year and forage -livestock
and machinery investments were adjusted so that they were in dollars invested V
for the entire year -·= so, the 1ast—unit earning is the change in gross earning
caused by using that number of units instead of using one less unit of the input
on the farms studied,
OUANTITY OF INPUTS USED BY THE
USUAL FARM OF THE SAMPLE ‘
Land (acres) · ---- ¤ -—-— ~ —-—-——----—-—-—- 126. 9
Labor (months) -—-—---~~———--·————·---— 15, 82 I
Forage -livestock investrnents (dollars) - -—-—---- $ 3,608, 00
Machinery investment (dbllars) --—-—---—---- $ 1,381 , OO _
Current operating expenditures (dollars) --—--—-- $1,162, 00
.-2-
N Land itself was not a high earner. The last acre of the usual 126. 9
_ acre farm was estimated to be earning $3. OO in 1951. "Land" was the total
acreage which the operator had under his control, whether owned, rented or
-. leased. No adjustment was made for any difference in value of the land or
for the different uses to which the land was put. The land on some farms
was probably utilized more fully than on other farms. On farms using a
" ` greater percentage of the land to the best advantage, higher earnings per
acre would be expected. The acres of land are not as important as money
earners as the guantity and organization of the investments in other pro-
ductive agents used on the land. Earnings per acre of land can be increased
by using more of other productive agents on the land and increasing production
f per acre. Less than the usual earnings would be expected if the usual number
_ of acres were used with less than the usual amounts of the other things that
are used with land to make farming pay off.
» THIS LAND WILL NOT EARN
WITHOUT OTHER INVESTMENTS AND INPUTS
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...3..
THE EARNING POWER OF LABOR
The usual amount of labor was found to be 15. 82 man-months per year.
The last man-month used was estimated to be earning $78. 00. This seems to _
be a fairly high rate of earning for the last unit of this category, considering `4
that the man—months of labor are a measure of all the potential labor of the
farm° operator and all labor hired or furnished by other members of the farm _
family. Such earnings seem to indicate that the farmers are using their labor i
fairly well. A high proportion of Grayson county farmers work off the farm.
This may account for labor being more fully utilized. The earnin s per month * " '
.of labor can be increased by using the labor with more inputs which are earn-=
ing high returns. A _,
THE EARNING POWER
OF THE FORAGE•LIVESTOCK INVESTMENT _`
This investment category is made up of two major items? 1
1. Forage investment --= the estimated value of stands of grasses and
legumes on the farm during the year. The value of the stands were estimated ·
on the basis of an acre of a good grass-legume mixture having a value be- .~
tween $35 and $40, down the scale to a value of $2 per acre for Korean les-
pedeza in conditipn to reseed itself at the beginning of the year. The cost
of additional seed and fertilizer used during the year in seeding hay and pas=
ture crops are counted as forage investments also. .
2. Livestock investment -·= the total investment on a year-dollar basis
in all breeding stock, workstock, and feeder cattle. This means that if, for .
example, an investment of $2000 in cattle was made in June and kept through
the year, the year-dollar investment would be one #-half of $2, 000. If the ine
vestment was made in January and kept through the year, the year ·—dollar `
investment would be $2, 000.
Since pasture and hay are of major importance in most livestock enter··
prises on Grayson county upland farms, it would be hard to separate the A
earnings due to investments in the two. One cannot well be considered with·=
out the other. It would be difficult to make livestock profitable without
pasture and hay. Pasture, on the other hand, would not pay off much with- -
out livestock through which to market it. Therefore, the two were combined .
into one investment category and their combined earning power was estirriated. 4
Forage -Livestock ‘ s ‘
Earnings Were High
The analysis shows that in 1951, the last dollar invested in livestock °
and forage at the usual investment level of $3, 608 was earning 24. 3 cents
per year when used in combination with the usual quantities of the other in—
puts, investments, and expenditures. This level of earning should be more
than high enough to cover interest on the investrnent and normal replacement. *
costs of livestock and the forage stands. There is logical reason to believe
-4-
, that the methods used in this study tended to underestimate the earning power
of forage-livestock investments and to overestimate the earning power of
machinery, as a result of difficulty,in separating the earnings of the two.,
This was taken into consideration in interpreting the data and making recom-
Y mendations.,
Investrnents in forage and livestock could profitably have been higher
in 1951 at the rate they were earning., Many of the farmers in this study had
high investments in young livestock and pasture in 1951 which had not yet
reached a most profitable level of production, Other farmers were milking
_ beef-type cows which probably could have been used more profitably for
beef production, In both of these cases high investments were involved, but
lower—than-normal earnings were being realized from the investments, Higher
. earnings per dollar invested will be realized in later years from the young
stock and pastures, Higher earnings could be realized from the investments
4 in livestock if they were used according to the most profitable capability of
their breeding,
Forage —Live stock Investments
Affected Earnings of Other
“ Inputs Importantly
I The usual quantities of inputs other than forage =livestock investments
earned low rates when used with small forage -livestock investrnents and higher I
rates when used with larger forage -livestock investments,
COMPARATIVE EARNING POWER OF OTHER
INPUTS USED WITH SMALL AND WITH I
1 LARGER FORAGE·· LIVESTOCK INVESTMENTS
put, `1 ` ` z M I ` ```` I
ment, or 2 on 30 Farms 2 With $1, 000fin Forage- 2 With $?\, OOO in
Expenditure 2 Studied 2 Livestock Investment ; Forage —Livestock
2 _ _A: p px : Investment
Land 2 126, 9 acres L1 $2, 40 an acre 2 $3, 37 an acre
Labor 2 _15_, 82 months: p $62, 25 a month 2 _ $87, 65 a monph
· Machinery 2 $1, 383. OO 2 _ 38 per lastimu 2 $;_54 per last $
Current Expenses: $1,162, O0 2 $, 70 perqlast $ 3___ 98 per last $
"· Gross earnings with $1, 000 invested in forage and livestock were $3, 981, Gross
earnings with $7, OOO invested in forage and livestock and no change in other in·—
- . puts were $5, 606, to give an increase of $1, 625 annually for the $6, 000 increase
in forage -livestock investments, For this $6, OOO, 14 or 15 good beef or dairy
cows valued at about $300 each could be purchased and about 65 acres of good 2
pasture could be established.
THE EARNING POWER
OF MACHINERY INVESTMENTS
The usual amount of machinery found on the farms studied had a value es- __
timated at $1, 381. These estimates were made by the owners of the machinery
at the beginning of 1951, and adjustments were made for any machines sold or
purchased during the year. ·
The analysis indicated that returns to the usual investrnents in machinery
were high under 1951 conditions. Returns to the last dollar invested were es- ·
timated at 47. 9 cents annually before maintenance and depreciation were de-
ducted. On the basis of this estimate, a considerably higher investment than l ‘
usual would have been profitable unless repair and maintenance costs were
extremely high. There was reason to believe that this estimate was somewhat _
high. Even so, the indications were that machinery was being used effectively , »
and paid off well. The earnings of this investment have to be high enough to
cover interest, repair and maintenance costs.
THE EARNING POWER I
OF CURRENT OPERATING EXPENDITURES
General expenses for items like gas and oil, feed purchased, custom I
work, hauling and freight, annual seed, fertilizer value consumed during the
year, breeding fees, veterinary costs, and others are part of each yearls ex-
penditures in a farm business. Unlike investments, which may last for several
` years, these items are consumed during one year. Since current operating
expenditures are used up during one yearls operation, they would be expected .
to earn a dollar for each dollar expended on these items during the year plus
interest on the money from the time it was spent until recovered. The esti-
mates show that the last additional dollar of the usual amount ($1, 162) expended `
for these inputs returned only 87. 6 cents to the farms on which they were used.
This estimate was believed to be low, however. By keeping these expenses
low and increasing other productive investments, these inputs can be made
to earn more than a dollar for each dollar expended for them.
It appears that the returns to machinery investment may be estimated too 4
high and that current. operating expenses may be estimated too low as compared
with actual returns to these expenditures. The two are closely interrelated
and this makes it difficult to establish the true relationship between each of
these groups of inputs, separately, and total sales from the farm. When in- , A
vestments in livestock and machinery are earning a high rate and earnings
to labor are high, as the results in 1951 indicate, it seems that the dollars —
expended for feed, gas and oil, fertilizer, and such items should at least '
earn enough to pay for themselves., Perhaps more was expended for some of
these items than should have been necessary in the operations which were
carried out. For instance, feed purchased is one of the major items in this group.
-6.-
From observation it appears that in 1951. livestock enterprises which con- I
sumed less bought feed and more home -grown feed were more profitable.
Considering the topography and nature of Grayson county soils it appears
logical that more forage and forage -consuming livestock should be grown to
A_ remedy this situationt
··¤
POSSIBLE REORGANIZATION
-- OF THE USUAL SIZE FARM
I What rule can be offered as to the way the usual size farm can be re-
”* organized for greater profit'? A basic principle is that inputs earning higher
relative returns should be increased in use first.
-· The Last Additional A
Dollar in Machinery
I; Earned High Returns
Investments in machinery were low relatively and earnings of the last
additional dollar invested in machinery were high, This does not mean that
machinery was earning a larger share of the total returns than other invest-
ments. At the same amount of investment, forage -livestock investments would
%~ have earned more per last dollar invested than machinery. The indications
are, therefore, that more machinery could profitably be used.
ESTIMATED ANNUAL RATE OF EARNING OF TI-IE LAST UNIT OF INPUTS
WITH USUAL FARM ORGANIZATION
Land ———----——·-—--------— 126r 9 acres at $3. 00 per acre
Labor ---—----———---————¤- 15. 82 months at $78. 00 per month
Forage —Livestock Investment ----——- $3, 608 at 24. 3 cents per dollar
s Machinery Investment --·--~·-- ·- - $1, 381 at 47. 9 cents per dollar
Current Operating Expenditures -~—--- $1,162 at 87. 6 cents per dollar
ESTIMATED ANNUAL LAST UNIT EARNINGS WITH MACHINERY INVESTMENT
_ £ 3,500 AND USUAL QUANTITIES OF OTHER INPUTS
Land --—----~-— r- ·- —·—--———— 126,. 9 acres at $3. 40 per acre
’ A Labor —--~---------—-—-—~· 15. 82 months at $88. 26 per month
4 _ Forage-Livestock Investment ·- · ·—··—· $3,. 608 at 27. 5 cents per dollar
Machinery Investment ——·—·~ < ·---- $3, 500 at 21. 4 cents per dollar
Current Operating Expenditures · - K- —· - -$l, 162 at 99. O cents per dollar A
-7-
With a larger machinery investment gross earnings increased from $4, 989 to A
$5, 645. It may be noted that all "1ast unit of input" earnings increased ex-
cept that for machinery, which fell but was still high.
Adjustments For A More
Profitable Organization . `°"
Further adjustment seems feasible for a more profitable organization of
the farm business. Since the earnings of machinery investments are believed r
to be overestimated and earnings underestimated for forage -livestock invest-
ments, forage —1ivestock investments could profitably be increased considerably P ° ·
and labor and current operating expenditures slightly to reach a more balanced V
input combination on a farm of the usual acreage. p
_ A MORE §°RO?§'l'ABt.E ORGANIZATEOM '
FOR FARM OF USUAL ACREAGE
Land --—-----—--——--—- 126. 9 acres earning $3. 92 per acre i"
Labor -—--~----------- 16. O months earning $100. 61 amonth
F`orage—Livestock Investment - - - $7, 000. O0 earning 16. 4 percent ‘
Machinery Investment ----—-· $3, 500. O0 earning 24.5 percent l Q
Current Operating Expenditures - · $1, 300. 00 earning $1. O2 per dollar
A farm with this organization, average management, and under the production _
and marketing conditions of 1951, would have earned a gross of approximately
$6, 508. Although smaller investments in forage -live stock and machinery would
have earned a higher return on the last dollar invested in these items, total
and net returns would have been less. Therefore, more money could have been
invested profitably in such investment items.
Under the more profitable organization, land, labor, and current operating
expenditures earned higher returns because these were used with more of the
supporting investments. When used more effectively, machinery makes labor v
earnings higherr With. more invested in forage and livestock which were earn-
ing high returns, earnings of other inputs used were higher also.
Funds Needed to Balance ,
The Farm Business
1
The money required for reorganization of the farm may have to be borrowed 6
by some farmers. Would this be sound business? Judging from the indicated 6
larger returns. it would. For the additional livestock and forage an increase A
in investment of $3, 392 would be needed. With this amount of money seven or
eight good cows valued at $275 to $300 each could be purchased and 30 to 35 · V,
acres of good forage and pasture could be established with an average fertilizer
and seed cost of about $30 an acre. With an additional $2,119 for machinery,
such items as a tractor outfit, fertilizer spreader, and milking machine could
be owned. In some cases, good second-hand items of machinery may be better .
-8-
buys than new machinery, and some items may be owned jointly with neighboring
farmers, At least $138 more would be needed for extra gas, oil, and other
' current—expense items. More probably could be spent profitably for the items
in this category as the earning power of such items was believed to be under-
B estimated.
The above figures add up to a total of $5, 649 needed to carry out the
reorganization. For these additional investments and expenditures, with more
’ efficientuse of land and labor, an estimated increase of $1, 519 in annual
gross income would be expected. Each farmer would have to decide whether or
=· , not that rate of earning would be high enough to pay him to take the risk in-
volved in making the additional investments.
_ Suppose the farmer owned his farm debtc-free but needed to borrow $5, 000
for the additional investments and could get this amount at 6 percent and‘pay
back the debt at the rate of $1, 000 per year. At the end of the first year after
f paying interest, debt due, current operating expenses, and allowing 15 percent
for depreciation on forage ·=livestock and machinery investrnents, $2, 333 would
be left for general upkeep of the farm, buildings, and family living (value of
house rent was not included in income) unless income was received from some
other source. At this rate, in five years all assets would be debt-free and a
j better standard of living could be realized. If labor could be used more
efficiently so that some offefarm work could be done, net income could be in-
creased beyand the estimated amount. Better than average management might
increase the net even further.
SCALE OF OPERATIONS
i` Estimates show that after a more profitable balance of the farm business
has been attained, the business could profitably be expanded to twice its size,
4 Because the input items are combined in the most profitable proportions, all
inputs including land, would need to be exactly doubled from the organization
suggested as "A More Profitable Organization For Farm of Usual Acreage."
‘ To carry out this expansion an additional $23, 000 would be required. From
such an organization and size of farm business, a gross income of approxi-
mately $12, OOO would have been expected under the usual conditions of 1951.
Earnings of the last additional unit of each input would be lower than when
smaller quantities were used, but would still be high enough to make their use
s profitable,
Whether or not such a large—scale expansion would be feasible would
,,4 depend on individual situations. Availability of adjacent land is one factor
involved. Efficiency of operation might be lower unless the entire farm was
' in one tract, However, this study was not confined to farms of one tract.
° For a farmer who had managed to accumulate a sizeable sum of money and
had one or two sons who could be depended on to stay on the farm -·» perhaps
one returning from service with the Armed Forces who was interested in farm~·
ing and expected to stay on the farm ——~ such an expansion may be recommended,
’ Hardships could result from going too deeply in debt if economic conditions
· became less favorable than existed when the money was borrowed.
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Consider a 50 -Percent I
Increase in Size
If a 100-percent expansion appears too great a step from the balanced farming
position, let a 50 -percent expansion be considered. :__
Suppose at the end of one year a better balance was attained between the inputs
on the usual size farm and the operator wishes to expand his operation. ,
The situation is: , I
1. The farm is showing signs of improvement.
2.. The operator has shown that he intends to succeed in getting ahead. ~ ‘
3. He still owes $4, 000, but has demonstrated that he is a good credit risk.
‘9
The next move would be to raise the additional money needed for the expansion. _
This should not be too hard for him to do in view of the situation.
REQUIREMENTS FOR 50 PERCENT EXPANSION
For 63 acres of land, about —-—----—-————--—-- $6, 000
For the increase in livestock and forage ----——-~··- $3, 500 _
For the increase in machinery -———-—--—-—-——-— $1, 750
More gas, oil, seed, feed, etc. —--------——----- $ 650 ¤
For a total of —--—-——---— ·- --—-----—----- $11, 900
THE ORGANIZATION AND EXPECTED EARNINGS 4
AFTER THE 50 PERCENT EXPANSION
Land ··--------—-----—- 190 acres at $3. 71 per acre 3
Labor —·---——--—-—---—- 24 months at $95,11 a month ,
Forage —1ivestock Investrrient ----- $10, 500 at $. 154 per dollar I
, >
Machinery Investment -——-·-—-- $ 5, 250 at $. 233 per dollar
Current Operating Expenditures — - — $ 1, 950 at 966 per dollar ' ,
The estimated gross income for this organization was $9, 228. After paying
interest, making a $1, 000 payment on the total debt, getting back the current I
operating expenses, and setting aside 15 percent for replacement and main- ·
tenance of livestock—forage and machinery investrnents, almost $3, 000 would
remain for general upkeep of buildings, farm, and family living.
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Each year that another $1, 000 was paid on the debt the farmer has increased
his assets that much. Each year interest would be less. At the end of about 15
years, if the same rate of earnings continued, the farm and investments should
be debt free and a considerably higher standard of living could be enjoyed.
»»
1 GENE.F<°»M. *CONCL.U$lQi\!S »
Under the production and marketing conditions of 1951, the following general
’” ¤ statements can be made concerning Grayson county upland farming on the basis of
this study and some knowledge of agriculture in Grayson county.
‘ l. Farmers with farms of the usual size should increase investments in
forage —livestock and machinery on their farms before increasing acre-
4 age of the farms.
2. During 1951, labor on Grayson county upland farms earned a fair rate
of return. The high price of burley tobacco probably contributed .
substantially to the earnings of labor. Labor earnings can be in-
, creased further by using the same amount with more of the high pro-
9 ducing livestock and forage.
3. Investments in livestock and forage were paying off well during 1951.
These investments could be paying higher returns if investments were
made in higher producing livestock and if the most profitable markets
were patronized. This seems to be especially true of the dairy in-
· dustry. Many low—producing cows are being milked in the county.
Investments in these low-producing cows could more profitably be put
into higher—producing cows by buying a better grade of dairy cattle and
breeding for higher production. A higher producing herd can be built
up at low cost by breeding artificially. By producing graded milk higher
; prices can be received for milk.
· 4. Machinery on the farms studied was earning a high rate of return. The
earning power of machinery was probably overestimated, but indications
were that machinery was used effectively during 1951.
i 5. Current operating expenditures were not earning as much as appears
desirable. This indicates that too much of this category is being used
we in relation to other inputs, which in turn means that items in this
category should be used more sparingly. Perhaps more forage and
forage-consuming livestock should be grown since feed purchased was
; a major item in this category.
6. The results of this study indicate that the pasture-live stock program
advocated by state and federal agencies is sound for Grayson county
, farmers. Farmers who have developed this type of program are
‘ earning higher returns and at the same time conserving the soil.
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7. With the usual management, level of production, and price ratios
which existed in 1951, a farm business could be expanded to furnish .
a better than average standard of farm living, pay off debts, and
maintain and operate the farm after the expanded business was put into
operation. la
8. Debts must be paid. —- Before going deeply in debt, farmers should
be sure payment terms are such as can be met. $
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