Harrington, David H.

English

Research Papers in Economics

INCOME AND  WEALTH  ISSUES  IN COMMERCIAL
FARM  AND  AGRICULTURAL  POLICY
David H. Harrington
Economic Research Service, USDA
This workshop addresses the subject of income  and wealth issues in
commercial  farm and agricultural  policy. The  focus  is on broad  defi-
nition of the issues, and broad definitions  of the possible policy  inter-
ventions.  In their broadest  sense the policy issues  are:
(1)  What are the income and wealth situations of farmers? Is the
farm  sector still disavantaged?
(2)  Are these situations anomalies? Or are there phenomena which
make normal  economic  performance  look poorer  than it  ac-
tually may be?
(3)  Can policy  interventions  cure such anomalies?  Do they have
side effects?
(4)  Finally, where  does all this leave  us?
What are the Income  and Wealth Situations  of Farms?
It is  almost  a  truism that farms  vary  widely  in  sizes,  sales
classes, incomes,  and wealth positions,  and that off-farm  income
sources are highly negatively correlated with farm sales classes.
Because  population averages tend to be meaningless across such
a diverse population  as farms of all sizes, an initial classification
of farms into descriptive  size  classes is  necessary.  The diversity
of the farm sector in terms of concentration  of farm numbers and
total farm product sales is shown in the concentration chart (Fig-
ure 1).
Approximately half of all farms have sales of less than $10,000,
but account for only 5 percent of total agricultural product sales.
At the other end of the distribution, the largest 5 percent of farms
account  for almost 50 percent  of total agricultural product sales.
The most meaningful  descriptive sales classes  grouping farms
of similar sizes for  1982 appear  to be  as  follows  in Table  1. At
the small end,  rural residences and small family farms have  ex-
perienced  negative  net farm  income  since  the beginning  of the
1980's (Figure 2), but have off-farm incomes roughly comparable
145Concentration  of  Farms  and
Production,  1982
Percent
100  I
80
60
40
20
Percent-
0
20
40
60
80
!  {,tt|EIIIs1111t11t'  ]  1 100 0  100
0  2.5  5  10  20  40  100  200  500 500+
Gross  sales  ($1,000)
Left  scale  - 50%  of  farms  less  than  $10,000  in  gross  sales  produce  5%  of
total  agricultural  production.
Right  scale  - 5%  of  farms  with  sales  greater  than  $200,000  produce
approximately  50%  of  total  agricultural  production.
FIGURE  1.
TABLE  1
FARMS AND  PRODUCTION  BY  SALES CLASS  GROUPS,  1982
Number  Percent  of
Size Group  Sales Classes  of Farms  Production
Rural  Residences  Less than $ 10,000  1,154,000  6.5
Small Family  Farms  $ 10,000  -$ 40,000  551,000  10.1
Family Farms  $ 40,000 -$200,000  561,000  37.6
Large Family  Farms  $200,000  - $500,000  83,000  18.0
Very  Large Farms  $500,000  and up  24,000  27.8
Source:  Census of Agriculture,  1982
to the median of the non-farm population. The small family farms
have lower off-farm incomes, largely because many of these farms
are too large to be operated in conjunction with full-time off-farm
work.  The family farm category  has historically yielded positive
net farm  incomes,  but  in recent  years  off-farm  income  sources
have  exceeded  net farm income.  The upper cut off of family  size
farms of $200,000 may appear  large at first, but is not when one
considers that with national average yields and prices of 1982  it
only takes 645 acres of corn to equal $200,000.  A cash grain farm
146
-Comparison  of  Farm  and  Nonfarm
Incomes,  1934-82
Farm  income  as  a  percent  of  nonfarm  income
180
Farm  operators  whose
principal  occupation  is
140  - farming  X
100  -. ,
All  farm  operators  ,..'
60  to
6  i  . . a  + '**'  +  All  farm  residents
1934  40  50  60  70  80
FIGURE  2.
of this size could readily be operated by a single family. Off-farm
incomes are lowest for family size farms. Large family farms and
very large farms are generally multiple family farms with more
than one operator.  Corporate  forms of organization are much more
important  among  these  larger  farms.  Off-farm  income  sources
also increase  for  these  large farms,  but it  is generally  interest
and dividend income,  rather than wage and salary income.
Given that almost half of the farms are noncommercial,  rural
residences,  what would  be the effect  of eliminating  these rural
residence  farms from  the Economic  Research  Service  (ERS)  re-
ported  income statistics?  Since these farms are almost  indistin-
guishable from the nonfarm population in terms of income sources,
account for very little production, and consistently yield negative
net incomes, there is some sentiment for not calling them farms.
If these small units were  not counted as farms, the reported  av-
erage net farm income of the remaining farms would almost dou-
ble,  and  the  reported  average  income  from  all  sources  would
increase by 26 percent  (Table 2).  The resulting income  statistics
would show the farm sector  to have higher family incomes than
the average of the nonfarm population.
147TABLE 2
EFFECTS  OF  REMOVING  SMALL  FARMS  FROM  INCOME  STATISTICS:  TOTAL
INCOME  FROM  FARM  AND  OFF-FARM  SOURCES  FOR  ALL  FARMS  AND  ALL
FARMS  WITH GROSS  SALES OF $10,000  OR  MORE,  1982
Change  if farms with  less
than
Farms with  $10,000  $10,000  gross  sales were
Item  All farms  or more gross sales  excluded
Million Dols.
Percent  Percent
Net farm  income  24,899  25,580  +  681  2.7
Off-farm  income  39,415  16,462  - 22,953  - 58.2
Total operators'  42,042  - 22,272  - 34.6
income  64,314
Thousand Farms
Number of farms  2,400  1,245  - 1,155  -48.1
Per farm  Dollars
Net farm income  10,374  20,546  +10,172  98.1
Off-farm income  16,423  13,222  - 3,201  -19.5
Total operator's  26,797  33,768  +  6,971  26.0
income
Source: U.S. Dept.  of Agriculture,  Economics Research  Service, Seventh Annual Report
to the Congress on the Status of Family Farms, Nov.  1984
Comparisons  of wealth positions of farm families with nonfarm
families are difficult because  of a lack of comparable data on the
nonfarm sector.  Nevertheless, wealth positions (total value of as-
sets and net worth) show significant accumulation of wealth among
farm families. The smallest, rural residence class of farms appear
to  have net  worths  approximately  equal  to  the  average  of the
nonfarm economy. Larger sales classes represent correspondingly
larger  accumulations  of wealth (Figure 3).
The conclusions supported  by reported  income and wealth dis-
tributions are that the farm sector cannot  any longer be consid-
ered as disadvantaged  when compared  to the nonfarm  economy.
Incomes in farming do fluctuate  from year to year,  possibly cre-
ating "boom and bust" conditions within agriculture, but incomes
within  the  farm  sector  do  not  appear  to  place  farmers  at  any
disadvantage  compared  to the general  population.  The next sec-
tion will further explore the  income  comparisons.
Are These  Situations Anomalies?
Incomes  of farm families were very  low in comparison to their
nonfarm  counterparts  throughout  much of this century  and  as-
sertions are still made that farm incomes have not achieved  par-
ity with nonfarm  incomes.  To examine this question,  researchers
in ERS compiled the income parity comparisons in Figure 4. Each
line represents the parity ratio (the total income measure for the
148FIGURE  3.
farm  population  divided  by the  corresponding  measure  for the
nonfarm  population  and expressed  as  a percent)  for  a  specific
measure  of farm income  over time. When the ratio  exceeds  100,
farm incomes exceed nonfarm incomes. The most commonly used
measure  is "income  of the farm  population",  which  includes in-
come from all sources and is available on a per capita basis back
to  1934.  This measure  of the population includes  all persons liv-
ing on  farms, whether or  not they derive  any  income  from the
farm; and excludes farm  operators who do not reside on farms. It
is comparable  to national per capita  income figures for the non-
farm  population.  This  series  has  historically  remained  at  less
than  100  percent  of parity  except  for  1973,  when it ticked over
100 percent.  By this measure, the farm-nonfarm income  gap has
steadily closed; but it has not been eliminated. This is the income
series used for most analysis and justification of farm commodity
programs.
A second, perhaps more meaningful, series compares the family
incomes of farm operator families (from all sources) with the fam-
ily incomes  of nonfarm  families.  The income  series  for farm  op-
erator families  includes all farm operator  families,  but excludes
nonoperator  families residing on farms. This series, available  since
149Net  Income,  Off-Farm  Income,  and
Government  Payments,  1982  4
Thousand  dollars
60  Net  farm  income
50  Off-farm  income
Government
40  Ipayments
30
20
10
-10  l  l  l
<10  10-40  40-  200-  500+
200  500
FIGURE  4.
1960,  shows  that farm  family  incomes  have  exceeded  nonfarm
family  incomes  in most years  since  1970, reaching  a maximum
of 150 percent in 1973 and subsequently declining to about parity
with nonfarm  family incomes.
The third income  series is the income (from  all sources) of farm
families whose  principal  occupation  is farming,  compared  to the
average  family income  of the nonfarm population.  This series  is
available  for  selected years  since  1960  and reflects  only the  op-
erators  of larger  farms (probably equivalent to  sales  of approxi-
mately  $40,000 or more ), who stated farming as their principal
occupation.  Incomes  of farm  operator  families  whose  principal
occupation  is farming,  have  consistently  been higher than their
nonfarm counterparts since the mid 1960's, attaining a maximum
of 180  percent in  1975.
These  comparisons  show that incomes  of farm  families  - es-
pecially  farm operator families - are not depressed  in compari-
son  to the  rest  of the  economy,  but  are  lower  or  more  volatile
when compared to previous  years of the 1970's. Thus the income
levels  of farmers  are  not  anomalies  compared  to  other sectors,
but are  anomalously  low when  compared  to  incomes of the  mid
1501970's.  One  period  or the other - the  1970's  or the present-
must be out of the ordinary.
A  second question arises  in these  income  comparisons.  Is ag-
riculture riskier than other pursuits? There is not yet a definitive
answer available to this question, but there are two answers that
appear to be justified at first glance. First, agriculture is riskier
than  the wage  and  salary  employment  to  which  it  is  usually
compared.  Secondly,  agriculture  is probably not riskier than  other
small businesses to which it ought to be compared, if farmers are
considered  as  combination  owner-operators,  rather  than  hired
managers.  Weather,  vagaries  of the  market,  input  costs,  etc.
probably  affect  other comparable  size  businesses  to  nearly  the
same  degree  as  they  affect  agriculture.  Business  failure  rates
appear to be much higher in the nonfarm sector than in the farm
sector.
A third consideration with respect to whether the performance
of the farm sector is anomalous is that there are two mechanisms
which affect how well the sector appears  to be performing versus
how well it may actually be performing. The first of these is that
net farm  income  before  inventory  adjustment  - the most  com-
monly cited measure of income of the farm sector - is calculated
on the basis of cash incomes and expenditures with a percentage
allowance  for  capital  consumption  expenditures.  This is  similar
to cash basis accounting for farm firms. Several  authors, includ-
ing  Boehlje,  Melichar,  and  Harrington,  have  shown  that  cash
accounting, combined with income tax sheltering and/or inflation
in the general  economy,  and/or capital  appreciation  of land,  re-
sults in downward  biased estimates  of the  economic  well-being
of farmers  [1,  4,  2,  3].  The second  consideration  stems  from the
first.  If farmers'  net incomes  or  rates  of return  are  incorrectly
measured,  and  policies  are put  in place to  attempt to bring the
performance measures into some desired range, then farmers are
likely to change their production and investment  behavior such
that  desired  increases  in income  or rates  of return are  quickly
bid  into  asset  values,  and  incomes  and rates  of return  remain
unchanged.  Harrington  described this phenomenon  in regard to
cost  of production  pricing  of farm  commodities  [2].  More  about
the effects of policy  intervention follows  in the next section.
Can Policy  Interventions Cure Such Anomalies?
Agricultural  policies  and  programs  affect  farms  through  an
interlocked  set of effects.  Policy interventions  affect:
*  The  demands  or supplies  of agricultural  commodities,  which  in
turn affect,
*  The level and stability of prices, quantities, and revenues, which
in turn affect,
151*  The  production  and investment behavior  of farmers,  asset  own-
ers, and lenders, which in turn affect,
*  The values  of farm  assets, which finally affect
*  The ownership patterns of farm assets (by large vs. small farmers
and farmers vs. nonfarmers)  and the debt-equity position of asset
owners.
Policy  makers (and analysts) have usually concentrated on the first
two  of these  as  the  primary  effects  of the program  and  ignored the
others, or called them "unanticipated side-effects."  This is understand-
able  because  the first  two  points  offer  help  for  "today's"  problems,
while the next three points  are long-run  effects not felt until "tomor-
row." But more importantly, the interlocked  set of effects implies that
short-run gains  from the first two  effects  will be dissipated  or  coun-
teracted  through  changes  in  the rest  of the  system.  This  makes  it
impossible  to "cure"  a problem through  a  once-and-for-all  change  in
policy. Hence,  policies tend to treat today's symptoms because  of their
inability to treat the underlying  problem. In the long run, changes in
the behavior  of participants  result  in  new equilibrium  relationships
between  supply,  demand,  prices,  incomes,  and  values  of assets.  The
major question becomes,  "How  soon  do these long-run effects occur?"
ie. When does the day of reckoning arrive? There is mounting evidence
that the  effects  are  not dependent  on a  fixed time  frame, but rather
upon  the prevalence  and  strength  of the future  expectations  of the
farmers, investors, and asset owners which can change rapidly or pain-
fully slowly at different times [4,  5]. This brings us to our final ques-
tion.
Where Does All This Leave  Us?
Two  important  principles  seem  to  be  supported  by  the foregoing
discussion:
(1)  Policies  and  programs  should  not attempt  to  supplant  market
signals for any extended period of time because  of possible long-
term detrimental  effects  on behavior,  asset values,  and owner-
ship structure.
(2)  Rather, if policies have  an attainable  role in the farm economy
it would be in dealing with the potentially excessive variability
of agricuture:  (a) to prevent the market from sending wrong or
ambiguous  signals,  (b)  to prevent  market forces  from making
unwarranted  or overcorrecting  adjustments  to the market sig-
nals,  and (c)  to  ease the transition  to a new situation.
The first principle argues against autonomous price or income support
policies which  operate  constantly  or frequently.  The second principle
argues for policies  of analysis and information dissemination,  policies
of risk reduction or risk sharing, and direct intervention policies only
152at stop-loss  levels.  These  are  usually termed "market-oriented"  poli-
cies.
Does this mean that existing commodity programs  and other forms
of policy intervention  in the farm sector should be scrapped forthwith?
Obviously  not!  Adding  a  new  policy  or  removing  an existing  policy
that has been in place long enough to affect the system are each equiv-
alent to changing the rules of a game.  Generally,  changing the rules
of a  game  adversely  affects  everybody  except  those  who  have  been
sitting on the sidelines. Both struggling and established farms would
suffer income and capital  losses through the reverse action of the set
of five interlocked effects  discussed  earlier.  They would both be  at a
disadvantage relative to people  who had no position in farming when
the policies were suspended.  Changing  of policy directions  should  be
signalled well in advance; they should be timed so as not to compound
any other  economic  adjustments  that may  be  going  on at  the same
time; and they should be gradual - such  as, perhaps, freezes  of price
support  levels  which  allow  other  forces  in the  farm  economy  to  su-
percede the support policies in importance until the policies gradually
become ineffective.
REFERENCES
[1]  Boehlje, Michael  J.  "Taxes and the Future Food  and Fiber System." The Farm and Food System
in Transition, Emerging  Policy Issue Paper  No.  25.  East Lansing:  Michigan  State University,
1984.
[2]  Harrington,  David  H.  "Costs  and Returns:  Economic  and  Accounting  Concepts,"  Agricultural
Economics Research, No.  4 (October  1983),  pp.  1-8.
[3]  Harrington,  David  H., et al.  U.S. Farming in the Early 1980's: Production  and Financial  Struc-
ture. Washington DC:  USDA ERS  Agr. Econ. Rep.  504, Sept.  1983.
[4]  Melichar,  Emanuel.  "Capital  Gains  Versus Current  Income in  the Farming  Sector." Amer. J.
Agr. Econ. 60(1979):1085-92.
[5]  Miller, Thomas A., Costs, Returns, and Land Values on Colorado Wheat Farms, 1950-1980: How
Historical  Relationships Have Changed, Colorado  Ag.  Expt.  Sta. Tech.  Bull. No.  150,  Colorado
State University,  1983.
153METHODOLOGY WORKSHOPS

Capital Gains Versus Current Income in the Farming Sector.&quot;

INCOME AND WEALTH ISSUES IN COMMERCIAL FARM AND AGRICULTURAL POLICY

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics