Lecture 4.
Measurement of farm incomes

What we want to learn about this topic

• measuring farm incomes - the statistical sources of information and concepts used in measuring farm incomes
• assessing farm incomes - the pitfalls involved in making farm/nonfarm income comparisons

Short introduction to the issues

Farm income concerns

There are three dimensions to farm incomes which may give rise to a policy concern:

• income adequacy - are farmers poor?
• income parity - do farmers earn less than the going rate on the resources they employ (labour and capital)?
• income stability - are farm incomes particularly volatile?

The distinction between the first two of these issues can be clarified using the resources/returns square

Parity Welfare	More than parity returns	Less than parity returns
Above the poverty line	Well-structured commercial farms	Large but low-yielding farms
Below the poverty line	Productive small farms with limited resources	Marginal farms, both poor and inefficient

Farmers can be well-off if they have sufficiently large farms even if these farms are not run very well run; farmers can also be productive but poor.

Use of farm income statistics

Farm income statistics are used in different ways:

• to examine trends in farm income over time. We may be interested in comparing farm income trends across different periods, or across different countries, or measuring the volatility of incomes over time. An important issue here is how to take account of inflation. Possible price deflators include the Consumer Price Index (CPI) and the implicit price index of Gross Domestic Product (GDP deflator). The latter deflator is the best measure of changes in the value of money over time and thus gives a measure of agricultural income in constant prices. The practice in Ireland is to use the CPI deflator and the resulting series is then a measure of changes in the purchasing power of income from agricultural activity over time.
• to make welfare comparisons of average farm incomes with average nonfarm incomes. Even with an accurate measure of the average income of both groups (see below), there are pitfalls in drawing conclusions about relative welfare levels from data on incomes. Welfare indicators may differ because of the different cost of living in urban and rural areas, differences in the taxation treatment of farmers and non-farmers, the failure to take into account changes in the value of net assets held by farm and nonfarm households, the degree of security and stability attached to the various income streams, etc.
• to estimate the number of farmers in poverty and the importance of farm poverty in overall poverty levels. Here comparisons are made between individual farm household incomes and some defined 'poverty line'.
• to derive an estimate of the return to family labour used in farming in order to assess the efficiency of resource use in agriculture compared to other sectors. Here the main problem is to disentangle the return to labour from other family-owned resources in overall farm income.

MEASURING FARM INCOME

Calculating aggregate farm income

In October 2001 the CSO produced estimates of aggregate income from farming based on a new agreed EU methodology for the first time. The main differences with the old method are three fold:

The Basic Unit
Under the old methodology the concept of the 'national farm' was applied. This meant that the whole agriculture of a country was regarded as one big farm. This meant that flows on the same farm and between different farms were not accounted for in the agricultural accounts, as these flows would cancel each other out in the overall 'national farm'. With the new methodology, however, the concept of the 'national farm' has been replaced by the use of the individual farm as a unit. The important difference is that inter-farm transactions (e.g. the sale of cereals or cattle from one farm to another) are now captured in the statistics both as an output and as an input.

Valuation of agricultural output:
Under the old series output was valued at producer prices. The producer price is the price received by the farmer, and is sometimes referred to as the farm-gate or ex-farm price (it excludes VAT). Under the new EAA methodology output is now valued at the basic price. The basic price corresponds to the producer price plus any subsidies directly linked to a product (for example the Special Beef Premium for cattle) less any taxes on products (for example the Bovine Disease Levy for cattle).

The income concept
In the past, different income concepts were used e.g. net value added, income from self-employment in agriculture, net farm income. These are now replaced by the concept of operating surplus. Operating surplus is calculated before deduction for interest payments on borrowed capital and before deductions for land annuities and for rent paid by farmers to landowners for the use of their land. Entrepreneurial income is operating surplus less these interest and rental payments.

There is a detailed description of the concepts underlying the new EEA methodology in the CSO Output, Input and Income in Agriculture release dated 2 July 2002.

Calculating average farm incomes from aggregate statistics on income from farming

By dividing aggregate income from farming (operating surplus) by the numbers engaged in farming, an average income from farming figure can be derived.

Limitations of the aggregate income measure

• imprecision over numbers at work in the industry (Labour Force Survey vs. Farm Structures Survey sources)
• not all farmers are solely dependent on farming for their livelihood. A high proportion of farm household income now comes from off-farm sources
• ignoring wealth and capital gains effects gives a misleading impression of economic status
• farming is not a homogeneous industry. Contains a wide range of farm sizes and types. Incomes in cattle farming in Ireland are particularly low.

Micro data on farm incomes

• the National Farm Survey (NFS) produced annually by Teagasc provides estimates of family farm income for different categories of farms. Surveys only the farming income of farm households and takes no account of the nonfarm income of farm households. Looking at the incomes of full-time farms only may diminish this bias but will not eliminate it if spouses have off-farm income.
• the Household Budget Survey (HBS) provides estimates of the total income of farm households. Primarily designed as an expenditure survey, and income data are known not to be fully reliable. Can still be useful for comparison purposes if the degree of income under-reporting is assumed the same for farm and nonfarm households.

The absolute level of farm incomes - trends over time

• Eurostat uses net value added at factor cost per agricultural work unit to make comparisons across EU countries. Check out how Ireland has done relative to other EU countries over the past decade (to see the table requires that you have Acrobat Reader on your machine)

ASSESSING FARM INCOMES

The absolute level of farm incomes - farm/nonfarm comparisons

• such comparisons can be made using a variety of statistical indicators. An early and crude approach is to calculate a disparity index - the ratio of average agricultural incomes to average earnings in rest of economy from national accounts and labour force data (Bellerby). Ignores all the caveats mentioned above.
• Such comparisons can be based on aggregate data (note their limitations) or on microdata comparisons. For example, a somewhat more sophisticated approach uses farm survey data to compare farm income per labour unit on full-time farms to average industrial earnings. Alternatively, household budget survey data can be used to compare incomes/consumption of farm/nonfarm families
• HBS evidence (1994/95) that farm households have disposable incomes on average at least as high as other households in the state. No longer evidence of a generic farm income problem.
• See recent evidence on Irish farm income levels in the Department of Agriculture and Food's Annual Review and Outlook reports - see Chapter 2 on farm incomes (note this is a large Acrobat file of 1.5 MB).

The absolute level of farm incomes - are farmers poor?

• Two issues
  • what is the relative importance of poverty (risk, incidence and severity) among farmers as compared to other social groups
  • identifying the characteristics of farm households in poverty
• Defining the poverty line
  • whether to look only at financial income or other indicators of deprivation
  • absolute vs. relative measures
  • the unit of analysis - individuals vs. households
• The Irish data (ESRI surveys) show a diminishing level of farm poverty over time
• See evidence on Irish rural poverty in the Department of Agriculture, Food and Rural Development's Annual Review and Outlook report (again, be warned that this is a large file and requires Adobe Acrobat on your computer).

Comparability of returns from farming - are farmers underpaid?

• Comparing the total income of farm and nonfarm households ignores the fact that farming income is made up of a return to both the farmer's labour and management as well as own capital. An even more sophisticated question is to ask how the labour income of farmers or, more usually, the return to capital employed in farming, compares to the returns to labour and capital in the rest of the economy.
• The approach rests on the calculation of labour (occupational) income - add average capital gain to current income of farm and deduct a charge for own capital to arrive at the farmer's earnings after allowing a reasonable return for capital. Alternatively, value the farmer's labour input at some appropriate wage rate and assign the residual as the return to capital.
• Such calculations suggest that, even though farmers may not be poor, their resources are not being used very productively. This is both an efficiency and equity issue.

Reading suggestions

OECD, Policy Brief Farm Household Income: Towards Better Informed Policies, OCD, 2004.
(summarises issues covered in the longer report below)

Department of Agriculture and Food, Annual Review and Outlook 2005-06, Chapter 2 'Farm Incomes and Rural Poverty', Dublin.
(This is a large download of 1.5 MB but you will also find the remainder of this publication of interest in other parts of the course).

Matthews, A., 2000. Farm Incomes: Myths and Reality, Cork, Cork University Press, esp. Chaps 2 and 5. LEN 338.109415 P0 (multiple copies)
(these chapters discuss the measurement of farm incomes and their comparison with nonfarm incomes, respectively).

Supplementary reading

OECD, 2003, Farm Household Income: Issues and Policy Responses, Part I, 'Farm household income issues in OECD countries'.
(provides a more elaborated account of the analysis behind the OECD policy brief. Only Part 1 is relevant for this lecture).

Hill, B., 2000. Farm Incomes, Wealth and Agricultural Policy, 3rd edition. London, Ashgate.
(exhaustive account of measurement of agricultural incomes within the EU - author has been an advisor to Eurostat on this question)

Web resources

Eurostat, Income from agricultural activity.
(pre-defined table showing trends in deflated income per Annual Work Unit in EU member states)

CSO, Output, Input and Income in Agriculture (for Irish data)
(click on the links on this page for latest releases)

Teagasc, National Farm Survey 2006.

CSO, Household Budget Survey 2004/05, Preliminary Results