Measurement of Farm Incomes

Economics of Food Markets

Lecture 4

Alan Matthews

Lecture objectives

• Identifying concerns about farm income– The resources/returns square

• Measuring farm incomes– Macroeconomic sources– Microeconomic (survey) sources

• Assessing farm incomes in Ireland– Farm household living standards– Are farmers poor?– What about returns to farming?

• Distribution of support to farming

Farm income concerns

• Dimensions of the farm income problem– poverty (income adequacy), comparability (income parity), income instability

• Income adequacy – are farmers poor?• Income parity – do farmers earn less than the going rate on the resources

they employ?• Income stability – are farm incomes particularly volatile?

Parity--Welfare

Greater than parity Less than parity

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

Uses of farm income statistics

• To measure trends in farm income over time• To make welfare comparisons between

farmer and nonfarm populations• To estimate the number of farmers living in

poverty• To examine the efficiency of resource use in

agriculture

Sources of data on farm incomes

• Macroeconomic– Economic accounts for agriculture– Combine with data on sources of labour input (LFS vs AWU)– Limited to averages/useful for showing trends over time

• Microeconomic– National farm surveys (Teagasc)– Household budget surveys (CSO)– Good for showing differentiation within the sector/may not be

fully representative

Eurostat Income Indicators

Operating surplus

Producer price: Price received by the farmer, also called the farmgate or ex-farm price

Basic price: The producer price plus any subsidies directly linked the product

Note that the Single Farm Payment is no longer linked to production

Source: Department of Agriculture and Food Annual Report 2006

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Note: Double

payment of DPs in 2005 because of changeover

to Single Farm

Payment

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Limitations of the macroeconomic 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 (Household Budget Survey source)

• 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 (Teagasc National Farm Survey). Incomes in cattle farming in Ireland are particularly low.

Microeconomic (survey) data on farm incomes

• Drawn from the Teagasc National Farm Survey– Allows us to measure the heterogeneity of incomes within

farming, by farm size or farm system or region– Deals only with income from farming

• Drawn from the Household Budget Survey– Allows us to measure the total household income of farm

families– Note distinction between the ‘narrow’ and ‘broad’ definitions

of a farm household

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Household budget survey data

• Broad definition of farm households– All households (including urban households) which have an

income from farming

• Narrow definition of farm households– Households in which the head of household is a farmer or

head of household is a retired farmer and there is at least one other farmer in the household

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Comparing farm and nonfarm incomes

• crude approach based on calculation of a disparity index - ratio of average agricultural incomes to average earnings in rest of economy

• Average farm income vs. average industrial earnings• Income from farming vs. total household income?

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)(/

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)(

nonagEmployment

nonagGVA

agricEmployment

agricGVA

Percentage of farm household income from all sources, per cent

1973 1980 1987 1994 1999/

2000

Farming 70.1 58.3 54.2 51.3 39.0

Other direct income

19.1 26.3 17.6 37.0 50.3

Transfer payments

10.8 15.2 28.3 11.7 10.6

Gross income

100 100 100 100 100

Source: Matthews 2004, in O’Hagan and Newman

Comparison urban-rural household incomes, 2004 (repeated)

Absolute levels of farmer incomes - measuring the extent of poverty

• 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 considerable farm poverty, mainly older farmers on smaller holdings in west of country

Risk of poverty (relative income

measure)

Source: Department of Agriculture and Food Annual Review and Outlook 2005-06

Risk of poverty (consistent poverty

measure)

Source: Department of Agriculture and Food Annual Review and Outlook

2005-06

Are farmers underpaid?

• Idea is to compare returns to farm labour or capital with returns elsewhere in the economy

• Total return to farming is a return to farmer’s own labour, own labour plus management input

• Applying standard rates of return more than exhausts the available factor income

• Conclusion is that, even if farmers may not be poor, their resources are not being used very productively.

The distribution of government support – how well targeted?

• Support to farmers provided both directly and through market price support – easiest to measure distributional effects of direct payments

• DPs in EU often said to follow an 80/20 rule• DPs in Ireland also go mainly to the better off

farmers, but this conclusion can vary by scheme.

Distribution of direct payments at EU25 level

Payment class (euro)

% of total beneficiaries

% of total payments

<1,250 62.80% 4.90%

>1,250 and <5,000 18.66% 10.48%

>5,000 and < 100,000

18.20% 70.28%

> 100,000 and < 200,000

0.25% 7.20%

> 300,000 0.04% 4.89%

Source: Department of Agriculture and Food, Annual Review and Outlook 2005-06

Measuring and assessing farm incomes - summary

• Farm problem concerns emerge from the direction and pace of the economic adjustment required of the sector

• widening differentiation in the farm sector (greater polarisation of farm size, greater access to off-farm income sources) makes drawing inferences from ‘average’ farm incomes increasingly anachronistic

• different measures of farm income are available and can be useful depending on the purpose in hand

• assessing the adequacy of farm incomes complicated by the huge degree of existing government support

• serious problems of farm (and rural) poverty persist

Recommended readings

• OECD Policy brief• Department of Agriculture and Food chapter• Matthews Farm incomes monograph• Hill and OECD reports