Measurement of Farm Incomes

Economics of Food Markets

Lecture 4

Alan Matthews

Outline

• What are 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

• 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

Measuring farm income• Dimensions of the farm income problem

– poverty (income adequacy), instability (income stability), comparability (income parity)

– conceptualising farm problems using the farm welfare/resource returns square

• Aggregate income derived from the agricultural accounts calculated on a ‘national farm’ basis (CSO Economic Accounts for Agriculture)

• Different income concepts are used– net value added, income from self-employment in agriculture, net farm income

• Dividing aggregate farm income by the numbers engaged to obtain a measure of the health of the farming sector

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

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

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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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, 1999/2000

Income Source Farm H’hlds

Other Rural H’hlds

Urban H’hlds

State Average

Farming income 12,866 252 14 1,011

Non farm employment 14,270 20,924 29,506 25,949

Other direct income 2,315 2,818 4,986 3,413

Total state transfers 3,501 4,537 4,158 4,219

Gross Income 32,951 28,531 38,665 34,592

less Total direct taxation 3,437 4,116 7,088 5,974

Disposable Income 29,514 24,415 30,456 28,618

Persons per household 3.56 3.16 3.00 3.08

Gross Income per person in household

8,290 7,726 10,152 9,292

Disposable Income per person in household

2,329 2,445 3,384 3,017

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)(Poverty lines constructed using mean income)

1994 2000 2001

40 per cent line % % %

Farm households 11.4 14.4 10.5

Non-farm rural households 4.7 16.4 11.6

Urban households 4.0 8.6 8.3

50 per cent line

Farm households 20.1 26.4 21.3

Non-farm rural households 21.2 34.6 31.6

Urban households 17.0 20.2 18.7

60 per cent line

Farm households 30.9 41.1 38.1

Non-farm rural households 40.2 42.5 39.6

Urban households 31.4 25.8 26.5

Source: ESRI Living in Ireland Survey

Risk of poverty (consistent poverty measure)

1994 2000 2001

40 per cent line % % %

Farm households 2.2 0.7 1.9

Non-farm rural households 2.2 3.7 2.9

Urban households 2.5 2.7 2.1

50 per cent line

farm households 2.9 2.6 2.9

non-farm rural households 7.8 5.5 4.8

urban households 10.5 5.1 3.4

60 per cent line

farm households 4.7 2.8 3.1

non-farm rural households 14.3 6.8 6.5

urban households 16.9 6.2 4.2Source: ESRI Living in Ireland Survey

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.

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