Measurement of Farm Incomes

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Measurement of Farm Incomes

• Economics of Food Markets
• Lecture 4
• Alan Matthews

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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

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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
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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

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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

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Eurostat Income Indicators
Operating surplus
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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.

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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

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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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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 OHagan and Newman
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Comparison urban-rural household incomes,
1999/2000
Income Source Farm Hhlds Other Rural Hhlds Urban Hhlds 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
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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

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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
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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 4.2
Source ESRI Living in Ireland Survey
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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 farmers
  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.

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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.

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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