Farmers are getting older and farms are getting bigger. And an increasing amount of farm products is grown or raised under contract, according to a new report on the American farm.
What’s a farm?
Every so often, the U.S. Department of Agriculture tries to answer that question by compiling information about the size and finances of the country’s farms.
The USDA, through its Economic Research Service, also describes farmers, their age, income and the amounts of work they do on and off the farm.
The entire report, Structure and Finances of U.S. Farms: Family Farm Report, 2010 Edition, fills 72 pages. We’ve excerpted some highlights below. If you want the full report, go here.
Before we get on to the report, a definition. A “farm” here is defined as “any place from which $1,000 or more of agricultural products (crops and livestock) were sold or normally would have been sold” in a year.
A “family farm” is “any farm where the majority of the business is owned by the operator and individuals related to the operator…including relatives who do not reside in the operator’s household.”
And now, on to the report:
Farms Getting Bigger AND Smaller
After peaking at 6.8 million farms in 1935, the number of U.S. farms fell sharply until the early 1970s.
Falling farm numbers during this period reflect growing productivity in agriculture and increased nonfarm employment opportunities. Growing productivity led to excess capacity in agriculture, farm consolidation, and farm operators’ leaving farming to work in the nonfarm economy. The decline in farm numbers slowed in the 1980s and essentially stopped in the 1990s.
The greater stability in farm numbers, however, masks shifts in the size distribution of farms. For example, though farm numbers stabilized from 1978 to 2007, the number of farms operating fewer than 70 acres increased 12 percentage points, the number of “thousand-acre farms” increased 1 percentage point, and the number of farms in all acreage classes in between decreased.
The shift to farms with more than 1,000 acres is more marked when examined in terms of these operations’ land in farms (up 12 percentage points) or market value of sales (up 15 percentage points). Note that farms do not necessarily own all the land they operate; they can also rent land. For example, a farm operating 1,000 acres could own 500 acres and rent 500 acres, or even own no land at all and rent 1,000 acres.
Three features of U.S. farm structure stand out. First, small family farms make up 88 percent of all U.S. farms. Second, large-scale family farms—only 9 percent of all farms—account for a disproportionately large, 66-percent share of the value of production. Third, farming is still an industry of family businesses. Ninety-eight percent of farms are family farms, and they account for 82 percent of production. Only 2 percent of U.S farms are nonfamily farms, accounting for the remaining 18 percent of production.
Despite their 16-percent share of total farm production, small farms produce a larger share of specific commodities: 23 percent of the value of production for cash grains and soybeans, 51 percent for hay, 34 percent for tobacco, and 22 percent for beef.
At the other extreme, small farms contribute a miniscule share to the value of production for hogs (5 percent) and poultry (3 percent). The largest share of small-farm production occurs among medium-sales farms, which account for 7 percent of total U.S. production.
The share of assets and land held by small farms is also substantially more than indicated by their small share of production. Small farms hold 64 percent of all farm assets, including 63 percent of the land owned by farms. Because of their large land holdings—in aggregate—small farms are important in conservation efforts. Small farms account for 76 percent of the land farmers enroll in USDA land-retirement programs.
Variation in farm size—whether measured in sales, acres, or labor use— helps explain the distribution of agricultural production. The 1.4 million retirement and residential/lifestyle farms account for only 6 percent of production because most of these farms are very small. Seventy-six percent of the farms in both groups have annual sales of less than $10,000, including 31 percent with sales of less than $1,000.
Thirty-seven percent of very large family farms and 13 percent of nonfamily farms are “million-dollar farms” with annual sales of $1 million or more. There are only 47,600 million-dollar farms—2 percent of all U.S. farms— but they account for 53 percent of production.
They dominate the production of five major farm products: high-value crops (vegetables, fruits and tree nuts, and nursery and greenhouse products), hogs, dairy, poultry, and beef. The largest million-dollar farms—those with sales of at least $5 million— by themselves account for 35 to 45 percent of the production for beef cattle (largely in feedlots), high-value crops, and milk.
Farming is popularly viewed as taking place in rural areas. Nevertheless, 39 percent of U.S. farms are located in metropolitan (metro) areas, defined as a county or group of counties with an urban population concentration of at least 50,000 people.
Metro areas provide both opportunities and problems for farms. For example, farmers may have opportunities to produce and sell high-value crops through farmers’ markets. Proximity to employment in the metropolitan core might provide members of farm families with opportunities to work off-farm. On the other hand, markets for traditional field crops could be reduced as more land is developed. Grain elevators, for example, might go out of business. Real estate taxes may increase as land prices rise to reflect the value of the land in nonfarm uses.
Farms in metro areas account for 40 percent of the value of U.S. agricultural production (table 6) and have a product mix different than farms in nonmetro areas. High-value crops and dairy products make up a larger share of production in metro areas than in nonmetro areas, while cash grains and beef make up a smaller share.[img:productionbysize.png]
Perhaps the most striking characteristic of principal farm operators is their advanced age.
About 28 percent of farm operators are at least 65 years old. In contrast, only 8 percent of self-employed workers in nonagricultural industries are that old.
Retired operators are the oldest group—as one might expect—with an average age of 70 years, followed by low-sales operators, with an average age of 59 years.
The advanced age of farm operators is understandable, given that the farm is the home for most farmers and that farmers can phase out of farming gradually over a decade or more. Improved health and advances in farm equipment have also allowed farmers to farm later in life than in previous generations.
The nation’s 28-percent share of operators at least 65 years old—called “older farmers” in this report—has raised concerns about a mass exit of farmers from agriculture in the near future and the likelihood of finding younger farmers to replace them and absorb their assets, including land.
The eventual exit of older farmers appears less ominous, however, if one examines their characteristics, especially the type of farms they operate. Remember also that some farms with an older principal operator actually are multiple-generation businesses with younger operators present.
Profitability measures are strongly associated with farm size.
The average rates of return on assets and equity and the average operating profit margin are negative for retirement, residential/lifestyle, and low-sales small farms. These measures turn positive for medium-sales small farms, and increase further for large-scale and nonfamily farms.
The ratios are higher for very large farms than for large farms, reflecting very large farms’ higher level of sales. Larger farms often can use their resources more productively than smaller farms, generating more dollars of sales per unit of labor and capital.
Average profit measures, however, obscure the wide variation in financial performance among farms, including small farms. Although 45 to 75 percent of the farms in each small-farm type had a negative operating profit margin in 2007, other small farms among these types were much more profitable. For example, between 17 percent and 32 percent of each small-farm type had an operating profit margin of at least 20 percent.[img:farmincome07.png]
Nevertheless, an even greater share of large-scale family farms had profit margins that high—45 percent for large family farms and 54 percent for very large family farms. In addition, most of the farms in both of these groups had a positive operating profit margin.
Small farms appear more profitable if net farm income is examined rather than operating profit margins. Although most small farms had a negative operating profit margin, a majority of each small-farm type generated positive net farm income. The different results are attributed mostly to differences in the way the two measures treat unpaid labor by the operator.
Income and Net Worth
Given their negative operating profit margins and low net farm income, on average, how do so many small farms continue to exist?
Households operating small farms typically receive substantial off-farm income. In 2007, average off-farm income for small-farm households ranged from just under $50,000 for low- and medium-sales households to $107,700 for households operating residential/lifestyle farms. Most off-farm income—76 percent for all U.S. farm households—is from earned sources, either a wage-and-salary job or self-employment.
However, households operating retirement farms receive nearly three-fifths of their off-farm income from unearned sources (such as Social Security, pensions, dividends, interest, and rent), reflecting the advanced age of operators on those farms.
Participation in off-farm work varies by farm type. At one extreme, neither the operator nor spouse worked off-farm on 66 percent of retirement farms. At the other extreme, both the operator and spouse worked off-farm on 57 percent of residential/lifestyle farms. In the remaining farm types, someone— the operator and/or the spouse—worked off-farm in 43 to 59 percent of farm households.
Farm Household Income
Average operator household income for all farm households was $88,900 in 2007, about 9 percent higher than in 2006.
The 2007 estimate also was about 32 percent higher than the average for all U.S households in 2007, as measured by the Current Population Survey. Mean (average) income, however, may not be the best income measure to use for such comparisons because a few very high-income households can raise the mean well above the income received by most households.
Median income for farm households as a group is similar to that for all U.S. households. Median farm-operator household income in 2007 was $54,000, only 8 percent higher than the $50,200 median for all U.S. households. Farm operator households in general cannot be considered low income. Only two types of farm households—those operating retirement or low-sales farms— received median household income below the U.S. median.
The income that farm operator households receive from farming does not reflect the large net worth of many farm households. For example, for households on farms with gross sales of at least $100,000, average net worth in 2007 ranged from $1.3 million for medium-sales farms to $2.5 million for very large family farms.
Unlike household income, most of which comes from off-farm sources, net worth from the farm makes up most of the wealth of farm households, regardless of farm type. The farm—on average—accounts for 76 percent of operator household net worth, reflecting the value of the land used in farming. However, much of the net worth of farm households is illiquid and not easily available to spend for consumption because it is largely based on assets necessary to continue farming. Real estate amounted to 79 percent of total assets of family farms.
Farming Under a Contract
Although contracts account for nearly two-fifths of U.S. agricultural production, the share varies by commodity. For example, U.S. farmers produce 85 percent of poultry under contract. Contracting also accounts for at least half of the production of peanuts, tobacco, sugarbeets, dairy products, and hogs.
At the other extreme, only small portions of wheat, soybeans, or corn—all traditional field crops—are grown under contract.
The aggregate data show slow and steady growth in contracting over the years, but change can be more rapid for some commodities. For example, the share of total agricultural production under contract grew by only 5 percentage points (from 32% to 37%) between 1996-97 and 2007.
During the same period, however, the share of tobacco production covered by contracts went from less than 1 percent to 64 percent. Cigarette manufacturers replaced cash auctions with contract marketing because contracts better enabled them to acquire enough of the specific types of tobacco they needed. The share of peanuts grown under contracts also increased rapidly, from 34 percent in 1996-97 to 63 percent in 2007.
The increase in the contracting share of hogs—from 34 to 65 percent—was of the same magnitude as the increase for peanuts. Growth in hog contracting was driven in part by production differentiation. Processors wanted more control over the characteristics of the hogs they acquired, which helped them provide a consistent quality of meat to consumers.