Measurement of Farm Incomes

1. Measurement of Farm Incomes Economics of Food Markets Lecture 4 Alan Matthews

2. 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

3. 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?

4. 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

5. 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

6. Eurostat Income Indicators Operating surplus

7. 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

8. 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

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

10. 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.

11. 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

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

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

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

15. 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

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

17. 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?

18. Percentage of farm household income from all sources, per cent Source: Matthews 2004, in O’Hagan and Newman

19. Comparison urban-rural household incomes, 2004 (repeated)

20. 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

21. Risk of poverty (relative income measure)Source: Department of Agriculture and Food Annual Review and Outlook 2005-06

22. Risk of poverty (consistent poverty measure)Source: Department of Agriculture and Food Annual Review and Outlook 2005-06

23. 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.

24. 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.

25. Distribution of direct payments at EU25 level

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

27. 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

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