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Farm Structure Terms:
Concentration
Concentration of production refers to the relative size of an industry's
largest firms. In farm structure discussions, concentration has
become a larger issue than the declining number of farms. The census
of agriculture provides a measure of concentration, the percent
of farms (starting with the largest and working down) needed to
produce a certain level of output. For example, in 1997 the largest
2 percent of farms accounted for 50 percent of gross farm sales.
In contrast, one needed to count down to the largest 8 percent of
farms to get to 50 percent of sales in 1969. The census measure,
however, is sensitive to the number and production of small farms
as well as the level of sales of the largest farms. For example,
consider massive farm consolidation that results in only 20 farms.
The census measure would actually show less concentration than currently
exists, if production was evenly distributed among the 20 remaining
farms.
Another measure, often used in manufacturing, measures the share
of industry output accounted for by the largest firms, often the
largest four, eight, twenty or fifty firms. Agriculture is still
relatively unconcentrated by that measure, although there has been
some striking increases in some commodities. The 20 largest hog
producers, for example, handled 35 percent of all hog marketings
to slaughter plants by 2000.
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Contracting
Broadly speaking, a contract is a written or oral agreement between
parties involving an enforceable promise to do or refrain from doing
something. In agriculture, contracts are agreements between farmers
and companies or other farmers that specify conditions of production
and/or marketing of an agricultural product. By combining market
functions, contracting can reduce industry participants' exposure
to risk. Contracts can specify not only quality requirements but
also price and quantities. The form of the contract, specific provisions,
and terms can vary greatly among commodities, and among producers
of the same commodity.
The degree of control that a contractor has over a farmer's production
decisions varies depending on the type of contract. There are generally
two types of contracts—marketing and production contracts.
Marketing contracts refer to verbal or written agreements
between a contractor and a grower that set a price (or
pricing mechanism) and an outlet for the commodity before
harvest or before the commodity is ready to be marketed.
Most management decisions remain with the growers since
ownership is retained while the commodity is being produced.
The contractee also assumes all risks of production, but
shares price risk with the contractor. Marketing contracts
can take many forms such as:
- Forward sales of a growing crop where the contract provides
for later delivery and establishes a price or contains provisions
for setting a price later
- Price set after delivery based on a formula that considers
grade and yield
- Preharvest pooling arrangement where the amount received is
determined by the net pool receipts for the quantity sold.
A distinguishing characteristic of production contracts
is that they specify in detail the production inputs supplied by
the contractor (processor, feed mill, other farm operation or business),
the quality and quantity of a particular commodity, and the type
of compensation to the grower (contractee) for services rendered.
Since contractors control the amount produced and the production
practices that are used, they tend to dominate the terms of the
contracts. One advantage of production contracts is that the grower
and contractor share risks of both production and marketing of the
commodity. Another advantage of the production contract arrangement
is that financing is available either directly from the contractor
or indirectly through other lenders who are more assured of loan
repayment.
Farmers themselves can be contractors. Most often a farm
business will contract for another farmer to complete
a stage of production in the raising of livestock. The
farmer, as contractor, can then specialize in one of the
stages of production, and pay another producer to either
provide young animals or finish the production cycle.
For more information, see "Agricultural
contracting."
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Family Farm
ERS defines a "family farm" as any farm
organized as a sole proprietorship, partnership, or family corporation.
Family farms exclude farms organized as nonfamily corporations or
cooperatives, as well as farms with hired managers. Family farms
are closely held (legally controlled) by their operator and the
operator's household. For more information see What
is a "family farm?"
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Farm
Since 1850, when minimum criteria defining a farm for census purposes
were first established, the farm definition has changed nine times
as the Nation has grown. A farm is currently defined, for
statistical purposes, as any place from which $1,000 or more of
agricultural products (crops and livestock) were sold or normally
would have been sold during the year under consideration.
This definition has been in place since August 1975—by joint
agreement among USDA, the Office of Management and Budget, and the
Bureau of the Census.
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Farm Operator
The person who runs the farm, making the day-to-day decisions.
In the Census of Agriculture and in the Agricultural Resource Management
Survey (ARMS), information is collected for only one operator per
farm. For farms with more than one operator, data are collected
only for the primary operator.
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Farm Operator Households
The households of primary operators of
farms organized as individual operations, partnerships, and family
corporations. These farms are closely held (legally controlled)
by their operator and the operator's household. Farm operator
households exclude households associated with farms organized as
nonfamily corporations or cooperatives, as well as households where
the operator is a hired manager. Household members include
all persons dependent on the household for financial support, whether
they live in the household or not. Students away at school,
for example, are counted as household members if they are dependents.
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Farm Operator Household Income
The Agricultural Resource Management Survey (ARMS), conducted by
ERS and the National Agricultural Statistics Service (NASS), provides
the data necessary for estimating operator households' income. The
Current Population Survey (CPS), conducted by the Bureau of the
Census, is the source of official U.S. household income statistics.
Thus, calculating an estimate of farm household income from the
ARMS that is consistent with CPS methodology allows comparing income
between farm operator households and all U.S. households.
The CPS definition of farm self-employment income is net money income
from the operation of a farm by a person on his or her own account.
CPS self-employment income includes income received as cash, but
excludes in-kind or nonmoney receipts. The CPS definition departs
from a strictly cash concept by deducting depreciation, a noncash
business expense, from the income of self-employed people.
Farm self-employment income from ARMS is the sum of the operator
household's share of net farm business income (less depreciation)
and wages paid to the operator. Adding other farm-related earnings
of the operator household yields earnings of the operator household
from farming activities. Finally, total operator household income
is calculated by adding earnings from off-farm sources. Off-farm
income may come from a variety of sources, including wages and salaries,
off-farm self-employment, interest, dividends, private pensions,
Social Security, veterans' benefits, and other public programs.
Earnings of the operator household from farming activities is not
a complete measure of economic well-being provided by the farm.
It leaves out some resources the farm business makes available to
the household. For example, depreciation is an expense deducted
from income that may not actually be spent during the current year.
Increases in inventories are excluded from the earnings measure,
but they could be sold to raise cash. Nonmoney income, such as the
imputed rental value of a farm-owned dwelling, represents a business
contribution to household income because it frees up household cash
that would otherwise be spent on housing. Finally, earnings of the
operator household from farming activities does not reflect the
large net worth of many farm operator households.
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Farm Structure
Farm structure refers to a broad set of characteristics that describe
U.S. farms, the distribution of farm production resources,
and returns to those engaged in farm production activities.
For example, farms and ranches as producing units may be categorized
by farm size (value of sales or number of acres), primary output,
and geographic location. Farm businesses may be delineated
by form of business organization, degree of land ownership, marketing
or production contractual arrangements, and financial position.
Farm operators may be described by age, education, and primary occupation.
Finally, farm households may be characterized by features of their
associated farm businesses and interaction with the nonfarm sector,
such as off-farm employment or income from nonfarm sources.
Any or all of these elements can be used to construct a structural
portrait of farming in the Nation. Basically, descriptions
of farm structure show how the Nation's farms are organized to use
and control their resources, as well as the financial and economic
results of their activities.
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Farm Tenure
Farm tenure refers to the share of land of a farming operation
that is owned by the operation. Each farming operation must
have access to assets in order to produce crop and livestock products.
This access may be obtained through renting rather than outright
ownership. Historically, analysts have been most interested
in the ownership and rental of land, since it is the principal asset
used by farmers. For convenience of analysis, farms are often
placed in one of three groups:
- Full owners, who own all the land they operate
- Part owners, who own at least 1 percent of the land they operate,
but also rent additional land
- Tenants, who rent all the land they farm. Operations
that own only a small portion of the land they operated (less
than 1 percent) are also considered to be tenant operations.
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Farm Typology
The Economic Research Service (ERS) has developed a farm classification
to divide U.S. farms into eight mutually exclusive and more homogeneous
groups. The farm typology focuses on "family farms," or
farms organized as proprietorships, partnerships, and family corporations
that are not operated by a hired manager. To be complete, however,
it also includes nonfamily farms. A collapsed
farm typology combines the eight groups into three categories.
Small Family Farms (sales less than $250,000)
Limited-resource farms. Small farms with
sales less than $100,000 in 2003 and low operator household
income in 2003 and 2004. Household income is low if it is
less than the poverty level in both 2003 and 2004 or if
it is less than half the county median income both years.
Retirement farms. Small farms whose operators report
they are retired (excludes limited-resource farms operated
by retired farmers).
Residential/lifestyle farms. Small farms whose operators
report they had a major occupation other than farming (excludes
limited-resource farms with operators reporting a nonfarm
major occupation).
Farming occupation/low-sales. Small farms with sales
less than $100,000 whose operators report farming as their
major occupation (excludes limited-resource farms whose
operators report farming as their major occupation).
Farming occupation/high-sales. Small farms with sales
between $100,000 and $249,999 whose operators report farming
as their major occupation.
Other Family Farms
Large family farms. Farms with sales between
$250,000 and $499,999.
Very large family farms. Farms with sales of $500,000
or more.
Nonfamily farms
Nonfamily farms. Farms organized as nonfamily
corporations or cooperatives, as well as farms operated by hired
managers.
Collapsed Farm
Typology
The collapsed farm typology combines the eight
farm typology groups into three categories:
Rural residence farms. Includes limited-resource, retirement,
and residential lifestyle farms.
Intermediate farms. Includes farming occupation/lower-sales
and farming occupation/higher-sales farms.
Commercial farms. Includes large, very large, and nonfamily
farms.
For further details on the collapsed farm typology, see Food
and Agricultural Policy—Taking Stock for the New Century
(Appendix 1)
For further details on the farm typology, see America's
Diverse Family Farms: Assorted Sizes, Types, and Situations
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Industrialization
Industrialization of agriculture is commonly associated with a
shift towards:
- Greater reliance on contracting and
vertical integration in the food and fiber system
- Increased specialization of farm activities, which results in
increased use of purchased inputs
- Larger farms, measured in terms of acreage or (preferably )
sales.
Processors often require precisely defined production processes
and farm products with specific characteristics. As a result, contracts
and vertical integration (the ownership of related stages in the
production process) are replacing cash market exchanges of agricultural
commodities. Increasing specialization means that farmers often
purchase things-such as feed, fertilizer, seeds, or services-they
used to produce themselves. Using purchased inputs, or inputs supplied
by contractors, allows farmers to focus their own efforts on fewer
stages of the production process. Finally, innovations in information
technology and capital equipment have allowed farmers producing
some commodities (particularly livestock) to operate at much larger
sizes.
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Point Farms
The official definition of a farm for census purposes is "any
place from which $1,000 or more of agricultural products were produced
and sold or normally would have been sold during the census year.
If a place does not have $1,000 in sales, a "point system"
assigns values for acres of various crops and head of various livestock
species to estimate a normal level of sales. Point farms are farms
with fewer than $1,000 in sales but have points worth at least $1,000.
Point farms tend to be very small. Some, however, may normally have
large sales, but experience low sales in a particular year due to
bad weather, disease, or other factors. Both the Agricultural Resource
Management Survey (ARMS) and the census of agriculture use the point
system to help identify farms meeting the current definition.
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Small Farm
In the past, ERS frequently used $50,000 in agricultural sales
as the delineation between large and small farms. "Noncommercial"
or small farms had sales less than $50,000, while "commercial" or
large farms had sales of $50,000 or more.
To some extent, the cutoff between small and large farms is arbitrary,
and cutoffs other than $50,000 are also used. The National
Commission on Small Farms, for example, used a much higher cutoff
in its definition of small farms: farms with sales less than $250,000.
The Commission wanted to include more farm families of relatively
modest means who may need to improve their net farm incomes.
ERS has created a farm typology, with eight
groups, that incorporates the Commission's $250,000 cutoff.
Nevertheless, most farm businesses are small businesses.
The Small Business Administration (SBA) generally classifies farms
as small if they have sales less than $500,000. By SBA standards,
about 97 percent of U.S. family farms are small. (The SBA
uses higher cutoffs for nonfarm businesses. Cutoffs range
upwards from $3 or $5 million, for businesses where cutoffs are
defined in dollar terms. They begin at 500 employees for businesses
where cutoffs are defined in terms of employment.)
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