Q. How do changes in farm structure affect the distribution of farm
payments?
A. In recent decades, the production of commodities
traditionally covered by farm programs (largely grains and
oilseeds) has shifted to larger farms, with farm size measured
by the level of sales. This means that commodity program
payments have also shifted to larger grain and oilseed farms,
because payments are based on planting and yield histories.
The shift in production to larger farms means that commodity
payments have shifted to households with higher incomes.
No explicit policy changes led to these changes in the distribution
of payments. They resulted from ongoing structural changes
in farming.
Data Sources and Farm Classification
Using data from USDA’s Agricultural Resource Management Survey
(ARMS) and its predecessor, the Farms Costs and Returns Survey (FCRS),
we sort family farms into five size classes, with sales expressed
in 2002 dollars, using the Producer Price Index (PPI) for Farm Products.
All nonfamily farms are assigned to a sixth class. Sales are expressed
in 2002 dollars in order to account for price changes. Consistent
data from the two surveys are available from 1989 forward, and we
use ARMS/FCRS data for 1989, 1991, 1997, and 2002. Using this farm
classification and the ARMS/FCRS data, we can trace changes in the
distribution of production and farm program payments from 1989 to
2002.
Agricultural Production is Shifting to Larger Farms
A striking shift in production occurred between 1989 and 2002. Farms
in the largest sales class (at least $500,000 in 2002 dollars) accounted
for 43.9 percent of production in 2002, up from 28.9 percent in
1989, the earliest year for which we have consistent data. There
were 64,000 farms in that size class in 2002, up from 32,000 in
1989. The shift to large family-operated farms was almost precisely
mirrored by a decline in the share of production by farms with between
$10,000 and $250,000 in sales. Their share of production fell from
roughly 44 percent in 1989 to 29 percent in 2002. Most agricultural
production continues to occur on family-operated farms; nonfamily
farms accounted for just 8.5 percent of the value of production
in 2002.
The trend to larger farms is sectorwide. The shift of livestock
production to larger operations is well known and quite dramatic,
with major shifts of hog, dairy, and poultry production toward farms
with sales of $500,000 or more.
But shifts in production toward the largest farms
have also occurred for such crops as cash grains and soybeans, tobacco,
cotton, and peanuts.
Acreage data from the last four censuses of agriculture trace
shifts in farm size for seven commodities: barley, corn, cotton,
rice, sorghum, soybeans, and wheat. Each commodity shows a steady
shift of acreage toward larger farms (at least 1,000 harvested acres)
over time, with the large farm share increasing by 100 to 300 percent
between 1987 and 2002.
We expect these changes in farm structure to continue,
for two reasons. First, the share of those age 65 years and older
among operators of smaller commercial farms, those with sales between
$10,000 and $250,000, has risen sharply in the last two decades.
Many are near retirement. Second, the ARMS indicates that larger
farms continue to realize higher profits. Operating profit margins
were negative, on average, for small farms (sales below $250,000)
in 2002, and rose steadily as farm sales increased.
Commodity Payments Are Shifting to Larger Farms
Commodity policies have traditionally provided support to producers
of selected commodities, principally grains and oilseeds. Consequently,
farms that produce high-value crops, cattle, and hogs do not draw
government commodity payments (unless they also produce program
commodities or have a history of producing program commodities),
and many of those farms are quite large. However, over time, commodity
payments have shifted [along with production] to larger grain and
oilseed farms , since payments are based on planting and yield histories.
Commodity program payments include all commodity-related payments
and disaster assistance payments, but exclude environmental payments
received under the Conservation Reserve Program (CRP) or the Environmental
Quality Incentives Program (EQIP). Commodity payments are closely
tied to production value for certain commodities. For example, family
farms with sales between $100,000 and $249,999 received 27.2 percent
of commodity program payments in 2002, and accounted for 27.3 percent
of the value of production of eight program commodities: barley,
corn, cotton, oats, rice, sorghum, soybeans, and wheat.
As the largest farms expanded their share of program crops, government
payments shifted sharply toward those farms. Farms with less than
$250,000 in production value received 66.3 percent of commodity
payments in 1989; by 2002, farms in those size classes received
46.5 percent of payments. Farms with at least $500,000 in sales
received 27.4 percent of all commodity payments in 2002, up from
11.7 percent 13 years earlier.
Operators of the Largest Farms Have Higher Incomes
Although small farms account for a shrinking share of production
and generally report negative income from farming, small farm operators
are not, in general, poor. As a group, farm household incomes compare
favorably to average U.S. household income; mean farm household
income matches or exceeds the mean for the U.S. population ($57,900)
in every size class.
Small farm households derive almost all of their income from off-farm
work, nonfarm businesses, and other income, such as pensions and
financial investments. Almost 80 percent of the smallest farm households
report negative incomes from farming, but those losses are generally
offset by substantial off-farm income such that their total income
is generally above national averages. Many other households operate
small but still significant farming operations (with annual sales
up to $250,000), and they frequently combine a profitable farm business
with off-farm employment to generate household incomes that match
or exceed national averages.
Because of the important role of off-farm income, household incomes
do not vary much, on average, as farm size increases to $250,000
in sales. Incomes for households in the next size group ($250,000-$499,999
in sales) are clearly higher, but the difference is not great. However,
operators of the largest farms ($500,000 and over) earn more than
twice the income of other farms.
Commodity Payments Shifting to Higher Income Households
With farm production and commodity payments shifting to the largest
farms, commodity payments are also shifting to higher income households.
We detail the shift in three ways.
- The following figure shows the household income that splits
the distribution of commodity payments by income—that is,
the income level at which half of commodity payments went to higher
income households and half to lower income households. We report
this figure for 1989, 1991, 1996, and 2002. The income levels
are in 2002 dollars, and are adjusted for inflation with the Consumer
Price Index (CPI). In 1989, half of commodity payments went to
households earning more than $46,661 (in 2002 dollars). That income
level was about the same in 1991, during a recession, and then
began to rise sharply to reach $60,580 in 2002, an increase of
30 percent. For comparison, we also report the median income among
all U.S. households, also in 2002 dollars. It also increased during
the period, but by less than 5 percent, from $40,484 to $42,409.
- The lowest line in the next figure repeats the previous figure
by reporting the income at the median of the payments distribution,
at which half of payments go to higher income households and half
go to lower income households. But it also reports two other points
on the distribution of commodity payments, the 75th and 90 percentiles,
all again in 2002 dollars. In 1989, an income level of $98,511
formed the 75th percentile of the payments distribution (one quarter
of payments went to higher income households), while the 90th
percentile was at $185,767 (one tenth of payments went to higher
income households). By 2002, the 75th and 90th percentiles had
risen sharply, to $130,277 and $265,682.
- The final figure holds income levels constant through time,
and reports how payments shifted among households in different
income categories. In 1989, households with incomes of less than
$50,000 received 52 percent of all commodity payments. Their share
fell by 9 percentage points, to 43 percent, by 2002. In turn,
households with income in excess of $100,000 increased their share
of commodity payments by 7 percentage points from 24.6 percent
to 32.5 percent.
Because household incomes do not rise sharply among operators of
farms with less than $500,000 in sales, shifts in production to
larger farms within these size classes do not shift commodity payments
to noticeably higher income households. What is driving the patterns
in the last three figures is shifts in production to the largest
class of farms, those with sales of $500,000 or more, whose households
have substantially higher incomes. As discussed earlier, the largest
farms have rapidly increasing shares of production of program crops.
However, their shares of production are still modest. Their shares
can grow considerably more.
Commodity payments shifted sharply to higher income households from
1989 to 2002, and we expect that process to continue along with
the continued shift of production to larger farms and higher income
households. No explicit policy changes led to this shift in payments.
Rather, they are driven by ongoing structural changes in farming.
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