This glossary is intended to provide the user with a working definition of the key terms and a better understanding of how these concepts are applied in estimating farm household income and wealth.
A farm is defined as any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the year. Since the definition allows for farms to be included even if they did not have at least $1,000 in sales, but normally would have, a system is developed by USDA's National Agricultural Statistics Service for determining when a farm normally would have. These are called point farms. If a place does not have $1,000 in sales, a "point system" assigns dollar 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 much larger sales, but experience low sales in a particular year due to bad weather, disease, changes in marketing strategies, or other factors. For farms with production contracts, the value of the commodities produced is used, not the amount of the fees they receive. Changes are made to the point system over time. For example, beginning with the 1997 Census of Agriculture, operations receiving $1,000 or more in Federal government payments were counted as farms, even if they had no sales and otherwise lacked the potential to have $1,000 or more in sales. And, for 2002, a farm that had $500 point value and $500 in government payments was considered a farm. This would not have been true for the 1997 census. The most recent Census of Agriculture is for 2007 ( USDA, NASS. 2007 Census of Agriculture, United States, Summary and State Data, Vol. 1, Geographic Area Series, Part 51, February 2009 ). More than one-quarter of farms have no sales in a typical year, and at least another 30 percent have positive sales of less than $10,000.
Farm Operator and Principal Farm Operator
The farm operator is the person who runs the farm, making the day-to-day management decisions. The operator could be an owner, hired manager, cash tenant, share tenant, and/or a partner. If land is rented or worked on shares, the tenant or renter is the operator. In the recent Census of Agriculture and in the Agricultural Resource Management Survey (ARMS), information is collected for up to three operators per farm. In the case of multiple operators, the respondent for the farm identifies who the principal farm operator is during the data collection process.
The general concept of a family farm is one in which ownership and control of the farm business is held by a family of individuals related by blood, marriage, or adoption. Family ties can and often do extend across households and generations. Historically, it was not uncommon for the family farm to provide all of the labor for the farm and to own all of the land and capital of the farm. That is no longer true today, although the extent to which individual farms hire nonfamily labor, rent-in land or other capital, or contract for various farm services varies greatly across farms. In short, the organization of family farms changes over time.
There is no hard-and-fast definition of a family farm, unlike the farm definition. In its program of analyzing the well-being of farm operator households using microdata, the ERS definition of family farms has changed over time. A preferred definition of a family farm would allow for organizational changes in the way in which operators structure their farm businesses as they respond to changes in technology, the marketplace, and policies, but still capture the general concept of a family farm in which a family unit maintains majority control and ownership.
The current definition of a family farm, since 2005, based on the Agricultural Resource Management Survey is one in which the majority of the business is owned by the operator and individuals related to the operator by blood, marriage, or adoption, including relatives that do not live in the operator household. Although the definition of a family farm has changed somewhat over time, the share of U.S. farms classified as family farms has changed little since 1996, ranging from 97.1 to 98.3 percent of all farms (see the data table on family and nonfamily farms, by farm size class (gross sales), 1996-2011 ).
Immediately prior to the implementation of the current definition, farms were considered family farms unless they were: organized as cooperatives, organized as corporations with the majority of shareholders not related (by blood, marriage, or adoption) or operated by a hired manager. In 2004, 98 percent of farms were classified as family farms using this definition with data from the Agricultural Resource Management Survey (see Structure and Finances of U.S. Farms, Family Farm Report, 2007 edition for more information). When the family farm definition was established using USDA's Farm Costs and Returns microdata in 1988, farms were defined as family farms unless they were organized as cooperatives or nonfamily corporations, or when the operator reported not receiving any of the net income of the business. At that time, 99 percent of farms were classified as family farms (see The Economic Well-Being of Farm Operator Households, 1988-90 ). USDA microdata were first collected in 1984 on the Farm Costs and Returns Survey; at that time, no distinction was made between family and nonfamily farms.
For farms where there is more than one operator and the multiple operators do not share a housing unit, detailed household data and off-farm income are not collected for the additional operators on either the Census of Agriculture or the ARMS-household data is only collected for a single principal operator. Hence, this data limitation has the effect of undercounting the total number of family farm households.
Farm Operator Household
Farm operator households are those who share dwelling units with principal farm operators of family farms. Multiple operators that do not share the same household operate less than 10 percent of family farms. In this case, the farm operator household population would include the households of the principal farm operator, but not the households of the other operator(s).
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 self-employment income is net money income from the operation of a business 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.
Total income for the farm operator household consists of income from the farm business, income from other farming activities, and income from earned and unearned off-farm sources.
Household income from the farm business: Several factors affect how much the household of the principal operator earns from the farm business, including how many households are associated with operating the farm, the legal organization of the farm, and whether or not the principal operator receives a wage or salary for operating the farm.
- Some farms have multiple operators who do not share a single household; in such cases, household income is calculated only for the principal farm operator's household and includes only that household's share of farm business income.
- Also, if a farm is organized as a C-corporation, the profit that the firm generates is retained by the business until the business pays out those earnings in the form of dividends. In 2006, for C-corporations, we include the farm business dividends that the principal operator household receives in household farm income. (The remaining profit of C-corporations is retained by the farm business or paid to other shareholders and is not reflected in the principal farm operator household's income.) Prior to 2006, all of the profits generated by farm businesses organized as C-corporations were included in farm household income based on the share of business returns the principal farm operator household reported as theirs.
- Operators of C- and S-corporations may also pay themselves a wage for operating the farm, and those payments are included both as an expense to the business and as income to the farm household when they are paid. Regardless of legal organization, wages and salaries paid by the farm business to household members other than the operator(s) are included in household income from the farm business.
Household income from other farming activities: A household may earn income from more than one farm. The other farming activities can include operating another farm or renting out farmland from another farming operation to another operator. Income from these sources is included in the farm operator household's earnings from farming activities.
It is important to note that the earnings of the operator household from farming activities as defined in the USDA measure is not a complete measure of the return provided by the farm. It excludes nonmoney income, in particular, the rental value of a farm-owned dwelling. In addition, farm losses, or negative farm earnings, of the operator household can reduce the income taxes paid on off-farm sources of income. The measure also excludes increases in inventories, which the household could potentially sell for cash.
Household off-farm income: Off-farm income can be classified as earned or unearned. Earned income sources are those that require a household member to allocate their labor or management time to the activity. This includes wages and salaries and off-farm self-employment income. Unearned income sources are passive or transfer income, such as from interest, dividends, private pensions, Social Security, veterans' benefits, and other public programs.
Farm Operator Household Wealth
Farm household wealth is derived from a variety of sources. It ranges from physical assets of both the business and household to various types of financial assets, all differing in degree of liquidity, capital certainty, and visibility. For example, wealth held in a bank account is highly liquid, capital certain, and visible. In contrast, wealth held in real estate is illiquid, or not readily available on demand. Wealth not only reflects the collective value of assets but also considers the business and consumer debt of households.
Components of Farm Household Wealth
The ERS farm typology groups relatively similar farms. The complete typology has seven groups, which are defined by the farm’s gross cash income, the primary occupation of the principal operator, and whether the farm is a family farm (see Updating the ERS Farm Typology, EIB-110, April 2013). The collapsed farm typology combines the seven farm typology groups into three groups:
- Residence farms: Farms with less than $350,000 in gross cash farm income and where the principal operator is either retired or has a primary occupation other than farming.
- Intermediate farms: Farms with less than $350,000 in gross cash farm income and a principal operator whose primary occupation is farming.
- Commercial farms: Farms with $350,000 or more gross cash farm income and nonfamily farms.
Note: Nonfamily farms are excluded from the commercial farm group in the reporting of household statistics.
Gross cash income includes the farm’s sales of crops and livestock, government payments, and other farm-related income but excludes revenues that do not accrue to the farm, such as the value of production accruing to share landlords or production contractors.
A farm's commodity specialization is determined by the one commodity or related group of commodities that makes up at least 50 percent of the farm's total value of production. This definition is consistent with the North American Industry Classification System (NAICS). Sometimes a farm does not have one commodity or one related group of commodities that makes up 50 percent of the total value of production. These farms have a mix of commodities, and are classified as other crops or other livestock operations. Also, when sample sizes are too small to report reliable statistics for a particular commodity specialization, even if at least 50 percent of the farms' value of production is represented by one commodity or a related group of commodities, they are included with the other crops or other livestock categories.
Disposable Personal Income of Farm and Nonfarm Residents
This is a longstanding statistical series that was published by ERS and its predecessor USDA agencies in the Economic Indicators of the Farm Sector series and the Farm Income Situation series for many years. Both the population and the income concept differ from the concepts used today. Farm residents are those who live on farms of 1 acre or more in rural areas, including hired workers and all others living on these farms. It excludes the households of operators who do not live on their farms. The disposable personal income series is an after-tax income that was estimated from sectorwide aggregate data. It was based, in part, on the annual net farm income estimate of the farm sector and various assumptions about how much of that income farm residents received and how much off-farm income farm residents received. Because the population concept was outdated and the income estimate was constructed using various assumptions rather than with observed data, the series was discontinued. However, it remains important as the only historical series that compares the well-being of farm and nonfarm persons.