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Image: Farm Economy

Background on Farm Organization

Farm Operators, Principal and Secondary

Every farm has at least one operator, the farmer who makes everyday decisions about the farm business. However, some farms—particularly the larger ones—have more than one operator who makes decisions. In such cases, one operator per farm is designated as the principal operator, the one most responsible for running the farm. The others are secondary operators. In the case of single-operator farms, the sole operator is the principal operator. 

Secondary Farm Operators and Their Farms

Commercial-sized farms often require more management and labor than an individual can provide. Additional operators can provide the necessary labor and management and possibly other resources, such as capital or farmland. Having a secondary operator may also provide a successor when an older principal operator phases out of farming. There were secondary operators on 822,300 multiple-operator farms in 2012, or 38 percent of all U.S. farms. Because farms are generally family businesses, one would expect family members to serve as secondary operators. In fact, 66 percent of secondary operators were spouses. 

Multiple-operator farms are particularly prevalent among large and very large family farms. About 17 percent of all multiple-operator farms (and 6 percent of all farms) were multiple-generation farms in 2012, with at least 20 years' difference between the ages of the oldest and youngest operators. The presence or absence of younger related operators may affect farm expansion and contraction decisions, depending on the principal operator's lifecycle position.

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Aging Principal Farm Operators

One striking characteristic of principal farm operators is their advanced age. About 31 percent of all farm operators were older operators in 2012—at least 65 years old. In contrast, only 12 percent of self-employed workers in nonagricultural industries are that old. Retired operators were the oldest group—as one might expect—with 72 percent at least 65 years old, followed by low-sales operators, with 36 percent that old. 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 healthcare and advances in farm equipment have also allowed farmers to farm later in life than in previous generations.

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Some of these older operators have already retired and effectively left farming. The 31 percent of operators classified as older are made up of two components—those who are retired (14 percent of all farmers) and those who are not (17 percent). Older retired operators account for only 2 percent of production. Younger retirees account for another 5 percent of farms and 1 percent of production. Some larger, more commercially-oriented farms run by older farmers have a younger, secondary operator who will eventually replace the principal operator. 

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Many retired operators continue to farm on a small scale and satisfy the USDA farm definition by selling at least $1,000 of farm products in a given year. (Government payments count toward sales.) Operations with sales below the $1,000 cutoff are also counted as farms if they normally would sell $1,000 or more of farm products. The USDA examines acres of crops and head of livestock to identify places with sales less than $1,000 that could normally sell at least that much. The amount of crops and livestock necessary to meet the normal sales criterion is small. To qualify as a farm, an establishment with neither sales nor Government payments would need—for example—only four acres of corn, three head of beef cattle, or five horses or ponies.

Contracting

Contracts can potentially provide benefits to both producers and contractors. Farmers get a guaranteed outlet for their production with known compensation, while contractors get an assured supply of commodities with specified characteristics, delivered in a timely manner.

Types of Contracts

A contract is a legal agreement between a farm operator (contractee) and another person or firm (contractor) to produce a specific type, quantity, and quality of agricultural commodity. ERS classifies contracts into two types—marketing contracts and production contracts.

Marketing contract. Ownership of the commodity remains with the farmer during production. The contract sets a price (or a pricing formula), product quantities and qualities, and a delivery schedule. Contractor involvement in production is minimal, and the farmer provides all the inputs. For crops, the contract is finalized before harvest. For livestock, the contract is finalized before the animals are ready to be marketed.   

Production contract. The contractor usually owns the commodity during production, and the farmer is paid a fee for services rendered. The contract specifies farmer and contractor responsibilities for inputs and practices. The contractor often provides specific inputs and services, production guidelines, and technical advice.  In livestock contracts, for example, contractors typically provide feed, veterinary services, transportation, and young animals. The contract is finalized before production of the commodity.

Who Uses Contracts?

Use of contracts—of either type—varies by farm type. The share of retirement and off-farm occupation farms using contracts is relatively low, 2 and 4 percent, respectively. For the remaining types of family farms, the use of contracts increases with gross cash farm income (GCFI), ranging from 7 percent of low-sales farms to more than 40 percent of large and very large family farms. See details on farms with contracts by farm typology, 2012 Excel icon (16x16), in the linked table.

The share of production under contract is highest for moderate-sales (44 percent) and nonfamily farms (42 percent). Poultry accounts for most of the production under contract for moderate-sales farms. Among nonfamily farms, contract production is concentrated in two commodities: cattle and high-value crops. Nevertheless, the majority of the value of U.S. farm production (65 percent) is sold through spot markets and not through contracts.

Small farms make up about 59 percent of the farms with contracts, but account for only 24 percent of the production under contract. In contrast, large-scale and nonfamily farms together account for only 18 percent of farms with contracts, but 56 percent of contract production. The share of production under contract per contracting farm is much higher for large-scale and nonfamily farms than for small family farms.

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Last updated: Thursday, May 08, 2014

For more information contact: Robert Hoppe

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