Economic Well-Being of Farm Households

Economic Well-Being of Farm Households
Carol A. Jones, Hisham El-Osta, and Robert Green
Farm subsidy programs in the 1930s were largely prompted by concern for the chronically low, and
highly variable, incomes of U.S. farm households. Seventy years later, commodity-based support
programs are still prominent, even though the income and wealth of the average farm household
now exceed those of the average nonfarm household—wealth by a large margin.
Farm households continue to face variability in income due to weather and natural disasters.
Household income is most variable for the small segment that operates commercial farms (above
$250,000 in annual sales). Relative to small farms, these farms achieve greater economies of scale,
generate higher profit margins, and their households realize a larger share of their income from
farming. However, the substantial net worth of these households acts as a cushion against uncertain farm income, much as off-farm income does for households operating smaller farms.
In a variable-income/high-wealth sector such as farming, economic well-being measures based on
both income and wealth can provide a better signal of household capacity to support a consistent
living standard than income measures alone. In 2003, 5 percent of farm households had both income
and wealth below the respective U.S. household medians, and those households, on average, spent
more on basic consumption than they earned in income. Households with low income and low
wealth are less likely to receive farm payments, excluding conservation programs; by contrast, only
3 percent of households receiving payments had income and wealth below the U.S. household
medians for each.

ECONOMIC BRIEF

Economic Well-Being of Farm Households

Increasing Farm Household Participation in Off-Farm Employment
and Investment is Key to Well-Being
The average income of farm households increased from half of nonfarm household income (per capita)
in the 1930s to relative parity by the 1970s. In every year since 1996, average income for farm households
has exceeded the average U.S. household income by 5 to 17 percent. Today, the economic portfolios of
most farm operator households are highly diversified. Off-farm sources of income (including employment earnings, other business activities, other investments, and transfer payments) provided 85-95 percent of household income over 1999-2003, up from around 50 percent in 1960.
Operators of family farms in all sales classes had average household income exceeding the 2003 U.S. average for all households ($59,083). However, farm households are following diverse paths to economic wellbeing. Commercial farms (annual sales above $250,000, representing about 7 percent of U.S. farms) produce about 70 percent of total farm sales and have an average operating profit margin1 greater than 10
percent, with economic performance and farm share of household income increasing with farm size within the commercial segment (see Economic Brief No. 6, Growing Farm
Size and the Distribution of Farm Payments). Very large commercial
Figure 1
farms (sales greater than $500,000) average household income about
Average household income for farm households compared
four times the U.S. household average. Though farm income prowith all U.S. households, 1960-2003
vided 80 percent of household income for the average very large
Thousand dollars
commercial farm operator in 2003, off-farm income still contributed
80
around $44,033 per year.
Farm earnings of farm households
1Operating profit refers to
net farm income plus interest
payments, minus the opportunity cost of operators’ unpaid
labor and management time.

Off-farm income of farm households

60

Total income of farm households
Total income of all U.S. households

40

20

0
1960
68
76
84
92
2000
Source: Various sources. For details, see www.ers.usda.gov/Briefing/
FarmStructure/Data/historic.htm

Figure 2
Average household income varies by sales class of farm, 2003
Thousand dollars
250
200

Off-farm unearned income

Farm Household Income is Most Variable for
Households with Highest Net Worth

Off-farm business income
Off-farm wages and salaries
Farm sources

150
100
50
0
All family

Across all other sales classes, farms have negative farm operating
profits, on average, and their households draw most of their income
from off-farm sources. Farm operating profit margins become more
negative and shares of household income from farm sources
decrease as farm size diminishes. Households just below commercial
farms ($100,000-$249,999 in sales) represent 8 percent of U.S. farms
and produce 17 percent of sales. Their average household income
was $67,275 in 2003. The remaining 85 percent of farms produce
around 15 percent of sales, and earn negligible income from farming.
The operators of these smaller farms (particularly those with less
than $10,000 in sales) disproportionately identify their primary occupation as “other than farming or ranching” or as “retired.” The
“other occupation” group, who operate 42 percent of all farms, is
more integrated into the off-farm economy than the farmer/rancher
or the retired, and relies primarily on earned income (off-farm wages
and salaries and off-farm business income.)

Less than $10,000- $100,000- $250,000- $500,000
$249,999 $499,999 or more

-50
farms
$10,000 $99,999
Share of farm households:
(100%)
(58%)
(27%)

(8%)

(4%)
(3%)
Commercial farms

Source: 2003 USDA Agricultural Resource Management Survey;
Economic Research Service, USDA.

UNITED STATES DEPARTMENT OF AGRICULTURE

Farm households as a group no longer experience chronically low
incomes relative to nonfarm households. On the other hand, farm
households do continue to experience more variable income from
year to year. However, it is the 7 percent of farm households operating commercial farms, who derive a majority of household income
from the farm, that experience the greatest degree of variability in
household income from year to year. The 8 percent of farm households operating the next size class of farms ($100,000-$249,999) also
experience variability in household income, though the effect is
dampened because about two-thirds of their income comes from offfarm activities.

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Economic Well-Being of Farm Households

ECONOMIC BRIEF

Distribution of Income and Wealth Across Farm Households
Within a given year, the variability of income across farm households tends to mirror that for all
U.S households. However, farm households tend to have lower incomes at the low end of the
income spectrum than nonfarm households, and higher incomes at the high end. The share
of farm households with negative household income was 6 percent in 2003, versus 1 percent
of all U.S. households.
In contrast to all U.S. households, where wealth is highly concentrated at the top end of the
distribution, wealth is more equally distributed across farm households. Nonetheless, differences exist by farm size and by age/retirement status. Across size classes, the variation in farm
household wealth roughly mirrors the variation in income levels: farm net worth and, to some
extent, nonfarm net worth are higher for households operating
Figure 3
larger farms. So the larger farms can counter their greater
Share of farm households with negative farm income, by
exposure to variable income with higher net worth – on
whether total household income is positive or negative, and
average in excess of $1 million, and closer to $2 million for
by sales class, 2003
very large commercial farms.
Percent
80

Again, the households operating larger farms (sales greater than
$100,000) are the ones more likely to experience the effects on household income from variability in farm income: in 2003, around 13 percent of households operating larger farms had negative household
income, compared with 4 percent of households operating smaller
farms (fig. 3). In contrast, the likelihood of incurring losses from
farm operations is highest among the smaller farms (less than
$100,000 in sales). But these latter households acquire virtually all of
their income from off-farm sources, so negative farm earnings seldom translate into negative household income.

A Joint Income-Wealth Indicator is More
Indicative of Farm Household Well-Being
In 2003, median wealth of farm households ($416,250) was five times
the estimated median wealth of all U.S. households ($89,578). (By
definition, 50 percent of households have wealth lower than the
median—also known as the 50th percentile—of wealth). Seventythree percent of farm household net worth is in farm equity (plus an
unknown share is in nonfarm business equity), whereas 17 percent of
the net worth of U.S. households is in business equity. Farmland,
which has appreciated greatly in recent years, particularly near urban
centers, currently represents about 60 percent of farm household
wealth. Excluding farm wealth, median nonfarm wealth of farm
households ($83,750) was almost as high as estimated median total
wealth of all U.S. households.
Gauging what share of farm households has low economic wellbeing is challenging, because farming is characterized by variable
income but also by high wealth. During periods of low income, farm
households may be able to maintain living standards by borrowing
against, or liquidating, assets. Consequently, household income for an
individual year, the standard measure of economic well-being, is not
necessarily a good indicator of a farm household’s ability to support

3

Negative farm income,
negative household income

60

Negative farm income,
positive household income

40
20
0

All family Less than $10,000- $100,000- $250,000- $500,000
farms
$10,000 $99,999 $249,999 $499,999 or more
Share of farm households:
(100%)
(58%)
(27%)
(8%)
(4%)
(3%)
Commercial farms
Source: 2003 USDA Agricultural Resource Management Survey;
Economic Research Service, USDA.

Figure 4
Average farm household net worth, by sales class, 2003
Thousand dollars
2,000

Farm net worth
Off-farm net worth

1,500

1,000

500

0

All family
farms

Less than $10,000- $100,000- $250,000- $500,000
$10,000 $99,999 $249,999 $499,999 or more

Share of farm households:
(100%)
(58%)
(27%)

(8%)

(4%)
(3%)
Commercial farms
Source: 2003 USDA Agricultural Resource Management Survey;
Economic Research Service, USDA.

ECONOMIC RESEARCH SERVICE

ECONOMIC BRIEF

How We Developed
the Data in this Brief
Data on farms and farm
operator households are
from USDA’s Agricultural
Resource Management
Survey (ARMS). Income
data for all U.S. households are from the U.S.
Census Bureau’s Current
Population Reports, Series
P-60. Wealth data for all
U.S. households are
derived from the Federal
Reserve Board’s Survey of
Consumer Finances (SCF).
SCF data are collected
once every 3 years, and
the most recent data
available are from 2001.
To provide a point of
comparison with farm
operator wealth in 2003,
we estimated median
wealth levels.

This brief is drawn from . . .
Ted Covey, Robert Green et al.,
Agricultural Income and Finance
Outlook, AIS-83, 45 pp,
November 2005.
David E. Banker and James M.
MacDonald, editors, Structural
and Financial Characteristics of
U.S. Farms: 2004 Family Farm
Report, Agriculture Information
Bulletin No. 797, 95 pp,
March 2005
James MacDonald, Robert
Hoppe, and David Banker,
Growing Farm Size and the
Distribution of Farm Payments, U.S.
Dept. Agr., Econ. Res. Serv.,
EB-6, March 2006.

Economic Well-Being of Farm Households

a given consumption level
through time. And wealth is particularly important for the retired
and near-retired, who may be
drawing down wealth accumulated over their lifetime, rather than
spending current income, to
support their standard of living.

Figure 5
Average farm household income and expenditures by
relative economic well-being group, 2003
$125,000

Total household income

Household expenditures

$100,000
$75,000

$50,000
To create a well-being indicator
that accounts for both income
$25,000
and wealth, we separate farm
$0
households by low and high
Low income/ Low income/ High income/ High income/
low wealth
high wealth
low wealth
high wealth
income and low and high
wealth, using the U.S. household
Share of farm households:
medians for income and wealth
(5%)
(41%)
(3%)
(51%)
as the dividing lines. By definiSource: 2003 USDA Agricultural Resource Management Survey;
tion, 50 percent of U.S. houseEconomic Research Service, USDA.
holds had income greater than
the U.S. median income ($43,378) in 2003. In contrast, 54 percent of farm households had income
greater than that level in 2003. However, the big difference is in the distribution of wealth across the
groups: 92 percent of all farm households—in contrast to 50 percent of all U.S. households—had wealth
greater than the U.S. median (estimated to be $89,578 in 2003).

So who is in the small group of low-wealth households? On average, the low-wealth group was younger
(virtually none was retired), operated substantially fewer acres, and generated lower farm sales than the
farm operator population as a whole. They reported substantial losses in the off-farm component of
household wealth. Among low-wealth households, a major factor differentiating the high-income subgroup (3 percent of total households) from their low-income counterparts (5 percent of total households)
is occupation: their primary occupation is disproportionately “other than farming/ranching,” whereas the
low-income group was more evenly split between operators declaring farming/ranching or “other” as
their primary occupation.
Do households with variable income have sufficient equity to borrow against, or to liquidate, to maintain living standards when income is low? Among farm households with income lower than the U.S.
median (46 percent), household wealth exceeded the U.S. median in 9 out of 10 households. Retired
households are disproportionately represented in this low-income/high-wealth subgroup. Even in the
low-wealth group, basic consumption expenditures exceeded income, though to a lesser extent than for
the high-wealth group.

Farm Households that Receive Commodity Payments
also Have High Incomes and Wealth
About 32 percent of all farm households receive farm program payments, excluding environmental payments (such as those received under the Conservation Reserve Program and the Environmental Quality
Incentives Program.) The share is lowest (12 percent) for households operating the smallest farms (sales
less than $10,000); over 50 percent of households operating farms in each of the larger size classes
receive payments. The high-income high-wealth group is more likely to be receiving program payments
(34 percent) than the low-income, low-wealth group (18 percent). Among recipients, payment levels
increase with production levels, and so payments disproportionately go to farm households operating
larger farms, with their higher average incomes and wealth.

THE U.S. DEPARTMENT OF AGRICULTURE IS AN EQUAL OPPORTUNITY PROVIDER AND EMPLOYER
For more information, see www.ers.usda.gov/abouters/privacy.htm

UNITED STATES DEPARTMENT OF AGRICULTURE

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