ASPECTS OF FARM PROFITABILITY: AN OUTMODED CONCEPT? PRESIDENTIAL ADDRESS

265

ASPECTS OF FARM PROFITABILITY: AN OUTMODED CONCEPT? PRESIDENTIAL ADDRESS

J. S. Nix

The paper be ins by recording Journal articles since 1952 of relevance to Jrming incomes and efficiency, and follows by reviewing the literature on measuring farmers’ incomes and the problems entailed, including consideration of non-farming incomes and capital gains and their relevance to agricultural policy. Definitions o ‘profit’ in selected economic texts are then compared,

Suitable charges for management and interest are then determined and estimates made of net profits and losses from different types of farming in 198617 and 198718 for both average and ‘top’ farms. Real farming incomes and capital gains rom land from 1938 to 1988 are then discussed. The paper concudes f by summarising why the concept of profitability from farming has now largely lost its significance - though not for aJ farmers.

together wit If attempts to measure ‘pure profit’ f rom farming.

1. Introduction

It is such an honour to be made President of this Society, especially as I have devoted so much of my energies over the past 25 years to a sister society, the Centre for Management of Agriculture (originally called the Farm Management Association).

As has been well documented (Giles, 1976; Nix, 1979) the proportion of our conference papers devoted to Farm Management has decreased substantially over the last forty or so years. However, during the 1980s the roportion appears to have fallen no further than the 13% estimated in 1975-7g although deciding what is and what is not essentially a paper on farm management is not easy, and many of those I would include would be unrecognisable as such to most farmers and farm managers.

I found it of interest to look at the list of past Presidents with regard to their particular fields within our basic discipline of agricultural economics, picking out those who are, or were, known as farm management specialists. Excluding farmers themselves there was Tony Giles only three years ago, Ian Reid in 1981, then we have to go back no less than 23 years to Arthur Jones in 1958, preceded by Jock Currie in 1955 and James Wyllie in 1948. They were the only ones, to my knowledge, since the end of World War 11, and possibly before. During that period there have been four farmer Presidents. The last was

266 J . S . NIX

Tristram Beresford (though better known to the Society perhaps as a journalist and author) in 1972, Wilfred Cave in 1965, W. S. Abbott in 1957 and A. Harvey Brown in 1950. I hope one day we might have another. Of course, several Presidents that I have not mentioned may well have started their careers in farm management - possibly collecting data from 25 sheep farmers in some remote part of these islands.

I had the same problem in choosing a topic as many previous Presidents must have had. I have already outlined my overview of my subject, farm business management, and where it is going, in my conference paper prepared just over a decade ago (Nix, 1979). I would make few changes to that if I were to rewrite i t today. Furthermore, I have given two inaugural lectures and one ‘keynote’ address in the last five years (Nix, 1985, 1987a and 1987b), which ruled out some other possibilities.

And what acts I have to follow: heroism last year (Bateman, 1989), poetic ear before (Jones, 1988), and nomadism the year before that

fGiles, 19875. After some thought, I decided to talk on a favourite subject of mine, farm

profitability. I have given many talks on the subject to farmers and other groups over the years, but here was an opportunity, the motivation, to expand upon certain aspects of those talks.

Little did I appreciate, when I finally chose the subject and gave the title to ou r Programme Secretary, just how much had already been written on this subject over the last decade: a serious deficiency on my part. The more I explored the more I discovered had already been done, much of it , i t seems, regretfully long forgotten. Nevertheless, I feel, and hope you do too, that a review is both worthwhile and timely, and it is certainly nice for me to be able to indulge myself by interspersing my own views and some figures of my own choice.

enius the

2. Relevant Journal Articles

In the thirty issues of the Journal published during the 1980s some 54 of the 276 articles, i.e. nearly 20 per cent, are to do with farming incomes or farm management in the broadest terms. A number of these relate to overseas countries. Some are highly mathematical. Of these, 15 have some relevance to the topic I have chosen.

In the literature to which I shall refer in this paper, I will particularly mention articles published since I joined the Society in 1952. This is not sim ly through

has given me. I can recall vividly a number of these papers being presented at meetings of the Society and pasts of the discussion that followed, beginning with Rasrnussen’s brilliant paper given an impossible 37 years ago (1953).

Nearly one article a year has had some relevance to the subject-matter I wish to cover: 35 in the 38 years 1952-89 inclusive. Some are classifiable into particular aspects, some are not.

A favourite topic, not directly related to my subject but close to some aspects of it, is the measurement of efficiency. There have been nine papers on this, which is more than on measuring incomes: (Dawson, 1985; Russell and Young, 1983; Simpson. 1981; Pasour, 1981; Lund and Hill, 1979; Nieuwoudt, 1977; Bessell, 1970; Fyfe, 1967; Rasmussen, 1953). In addition, Lingard and Rayner

loyalty, but in gratitude for the service and pleasure membership o P the society

PRESIDENTIAL ADDRESS 267

have researched into measuring productivity (1975). Hill and Gasson investigated tenurial effects (1985). Two of these papers also refer specifically to economies of size or scale (Pasour, 1981; Lund and Hill, 1979). There have been two more recent papers on this subject (Stefanou and Madden, 1988; Dawson and Hubbard, 1987) and two much older (Raeburn, 1958; Wynne, 1954). Other, ‘miscellaneous’, papers on farm incomes and efficiency which should be mentioned are Reid, 1981; Scully, 1962; Brech, 1961; Holme, 1955. Also, Trail1 (1982) considered the effect of price support on farm incomes, amongst other things.

There are four further papers which do not directly discuss the levels of, or measurement of, farm incomes or efficiency but which have some relevance to my subject. These are papers on the family farm concept (Gasson et al. , 1988), part-time farming (Robson, Gasson and Hill, 1987; Gasson, 1967) and the goals and values of farmers (Gasson, 1973). Finally, there are the articles dealing specifically with farm incomes. Two have considered trends (Furness, 1982; Dinsdale, 1958). Three have discussed variability of incomes (Smith, 1972; Bennett Jones, 1969; Tansey, 1957).

However, of special relevance are those discussing the measurement of farming income, or particular aspects of it: Hill (N.B.) 1987, 1984,1982; Hill (G.P.) , 1984; Simon, 1979; Malcolm, 1978; Britton, 1977; Britton, 1970. These will all be referred to again in the review that follows, except for those by Simon and Malcolm, who were responding to Britton’s Presidential Address (1977).

Turning now to that word ‘profit’. In the 810 articles that have appeared in the Journal in the past 40 years, the word ‘Income’ has appeared in a title 15 times but ‘Profit’ only 5 times. The word ‘Profitability’ has never appeared at all and so here, at least, my paper can claim to be original . . . However, all but one of those 5 papers has been to do with farm planning and decision-making. The concept of a ‘farm profit’ has appeared only once, and that was 33 years ago (Tansey, 1957).

But what’s in a name? That is what this paper is at least partly about. No doubt for excellent reasons most writers have preferred the term ‘farm income’.

3. Measuring Farm Incomes: Detail When I came to reviewing in detail what had been written on the definition and measurement of farm incomes, both in the Journal and elsewhere, I discovered after my initial foraging that much of the work had already been done for me, in two relatively recent reviews. Both are opening chapters of Ph.D. theses, both are from Wye, and both were supervised by Denis Britton. Both are excellent, though they differ in their treatment. The authors are Bryson (1985) and Gregory (1986). Much of what follows in this section is a blended synopsis of these reviews, to which I have added my personal views.*

How to define the word ‘income’, first of all in general terms? The nub of a practical, valid definition might be covered by the word ‘spendability’ (Pen, 1971), or, ‘that income in a given period (which) a erson could have spent while maintaining his wealth intact’ (Atkinson, 1575). Hicks (1946) had described it similarly: as the maximum value that could be consumed during a given period and still expect to be as well off at the end of the period as at the

Following the re aration of the review section of this address, a book by Berkeley Hill was published (l&39p, containing yet another comprehensive review of the literature.

268 J. S. NIX

beginning. Capital maintenance is an essential feature. In terms of a business, we could say that it is the amount that courd be spent annually without reducing the capability of the business to generate the same level of income in real terms ~n the future. However, this is clearly simplistic, inadequate: ‘spent’ must include payment of taxes and questions of reinvestment in times of inflation andor narrowing margins arise.

The ‘unit’ to be used in farming is open to debate: is it simply the farmer and spouse or the whole family? The unit may of course be a partnership or company. Does the term used have the same significance in all cases?

If a national or regional sum is to be translated into a ‘per farm’ figure, what is ‘a farm?’ What is the minimum area or size of business to be used? Britton (1981a) asked in the first Asher Winegarten lecture, in discussing what was meant by ‘fair standard of living’, how many of those who might call themselves farmers should the EEC be expected to try to sustain at that level? If the criterion should be a minimum size of business, there are various ways in which this can be measured. How should part-time farmers, in any sense, be dealt with in these matters? Also, if the unit is to be used for welfare considerations does not a minimum level of efficiency need to be stipulated?

Returning to the possible definitions of farni incomes, whatever the unit: there are many. In 1981, Lund and Watson described in detail the various set of estimates of agricultural business income in the UK; they listed no fewer than 12 different definitions, and illustrated them with data from the 1970s. Although they had the macro (national) as ect in mind, the variations could also apply at the micro (individual farm7 level. Some of the problems had been discussed earlier by Snowdon and Roberts (1973). Outlaw and Croft (1981) subsequently described a number of developments that had taken place, in 1977 and 1979, in order to harmonise UK methods with those used for the Community agricultural accounts.

During the last fifteen years or so practical difficulties, particularly involving inflation, have absorbed many hours of discussion between MAFF and University/College personnel concerned with the Farm Management (now Business) Survey. These have included the use of current, or replacement, cost instead of historic cost in calculating depreciation of machinery and equipment and whether or not to incorporate changes in the market value of breeding livestock and deadstock. Another example is whether or not gains from borrowing should be taken into consideration (Hill (G.P.), 1984).

Some have sought to avoid these and other difficulties, especially valuations and the calculation of de reciation, by advocating the use only of cash flow (e.g. Lee, 1980). No Rrther reference will be made to this alternative since cash flow can be very different from profit and the difficulties mentioned have to be faced.

Next is the question of standardisation. The main reason for this, I have always supposed, is for purposes of comparison, primarily of efficiency and productivity. With all its undoubted faults, management and investment income is a useful measure of comparative inter-farm efficiency, even thou h variations between years can confuse the issue and up-to-date

where horticulture is involved. Net farm income is the same except for adding back the value of the unpaid labour of the farmer and spouse. These measures will be returned to later.

stan f ards are often difficult to find for some types of farm, particularly


4. Now for a quantum leap - from detail to basic concept. Four major issues can be distinguished. These are whether or not to add any of the following to the income from farming of the farmer and spouse:

(i) non-agricultural income, both on-farm non-farming (e.g. from tourism or a riding school) and off-farm, whether earned or unearned, (e.g. from lorry driving, stockbroking, pensions or investments) ;

(ii) non-agricultural income of the spouse and incomes of other members of the family, whatever the source;

(iii) capital ains on fixed assets, primarily the ‘land’ (actually the whole

(iv) wealth-again primarily the land.

Measuring Farmers’ Incomes and ‘Well-Being’

farm in B rastructure: the land, house, buildings and roads).

In order to incorporate (iii) and/or (iv) the term ‘economic well-being’ has been used (Chase, 1980; Chase and Lerohl, 1981; Hill (N.B.), 1982). This refers to the total ‘potential command over goods and services’, or resources. However, the term could be used to cover all four of the above, separately or in combination. The term ‘economic status’ has also been applied (Weisbrod and Hansen, 1965).

There has been considerable debate on (i) (non-agricultural income) in recent years. In 1981 it was referred to by Lund and Watson and Britton, the latter in a paper presented to a one-day conference of the Society (1981b). On this subject since then Hill (N.B.) has had three articles published in the Journal (1982, 1984, 1987), presented a paper to a one-day conference of the Society (1985) and published several other articles (e.g. 1983). The 1984 article analysed and presented data from the Inland Revenue’s Survey of Personal Incomes. This work has provoked considerable national interest and received widespread publicity. Additional data have been recently acquired by the Universities/Colleges for MAFF on the total incomes of ‘Very Small Farms’ (Ansell, Giles and Rendell, 1988,1989), and more (if 1imited)information will be collected soon as part of the Farm Business Survey. The previous Minister of Agriculture caused much debate with a reference to substantial levels of non- farming income in his paper to last year’s Oxford Farming Conference (MacGregor, 1989).

With regard to (ii) (whole-farm family income), more interest has been shown in this abroad than in this country. Data have been accumulated in the USA, Canada and Denmark, including off-farm income. However, it is thought unlikely to be available for many years, if ever, in most EEC countries, including the UK. Nevertheless, in terms of all members of the family employed permanently on the farm, whether full-time or part-time, the total family income is in fact crucial in terms of the ability to survive on the farm (Furness, 1982 and 1983; Vine and Bateman, 1981).

The uestion of (iii) (capital gains) has been iven detailed consideration by

(1980), Hill (N.B.) (1982) and possibly others. Brinkman, in presenting the case for adding capital gains to income, argues that farmers do not have to set money aside for retirement if their land has appreciated substantially (presumably in real terms) and that they can li uidate part of their equity by

(increased) opportunity cost of land is included in the denominator when calculating return on total capital, why should not capital gains be included in the numerator?

Stark ( 9 972), Hearn (1977), McConnen (19797, Melichar (1979), Brinkman

borrowing on the basis of that appreciation. 4F urthermore, he says, if the

270 J . S. NIX

With regard to (iv) (wealth), Weisbrod and Hansen (1965) added annuitised net worth to income. The same avenue has been explored b Carlin (1973) and Carlin and Reinsel (1973) in the USA, by Chase (19804; and Chase and Lerohl (1981) in Canada, and by Hill (N.B.) (1982) in the UK. Also in this country, Sutherland (1980) and Peters (1980), in arguing against the necessity for capital transfer tax concessions on agricultural land, have stressed the considerable wealth of many farmers, notably of course owner-occupiers with little or no mortgage. Peters used Farm Management Survey data on farmers’ capital to prove his case.

What are the arguments against taking account of these four elements in determining the level of government support for agriculture? Number (ii) (whole-farm family income) is the most easily dealt with. Apart from the difficulty of acquiring the necessary data, no account is taken of the earnings of a spouse or other members of the family when other people’s wages or salary claims are considered. Against this, i t may be argued, these others are not receiving subsidies paid for by taxpayers. That too can be disputed, in that many others have incomes from industries or occupations funded, or supported, by the state. ‘To what extent, in each individual case, this amounts to ‘subsidisation’ is a matter of debate. Another point is that the amount of the earnings of offspring coming into the household are often small (sometimes non-existent) and mainly temporary, most leaving the family home after some years. Also, the cost of accumulating the necessary information to calculate total income per household would be a further drawback. Thus, in my view, the case against (ii) wins fairly easily, even though the crucial importance of total family income to the capacity for small farmers to survive is unquestionable.

The case for (i), i.e. taking account of non-agricultural earnings, both on and off the farm, is stronger, although the first point made against (ii) above again applies, i.e. why should farmers be singled out for this treatment? Because they are subsidised by the taxpayer and the level of these earnings are, in general, fairly high? However, there are many problems of detail regarding measurement (Williams and Bent, 1989).

A further problem arises in making use of this information. If the level of non-agricultural earnings are to be taken into account in determining the level of government support, presumably this would not be done across the board, i.e., reducing the level to the same extent for aff farmers, regardless of the amount of non-agricultural income each was obtaining. Many of them have none, or only trivial amounts. Thus a type of individual ‘means test’ would be required. Would this be worthwhile, in the name of ‘fairness’ or simply to reduce government expenditure and thus, marginally, taxation? Anomalies could easily arise. Presumably rogressive income tax should

subsidies, to the Exchequer. Admittedly this point was stronger when the top rates of tax were higher.

There are several ar uments against (iii), i.e. including capital gains. All

only be temporary; would there be recoupment for capital losses? Most at least of the gains may be incapable of being spent without ceasing, or reducing, production and thus the source of future income. In other words, the gains are difficult to measure, uncertain and illiquid.

The same points can be applied to (iv), i.e. accounting for wealth, particularly the illiquidity aspect. There are many owner-occupiers who are wealthy in terms of the value of their land but who will never sell their farms

return part of the total earnings, inch a ing the ‘unfair’, unnecessary

agree that these shoul B only be calculated in real terms. Even so, they may

PRESIDENTIAL ADDRESS 27 1

although they have a very low income. Are such people deserving of the taxpayer’s support, to enable them to stay working on their farms?

Is it, in fact, worthwhile to consider, and gather information, for these four types of additional income, spending power, or wealth? That is, a art

to consider the im act of capital taxation (possibly a wealth tax in the case

total well-being, or economic welfare, of farmers, which may be very inade uately measured simply by farm income, however defined. It is to do with t 41 eir true level of parity: compared with those in other occupations, professions, industries. It is to do with the sense of fairness in society, of Indefensible transfer payments between individuals in that society. To repeat, given that there is progressive taxation (if not high enough at present to meet the case fully) would the difficulties involved in endeavouring to improve the situation be worthwhile?

Of course, capital gains and wealth are in fact taken into account in assessing each individual’s liability for taxation when they are realised. Whether or not these capital taxes are at the right level depends on one’s

oint of view. To many people, the fact that no capital gains tax now has to !e paid on gains made before 1982, even in real terms, may seem overly generous. And many may feel that the roll-over relief given to the often huge development gains currently being made is both unjust and highly distorting (e.g. Rankin (1990)).

There does, however, seem little point in endeavouring to amalgamate the two quite different concepts: income and capital, or wealth. All sorts of problems arise if one tries to do so. Income taxation and capital taxation are two separate issues.

It is now time to leave the welfare, well-being, parity aspects of farming incomes, and thus questions of non-farming income, family income, capital gains and wealth, and turn to the matter of profit, i.e. the net revenue, or earnings, obtained from the employment of the resources required for farming. We shall ask ourselves the question, are these resources adequately rewarded?

from general interest, or thirst for knowledge? For (iii) and (iv) it coul B be

of (iv)) at various P evels. Mainly, though, it is of course to do with the real,

5. What is Profit?

“What is meant by ‘profit’?” must seem a silly question to any accountant, or indeed any businessman. To them it is uite obviously what is in these days referred to as ‘the bottom line’, whic 1 is simply (and simplistically) receipts less expenditure. But how has the term been defined by economists down the ages? (At this oint I take advantage of ‘presidential licence’ and indulge in sheer nostalgia7.

Starting with Adam Smith (1776)’ he says that ‘the revenue . . . derived from stock, by the person who manages or em loys it, is called profit.’ ‘As soon as stock has accumulated in the hands o P particular pcrsom, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials’. ‘Something must be given for the profits of the undertaker of the work who hazards his stock in this adventure’. However, ‘the greater part of the apparent profit is real wages disguised in the garb of profit’.

272 J. S . NIX

Ricardo also uses the term ‘profit on stock’, but does not elaborate except to say in his chapter ‘On Profit’ in his Principles (1817), ‘The remaining quantity of the produce of the land, after the landlord and labourer are paid, necessarily belongs to the farmer, and constitutes the profits of his stock’.

Marshall (1890) was critical of what had been written before on this subject: ‘The earlier economists did not do much good work in this direction because they did not adequately distinguish the com onent elements of

For example, ‘the head of a small business does himself much of the work which in a large business is done by salaried managers and foremen, whose earnings are deducted from the net receipts of the large business before its profits are reckoned, while the earnings of the whole of his labour are reckoned among his profits.’ Marshall goes on to say that the level of profit cannot be related to any one factor, such as the amount of capital employed, the total wages bill, the turnover, the difficulty of managing that business, or even just the level of risk.

Keynes, in his General Theory (1936), prefers the term ‘income’ to rofit’. The income of the entrepreneur is the excess of the value of his P inished output sold during the period over his prime cost. This is ‘his gross

profit in the ordinary sense of this term’. ‘Net income’, or ‘net profit’, is this amount less the estimated ‘supplementary cost’, i.e. the excess of the expected depreciation over the ‘user cost’ (the sacrifice of value involved in production). Finally, net income ‘is what we suppose the ordinary man to reckon his available income to be when he is deciding how much to spend on current consumption’. Here one comes very close indeed to the ‘spendability’ concept described earlier.

Let us jump now to two of the major economic texts of the present day. Lipsey (1989) defines profit simply as the difference between the revenue the firm gains from selling its output minus the cost of producing that output, and then points out that different definitions exist because of differing definitions of costs.

Firms, he says, regard profit as the excess of revenue over the costs calculated by their accountants. This concept of profit includes a return to cover the opportunity cost of its capital, but, he continues, owner-mana ed firms should be careful to include an imputed cost for the owner’s time [for management as well as any manual element).

Economists, however, according to Lipsey, define ‘pure profit’ as any excess of revenue over all opportunity costs, including those of capital. Any risk premium necessary to compensate the owners of capital for the risks associated with its use should also be deducted. Alternative terms to ‘pure profit’ are ‘economic profit’ or, ‘where there is not room for ambiguity’, just ‘profit’. He also refers to other terms ‘still used in elementary treatments’: ‘normal profits’, meaning the opportunity cost of capital, and ‘supernormal profits’, meaning pure profits.

A cost, then, must be assigned to factors of production that the firm neither purchases nor hires because it already owns them. These ‘imputed costs’ arise from the use of the owner’s money, the firm’s own capital e uipment, the need to compensate risk-taking and to value any special

profits, but searched for a simply general law . . . whic E . . . cannot exist’.

a 1 vantages the firm may have, e.g. franchises or patents. In earlier editions


(e.g. 1966) Lipsey includes: ‘if the owner of a firm also acts as its manager, he should impute to the firm a management fee equal to what he could obtain if he leased his services to some other firm’; this specific reference to own management is dropped in later editions.

For Samuelson (1989), profit ‘in accounting terms’ is simply sales revenue minus costs properly chargeable against the goods sold. But to the economist ‘profits are a hodge- odge of different elements’. Part of reported

their own invested funds. Thus much, possibly all, of what is ordinarily called profit is really nothing more than implicit rentals, rent and wages for factors the firm itself owns. In economic theory profit is the difference between sales revenue and the full opportunity cost involved in producing goods. Essentially, profit is the reward for risk bearing, including a reward for innovation and enterprise, and often incorporates monopoly earnings.

profits is merely the return to t R e owners of the firm for their own labour or

6 . Omitting the plethora of details referred to in Section 3 , keeping only to earnings from agriculture, and forgetting capital gains and measurements of wealth, how near do the main definitions of income or profit used in agriculture come to Lipsey’s ‘pure profit’?

Obviously the accountant’s calculation of profit for a farm is fundamentally the same as for any type of business and is as defined above - by almost anyone, but Lipsey’s ‘excess of revenue over the costs calculated by the accountant’ is neat, if question-begging. Certainly, no question of imputed costs arises, whether for any land, labour, management or capital. Naturally rent for rented land, wages for employed labour, an salary or fees for management (whether by an individual manager or a firm! and interest on borrowed capital are deducted.

In the widely used management and investment income (MII) some of those costs are (or should be) actually added back: management salaries or fees and interest payments, together with a further set of costs - for landownership (‘landlord-type’ expenses) on owner-occupied land. But imputed costs are deducted for the unpaid labour of the farmer and spouse and a rent for owner-occupied land. As far as possible the labour charge is at its opportunity cost, although in detail this could probably be argued for a long time. The rent is not the opportunity cost, in that the amount charged should be the rent that might be expected to be paid by an established tenant (with a traditional type of lease) for that farm, bearing in mind the levels currently prevailing in the area. The opportunity cost would be the rent that would be tendered for that farm by a responsible and competent would-be tenant in open competition. Again there is plenty of room for debate here too: for example, should the scarcity factor be accepted or should one try to estimate what the free market rent would be if all land were open to tender? Nevertheless, in principle it is fair to say that some of the ‘owned factors’ have been charged for, at least approximately. But it is still simply the (net) return to management and (all) capital.

Net farm income (NFI) goes less far, in that it is MI1 with the value of the unpaid labour of farmer and spouse added back. Clearly then, it is intended to represent the (net) return not only to management and (all) capital but also to the manual labour of the farmer and spouse. It is not a figure that means anything very much to the individual farmer, especially the owner-

Profit and Farm Income Definitions

274 J . S . NIX

occupier, although for tenant farmers with no borrowing it should be close to the profit shown on his trading account, at least if realistic valuations and depreciation allowances were used. Nor is it as much use as MI1 for inter- farm comparisons of efficiency.

Several attempts have been made to get at least close to ‘pure profit’, or anyway to go beyond MII. Of particular interest in this connection was Britton’s attempt to split the concept further by devising an empirical formula for estimating the managerial salary for each farm, based on the farm’s gross output, wage bill and net income. The residual was a measure of the return on ‘tenant’s’ capital (i.e. total farming capital excluding ‘the land’). Thus he attempted to separate out the returns to land, labour, management and capital, using Farm Management Survey data.

Hearn, in 1977, did the opposite and calculated the opportunity cost of capital, based on yields on ordinary industrial shares, which he deducted to leave what he called the ‘occupational income’. However, in endeavouring to compare incomes in agriculture with those in other sectors of the economy he felt it necessary to include capital gains in earnings.

Britton referred in his 1970 article to earlier attempts to se arate the management and interest on capital elements in MI1 by Camm p1064) and Raeburn (1961). There had in fact been still earlier attempts than these. Bellerby, in a classic paper to the Society delivered in 1952, in which he attempted to allocate the total ‘factor income of agriculture’ to its various factors or recipients, had calculated interest on tenant’s capital, but no management charge; the residual was termed the ‘farmer’s incentive income’.

As early as 1931, and until 1963, the Farm Economics Branch at Cambridge had calculated the ‘profit surplus’ from its Farm Management Survey farms, having deducted both interest on capital, at 4 or 5 per cent, and a management charge (University of Cambridge, 1932-6s). The farmer’s management charge was taken to be twice the allowance for his manual labour, starting at f 4 and f2 per week respectively in 1931 and rising to $22 and f l l by 1963; Camm, to whom Britton referred, was the author of the report for 1962/63, published in 1964. This ‘profit surplus’, then, was an attempt to calculate the ‘pure profit’. Other University centres may have made similar calculations in the past, but I do not know of them.

7.

After dismissing as being too simplistic the 1962/3 Cambridge allowance of f20 a week (f9,500 a year at current money values) for the farmer’s management input (according to the percentage of time he said he spent on management as distinct from manual work), and calculating interest on tenant’s capital after deducting various arbitrary levels of management salary per farm, Britton (1970) considered three alternatives for valuing this input:

(i) 10 per cent of gross output or 50 per cent of the wages bill (ii) 5 per cent of gross output + 25 per cent of the wages bill (iii) 4 per cent of gross output + 20 per cent of the wages bill + 7 per

The last item was to allow extra salary as a reward for greater profitability.

Calculating a Charge for Management

cent of net farm income.


He chose (iii) as his preference. One could of course adjust each of the three percentages to give a host of permutations.

Let us consider the levels of managerial salary that would be given by this calculation based on the most recent Farm Business Survey national results available (MAFF, 1989), averaging the two cropping years 1986-7 and 1987- 8. Table 1 presents the results. Only three types of farming will be considered. Since the 1967 division between Specialist Dairy and Mainly Dairy Farms no longer applies, these two figures have been averaged for that year. Obviously the samples are far from identical; in particular it is to be noted that the 1986-88 figures are for England only, whereas the 1967 data are for England and Wales, which could materially affect the dairy farm figures especially. The 1967 management salary figures have been multiplied by 6.45, which is the amount by which the RPI rose over the period.

The differences are explained by the accompanying figures for changes in the constituent items over the period in real terms. The management figure per farm for cereals fell mainly because, surprisingly, the average size of farm in the sample fell over the (approximately) 20-year period, though this was exacerbated by the much lower real farm income. The general cropping figure was much lower per hectare, because of a fall in all three constituent items, although the large increase in farm size for this group almost cancelled out these effects on a per-farm basis. For dairying, all items rose per hectare compared with inflation and the average size rose substantially too.

Do these figures seem reasonable, for today? Simply averaging the three figures for 1986-8 (f733.5) and multiplying by the increase in the retail price index between then and now (approximately 21 per cent), gives a figure of about f9,125 a farm, which is close to Cambridge's 1962/3 figure adjusted for inflation. The figure would be f68/ha for the two crop-type farms and fl20/ha for dairy farms.

Table 1 Average Imputed Management Salary (Britton Formula): f Per Farm Cereals General Cropping Dairy

1967 198617 1967 1986J7 1967 198617 udj. -198718 adj. -198718 adj. -198718 f f f f f f

Salary: Total 7,480 6.270 9,578 9,240 4,367 7,090 per ha 54 52 102 61 80 99

Index figure per item per farm for 1986-8 (1967=100):' Gross Output 592 Paid Labour 493 Net Farm Income 194 Size of farm (ha ) 88

917 684 391 159

Index figure per item per ha for 1986-8 (1967=100): Gross Output 673 576 Paid Labour 560 430 Net Farm Income 220 246

1143 1006 883 130

879 774 679

* Retail price index figure = 645

276 J . S. N I X

It has to be borne in mind that the calculation was not necessarily aimed at full-time managers. Rather it was aimed at the ‘management element’, i.e. that proportion of the farmer’s time estimated to be spent on management as distinct from manual work. The difficulty in drawing the line, on many farms, is obvious. Farmers today, generally speaking, have to s end a lot more time working manually on medium-sized and large farms t K an they did 20 or more years ago; does that mean that the level of management is less? This is clearly not so - except that they do have less hired labour to manage.

Looking at the salaries of professional farm managers does not help too much. This is partly because one is then tending to look mainly at larger farms and partly because the term ‘farm manager’ may be applied to a range of personnel, from some who might be better described as working bailiffs, or foremen, working manually nearly all the time, to full-time organisers on very large units who may do no manual work at all.

The main source of information on farm managers’ salaries has been the five surveys carried out by the University of Reading since 1969, particularly associated with Tony Giles. The last was in 1988 (Lewis & Giles, 1989). This related to 85 members of the Centre for Management in Agriculture and the average salary was f 15,738, or approximately $18,250 at 1990 price levels. The median was about f14,475 (f16,725 today). To this was added non-cash benefits estimated to have a median value of nearly f5,000 at 1990 prices. The median area farmed was just under 500 ha.

Another survey, carried out in 1986, gave a median salary of 126 managers of f12,500 (Clark, Johnson and McAuley, 1989), or f15,800 at 1990 prices. Nine had salaries exceeding f20,000 (worth f25.000 today). Again, non-cash benefits were substantial. Determinants of salary levels were statistically examined at two levels: on both a national and a local survey basis. On the national level farm size (in area) was a poor predictor of salary, but at the local level it was the most statistically significant variable.

In an article published six years ago I compared the salaries of mana ers, or executives, in other walks of life with those of farm managers ?Nix 1984). I updated some figures originally prepared in 1968 showing suggested range of salaries on a non-linear sliding scale according to area of farm, standard output, standard gross margin and standard man days. The amount of capital employed (excluding the value of the land) mi h t also have been used, but it is more difficult to establish readily and satis P actorily for the individual farm. I gave, and give, standard gross margin as my preferred basis. For simplicity, giving only the area basis and updating the sums suggested then to 1990 according simply to the change in the RPI, one has approximately:

Ha

200 300 400 600 800

Salary f

13,850 16.600 19.400 23:soo 27,750

Per ha

69.25 55.33 48.50 39.25 34.75

f P

It was assumed that the manager would also be supplied with a house free of rent, together with lighting, heating, etc. and a car. As is to be expected, since most objective observers would argue that farm managers tend to be


underpaid, the above levels exceed those found to be paid in practice from the two surveys. For farms below 200 hectares, unless particularly intensive (horticulture, pigs and poultry, etc.), a full-time manager’s salary can obviously not be justified. Even on the largish farms in the Reading survey, only 27 per cent of the managers said they did no manual work on the farm; 46 per cent said they spent up to 25 per cent of their time on such work; 17 per cent spent 26-50 per cent; and 10 per cent over half their time working manually.

The Reading median figure of approximately €16,725 (at 1990 price levels) for 500 ha’gives f33.50ha. This could be argued as being too low as a general figure per hectare, for three reasons: the eneral underpayment already referred to; the value of the non-cash benefits $though these tend to be ‘part of the farm’, whoever manages it); and 500 ha is well above the average size of farm. Alternatively some might say the figure is too high because a deduction should be made for the manual work performed.

There is yet a further point. It is mainly the op ortunity cost of the farmer’s own management with which we are concerned. ?We shall have to assume that they do not all place themselves on the job market at once!). Should account not be taken, individually, of their qualifications, experience and ability (allowed for by Britton in his percentage of net farm income)?

The advantage of thinking only of the percentage of time a farmer spends working in a managerial capacity as distinct from a realistic and acceptable stipend for a full-time farm manager is that one can then, like Britton, avoid the complexity of devising a non-linear sliding scale.

I t is clearly inadequate to relate only to the area of the farm. But a formula that gives a figure of €40/ha for the farm of average intensity seems to me about right, all the above points being considered. As a measure of business size gross margin is better than output, but is less generally available. Standard gross margin is preferable to actual gross margin but requires separate calculation; furthermore, the average total gross margin (TGM) over two or three years for groups of farms should be little different. There is something to be said for allowing for the level of paid labour, but should more be allowed for management if the labour bill is excessive, and vice versa? At the individual farm level, some allowance would need to be made for profit, NFI or MII, since otherwise high fixed costs would not be penalised; however, these measures are affected by many factors other than managerial skill, e.g. the weather, market forces and government policy. MI1 would be a better basis that NFI, because the use of paid labour rather than own labour would otherwise be penalised - though this point was covered by Britton’s additional allowance for the wage bill.

Simply to establish an overall figure, it is useful to consider the average gross margin per hectare in entire FBS samples. Only two centres give this figure in their annual reports: Reading and Cambridge (University of Reading, 1988 and 1989; Murphy, 1988 and 1989). 1986t7 and 1987/8 were two fairly average years for real farming income considering the whole of the UK for the 1980-88 period (see Table 6, page 282). The average total gross margin per hectare for these two years was €641 for the Reading sample and f643 for Cambridge. (The Cambridge figure was well above that of Reading for 1986t7 but well below it in 1987/8 - a bad year for cash crop farming).

Ignoring inflation since 1986-88, 6.25 per cent would give the suggested management charge of €40/ha. If total gross margin were rising with inflation the percentage required in 1990 would be just over 5 per cent.

278 J . S. NIX

If allowance were made for the level of MI1 (which would only be relevant if the appropriate charge for individual farms were being considered) then obviously various combinations of percentages are possible. The straight average MIVha for Reading and Cambridge in 1986/7 and 198718 was approximately f70/ha. A management charge of f40/ha would be obtained approximately by the following combinations (taking the average 1986 and 1987 figures only and ignoring inflation):

Option YO TGM Yo MI1 1. 6.25 + 0 2. 5.15 + 10 3. 4.5 + 15 4. 4.0 + 20 5. 3.5 + 25

There seems little point in allowing for relative financial performance in a trivial manner; heqce I would favour one of the last two combinations for setting an individual farm managerial charge. However, the figure will vary even more with weather and government policy than the percentage of TGM alone figure. In calculations below I have selected options 1 and 4 (called calculations A and B respectively).

8. Allowing for Capital Investment Making an interest charge on tenant’s capital is more straightforward, assuming sensible valuations have been made, but deciding the rate is far from easy. Raeburn, in 1961, calculated an interest charge on tenant’s capital and deducted this from what was virtually the MI1 to give the farmer’s net return for management and risk-bearing (using 195213 data). He took 4 per cent of current market value, which he estimated as being 6.8 per cent of the written-down values given in the M A W S Farm Incomes reports. Given the use of current cost accounting procedures for machinery valuations and the care now taken in the FBS to use realistic valuations for breeding livestock, crops in store, etc., it seems unnecessary to adjust the tenant’s capital figure in this way, even if a small element of undervaluation may still be present.

In 1952 Bellerby deducted 1 per cent above the current yield on consols in amving at ‘farmers’ and relatives’ incentive income’, from 1867 to 1938. In the Cambridge Farm Management Survey, between 1931 and 1963, either 4 or 5 per cent was deducted.

Considering that Base Rate varied from 7.5 to 15 per cent within eighteen months in 1988-9, it is difficult to decide on a reasonable ‘settled’, long-term figure, for the 1990s and beyond. Safe, long-term investments are currently estimated to yield between approximately 11 and 12.5 per cent, according to their relative security and marketability. However, to estimate the real rate of return allowance must be made for inflation, which is again impossible to forecast looking ten or more years ahead. The current redemption rates on index-linked stocks is only 3.75 to 4 per cent. Obviously shrewd investments could give a higher return including real capital gains, but equally obviously


capital losses might be incurred. In taking the low real rate of return one is assuming, for pu oses of corn arability with staying in farming, that future

reduction in the future real rate of return on capital invested in farming would need to be added to the real rate of that capital invested safely elsewhere for ’parity’ to be achieved. I eventually decided to settle for 5 per cent. *

Again, considering the ‘All Farms’ figures from the Reading and Cambridge FBS samples, the average tenant’s capital in 1987 was just over f1400ha. The interest charge on that at 5 % is f70/ha, which still exceeds any suggested reasonable management charge.

Let us now consider some examples of how the above calculations work out overall. In order to economise in space, only the main types of lowland farming will be considered. It was decided to keep to the Reading and Cambridge fi ures, as containing types of farming groups, including sue groups in the case

difference between arable farming results in 1986/7 and 1987/8 necessitated the presentation of two years’ results.

farm incomes will ’E eep pace wit g inflation: perhaps an heroic assumption. Any

o i! dairying, most of which contained a large number of farms. The large

9. Results

(i) Average Figures

The basic data for the six farm type/size groups for the two years are presented in Table 2 . Table 3 gives for each farm typelsize the management charge calculated on two bases, the ‘investment income’ (i.e. MI1 less management charge) both per hectare and as a percentage of tenant’s capital, the interest charge (at 5 per cent), the ‘return to management and risk-bearing’ (i.e. MI1 less the interest charge), and the ‘pure margin’ (i.e. MI1 less both the management and the interest charges).

Table 2 Selected Farm Groups: Basic Data 198617 and 198718 (€ha)

A v . FBS No. Size Ten. Unpd.

No. Cenrre FarmType Year Farms (ha) Cap. TGM NFI Lab. MII l a Reading Spec.Milk,underMha 8718 17 35 2265 1075 498 321 177 l b Reading Spec.Milk,under%lha 8 M 17 35 2235 1045 498 297 201 2a 2b 3a 3b 4a 4b 5a 5b

Reading Reading Reading Reading Reading Reading Camb. Camb.

Spec. M&, over 50 ha Spec. Milk, over 50 ha Mainly SheedCattle Mainly SheepCattle Dairy &Arable Dairy& Arable WyCemk,ovcr 40 ha M y C e d , ovnlha

8718 8 M 8718 8M 8718 861’7 8718 86/7

40 107 40 106 39 97 39 95 58 270 58 270 79 167 78 169

1625 925 366 101 265 1600 820 285 99 186 1045 430 125 113 12 1010 400 94 109 -15 1295 690 166 40 126 1270 645 145 37 108

1350 565 10s 27 81 1290 410 -46 30 -76

6a Camb. hiiedCropping.over4lba 8718 63 197 1455 540 25 20 5 6b Camb. hiidCmppinp;.ovcrJOha 86’7 58 191 1590 700 147 19 128 .. - * I am indebted to Lloyds Bank and, especially, Paul Hill of Wye College for their advice on the

question of interest rates. However, neither is responsible for my final decision!

280 J . S . NIX

Table 3 ImDuted Manneerid and Interest Charges and ‘Pure Margins’, 1986 & 1987/8 (Uha) Managt. Investment Investment Interest Return to ‘Pure Charge Income Income (%) Charge (%) Managt. Margin’

No. A B A B A B A B la 67 78 110 99 4.9 4.3 113 64 -3 -14 Ib 65 83 136 118 6.1 5.3 112 89 24 6 2a 58 90 207 175 12.7 10.8 81 2b 51 70 135 116 8.4 7.2 80 3a 27 20 -15 -8 - - 52

50 4a 43 53 83 73 6.4 5.6 65 4b 40 48 68 60 5.4 4.7 63

64 5a 26 5b 35 39 46 42 3.4 3.1 67 6a 34 23 -29 -18 - - 73 6b 44 54 84 74 5.3 4.7 79

Management Charge A = 6.25 per cent of TGM Management Charge B = 4 per cent of TGM + 20per cent of MI1 (Real) Interest Charge = 5 percent.

- 3b 25 13 -40 -28 -

1 -102 -77 - -

184 106 -40 -65

61 45

-140 14

-68 49

126 55

-67 -90

18 5

-166 -2 1

-102 5

94 36

-60 -78

8 -3

-141 -25 -9 1 -5

The weighted average for the management charge was f39 per ha on calculation A and f41 per ha on calculation B . Obviously these figures have been determined by the selection of centres and farm types and size and so there can be no pretence that they are a true representation of all British agricultural cash crop and grazing livestock farming. Naturally the mana ement charge under calculation B exceeded that of A where the MI1 was high brimarily dairying) and vice versa where it was low (sheepkattle farms and cash cropping farms in 198718). Had the calculations been made in the two years 198314 and 198415 the dairying and cash cropping comparison would have been reversed.

Only the specialist dairy farms over 50 hectares show a large positive ‘pure margin’*. The small positive margins in several other groups/years would have been eliminated by raising the interest charge to 6.5 per cent. About half the groups1years showed a negative pure margin even at the 5 per cent interest charge. These results are unsurprising to anyone familiar with recent figures for return on tenant’s capital. Whereas, for all farm types taken together, this was consistently within a few percentage points of 15 per cent between 1940 and 1976, it has been more than halved in recent years.

In 1967, when Britton made his calculations, UK farming income was just about double those in 198617 and 1987/8 in real terms (Table 6). Hence for all except the smaller sizes of farm business, a ‘pure’ profit remained after deducting his estimated management charge and 10 per cent interest on tenant’s capital.

(ii) ‘Top Farms’ As every farm survey shows, in whatever year, and whether the whole farm or a single enterprise is considered, wide variations in performance occur between farms, both in physical and economic terms. Tables 4 and 5 show the results, on the same bases as the average figures in Tables 2 and 3, for Reading’s average of the top 25 per cent and Cambridge’s average of the top 10 per type of farming BrOUD. * The value (opportunity cost) of the milk quota, currently about 55 pence per litre, has not been

included in the capital figure. This point could be disputed.


Table4 Selected Farm Groups: Basic Data for Top Farms, 1986‘7 and 198718 ( m a )

No. la lb 2a 2b 3a 3b 4a 4b 5a 5b

- FBS

Centre Reading Reading Reading Reading Reading Reading Re ad i n g Reading Camb. Camb.

Farm Type Spec. Milk,underSOha Spec.Milk,underSOha

Spec. Mlk, over 50 ha Mainly SheeplCattle Mainly SheepCattle Dairy & Arable Dairy & Arable

Spec.Milk,overMha

Mainly cereals, ow aha w y ~ ~ , o v ~ 4 o l M

Year

A v. No. Size Ten.

Farms (ha) CUD. 8718 8 M 8718 86n 8718 86n 8718 8 M 8718 86n

4 35 2670 5 36 2715

10 104 1900 9 .75 1915

10 137 1465 7 93 1025

15 231 1440 16 268 1440 10 128 1335 10 I92 1465

TG M 1435 1345

-

1290 1100 683 465 860 855 575 815

U p d . NFI Lab. 728 271 707 297 676 100 553 126 327 114 170 79 333 41 303 M 121 59 303 25

MII 457 410 576 427 213 91

292 273 63

278

-

6a Camb. kcdCmpping,over@ha 8718 10 232 1310 675 231 20 211 6b Camb. WCroppmg,ovcr4Oha 8 M 10 195 1741 945 334 26 308

Table 5 Imputed Managerial and Interest Charges and ‘Rye Margins’, Top Farms, 1986 81 lWL3 (f/

Managt. Investment Investment Interest Return to ‘Pure Churge Income Income (%) Charge (%) Managt. Margin’

No. A B A B A B A B la 90 149 367 308 13.7 11.5 133 324 234 175 lb 84 136 326 274 12.0 10.1 136 274 190 138 2a 81 167 495 409 26.1 21.5 95 481 400 314 2b 69 129 358 298 18.7 15.6 96 331 262 202 3a 43 70 170 143 11.6 9.8 73 140 97 70 3b 29 37 62 54 6.0 5.3 51 40 11 3 4a 54 93 238 199 16.5 13.8 72 220 166 127

53 89 220 184 15.3 12.8 72 201 148 112 4b 5a 36 36 27 27 2.0 2.0 67 4 4 0 -40 5b 51 88 227 190 15.5 13.0 73 205 154 117 6a 42 69 169 142 12.9 10.8 65 146 104 77 6b 59 99 249 209 14.3 12.0 87 221 162 122 Management and Interest Charges as in Table 3.

The weighted average total gross margin (TGM) and MI1 per hectare for all farms in the 12 farm type/size/years were €626 and f78 res ectively (the latter compares with the straight average for the two entire samp f es for the two years of f70/ha). However, the averages for the top farms were €880 and f290 respectively. Thus, while the weighted average managerial charge for the top farms under calculation A, at €55/ha, was 41 per cent above the average figure, that under B, at €93/ha, was 127 per cent above the average. To what extent the last, much higher, figure was earned, through superior management, and to what extent it was due to a combination of chance and favourable external factors (especially quality of soil in the case of cash crop farrnin ) is difficult to

Bessell, 1970; Tansey, 1973). Diierences in soil uality can easily make a

and management skill, while differences in stockmanship and managerial ability can make still bigger differences in livestock gross margins, as any enterprise study will testify.

establish, as several studies have roven (e.g. Rasmussen, 19 9 3; Fyfe, 1967;

difference in gross margin per hectare exceeding € 9 50, with the same inputs

1. S . NIX

Despite the much higher managerial charge and the generally low level of profitability an investment income exceeding or very close to 10 per cent was obtained for most of the selected farm groups’ top farms, and thus the pure margins were high. The exceptions were the Reading sheepkattle farms in 1987/8 and the Cambridge mainly cereals farms in 1986/7. It needs to be remembered that these results are close to the upper deciles and that the top farms are not necessarily the same ones each year. The figures for the ‘bottom farms’ must clearly have been disastrous, especially where there was no dairy herd.

10. Farming Incomes 1938-1988

Several references have been made to higher levels of profitability in the past, compared with the two years considered for the above calculations, which were the two latest available. How bad have recent years been, compared with the previous thirty or forty? Table 6 shows the decline in total UK farming income since 1976, in real terms. The data are taken from Marks and Britton (1989), updated (for 1977 onwards) from MAFF (1990). The 1985 figure and that forecast for 1989 are below those for 1938. Is the position as bad as it looks?

Table 6 1938 44 1955 100 1972 I I5

UK Real Farming Income Indices 1938-89 (1970 = 100)

1939 1940 1941 I942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954

67 103 107 109 1 I4 I04 98 95 94

112 125 I15 112 114 I l l 102

1956 1957 1958 1959 I960 1961 1962 I963 I964 I965 1966 I967 I968 1969 1970 1971

97 104 100 94 98

102 I06 1 (x)

107 107 106 112 102 101 100 101

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

I45 I08 I03 I19 I03 93 76 59 70 82 62 91 45 59 59 43 46 *

* = forecast

Sources: Adapted from Marks and Britton (1989). and MAFF (1990).

First it depends on the type of farming. The Up Corn, Down Horn of the late 1970s and early 1980s has gradually given way to Up Dairy, Down the Rest since the introduction of milk quotas in 1984. Table 7 tells the story. The base year, 1982/3, was admittedly a good year for cereals and other cash crops, but there is no doubtin the considerable decline in the fortunes of mainly arable farmers since 1985 P 6 , primarily caused by a combination of modest harvests and substantially lower real cereal prices net of co-responsibility levy.


Table 7 Indices of Real Income by Farm Type, UK, 1983/4-1989/90 (1982/3=100) Farm Tvoe 198314 19841s 198.516 198617 198718 198819 1989lW’ Dairy 63 59 64 66 86 102 110 Lowland CattleISheep 86 55 24 13 27 23 15 Cereals 100 119 12 46 11 6 15 Other Croooine: 124 98 21 94 39 31 60

forecast Source: MAW (1990)

Returning to the overall financial situation, MAFF publishes three other measures of ‘farm income’. Table 8 considers the trends in all four measures since 1977. (1976 was a particularly good year, whereas UK real farming income in 1977 approximately equalled the four years from 1968 to 1971 inclusive (Table 6) and it therefore seems a reasonable base year to use).

The indices for total income from farming and especially cash flow show less of a decline than that in UK farming income. Total income from farming is farming income plus the estimated value of the labour of family workers (other than spouses), non-principal partners and directors. The reasons why cash flow may differ from net farm income are well-known; in particular, capital investment in new buildings and machinery has declined substantially in recent years: in 1989 ‘gross capital formation’ was little more than half the late-1970s’ level in real terms. It needs to be remembered that all these measures represent fairly narrow margins between two large totals; hence small differences in either can cause large percentage variations in the figures shown.

Table 8 Alternative Measures of UK Real Farm Income, 1977-89 (1977 = 100) ~~

Farming Income Cash Flow from Farming (of farmers Total Income of armers of farmers,

directors, etc. 100

Year and spouses) from Farming’ an spouses 1977 100 100 100 1978 90 92 102 102 1979 74 79 90 92 1980 57 66 82 81 1981 68 7s 91 99 1982 80 8.5 99 100 1983 60 69 7s a2 1984 a9 92 104 105 1985 44 57 13 81 1986 57 68 81 88 1981 57 67 95 99 1988 42 54 12 80 1989t 4s 56 68 75 * of farmers, non-principal partners and directors and their spouses and family workers. t forecast Source: Adapted from MAFF (1990)

d

It is sometimes observed that while aggregate UK farming income may have fallen in real terms this exaggerates the effect p e r f u m e r since the average size of farm has increased considerably over the past 50 years. Because of periodic changes of definition and the problem of deciding what constitutes ‘a farm’, particularly a full-time one, it seems impossible to determine how much average farm size has increased over the period with any degree of precision.

284 J. S. NIX

Denis Britton has suggested two alternatives (in a ersonal communication):

the size of holding at which half the total land area is in holdings above and half in those below that size (Britton, 1950). Regarding the first alternative, the figure in 1948 was 24.7 er cent and in 1986 46.8 per cent. Regarding the second, in 1948 it was 66. s ha and in 1986 112.5 ha. The first gives an increase of 89 per cent and the second 69 per cent. There are obvious problems with both alternatives, e.g. that of multi le holdings; nevertheless, they are preferable to

and 100 per cent seems highly plausible. Thus, certainly, net income per farm has fallen by nothing like the amount suggested by Table 6.

Two contrary points may be made, however. One is that if one invests more capital and more management effort and time in a larger farm one might reasonably expect a higher income, ossibly pro rum as far as the capital is

been rising substantially over this period. At approximately 2 per cent per person per year, the compounded increase over 50 years has been in the order of 175 per cent.

There is also the question of other, non-farming income. As far as I am aware there are no figures going back beyond 1977/8. According to the (approximately) 1 per cent Inland Revenue data quoted by MAFF (1990), between that assessment year and that of 1987/8 ‘other earned income’ of self- em loyed persons in agriculture rose in real terms by 24 per cent and pensions

employment (95 per cent from farming) rose by 24 per cent. The latter figure contrasts considerably with the relative figures for those years in Table 6; however, MAW warns against such comparisons ‘because of important differences in scope, timing and definition’.

the percentage of the total area of crops and grass in R oldings of over 120 ha and

guesswork or no attempt at a P 1. An increase (by 1990) of between 75 per cent

concerned. The other is that the stan c f ard of living of the whole population has

an B investment income by 35 per cent, while their income from self-

Comparison with the 1930s. It is sometimes claimed that farm incomes now are at such a level that farmers are no better off than in the 1930s. According to reports from Cambridge’s Farm Economics Branch in the 1930s, farm incomes had recovered to a ‘reasonable’ level from 1933 onwards, to figures about half those obtained after the outbreak of war. This was due largely to government intervention, beginning in 1931. Incomes in 1930-2 were truly at a disastrously low level.

Levels now are not to be compared with the early 1930s, nor, yet at least, to the later 1930s. The decline after 1976 (and arable farming not till after 1984) followed 35 years of possibly unprecedented prosperity (over 40 years for arable farmers). The farms, buildings, roads and houses are very well set up, or should be. Two thirds of our land is now owner-occupied, most of it carrying little or no mortgage. In the 1930s, between two-thirds and three-quarters of the farmland was rented. Many more farmers now have investments outside farming and other incomes. Most of the farmers I know, at least, though in most cases their incomes are current1 well below what they have been, still expect to send their children to publi d private schools and to be well-equipped with fairly new private vehicles - like any other businessman with similar amounts of capital invested, no doubt. I think things must have been quite different in the 1930s, except amon st the largest farmers and estate owners on the best land. According to Ashby f1953), reporting on a 1944 survey of nearly 2,000 farmers, only 5 per cent went to public school; even on the 9 per cent of largest farms (over 120 hectares!), only 21 per cent attended such a school.


11. Capital Gains from Land Continuing to pursue changes in prosperity, what of the increase in land prices over the last 50 years, in real terms? Table 9 gives the relevant data, for vacant- possession land in England and Wales, according to the Oxford Institute series. Of the overall increase there can be no doubt, but the amount varies considerably according to the first and last dates chosen. Thus from 1945 to 1988 the increase was x 4.17, whereas between 1948 and 1986 it was only x 1.88; admittedly 1986 was a particularly low figure. If land were bought in 1971 and sold in 1983 its real value would have nearly doubled during those 12 years, whereas if the land were bought a year later, in 1972, and sold a year later, in 1984, its real value in hose years would have fallen nearly 20 per cent. Buying in 1971 and sellin in 1973 would have meant an increase of x 2.5, whereas

value. During the last 40 years the real value has fallen between consecutive years 17 times and risen 23 times.

buying in 1973 an cf selling in 1975 would have resulted in a loss of half the real

Table 9 Agricultural Land Prices 193719-1988 (ma)

Year Current Real Year Current Real Year Current Real (Real = 1986 values)

1937-9 60 1323 1959 250 1965 1974 1572 5596 1945 1 1 1 1474 1960 304 2365 1975 1332 3810 1946 146 1916 1961 306 2316 1976 1814 4462 1947 177 2126 1962 331 2410 1977 2449 5192 - ._

i948 i9S 2225 i963 41s 2963 1978 3279 6427 1949 188 2096 1964 529 3655 1979 4371 7562 1950 198 2146 1965 581 3840 1980 4265 6227 1951 217 2157 1966 598 3803 1981 4272 5596 1952 188 1760 1967 638 3949 1982 4557 5468 1953 180 1658 1968 692 4097 1983 5145 5917 1954 185 1676 1969 734 4125 1984 4888 5377 1955 198 1732 1970 605 3195 1985 4781 4924 1956 193 1619 1971 647 3119 1986 4193 4193 1957 180 1462 1972 1473 6628 1987 4944 4746 1958 210 1661 1973 1871 7727 1988 6716 6144 Sources: Oxford Institute of Agricultural Economics (except 1988 (Savills, 1989)); 1986 values as given in Marks and Britton (1989). England and Wales, with vacant possession, average of land sold at auction. New series from 1970 onwards (minimum size increased from 2 to 10 hectares and weighting by region as well as size).

This considerable variation in the change in real value since the end of World War I1 according to the first and last dates selected is illustrated in Table 10. The average annual increase in real value for those six periods was 2.5 per cent compound, ranging from 1.7 to 3.4. 1988 saw a spectacular increase which had little to do with agricultural value but much to do with the price of housing and development land and ‘roll-over relief from capital gains tax (Johnson, 1990). The increase may be short-lived but at least continued through the first half of 1989.

The reality of the data is always a problem with land prices. It is worrying that the ADAS/AMC/CLA ‘CALP’ series (England only, vacant possession, over 5 ha, and excludin land sold for development or forestry, gifts, inheritances and compulsory purc fi ases) has shown very different figures for 1987 and 1988 from those in Table 9. Whereas the Oxford Institute series gave averages above those for CALP varying between 4 and 11% between 1978 and 1985 inclusive, the discrepancy rose to 14% in 1986,32 per cent in 1987 and was 26 per cent in 1988.

286 J . S. NIX

Table 10 Increases in Land Value, 194517-198618 Increase in Increase in

Increase in Real Value Real Value

Period Real Value per I 0 0 ha per year (compound) f f %

1945-88 x 4.2 467 ,000 10,860 3.4 1945-87 x 3.2 327,200 7,790 2.8 1946-88 x 3.2 422,800 10,065 2.8 1946-87 x 2.5 283,000 6.900 2.2 1947-86 x 2.0 206,700 5.300 1.8 1948-86 x 1.9 196,800 5,180 I .7

Increase in Real Value per 100 ha per year

The increase in real value per year between 1945-8 and 1986-8 has clearly been considerable, ranging from over €5,000 to almost €11,000 per year for a 100 ha farm, which is a very approximate average size for a full-time holding in the UK today the average size over 4 British Size Units being 107 ha in 1988 (MAFF, 1986b 0 ). Whether this justifies its being taken into account for price support purposes, and to what extent price support and hence the level of farm income has been responsible for this gain, are both questions open to debate and much statistical analysis (e.g. Traill, 1982; Johnson, 1984; Harvey, 1989). The former aspect has been discussed earlier. Alternative long-term investments in 1945-8 may have achieved more. It has to be remembered, too, that in 1945 only about one third of British agricultural land was owner- occupied.

12. Conclusion Considering all the above, has the relevance of discussing levels of farm profitability in general terms declined so much that i t is now hardly worth giving i t much attention? The following reasons may be put forward in support of this view: i) For several years now the majority of farms do not show, and have little

chance of showing, a ‘pure’ profit, in the sense of leaving a margin after a ‘reasonable’ management charge and an interest charge on all farming capital (even excluding the land) have been made. Of course, the situation may chan e in the future. That is a matter of considerable

Increasingly, therefore, farms are being purchased by those who are able to buy the land outright and thus have no rent or mortgage to pay. These include both wealthy non-agriculturalists and farmers with plentiful funds, e.g. those with roll-over money from development land sales, (Savills (1989) found that in 1988 over 40 er cent of farmland purchases

landowners). It is rare for such people to consider the opportunity cost of the capital thus invested, this factor being far outweighed by other considerations. Prices would have to fall substantially more before there was no pre-rent surplus, i.e. the margin over expenditure excluding rent, mortgage or other interest charges and management. The average tenant today, even supposing he has a traditional lease, and supposing he borrows a third of this farming capital, has to achieve €125 per hectare

speculation, much c f epending on what happens to cereal prices.

were financed by roll-over funds, two-t R irds of them by farmers and

ii)


iii)

iv)

v>

vi)

vii)

13.

more output with the same other costs to make the same ‘profit’ as the owner-occupier with no mortgage and no other borrowing. This rises to f 175 per hectare with a full repairing lease. A high and apparently increasing proportion of farmers have additional income, from various sources. According to MAW, ‘Inland Revenue analyses indicate that income from farming tends to account for about 56 per cent of total taxable income’ (MacGregor, 1989). About 20 per cent is from other occupations, the rest from pensions and investments. Of course, this proportion must be very unevenly spread - a point referred to earlier when discussing whether this fact warranted reduced price support.

Allied to the above point is the increasing percentage of British farms which are part-time, however defined. This area has been very thoroughly researched, particularly by Gasson (1967, 1983,1985, 1988, 1990). Her latest estimate (1990) is that at least one third of households on main agricultural holdings in the UK today have second sources of earned income. Many of these part-time farmers are little affected by, and certainly not dependent upon, the profitability of farming.

Related to both the previous points, farmers are increasingly diversifying into non-farming activities, in an endeavour to maintain incomes and encouraged by government. A number of studies have investigated the extent of this development (Ilbery, 1987; Byrne and Ravenscroft, 1989; McInerney, Turner and Hollingham, 1989). The Exeter study found that about a third of holdings in the UK had diversified enterprises, a uarter of these having been established in the last five years. This, it is ?l oped, adds to the net income of the farm, and the farm household, but most of these enterprises do not add to the profitability of farming, as such. The increasing capital value of the land to the approximately two-thirds of UK farmers who are owner-occu iers and the total value of that land

if neither is available unless the farmer gives up full-time farming and sells the holding. Grants and subsidies of various forms are increasingly being given to enhance the environment, including the appearance of the countryside, rather than to support farm production, i.e. substitution of public welfare for support of farmers’ incomes, except incidentally.

have tended increasingly to swamp t K e annual profitability aspect - even

Final Word Through the above arguments, and various calculations, I have endeavoured to convince myself that the hypothesis 1 posed is true - that the concept of farm

rofitability is now an outmoded concept. For the reasons summarised above I gave almost succeeded, but not completely. Certainly, the economist’s definition seems today to have little relevance, even if it is considering only the return from farming. Some might argue that it never has. However, there are still many farmers, especially tenants and owner-occupiers with high mortgages, with no other source of income except perhaps a minor diversification enterprise, to whom ‘profitability’, in any sense, from farming, is still very real. Naturally the same is true of the large commercial farming companies. The composition of our farms and farmers may have changed considerably over the past 50 years, in size of business, financial position,

J. S. NIX

dependence on the farm for a living, and so on, but the diversity is still enormous - which is why, of course, making generalisations about farmers and attempting to make optimal decisions about agricultural policy are so extremely difficult.

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Documents

ASPECTS OF FARM PROFITABILITY: AN OUTMODED CONCEPT? PRESIDENTIAL ADDRESS