“Most U.S. farms—98 percent in 2003—are family farms, defined as operations organized as proprietorships, partnerships, or family corporations that do not have hired mangers.” There you have it. That is the bottom line. End of story. Or is it just the beginning of the story?

The statistic that 98% of farms are “family farms” comes from the newly released study conducted by USDA’s Economics Research Service, entitled: Structure and Finances of U.S. Farms: 2005 Family Farm Report. Of course, your family farm is different from the other family farms in your neighborhood, but they are all business units that are neatly woven into the family fabric. The issue is one of constant debate because some of the larger family operations are incorporated, and to some people that is the indicator of evil. The debate will also be heard as Congress prepares a new Farm Bill, which will have financial support for “family farms.” But for all practical purposes, farm policy will be tailored more toward the size of the business unit than the character of the patriarch.

Unfortunately, labels are important, and all farms must be put in a different pigeon-hole:
Small family farms have gross sales under $250,000. They include limited resource farms, retirement farms, residential/lifestyle farms, and farming-occupation farms (low sales farms with less than $100,000 in sales and medium sales farms with $100,000 to $249,999 in sales). Then come large-scale family farms with sales over $250,000.
Finally non-family farms, which are organized as non-family corporations or cooperatives, as well as farms operated by hired managers.

One of the key issues in the definition of a farm is the fact that the volume and value of production, is inversely proportional to the number of farms in a given category of size. A large number of small operations produce very little. The most extensive production comes from a small number of large operations. USDA says, “Large and very large family farms, plus non-family farms, made up 9 percent of U.S. farms in 2003 but accounted for 73 percent of the value of production.” And the issue of “family” is hard for many people to reconcile with large operations.

While smaller farms, which are also family farms, earn smaller amounts of agricultural production revenue, their existence is subsidized by off farm income. “Small-farm households typically receive substantial off-farm income and do not rely primarily on the farms for their livelihood. Most off-farm income is from earned sources, either wage-and-salary jobs or self-employment.” A common risk management tool for all sizes of farms is a production contract, but by far the larger farms are the dominant users of them. USDA’s 2003 study found that very large family farms account for 59% of the total production under marketing or production contracts.

You already know that 98% of U.S. farms are family farms. The others are the “non-family” farms which produce 14% of US farm output. Of the family farms, 91% of all farms are in the “small” category and 59% of all agricultural production comes from farms in the “large” category. Surprisingly, 71% of farm assets are in small farms, including 70% of the farmland.

There are two significant trends noted by USDA which occurred between 1989 and 2003:
1) Small farms with annual sales of less than $10,000, very large farms, and non-family farms increased in number. At the same time, the number of small farms with annual sales between $10,000 and $249,999 declined.
2) Production shifted sharply to very large family farms and non-family farms. These types accounted for 58% of the value of production in 2003, compared with 38% in 1989, shifting mainly from farms with annual sales between $10,000 and $249,999 and—to a lesser extent—large family farms. (USDA expects this trend to continue because farms in this category frequently are losing money and are managed by operators 65 years of age and older.)

“Farm profits are strongly associated with farm size. Average operating profit margins increase with sales and are negative until sales reach $175,000.” So how do those farms stay in business? “Most off-farm income is from earned sources, either a wage or salary job or self-employment. For households operating limited-resource or retirement farms, however, more than half of off-farm income comes from unearned sources—such as Social Security, pensions, dividends, interest, and rent—reflecting the advanced age of operators on those farms. About 44 percent of all farm households were dual-career in 2003, with a spouse working off the farm and the principal operator engaged in farming (with or without off-farm work).”

Summary:

The family farm is alive and well, and will continue to be the primary source of agricultural commodities for the US domestic market in the foreseeable future. However, there are many dynamics in play that continually change the face of the typical farmer. While the average age of the farm operator continues to increase, he is taking a smaller role in the larger family farming operations. If he is alone in a smaller operation, that operation’s financial viability may be threatened, and his family may be living off non-farm income more so than sales of commodities. There is also a significant growth in the number of small family farms, primarily for lifestyle purposes. And it is those small lifestyle, retirement, and low sales farms which control the bulk of the land-based assets in the US.

Stu Ellis

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