Farm Household Incomes: Perceptions and Statistics

Journal of Rural Studies, Vol. 15, No. 3, pp. 345—358, 1999  1999 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0743-0167/99 $ — see front matter

PII: S0743-0167(98)00068-0

Farm Household Incomes: Perceptions and Statistics Berkeley Hill* Department of Agricultural College, Wye College, University of London, Ashford, Kent TN25 5AH, UK

Abstract — Although concern with the incomes of the agricultural community is at the centre of agricultural policy in Europe, and a major reason why reform of the CAP has been opposed, reliable statistics on the incomes of farmers and their households are scarce. Policy has been built on assumptions about incomes in agriculture that have remained largely unsubstantiated by official statistics. Recently, information has been generated by Eurostat about the aggregate disposable income of the agricultural household sector in EU countries which, though falling short of being comprehensive, causes some of these assumptions to be seriously challenged. By providing policymakers with better information, and indicating where more detailed statistics are needed, the quality of policy decisions should be improved.  1999 Elsevier Science Ltd. All rights reserved.

Introduction The incomes of those engaged in agriculture are at the centre of agricultural policy in the European Union (EU) and many other OECD countries (Commission, 1994; OECD, 1995; Winters, 1990; reviewed in Hill, 1996a). The passage of CAP reforms through the process of EU decision-making that reflects the dynamics of state interests (Moyer and Josling, 1988) would have been much quicker and smoother had not concern for their impact on the incomes of farmers and their families acted as a brake, and ‘this issue will have to be addressed if any (reform) programme is to have the slightest chance of being taken seriously’ (Ockenden and Franklin, 1995). Actions to support incomes arise from, first, the perceived need to intervene because of the income problems of agricultural households (described below) and, second, because of assumed links between incomes in farming and other policy issues, such as the viability of the rural economy and the conservation of the rural environment. It is

* The author has been an External Expert to Eurostat in developing its Income of the Agricultural Households Sector (IAHS) statistics, drawn on for this article. However, the use of data and interpretation expressed here are entirely the responsibility of the author.

worth noting that the incomes in question are overwhelmingly those of the self-employed farmers and their households; little within the CAP is concerned with the incomes situation of hired farm workers, perhaps because they are relatively scarce in most Member States. The ‘income problem’ assumed to exist among agricultural households has three inter-related aspects (Gardner, 1992; Hill, 1982); these imply that, without intervention, farm families would suffer a mix of low incomes (the poverty issue), poor rewards compared with people in other broadly similar occupations (the comparability issue) and, because of the inherent variability of output and revenues, unacceptable fluctuations in their incomes from year to year (the instability issue). The welfare aspect of the Common Agricultural Policy is articulated in the 1957 Treaty of Rome’s article 39 which refers to the objective of ensuring a fair standard of living of the agricultural community. Initially, it was envisaged this was to be achieved by improvements in productivity, but over time this line of causality has been disregarded as the treadmill of technical advance has failed to bring income solutions for all but the successful larger innovator. Thus, the income objective has assumed an independent existence and is often quoted without the causal link

346

Berkeley Hill

(for example, by Grant (1997) and, in this Journal, by Terluin et al. (1995)). When monitoring the CAP’s performance in relation to the income problem, measures of income are used by policy-makers which imply that they accept the paradigm of an agricultural industry comprised of farms operated by self-employed households that are fully dependent on agricultural production for their livelihoods. This perception has survived despite a mass of evidence on pluriactivity which demonstrates that this model of farming is far from reality in the late 20th century, and has probably never been valid (for example, Gasson, 1988; Hallberg et al., 1991; Bryden et al., 1992). Within the heterogeneity that characterises farming no doubt there are some families that have no source of income other than their selfemployment in agriculture, but the overall picture is one of households that as a group are not confined to this one single statistical category of economic activity. The combination of farming with some other way of earning a living is a widespread phenomenon with a long history and is increasingly encouraged by governments in the as one way of coping with the pressures to which agriculture is subject at the turn of the millennium. Consequently, it is self-evident that income measurement in the welfare context of ensuring a fair standard of living should cover the rewards from all forms of gainful economic activity, not just that derived from agricultural production, and extend to resources flowing to them from property rents, interest, pensions and other transfers.

proportion of farm occupiers are highly dependent on agriculture for their livelihoods will have a major impact on the way that policy-makers attempt to support rural areas, in that it signals that policy instruments confined to stimulating agriculture are unlikely to perform well in achieving broader economic ends (Cahill et al., 1993; Williamson, 1991).

Information on incomes in agriculture Policy-makers require statistics that are reliable, timely, pertinent and (for EU-level action) internationally comparable. Though research studies, such as those cited above, may influence the background against which EU policy decisions are taken, the design and implementation of policy requires the provision of a flow of official statistics, that is, issued by EU institutions and hence having the requisite authority. Incomes from agricultural production

In addition to the welfare issue, it is clear that behavioural patterns of farmers, such as their intensity of land use and investment levels, cannot be satisfactory explained without recognising that farm operators frequently make judgements that involve the use of resources outside the bounds of their farms, particularly when this takes the form of other businesses run in parallel (Harrison, 1975; Gasson and Errington, 1993; Phimister, 1993). The survival strategy of farm households frequently involves the development of non-agricultural income, from off the farm or from diversification on it (for example, Shucksmith et al., 1989; MacInerney and Turner, 1991; Bateman and Ray, 1994; Benjamin, 1994; Bowler et al., 1996; Davis et al., 1997), and the viability of small farms as independent units is often conditional on access to income from other activities undertaken by household members (Zeddies, 1991). The wide variation in incidence of non-farm income is a contributing factor to the diversity of responses to policy instruments found in agriculture (MacFarlane, 1996).

Official statistics on agricultural incomes in the EU come in two forms. The first views income as the residual reward for the production of agricultural commodities. There is a well-established system, within the framework of national accounts, for drawing up aggregate economic accounts for agricultural production and for deriving indicators of income from them (Eurostat, 1992). Based on data provided by national statistical offices or agricultural departments, these Economic Accounts for Agriculture (EAA) and Income Indicators (of which the best-known, Indicator 1, is Net Value Added per Annual Work Unit of labour, expressed in real terms and as an index) are published for each Member State and for the EU as a whole annually by Eurostat,* summaries appearing in the Commission’s annual Agricultural Situation in the European ºnion report. Individual countries also make similar presentations for national reporting purposes (such as in the UK’s Agriculture in the ºnited Kingdom). In addition, at microeconomic level the European Commission’s Farm Accountancy Data Network (FADN or RICA) surveys some 62,000 farm businesses annually, collecting physical and financial information that includes, inter alia, calculations of the residual income remaining to the operator and his or her family (non-hired labour). Drawing its data from official national surveys (such as the UK’ Farm Business Survey and Ireland’s National Farm Survey), the FADN results are inevitably less up-to-date than those using the aggregate approach. FADN results appear, with a lag of about 2 years, in

The income composition of farm households also has a part to play in the design of policies for rural development. A finding that, for example, only a small

* Statistical Office of the European Communities, based in Luxembourg.

Farm Household Incomes summary form in the Agricultural Situation in the European ºnion report, but publication in greater detail is irregular and much delayed.* Nevertheless, analyses of FADN data give valuable insights; for example, Hill and Brookes (1993) were concerned with income distributions and differences between countries and among farm sizes and types, and Terluin et al. (1995) with farming in Less Favoured Areas. A crucial point is that both the EAA and FADN restrict coverage to incomes derived from agricultural production only.- While undoubtedly of high quality, they fail to capture the breadth of economic activities of agricultural households. Statisticians may appreciate the nature of the income measures, but among observers, politicians, academics and (some) policymakers there is a failure to distinguish between the income from farming and the income of farmers. Personal incomes of agricultural households The second form of official EU statistics on agricultural incomes is concerned with the personal incomes of farmers and their households and covers all sources of income (and negative items such as income tax). Information of this more comprehensive type is far less readily available than that which relates only to incomes from agricultural production. In 1992 Eurostat started to publish figures for the entire agricultural households sector of each Member State using a harmonised methodology (Eurostat, 1995) based in national accounts; coverage of the Income of the Agricultural Households Sector (IAHS) statistics (known up to 1997 as the ¹otal Income of Agricultural Households (¹IAH) statistics but renamed to more correctly reflect their nature) now extends to all 15 countries (Eurostat, 1997a). However, at the microeconomic level official data are seriously deficient (Cahill et al., 1993; OECD, 1995). In some EU Member States (such as the Netherlands and Germany) the national farm surveys that supply FADN data also collect information on non-farm incomes of the person nominated at the head of the holding and their spouse/partner, but in many they do not (in France there is strong interest-group pressure against doing so). Official economy-wide household budget surveys are found in all countries, but the numbers of agricultural household cases are small in northern states, and the quality of

* The latest set of FADN results was published in 1993, covering incomes in 1990/91 (Commission, 1993). - FADN is slightly less strict in this respect, in that the latter permits the inclusion of farm woodland and tourism where these activities overlap agricultural activity on the holdings to the extent that it is impractical to distinguish them (Commission, 1988).

347

income data poor (low response rates to income questions and under-reporting of amounts). Tax surveys are hampered in many southern Member States, by systems that tax farmers’ incomes principally on flat rates per hectare rather than on actual income, invalidating tax records as a reliable data source on incomes, or which allow them to fall outside the tax net (Ireland being the main example) (Hill, 1988). Consequently, while in some countries household level income results are plentiful and of good quality, often with several reliable data sources (Denmark, Germany, Ireland, Netherlands, Sweden, Finland), in others there may be not any source that is suitable for their calculation. A critical issue with household income statistics, at both aggregate and microeconomic levels, is how agricultural households should be distinguished from those in other socio-professional groups (Hill, 1990). While for some purposes it may be desirable to include all households that occupy a farm (the basis of statistics on farm operator households in the USA; (Ahearn et al. (1993)), such a ‘broad’ approach embraces many for whom farming is only a minor activity and whose livelihoods are primarily determined by what is happening in other parts of the economy. It is unlikely that agricultural income support is intended to benefit all these, and something more targeted is envisaged, though politicians have been reluctant to be specific about the intended beneficiaries of the CAP (Hill, 1996a). The methodology of national accounts sets out, in general terms, a mechanism by which households may be categorised into socio-professional groups, of which agricultural households could form one, based on the main income source of the entire household. However, a more practical alternative is to classify according to the main source of income of a reference person (usually the head of household), a system adopted by most household budget surveys. In this ‘narrow’ approach, which has been adopted by Eurostat as the target methodology for its recent agricultural household sector statistics (Eurostat, 1995), agricultural households are those in which farming is the main income source of the reference person, main implying over fifty per cent of the total income, or the largest single source.‡ Where countries are not yet able to apply this income-based definition, they are permitted in Eurostat’s IAHS statistics, in the interim, to use a system based on the reference person’s main occupation. Because each and every households falls into one (and only one) socio-professional group, it is possible using this approach to compare income levels

‡ The other sources considered are (a) all other forms of self-employment, (b) wages, (c) property income, (d) welfare transfers and (e) all others.

348

Berkeley Hill

between agricultural households and other socio-professional groups defined in a consistent way.*

Numbers of agricultural holdings are not reliable guides to the numbers of agricultural households

The unit over which income measurement takes place in Eurostat’s IAHS statistics is the dwelling household, as defined in national family budget surveys; though there are small differences between countries, this typically comprises people living together under the same roof and sharing some meals. A case could be made that this is too wide, in that a household defined in this way could include not only ‘core’ members who form a single budgetary unit by pooling income and expenditure (for example, a couple and dependants) but also some additional adults (siblings, grown-up children, etc.) who, while living under the same roof, are in practice financially independent from the ‘core’ and thus whose incomes do not influence the consumption level of the ‘core’. Such households are a particular concern to statisticians in the EU’s southern Member States. While the notion of income measurement confined to the single-budget ‘core’ is superficially attractive, to put it into operation would first require a major exploration of the diverse economic relationships that can be found within the dwelling household; these could vary dramatically, and common practices within regions or countries may not necessarily be observed. A further, practical, problem is that primary data sources frequently do not provide for measurement over a ‘single budget’ unit. Thus, as the basis for harmonised statistics, the dwelling household remains the only feasible unit at present, though its limitations must be borne in mind when interpreting results.

The structure of agriculture is often described in terms of holdings — the unit for which returns are made in censuses. It is well known that holdings and farm businesses do not necessarily coincide. In the UK surveys often find that large farms comprise more than one holding, associated (though not entirely so) with past growth patterns, so that official statistics based on holdings overstate the number of small farms and understate the number of large ones (Harrison, 1975; Commission, 1981). The link between holdings and households in which the operator is mainly dependent on farming is even more remote. When an agricultural household is defined as in the IAHS statistics, an agricultural holding may have no such household or more than one.

Main findings on household incomes of agricultural households — aggregate sector accounts The recently published aggregate statistics for the agricultural households sector of EU Member States, though not yet fully developed (the UK is one of the least well-provided with data) and with some disharmonies still to be resolved, now form part of the background information against which policy decisions are being made. A number of key points emerge from the analysis of the data that carry strong implications for agricultural policy, in particular for the way in which the income situation in agriculture is perceived. These are described below.* The enlargement of Germany to include significant numbers of large farms organised in ways that are far removed from the conventional family farm model (Bergmann, 1992) has presented a challenge to the IAHS definition of an agricultural household that has not yet been resolved. Results for Germany so far only apply to how it was constituted before 3/10/1990. - The results reported here are based on published reports from Eurostat on its TIAH and IAHS statistics, mainly the latest edition (Eurostat, 1998). The author was responsible for the contents of these publications. Earlier results were also discussed in Hill (1996b).

Table 1 shows that, for the European Union as a whole (EUR 12), the number of agricultural households in the common year of (1987)‡ was less than half the number of holdings, implying the presence of many households with a reference person (head) whose main income source was not from farming. In some countries (notably Italy, Spain, Portugal and Denmark), the number of agricultural households was particularly low. The UK is unusual in that its number of holdings and agricultural households coincided approximately; though there were many holdings (mainly small) without an agricultural household, there were many others (usually larger holdings) with more than one.m In countries where IAHS results are available for a run of years, it is clear that the number of agricultural households has been in decline. In Germany (as constituted before October 1990) the fall was from 349,000 households in 1984 to 261,000 in 1993 (!25%, or an annual change of !3.2%) against an overall rise (#13%) in the total number of private households. In France, farm household numbers fell even faster, with a fall of more than a quarter (—27%, or !3.9% annually) in the number of agricultural households in the seven-year period 1984—90 against a background of a 7% increase in the total number of households. In Portugal the fall in agricultural household numbers between 1980 and 1989 was 37%

‡ The three new Member States are not included and there are two exceptions (for Denmark and Luxembourg) which refer to 1989. m The number of agricultural households in the UK was taken from the Survey of Personal Incomes; this probably underestimated the real number because it does not cover farmers whose farms are arranged as companies.

Farm Household Incomes

349

Table 1. Comparison of the numbers of agricultural holdings in the Eurostat’s Farm Structure Survey with the numbers of agricultural households from Eurostat’s TIAH statistics (‘narrow’ definition), 1987

Member State Belgium Denmark Germany Greece Spain France Ireland Italy Luxembourg Netherlands Portugal United Kingdom Sum of the above

No. agricultural holdings;1000

No. agricultural households;1000

No. agricultural households as percentage of no. holdings

93 81 * 705 953 1792 982 217 2784 4.0* 132 636 260 8639

66 28 * 319 393 505 660 85 646 2.7* 92 191 261 3249

71 35 45 41 28 67 39 23 67 70 30 100 38

* 1989. Source: 1987 Farm Structure Survey and Eurostat’s IAHS database.

(!4.9% per year).* Interpretations of income movements over time must recognise that the agricultural households group is not of a constant composition but is changing and contracting. Many households with some income from farming are not agricultural households Numbers of households that satisfy the ‘narrow’ definition of an agricultural household can be compared with those of households where at least one member of the household has some income from farming (a ‘broad’ definition). This also throws some light onto the households that are outside the former definition but inside the latter, here called ‘marginal’ agricultural households. Only seven countries can provide such information at present- (Denmark, Germany, Greece, Ireland, Netherlands, Finland and Sweden), and mostly for only single years spread from 1983 (Germany) to 1995 (Denmark), so caution must be exercised in interpreting the findings. In each country, whilst the use of the ‘narrow’ definition reduced the number of agricultural households compared with the numbers which qualified under the ‘broad’ definition, the extent varied substantially; the number of ‘narrow’ households as a percentage of ‘broad’ households ranged (in ascend-

* Over the same periods the declines in the volume of total agricultural labour input (measured in Annual Work Units) were Germany — 14%, France — 20% and Portugal — 30% (Eurostat, 1997b). - Some other countries (Greece, Spain and Austria) are also able to use definitions for the household that are broader than the IAHS ‘narrow’ definition but do not correspond fully to the IAHS ‘broad’ definition.

ing order) from 30% in Denmark (1995), 41% in Ireland (1987), 53% in Finland (1992), 57% in Sweden (1992), 58% in Germany (1983), 60% in the Netherlands (1988) to 65% in Greece (1988). Thus between one- third and two-thirds of households with some income from farming failed to qualify as agricultural households in the ‘narrow’ sense of the term. Further consideration of these ‘marginal’ agricultural households is given later. As a group, agricultural households (defined in the ‘narrow’ sense) have substantial income from outside farming Even among the households that satisfy the definition of being agricultural in the ‘narrow’ sense, typically only about a half to two-thirds of the households’ total income comes from farming, though there are substantial differences between Member States (see Fig. 1). In the years shown (three-year averages ending in the latest available year or, where this is not possible, two-year averages or single years), countries in which substantially less than half of the total household income came from farming were Germany, Finland and Sweden. At the other end of the spectrum, with more than two-thirds coming from farming but still with a substantial minority of their income coming from other sources, were the Netherlands and Austria. Clearly, even this group of agricultural households, defined in the ‘narrow’ sense, demonstrates diversification in terms of income sources, with a dependency on farming that is far from complete. The second most important source of income of agricultural households was usually wages (by definition, from off-farm employment) or social receipts,

350

Berkeley Hill

Figure 1. Composition of the total income of agricultural households by source, for selected Member States. Per cent.

although in the United Kingdom (not shown in Fig. 1 because of large methodological differences) in the early 1990s it was property income. Income from other forms of independent (self-employed) activity, such as operating other (non-agricultural) businesses, was generally unimportant, except in Finland where farm forestry appears to provide the explanation. However, this finding almost certainly under-represents the extent of diversification into non-agricultural activities because data sources (such as taxation statistics) often do not require a distinction to be drawn between farming and other entrepreneurial activity carried out within the framework of what is primarily a farm business. Substantial growth in non-agricultural income could occur without changing the occupation group into which the business operator is classified. Only if other income grows to the point that

farming is no longer the main source of income will classification be affected. Official statistics on farming income overstate the instability of the total income of agricultural households Because of the presence of other forms of income, it follows that temporal changes in farming prosperity will not translate to equivalent proportional changes in total income of agricultural households, given that factors determining farm and other incomes are unlikely to be directly linked. This is supported by empirical evidence from several countries with runs of statistics that show that the total household income for agricultural households is more stable than their income from farming alone (Hill, 1995, 1996a). Nonagricultural income (taken all together) is less variable

Farm Household Incomes

351

Figure 2. Proportion of total income taken by taxation and social contributions, for agricultural households and all households in selected Member States.

from year to year than is farming income (though this is not a necessary condition for total income to be more stable*). Disposable income seems to be less stable than total income but more stable than farming income; a variety of factors seem to be operating here, including the way that taxation is levied.Findings 3 and 4 have important repercussions for official statistics and agricultural policy, because they show that Eurostat’s income indicators for the indus-

try and the farm-level FADN, both long-established and highly regarded by policy-makers, are no reliable guide to the overall income situation of agricultural households (and even less so for the other households with holdings that fall outside this ‘narrow’ definition). Year-on-year changes in these indicators of the rewards from agricultural production (often the subject of much political interest) should not be taken to imply equivalent movements in the total household income; these are likely to be smaller. Agricultural households are relatively lightly taxed

* Stabilisation of total income depends on a number of factors, including the degree of correlation between changes in agricultural income and non-agricultural income. A variation in non-agricultural income of the same absolute magnitude as a change in agricultural income but in the opposite direction would result in a stable total income, even though the changes in percentage terms might be greater in the non-agricultural income than in the agricultural income. - A progressive taxation system that levies tax a year in arrears can aggravate fluctuations by causing high tax payments to fall due in years where pre-tax incomes are reduced.

Where countries differ in the amounts of household income taken in taxation and other deductions, the same average total income figure can imply different levels of disposable income. Taxation disparities may carry implications for the competitiveness of farmers from different countries in a single market, and have longer-term impacts on income, for example by influencing farmers’ abilities to reinvest in modern technology. Fig. 2 shows substantial variation in the average tax rates between Member States. At one extreme were Denmark, Germany and Sweden, where

352

Berkeley Hill

a quarter or more (on average) of an agricultural household’s income was taken as taxes and social contributions in the latest period for which results are available. At the other were Portugal and Greece, where less than 5% was taken. Of course, these differences reflect national policies on taxation for which there may be a counter-provision of goods and services in the form of social benefits, only some of which are at present captured in the measurement of disposable income. A general finding is that the proportion of total income taken by current taxes and social contributions was lower (often much lower) among agricultural households than among households in general in each country. In Fig. 2, Denmark, Germany and Sweden are the exceptions, where agricultural households have shares taken that are close to the national allhouseholds average. However, no firm conclusions can be drawn as to the relative burdens of taxation on farmers and other socio-professional groups without much more information on the levels and distributions of income, and details of the tax regimes applied

to income from self-employment in general and agriculture in particular vis-a% -vis income from employment and other sources. Agricultural households, as a group, do not have low average incomes Agricultural households appear to compare favourably with the rest of society in terms of their average disposable incomes. Fig. 3 shows that, for the latest periods, in most countries average incomes of agricultural households were typically close to or higher than the all-household average (comparisons are not possible for every Member State). The main exception was Portugal, where it was much less (under half ). Somewhat lower levels were also seen in Greece (81% of the all-households average) and Italy (90%). The relative position was eroded when income was expressed per household member or per consumer unit (a measure of household size that uses a set of empirically determined coefficients to convert the number of children to their equivalent of adult consumers). Nevertheless, on all three measures (per household,

Figure 3. Average disposable income of agricultural households relative to the all-household average. Selected Member States.

Farm Household Incomes per household member and per consumer unit) agricultural households had incomes above the national averages in France, Ireland, Luxembourg and (most notably) the Netherlands. Caution has to be exercised in making comparisons between incomes of farm occupiers and other groups because of difficulties in the identification and valuation of income in kind (such as food produced on the farm and the rental value of the farmhouse) and there may well be differences (in both directions) in the costs of consumption items that affect the standard of living. Nevertheless, these results do not suggest that, in income terms, agricultural households are a particularly disadvantaged group, a major finding in the light of the assumptions that lie behind policy actions and the stated objectives of the CAP. Incomes of other households that operate agricultural holdings. Reference was made above to the substantial numbers of households where at least one member has an income from farming (they are covered by the ‘broad’ definition of an agricultural household) but where farming is not the main income source of the household’s reference person (they fall outside the ‘narrow’ definition). Of particular significance are the income characteristics of these ‘marginal’ agricultural households (Table 2). In Denmark, Ireland, the Netherlands and Finland the average disposable incomes per household of the ‘marginal’ households were smaller than those of the agricultural households defined in the IAHS ‘narrow’ way. In the first two countries they appeared to be

353

a relatively low-income group, with incomes below the all-households average; in the Netherlands and Finland they were above it. However, in Germany (as constituted before the enlargement of 1990) and Greece the ‘marginal’ households appeared to comprise relatively high-income groups. They had an average disposable income per household that was not only larger than that of agricultural households defined in the ‘narrow’ way but was also substantially above the all-households average. In Sweden there was little difference between the groups on a per household basis. Such diversity indicates that quick generalisations are to be avoided and requires countries to be considered individually, taking into account their differing social, economic and agricultural structures. For example, there are suggestions that, in Denmark, the group contains substantial numbers of heavily indebted (and therefore low net income) new-entrant farmers who take off-farm jobs to meet interest charges incurred through inter-generational land transfers. In Ireland the group contains a high proportion of elderly unmarried males dependent on welfare payments. In Greece the ‘marginal’ households are larger than those in the ‘narrow’ agricultural household group (with 2.77 and 2.65 member per household respectively), and probably contain more financially independent adults with off-farm jobs. In Germany, the picture is coloured by part-time farmers who are also blue-collar employees with full-time off-farm jobs. However, a characteristic shared by all the countries from which evidence is available is that only a small proportion of the total income of this ‘marginal’ household comes from farming. In Germany, only 5%

Table 2. Number of households and levels of average net disposable income for three groups of agricultural households, in selected Member States Denmark (1995)

Germany (1983)

Greece (1988)

Ireland (1987)

68 20 48

613 353 260

100

100

100

100

96 103 93

110 101 123

113 83 170

105 127 89

Netherlands (1988)

Finland (1992)

Sweden (1992)

139 73 65

94 54 41

100

100

100

210 267 108

124 131 116

89 87 92

No. agricultural households (;1000) ‘Broad’ ‘Narrow’ ‘Marginal’ All households Agricultural households ‘Broad’ ‘Narrow’ ‘Marginal’

729 207 136 475 85 87 254 122 49 Disposable income per household

Notes: The definitions of the three groups of agricultural household are: ‘narrow’ — main source of income of the reference person is independent activity in agriculture. ‘broad’ — where any member of the household has some income from independent activity in agriculture. ‘marginal’ — households which satisfy the ‘broad’ definition but not the ‘narrow’ definition. Source: Eurostat’s IAHS database.

354

Berkeley Hill

of their income came from farming, the Netherlands 8%, Finland 11%, Ireland 14%, Greece 19% and in Denmark 20%.* It follows that changes in the income from farming are of relatively small impact on the total income of these ‘marginal’ households; their overall position is more likely to be affected by changes in the economy in general (as these impact on wages, often the major source of income) and policy on social benefits (another major source). Support of farming incomes through instruments such as raising the market prices of agricultural commodities is therefore not likely to be an appropriate way of improving the income situation of these households.

Findings from microeconomic studies Results for the entire agricultural households sector, though important in shedding light on the income situation, especially when in the guise of official statistics, are incapable of answering the many policy questions that are concerned with distributional issues. For example, in investigating whether there is a problem of low incomes, information is particularly needed on the number of cases falling into income classes that are deemed to place them in poverty, and of the characteristics associated with low income, such as their location, type and size of farm, age of operator, presence or absence of a successor, net worth and so on. And it should be recalled that, despite the stabilising influence of income from sources other than farming, the situation of individual agricultural households can be subject to quite large short-term variations, so caution must be exercised when considering the results for single years and ways sought of looking at incomes of individual cases over a somewhat longer period. Cases experiencing transitory low incomes must be distinguished from those suffering more permanent poverty. Longitudinal analysis is capable of yielding valuable information not only on this issue but also how individual households respond to developing economic situations (such as to declining incomes from farming), but data that can be analysed in this way are rarely available in adequate volume (Hill and Brookes, 1993).

of distributional characteristics can be gained only by piecing together fragments of information from disparate sources for EU Member States and by drawing on more complete data from other countries, notably the USA, where the Farm Costs and Returns Survey is a particularly comprehensive source (Aheam and Lee, 1991; Ahearn, El-Osta, 1993; Ahearn, 1996), and Canada, where several sources, including taxfiler data, can be linked (Bollman and Smith, 1987; Yap et al., 1995; Davey, 1996). There are differences between countries that reflect, inter alia, their varying social, demographic, economic, geographic and cultural conditions, as well as the diverse conventions used to measure farm size and incomes. Nevertheless, common threads run through the income evidence (reviewed in Hill, 1996a; OECD, 1995), threads which are of the utmost importance to agricultural policy. In addition to the characteristics already revealed by the aggregate statistics, the following are apparent from the microeconomic data: (a) When farms are ranked by size,- there is, as would be expected, a positive relationship between size and income from farming per farm, the nature of the relationship varying with the measure of size that is used. However, the pattern of non-farm income is not so straightforward. Non-farm income tends to be greatest in absolute terms among the occupiers (and spouses) of the smallest and largest farms, though the level among the latter is not sufficient to reverse the trend in the ratio between non-farm income and farm income to decline across the farm size spectrum. (b) When farm income and non-farm incomes accruing to occupiers are combined, there is a tendency for total incomes to rise with farm size, but the smallest farms do not always have occupiers with the smallest average total incomes. There is some suggestion that lowest total incomes are associated not with the smallest farms and those generating the smallest incomes from farming but with those somewhat larger, typically farms which are too large to be operated on a part-time basis but too small to generate an income from farming adequate to support a household. (c) The wide disparity of incomes between farms that is found if only the income from farming is

As noted above, there is no single source of EUwide official microeconomic data on the income situation of agricultural households. An overall picture

* These marginal households faced a disproportionately high level of interest per household compared to agricultural households under the ‘narrow’ definition.

- In surveys of farm accounts it is often assumed, when calculating income, that there is only one entrepreneurial household per farm, and any secondary farmers are treated (and costed) as if they were hired employees. This assumption hinders attempts to establish income patterns for selfemployed households, and secondary users of the data find it technically difficult to overcome.

Farm Household Incomes

(d)

(e)

(f )

(g)

considered is substantially narrowed once the nonfarm incomes of their occupying households are taken into account. The tendency for the disparity of incomes from farming to widen over time is to some extent modified by the growth of non-farm incomes, though the evidence is not clear-cut. The impact of non-farm income is not uniform across the enterprise types. For example, because dairy farming is relatively labour-demanding and exacting in timeliness, this restricts opportunities for off-farm activity, so that the total income of such farm households may be low, even where farming incomes are relatively high (as in the Netherlands). Conversely, the total incomes of large crop farms are often high because other activities can be carried out in parallel, though this form of farming may not be particularly profitable. However, the line of causality behind this situation is not clear. While some types of farming may impose severe constraints on the development of off-farm pluriactivity, farming types are to some extent flexible, and farm occupiers who wish to pursue off-farm careers may purposely select crop enterprises for their holdings. Prevalence of particular farming types may be reflected in regional differences in rates of pluriactivity and income, though other factors are at work here, such as access to off-farm employment opportunities (MacKinnon et al., 1991). When farm households are grouped according to the age of the reference person (typically the head of the farm household), total income rises with the farmer’s age up to a certain point and thereafter declines. This peak occurs between the age of 40 and 50 in Germany and Sweden, a little earlier in Denmark (35—45 years) and a little later in the US (45—55 years). Though broadly reflecting stages in the life cycle (the impact of which on aspects of farming practice and investment has been demonstrated by, for example, Nalson (1968), Potter and Lobley (1992) and Gasson et al. (1998)), differences in the patterns between countries also appear to show the influence of varying socio-cultural conditions, including the attitudes of farmers to formal retirement and the ways in which farm property is passed between generations (Perrier Cornet et al., 1991). There is a suggestion that income disparities among agricultural households are wider than among households in general, and that there is often a long ‘tail’ of low income cases (Cahill et al., 1993). If this is the situation, an adequate average income among agricultural households may imply a greater proportion of farm households that fall below a given poverty line. Low total incomes in one year may be transitory. A distinction has to be made between, on the one hand, those farm households where incomes

355

taken over a run of years may be satisfactory, though single years may be low and, on the other, the smaller number of those who face a more permanent income problem. In those few instances where information exists (such as in Denmark and Norway), it is clear that farmers’ consumption expenditure is more stable from year to year than is their income, again pointing to the need in a welfare context to look at incomes over a longer period.

Conclusions Information on the incomes of farmers and their households is critical to the proper monitoring of the performance of the CAP and an essential element in facilitating reform of agricultural policy. Yet official agricultural statistics in the European Union, by restricting consideration of incomes to those coming from agricultural production alone, have provided results that, though reliable within their chosen methodologies and harmonised between countries, only present a partial picture. By excluding important components of income of agricultural households, they have fostered misconceptions about the real income situation of the agricultural community. Recent steps in the direction of fuller information on the total incomes of agricultural households at aggregate level, combined with fragmented findings at farm and household level, show that other forms of income are frequently present, account for a substantial proportion of income even among households where the head’s main source is farming, and their inclusion radically alters total income levels. Appreciation of this should, with time, impact on the perception held by policy-makers of the real income problem in agriculture and of the information needed for the management of policy. They are confronted with the evidence that, across the size spectrum, the income that a household receives from farming is no reliable guide to its overall income and that, as a group, in most EU countries agricultural households do not appear to be disadvantaged in terms of their disposable incomes when compared with national all-households averages. In particular, non-farm income transforms the income situation among the small farms, where low incomes from farming could be anticipated and where concern with incomes is usually concentrated, so that on average their total incomes are frequently satisfactory. Such findings pose a fundamental challenge to the assumptions that lie behind the CAP. Income evidence highlights the heterogeneity of the households that operate agricultural holdings. In

356

Berkeley Hill

particular, the finding that farming households which fall outside Eurostat’s definition of an agricultural household (between a third and two-thirds of all households with an agricultural holding — depending on country) as a group derive very little income from farming suggests that a reform of agricultural policy that involved steering agricultural support away from them would only have a small affect on their total incomes. Though many of these households will be occupiers of small farms and may view their land primarily as a consumption good rather than as a production asset, some will be substantial agricultural producers who have, in addition to their farming profits, even larger incomes from other sources. In opposing reform the income case is weak for these households; their prosperity is much more heavily influenced by what is happening in the rest of the economy — though not necessarily in what might be labelled the ‘rural economy’ since their wages, property income or pensions may have no obvious rural link. Such households are predominantly outside the influence of agricultural policy as far as their incomes are concerned, though of course they may still be targets for environmental policies directed at the occupiers or owners of land (Slee, 1996). Even for the rest, the presence of substantial amounts of non-farm income points to a commercial farming industry that is already diversified in its use of resources and dilutes the argument against CAP reform that is based on income consequences. The case for a continuation of support is further weakened where the personal incomes of agricultural households appear currently to compare quite favourably with those of the rest of society.* Among official statistics there is a major gap in income information at the microeconomic level. The satisfactory design and monitoring of policy directed at income support under the CAP clearly requires better distributional information than currently exists to complement the aggregate statistics. No doubt there are some farm households that have levels of disposable income that are unacceptably low — even after taking into account the income averaging over, say, three years that farmers might be expected to anticipate and to plan for. Knowledge of the numbers and locations (by region, type and size of farm etc.) of such low-income cases would greatly assist in the design of support policy that was more transferefficient, yet this information is not available at EU level, and nationally data sources are patchy and

* Wealth or Net worth is usually ignored in any income comparison but, where information exists, farm households on average are in an even more favourable position when judged on an assets basis — see Hill (1996a).

frequently inadequate. One-off studies (such as Davis et al., 1997) can establish that low-income households exist, but robust official statistics are needed if policy action is to be effected. Proposals have been made to add questions on non-farm income to the Commission’s annual Farm Accountancy Data Network survey as the most suitable way of filling the data gap, but there is resistance from agricultural organisations in some countries and no strong wish by the European Commission to engender high-profile opposition (Robson, 1996). Perhaps a fear of those farmer-representatives which block statistical development in this area is that better information would eventually result in a greater degree of policy targeting, so that the present pattern of allocation of benefit would change, to their detriment. As Hill (1996a) points out, agricultural institutions (especially ministries of agriculture) may also see a long-term danger to their longevity in information that undermines the assumptions about the uniqueness of low income on farms, increasing the possibility of transferring responsibility for poverty in agriculture to departments concerned with general social policy and the operation of non-specific welfare nets. Nevertheless, what is emerging about the overall income situation of agricultural households is likely, in a policy environment committed to lowering agricultural commodity support prices and to a greater role for environmental payments and for rural development, to focus attention on the perceived need for income support and on which households are its intended targets. That alone is likely to offer some medium-term improvement in the quality of policy decisions and the consequent use of resources.

References Ahearn, M. C. (1996) Methodological issues in the measurement of the income of farm households in the USA. In Income Statistics for the Agricultural Household Sector. Hill, B. (ed), Eurostat, Luxembourg. Ahearn, M. and Lee, J. E. (1991). Multiple job-holding among farm operator households in the United States. In Mutiple Job-holding among Farm Families, Chapter 1. Hallberg, M. C., Findeis, J. L. and Lass, D. A. (ed), Iowa State University Press, Ames. Ahearn, M. C., Perry, J. and El-Osta, H. S. (1993) ¹he economic well-being of farm operator households, 1988—90. Agricultural Economic Report No. 666, USDA ERS, Washington. Benjamin, C. (1994) The growing importance of diversification activities for French farm households. Journal of Rural Studies 10(4), 331—342. Bateman, D. and Ray, C. (1994) Farm pluriactivity and rural policy: Some evidence from Wales’, Journal of Rural Studies 10(1), 1—13. Bergmann, T. (1992) The re-privatisation of farming in Eastern Germany. Sociologia Ruralis 32(2/3), 317—334.

Farm Household Incomes Bollman, R. D. and Smith, P. (1987) The changing role of off-farm income in Canada. Proceedings of the Canadian Outlook Conference, December 1987. Bowler, I., Clark, G., Crockett, A., Ilbery, B. and Shaw, A. (1996) The development of alternative farm enterprises: a study of family labour farms in the Northern Pennines of England. Journal of Rural Studies 12(3), 285—295. Bryden, J., Hawkins, E., Gilliatt, J., MacKinnon, N. and Bell, C. (1992) Farm household adjustment in ¼estern Europe 1987—1991. Final Report on the Research Programme on Farm Structure and Pluriactivity, vol. 1. Arkleton Trust, Nethy Bridge. Cahill, C., Fulponi, L. and Morendo, C. (1993) The total income situation of farm households in the OECD: linkages to the rural economy. Paper presented to the Agricultural Economics Society meeting on Rural Sustainability, London, 13 December 1993. Commission of the European Communities (1981) Factors influencing ownership, tenancy, mobility and use of farmland in the ºnited Kingdom, Information on agriculture No. 74. The Commission, Brussels. Commission of the European Communities (1988) ¹he farm accountancy data network handbook of legislation, instructions, notes for guidance: Section III, ¹he farm return. Document Series. The Commission, Brussels. Commission of the European Communities (1993) farm incomes in the European Community 1990/91, including selected results for 1986/87 to 1989/90. Document Series. The Commission, Brussels. Commission of the European Communities (1994) EC Agricultural Policy for the 21st Century (the Larsen report). European Economy, Reports and Studies No. 4. The Commission, Brussels. Davey, B. (1996) Income statistics in countries outside the EU and their relevance to agricultural and rural development policies in the 1990s: lessons from Canada. In Income Statistics for the Agricultural Household Sector, Hill, B. (ed), Eurostat, Luxembourg. Davis, J., Mack, N. and Kirke, A. (1997) New perspectives on farm household incomes. Journal of Rural Studies 13(1), 57—64. Eurostat (1992) Manual on the Economic Accounts for Agriculture and Forestry. Theme 5 Series E. Eurostat, Luxembourg. Eurostat (1995) Manual of the ¹otal Income of Agricultural Households (Rev.1). Theme 5 Series E. Eurostat, Luxembourg. Eurostat (1997a) ¹otal Income of Agricultural Households: 1996 Report. Theme 5 Series C. Eurostat, Luxembourg. Eurostat (1997b) Agricultural ¸abour Input in the Eº, 1973—1995. Theme 5 Series C. Eurostat, Luxembourg. Eurostat (1998) Income of the Agricultural Households Sector: 1997 Report. Theme 5, Series C. Eurostat, Luxembourg. Gardner, B. L. (1992) Changing economic perspectives on the farm problem. Journal of Economic ¸iterature 30, 62—101. Gasson, R. (1988) ¹he Economics of Part-¹ime Farming. Longman, London. Gasson, R. and Errington (1993) ¹he Farm Family Business. CAB International, Wallingford. Gasson, R., Errington, A. and Tranter, R. (1998) Carry On Farming: A Study of How English Farmers Have Adapted to the Changing Pressures on Farming. Wye College Press, Ashford. Grant, W. (1997) ¹he Common Agricultural Policy, European Union Series. Macmillan, Basingstoke.

357

Hallberg, M. C., Findeis, J. L. and Lass, D. A. (eds). (1991). Mutiple Job-holding among Farm Families. Iowa State University Press, Ames. Harrison, A. (1975) Farmers and farm businesses in England. Miscellaneous Studies 62. Department of Agricultural Economics and Management, University of Reading. Hill, B. (1982) Concepts and measurement of the incomes, wealth and economic well-being of farmers, Journal of Agricultural Economics 33(3), 311—324. Hill, B. (1988) ¹otal Income of Agricultural Households. Theme 5 Series D. Eurostat, Luxembourg. Hill, B. (1990) In search of the common agricultural policy’s ‘agricultural community’. Journal of Agricultural Economics 41(3), 316—326. Hill, B (1995) ¹otal Income of Agricultural Households: 1995 Report. Theme 5 Series D. Eurostat, Luxembourg. Hill, B. (1996a) Farm Incomes, ¼ealth and Agricultural Policy, 2nd edn, Avebury, Aldershot. Hill, B. (1996b) Monitoring incomes of agricultural households within the EU’s information system — new needs and new methods. European Review of Agricultural Economics 23, 27—48. Hill, B. and Brookes, B. (1993) Farm incomes in the European community in the 1980s. Document Series. The Commission of the EC, Brussels. MacFarlane, R. (1996) Modelling the interaction of economic and socio-behavioural factors in the prediction of farm adjustment. Journal of Rural Studies 12(4), 365—374. MacInerney, J. and Turner M. (1991) Patterns, Performance and Prospects in Farm Diversification. Agricultural Economics Unit, University of Exeter. MacKinnon, N., Bryden, J., Bell, C., Fuller, A. M. and Spearmann, M. (1991) Pluriactivity, structural change and farm household vulnerability in Western Europe. Sociologia Ruralis 31, 58—71. Moyer, W. and Josling. T. E. (1988) Agricultural Policy Reform: Politics and Process in the EC and ºSA. Iowa State University Press, Ames. Nalson, J. S. (1968) Mobility of Farm Families, Manchester University Press, Manchester. Ockenden, J. and Franklin, M. (1995) European agriculture: making the CAP fit the future. Chatham House Papers, The Royal Institute of International Affairs. London. Organisation for Economic Co-operation and Development (1995) A review of farm household incomes in OECD countries. Background paper to Adjustment in OECD Agriculture: Issues and Policy Responses, OECD, Paris. Perrier Cornet, P., Blanc, M., Cavailhes, J. Dauce, P. and Le Hey, A. (1991) Farm take-over and farm entrance within the E.E.C. Document Series, Commission of the European Communities, Brussels. Potter, C. and Lobley, M. (1992) Ageing and succession on family farms; the impact on decision-making and landuse. Sociologia Ruralis 32, 317—334. Phimister, E. (1993) Savings and Investment in Farm Households: Analysis ºsing ¸ife Cycle. Avebury, Aldershot. Robson, N. (1996) Practical and legal challenges of developing pluriactivity and non-farm incomes data using the EU’s Farm Accountancy Data Network. In Income Statistics for the Agricultural Households Sector, pp. 69—77, Hill, B. (ed), Eurostat, Luxembourg. Shucksmith, M., Bryden, J., Rosenthall, P., Short, C. and Winter, M. (1989) Pluriactivity, farm structure and rural change. Journal of Agricultural Economics 40, 345—360. Slee, B. (1996) Farm diversification and the environment. In Changing Rural Policy in Britain: Planning, Administration, Agriculture and the Environment. Curry, N. and

358

Berkeley Hill

Owen, S. (eds), Countryside and Community Press, Cheltenham. Terluin, I. J., Godeschalk, F. E., von Meyer, H., Post, J. H. and Strijkers, D. (1995) Agricultural incomes in less favoured areas of the EC: a regional approach. Journal of Rural Studies 11(2), 217—228. Williamson, L. (1991) Public programs for multiple jobholding farm families: discussion, In Mutiple Job-holding Among Farm Families, Chapter 20. Hallberg, M. C., Findeis, J. L., and Lass, D. A. (ed), Iowa State University Press, Ames.

Winters, L. A. (1990) ¹he so-called non-economic objectives of agricultural policies. OECD Economic Studies, No 13, Winter 1989—90, Paris. Also published as Winters, L. A. (1988), OECD Department of Economics and Statistics. Working Paper No. 52. OECD, Paris. Yap, S-S., O’Connoer, K., St Jean, J. and Culver, D. (1995) An Economic Overview of Farm Incomes, by Farm ¹ype, Canada, 1992. Agriculture Canada, Ottawa. Zeddies, J. (1991) »iability of farms. Document series. Commission of the European Communities, Brussels.