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Behind Farm Policy: Income of Farm vs. Nonfarm Population

July 9, 2013
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Is a farm safety net needed? An ag economist examines the issue by comparing U.S. farm income to the rest of the country.

By Carl Zulauf, University of Illinois

This is the first in a series that will examine big picture issues that frame U.S. farm safety net policy. Impetus for the series is the recent rejection by the U.S. House of Representatives of the proposed 2013 farm bill. While spending on food nutrition programs was a key issue, both the proposed spending and structure of the farm safety net impacted at least some, maybe many, votes. Thus, the decision by the House of Representatives suggests the U.S. is now fully engaged in a major debate about the future of its farm safety net. These types of debates are more about the big policy picture than about specific policy parameters, such as the level of target prices. This post specifically examines the issue of farm income relative to the income for the rest of the U.S.

Historical Perspective

Average income of U.S. farm households has exceeded average income of all U.S. households every year since 1996, a full decade before the start of the recent farm prosperity (see Figure 1). Moreover, since 1972, income of farm households has exceeded income of all households in 67% of the years. The major exception is 1979 through 1984, a period that overlaps with the farm financial crisis. Note that farm household income is calculated using net farm income. For a more detailed discussion comparing U.S. farm household and all U.S. household income see the U.S. Department of Agriculture (USDA), Economic Research Service (ERS) website.

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Average household incomes can be compared back to 1960. In 1960, average farm household income was 65% of average U.S. household income. Thus, over the last half century, farm household income has increased substantially relative to income of U.S. households.

To obtain a longer historical perspective, two data series need to be spliced. Specifically, USDA, ERS published a comparison of per capita (per person) personal income from 1934 through 1983. This data also is presented in Figure 1. It is from the Economic Indicators of the Farm Sector: Income and Balance Sheet Statistics, 1983. Specifically, Figure 1 contains per person disposal personal income. Disposable income is total personal income minus personal current taxes. In 1934, per person disposable income of farms was 39% of U.S. per person disposable income. By 1983, the ratio was 69%. The ratio of farm household income to all U.S. household income usually exceeds the ratio of per person disposable income because farm households are larger on average than nonfarm households. Again, per capita farm income is calculated using net farm income.

Caution is always in order when conducting a comparison over time and when comparing across different data sets. Nevertheless, the trend is so strong that it is difficult to argue that farm income is not substantially higher relative to nonfarm income now than when farm programs began in 1933. This historical perspective is relevant for the current debate because farm programs were adopted in part as a response to the poverty of the U.S. farm population, which was 25% of U.S. population in 1930. Critics of farm policy commonly mention this historical change in relative economic status.

Role of Nonfarm Income

The increase in farm income relative to nonfarm income is the result of many factors, but two stand out. One is the increasing size of the farm production unit, which in turn is partially driven by technology. The second is the increasing role of nonfarm income (also referred to as off-farm income). Figure 2 is a companion to Figure 1, specifically presenting the ratio of the income of the farm population (or households) that comes from farm sources. Nonfarm income comes from varied sources. The majority are wages and salaries from off-farm jobs, followed by transfers, such as Social Security, and income from nonfarm businesses. Farm income provided over 60% of per capita income of the U.S. farm population in the 1940s and 1950s. In contrast, farm income has provided less than 15% of all income of farm households in recent years, even including the farm prosperity years since 2005.

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