Cdn. J . of Agric. Economics 225

29 (July, 1981)

On Measuring Farmers' Economic Well-Being

Linda Chase* and M.L. Lerohl**

Typically farm income is low relative to the level of assets invested in agriculture but. looked at another way, farmers' equity positions are high relative to farm labor returns (Brinkman; Carlin). Changes in the relative importance of equity vs. money incomes to total economic well-being bring into question the use of money incomes alone in the design of agricultural policies and programs.

The limits of farm income as a measure of total economic well-being have long been recognized (Shaw 19790, p. v) and have been the focus of several recent Canadian studies (Bollman, 1980; Brinkman; Chase; Gray and Prentice; McClatchy and Campbell; Shaw 19796).1 Here, an approach is described which annuitizes changes in farm net worth so that it can be added to money income-both farm and off-farm-to provide a single measure of economic well-being. Estimates of the economic well-being of Canadian farmers in aggregate and by province are provided. The analysis is based on a perceived need to examine well-being in agriculture from a total point of view, a view that assets as well as both farm and non-farm income are important to farmers'economic well-being in the long run. A measure of total economic well-being-or better still, of total well-being, should such a concept be measurable-could be used to compare positions between the farm and non-farm sectors. No such measures are calculated here for comparison but they should not be ignored, especially since farmers'equity positions generally are higher than average equity holdings in the non-farm sector (Chase; Shaw 19790).

Methodology

The methodology proposed here to include both income and asset positions in a measure of economic well-being is to annuitize net worth as a proxy for its annual income flow and combine this with conventional annual income-in this case net farm and off- farm income.*

The authors would like to acknowledge the helpful suggestions o f the reviewers. George Brinkman and Ray Bollman

'Alberta Agrtculture **Department of Rural Economy. University of Alberta

I Earlier studies include Bollman. 1979. Brinkman and Gellner. Carlin. Huff and Cusack. Kulshreshtha. MacMil lan. Tung and Loyns. and Perkins

More details on rhis. along with data sources. are provlded in the Appendix 2

226

( 1 ) Economic well-being = A ( N W ) + Y

NW = total asset values - liabilities where A = the annuity formula

Y = total money income (independent of assets) The annuity approach was initially formulated to measure total economic well-being

based on the life-cycle hypothesis of consumption (Weisbrod and Hansen). All sources of current income plus annuitized net worth represent the flow of economic services at the command of the consumer unit. Current annual income has to be independent of net worth in order to add the two streams.

The annuity formula is a function of an interest ra ter and life expentancy of the unit n. An interest rate reflecting the borrowing cost of capital, for example, would show the amount by which income could be increased in a given year, assuming an offsetting decrease in income in another year. Credit costs are deducted annually from income. Choosing a higher interest rate or shorter life expectancy would increase the annual annuity value.

Ideally. a measure of total economic well-being would include all sources of income from the use of labor and owned assets (Huff and Cusack). Thus for the farm sector, both farm and off-farm income would be considered along with values of farm and off-farm investments, including assets such as quota. Estimates provided here use farm income, off-farm income and traditional farm physical assets. Money income enters the calculation as a flow and the net worth values are annuitized before combining the two.

Application of the annuity treatment of net worth to the farm sector cannot be made directly. For the average consumer in the non-farm sector, most appreciating assets are not tied to labor income; that is, they are in the form of financial assets or a home. Farmers, on the other hand, own physical assets used in their occupation of farming. Interdependence of income and farm assets should be accounted for. Since part of farm income is a return to assets, returns to farm assets have been estimated and deducted from farm income, before the income component is calculated.

Of course not all farmers own physical assets. It has been estimated that farmers own over 80 percent of all farmland (Perkins) and it is probable that this proportion is higher for other farm asset categories. Here farmers are considered in aggregate though the annuity approach actually applies only to farmers with equity in farm assets.

Empirical Estimation

Three components of economic well-being, farm returns to labor and management, off- farm income. and an annuity calculated from farm net worth, are estimated for the average census farm in Canada-’ and in each province. Data sources include Statistics Canada 21-202, taxfiler returns, and Agriculture Canada Canada (Daviault). These estimates are summed to provide a single measure of farmers’ economic position. The Consumer Price Index is used to deflate current estimates to constant 1971 dollars.

3 Excluding Newfoundland, the Yukon and the North West Territories.

227

Table I : Economic Well-Being'-Average Census Farm ($1971); "Low Estimate"b

~ _ _ ~~ ~

'Combines farm returns to labor and management. off-farm and annuity values of farm net worth. using estimates from Statistics Canada and taxation data

'Annuity calculated using r = 10 percent. n 30

Table 2: Economic Well-Beinga-Average Census Farm ($1971); "High Estimate"b

"E&R CAN P I 1 N1 m WE OUT MAN SASM A L T A I C

I N 7 16071 1140 I110 I 5 1 4 1 1 1 4 0 loso I 4 1 1 1 7364 1.70 l 5 l I 1 9 4 W 1.71 IS115 1-

1073 x H 7 l I 4 9 1 1 1074 14717 1 1 I M I 0 7 5 11181 I4369 l*l6 11407 I7047 IS77 13917 I l l 4 5

1171 17s.4 ma3

M.5 1770 ma1 0151

I0311 1737

1 7 M 0311 I 1 7 0 3 1 0 9 . 1

Iml 133w I5174 14601 I 1 7 7 1 I4030 Isle3 130-7

m s i i io.3

m i t e l l 4 W

I4103 I1947 I6757 17015 234W I M I O 11731 11443 18193 16468 11111 I1457 1 1 1 1 1 I1101 16437 I 7 0 7 1 11304 11755 I1770 17431 I7765 I1011 I 4 1 7 1 I9134 11135 1.777 14.0. I7111 l M 4 1 1 0 7 3 1

11150 1-00 16640 IS349 3.- 1WG0 1 1 1 0 17817 30101 37511 30041 I8111 1-0 l S l 4 0 am31 20161 I1157 11913 18131 31941

140.3 17164 w s a noso as011

'Combines farm returns to labor and management. off-farm and annuity values of farm net worth. using estimates from Statistics Canada and taxation data

'Annuity calculated using r = I S percent. n = 20

Starting with the composite measure, Tables I and 2 show "1ow"and "high"estimates, respectively for Canadian farmers' economic well-being between 1967 and 1977. "Low" estimates use parameters of a 10 percent interest rate and a 30-year life expectancy in the annuity calculation; "high" estimates use I5 percent and 20 years. Both the "low" and "high" estimates show tha t across Canada farmers' economic well-being has increased in real terms over the period. Generally. economic well-being levels a re higher moving from east to west. and between 1967 and 1977 the disparity between provinces became larger. There is also a wider difference between provinces using "high"estimates vs. "1ow"ones.

228

Table3: Farm Returns to Labor and Management-Average Census Farm ($ 1971)

i n 7 in. I n n 1.70 1.71 1.71 1.73 IS74 1.1. 1.1. 1.77

- 11. -3- 113

t a n - n a - 3 n 11.4 4311 1.11 4114

ID.

14.1 lx). 3013 3 I H 11.1

474 I I184 1.40 4131 w 4

a w a

1114 1384 2081

141. 1.40 .u* .a11 118.

1.84

a711

1.41

1311 13..

1171 1olo a n 7 31.4 304. 4 1 M

1830

a.ai

as34

010 1 1 0 . 1118 110. 4.1

18..

4 0 1 I

1.11 770

a m a l o I

3MJ 1.96

- 1 0 0 . I01

1801 4413 41.4 -4 ..a1 3 4 1 1

1.4

1 3 U 1.01

134 -248 ~3. ..a

1010 3.0. 1 4 M

-1304 - 1484

39.. 41E8 1100 1117

1.0 1 3 0 8 4124 201.

144 B W 074

Sources: Quclrrerli, Bulkfin o / A ~ r i c d f u r u l Sfu!isfic.r. Statistics Canada 2 1-003; Cunsutiirr Pr iw /ndr.r. Statistics Canada 62-010.

Table4: Off-Farm Income-Average Census Farm ($ 1971)

Source: Canadian laxfiler data. Statistics Canada (See lext for an explanation of adjustmenl made to thecensus iarm categor).). C'umiiiiirr P r u t l i i d e t . Statirticb Canada 62-010.

Table5: Annuity of Farm Net Wortha-Average Census Farm ($ 1971); "Low Estimate."b

PL I WI U WE om u* SAY ALIA oc VfAR CAN

10.7 I-. 19.8 I910 I911

I073 I074 1971 1011 ID17

i o n

a4.8 U 8 1 SO¶ I I.30 e.11 7111 114. 0110 10433 1 I 4 3 0 I I J I O

3174 33.1 n.3 3147 3111 42.a 801.

.1.1 S311 8179

l o a t

4C48 4111 4w. 4 n . 4.1s

.1w 12.1 7416 1s.n 6807

m a

3411

37.1 4031 3.3 1 4170 4731 840. 1071 Ma. H 7 1

nrs 3311 344. no1 4.17 3113

44 I. 414s 4711 8111 M3.

n i n

* 4 n 1OM 1.1 1 7.13 7 w 1 8117 nn

1114. 11404 I3477 i n 1 4

7817 7741 1141 e n 3 ..I1 a7.3 711. 11.1 S U B I I I.. 10.4.

mn u.1 .7.. ma30 I 4 M .44.

I l W l 131.4 I4783 14070

ion ia

M 1 4 8.80

100.4 I l 3 4 D law. I 1.4. I l l 10 11877 11.2. 18.1. 14743

'Includes Statistics Canada estimates of farm land. machinery and livestock values 'Calculated using r = 10 percent. n = 30. as parameters.

2 29

Table6: Annuity of Farm N e t Worth'-Average Census Farm ($ 1971); "High Estimate."b

WE an MAN S A S K A L l A BC VCAP CAN P t I N S m 1-7

IHI 1870 1171 1971 I873 I874 I 9 7 1

le77

i n n

1171

0741 I0311 IOH). 10411 I0307 10.71 11110 I4194 I1150 17131 I1917

4781 1103 1 1 4 1 1780 - 1 4 S.13 7113 0033

n 4 i

8150 9139

1330 1833

7118 7081 7187 8 7 3 0

1701

9718 10.17 I I819

10311 10394

9104 9741 9401 9171 8171 -0

l033l 1 1 1 I 4 11183 13149 13117

I I331 1 1646 I0711 104.3 I0113 10111 I t 4 1 4 118.1 147-

I.3.7 18133

11595 13313 13119 I1181

I 4 1 1 3 16IW 11714 10376 11131 1 1 0 4 1

t i 1 . o

13011 1407; Is091 17071 1 1 1 4 1 17911 1.461 13361 13743 13933 110..

~~~~

'Includes Statlstlcs Canada estlmatcs of farm land. machlnery and Ilvestock. "Calculared using r = 15 percent. n = 20. as parameters.

Estimates for each component of the measure are shown in Tables 3 to 6. Table 3 shows estimates for farm returns to labor and management. These are calculated for net farm income: i.e. gross farm receipts, supplementary payments and income in kind less operating expenses and d e p r e ~ i a t i o n . ~ Following a methodology described by Johnson, separate calculations are made for estimating the deductions of returns to land and to other farm asset values (machinery and livestock). Returns to land are estimated by assuming that the current return to all farmland is proportional to the rental value of all acres rented. A standard 80 percent of this estimate is used to compensate for returns going out of agriculture to non-farmer land owners (McClathy and Campbell). Returns to other farm capital are taken to approximate their value times an intermediate interest rate (Rust; Thompson). Use of this method is intended to free asset returns estimates from speculative or inflationary i n f l ~ e n c e s . ~ I t leaves as part of the return to labor and management not only the productive value of labor in agriculture but also management skills such as risk taking and investment decision-making.

Farm returns to labor and management are seen to be low relative to total economic well-being, and vary substantially from year to year. From 1967 to 1977. these returns generally decrease in proportion to total economic well-being. The proportions differ widely between provinces, however. For example the proportion of farm returns to labor and management in total well-being in Ontario is about half that in Quebec. The fastest rates of decline in this proportion are seen in Alberta and British Columbia.

Off-farm income estimates shown in Table 4 are taken from taxfiler data. Since numbers of farm taxfilers and numbers of census farms d o not coincide, an adjustment has been made to each estimate reflecting the proportion of taxfilers to census farms. I n most cases the effect is t o increase estimates of off-farm income; however for Prince Edward Island. New Brunswick and Quebec, where there have been fewer taxfilers than census farms on average between 1967 and 1977, the effect is t o reduce reported off-farm

4 Depreciation estimates are l h o x of Statistics Canada, and are intended to reflect farmers' perceptions of declines In the value of buildings and machinery due to wear and obsolescence. The eatent to which these estimates accurately reflect such declines durlng periods of asset price lnflatlon IS unknown.

This estimate may be high. as not all farmland owners demand full productive value of land as rent. 5

230

income. Off-farm ' rcome has increased rather steadily across Canada between 1967 and 1977, forming a g'eater or lesser part of money income depending on the province and/ or year.

Annuity values shown in Tables 5 and 6 are calculated from farm net worth at two combinations of interest rate and life expectancy as discussed above. It can be seen that annuities represent an important part of farmers' total economic well-being, forming approximately half the total "1ow"estimate measure and around 60 percent of the"high" estimate for Canada as a whole. The proportion tends to increase between 1967 and 1977. Annuity values are more important in some provinces than others, particularly in Alberta and Saskatchewan.

Summary

A measure broader than net farm income has been used to examine the economic well- being of farmers. The composite measure incorporating farm returns to labor and management, off-farm income. and net worth values, shows Canadian farmers'economic well-being has improved in real terms since 1967. However. disparity in the measure among provinces has increased. Off-farm income and annuities of net worth have increased in importance, relative to the total economic well-being measure, though at different rates in different provinces. and should not be ignored in agricultural policies and programs.

Two related issues require furtherattention. One is to examine the interaction of money income and asset ownership within the farm sector; the other is to provide comparison groups in the non-farm sector which take into account money income and net worth. The annuity approach to net worth may provide an appropriate instrument for comparison.

[Received April, 1980; Revisions accepted April, 19811

REFERENCES

Bollman, R.D. OfjFarni Work hi. Farniers. Ottawa: Statistics Canada. March 1979

_ _ _ _ , "A Comparisonofthe Money lncomeof Farmersand Non-Farmers." F'roc~errlin~s ofrhr Canac/ian ARri-

Brinkman. G.L.. and Gellner. J.A. 'Relative Rates of Resource Returnsfor Ontario Commercial Farms - A Farm

Brinkman. G.L. "Reflections on Farm Income in the 1970s." PrucrrdinR.$ qfihr Coiadian ARriculrural Ec.onutnii~r

c,u/rura/ ~c'UnolJllc'.T .%~ir/, (August. 1980): 48-55.

to Non-Farm Comparison. 1971-74." Canadian Journal uf Afric.u/Iurd E c ~ i i n r i ~ i i i ~ ~ ~ 25 (July. 1977) 26-44

Socierr (August. 1980): 56-66,

23 I

Carlin. T.A."Economic Position of Farm Families When Money Income and Net Worth areCombined." Agrit ul-

Chaw. L. "Inflation. Capital Gains and Farmers' Economic Well-Being." Prric.eedin~.c of rhe Canadian A~r i cu l - tural Ei.unoinit.s Socieri. (August. 1980): 67-77.

Daviault. R. Sekcred ARrrul tural Srarrsri[.s for Canada. Agriculture Canada. Publication 781 10. Ottawa. 197X.

HuR. H.B., and Cusack. T J. Capital Gains in Canailran Agriculrure. 1946-65. Publication AE/72/ I . Univer- sity o f Guelph. 1972.

Gray. E.C.. and Prentice. B E. "Recent Trends in the Rate of Return to Ontario Farm Asscts." Proceedings ofihe Canadian ARriculrural Ec.onomic~.s Soc.ieri. (August. 1910): 78-87.

Johnson. D. Gale. "Allocation of Agricultural Income." Journal of Farii i Ei.unomii.s 30 (November. 1948):

Kulshrcshtha. S.N. "An Approach to Develop Comparisons of Farm and Non-Farm Incomes in Canada."

MacMillan. J.A.; Tung. F.L.: and Loyns. R.M.A. 'Differences in Regional Household Consumption Patterns by

McClatchy. D.. and Campbell. C . "An Approach to Identifying and Locatingthe Low Income Farmer."Canadian

Perkins. B B. "Farm Income and Labour Mobility." A i i r e r i m ~ Journalol A~r r i~u l i u ra l Ei.onoiirrcs 55 (December.

Rust. R.S. "Farm Business Financing and 1 axalion Regulations."Canadian Furiii Ei-onoiiiic Y 9 (October. 1974):

rural Ewnoinicc Research 2S(July. 1973): 61-70

724-45.

Canadian Journal of ARricuirural Ecunoiiiic~.c 14 (no. I , 1966): 61-76.

Urbanization: A Cross-Section Anaysis." Journal o/ ReRiunal Science I2 (1972): 41 7-24.

Fami Ei.unuiiiicr 10 (April. 1975): 1 - 1 I

1973): 913-20.

11-28,

. "Farm Credit." Canadian Furiii Ei.uiiotiiii.s 10 (February. 1975): 37-43

_ _ _ _ . "Farm Finance." Canailrun Farm Ei~unoiiiir~~ I I (December. 1976): 41-49,

Schultz. T W Pr i~lucrtun ond Welfare (J( .4~r i i .u l iurr New York: Macmillan. 1'149.

Shaw. P. [a]. Canada? Fariii Pupulurron. Ottawa: Statistics Canada, March 1979.

~ _ _ _ [h]. "Canadian Farm and Nonfarm Family Incomes." Aiiierican Journal of A ~ r i c d r u r a l E i ~ o n ~ ~ i i i i c . ~ 61

Statistics Canada Furiir Vet In'oiiie R t * l i * ro i~ t &id Puhlication h 79 O t t a w 1979.

- __ , "Farm Net Income." Catalogue 21-202. Ottawa: various dates.

Thompson. D. "Investment Demand for Farm Credit i n Canada." M.Sc. thesis. University of Alberta. 1978.

Wcisbrod. B.A.. and Hansen. W.L. "An Income-Net Worth Approach to Measuring Economic Welfare."

(1979). 676-82.

Aiiierican Ei~onotiiic. Reweit. 58 (December. 1961). 131 S-29

APPENDIX

Economic Well-Being = A ( N W ) + Y

where A = the annuity formula =A I - ( I +I)-"

r = interest rate n = life expectancy o f the unit

Y = I., =

R L =

N W = total asset values ( A Y ) - liabilities ( L ) farm returns to labor and management (y,) + off-farm income ( I ,? )

realized net farm income ( N N ) - current return to land ( R L ) - current return to machinery and livestock ( R M L ) total improved acres i n agriculture (AA) the ratio of value of rent (YR)/acres rented (A R)

232

R M L = y! =

machinery + livestock asset values ( M L A V ) = medium term interest rate Ow) reported off-farm income (OF11 ratio o f number of tax filers (NT)/ number of census farms ( N C ) for each province.

Data Sourcw

r. n AV

L N N AA VR A R

M L A V mr O N NI

NC

chosen to reflect the general economic situation in Canada over the period 1967-1976 CANSIM Data Retrieval Farm Net Income 21-202 Farm Net Inc ome Refrrenc e Book Census of Canada Farm Net Inc ome Referenc e Book Census of Canada CANSIM Data Retrieval R Rust in various issues of Canadian Farm Ecunurrrccr 10% longitudinal taxation sample provided by Statistics Canada 10% longitudinal taxation sample provided by Statistics Canada R Daviault. Selei red ARric ulrural Srarisrrcs for Canada

The time series is deflated using the CPI