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THE ANALYSIS OF INCOME SHARES IN AGRICULTURE: A NOTE

John Malcolm National Farmers’ Union

In his stimulating Presidential Address to the Society ‘Some Explorations in the Analysis of Long-Term Changes in the Structure of Agriculture’, Britton (1977) enjoined us to exploit more fully the wealth of statistical information which exists relating to British agriculture. He then went on to illustrate a number of ways in which the data could be subject to further analysis in order better to inform ourselves about the changing structure of the industry.

In his final section, on ‘Income Structure’, Professor Britton looks, inter alia, at the movements in the share of the ‘social income of agriculture’ received by farmers, workers and landowners. He concludes that during the 1960s and 1970s the share of the workers as shown by the industry’s wage bill has been steadily declining; that of landowners as expressed in the aggregate gross rent has undergone a marked decline in the 1970s; and that the beneficiaries of these movements in income shares have been the farmers who have seen the industry’s aggregate net income take a rising share of the social income - a share that has risen especially rapidly in the last five years.

However, in seeking to compare the share of farmers, workers and land- owners by aggregating net farm income, the wages bill and gross rent, Professor Britton has not taken figures which are equally representative of income. Firstly, in common with most other commentators, Professor Britton has taken as the farmers’ share of income the industry’s aggregate net farm income inclusive of stock appreciation. Whilst in the past the distinction between income inclusive and exclusive of the stock appreciation element has perhaps not been of great consequence, with high rates of inflation the matter becomes of much greater significance. Stock appreciation is that part of the change in the value of stocks between the beginning and end of the accounting year which has been due to higher input costs. Thus if a farmer begins a year with 40 dairy cows each of which were valued (on a ‘cost of production’ basis) at E200 and ends the year with the same or a similar 40 cow herd but due to inflation the cost of production is now E220 per cow, the total value of stock appreciation is E800 (40 cows @ E20 each). Stock appreciation is in fact merely a paper profit which is realisable only if the farmer reduces the volume of his business or goes out of business altogether. In all national income accounts* stock appreciation is deducted from factor incomes in order to arrive at Gross Domestic (or National) Product and National Income. There is, of course, no stock appreciation element in incomes from employment and in order, therefore, to make a proper comparison with incomes from self-employment the latter must be taken net of stock appreciation. Professor Britton expresses surprise that, in his analysis, it is the farmers who have gained an increasing share of ‘gross income’ during the rapid inflation of the past five years. Closer examina-

*See, for example, the U.K. Natiunal Income Blue Book, published annually by the Central Statistical Office.

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tion of the data shows, however, that the ‘gain’ to farmers is a totally spurious one which is simply the result of including stock appreciation with farming net income. The magnitude of this item in a period of substantial inflation can be shown by the fact that whereas in the first half of the 1960s stock appreciation was consistently equal to around 6 per cent of farming net income, excluding stock appreciation, in the second half of the 1960s it averaged 12 per cent of net income; thereafter it rapidly accelerated reaching a peak of no less than 64 per cent of net income in 1974/75. Adding in this item as income clearly substantially inflates the ‘share’ of farmers’ income vis-d-vis workers and landlords.

Secondly, Professor Britton has taken as the income of landowners, the gross rent paid by tenants (and imputed for owner-occupiers). However, out of the landlord’s gross rent he has to cover repairs and maintenance of the farm and farm buildings, estate agents’ fees where applicable, insurance and statutory charges. Together these items have been found by the Enquiry into the Expenses of Agricultural Landownership (M.A.F.F., 1976) to average 40 per cent of the gross rent. Finally to make the rental income of landowners comparable to the net income of farmers, one has also to deduct depreciation from the rent. In the Government’s Departmental Net Income Calculation (Cmnd. 6703,1977) estimates are made of ‘landlord-type’ depreciation using data for investment in buildings and works.

The M.A.F.F. have only been publishing a breakdown of gross rent into its three constituent elements since 1964/65 and figures for earlier years are not readily available. Hence, in the analysis of movements in income share which follows, I have not been able to show a corrected version of Professor Britton’s Figure 4 for the whole post-war period.

Table 1 below sets out the wage bill as a proportion of the total of net in- come plus wages for seven successive four-year periods.

Table 1 1

PERIOD WAGES AS PERCENTAGE OF TOTAL OF

NET INCOME AND WAGE BILL

1948149 to 1951152 1952153 to 1955156 1956157 to 1959160 i96oj6i to m i 6 4 1964165 to 1967168 i968169 t i i9iiji2 1972173 to 1975176

44 42 42 41 4

As can be seen, the workers’ share shows an overall decline from the late 1940s to the mid 1960s, since when it has been remarkably constant. This constancy of the relative share of farmers and workers for more than a decade is surprising. One would expect that the increasing share going to farmers during the first half of the period would have continued into the second half. Throughout the post-war period, the industry has become more and more capital intensive. This leads one to expect the share of labour in the industry’s gross income to decline and that of capital (as represented by the landowner’s and the farmer’s profits) to rise. Furthermore, with the decline in the number of hired workers, the average farmer himself has come to do an increasing amount of manual labour. Again one would therefore expect a shift in the share of ‘total labour earnings’ away from the wage bill into farmers’ net in- come (the farmers’ net income comprises as it were three distinct elements - the payment for the farmers’ own manual labour, the reward for his managerial

THE ANALYSIS OF INCOME SHARES IN AGRICULTURE : A NOTE 83

and entrepreneurial function and the return of his own capital employed in the business). However, the shift towards the farmer seen in earlier years has not continued and it is interesting to speculate on the causes of the constancy of shares in more recent years. On the other hand, given the apparent constancy of the share of labour in the national income, it could perhaps be argued that it is the declining trend in the share of agricultural workers’ wages in the first half of the period that needs to be explained. At all events the subject is worthy of further study.

For the period from 1964/65 to the present day we can examine the relative share of landowners as shown by the net rent. Figure 1 shows the percentage shares of farmers, workers and landowners (as a three-year moving average) and corresponds to the Britton diagram for the period.

Figure 1 Shares of farmers, farm workers and landowners in the income generated in agriculture, United Kingdom, 1964/65 to 1976/77 (f) (3 year-moving averages)

Net Fam Inoooe

50 t

IWJKS rslc/71 ‘?76/77 0

Source: Annual Abstract of Statistics and Annual Review White Papers.

This figure shows that after a period of very constant income shares in the second half of the 1960s, both farmers and workers have gained during the 1970s at the expense of landowners. The restrictions on rent increases in recent years, at a time of rising maintenance and capital costs, have undoubtedly been the major causes of the reduction in the landowner’s share of the cake.

We have to conclude that the re-examination of the basic data makes it apparent that the diverging trends in income shares shown in Figure 4 of Professor Britton’s paper are in fact the result of adding together non-comparable items. I am aware that the absence of data on net rent prior to 1964/65 makes for a discontinuity in the statistical series but detailed estimates of the item for earlier years could not be made in time for inclusion in this note. It is question- able too whether one should look at income shares in quite the way that Pro- fessor Britton in his paper and I in this note have done. The ‘landowner’ identi- fied here is sometimes a separately identifiable landlord and sometimes an owner-occupier. Similarly the ‘farmer’ is an amalgam of tenant farmers and owner-occupiers. It is doubtful whether owner-occupiers could or should completely separate out their farming activities as distinct from land ownership.

In a more detailed study it would perhaps be more appropriate to look at the industry’s gross product and examine the changing elements of wages,

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profits, interest and rent as well as seeing how the depreciation item has changed over the years. I hope this might be just one of the detailed studies which Professor Britton’s paper inspires and it is one to which I should myself like to return at a later date.

References Britton, D. K. (1977). Some Explorations in the Analysis of Long-Term Changes in the

Structure of Agriculture, J. agric. Econ. 28, 197-209. Cmnd. 6703 (1977). Annual Review of Agriculture 1977. London: H.M.S.O. Ministry of Agriculture, Fisheries and Food (1976). Expenses of Agricultural Land Ownership

England and Wales 1973-74. A.D.A.S. Technical Report, 2S/1. London: H.M.S.O.