The Economics of Farm Households from University of New England

University of New England Week 4

LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 The Economics of Farm Households Week 4 Prescribed Reading: de Janvry and Sadoulet, ch.10. ECON390/590 Economics of Developmentune

Learning Objectives

Week 4 Learning Objectives

University of New England Learning Objectives Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8

1. Importance and definition of farm households
2. Farm household behaviour models
3. Responses to market signals
4. Net buyers, net sellers and food security
5. Can the family farm be competitive and survive?
6. Risk and self-insurance in household behaviour
7. Intra-household allocation of resources and gender rolesune

Stylised Facts About Farm Households

Farm Household Categories

University of New England Some Stylised Facts About Farm Households Farm households, also called family farmers, smallholder farmers, and peasants, are one of the most important social categories in the world.

Global Farm Size in 2018

At a world scale in 2018, with 84% of all farms under 2 hectares, farm households dominate agriculture.

Farm Size Evolution and Structural Transformation

The evolution of farm size over time reflects the stage of the structural transformation countries are at. Developing countries: High farm no. and low mean farm size Developed countries: Low farm no. and high mean farm size Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8une

Structural Transformation and Farm Size Trends

Farm Holdings and Mean Size by Country

University of New England Structural Transformation and Farm Size India Brazil Number of holdings (million) 160 2.8 120 21 140 2. 120 2.2 100 1.8 80 1.6 60 1.2 40 1.0 2 1950 1960 1970 1980 1990 2000 2010 2020 1950 1960 1970 1980 1990 2000 2010 2020 United States Number of holdings (million) 6 21 190 5 170 150 4 130 110 3 90 Mean size (ha) 0.0 1970 1980 1990 2000 2010 Cameroon Senegal -A Uganda Kenya Rwanda -Number holdings - Mean size

Impact of Structural Transformation on Farms

Structural transformation tends to reduce farm number and raise mean farm size. Successful structural transformation requires agricultural productivity growth and sufficient labour absorption capacity in the urban sector. Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 1970 1980 1990 2000 2010 2020 0.9 0.8 0.7 110 6 100 0.6 0.5 0.4 0.3 0.2 0.1 70 2 50 Number of holdings (million) 5 2.1 90 80 4 8 8888 70 Mean size (hectares) 1.4 Mean size (hectares) 3 Hectares per person 1950 1960une

Importance of Farm Households

Economic Contribution of Farm Households

University of New England The Importance of Farm Households Economics: Farm households provide agricultural production in most developing countries, with mostly family labour and keep the profit.

Social Welfare and Migration

Social welfare: Farm households comprise the bulk of world poverty. The lack of non-farm employment push migrant workers to the urban sector, lowering unskilled-labour wages for urban residents, and filling urban slums.

Political Influence of Rural Voters

Politics: Major revolutions were all fought by peasants. Despite a small farming population, rural voters can determine election outcomes in Europe, Japan, and the US. Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8une

Ellis's Definitions of Farm Households

University of New England Ellis's Definitions of Farm Households Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8

1. They live mainly from agriculture.
2. They use mainly family labour in production.
3. They are partially integrated into markets.
4. They participate in imperfect markets.
5. They are members of local communities.
6. They are part of a larger non-peasant society where they are dominated by other social classes.une

Farm Households Based on Labour Market Participation

Labour Strategy and Transaction Costs

University of New England Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 Farm Households Based on Labour Market Participation Farm households can be defined by their labour strategy in production relative to other types of rural households. The labour market offers a wage w, but the household incurs transaction costs (TC) when selling or hiring labour. When selling labour => The wage received is w - TCs. When hiring labour => The wage paid is w + TCh.

Labour Demand and Supply by Farm Size

Rural households with differentiated land endowments ranging from A1 (small farm) to A6 (large farm). The corresponding labour demand rises from D1(A1) to D6(A6) as farm size A increases. The labour supply of all households is represented by the upward sloping line.the

Price-Band Model and Social Classes

Price-Band Model Diagram

University of New England A Price-Band Model Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 D6(A6)\ Household labor supply (on, off) W D5(A5) Hire in w + TCh D4(A4) TC in hiring = TCh Shadow wage D1(A1) D3(A3) __ On Market wage = Self-sufficient D2(A2) TC in selling = TCs On Off w - TCS Labor demand for farm (on, in), according to farm size (A) Social class Family labor use Farm size (assets) Farm labor demand Off- farm On- farm Hire in and supervise Landless worker <A1 <D1 ++ 0 0 Sub-family farm Al to A3 D1 to D3 1 + 0 Pure family farm A3 to A5 D3 to D5 0 + 0 Small commercial farn A5 to A6 D5 to D6 0 + + Large commercial farm >A6 >D6 0 + ++ Labor (on, off, in) w paid in selling On w paid in hiring

Farm Household Categories by Labour Use

Sub-family farms: Household members work both on and off farm. Pure family farms: The household is self-sufficient in labour. Small commercial farms: They hire in less labour than they use of family labour. Landless workers: They only work off-farm on the labour market. Large commercial farms: They hire in more labour than they use of family labour.the

Labour-Based and Ellis Definitions

University of New England The Labour-Based Definition and the Ellis Definition Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 The labour-based definition satisfies the Ellis definition as follows:

1. live mainly from agriculture
2. use mainly family labour
3. are partially integrated into labour markets
4. these markets are imperfect as they have transaction costsune

Farm Household Behaviour Models

Production and Consumption Decisions

University of New England Farm Household Behaviour Models The farm household is an economic unit that must make both production and consumption decisions.

Utility Function and Time Allocation

The utility function (U) depends on income (Y) and leisure (Tz): U(Y, Tz) The household spends time working on the farm (TF), working in the labour market (Tw), and leisure (Tz): T = TF + Tw + Tz

Farm Labour and Output

Farm labour may be complemented by hired labour (LIN): L = TF + LIN Farm output (Q) depends on a fixed land endowment (A ) and variable labour input (L): Q = Q(L, A ) ¯ Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8une

Allocation of Household Time and Hired Labour

Household Time Allocation Diagram

University of New England Allocation of Household Time and Hired Farm Labour Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 Hired farm labor LIM Leisure Tz 7 1 Total farm labor T Household time 7 TE On-farm work Ls Work Tw Off-farm work

Farm Household Income Calculation

Let p be the unit output price, ws the wage received by family labour, and WH the wage paid to hired labour, the farm household income (Y) is: Y = pQ + Ws Tw - WHLINthe

Constrained Utility Maximisation for Farm Households

Maximisation Problem and Categories

University of New England Constrained Utility Maximisation for Farm Household Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 max U(Y, Yz) TF , TW , TL,LIN subject to Y = pQ + ws Tw - WHLIN Q = Q(L, A ) L = TF + LIN T = TF + Tw + Tz ¯ Constrained maximisation leads to five farm household categories, defined by a household's relative endowments of land and labour.University of

Consumer-Worker Household

Landless Household Model

New England Consumer-Worker Household Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 Y 1 U(Y,Tz) Tw > Lo L T7 TL This is a landless household with no land endowment. MaxTw , Tz U(Y, Tz) subject to T = Tw + Tz Y = ws Twune

Pure Producer Household

Hired Labour Only Model

University of New England Pure Producer Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 Y 1 pQ(L,A) wL Max II L L A farmer who only uses hired labour. His own family's labour is entirely allocated to leisure. Maxi[] = pQ - WHL subject to Q = Q(L, A ) ¯une

Autarkic Household

Family Farm Model

University of New England Autarkic Household Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 Y 1 U(Y,Tz) > Lc L T, TL A family farm with no hired labour, or within the price band for a labour market with transaction costs. The price band: Ws ≤ MPL ≤ WH pQ(L,A) MaxTF, Tz U(Y, Tz) subject to ¯ Q = Q(TF, A ) Y = pQ T = TF + Tzthe

Sub-family Farmer

Labour Allocation Model

University of New England Sub-family Farmer Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 1 Y U(Y,Tz) pQ(L,A) TE L T W/ T7 A household with a large farm labour relative to its land endowment. It will allocate surplus farm labour to the labour market. MaxTF, Tw, Tz U(Y, Tz) subject to ¯ Q = Q(TF, A ) Y = pQ + Ws Tw T = TF + Tw + Tzune

Small Commercial Farmer

Land Endowment and Hired Labour

University of New England Small Commercial Farmer Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 U(Y,Tz) 1 1 Tz > TF LIN L T L The household has a large land endowment relative to its farm labour. pQ(L,A) It will hire in labour to compensate for the family labour deficit. TF, TZ,LIN U(Y, Tz) subject to ¯ Q = Q(L, A ) Y = pQ - WHLIN L = TF + LIN T = TF + Tzthe

Responses to Market Signals: Separability

Perfect Markets and Decision Making

University of New England Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8 Responses to Market Signals: Separability The opportunity cost of farm labour is a market wage. In perfect markets, there is separability between production and consumption decisions. First, the farm household is a producer, maximising profits subject to a cost function. Next, the farm household is a consumer, maximising utility under a budget constraint. The link between production and consumption decisions is through farm profits that enter into the budget constraint, limiting consumption decisions. If no transaction cost on labour, the land is efficiently used. But, land distribution affects equity because the level of profit derived from farm production depends on the farm size.the

Responses to Market Signals: Non-separability

Imperfect Markets and Internal Markets

University of New England Responses to Market Signals: Non-separability In imperfect markets, production and consumption decisions become one single interrelated problem. The household behaves as if it had internal markets when making these decisions at the margin. Shadow Price = Marginal Utility in Consumption = Marginal Productivity in Production

Impact of Market Failures on Crop Supply

If the farm household produces both a food and cash crop, and that the price of the cash crop rises. If there is no market for the food crop, the farm household can't increase its supply of the cash crop. If there is no market for labour, the household can't increase its supply of the cash crop. Improving markets heightens the farm households' responses to market signals. Subsidising cash crop might fail without addressing market failures in stapled crop and labour. Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8the

Net Buyers, Net Sellers, and Food Security

Impact of 2008 Food Crisis

University of New England Net Buyers, Net Sellers, and Food Security The 2008 food crisis appeared to have benefited farm households. However, Net sellers: Better off Self-sufficient: Indifferent . Net buyers: Worse off

Home Production and Public Investment

Most farm households are net buyers of staple food. High transaction costs in selling and buying staple food encourages home production. Investing public resources in farm household, even at the cost of a subsidy to private investment, which can be cheaper than other forms of social programs. Week 4 LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 LO.7 LO.8