Income in Agriculture: a Holistic Analysis is Needed

Farms, their risks and various underlying conditions are becoming increasingly complex. Because of this, agricultural income should be considered holistically.

Income from a production and consumption perspective

Economically viable farms are a prerequisite for sustainable and resilient agri-food systems. Economic viability is often measured on the basis of agricultural income. The issue can be considered from two different perspectives:

1. A production-side perspective reflects the added value at farm or sectoral level achieved with the use of labour, land and capital.
2. A consumption-side perspective shows the income from agricultural and non-agricultural activity available for the consumption of the members of the farming household.

Although the income available for consumption on the ‘farming household’ level would be a key element for the evaluation of living standard, and hence of economic and social sustainability, the (political) discussion frequently focuses on key figures from the production side. For this reason, the consumption perspective of farming households should attract greater attention when evaluating the achievement of agricultural-policy income targets.

The different facets of income

Three different facets of income are especially relevant in the context of agricultural policy:

1. The average income level is a frequently used indicator for the general economic viability of farms and of the agricultural sector as a whole. This indicator is used to assess development over time, and to compare income in agriculture with the income of non-farming households.
2. Income variability over time reflects the income risks of farms. Fluctuating incomes reduce objective and subjective wellbeing, especially in the case of risk-averse farmers, and decrease incentives to produce, invest and innovate.
3. Income distribution within the farming population is relevant for evaluating the heterogeneity and (in)equality of incomes. Here, the issue of inequality includes both income inequality within the agricultural sector as well as between the farming and non-farming population.

Agricultural policy discussions often focus on average income levels, but should be expanded to include the aspects of variability and distribution.

New prospects for a comprehensive policy evaluation

Farms structures as well as the market, biophysical and policy environments have changed so much in recent years that insights and tools from the past can lead to biased policy conclusions. Here, the following three developments should be highlighted in particular:

1. The increasing complexity of farms (‘complex farms’) in terms of technologies, production systems and income sources. Multiple ownership, distributed ownership, the geographical spread of a farm and a more-complex labour deployment situation are increasing in the European farming sector.
2. The increasing risk exposure of European farms, for example owing to climate change, affects the economic welfare of the farms. There is often still a lack of efficient insurance solutions for managing risks, especially the increasingly relevant climate risks such as droughts and heat waves.
3. The increasing complexity of agricultural policy. Understanding the links between different policy measures and decisions at farm- and farm-household level is crucial for evaluating the influence of increasingly complex policy measures.

For agricultural policy, this means that new methods, data and tools are needed for a holistic analysis of the income situation in the agricultural sector.