April 11, 2007 | By: Laura Skillman

Kentucky’s rural farming economy has changed dramatically in the past decade and will continue to shift in the coming years. Most of Kentucky’s farms are small with off-farm income a prime component. Tobacco production is moving west and so has total cash receipts.

“With this change in structure, we are also seeing changes in economic importance of agriculture. We knew that when the tobacco buyout was completed there would be significant change,” said Will Snell, farm policy specialist with the University of Kentucky College of Agriculture.

In 2005, Kentucky had the United States’ 11th highest net farm income – what’s left after the bills are paid – thanks in part to tobacco buyout payments and other federal farm program payments. The tobacco buyout was designed to provide payments over a 10-year period, but half of the buyout dollars have already been distributed in the first three years as a large number of recipients have opted for the lump sum option. 

But prosperity has not been even across the state, Snell told farm leaders attending the recent Governor’s Summit on Agriculture. Growth in cash receipts primarily has been in western Kentucky thanks to poultry, some good grain years and increased tobacco production, while in central and eastern areas of the state, many counties have seen cash receipts drop by 25 percent or more between 1998 and 2005, primarily because of lost tobacco acreage.

Cash receipts in 2006 and 2007 are expected to continue to increase, but net farm income will come down because of higher production costs and a reduction in government payments. While receiving less net farm income, the farm economy will remain relatively strong, thanks to good prices for grain and equine sales.

Kentucky also has seen a change in the composition of farm cash receipts. Traditionally, the state has had about a 50-50 balance between crops and livestock, but in the past few years livestock has come to play a more prominent role, led by horses, cattle and poultry. In the 1990s, $1 of every $4 came from tobacco. In 2005, tobacco receipts fell to less than 10 percent of total cash receipts.

“There’s no doubt we’ve been talking a lot about diversification in this state, given the changes in our tobacco economy, and I’ll be the first to admit that it takes time for some of these markets to develop and for infrastructure to take hold. But the bottom line is that traditional enterprises in Kentucky still account for well over 80 percent of our total cash receipts,” he said.

In the 1997, the value of tobacco production reached an all-time high with those dollars spread across 45,000 farms growing the crop and about 60,000 farms renting out their production quotas. Today the value of the crop has dropped to about $300 million, but the number of farms growing the crop has declined even more – down to about 7,000 to 8,000 farms with the potential to still fall to about 5,000, he said.

“I feel tobacco will still be an important and profitable crop, a $300 to $400 million enterprise for our farm economy, but considerably fewer people will be a part of that farm economy in the future,” Snell said. “We are optimistic that there will be some opportunities for those who stay in the business.”

Additionally, Snell said he had anticipated tobacco production would shift from east to west in the state but that the shift has occurred even faster than expected. The top seven tobacco producing counties prior to the buyout were primarily in the central, Bluegrass region. Post buyout, the top seven now are located west of Interstate 65.

The rest of agriculture is also seeing change. But overall, Kentucky is retaining most of its farms with the average size about 160 acres. In many cases individual farm operations may be getting larger but not by ownership. Kentucky farms are very dependent on off-farm income, as two-thirds of the state’s farms have less than $10,000 in farm sales. The U.S. Department of Agriculture estimates that nationally 86 percent of farm income comes from off-farm sources, and Snell estimates that figure likely to be even higher in Kentucky.

“A lot of people would look at those farms and say they aren’t important to the farm economy or the local community but I would take exception to that,” he said. “I would think that most of these part-time farmers use their off-farm income to pay the normal bills: the mortgage, health insurance, groceries. The discretionary income generated from that part-time farming buys equipment, sends a son or daughter to college, or helps in making that decision to buy a new vehicle. It’s not a lot of money on an individual basis, but when you multiply hundreds and hundreds of your neighbors out there which are in this income class and multiply that by the thousands across the state, I would argue that that income makes an impact in the local community.”

Comparatively, only 7 percent of the total farms in Kentucky sell more than $100,000 annually in farm products. But those 7 percent make up about 70 percent of agricultural sales. 

This doesn’t mean agriculture isn’t critical to Kentucky, Snell said. It is important to remember that in many counties it is still the driving economic force, rivaled only perhaps by the health care industry or the local school system. 

Additionally, it is important to point out that agriculture is more than just the sale of commodities, he said. Agriculture, agribusiness, ag-processing and forestry makes up 9 percent of the total economic activity in Kentucky and about 7.5 percent of the jobs. If food retailing is included, then it goes up to 12 percent of the total economic activity and about one out of six jobs are either directly or indirectly tied to agriculture.

“My point is that when we promote agriculture, we need to get away from talking just about cash receipts,” Snell said. “We’ve got to include value-added. We as agriculture leaders have to continue to work with our farmers to continue to strengthen net farm income but we cannot forget about the needs of our rural communities. Our farm households depend on a strong rural economy that provides good paying off-farm income opportunities, along with improved infrastructure and services to compete in a global economy.”

Snell said the agriculture industry needs to continue to focus on marketing and promoting Kentucky products to discriminating consumers who demand fresh, safe, uniform and nutritious food.

“We also have to continue to focus on adding value to our farm commodities from biofuels to plant-made pharmaceuticals to forest products,” he said. “While value added is important to our future growth, I am still very optimistic about the opportunities that we still have for many of our traditional markets of livestock, equine, tobacco and grains. The bottom line in survivability will be management – the ability to control costs, manage risks and offer quality products amidst volatile prices.

“Economic development is also vitally important to our rural communities,” Snell said. “We need to place more emphasis on education, infrastructure, leadership and entrepreneurship in our rural communities. I’m very excited about the future. We’ve got opportunities; educated, energetic producers; and a forward looking group of educators, policy makers and farm leaders who are working together to strengthen the future of a changing Kentucky agricultural economy.”


Will Snell, 859-257-7288