3.5 Household income, subsistence consumption and expenditure

3.5.1 Computation equations for consumption, net income and cash income
3.5.2 Relevant exercises

Input-output relationships alone are not sufficient to evaluate the performance of a particular production system. The information contained in an input-output table needs to be converted to indicators which demonstrate how production and the use of resources contribute to a family's goals. Two such indicators are: the direct contribution made by production to home consumption and the income generated on and off the farm.

3.5.1 Computation equations for consumption, net income and cash income

As the example given in Exercise 3.2 demonstrates, the two indicators can be computed using data from an input-output table together with additional information on subsistence consumption and prices. First we must calculate what is called a supply disappearance equation for each product produced on the farm:

TC =TP+P-S or TP=TC+S-P
SC = TC - P + S where:
TC = total consumption
TP = total production
P = gross purchases
S = gross sales
SC = subsistence consumption
P - S = net purchases if P > S.

Net purchases are treated as negative net sales and appear in brackets () in Table 3.3.

For simplicity, internally produced inputs produced on farm, e.g. seed, feed or milk are treated as if they were first sold and then repurchased.

The first part of Table 3.3 shows how the total value of output is calculated by multiplying the quantity of each commodity produced by its price and summing the results. Note that the total output value consists of both the value of cash sales and the value of subsistence consumption. In order to compare incomes earned by different farm groups (and between farm and non-farm sectors), it is necessary to ensure that both components are properly accounted for, since estimates based on sales and cash expenditures alone would bias results.

The common practice of using producer prices to value farm output is inappropriate where the income of a semi-subsistence farm is being calculated. Instead, the producer price should be used only for the portion of production actually sold. The consumer price should be used for the portion consumed on the farm, the reason being that reduced subsistence production would force the household either to reduce consumption or to buy the deficit at the prevailing consumer price. However, in the exercise that follows, the common practice of using the producer price to value home consumption is maintained in order to reduce complexity.

The second part of the table is concerned with the calculation of total net income:

total value of output - total variable costs - total fixed costs = net income from farm sources + non-farm income = total net income

Fixed costs are costs which remain constant irrespective of the level of output produced, such as depreciation, rent etc. while variable costs are those which vary directly with the level of output, for example fertiliser, seed and insecticide.

Calculating the net total cash income (as opposed to the net total income) will provide an indication of the liquidity position and the degree of market integration. Net total cash income is computed as follows:

total value of sales - value of purchased inputs (variable costs) - fixed costs (excluding depreciation) = net cash income from farm sources + cash income from non-farm sources = net total cash income

3.5.2 Relevant exercises

Exercise 3.2: Estimating total net income.

Example: Refer to the example given in Exercise 3.1. We will now convert the information contained in Table 3.2 into financial terms using the following additional information:

Consumption, purchases and sales:

Resident household members consume all maize produced on the farm; the average requirement (regardless of age) is 0.5 kg/person per day. Sorghum is regarded as an additional source of starch and all domestic production is consumed by the household. An additional 25 kg of sorghum is purchased for beer production. A surplus of 10 kg of beans is available for sale, but there is a deficit of 20 kg of groundnuts. Cattle are sold for slaughter, but cattle and goat milk and goat meat are consumed by the household. No additional milk or meat is purchased.

Cost and price data:

Item		Sale price (cents/kg)	Purchase price (cents/kg)
Maize		3.0	3.01
Beans		12.0	12.0
Groundnuts		5.0	50
Sorghum		3.0	3.0
Meat:
	Beef	18.0	n.a.
	Smallstock	25.0	n.a.
Milk		5.0	n.a.
Manure		0.001	0.001

n.a. = not applicable.

¹ Assume maize is locally available for purchase at the producer price, implying that there are surplus producers within the area. If this were not the case, the purchase price would exceed the producer price, in which case output would have to be valued at the consumer price.

Annual fixed costs amount to $ 15.10, of which depreciation accounts for $ 10. Non-farm income consists of $ 28.00 from handicraft sales.

Using these data and the data in Table 3.2 (Exercise 3.1), it is possible to derive a total income table as shown in Table 3.3.

Table 3.3. Sample household total income table for an agropastoral production system.

		Quantities			Values
		Produced/used	Consumption		Net sales1	Total cash value ($)	Total value ($)
			Total	Subsistence
Output:
	Maize (kg)	750	1160	750	(410)		22.50
	Beans (kg)	100	90	90	10	1.20	12.00
	Groundnuts (kg)	75	95	75	(20)		3.75
	Sorghum (kg)	300	325	300	(25)		9.00
Cattle:
	Meat (kg)	125			125	22.50	22.50
	Milk (kg)	300	150	150			15.00
Small stock:
	Meat (kg)	20	20	20			5.00
	Manure2 (t)	6			6	6.00	6.00
Subtotal						29.70	95.75
Variable costs:
	Maize seed (kg)	90				2.70	2.70
	Bean seed (kg)	45				5 40	5.40
	Groundnut seed (kg)	45				2.25	2.25
	Sorghum seed (kg)	10				0.30	0.30
	Calf milk (kg)	150				7.50
	Veterinary ($)	5				5.00	5.00
	Manure2 (t)	6				6.00	6.00
Subtotal						21.65	29.15
Fixed costs ($)						5.10	15.10
Net farm income ($)						2.95	51.50
Non-farm income ($)						28.00	28.00
Total income ($)						30 95	79 50

¹ The value of the quantity (shown in brackets) of net purchases (negative net sales) of purchased food consumed is not deducted from farm income.

² Used on farm, but treated in accordance with section 3.5.1, thereby exaggerating the importance of the monetary circuit.

Exercise: (estimated time required: 2 hours).

Study the input-output table calculated for the small-scale dairy model in Exercise 3.1 and the following information on consumption, costs and prices:

Consumption, purchases and sales:

The resident household requires 0.5 kg/day per caput of maize, 40 kg of beans in total and the same amount of groundnuts are purchased to meet the household's need. All coffee produced is sold, but all meat and 40% of the milk produced is consumed at home.

Cost and price data:

Item		Producer price (cents/kg)	Consumer/input price (cents/kg)
Maize		3.0	50.01
Beans		12.0	12.0
Groundnuts		5 0	5.0
Coffee		15.0	n.a
Livestock:
	Milk	5.0	n.a
	Meat	18.0	n.a
	Concentrates	10.0
	Minerals		30.0
Fertiliser (compound)			12.0
Manure		0.001	0.001

n.a. = not applicable.
¹ Hybrid seed.

Fixed costs amount to $ 24.90/year, $ 20 of which are for depreciation. Income from non-farm sources amounts to $ 32. For other cost details, refer to the input-output table for the small-scale dairy operation in Exercise 3.1.

Question 1. Calculate an income table using the above information.

Question 2. What proportion of total net farm income is total net cash income? What does this imply in terms of market integration? Is this farmer more or less integrated in the market than the farmer in Table 3.3?

(Hint to instructors: In the sections on input-output tables and consumption purchases and sales and in Exercise 3.1 and 3.2, very simple examples of mixed farming enterprises have been given in which there are no livestock purchases and no changes in the value of the herd. Changes in the value of the herd may come about through transfers of livestock in and out (e.g. sales, purchases, gifts/bride wealth given and received) and through births and deaths, or by changes in the value of individual animals as they mature or decline through age. Such changes in the value of the herd can be very important in livestock-dominated farms.)

A full table of farm income for such farms would have a separate livestock section in which the following items would be distinguished:

+Sale of livestock produce (milk, meat, manure, draft power)
+Home consumption of livestock produce
+Sales of livestock
+Gifts of livestock given away
-Purchases of livestock
-Gifts of livestock received
+Closing (i.e. end-of-year) value of the herd
-Opening (i.e. beginning-of-year) value of the herd

The "opening" value of the herd should include the value (at the start of the year) of animals later given away or sold. Similarly, the "closing" value should include the value (at the end of the year) of any animals purchased or received as gifts during the year.

The "sale of livestock produce" entry should include internal transfers of, e.g. manure and draft power to the crop activities of the same farm, with the same items being shown as "purchases" by those crop activities.

If you have some spare time, you may want to demonstrate some examples of this full reckoning. They have not been included in the manual in order to keep it as simple as possible.

Important points (3.4-3.5) · input-output tables are used to show specific production patterns, input-output relationships and resource deficits or surplus of a farm. The tables help to characterise production systems and assess the potential for increasing production. · Subsistence consumption and cash income earned on and off the farm are the important performance indicators of a production system. · Subsistence consumption = production - sales + purchases. Total net income = total value of output - total variable costs - total fixed costs + non-farm income. · Net total cash income = value of sales - value of purchased inputs fixed costs + cash income from non-farm sources.