Net Value Added
Net value added represents the total value of the farm sector's
production of goods and services, less payments to other (nonfarm)
sectors of the economy. It reflects production agriculture's addition
to the National economic product. It also represents the sum of
the economic returns to all the providers of factors of production;
farm employees, lenders, landlords, and farm operators. ERS value-added
estimates are used by the Bureau of Economic Analysis in the development
of the National Income Accounts and for Gross Domestic Products
and by the Organization for Economic Cooperation and Development
(OECD) in their international agricultural accounts.
How are net value added and net farm income related?
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Net farm income is that portion of net value added
earned by farm operators (defined as those individuals who share
in the risks of production). Farm operators typically benefit
most from the increases and assimilate most of the declines
arising from short term, unanticipated weather and market conditions.
Why has the value-added format been adopted for reporting
farm income?
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The value-added format is now used to present the agricultural
sector income accounts for the United States and the States,
replacing the traditional net farm income format. The underlying
accounting concepts remain the same under the new format, and
the value for net farm income is identical. An advantage of
value added is that it represents the sum of the economic returns
to all the providers of factors of production: farm employees,
lenders, landlords, and farm operators. (Two
tables together provide a map of how to crosswalk between
the two formats, the current value-added and the discontinued
traditional formats.)
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The presence of more disaggregated components under the value-added
format makes it much easier to discern what forces are driving
the changes and trends in farm income. Changes in commodity
production is the cause of most of the volatility in the income
accounts, and much more detail is available to the reader in
the value-added format. For example, the critical impact of
the value of feed grain production on the gyrations in net farm
income is clearly observable in the value-added format but not
the previous presentation format.
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Perhaps most importantly, the value-added approach to sector
accounting has the advantage of being the format accepted and
used internationally, thereby enabling comparisons across countries.
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