Over time, machines, agri-chemicals, and other technologies have resulted in substitution of capital and land for labor and management. Consequently, a typical full-time farm today requires far more land and capital today than fifty years ago. It takes far more money to buy and operate a farm today because of high land and equipment costs and expenses for fertilizers, pesticides and other commercial inputs. But, in a typical farm today, labor and management are far less important than fifty years ago. In economic terms, each of the four factors earns something in return for its contribution to productivity.
Land earns rent, labor earns wages, capital earns interest, and management earns a salary.
Profit or loss is the reward or penalty for taking the risk associated with investing land, labor, capital, and management in an enterprise without knowing whether the net results will be positive or negative. Profit is the reward for taking the risk of farming rather than renting the land, putting the money in an insured CD, and working for someone else. In general, each factor of production earns a return in relation to its contribution to the production process. As the nature of farming has changed, the returns to land and capital have grown and the returns to labor and management have declined. Returns to labor and management are returns to the farmer to the human investment in a farming operation.