Capital is the stock of produced assets — machinery, buildings, irrigation works, breeding livestock, established orchards and stored inputs — that is used to produce further output rather than consumed directly.
It is everything a farm has built up or bought in order to make next season’s production possible.
Capital is the third of the Factors of Production, and the one that separates a hoe-and-hand farming system from a mechanised one. Its return is interest, or equivalently the rental value of the asset.
What Is Capital?
The defining test is that capital is produced. Land exists without human effort and labour is not manufactured, but a tractor, a grain store, a borehole and a coffee bush all had to be made or established by earlier production that someone chose not to consume. Capital is therefore the embodiment of past saving: output that was set aside instead of eaten, in order to raise output later.
Two common confusions are worth clearing up immediately.
Money is not capital in the economic sense. A bank balance is a financial claim — a means of acquiring capital, not capital itself. When a farmer says they need capital they usually mean finance; when an economist says capital they mean the physical assets that finance buys. Both usages are legitimate, but mixing them inside one analysis produces nonsense, such as double-counting a loan and the tractor it purchased.
Capital depreciates. A combine loses value every season through wear and obsolescence, whether or not any cash changes hands. National accountants call this the consumption of fixed capital; farm accountants call it depreciation. Either way it is a genuine cost of production, and ignoring it is the single most common reason a farm appears profitable for years and then cannot afford to replace its machinery.
What Types of Capital Does a Farm Hold?
Fixed capital
Durable assets that survive many production cycles: tractors, implements, sheds, fences, boreholes, processing equipment, farm roads. These generate Fixed Cost because their charge falls due whether or not a crop is planted.
Working capital
The circulating stock consumed within a single cycle: seed, fertiliser, agrochemicals, fuel, animal feed, and the cash needed to pay hired labour before the harvest is sold. Working capital is why farming has a cash-flow problem even when it is profitable — money goes out at planting and comes back months later.
Biological capital
Living assets that yield output over several seasons: breeding herds, dairy cows, laying flocks, and perennial crops such as coffee, cocoa, rubber and fruit trees. These have a long establishment period and a long payback, which makes them acutely sensitive to tenure security and interest rates.
Land improvements and infrastructure
Terraces, drainage, irrigation channels, levelling and soil-fertility investments are produced assets fixed to a specific plot. They are capital in economic terms even though they cannot be sold separately from the land they sit in.
Why Does Capital Matter?
It multiplies what labour can do. Output per worker rises when each worker has more and better equipment to work with — capital deepening. The difference between one hectare a day and twenty is almost entirely a difference in capital per worker.
It buys timeliness. Agronomic windows are narrow. A tractor is often worth having not because it ploughs more cheaply per hectare, but because it allows the whole farm to be planted inside the two weeks when planting pays.
It is lumpy. Capital goods come in indivisible units. A harvester cannot be bought in tenths, so a small farm cannot spread its cost over enough hectares to justify it. This indivisibility is a principal source of Economies of Scale in agriculture, and the reason institutions such as custom hire, machinery rings and the Agricultural Cooperative exist — they let several farms share one indivisible asset.
It must be financed. Because capital is paid for now and repaid by output later, access to Farm Credit and the level of the Interest Rate determine how much capital a farm can profitably hold. Where credit is rationed, farms operate below their optimal capital stock indefinitely.
Tenure security shapes capital formation too. A study in the Journal of Political Economy examining farming in Akwapim, Ghana, found that farmers with weaker rights over a plot invested less in its fertility and harvested substantially less, because an investment that takes years to repay is worth little to someone who may lose the plot before then.
How Much Capital Is in World Agriculture?
FAO tracks agricultural capital through the national accounts framework. The global net capital stock in agriculture, forestry and fishing reached USD 6.5 trillion in 2023, up from USD 5.1 trillion in 2013. Annual investment — gross fixed capital formation — grew from USD 512 billion in 2013 to USD 684 billion in 2023 in constant 2015 prices. Between 2021 and 2023 that investment flow rose in every region at an average of 8.1 percent a year, fastest in Oceania at 12.9 percent and the Americas at 11.5 percent, and slowest in Africa at 6.0 percent. For scale, global agriculture value added was around USD 4.0 trillion in 2023.
That regional pattern is the crux of the global capital problem. The regions with the most labour in farming are accumulating capital most slowly, which is precisely why output per farm worker diverges rather than converging.
Within a highly capitalised sector, capital still sits mostly in land. USDA Economic Research Service figures show farm real estate at about 83 percent of total United States farm sector assets; machinery, vehicles, inventories and financial assets together make up the rest of a balance sheet of roughly USD 4.5 trillion.
Does More Capital Still Drive Growth?
Not as it once did. USDA Economic Research Service analysis shows that in the 1960s and 1970s the main source of world agricultural output growth was input intensification — using more capital, labour and material inputs per hectare — whereas since the 1990s growth in Total Factor Productivity has been the major source. Over 1961 to 2021, output grew about 2.3 percent a year against 1.2 percent growth in input use.
The lesson is not that capital has stopped mattering, but that piling on more of it yields less than it used to. What now raises output is better capital — improved genetics, precision application, better-adapted machinery — combined more efficiently with the other factors.
Key Takeaways
- Capital is the stock of produced assets used to generate further output; it represents past saving embodied in physical form.
- Money is a financial claim, not capital in the economic sense — it is the means of acquiring capital.
- Capital depreciates, so depreciation is a real cost of production even when no cash leaves the business.
- Farm capital divides into fixed capital, working capital, biological capital and land improvements.
- Capital raises output per worker, buys timeliness in narrow agronomic windows, and is lumpy — which creates economies of scale and drives cooperative and custom-hire arrangements.
- Credit access, interest rates and tenure security determine how much capital a farm can profitably hold.
- Global net agricultural capital stock reached USD 6.5 trillion in 2023, with annual investment of USD 684 billion, but investment is growing slowest in Africa.
- Since the 1990s, productivity improvement rather than added capital and other inputs has been the main driver of world agricultural output growth.
Frequently Asked Questions
What is capital as a factor of production?
Capital is the stock of produced assets used to make further output rather than consumed directly — tractors, sheds, irrigation infrastructure, breeding stock and stored inputs are all examples on a farm. It is distinct from land, which is not produced, and from labour, which is human effort; capital’s return is interest or the asset’s rental value.
Is money considered capital?
Not in the strict economic sense. Money is a financial claim — a means of acquiring capital — while capital itself is the physical or biological asset that money is used to buy, such as a tractor or a breeding herd. A farmer’s cash savings become capital only once they are converted into a productive asset.
What are the different types of capital in agriculture?
Farm capital is usually grouped into fixed capital (durable assets such as machinery and buildings), working capital (the circulating stock of seed, fertiliser and fuel consumed within one production cycle), biological capital (breeding herds and perennial crops such as orchards), and land improvements (irrigation channels, terraces and drainage fixed to a specific plot).
What is the difference between fixed and working capital?
Fixed capital survives many production cycles and generates a cost whether or not a crop is planted, such as a tractor or a shed. Working capital is consumed within a single cycle — seed, fertiliser and fuel — and must be replenished every season, which is why it drives most of a farm’s cash-flow timing problem.
Continue Exploring
References and Further Reading
- Goldstein, M. & Udry, C. (2008). The profits of power: land rights and agricultural investment in Ghana. Journal of Political Economy, 116(6), 981–1022. https://www.journals.uchicago.edu/doi/10.1086/595561
- A new global database on agriculture investment and capital stock. Food Policy (Elsevier). https://www.sciencedirect.com/science/article/abs/pii/S0306919220301652
- FAO. Agricultural investments and capital stock: global and regional trends (2013–2023). FAOSTAT. https://www.fao.org/statistics/highlights-archive/highlights-detail/agricultural-investments-and-capital-stock.-global-and-regional-trends-(2013-2023)/en
- FAO. Gross domestic product and agriculture value added 2014–2023. FAOSTAT. https://www.fao.org/statistics/highlights-archive/highlights-detail/gross-domestic-product-and-agriculture-value-added-2014-2023/en
- USDA Economic Research Service. Farm sector income and finances: assets, debt, and wealth. https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/assets-debt-and-wealth
- Fuglie, K., Morgan, S. & Jelliffe, J. (2023). World agricultural output and productivity growth have slowed. USDA Economic Research Service, Amber Waves. https://www.ers.usda.gov/amber-waves/2023/december/world-agricultural-output-and-productivity-growth-have-slowed
- Fuglie, K., Morgan, S. & Jelliffe, J. (2024). World Agricultural Production, Resource Use, and Productivity, 1961–2020 (Report No. EIB-268). USDA Economic Research Service. https://ers.usda.gov/sites/default/files/_laserfiche/publications/108650/EIB-268.pdf