Good Question.  

A farm area is an area that you pre-define as an area you want to target for marketing.  It could be a specific subdivision.  It could be a zip code, or a postal route.  It could be homes that you hand pick based on criteria that you establish (sq ft, bedroom count, etc) that aren't necessarily even in the same area.

The process is VERY similar to ACTUAL farming, which is why the terminology is used.  You first drop the seeds (first mailer), then you frequently water it (repeated mailers or alternate contact), you provide sunshine (alternate exposure like online targeted ads to your target homes, or an ad in the local paper, etc).  Then you prune it (delete the returned mail from your list, update addresses for owners who are out of state, etc).  Then you start picking fruit! (fielding calls, discussing deals, closing sales!)

Many people make the mistake of growing their farms too large, too fast.  DO NOT make this mistake.  A good farm needs frequent and consistent attention.  If you grow the farm bigger than you can afford to regularly support, it's like planting seeds and only being able to water the garden every month.  It will all die on the vine.

Grow the farm as you start seeing results.  Expand by reinvesting a portion of your closed deals.

Lastly, DO NOT forget about your farm!!  Many people make the mistake of turning away from their farming when deals start to flow.  This is a huge mistake as with any farm, you can pick fruit for a while, but if you don't continue to seed and water and prune, the fruit will dry up eventually.  Then you are starting all over.

I hope this helps.  Best of luck to you!