A Farm limit (If enabled) gives you a maximum number of units that can be present in a village before their effectiveness starts decreasing. This is based on the world farm limit (Available on the world settings page) and the size of the farm in your village.
To calculate what that will be, you can use this formula : (Farm Level * Farm Limit') / Population of units present
If the result if Higher than 1, the troops will fight at full strength. If the number is lower, your troops will fight at this reduced percentage (IE 0.89 would be 89%)
Bear in mind the population of units present is NOT The amount of units, its the farm space the units are using (EG 1 for a Spearman, 4 for a Light Cavalry)