How a link farm works?
Suppose there are ten different sites and they all start to link each other. In this process every website gets nine links each. This strategy helps in getting more backlinks in a faster and a better way. These sites can reciprocally link to each other trying to influence each others rankings by embedding proper anchor text as required.
Now some webmasters have started creating website solely for the purpose of exchanging links and in this process they are creating lots and lots of link farms. These websites can be easily identified as they do not have a meaningful domain name, they provide little to no content, they contain lots of outbound links (sometimes even more than 500 on a single page), most of the sites have lots of links on the home page etc.
Excessive reciprocal linking does not works!
After the Google Penguin Update, there is more restrcitions on reciprocal linking. Now these types of strategies do not work. Hence, it is suggested to drop this idea of creating of link farms and to create quality content which is helpful for the user and use it as a link bait.