[The Saucepan Man]

By "rustic folk of dell and cave", I suppose that Tolkien meant that those Elves who stayed and did not pass West would be pushed out by Man, the "dominant race" as Mithalwen puts it, and marginalised to the lonely, uninhabited places of the world, gradually to fade out of physical existence.

Hobbits and Dwarves were to suffer much the same fate, although they would not "burn out" like Elves, but rather gradually die out. Ot at least that would be the case with Dwarves, who are characterised by a low reproduction rate. Tolkien would have us believe (in the opening to The Hobbit) that Hobbits are still with us, only they are even more skilled at hiding themselves away from the "Big Folk" than they were at the time of the War of the Ring.