compensating for lower household income: the case of u.s. farm households

Compensating for Lower Compensating for Lower Household Income: The Case Household Income: The Case

of U.S. Farm Householdsof U.S. Farm HouseholdsBrian C. BriggemanBrian C. Briggeman

Oklahoma State UniversityOklahoma State UniversityKen FosterKen Foster

Purdue UniversityPurdue University

SAEA Annual Meetings 2006SAEA Annual Meetings 2006Orlando, FLOrlando, FL

BackgroundBackground U.S. farm households are just as diverse as U.S. farm households are just as diverse as

their farm (Mishra et al. 2002)their farm (Mishra et al. 2002)

Mishra and Goodwin (1997) found that Mishra and Goodwin (1997) found that higher farm income variability increased higher farm income variability increased off farm labor supply for Kansas farmersoff farm labor supply for Kansas farmers

Rural Malawi household labor allocation is Rural Malawi household labor allocation is affected by individual access to credit affected by individual access to credit (Swaminathan and Findeis, 2003)(Swaminathan and Findeis, 2003)

Miranda seminar (2003)Miranda seminar (2003) Developed a Bellman theoretical frameworkDeveloped a Bellman theoretical framework How does borrowing and saving affect farmsHow does borrowing and saving affect farms Used ARMS dataUsed ARMS data

Working paper by Crook (2002)Working paper by Crook (2002) How do U.S. households fund excess How do U.S. households fund excess

expendituresexpenditures

Who cares and why?Who cares and why?

MotivationMotivation

ObjectiveObjective

How do U.S. farm households smooth How do U.S. farm households smooth consumption?consumption?

Policy ImplicationsPolicy Implications Targeted policy to U.S. farm households with Targeted policy to U.S. farm households with

limited optionslimited options

2001 ARMS Questionnaire2001 ARMS Questionnaire Was your household income below the Was your household income below the

amount from the previous year (2000)? If amount from the previous year (2000)? If yes, then proceed.yes, then proceed.

In what way did you compensate for In what way did you compensate for lower household income this year?lower household income this year?

Savings/InvestmentSavings/Investment Sell AssetsSell Assets BorrowBorrow Decrease SpendingDecrease Spending OtherOther

Dependent Dependent VariableVariable

Data and MethodologyData and Methodology 2001 ARMS Data2001 ARMS Data

Family FarmsFamily Farms 1,163 total respondents1,163 total respondents

Interested in choice to compensate for Interested in choice to compensate for lower incomelower income

Conditional Multinomial LogitConditional Multinomial Logit

m

l il

ijthth

X

Xji

1'

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exp

expincome)lower |choice selects hhld Prob(

Probability of choosing “alternative Probability of choosing “alternative compensation method” relative to compensation method” relative to decreased spending as a function of:decreased spending as a function of:

Farm AssetsFarm Assets

Non-Farm AssetsNon-Farm Assets

Off Farm Income ShareOff Farm Income Share Off Farm Income Relative to Minimum ConsumptionOff Farm Income Relative to Minimum Consumption

Interest RateInterest Rate

CONTINUED…CONTINUED…

Probability of choosing “alternative Probability of choosing “alternative compensation method” relative to compensation method” relative to decreased spending as a function of:decreased spending as a function of: Depreciation as a Percent of Total ExpensesDepreciation as a Percent of Total Expenses

Profitable Farm InvestmentProfitable Farm Investment ROA > 3% (CD Rate)ROA > 3% (CD Rate)

Subsidized AgricultureSubsidized Agriculture Received an AMTA paymentReceived an AMTA payment

RetirementRetirement Operator age > 65Operator age > 65

Lower Income because of Farm LossLower Income because of Farm Loss

Descriptive Statistics and Descriptive Statistics and Expected SignExpected Sign

Variable Mean Std. Dev.Savings/

InvestmentSell

Assets Borrow OtherDecreased Spending

Farm Assets $553,316 $316,570 ? + + ? +

Non-Farm Assets $118,292 $56,633 + ? ? + ?

Off Farm Income Share 1.46 0.44 + ? - / + + ?

Interest Rate 4.38% 2.70% + + - ? +

Depreciation Rate 16.35% 10.77% ? ? ? ? +

Expected Sign on Choice

*Expected sign on choice is for marginal effects *Expected sign on choice is for marginal effects

Descriptive Statistics and Descriptive Statistics and Expected SignExpected Sign

*Expected sign on choice is for marginal effects *Expected sign on choice is for marginal effects

Variable MeanSavings/

InvestmentSell


Profitable Farm Investment 0.27 + - ? ? ?

Subsidized Agriculture 0.33 ? - ? ? ?

Retirement 0.19 + + - ? ?Lower Income b/c of

Farm Loss 0.42 + ? - / + ? +

Expected Sign on Choice

ResultsResults

*Orange and yellow represent 5% and 10% statistical significance *Orange and yellow represent 5% and 10% statistical significance respectivelyrespectively Standard errors calculated for coefficients Standard errors calculated for coefficients

VariableSavings/

InvestmentSell


Farm Assets -0.07% 0.08% 0.23% -0.47% 0.23%

Non-Farm Assets 2.83% 0.37% -1.49% -0.02% -1.69%

Off Farm Income Share -0.03% 0.37% -5.57% 2.10% 3.13%

Interest Rate 0.21% 0.13% 1.22% 0.77% -2.33%

Depreciation Rate 4.47% 1.99% -24.84% -16.43% 34.82%

Marginal Effects

ResultsResults

*Orange and yellow represent 5% and 10% statistical significance *Orange and yellow represent 5% and 10% statistical significance respectivelyrespectively Standard errors calculated for coefficients Standard errors calculated for coefficients

VariableSavings/

Investment Sell Assets Borrow OtherDecreased Spending

Profitable Farm Investment -8.51% 4.97% -1.56% -1.30% 6.39%

Subsidized Agriculture -7.20% -6.14% 3.45% -5.14% 15.03%

Retirement 9.40% 4.78% -16.22% 0.49% 1.55%Lower Income b/c of

Farm Loss 9.79% -3.89% 4.82% -8.00% -2.73%

Marginal Effects

0 $200,000 $400,000 $600,000 $800,000

0.0

0.2

0.4

0.6

0.8

1.0

Non-Farm Assets

Pre

dict

ed p

roba

bilit

yDec SpendSav/InvSell AsstBorrowOther

Predicted probability graphPredicted probability graph(Change in Non-Farm Assets)(Change in Non-Farm Assets)

0.0 0.2 0.4 0.6 0.8 1.0

0.0

0.2

0.4

0.6

0.8

1.0

Depreciation Rate

Pre

dict

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Predicted probability graphPredicted probability graph(Change in Depreciation Rate)(Change in Depreciation Rate)

0 1 2 3 4 5

0.0

0.2

0.4

0.6

0.8

1.0

Off Farm Income Share

Pre

dict

ed p

roba

bilit


Predicted probability graphPredicted probability graph(Change in Off Farm Income Share)(Change in Off Farm Income Share)

Implications of ResultsImplications of Results Targeted policy to farm households with Targeted policy to farm households with

limited optionslimited options Off farm employment, credit availability, Off farm employment, credit availability,

savings behaviorsavings behavior

Better customer profile for lendersBetter customer profile for lenders

Demand for capital goodsDemand for capital goods

Questions?Questions?

Further ResearchFurther Research Credit ReserveCredit Reserve

Unconditional Multinomial LogitUnconditional Multinomial Logit Probit with the Mills RatioProbit with the Mills Ratio

Diagne and Zellner (2001) two step Diagne and Zellner (2001) two step approach controlling for choice-based approach controlling for choice-based samplingsampling Swaminathan and Findeis (2003) adopted this Swaminathan and Findeis (2003) adopted this

approachapproach

Additional ResearchAdditional Research U.S. farm household typologyU.S. farm household typology

Refine U.S. farm household Refine U.S. farm household consumption smoothingconsumption smoothing

Dynamics of U.S. farm household Dynamics of U.S. farm household behaviorbehavior ““Pseudo Panel” based on typologyPseudo Panel” based on typology DSP framework on saving/borrowing DSP framework on saving/borrowing

behaviorbehavior

Theoretical Model under Differing Theoretical Model under Differing RatesRates

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compensating for lower household income: the case of u.s. farm households

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