Compensating for Lower Household Income: The Case of U.S. Farm Households

1. Compensating for Lower Household Income: The Case of U.S. Farm Households Brian C. Briggeman Oklahoma State University Ken Foster Purdue University SAEA Annual Meetings 2006 Orlando, FL

2. Background • U.S. farm households are just as diverse as their farm (Mishra et al. 2002) • Mishra and Goodwin (1997) found that higher farm income variability increased off farm labor supply for Kansas farmers • Rural Malawi household labor allocation is affected by individual access to credit (Swaminathan and Findeis, 2003)

3. Motivation • Miranda seminar (2003) • Developed a Bellman theoretical framework • How does borrowing and saving affect farms • Used ARMS data • Working paper by Crook (2002) • How do U.S. households fund excess expenditures • Who cares and why?

4. Objective • How do U.S. farm households smooth consumption? • Policy Implications • Targeted policy to U.S. farm households with limited options

5. Dependent Variable 2001 ARMS Questionnaire • Was your household income below the amount from the previous year (2000)? If yes, then proceed. • In what way did you compensate for lower household income this year? • Savings/Investment • Sell Assets • Borrow • Decrease Spending • Other

6. Data and Methodology • 2001 ARMS Data • Family Farms • 1,163 total respondents • Interested in choice to compensate for lower income • Conditional Multinomial Logit

7. Probability of choosing “alternative compensation method” relative to decreased spending as a function of: • Farm Assets • Non-Farm Assets • Off Farm Income Share • Off Farm Income Relative to Minimum Consumption • Interest Rate CONTINUED…

8. Probability of choosing “alternative compensation method” relative to decreased spending as a function of: • Depreciation as a Percent of Total Expenses • Profitable Farm Investment • ROA > 3% (CD Rate) • Subsidized Agriculture • Received an AMTA payment • Retirement • Operator age > 65 • Lower Income because of Farm Loss

9. Descriptive Statistics and Expected Sign *Expected sign on choice is for marginal effects

10. Descriptive Statistics and Expected Sign *Expected sign on choice is for marginal effects

11. Results *Orange and yellow represent 5% and 10% statistical significance respectively Standard errors calculated for coefficients

12. Results *Orange and yellow represent 5% and 10% statistical significance respectively Standard errors calculated for coefficients

13. 1.0 Dec Spend Sav/Inv Predicted probability graph (Change in Non-Farm Assets) 0.8 Sell Asst Borrow Other 0.6 Predicted probability 0.4 0.2 0.0 $200,000 $400,000 $600,000 $800,000 0 Non-Farm Assets

14. Predicted probability graph (Change in Depreciation Rate)

15. Predicted probability graph (Change in Off Farm Income Share)

16. Implications of Results • Targeted policy to farm households with limited options • Off farm employment, credit availability, savings behavior • Better customer profile for lenders • Demand for capital goods

17. Questions?

18. Further Research • Credit Reserve • Unconditional Multinomial Logit • Probit with the Mills Ratio • Diagne and Zellner (2001) two step approach controlling for choice-based sampling • Swaminathan and Findeis (2003) adopted this approach

19. Additional Research • U.S. farm household typology • Refine U.S. farm household consumption smoothing • Dynamics of U.S. farm household behavior • “Pseudo Panel” based on typology • DSP framework on saving/borrowing behavior

20. I’ X ’ U ’ A 2 V C U 2 Y ) 2 I Z I 1 W X A Y C 1 1 1 (Y + A ) 1 1 Theoretical Model under Differing Rates C2 C 1

21. Theoretical Model under Differing Rates Y1

22. Theoretical Model under Differing Rates Y’ C 2 X ’ U ’ C 2 E (Y ) U 1 2 Z A 2 Y D X Y C A C 1 1 1 1 (Y + A ) 1 1

23. Y ’ X ’ U ’ A 2 V C U 2 E (Y ) 1 2 Y Z I 1 W X A Y C 1 1 1 (Y + A ) 1 1 Theoretical Model under Differing Rates C2 C 1