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

Background U.S. farm households are just as diverse as their farm (Mishra et al. 2002) 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 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) Rural Malawi household labor allocation is affected by individual access to credit (Swaminathan and Findeis, 2003)

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

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

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

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

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

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

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

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

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

Results

0 $200,000$400,000$600,000$800, Non-Farm Assets Predicted probability Dec Spend Sav/Inv Sell Asst Borrow Other Predicted probability graph (Change in Non-Farm Assets)

Predicted probability graph (Change in Depreciation Rate)

Predicted probability graph (Change in Off Farm Income Share)

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

Questions?

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

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

Theoretical Model under Differing Rates C2C2 C 1 C 1 V U U ’ 2 C I 1 W 1 A A 2 I I’ X (Y + A Z X Y ’ Y 1 1 ) 1 ) 2

Theoretical Model under Differing Rates Y1Y1

Y 1 X’ X (Y 1 + A 1 ) Y Y’ C 2 C 1 U’ U E 1 (Y 2 ) C 2 Z A 2 C 1 A 1 D

Theoretical Model under Differing Rates C2C2 C 1 C 1 V U U ’ 2 C I 1 W 1 A A 2 Y Y’ X (Y + A Z X E Y ’ (Y 1 1 ) 1 ) 12