Volatility of Farming and Operator’s Family Income of Canadian Farmers Kenneth Poon University of Guelph AGRI Research Group, Statistics Canada

Farm Income Characteristics  Farming income highly variable compared to other sectors  Variability in production and price  Farm families are more financially vulnerable  Volatility as a measure of financial well-being  Volatility = variability over time

Support Program  Growing Forward  Objectives: Foster competitive and innovative sector  improve welfare of farm operators and families  Business Risk Management (BRM) Suite  Programs designed to reduce income / margin volatility  Catch-all program: no specific commodity/group targeted

Why Volatility?  Currently, no clear picture of income volatility for Canadian agricultural sector  Few datasets are formatted to examine volatility  Studying volatility can identify…  Any sectors are relatively more vulnerable  Trends in volatility  Factors related to volatility

Data Source  The Farm Micro-Longitudinal Dataset  Operator-level Panel data,  Source incorporated & unincorporated income tax  Data cleaned  NO T3 records (i.e. community farms)  NO duplicates: 1 operator per farm per family  NO entries with 0 revenue or expenses for all 6 years  NO entries labeled as ‘non-farm’ for 3+ consecutive years  Final Sample Size: operators  5355 operators dropped

Measuring Volatility  Volatility = variation over time  Measurement: Coefficient of Variation (CV)  Standard deviation over time / mean over same period  % variation from mean  CV=0: no volatility, CV=1: SD=mean, CV undefined: mean=0  Interested Variables  Net Operating Revenue (NOR)  Operator’s Family Income (OFI), unincorporated only

Relating Volatility  Relating volatility: Spearman Rank Correlation  Similarity in ranking of CV between NOR, OFI  Unweighted comparison between 2 variables  If Spearman’s rho =  1: ranking matches perfectly  0: non of the rankings match  -1: ranking exactly opposite

Typology  Typology based on AAFC definition  Determined by start of sample (2001) *Low income cutoff in 2001, for family with 2 parents, 2 children under 18 SOURCE: Farm Micro-Longitudinal Dataset, TypologyLow IncomePensionHobby DefinitionTHI < $19,473* & REV <$250k Age ≥ 65 OR Age ≥ 60 with pension income REV <50k & Family off-farm income > $50k # of Records TypologySmallMediumLargeVery Large DefinitionREV ≤ $99,999REV between $100k and $249,999 REV between $250k and $499,999 REV ≥ $500k # of Records

Commodity Groups determined by NAISC Commodity consist of >50% sales start of sample (2001) Commodity Groups Oilseeds & Grains PotatoFruits & Tree Nuts Greenhouses, Nurseries & Floriculture Other Vegetables Other Crops # of Records Beef CattleDairy Cattle Hog and PigsPoultry & EggsOther Animals # of Records SOURCE: Farm Micro-Longitudinal Dataset,

Typology vs. Commodity Groups SOURCE: Farm Micro-Longitudinal Dataset,

Volatility of Typology  CV ranked within typology, into quartiles  Max CV of 25 th, 50 th, 75 th percentile reported Volatility of NOR, Low IncomePensionHobbySmallMediumLarge Very Large 25ptile ptile ptile SOURCE: Farm Micro-Longitudinal Dataset, CV of NOR at selected percentiles,

Weighted Annual Mean of NOR, SOURCE: Farm Micro-Longitudinal Dataset,

Median 3-year CVs by Typology, SOURCE: Farm Micro-Longitudinal Dataset,

Volatility of NOR by Commodity Groups CV atGrain & OilseedPotato Fruits and Tree Nuts Greenhouses, Nurseries, Floriculture 25ptile ptile ptile CV atBeef CattleDairy CattleHogs and Pigs Poultry and Eggs 25ptile ptile ptile CV of NOR at selected percentiles, SOURCE: Farm Micro-Longitudinal Dataset,

Weighted Annual Mean of NOR, SOURCE: Farm Micro-Longitudinal Dataset,

Median 3-Year CVs by Commodity, SOURCE: Farm Micro-Longitudinal Dataset,

Volatility by Typology Volatility of OFI, CV at Low IncomePensionHobbySmallMediumLarge Very Large 25ptile ptile ptile SOURCE: Farm Micro-Longitudinal Dataset,

Weighted Annual Mean of OFI, SOURCE: Farm Micro-Longitudinal Dataset,

CV of Total Household Income SOURCE: Farm Micro-Longitudinal Dataset,

Volatility of Commodity Groups CV atGrain & OilseedPotato Fruits and Tree Nuts Greenhouses, Nurseries, Floriculture 25ptile ptile ptile CV atBeef CattleDairy CattleHogs and Pigs Poultry and Eggs 25ptile ptile ptile Volatility of OFI, SOURCE: Farm Micro-Longitudinal Dataset,

Weighted Annual Mean of OFI by Commodity Group, SOURCE: Farm Micro-Longitudinal Dataset,

3-year CVs of OFI by Commodity Group, SOURCE: Farm Micro-Longitudinal Dataset,

Correlation between CV of NOR & THI Spearman’s rho between NOR & OFI by typology, Low IncomePensionHobbySmallMediumLarge Very Large rho Grain & OilseedPotato Fruits and Tree Nuts Greenhouses, Nurseries, Floriculture rho Beef CattleDairy CattleHogs and Pigs Poultry and Eggs rho Spearman’s rho between NOR & OFI by commodity groups, SOURCE: Farm Micro-Longitudinal Dataset, All positive, significant at 5%

Volatility & Correlation: NOR vs OFI Coefficient of Variation (CV)Net Operating Revenue Total Household Income By Typology Highest VolatilityLow-Income Farms Lowest VolatilityMedium FarmsHobby Farms By Commodity Group Highest VolatilityBeef CattleHogs and Pigs Lowest VolatilityDairy CattleGreenhouses Spearman’s Rank Correlation (rho) By Typology Highest CorrelationVery Large Farms Lowest CorrelationHobby Farms By Commodity Group Highest CorrelationDairy Cattle Lowest CorrelationFruits and Tree Farms SOURCE: Farm Micro-Longitudinal Dataset,

Major Trends in Volatility  Volatility of NOR, OFI increasing over time  OFI volatility increases with farm size  NOR volatility lowest for medium farms  High volatility not always linked with low NOR or OFI  Operators of very large farms have high volatility and NOR  Correlation Between NOR and OFI volatility increases with farm size

Possible Explanation for Trends Farm size vs OFI Volatility – Operators of smaller farms more likely to adopt off-farm work, stabilize off-farm income – Large-farm operators likely take on higher risk, specialize, reliant on farming as main source of income – Low-income farm operators may not have time/resource for effective risk management, relies on farming as main source of income

Possible Explanation for Trends  Correlation Between NOR, OFI volatility increases with farm size  Large-farm operators likely more reliant on farming as main source of income  Operators of smaller farms likely have off-farm work  Medium farms have lowest volatility in NOR  Dairy operators make up majority of medium farm operators  Efficiency of scale? Best combination of diversification & risk management?

Further Research  Relationship between size, volatility, and correlation  Explain by off-farm work opportunities?  Regression between CV & size, farm type, typology, off-farm labour market characteristics  Low-income farm operators financially vulnerable  How does current support programs affect household income for these individuals?