Elsevier

Journal of Policy Modeling

Volume 39, Issue 3, May–June 2017, Pages 387-409
Journal of Policy Modeling

Impact of farm programs on farm households in the US

https://doi.org/10.1016/j.jpolmod.2017.04.001Get rights and content

Abstract

The growth of the firm is often financed through retained earnings. Entrepreneurs look to expand, make new investments, or pay off debt using free cash flows from the business. However, entrepreneurs in farming businesses derive income from enterprises that have variable income, and farm program payments provided by the government helps smooth income and consumption. Using national-farm level data (2008–2013) and free cash modelling approach we study how government commodity support (decoupled, coupled payments and subsidized crop insurance) affects the financial status of farm businesses. Additionally, we investigate the impact of government commodity support on farming business and household expenditures. Findings suggest that free cash flows to equity has a significantly negative impact on total farm household expenditures. Further, our results also suggest that the effect of farm program payments, especially decoupled payments, is small. Elasticities on the decoupled Payments and coupled Payments variables are both positive. However, the magnitude of the effect on the former is four times higher than on the latter. Hence, most of the impact of Title I support on total farm household expenditures will likely be via the decoupled Payments channel. Nonetheless, if the goal of commodity support is to reduce the consumption volatility of farm household, our results suggest that these payments have little impact.

Section snippets

Impact of farm programs on farm households: a free cash flow modelling approach

The Agricultural Act of 2014 makes significant changes to reform farm commodity policy with the introduction of three new “shallow loss” programs—Agriculture Risk Coverage (ARC), Supplemental Coverage Option (SCO), and the Stacked Income Protection Plan (STAX). The latter two make federal crop insurance a larger player in risk management, at least in principle. In the light of the new farm program payments system and increasing importance of off-farm income to farm households, the issue of how

History and comparison of past farm bills

Price and income support programs were implemented seven decades ago to provide financial assistance to farms, farm people, and rural areas. A key stimulus for legislative action was a disparity between farm and nonfarm incomes (Gardner, 1992, Houthakker, 1967). Congress has devised a variety of programs operated by the U.S. Department of Agriculture (USDA) to support farm income and help farmers and ranchers manage production or price risk. The programs essentially supplement farm incomes in

Model of free cash flow to farm households

The conceptual model used to analyze the impact of federal crop insurance programs and counter-cyclical programs on farm households’ expenditures is built around the idea of free cash flows available to owners of the farm business, free cash flows to equity (FCFE). In other words, FCFE is the cash flow available to the firm’s common stockholders once operating expenses (including taxes), expenditures needed to sustain the firm’s productive capacity, and payments to (and receipts from) debt

Estimation procedure

The estimation of the empirical model (Eq. (7)) could easily be performed by Ordinary Least Squares (OLS) method. One can argue that OLS estimates of are biased downwards because free cash flows to equity could be considered as an endogenous variable. We address the endogeneity bias in this study by adopting an instrumental variable (IV) approach. The following two-equation model describing the farm household expenditures (Yi) and free cash flows to equity (X1i) is normally applied to cope with

Data

The farm household data are from USDA’s Agricultural Resource Management Survey (ARMS). The ARMS, since its inception in 1996, is USDA’s primary vehicle for collecting and disseminating data on a wide range of issues about resource use and costs and farm financial conditions (USDA, ERS, 2003). As did its predecessor the Farm Costs and Returns Survey (FCRS), the ARMS, which has many versions, performs many functions. Specifically, it is used to gather information about the relationships between

Results and discussion

Results for the farm household expenditures equation using the IV approach are presented in Table 2, while the results of the first-stage estimation are presented in Appendix A Table A1. Each column (2–7) represent the parameter estimates from separate regression analysis (e.g., 2008–2013) on the noted independent variables. However, we have also estimated a pooled regression function of our model, and the results are reported in Table 3. Note that the results of the first-stage pooled data

Conclusions and policy implications

Farming is a self-employed business in which operators of the farm make a managerial decision. These decisions include production, acreage, crop choice, participation in government farm programs and other issues related farm financial decisions. Farm businesses likely have multiple sources of income. These may include income from the farm, non-farm labor income, non-farm non-labor income, and government payments. The various sources of off-farm income help smooth incomes and household

Acknowledgments

Authors remain thankful to the Editor and four anonymous referees for their useful reviews that have added substantial value to the work. The views expressed are those of the authors and should not be attributed to the Economic Research Service or USDA. This research was funded under USDA cooperative agreement 58-3000-4-0021.

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