Impact of farm programs on farm households in the US☆
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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The views expressed are those of the authors and should not be attributed to the Economic Research Service or USDA.