RISK AND STRUCTURAL CHANGE IN AGRICULTURE: HOW INCOME SHOCKS INFLUENCE FARM SIZE

Farm-level Census data and county-level income shock data reveal that past unexpected income shocks affect the rate of change in average farm size. Average farm size increases more quickly in counties experiencing negative income shocks as compared to counties experiencing positive income shocks. This result cannot be explained by perfect-market models, which predict farm size should adjust according to changes in the relative prices of labor and capital. We posit a model wherein cash flows affect liquidity, which in turn affects farm borrowing and capital costs. In the model, farms that do not face liquidity constraints benefit from negative income shocks because they reduce land values, so these farms expand while liquidity-constrained farms contract. Observed farm consolidation patterns and farm exit rates are consistent with a model wherein liquidity constraints affect small farms more than large farms.farm size, farm structure, income shocks, liquidity constraint, risk, Agricultural Finance, Industrial Organization,

Did the Baby Boom Cause the Farm-Size Boom?

Growing farm size has generally been explained by technological advances that have allowed farmers to substitute capital for labor. Another possible factor in explaining recent farm size is the demographic shift: the age distribution of farmers has shifted to the right and older farmers generally operate larger farms than younger farmers. This paper uses data from the 1982, 1987, 1992, 1997, and 2002 Agricultural Censuses to examine the relative importance of the demographic shift versus technological factors in explaining overall farm size growth. Results indicate that farm sizes tend to increase with age and that, holding age constant, the typical farm-size has increased over time for all ages, presumably due to technological change. The age-distribution shift is combined with the age-specific farm-size shift, to provide a preliminary estimate of the effect of the age distribution shift and technological change on average farm size growth.farm structure, demographic shift, age distribution, farm size distribution, Farm Management, Industrial Organization, Labor and Human Capital,

Government Payments and Farmland Concentration

Over the last twenty five years commodity crop farms have steadily declined in number and grown in average size, and production has shifted to larger operations. During the same period, the share of agricultural payments going to large farms has increased, in large part because payments are tied to actual or historical crop production. This study evaluates whether payments from federal farm programs may have contributed to the concentration of farmland. Using zip code-level data constructed from the micro files of the 1987-2002 Agriculture Censuses the study estimates the association between government payments per acre and subsequent growth in weighted median farmland area. A semi-parametric generalized additive model controls for location and initial concentration levels, and narrows comparisons to nearby zip codes with similar average farm sizes. Findings indicate, both with and without spatial controls, that government payments are strongly associated with subsequent concentration growth.Agricultural and Food Policy,

Commodity Payments, Farm Business Survival, and Farm Size Growth

In the last 25 years, U.S. crop farms have steadily declined in number and grown in average size, as production has shifted to larger operations. Larger farms tend to receive more commodity program payments because most payments are tied to a farm’s current or historical production, but whether payments have contributed to farm growth is uncertain. This study uses farm-level data from the census of agriculture to determine whether there is a statistical relationship between farm commodity program payments and greater concentration in production. The analysis indicates that, at the regional level, higher commodity program payments per acre are associated with subsequent farm growth. Also, higher payments per acre are associated with higher rates of farm survival and growth.agricultural payments, farm size, farm survival, concentration, consolidation, government payments, commodity programs., Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Crop Production/Industries, Farm Management,

Do Government Payments Influence Farm Business Survival?

Using a unique farm-level panel data set derived from three U.S. Agricultural Censuses, we estimate a Cox proportional hazard model to examine the effect of direct government payments on the survival of farm businesses, paying particular attention to the differential effect of payments across farm size categories. For identification the study exploits variation in payments resulting from historical differences in 'base acreage' in otherwise similar farms. We find an increase in government payments has a small but statistically significant positive effect on the rate of farm survival, and the magnitude of this effect increases with farm size.Agricultural and Food Policy,

NONPECUNIARY BENEFITS TO FARMING AND DECOUPLED PAYMENTS

The first part of this paper presents a simple labor supply and production model wherein farmers with diminishing marginal utility of income derive nonpecuniary benefits from farming. We use the model to show how lump-sum or decoupled government payments could have positive and substantial effects on the supply of agricultural products. The result is simple and intuitive: payments allow those who enjoy farming to continue farming while maintaining a reasonably high living standard. Without payments, a lower living standard leads to higher marginal utility of income, making higher off-farm wages more desirable than lower on-farm wages plus non-pecuniary benefits from farming. Farmers respond to a reduction in payments by shifting their labor off-farm or exiting farming. This effect on labor supply and production is potentially much larger than effects predicted by earlier theoretical models that rely on utility with declining absolute risk aversion. The second part of this paper estimates the hourly nonpecuniary benefits to farming, for farms where the operator or spouse works off-farm, by comparing returns to household labor on-farm and off-farm. Results indicate substantial nonpecuniary benefits to farming. The empirical findings support a necessary (though not sufficient) condition for lump-sum payments having a substantial influence on production via an income effect.Decoupled payments, government payments, nonpecuniary benefits, labor supply, trade, Agricultural and Food Policy,

Do Decoupled Payments Stimulate Production? Estimating the Effect on Program Crop Acreage Using Matching

This study uses matching to evaluate the effect of decoupled payments on the acreage response of Iowa farmers who were in business in 1997 and 2002. Using farm-level panel data from the U.S. Agricultural Census, we examine whether farmers receiving high levels of 1997 agricultural payments per acre had a greater increase in program crop acreage between 1997 and 2002 than farmers receiving low levels of payments. The panel data set allows for conditioning current acreage on past individual acreage and operator characteristics. The large and exhaustive sample allows for comparisons across similar farms. The matching methodology avoids distributional and functional form assumptions about the relationship between the treatment and outcome. Results are consistent with other recent empirical estimates that suggest small but statistically significant effects of decoupled payments on production.decoupled payments, supply response, government payments, program crops, trade policy, Agricultural and Food Policy, Crop Production/Industries, Production Economics,

Does risk matter for farm businesses? The effect of crop insurance on production and diversification.

We use a large increase in Federal crop insurance subsidies as a natural experiment to identify the impact of risk on acreage and diversification decisions. Subsidy increases induced greater crop insurance coverage, which reduced farmers' financial risks. Did this change in the risk environment alter production decisions? We merged crop insurance participation data with farm-level Agricultural Census data from 1992 and 1997 to examine how harvested acreage and diversification changed in response to the policy-induced change in insurance coverage. The difference in differences empirical approach controls for unobservable heterogeneity and our results are robust across multiple definitions of our key variables and various fixed effects. We find that changes in the risk environment caused larger farms to expand while smaller farms shrank. Regardless of size, producers showed some evidence of using diversification as a method to mitigate risk. However, risk does not seem to have large overall effects.Risk and Uncertainty,

THE IMPORTANCE OF INCOME RISK IN LABOR ALLOCATION DECISIONS

Previous research has found that on-farm income variability helps determine off-farm labor supply. However, unobserved heterogeneity of farms or regions may have biased earlier results. In this study, we use an exogenous increase in Federal crop insurance subsidies as a natural experiment to identify the importance of risk in off-farm labor supply. The subsidy increases induced greater participation in crop insurance programs and thereby reduced farmers' financial risks. By merging county-level crop insurance participation data with farm-level Agricultural Census data from 1992 and 1997 we can compare the off-farm labor decisions of individual farms before and after the subsidy and thereby control for unobserved heterogeneity. Unlike previous studies, we find that on-farm risk does not affect the labor allocation decisions of farm households.Labor and Human Capital,

Production Effects of Decoupled Commodity Program Payments: An Instrumental Variables Approach

Instrumental Variables, IV, Policy, Agriculture, Subsidies, Production, Agribusiness, Agricultural and Food Policy, Farm Management, Land Economics/Use, Production Economics, Q1, Q12, Q15, Q18,