This paper examined the marginal propensity to consume (MPC) for a sample of Kansas farms. Sensitivity of estimated MPCs to the use of accrual net farm income, net cash farm income, and the inclusion of off-farm income was also examined. Results yielded a range of short-run MPCs from 0.011 to 0.015. Statistical tests suggested that the income coefficients used to compute short-run MPCs were not statistically different.Farm Consumption, Habit Persistence, Agricultural Finance, Farm Management, E21,

Langemeier, Michael R.

Snider, Lindsey

English

Research Papers in Economics

1 
 
Marginal Propensity to Consume for a Sample of Kansas Farms 
 
 
 
 
Michael Langemeier 
Lindsey Snider 
346 Waters Hall 
Department of Agricultural Economics 
Kansas State University 
Manhattan, Kansas 66506 
mlange@agecon.ksu.edu 
 
 
 
 
 
 
Selected Paper prepared for Presentation at the Southern Agricultural Economics 
Annual Meeting, Atlanta, Georgia, January 31-February 3, 2009 
 
 
 
 
 
 
 
 
Copyright 2009 by Michael Langemeier and Lindsey Snider.  All rights reserved.  Readers may 
make verbatim copies of this document for non-commercial purposes by any means, provided 
that this copyright notice appears on all such copies. 2 
 
Marginal Propensity to Consume for a Sample of Kansas Farms 
 
Abstract 
  This paper examined the marginal propensity to consume (MPC) for a sample of Kansas 
farms.  Sensitivity of estimated MPCs to the use of accrual net farm income, net cash farm 
income, and the inclusion of off-farm income was also examined.  Results yielded a range of 
short-run MPCs from 0.011 to 0.015.  Statistical tests suggested that the income coefficients used 
to compute short-run MPCs were not statistically different. 
 3 
 
Introduction 
  Consumption behavior of a farm family affects firm growth, debt repayment, and 
response to policy changes.  Previous research has found short-run marginal propensities to 
consume (MPCs) to be less than 0.10 (Langemeier and Patrick, 1990; Carriker et al., 1993; 
Langemeier and Patrick, 1993).  The relatively low estimated MPCs reflect the difference in 
volatility between farm consumption and net farm income.  Due to habit persistence and inertia 
in farm consumption, net farm income tends to be considerably more variable than farm 
consumption.  The life cycle consumption model is frequently used to study habit persistence 
(Ando and Modigliani, 1963; Browning and Crossley, 2001).  With this model, farm 
consumption is regressed on lagged consumption, net farm income, and net worth. 
  Previous literature has typically used accrual net farm income as the income variable in 
farm consumption models.  Anecdotal evidence suggests that farms may respond more strongly 
to changes in net cash farm income than to changes in accrual net farm income.  The primary 
difference between these two income measures is the inclusion of crop and livestock inventories 
in the computation of accrual net farm income and the exclusion of these items in the 
computation of net cash farm income. 
  The objective of this study was to determine the marginal propensity to consume (MPC) 
for a sample of Kansas farms.  Sensitivity of estimated MPCs to use of accrual net farm income, 
net cash farm income, and the inclusion of off-farm income was also examined.  
Methods 
  The life-cycle consumption model was used to compute MPCs (Ando and Modigliani, 
1963; Browning and Crossley, 2001).  Four separate models were estimated.  In the first model, 
farm consumption was regressed on lagged consumption, accrual net farm income before 4 
 
depreciation, and net worth.  In the second model, farm consumption was regressed on lagged 
consumption, accrual net farm income plus depreciation plus off-farm income, and net worth.  In 
the third model, farm consumption was regressed on lagged consumption, net cash farm income, 
and net worth.  In the fourth model, farm consumption was regressed on lagged consumption, net 
cash farm income plus off-farm income, and net worth.  Statistical tests were conducted to 
determine whether the net farm income measures were significantly different across models.       
Data 
  The data for this study were obtained from the Kansas Farm Management Association 
databank (Langemeier, 2003).  Farms represented in this databank are members of the Kansas 
Farm Management Association (KFMA) and generally provide the association with annual data.  
A sub-sample of the KFMA farms record information on farm consumption.  To be included in 
this study, a farm had to have farm consumption, net farm income, net worth, and off-farm 
income information for each of the years from 2002 to 2007.  The first year of the data, 2002, 
was used to compute lagged consumption for 2003.  Farm consumption included food purchased; 
household operation, upkeep, and repairs; personal and recreational expenses, educational 
expenses; child care; clothing; gifts and charitable contributions; medical expenses; health and 
life insurance premiums; auto expenses; utilities; and interest on personal debt (interest on farm 
debt is not included in farm consumption expenditures).  More information pertaining to KFMA 
farm consumption, income, and balance sheet data can be found on the following web site: 
www.agmanager.info/kfma. 
  Table 1 presents the summary statistics for the 2003-2007 period for the 121 farms used 
in this study.  Average farm consumption for the sample of farms was $44,901 which was similar 
to the five-year average farm consumption, $44,686, for all of the farms that kept farm 5 
 
consumption data during the 2003-2007 period.  Average value of farm production and net farm 
income were $284,325 and $64,192, respectively.  The average value of farm production for the 
sample of farms was 6 percent lower than the average value of farm production for the entire 
sample of KFMA farms over the 2003-2007 period.  Similarly, average net farm income was 9 
percent lower than the average net farm income for the entire sample of KFMA farms.  These 
differences are not surprising given the fact that sole proprietors are more likely to keep farm 
consumption data than partnerships or corporations.  Farms organized as partnerships or 
corporations tend to be larger farms.  Average net cash farm income was $63,611 and average 
off-farm income was $17,880 for the sample of farms.  Net cash farm income was computed by 
subtracting total cash farm expenditures from total cash farm receipts.  Total cash farm receipts 
included crop sales, livestock sales, government payments, crop insurance proceeds, and 
miscellaneous income items such as patronage dividends.  Total cash farm expenditures included 
cash expenses and livestock purchases.  Off-farm income represents wages earned from off-farm 
employment. 
      Farm consumption was substantially less variable than the income measures and net 
worth.  The coefficient of variation for farm consumption was 0.36 while the coefficient of 
variation for the income measures ranged from 1.08 for net farm income plus depreciation to 
1.33 for net cash income.  
Results 
  Table 2 presents the regression results for the four consumption models.  As in previous 
studies, lagged consumption or habit persistence had an important impact on farm consumption.  
Given the fact that farm consumption was considerably less variable than the net farm income 6 
 
sources, this result was expected.  Net worth was not significant in any of the consumption 
models. 
  The coefficient on the net farm income variable was significant in each of the four 
consumption models.  Statistical tests indicated that the coefficients on the net farm income 
variable for each consumption model were not significantly different.  Thus, as far as the MPC 
computations are concerned, it does not matter whether accrual or cash net farm income is used 
or whether off-farm income is included or excluded. 
The short-run MPCs are represented by the coefficient on the net income variables.  
Using these coefficients, the short-run MPC ranged 0.011 to 0.015.  The short-run MPCs can be 
used to examine the impact of an increase in income on farm consumption.  Specifically, each $1 
increase in net income results in an expected change in farm consumption between $0.011 and 
$0.015. 
  Long-run MPCs can be approximated by dividing the income coefficient in each model 
by one minus the coefficient on lagged consumption.  For example, for model 1, the long-run 
MPC would be computed by dividing 0.012 by 0.220.  The resulting long-run MPC for Model 1 
would be 0.055.  Using the coefficients for all four models, the long-run MPCs ranged from 
0.051 to 0.065. 
Summary and Implications 
  The objective of this study was to determine the marginal propensity to consume for a 
sample of Kansas farms.  Farm consumption was considerably less variable than net income or 
net worth.  The short-run MPCs ranged from 0.011 to 0.015. 
  The low estimated MPCs have important implications for firm behavior and policy 
analysis.  In terms of firm behavior, the low MPCs suggest that money will be available in good 7 
 
years for other uses of funds such as asset purchases and debt repayment.  Conversely, during 
years with relatively low net farm incomes, asset purchases and debt repayment may have to be 
foregone, and the firm may need to draw down savings or inventories to maintain farm 
consumption levels.  In terms of policy analysis, models that assume farm consumption is 
constant over time are not as ad hoc as they may seem.         8 
 
References 
Ando, A., and F. Modigliani.  “The Life Cycle Hypothesis of Savings: Aggregate Implications 
and Tests.”  American Economics Review.  53(March 1963):55-84. 
 
Browning, M. and T.F. Crossley.  “The Life-Cycle Model of Consumption and Saving.”  Journal 
of Economic Perspectives.  15(Summer 2001):3-22. 
 
Carriker, G.L., M.R. Langemeier, T.C. Schroeder, and A.M. Featherstone.  “Propensity to 
Consume Farm Family Disposable Income from Separate Sources.”  American Journal of 
Agricultural Economics.  75(August 1993):739-744. 
 
Kansas Farm Management Association web site:  www.agmanager.info/kfma. 
 
Langemeier, M.  “Kansas Farm Management SAS Data Bank Documentation.”  Department of 
Agricultural Economics, Kansas State University, Staff Paper No. 03-02, June 2003. 
 
Langmeier, M.R. and G.F. Patrick.  “Farmers’ Marginal Propensity to Consume: An Application 
to Illinois Grain Farms.”  American Journal of Agricultural Economics.  72(May 1990):309-316. 
 
Langmeier, M.R. and G.F. Patrick.  “Farm Consumption and Liquidity Constraints.”  American 
Journal of Agricultural Economics.  75(May 1993):479-484. 9 
 
 
Table 1.  Summary Statistics for a Sample of Kansas Farms.          
Standard 
Variable  Average    Deviation  CV 
Consumption  44,901 16,250  0.36 
Lagged Consumption  43,269 16,018  0.37 
Value of Farm Production  284,325 204,025  0.72 
Net Farm Income  64,192 84,975  1.32 
Net Farm Income plus Depreciation (IBD)  86,234 93,178  1.08 
Net Cash Farm Income (NCI)  63,611 84,868  1.33 
Off‐Farm Income (OffInc)  17,880 19,602  1.10 
Net Worth  564,201 461,812  0.82 
                 
Source:  Kansas Farm Management Association 2007 Databank. 
 
 10 
 
 
Table 2.  Regression Results for Four Consumption Models.       
Variable         Model 1  Model 2   Model 3     Model 4 
Intercept  10,755***  10,710***  10,628***  10,552*** 
(1,237)  (1,232)  (1,235)  (1,231) 
Lagged Consumption  0.780***  0.770***  0.784***  0.775*** 
(0.027)  (0.027)  (0.026)  (0.027) 
IBD  0.012** 
(0.005) 
IBD plus OffInc  0.015*** 
(0.005) 
NCI  0.011** 
(0.005) 
NCI plus OffInc  0.015*** 
(0.005) 
Net Worth ‐ 0.001 ‐ 0.001 ‐ 0.001 ‐ 0.001 
(0.001)  (0.001)  (0.001)  (0.001) 
R
2  0.615   0.617   0.615   0.617  
                             
Notes: 
 
One asterisk denotes significance at the 10 percent level, two asterisks denote significance 
at the 5 percent level, and three asterisks denote significance at the 1 percent level. 
IBD = accrual net farm income plus depreciation 
NCI = net cash farm income 
OffInc = off‐farm income 
 

Marginal Propensity to Consume for a Sample of Kansas Farms

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