Farm businesses put federal payments toward saving, not spending

Research by Professor of Agribusiness Ashok Mishra examines whether Great Depression-era legislation continues to have a positive effect on contemporary farmers.

The pages of history are filled with images of U.S. farms struggling during the Great Depression, of crops rotting in fields as overproduction and low prices left farmers too poor to harvest them, of consumers fearing shortages of food and fiber.

President Franklin D. Roosevelt’s Agricultural Adjustment Act of 1933 changed that picture with government programs that paid farming businesses to stabilize production and prices, thus sparing them from volatile swings in income and purchasing power. The programs were meant both as a safety net for farmers and a way to ensure adequate food supplies for the nation.

Federal farm policies have become increasingly market-oriented over time. Nevertheless, more than 80 years after the Great Depression, the federal government writes checks totaling $11 billion in a year to U.S. farmers with the goal of smoothing their incomes and encouraging their spending.

Are those payments still saving farms from failure and spurring the economy?&nbsp

New research by Professor of Agribusiness Ashok Mishra and Joseph Cooper of the U.S. Department of Agriculture’s Economic Research Service shows that those billions in payments are doing little today to boost spending by farm households. Instead of using the money for living expenses, Mishra’s research found farmers are much more likely to be using it to boost their savings and make other investments that increase their net worth.

They’re not consuming it. That means those principles that were set up in the 1930s are not what’s happening. These monies are being saved and invested somewhere else.&nbsp

Looking at farm households’ spending

Parts of the U.S. farm picture have changed since the 1930s. U.S. farms remain family-owned businesses overwhelmingly, but large farms account for 10 percent of agricultural businesses and 90 percent of the U.S. agricultural output. And most of the nation’s population no longer lives in rural areas.

Mishra says other researchers have looked at the relationship between government payments to farming businesses and the amount of acreage devoted to production. He wanted to look at farm households and, specifically, at what the households did with their free cash — the cash left over after paying business expenses. If the amount of free cash they spent matched the number of government payments they received, it would mean the programs are working as intended.

The researchers used 2008-2013 data on the characteristics and financial conditions of farming business households, as tallied by the USDA’s Agricultural Resource Management Survey. They limited the data to crop farmers whose households received government program payments, for totals that ranged from a low of 2,705 households in 2010 to a high of 4,478 households in 2012.

They focused on so-called “coupled payments,” a traditional program based on a farm’s production base acreage and crop prices in the current year, and on “decoupled payments,” a newer program in which payments do not depend on current-year production or prices. The modern program helped give farming business owners more freedom in decision-making and encouraged the growth of large, more efficient farming businesses.

The researchers first used the data to measure how the farmers’ free cash flow after paying business expenses affected their spending on household goods and services. They next looked at how much of the government payments received by farming business households was going to consumption and thus flowing back into the economy.

Payments boost consumption slightly

Mishra’s research found that before government payments are included in farm household income, every $1,000 increase in the households’ free cash flow decreased their spending by $80 to $228, or 8 to 23 percent. In other words, the more extra cash a farming business household had, the less it spent on goods and services and the more it invested the money elsewhere.

When taking government payments into consideration, the research found, spending rose, but only slightly.

In programs that decoupled payments from production, the study found that for every $1,000 a farming business household receives in payments, it increases its spending by $5 to $14, or 0.5 to 1.4 percent. In programs that couple payments with production, the research found that for every $1,000 a farming business household receives in payments, it increases its spending by $2 to $3, or 0.2 to 0.3 percent.

That translates into, at most, a trip or two to Starbucks, or a few gallons of gas in the tank, per $1,000 in payments received. Mishra is surprised by the small spending figures. So where might farmers be putting the rest of each $1,000?

That tells me farmers know where to put the money and where not to put the money. They don’t value short-term spending as much as long-term savings, which can come in handy for future household consumption, either in retirement or if government payments end. They also might be buying more land and investing in the farm.&nbsp

Bolstering the idea that farming business households are saving rather than spending the payments, the researchers note that today’s farm households have greater wealth than the average U.S. household. Farming-business household wealth averaged $873,000 in 2014 (though more than three-quarters of that wealth is tied up in the land), compared to $82,500 in money for the average U.S. household.

The researchers also found that other factors do as much as or more than the government payments to increase farming business households’ spending.

Farming business households likely have multiple sources of income, and the average U.S. farm household today earns just 15 to 18 percent of its revenue from the agricultural business, Mishra says. The research found that every $1,000 increase in off-farm income raised household spending between $3 and $11, or 0.3 to 1.1 percent, a finding that Mishra says shows farming business households today depend on the non-agricultural economy to help them bridge the urban-rural income gaps of the 1930s.

Demographics also were big factors leading to increased spending. When a farm business household’s size increases by one member, household spending rose by 11 to 15 percent. For every additional year of education, a farm business owner has, spending rose 3 to 5 percent. And for every year added to an operator’s age, spending rose 0.4 to 1.2 percent.

Farming risky, but so are other businesses

Mishra acknowledges the nostalgia with which Americans view family farm businesses. He also knows that geographic location helps determine a farming business household’s profitability, net income, and opportunities for off-farm employment. And farming is a risky business, made tougher by weather variability, pests, fluctuations in global demand, and a shortage of buyers for assets often fixed in the middle of nowhere.

As a believer in market economics, though, he argues that the forces of supply and demand will attract new entrants to the farming business or cause current farmers to exit. Also, there are federal programs that make credit cheap, and some states have programs to help young farming entrepreneurs take over from retiring ones.

Mishra also points out that other self-employed business owners, from restaurateurs to shop owners, face volatility in income and have much of their wealth tied up in their businesses, but none receive the kind of government support that farmers do.

Other sectors may have small business loan programs, but the government doesn’t write a check at the end of the year and say, ‘I saw you had low-income last year. Let me bridge your gap so you can consume this. True entrepreneurs say if this fails, they will go into Chapter 11 bankruptcy, wash their hands, and move to something else.&nbsp

The goals of farm safety net programs are vague, the researchers say. If the purpose of the payments is to smooth out volatility in farming business households’ consumption, the research shws they are having little effect on spending. If the purpose of the payments is to increase farm households’ retained earnings, the research suggests that the payments are indeed going into savings.

“To me, it seems the payments are not needed because farmers are not consuming the exact amount of it,” Mishra said. “Either the payments are very high and should be brought down, or they don’t need it at all.”

Mishra would like to see the United States reassess its priorities. If the nation wants to reduce volatility in household spending by transferring taxpayer-funded support to certain households, it could make a greater impact on spending and the economy with block grants to lower-income recipients than with payments to farm households. Or, he adds, “There are a lot of other things we could spend $11 billion on.”

The bottom line

• For farming business households: You are shrewd business owners who value saving for the future overspending in the present. If you aren’t spending the full amount of your government payments, then the payments might be too high, or you don’t need them.
• For taxpayers: Farm payments are not giving you a good return on your tax dollar, but they do assure you of food and fiber that is much less expensive than what consumers in Europe and China pay.
• For policymakers: If the nation’s priority is to have enough affordable food and fiber, then the payment programs favor that. If the priority is to enable farming business households to increase their spending, then these entrenched programs aren’t accomplishing that. Assess whether the government should give payments to other self-employed business owners facing similar risks and having similar wealth, give payments to households more likely to spend, or whether it should get out of the business of subsidizing agriculture.