Determinants of farm income

Abstract

Purpose – The recent fluctuations in farm income remind us of the boom-bust nature of the agricultural sector. To better understand these fluctuations in farm income, the purpose of this paper is to examine the relationship between farm income and influential factors from 1964 to 2010 allowing for structural breaks in the data. Design/methodology/approach – The authors estimate error-correction models for an overarching model and several sub-models at different scales based on their relationship with farm income: micro, meso, and macro. The authors then provide a series of impulse response functions (IRFs) that combine short- and long-run impacts in a rigorous framework indicating the response of farm income to shocks from any of the explanatory variables. Findings – Results indicate that prices paid (PP) and received by farmers, technological change, interest and exchange rates (ERs), gross domestic product (GDP) and land prices all influence farm income. Results using IRFs show how increases in farm income arise from shocks to prices received and GDP; while PP, interest rates, and land prices have a negative impact on farm income. Technological progress and ERs switch from having a negative short-run impact, to a positive long-run impact. Originality/value – This paper takes a fresh look at the single, overarching model for farm income determinants. The authors break this model into three separate levels, with results indicating that these sub-groups perform better than the one overarching model of all variables.