The effect of farm savings accounts on farm households' portfolios
Abstract
There has been a marked increase in the discussion of implementing a U.S. farm policy that complies with WTO standards on decoupled payments and provides farmers with income protection. One policy that meets these criteria and warrants consideration is a farm savings account (FSA). It is crucial that the role of a FSA in a farm household's portfolio is understood before implementing it as policy. Consequently, this research uses a discrete stochastic programming model to investigate the relationship between the FSA and the portfolio allocation choices (consumption, land allocation, stock, and debt) for a utility-maximizing farmer in a theoretical and empirical framework. This analysis shows that a FSA can help stabilize, enhance, and/or reduce the variability in wealth. The results also suggest that the availability of a FSA as an investment has significant impact on the asset allocation patterns for the household. First, the presence of matching government contributions motivates the household in ever year when they have sufficient cash to contribute funds to the FSA to receive these government contributions. This result occurs irrespective of the initial endowments, risk aversion level, and presence of other U.S. farm policies. Access to the FSA causes the household to decrease purchases of stocks compared to a household without access to the FSA. Second, the powerful income protection effects of the FSA help explain the observed willingness of the household to make annual land purchase decisions that are far larger than in the scenario without the FSA. In turn, this causes the household to have a much larger percentage of its assets financed with debt capital. The availability of a FSA results in modest increases in average terminal wealth, lower variability in terminal wealth, and no significant change in average annual consumption, but lower variability in consumption. Finally, as the amount of farmland in the portfolio grows, a decrease in the probability of a withdrawal and an increase in the size of the average withdrawal from the FSA can be observed. These results are consistent with prior research on the National Income Stabilization Account (NISA), a Canadian farm policy similar to the FSA.
Degree
Ph.D.
Advisors
Boehlje, Purdue University.
Subject Area
Agricultural economics
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