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In a variable-income industry like farming, an important aspect of well-being is a household’s capacity to maintain its standard of living through periods of low prices or yields. Furthermore, aggregate statistics like the median or mean reflect general tendencies in the population but do not reveal how income or wealth is distributed across the population. To describe the economic conditions across the distribution of farm households and to capture the ability of households to maintain their standard of living, this chapter presents information on:
Farm Household Wealth by Level of Income
During years of low income, farm households may be able to borrow against, or liquidate, assets. Household net worth (assets minus debt) therefore reflects the potential for households to maintain their standard of living. Furthermore, because wealth is the accumulation of income over time, it provides a longer term measure of the returns that farm households have received from employing their labor and capital in farm and off-farm activities.
To jointly consider both income and wealth, farm households are divided into four groups, separated into low and high levels of income, and low and high levels of wealth, with the estimated median levels of U.S. household income or wealth as the dividing lines between low and high. Median income (or wealth) is the level at which 50 percent of households have greater income (wealth) and 50 percent have less. The distribution of farm households in each income/wealth group has been relatively consistent over time, with only minor variations across recent years.
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There is a difference between farm and other U.S. households in the pattern of wealth compared to income. In 2010, less than 8 percent of all farm households—in contrast to 50 percent of all U.S. households—had wealth less than the estimated U.S. median household level. The 92 percent of farm households with high wealth are split into two groups, with more having incomes above the U.S. median than below the U.S. median. It is not surprising that farm operator households have more wealth than the average U.S. household because capital assets, like farmland and equipment, are generally necessary to operate a successful farm business. In general, households with self-employed heads have greater wealth than the average U.S. household.
So who is in the small group of low-wealth farm households? On average, the low-wealth group is younger (virtually none are retired), operates substantially fewer acres, and generates lower farm sales than the farm operator population as a whole (see table). Among low-wealth households, those in the high-income subgroup disproportionately report their primary occupation as "other than farming/ranching." Those in the low-income subgroup were more likely to have operators that reported farming as a primary occupation, but most still relied on nonfarm work as the major source of income.
Another way to look at the relationship between farm operator household wealth and income is to look at the distribution of households ordered by percentiles like deciles or quartiles. Households in the first income decile, for example, are the households whose income is less than the income of 90 percent or more of households in the population.
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While wealth tends to be correlated with current income, even farm households with low incomes in 2010 tended to have close to $400,000 or more in wealth. Furthermore, farm households over a wide range of income values had similar wealth. Only at the ends of the income distribution did wealth levels diverge significantly from the levels at the middle of the distribution. Interestingly, median wealth for households within the lowest income decile was over $600,000, exceeding median wealth in all other deciles except the ninth and tenth, which contain the highest income households. The first income decile contains households—including those with large farms (and therefore many assets)—that experienced a year of particularly low earnings, perhaps from drought or flooding. In addition, the first decile includes farm households—including those with high wealth—that were particularly aggressive in organizing their finances to show lower incomes for tax purposes.
Risk and Farm Programs
U.S. farm policy includes several programs that make cash payments to farm businesses, which are often passed on, at least in part, to farm households. Direct payments provide regular payments to farm businesses based on historic yields and acreage for particular row crops. Payments are made regardless of production outcomes or market prices. Direct payments therefore do not stabilize income as much as price-related payments like loan deficiency payments, which pay out when prices fall below preset levels, or disaster payments, which are made in severe conditions such as during a drought or flood.
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Most family farm businesses receiving some type of government payment receive a relatively small amount; in 2010, 75 percent of family farm businesses receiving payments received less than $11,000. However, households whose farms receive more government payments tend to have higher income from farming and higher total income. The 25 percent of households whose farm businesses received at least $11,000 in government payments had a median total income of $95,325 in 2010. The distribution of farm program payments by farm household income reflects, in large part, the fact that most government payments are made on a per-acre or per-output basis, meaning that larger farms, whose households tend to have higher incomes, will naturally receive more government payments than smaller farms.
Crop farms perennially face the risk that poor weather or pests will lower yields or even decimate a crop. The Federal Government subsidizes premiums for multiple-peril crop insurance. Although lower wealth households have fewer resources to overcome a bad crop year, crop farms whose households are in the highest quartile for wealth have, on average, a higher percent of cropland covered by a Federal crop insurance policy.
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Although higher wealth households have a greater ability to bear risk than other households, they typically have farms with more cropland. As crop acreage increases, the risk borne by the farm business, and ultimately the farm household, can increase exponentially. The sharp increase in risk as farm size increases helps to explain why the farm businesses of high wealth households enroll a greater share of their cropland in a Federal crop insurance program.
Health Insurance Coverage
As for U.S. households in general, an important risk faced by farm households is illness or injury to household members and the potential for medical expenses to drain the household’s resources. Health insurance provides individuals or groups with a contractual arrangement for personal medical expenses to be at least partially covered by insurance companies in return for a fee. Because medical attention is expensive and often essential for maintaining one’s health, the incidence of health insurance among populations is an important indicator of their well-being. It also indicates how much health-related financial risk the household bears.
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In 2009, 16.9 percent of the U.S. population had no form of health insurance. In 2010, only 12.8 percent of persons in farm households lacked health insurance, and the share was even lower for commercial and residence farms (see glossary). In contrast, 20.7 percent of persons on intermediate farms had no health insurance, well above the national average. Households of intermediate farms also had the lowest median income of the three farm types, even lower than the median U.S household, suggesting that a limited cash flow may constrain the ability and willingness for households in this group to buy insurance.
Most Americans receive health insurance through their employers. Although farm operators are largely self-employed, the majority of farm households have an operator or spouse employed off the farm (see table). As with the general population, the most common source of health insurance for members of farm households is employment-based. In fact, farmers are as likely as the general U.S. population to receive their health insurance through an outside employer. Farmers are more likely than the general population to directly purchase their health insurance from an insurance company, and less likely to receive health insurance from a government-sponsored program, such as Medicare or Medicaid.
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In 2010, about half of farm household members had health insurance coverage from an employment-based plan. One major reason that a farmer or rancher would work solely on the farm and not have access to employer-sponsored insurance through an off-farm job is the intensive time commitment for some commodity specializations (see table). An example of this is in dairy production. Farming is the major occupation for nearly all of those who specialize in dairy production—significantly more than the 46 percent across specialties. Compared to the 55 percent of all farm persons who receive insurance from employer-sponsored plans, only 32 percent of persons in dairy households do. The lack of off-farm employment likely contributed to the difference in health care coverage between persons in dairy farm households and those in the overall farm household population. In 2010, about half of persons in dairy households were uninsured, compared to 12.8 percent for all farm persons.
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Having health insurance and the source of health insurance are major determinants of household expenses for health care. The most expensive type of health insurance is direct purchase. Farm households with direct-purchase insurance had the highest health expenses of all farm households, more than $8,000 per household. Households with all persons uninsured have the lowest health expenses, indicating that they often go without care.
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