Source: USDA ECONOMIC RESEARCH SERVICE, Feb., 2017

Highlights:
• For many farm households, income varies considerably from year to year and may even be negative; farm household income volatility is driven mostly by farm income, which is more volatile than off-farm income.
• Total household income is more volatile on larger farms than on smaller farms, and crop farms have more volatile household income than livestock farms.
• Between 1996 and 2013, the volatility of farm household income declined 1.2 percent per year.

Farm income is highly variable, with earnings subject to fluctuations in output and prices.  Income variability affects key farm decisions—how much labor to use on-farm versus off-farm, how much income to save as a cushion for low-earning years, how much income to invest in machinery or land, which combinations of crops or livestock to produce, and how much income to spend on risk-reducing inputs such as pesticides or irrigation. Because household income variability influences these decisions, it can strongly affect agricultural production and household well-being. Also, by influencing land, water, and agrochemical decisions, income variability can affect environmental quality.

Federal agricultural policies have long been designed to shelter farmers from income fluctuations through the use of price supports, direct income support, disaster assistance programs, and yield and revenue insurance programs. Recently, the 2014 Farm Act shifted spending priorities to programs designed to reduce income risk—eliminating direct payments and creating new programs with payments linked to annual or multiyear fluctuations in prices, yields, or revenues.

Despite the importance of income volatility for farm household behavior and welfare and the growing emphasis of Federal programs on farm income risk reduction, there is little information about the extent of individual U.S. farm household income volatility and the degree to which it varies across different types of households.  Aggregate statistics (e.g., the national mean or median income) can provide useful insight into how the farm sector as a whole fares from year to year but can mask considerable variation at the farm level. In a given year, producers in one region might be thriving, whereas those in another region might be incurring losses from local drought or pest infestations—so individual household income can vary much more than aggregate statistics would suggest
For example, between 1999 and 2004, the median farm income for a commercial farm household (with at least $350,000 in gross cash farm income, adjusted for inflation) ranged from about $70,000 to $180,000, and the average magnitude of the change (positive or negative) in median income between consecutive years was about $20,000. The median income over the period varied less than the income of a typical commercial farm. This is illustrated in the figure with the red line, which shows the annual farm income of a single hypothetical commercial farm. Between 1999 and 2014, this typical farm had the same average income as the median commercial farm (about $120,000). However, the income stream for the farm shown here varied more from year to year—with an average income swing of $86,000. Because farm income spans a wide range, in some years, a usually profitable commercial farm household loses money.

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