Farm Households' Consumption of Market Facilitation Payments Differed by Farm Type and Year

Farm incomes are volatile and farm households employ a variety of financial strategies to generate the necessary cash flows to maintain a standard of living that is based on their expected average income over time—a process called “consumption smoothing.” Households save, invest, and work fewer hours off the farm when farm income is higher than expected and spend down their savings, borrow, disinvest, or work more at off-farm jobs when farm income is lower than expected. The marginal propensity to consume (MPC) out of income—how much an additional dollar of income increases consumption spending—tells researchers how well households are able to smooth their consumption. The larger the MPC, the less the household is smoothing consumption.