Long Run Impact of Rural Household Income on Family Living Expenses

Despite the steady rise of farm income between 2010 and 2014, farm income has dropped drastically in the past two years. Does the latest volatility in farm income have immediate effect on family living expenses (FLE) or does it take several years detect lagged adjustments? We applied the autoregressive distributed lag model (ARDL) to access the relationship between past net farm income (NFI) and present FLE among Kansas farm households. We assumed a linear function between family living expenses and both the present and lagged values of NFI. We used 23 years (1993 – 2015) of Kansas Farm Management Association (KFMA) data on farmers’ net farm income and family living expenses. Our hypothesis is that farm household income will have a long run impact on the household’s living expenses. Preliminary results indicate that farm household income has only immediate effect on the farm living expenses when NFI is increasing. When NFI is decreasing, the lagged response between NFI and FLE increases. A good forecast of farm living expenses using past and current farm household income will be useful for making better policy adjustment towards the farm living households during poor farm years.