Do economic shocks matter to US farm income?

Analysing the effect of economic shocks on farm profitability is crucial for determining the U.S. farm economy's vulnerability to macroeconomic changes. Using a structural vector autoregressive model and over five decades of data, we examine the impact and importance of external economic shocks to the U.S. farm economy. Specifically, we measure the short-term and long-term volatility spillover effects on U.S. farm income from shocks in energy markets, exchange rates, and agricultural markets. We find that volatility in exchange rates significantly affects US net farm income fluctuations in the short term. Results also suggest that shocks in the exchange rate are more important than other economic shocks, explaining about 47% of the short-run fluctuation in U.S. net farm income. These results highlight the importance of accounting for macroeconomic shocks to enhance the stability of the U.S. agricultural sector and to improve the accuracy of USDA short-term forecasts and long-term projections of farm income components.