Subsistence and semi-subsistence farms in Hungary : role, determinants and directions

Abstract: This study aimed to define and characterise subsistence and semi-subsistence farms (SSFs) in the Hungarian context, with particular attention given to identifying the determinants of their production, labour allocation and market participation decisions. In order to reveal the determining factors of Hungarian SSFs’ market participation and sales decisions for goods and labour, the thesis identified the household’s seven simultaneous decision equations and econometrically estimated them using a 2013 cross-sectional dataset of Hungarian SSFs and the seemingly unrelated regressions (SUR) framework. For the econometric estimation, the traditional farm household model served as a theoretical basis. The farm household model outlined that imperfect markets, and transaction costs in particular, prompt the household to be increasingly self-subsistent or autarkic by increasing the price band the household faces. The descriptive analysis of the data showed that (i) SSFs’ agricultural activities play a very important role in the life of rural households as they increase households’ disposable income by 30 percent; (ii) SSFs’ farming activities in fact have a “buffer role” and provide a risk aversion strategy for small impoverished rural households in Hungary; however (ii) agriculture is only an auxiliary activity of these SSF households; and (iii) small farms’ agricultural activities do not contribute significantly to the competitiveness of the agricultural sector given their small share in production. The econometric results showed that transaction cost proxies and household characteristics in fact influence the semi-subsistent household’s decisions. In particular, we found that credit constraints have a significantly negative impact on production, and unemployment positively affects sales; suggesting that transaction costs distort Hungarian SSFs’ production and labour allocation decisions. Similarly, tax breaks were found to prevent potentially market-oriented households from pursuing higher sales and off-farm incomes; implying that becoming a tax payer on the margin (i.e. becoming the “bottom” of the next income group) does not provide large enough compensation for SSF households to develop. In terms of policy, targeting the heterogeneous small farm group with heterogeneous policies and adequate support could enhance their chances to compete in the national economy. In particular, reducing SSFs’ transaction costs by providing credit, insurance and large enough subsidies could aid market-oriented SSFs to develop to be profit maximising producers.