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An Assessment of the Equitability of Farm Program Payments Across Crops. James W. Richardson Co-Director AFPC, Regents Professor and TAES Faculty Fellow Joe L. Outlaw Co-Director AFPC, Associate Professor and Extension Economist-Policy Lindsey Higgins Research Assistant.
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An Assessment of the Equitability of Farm Program Payments Across Crops James W. Richardson Co-Director AFPC, Regents Professor and TAES Faculty Fellow Joe L. Outlaw Co-Director AFPC, Associate Professor and Extension Economist-Policy Lindsey Higgins Research Assistant National Public Policy Education Conference St. Louis, Missouri September 19-22, 2004
Objectives • Determine alternative methods of measuring equitability • Discuss the merits of each measure • Apply the measures to 9 major commodities for the period 1990 – 2002 – marketing year basis • Preliminary results
Justification • Potential Budget Reconciliation January 2005 • Potential commodity versus commodity conflicts
Definitions of Support Categories • Deficiency Payments • Payment rate = Target price – max (loan rate, avg. market price) • Producer’s Payment = Payment rate * base acres *program yield *.85 • Production Flexibility Contract Payments • Payments made under the 1996 Farm Bill • Comparable to Direct Payments under the 2002 Farm Bill
Definitions of Support Categories • Market Loss Assistance Payments • Payments authorized by emergency legislation in 1998-2001 • Made to recipients of production flexibility contract payments • Also called “double AMTA Payments” • Loan Deficiency Payments • Payments made when market prices (PCP or AWP) are lower than commodity loan rates • Payment Rate = Loan rate – loan repayment rate
Definitions of Support Categories • Direct Payments • New to the 2002 Farm Bill • Annual per unit payment rate • Counter-cyclical Payments • New to the 2002 Farm Bill • Payments to covered commodities whenever the effective price is less than the target price • Producer’s Payment = Payment Rate * Base Acres * CCP Yield * .85
Definitions of Support Categories • Marketing Loan Gains • Realized when a loan is repaid at less than the loan principal • Marketing loan gain rate = loan rate – loan repayment rate • Producer Storage Payments • Payments made to producers for farmer-owned reserves
Definitions of Support Categories • Certificate Exchange Gains • PIK, Diversion and Deficiency certificate gains • CropInsuranceBenefits • Indemnities – premiums + subsidies • Commodity Specific Payments • User Marketing Payments (Step 2), Oilseed payments, peanut payments, and quota compensation payments
Measures of Equitability • Support per Acre • Support per planted acre • Total Annual Support divided by Total Annual Planted Acres • Used by Monke J. in a Congressional Research Service report • Support per base acre • Total Annual Support divided by Annual Base Acreage • Modification of Monke’s formula
Measures of Equitability • Support per Yield Unit • Support per unit of Actual Production • Total Annual Support divided by Actual Production units • Support per unit of Program Production • Total Annual Support divided by “Program Production“ • Program Production is program yield multiplied by base acres
Measures of Equitability • Support Relative to Costs • Per Acre Support Relative to Total Economic Costs • Total Annual Support per planted acre divided by Total Economic Costs (includes depreciation, capital replacement, unpaid labor, etc.) per planted acre • Per Acre Support Relative to Total Variable Costs • Total Annual Support per planted acre divided by Total Variable Costs per planted acre
Measures of Equitability • Support relative to value • Per Acre Support to Gross Value of Production • Total Annual Support per planted acre divided by Gross Value of Production (excluding government payments) per planted acre • Support per Yield Unit Relative to Price • Divides Support per Actual Production by Price per unit. Support per Actual Production is Total Annual Support divided by Actual Production • Total Annual Support/Total Value of Production • Total Annual Support divided by Total Annual Value of Production as defined by NASS • Used by Hart, C. in the Iowa Ag. Review
Measures of Equitability • Payment Provisions relative to costs • Target Price to Total Economic Costs • Annual Target Price per unit divided by Total Economic Costs per unit • Economic Costs per unit calculated by taking Total Economic Costs per planted acre divided by yield per acre • Used by Keough, et al. in AFPC working paper 89-4 and Miller, et al. in AFPC working paper 95-2 • Target Price to Variable Costs • Annual Target Price per unit divided by Variable Costs per unit • Variable costs per unit calculated by taking Total Variable Costs per planted acre divided by yield per acre • Used by Keough, et al. in AFPC working paper 89-4 and Miller, et al. in AFPC working paper 95-2
Measures of Equitability • Payment Provisions relative to costs • Loan Rate to Total Economic Costs • Annual Loan Rate per unit divided by Total Economic Costs per unit • Economic costs per unit calculated by taking Total Economic Costs per planted acre divided by yield per acre • Used by Keough, et al. AFPC working paper 89-4 • Loan Rate to Variable Costs • Annual Loan Rate per unit divided by Variable Costs per unit • Variable costs per unit calculated by taking Total Variable Costs per planted acre divided by yield per acre • Used by Keough, et al. AFPC working paper 89-4
Measures of Equitability • Payment Provisions relative to Value • Target Price relative to Price • Annual Target Price divided by Price • Used by Keough, et al. AFPC working paper 89-4 • Loan Rate relative to Price • Annual Loan Rate divided by Price • Used by Keough, et al. AFPC working paper 89-4
Measures of Equitability • Effective benefits relative to effective costs • Effective Benefits/Effective Variable Costs • Effective benefits include direct payments, market price or loan rate, and for 2002, countercyclical payments • Effective variable costs include variable costs and ARP costs • Updated formula used originally by Used by Keough, et al. AFPC working paper 89-4
Measures of Equitability • Effective benefits relative to effective costs • Effective Benefits/Effective Fixed Costs • Effective benefits include direct payments, market price or loan rate, and for 2002, countercyclical payments • Effective total economic costs include fixed costs reduced by ARP percentage and ARP costs • Updated formula used originally by Used by Keough, et al. AFPC working paper 89-4
Measures of Equitability • Effective benefits relative to effective costs • Effective Benefits/Effective Costs • Effective benefits include direct payments, market price or loan rate, and for 2002, countercyclical payments • Effective costs include variable costs, fixed costs, and ARP costs • Updated formula used originally by Used by Keough, et al. AFPC working paper 89-4
Summary • It Depends ….. • No commodity consistently receives the most or least support throughout all the measures • Results depend on how you define equitability • Note: These outcomes are largely based on weather and market events, not based on intended expenditure patterns
References • Hart, C. “How the Brazil-U.S. Cotton Dispute Could Affect Iowa’s Agriculture.” Iowa Ag Review. Summer 2004. • Keough, Mary J., et al. “Are Farm Program Benefits Equitable Across Program Commodities?” Working Paper. Agriculture and Food Policy Center, Texas A & M University, 1989. • Miller, John W., et al. “Evaluating the Equitability of Farm Program Benefit Distribution Across Commodities”. Working Paper. Agriculture and Food Policy Center, Texas A & M University, 1995. • Monke, J. Congressional Research Service Report. June 2004 • Pasour, E.C. “Cost of Production: A Defensible Basis for Agricultural Price Supports?”. American Journal of Agriculture Economics. 62 (1980): 244-48. • Smith, Edward G., et al. “Equitability of Government Support Across Major Crop Commodities A Method of Comparison”. Working Paper. Agriculture and Food Policy Center, Texas A & M University, 2001.
