Sector Level Analysis of Alternative Payment Limits

Patrick Westhoff

September 22, 2003

www.fapri.missouri.edu

Stricter payment limitations scenario policy assumptions

• Each Census of Agriculture farm operation can receive no more than:− $40,000 in direct payments− $60,000 in counter-cyclical payments− $175,000 in marketing loan benefits

• No generic certificates, loan defaults, or paper reorganizations to avoid limits

• Stylized scenario—does NOT reflect specific legislation

Other assumptions underlying the analysis

• Farm consolidation has continued since 1997 Census

• Effects of limits on CCPs and LDPs depend on prices

• Producers will find ways to adapt to limitations over time

• Assumptions and modeling approach are explained more fully in report

Effects at 2004 baseline prices if producers do not adjust to limits (from

Table 1 in the report)

% of farms

w/ limited

payments

% of prod.

on limited

farms

% of prod.

ineligible for paym’t

Type of

payment

limited

Rice 44% 77% 39% Direct

Cotton 23% 62% 30% CCP

Sorghum 3% 23% 8% Direct

Wheat 1% 14% 6% Direct

Corn 2% 14% 6% Direct

Soybeans 2% 14% 4% Direct

FAPRI estimates based on projected farm distributions, crop mixes, and payment rates.

Proportion of cotton crop ineligible for payments if producers do not adjust (Fig. 1)

0%

5%

10%

15%

20%

25%

30%

35%

0.25 0.28 0.31 0.34 0.37 0.40 0.43 0.46 0.49 0.52 0.55 0.58 0.61 0.64

Cotton farm price, $/lb.

Direct Payments Counter-cyclical Payments Loan Deficiency Payments

FAPRI estimates based on projected farm distributions, crop mixes, and payment rates.

Proportion of production ineligible for 2004 payments if producers do not adjust

to limits (Table 2)

Direct

payments

Counter-

cyclical

payments

Loan

deficiency

payments

Cotton 25.7% 26.7% 4.8%

Rice 39.0% 19.8% 8.5%

Corn 5.7% 3.4% 0.6%

Soybeans 4.4% 2.4% 0.5%

Wheat 6.5% 4.7% 0.2%

Sorghum 7.8% 5.7% 1.4%

Figures represent average of FAPRI results for 500 alternative futures.

Effects of stricter limits on 2004 area planted and prices (Table 3)

Crop Change in area (mil. a.)

Change in area (%)

Change in price ($)

Change in price (%)

Cotton -0.51 -3.66% 0.011/lb. 2.30%

Rice -0.25 -7.92% 0.399/cwt 8.23%

Corn 0.01 0.01% -0.001/bu. -0.04%

Soybeans 0.11 0.15% -0.008/bu. -0.17%

Wheat -0.02 -0.04% 0.002/bu. 0.05%

Sorghum 0.06 0.61% -0.004/bu. -0.19%

6 Crops -0.61 -0.25%

Figures represent average of FAPRI results for 500 alternative futures.

Effects of stricter payment limits on cotton and rice area (Fig. 2)

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Crop Year

Mil

lio

n A

cres

Cotton Rice

Figures represent average of FAPRI results for 500 alternative futures.

Effects of stricter payment limits on 2004 cotton area at different prices (Table 4)

2003 cotton price

Change in 2004 cotton area

Under 40 cents/lb. -1.17 mil. a.

40-50 cents/lb. -0.51 mil. a.

Over 50 cents/lb. -0.22 mil. a.

Figures represent the average of 2004 area results for each price category from FAPRI’s analysis of 500 alternative futures.

Possible impacts on other crops (from NFAPP at ASU)

• Planting flexibility provisions− Deters entry into produce sectors

• Payment limitations− Induces entry into produce sector?

• Pros: Already, long term transition from cotton to produce (California); higher returns in produce.

• Cons: More volatile returns in produce; high startup costs; lengthy establishment periods; contract production

Possible impacts on other crops (from NFAPP at ASU)

• Possible entry into produce− Cotton growing regions – California,

Arizona, Georgia• Similar climatic requirements; existing

infrastructure

• Will it occur?• Potential impact

− Likely very modest…

Effects of stricter limits on average FY 2004-12 government farm program

outlays (Table 3)Crop Baseline

($ mil./yr.)

Limits

($ mil./yr.)

Change

($ mil./yr.)

Change (%)

Cotton 2,513 2,321 -192 -7.63%

Rice 1,142 1,044 -98 -8.60%

Corn 5,304 5,225 -79 -1.49%

Soybeans 2,044 2,032 -12 -0.59%

Wheat 2,124 2,084 -40 -1.89%

Sorghum 413 404 -9 -2.11%

Total CCC,

Conservation

19,952 19,520 -431 -2.16%

Figures represent average of FAPRI results for 500 alternative futures.

Effects of stricter limits on average 2004-12 farm income and land values

(Table 3)Crop Baseline

($ mil./yr.)

Limits

($ mil./yr.)

Change

($ mil./yr.)

Change (%)

Payments 17,648 17,213 -435 -2.47%

Crop sales 112,767 112,761 -6 -0.01%

Other income 138,446 138,423 -22 -0.02%

Rental costs 14,108 13,998 -110 -0.78%

Other costs 205,316 205,202 -114 -0.06%

Net farm inc. 49,437 49,198 -238 -0.48%

Land value ($/a., end of yr.) 1,485.32 1,479.55 -5.78 -0.39%

Figures represent average of FAPRI results for 500 alternative futures.

Concluding comments

• Effects of payment limits are hard to estimate—many uncertainties

• This analysis is of a stylized limitation—not of specific legislation

• FAPRI tries to provide useful information, but does not support or oppose proposals

• For more information, see full report at www.fapri.missouri.edu