Academic journal article Journal of Agricultural and Applied Economics

Analyzing Producer Preferences for Counter-Cyclical Government Payments

Academic journal article Journal of Agricultural and Applied Economics

Analyzing Producer Preferences for Counter-Cyclical Government Payments

Article excerpt

A dynamic-stochastic model is developed to evaluate preferences among alternative countercyclical payment programs for representative farms producing corn or soybeans in Iowa and cotton or soybeans in Mississippi. Countercyclical payment programs are found to not necessarily be preferred to fixed payment programs.

Key Words: agricultural policy, bootstrapping, countercyclical payments, nonparametric JEL Classifications: C15, D81, Q12, Q18

The Federal Agriculture Improvement and Reform (FAIR) Act of 1996 became law at a time when farm commodity prices were at their highest level in 20 years. The decades-old system of price supports and deficiency payments was replaced with fixed production flexibility contract (PFC) payments scheduled through 2002. These decoupled PFC payments were designed to decline over the six-year life of the FAIR Act as a prelude to lower government payment levels. Within two years, however, the high prices-which most observers believe were a key to the passage of the FAIR Act-fell sharply, eventually plunging to levels not anticipated by many advocates of the FAIR Act. Congress responded to the decline in prices by approving five ad hoc emergency assistance packages between October 1998 and August 2001, each providing billions of dollars in supplemental aid to farmers.

Although the FAIR Act retained a substantial countercyclical component in the form of the marketing loan program, which provides producers with loan deficiency payments (LDPs) when market prices fall below loan rates, the FAIR Act's detractors contended that a countercyclical alternative to PFC payments would be more desirable. These critics viewed the inability of the fixed PFC payments to respond to changes in the farm economy as one of the foremost weaknesses of the FAIR Act.

One proposed countercyclical alternative would base outlays on a measure of shortfalls in aggregate gross revenue per acre. In their report to the president and Congress, the Commission on 21st Century Production Agriculture endorsed this concept but did not make recommendations regarding specific program details. Prior to that, Rep. Charles Stenholm (D-Texas), the ranking minority member of the House Agriculture Committee, introduced legislation in Congress that would have created a countercyclical payment program based on aggregate gross revenue per acre. Known as Supplemental Income Payments for Producers (SIPP), this program would have provided producers with payments when the per acre national gross revenue of an eligible crop was less than 95% of its previous five-year average (U.S. Congress). SIPP defined national gross revenue as the product of the total U.S. production for a commodity and the higher of its season average price or loan rate. The total per acre payment to producers for a particular commodity would be equal to the positive difference between 95% of the previous five-year moving average of national gross revenue per acre and the current crop year's national gross revenue per acre.

SIPP was intended to provide producers with program payments during periods of low market revenue. Although SIPP failed to win approval in Congress, a countercyclical payment program based on price shortfalls was adopted in the Farm Security and Rural Investment Act of 2002. Advocates of SIPP and other subsequent countercyclical proposals implicitly assume that producers prefer payments based on revenue variability to the fixed PFC payments of the FAIR Act.

This paper provides an empirical evaluation of whether producers have a preference for payments from a SIPP-type program relative to PFC payments. Our approach involves a nonparametric bootstrapping model that simulates market-based net farm revenue for representative farms in Iowa and Mississippi over a five-year program period, 2000-2004. PFC payments, LDPs, and possible SIPP-type payments are added to market net revenue to determine ending wealth and producer welfare. …

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