When the 2007 Farm Bill was written one of the legacies from prior farm policy was the concept of Direct Payments.  In an effort to provide a financial safety net, Congress approved a per bushel rate of 28¢ for corn, 44¢ for soybeans and 52¢ for wheat on a per acre rate for a program yield for a farm.  Such an income transfer program was important in the days of $2 corn and $4 soybeans, but with the current market prices and the current budget deficit, most of the betting money is against Direct Payments being a legacy carried into the 2012 Farm Bill.  If that is the case, what are the dominoes that will fall?

Most Congressional advocates for budget cutting point to the USDA as a place to reduce government spending, including the nearly $5 billion in the form of Direct Payments.  The vast majority of program crop producers applies for and receives the payments; however the few that have participated in the ACRE program the past two years had to forego 20% of their Direct Payments in return for ACRE payments should they become eligible.  The removal of Direct Payments from the farm program has a number of ramifications, and the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri identified the potential impact of Direct Payments disappearing from the farm policy landscape.  FAPRI economists developed a ten year financial baseline that demonstrates the change beginning with the 2010-2013 crop years.

The FAPRI staff said the provisions of the ACRE program complicate the analysis, since ACRE may remain in some form in the next Farm Bill, but the offset of sacrificing 20% of Direct Payments would not be a part of the agreement, if Direct Payments disappear.  They believe such an impact would be increased ACRE participation, since loss of the Direct Payments is a disincentive for ACRE participation.  While all farmers might enroll in ACRE as a result, FAPRI doubts that to be the case.  Another sacrifice for ACRE enrollment is also the loss 20% of the benefits of the counter-cyclical program that makes a small payment when prices are low, to enable them to equate the difference between the target price and the Direct Payment rate.  But if the Direct Payment is zero, a counter-cyclical payment would be more quickly triggered.  Currently, commodity prices are about twice the level of the target prices, and are even further above the price that would trigger a counter-cyclical payment.  So at current levels, that is almost a moot issue.

Since Direct Payments are not tied to yield or production, but to historical program levels, participants can plant program crops or no crops, but cannot collect Direct Payments if horticultural crops are produced.  Subsequently, the payments are more tied to the farm than the production, and that may make Direct Payments a function of land values.  As a part of that formula, the FAPRI economists say any elimination of Direct Payments would mean a 0.5% increase in commodity prices.  If the elimination of Direct Payments results in higher ACRE enrollment, which is tied to specific crop acreage, the resulting change would offset the loss of Direct Payments. 

Any increase in production, says FAPRI, crop prices would decline marginally, but they say that has a 2% maximum change embedded in it.  Consequently, neither the livestock nor consumer sectors would really notice the change.

However, the big change would come in the impact on the budget.  Outlays are limited to the $4.9 billion for Direct Payments, but there is very little impact for the counter-cyclical program or the marketing loan program.  FAPRI says if ACRE is the only safety net and nearly every farmer enrolls, program expenditure would be $3.7 billion per year above current expenditure levels, and that would offset the elimination of paying Direct Payments.  One issue that skews the outlay is the fact that Direct Payments are made in the current marketing year, but counter-cyclical payments and ACRE payments are not made until the following marketing year.  FAPRI believes that by eliminating the $49 billion outlay over 10 years for Direct Payments, their replacement with ACRE payments would save $41.7 billion, if ACRE enrollment does not increase.  If ACRE enrollment increases to the maximum, eliminating the Direct Payments would save the government $18.9 billion.

Elimination of Direct Payments would come off a farmer’s bottom line, and that means a loss of more than $4 billion for farm income.  Additionally, FAPRI says Direct Payments are converted into cash rental payments to land owners, and over time, cash rent payments would decline.  That reduces annual production expenses, but without the Direct Payments net farm income also declines by $3.2 billion.  With the minor reduction in commodity prices, that will show up in lower fed costs for livestock producers, more livestock production and lower livestock receipts.

Lower farm income from the loss of Direct Payments also means lower values for farmland, which FAPRI calculates to be $71 per acre, or just under 3%.  However, if there is 100% ACRE enrollment, the average decline in land values is about $50 per acre, or just under 2%.

Looking at crop returns, FAPRI determined that some producers will feel the loss of Direct Payments and others will not, depending on what percentage those payments are in the budget of an individual operation.  It would represent about $24 per corn base acre annually for an operation not enrolled in ACRE.  If all operations enroll in ACRE, FAPRI says, “The net effect is to reduce average producer income by $16 per acre for those producers who have one acre of corn base for each acre planted.”  And FAPRI adds, “Results differ across commodities. Direct payments are lower on a per‐acre basis for soybeans than for other major crops, while projected ACRE payments are larger. For wheat, the story is fairly similar to that for corn, although per‐acre receipts and payments are generally lower.”

Even though the writing may be on the wall for loss of Direct Payments in the current political environment in Washington, don’t take all of this to the bank.  International trade rules may come into play, and they were one of the reasons that Direct Payments were fixed to a program yield, rather than vary per annual yield.  ACRE has not been blessed by the World Trade Organization, only because it has been writing its rules for the past 10 years or so.

Summary:

Eliminating the direct payment program would likely have larger impacts on budgetary outlays, farm income and land values than on commodity markets and consumer food prices.  However, if the next Farm Bill retains the ACRE program, that would have an impact on any budgetary savings.  And it is unknown how farm operators and land owners would respond to the loss of Direct Payments in their relationship.

Source: The FarmGate blog