Edwin Young and Barry Krissoff, Economic Research Service, USDA Domestic and Trade Impacts of U.S. Farm Policy: Future Directions and Challenges Eliminating Fruit and Vegetable Planting Restrictions: Market Considerations Edwin Young and Barry Krissoff, Economic Research Service, USDA November 15, 2006 The views expressed in this article reflect the views of the authors and do not necessarily reflect the views of the U.S. Department of Agriculture.

WTO cotton case “…production flexibility contract payments and direct payments are not "decoupled income support" within the meaning of paragraph 6, are not green box measures exempt from the reduction commitments by virtue of Annex 2 of the  Agreement on Agriculture, and are not, therefore, sheltered from challenge …” Report of WTO appellate body, March 2005 One solution is to end the planting restrictions for cotton. Most likely would have to also remove restrictions for other program commodities: Equity Potential WTO challenges

Conflicting pressures Fruit and vegetable growers oppose planting flexibility Concerned about price-depressing effect Processors favor planting flexibility Lower risk of localized crop problems Lower commodity and transportation costs

Our study approach Assess incentives to expand fruit and vegetable production along with the associated market impacts Look at the incentives program crop producers have to switch to production of fruit and vegetables. Program rules and administrative data Regional information Underlying agronomic and market constraints Production and price data Available evidence suggests limited market effects Also review attempts to value the costs of the compensation necessary to offset the value of direct and counter-cyclical payments.

Direct and counter-cyclical payments, 2004/05 $ per base acre

Average direct and counter-cyclical payments per county, 2004-05

Planting restrictions on base acres Loss of direct and counter-cyclical payments (DCP) if fruit, vegetables, and wild rice are harvested on base acres Varies by farm: DCPs reflect Crop base (corn, wheat, cotton, etc.) Program yields (farm-specific) Farms (or farmer) with history: acre-for-acre reductions Farms (or farmer) without history: can lose all DCP Double cropping permitted in some regions Regions with history Different rules from 1996 Act One year penalty More farms have a history as a result of base updating

Farm-level supply decision Farm with 1000 acres 400 non-base 200 soybean base 400 corn base Expected market net returns: $140/acre alternative crop Direct and counter-cyclical payments $15/acre soybean DCP $35/acre corn DCP Other factors such as risk and crop rotations also affect supply response Note that alternative crop is any non-prohibited crop, eg. alfalfa, dry peas, etc.

Farm-level vegetable supply function With planting restrictions c Corn base d Soybean base Direct and counter-cyclical payments a b f With planting flexibility e Non-base acres Ignoring factors such as risk and crop rotations, profit maximizing producers would plant their non-base acres to vegetables when expected net returns for vegetables are less than expected net returns plus direct and counter-cyclical payments for program crops. If net returns for vegetables exceed $155 per acre the producer would switch their soybean base acreage to vegetables. If net returns for vegetables exceed $175 per acre the producer would switch all of their acreage to vegetables.

Corn and wheat compared to vegetables (value per acre, 2003) The per acre value and production cost of fruit and vegetables are generally much higher than for program crops. We calculated value per acre for all vegetables, fresh and processed vegetables, and select vegetable categories. For fresh-market vegetables, average revenue per planted acre during 2003-05 was about $4,800—five times that for processing vegetables Calculated the per acre value of production plus marketing loan benefits and direct and counter-cyclical payments for five program crops in 2003. The value for the program crops ranges from about $144 per acre for wheat to about $835 per acre for rice. Fruit and vegetable crops have no national cost-of-production budgets, which makes comparing net returns for them with those for program crops difficult. Given the high cost of production for some fruit and vegetables, lower cost crops may garner more interest from new growers. Strawberries (for fresh and processing), fresh tomatoes, and bell peppers had the highest value (and by extension, the highest cost) per planted acre, with strawberries having by far the greatest value at nearly $27,000. Pumpkins, sweet corn, and watermelon had the lowest per acre value for fresh crops 1/ Assumes national average payment yields for direct payments. Source: Compiled by USDA’s Economic Research Service from the Farm Service Agency and National Agricultural Statistics Service.

Cotton and rice compared to fruit and vegetables (value per acre, 2003) The per acre value and production cost of fruit and vegetables are generally much higher than for program crops. We calculated value per acre for all vegetables, fresh and processed vegetables, and select vegetable categories. For fresh-market vegetables, average revenue per planted acre during 2003-05 was about $4,800—five times that for processing vegetables Calculated the per acre value of production plus marketing loan benefits and direct and counter-cyclical payments for five program crops in 2003. The value for the program crops ranges from about $144 per acre for wheat to about $835 per acre for rice. Fruit and vegetable crops have no national cost-of-production budgets, which makes comparing net returns for them with those for program crops difficult. Given the high cost of production for some fruit and vegetables, lower cost crops may garner more interest from new growers. Strawberries (for fresh and processing), fresh tomatoes, and bell peppers had the highest value (and by extension, the highest cost) per planted acre, with strawberries having by far the greatest value at nearly $27,000. Pumpkins, sweet corn, and watermelon had the lowest per acre value for fresh crops 1/ Assumes national average payment yields for direct payments. Source: Compiled by USDA’s Economic Research Service from the Farm Service Agency and National Agricultural Statistics Service.

Economic considerations Market demand considerations: locate, develop and secure markets Contracting is prevalent Inelastic demand Marketing expertise High production costs High labor requirements Specialized equipment Irrigation High pesticide and herbicide costs Several years needed fruit and vines to mature for production

Market impacts likely to be small Access to non-base acres Reduction in payments may be small relative to expected returns Barriers to entry in fruit and vegetable markets Supply-side Demand-side BUT fruit and vegetable growers concerned that it would be unfair for new competitors to receive payments Lease non-base acres or lease base acres with a history Farmers would give up payment on lower paying base first Don’t discuss details of barriers at this time. Detailed discussion is later in paper.

Payments per acre calculation Value of direct and counter-cyclical payments in ith county per base acre 1) $DCPi = ($DPi + $CCPi )/Basei Total value of payments to the jth commodity in the ith county 2) $FVij = $DCPi x AcresFVij Average payment for jth commodity 3) $FVj = Sum($FVij)/Sum(AcresFVij)

Estimated per-acre payment equivalents for fruit and vegetables Many farms that produce fruit and vegetables also produce program crops. Half of fruit and vegetable acreage is on farms that certify acreage to FSA 80% of vegetable acreage is on farms with base acres Almost all of these farmers probably have a “history” of producing fruit and vegetables on base acres so they can give up payments for one year if they want to expand production

Additional considerations Planting restrictions are not prohibitive About 14,400 to 15,000 program farms planted fruit and vegetables on just over 600,000 base acres nationwide in 2003 and 2004 Limited competition with base acres in many areas and for fruit and vegetables 9% of fruit and vegetable acreage is located in counties where payment amounts are negligible If market impacts are small the number of new entrants will be low Commodities such as alfalfa also compete for land Alternative solution would be to eliminate direct and counter-cyclical payments for program crops Removing restrictions could expand fruit and vegetable production and reduce grower prices. Based on the various pieces of evidence available our analysis suggests market effects are likely to be limited. Any impacts would be confined to specific regions and commodities. Markets would adjust and quickly return to a long-equilibrium levels. Analysis of market effects is complicated by the large number of commodities and lack of comprehensive and consistent data. Emphasize second bullet!

Concluding points Removing restrictions could expand fruit and vegetable production and reduce grower prices Markets effects Likely to be limited, barriers to enter industry Confined to specific regions and commodities Adjust quickly to new economic incentives Analysis of market effects is complicated by the large number of commodities and lack of comprehensive and consistent data Removing restrictions could expand fruit and vegetable production and reduce grower prices. Based on the various pieces of evidence available our analysis suggests market effects are likely to be limited. Any impacts would be confined to specific regions and commodities. Markets would adjust and quickly return to a long-equilibrium levels. Analysis of market effects is complicated by the large number of commodities and lack of comprehensive and consistent data. Emphasize second bullet!

Additional Resources Economic Research Service (ERS) web site http://ers.usda.gov 1996 and 2002 Farm Bill side-by-side comparison http://ers.usda.gov/Features/farmbill Farm Bill impacts http://ers.usda.gov/briefing/FarmPolicy Farm policy, farm households, and the rural economy http://ers.usda.gov/Briefing/Adjustments/