Direct Government Payments and Agricultural Land Values: Alabama in Perspective Charles Barnard Economic Research Service The views expressed in this presentation are those of the author, and not necessarily those of the Economic Research Service or the U.S. department of Agriculture. Butler/Cunningham Conference Montgomery, Alabama November 3-4, 2003

Factors Affecting Value of Alabama Agricultural Land According to earlier presentation by Walter Prevat:  Agricultural returns (net income) to the land  Urban Influence  Direct Government Payments  Intrinsic Value --- recreation, landownership, heritage  Property Tax Rate  Interest Rate (Discount rate)

Corresponding percentage for : 4 % Corresponding percentage for : < 19 % Percent of U.S. Farmland Value Potentially Attributable to Government Payments Currently: 25 % Corresponding percentage for : > 13 % Source: Calculations by Economic Research Service from farm sector financial data

Direct Government Payments in Perspective: Alabama vs Illinois, 2002 Source: Economic Research Service data

Government Payments in Perspective: Alabama vs Illinois Source: 1997 Census of Agriculture

Cropland in Perspective: Alabama vs. Illinois Source: 1997 Census of Agriculture

For Alabama, government payments equaled about 20 percent of 2002 net cash income Source: ERS calculations based on farm sector financial data

For Illinois, government payments equaled about 38 percent of 2002 net cash income (NCI) Source: ERS calculations based on farm sector financial data

How Payments Affect Land Values: Practical mechanism Land values reflect expected future returns to land  Government payments are a component of returns  Land values rise in response to higher returns  Land values fall in response to lower returns  Government payments generally attached to land  Transfer with ownership of land  Owners of land benefit from increase in land values: both owner-operators and nonoperator landlords  Benefits “captured” by increase in land values

How Landowners “Capture” Govt. Payments On cash rental arrangements:  Full Govt. payment goes to tenant, not landowner  Competitive tenants bid lease rates up On share rental arrangements:  Govt. payments proportional to share lease terms  Landlords adjusted lease terms to reflect payment  Reduced share of expenses, increased crop share  or converted to cash leases  or landowner becomes “operator”, perhaps hiring custom work

How Payments Affect Land Values: Theoretical mechanism V = R / d V = Value of Asset R = Annual return to that asset d = discount rate Basic Capitalization Formula:

Applying the discount rate, Alabama real estate values in the absence of government payments can be estimated Actual real estate value Real estate value w/o govt. payments Real estate value attributable to govt. payments Source: ERS calculations based on farm sector financial data

Applying the discount rate, Illinois real estate values in the absence of government payments can be estimated Actual real estate value Real estate value w/o govt. payments Real estate value attributable to govt. payments Source: ERS calculations based on farm sector financial data

Decline in average Alabama real estate value in the absence of government payments would be less than decline at U.S. level U.S. IL AL

Estimates Reflect the Maximum Effect of Government Payments Several Caveats suggest effect is less than the maximum: 1) Net Cash Income defined too broadly: NCI includes returns to factors other than land (e.g., returns to operator labor or management not subtracted) 2) Government payments do not contribute dollar-for- dollar to net income: allotments and quotas applied over much of period 3) Estimates do not account for the nonagricultural value of land 4) Assumes instantaneous adjustment: expectations for future income based on current income

2001 Direct Government Payments in Perspective

Recent Estimates of Cropland Value Attributable to Government Payments (Percent) ERS Farm Resource Regions (FRR)

Who Are the Nonoperator Owners? As a group, nonoperator-owners are older than owner operators, 55% are 65 or older compared to 29% of owner operators It appears than many nonoperator owners were formerly directly associated with agricultural production: retired farmers and their survivors –29% lived on the farm they rented out (31% for those 65 and older) –28% lived within 5 miles (44% for those 65 and older)

Bottom line for Alabama Alabama receives a relatively small share of total U.S. direct commodity program payments Direct commodity program payments may contribute 10 percent or less to the average value of Alabama farmland Direct commodity program payments contribute much more to the value of land growing cotton, corn, soybeans, or wheat The benefits of payments accrue mostly to landowners, many of whom are not farm operators

For Further Information on Direct Government Payments and Farmland Values Read the Report of the Commission on the Application of Payment Limitations for Agriculture A report from the Commission to the President and Congress, as mandated in the 2002 Farm Act (Farm Security and Rural Investment Act of 2002) The Report is available free in electronic form at

Direct Government Payments and Agricultural land Values: Alabama in Perspective Charles Barnard Economic Research Service The views expressed in this presentation are those of the author, and not necessarily those of the Economic Research Service or the U.S. department of Agriculture.

Statistically-based Estimates

Total Market Value of Farmland Attributable to Farm Commodity Program Payments, 2001

Basic Model Can Be Used to Estimate Maximum Effect of Government Payments on Farmland Values V = R M / d + GP / d R M = Annual return from market GP = Annual direct government payments d = discount rate

Direct Government Payments: Impacts on Alabama Agricultural land Values Charles Barnard Economic Research Service

Perspective on Direct Government Payments and Alabama Agricultural Land Values Charles Barnard Economic Research Service The views expressed in this presentation are those of the author, and not necessarily those of the Economic Research Service or the U.S. department of Agriculture.

Direct Government Payments in Perspective: Alabama vs Illinois, 2001 Source: Economic Research Service data

Nonoperators Own Much of the Cropland Devoted to Program Commodities Source: ERS survey data

Total market value of farmland attributable to farm commodity program payments (2001) (in billions of dollars) ERS Farm Resource Regions (FRR) < 1 3

Nonoperators Own Much of the Cropland Devoted to Program Commodities (Percent owned by nonoperator landlords) ERS Farm Resource Regions (FRR)