Sector Level Analysis of Alternative Payment Limits Patrick Westhoff September 22,

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 Rice44%77%39%Direct Cotton23%62%30%CCP Sorghum3%23%8%Direct Wheat1%14%6%Direct Corn2%14%6%Direct Soybeans2%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) 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 Cotton25.7%26.7%4.8% Rice39.0%19.8%8.5% Corn5.7%3.4%0.6% Soybeans4.4%2.4%0.5% Wheat6.5%4.7%0.2% Sorghum7.8%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) CropChange in area (mil. a.) Change in area (%) Change in price ($) Change in price (%) Cotton %0.011/lb.2.30% Rice %0.399/cwt8.23% Corn %-0.001/bu.-0.04% Soybeans %-0.008/bu.-0.17% Wheat %0.002/bu.0.05% Sorghum %-0.004/bu.-0.19% 6 Crops % Figures represent average of FAPRI results for 500 alternative futures.

Effects of stricter payment limits on cotton and rice area (Fig. 2) 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 mil. a cents/lb mil. a. Over 50 cents/lb 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 government farm program outlays (Table 3) CropBaseline ($ mil./yr.) Limits ($ mil./yr.) Change ($ mil./yr.) Change (%) Cotton2,5132, % Rice1,1421, % Corn5,3045, % Soybeans2,0442, % Wheat2,1242, % Sorghum % Total CCC, Conservation 19,95219, % Figures represent average of FAPRI results for 500 alternative futures.

Effects of stricter limits on average farm income and land values (Table 3) CropBaseline ($ mil./yr.) Limits ($ mil./yr.) Change ($ mil./yr.) Change (%) Payments17,64817, % Crop sales112,767112, % Other income138,446138, % Rental costs14,10813, % Other costs205,316205, % Net farm inc.49,43749, % Land value ($/a., end of yr.) 1, , % 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