1. An Assessment of the Equitability of Farm Program Payments Across Crops National Public Policy Education Conference St. Louis, Missouri September 19-22, 2004 James W. Richardson Co-Director AFPC, Regents Professor and TAES Faculty Fellow Joe L. Outlaw Co-Director AFPC, Associate Professor and Extension Economist-Policy Lindsey Higgins Research Assistant

2. Objectives Determine alternative methods of measuring equitability Discuss the merits of each measure Apply the measures to 9 major commodities for the period 1990 – 2002 – marketing year basis Preliminary results

3. Justification Potential Budget Reconciliation January 2005 Potential commodity versus commodity conflicts

4. Definition of Government Support IncludesExcludes Deficiency PaymentsLoans Production Flexibility PaymentsPurchases Market Loss Assistance PaymentsStorage and Handling Loan Deficiency PaymentsOther outlays Direct PaymentsLoan Repayments Counter-Cyclical PaymentsSales Proceeds Marketing Loan GainsOther Receipts Producer Storage PaymentsPL 480 costs Certificate Exchange GainsInterest Expenditures Crop Insurance BenefitsStorage Facility Expenditures Commodity Specific PaymentsDisaster Payments

5. Definitions of Support Categories Deficiency Payments –Payment rate = Target price – max (loan rate, avg. market price) –Producer’s Payment = Payment rate * base acres *program yield *.85 Production Flexibility Contract Payments –Payments made under the 1996 Farm Bill –Comparable to Direct Payments under the 2002 Farm Bill

6. Market Loss Assistance Payments –Payments authorized by emergency legislation in 1998-2001 –Made to recipients of production flexibility contract payments –Also called “double AMTA Payments” Loan Deficiency Payments –Payments made when market prices (PCP or AWP) are lower than commodity loan rates –Payment Rate = Loan rate – loan repayment rate Definitions of Support Categories

7. Direct Payments –New to the 2002 Farm Bill –Annual per unit payment rate Counter-cyclical Payments –New to the 2002 Farm Bill –Payments to covered commodities whenever the effective price is less than the target price –Producer’s Payment = Payment Rate * Base Acres * CCP Yield *.85 Definitions of Support Categories

8. Marketing Loan Gains –Realized when a loan is repaid at less than the loan principal –Marketing loan gain rate = loan rate – loan repayment rate Producer Storage Payments –Payments made to producers for farmer-owned reserves Definitions of Support Categories

9. Certificate Exchange Gains –PIK, Diversion and Deficiency certificate gains Crop Insurance Benefits –Indemnities – premiums + subsidies Commodity Specific Payments –User Marketing Payments (Step 2), Oilseed payments, peanut payments, and quota compensation payments Definitions of Support Categories

10. Measures of Equitability Support per Acre –Support per planted acre Total Annual Support divided by Total Annual Planted Acres Used by Monke J. in a Congressional Research Service report –Support per base acre Total Annual Support divided by Annual Base Acreage Modification of Monke’s formula

11. Measures of Equitability Support per Yield Unit –Support per unit of Actual Production Total Annual Support divided by Actual Production units –Support per unit of Program Production Total Annual Support divided by “Program Production“ Program Production is program yield multiplied by base acres

12. Support Relative to Costs –Per Acre Support Relative to Total Economic Costs Total Annual Support per planted acre divided by Total Economic Costs (includes depreciation, capital replacement, unpaid labor, etc.) per planted acre –Per Acre Support Relative to Total Variable Costs Total Annual Support per planted acre divided by Total Variable Costs per planted acre Measures of Equitability

13. Support relative to value –Per Acre Support to Gross Value of Production Total Annual Support per planted acre divided by Gross Value of Production (excluding government payments) per planted acre –Support per Yield Unit Relative to Price Divides Support per Actual Production by Price per unit. Support per Actual Production is Total Annual Support divided by Actual Production –Total Annual Support/Total Value of Production Total Annual Support divided by Total Annual Value of Production as defined by NASS Used by Hart, C. in the Iowa Ag. Review Measures of Equitability

14. Payment Provisions relative to costs –Target Price to Total Economic Costs Annual Target Price per unit divided by Total Economic Costs per unit Economic Costs per unit calculated by taking Total Economic Costs per planted acre divided by yield per acre Used by Keough, et al. in AFPC working paper 89-4 and Miller, et al. in AFPC working paper 95-2 –Target Price to Variable Costs Annual Target Price per unit divided by Variable Costs per unit Variable costs per unit calculated by taking Total Variable Costs per planted acre divided by yield per acre Used by Keough, et al. in AFPC working paper 89-4 and Miller, et al. in AFPC working paper 95-2 Measures of Equitability

15. Payment Provisions relative to costs –Loan Rate to Total Economic Costs Annual Loan Rate per unit divided by Total Economic Costs per unit Economic costs per unit calculated by taking Total Economic Costs per planted acre divided by yield per acre Used by Keough, et al. AFPC working paper 89-4 –Loan Rate to Variable Costs Annual Loan Rate per unit divided by Variable Costs per unit Variable costs per unit calculated by taking Total Variable Costs per planted acre divided by yield per acre Used by Keough, et al. AFPC working paper 89-4 Measures of Equitability

16. Payment Provisions relative to Value –Target Price relative to Price Annual Target Price divided by Price Used by Keough, et al. AFPC working paper 89-4 –Loan Rate relative to Price Annual Loan Rate divided by Price Used by Keough, et al. AFPC working paper 89-4 Measures of Equitability

17. Effective benefits relative to effective costs –Effective Benefits/Effective Variable Costs Effective benefits include direct payments, market price or loan rate, and for 2002, countercyclical payments Effective variable costs include variable costs and ARP costs Updated formula used originally by Used by Keough, et al. AFPC working paper 89-4

18. Measures of Equitability Effective benefits relative to effective costs –Effective Benefits/Effective Fixed Costs Effective benefits include direct payments, market price or loan rate, and for 2002, countercyclical payments Effective total economic costs include fixed costs reduced by ARP percentage and ARP costs Updated formula used originally by Used by Keough, et al. AFPC working paper 89-4

19. Measures of Equitability Effective benefits relative to effective costs –Effective Benefits/Effective Costs Effective benefits include direct payments, market price or loan rate, and for 2002, countercyclical payments Effective costs include variable costs, fixed costs, and ARP costs Updated formula used originally by Used by Keough, et al. AFPC working paper 89-4

20. Results

38. Summary It Depends ….. No commodity consistently receives the most or least support throughout all the measures Results depend on how you define equitability Note: These outcomes are largely based on weather and market events, not based on intended expenditure patterns

39. References Hart, C. “How the Brazil-U.S. Cotton Dispute Could Affect Iowa’s Agriculture.” Iowa Ag Review. Summer 2004. Keough, Mary J., et al. “Are Farm Program Benefits Equitable Across Program Commodities?” Working Paper. Agriculture and Food Policy Center, Texas A & M University, 1989. Miller, John W., et al. “Evaluating the Equitability of Farm Program Benefit Distribution Across Commodities”. Working Paper. Agriculture and Food Policy Center, Texas A & M University, 1995. Monke, J. Congressional Research Service Report. June 2004 Pasour, E.C. “Cost of Production: A Defensible Basis for Agricultural Price Supports?”. American Journal of Agriculture Economics. 62 (1980): 244-48. Smith, Edward G., et al. “Equitability of Government Support Across Major Crop Commodities A Method of Comparison”. Working Paper. Agriculture and Food Policy Center, Texas A & M University, 2001.

40. Definitions of Variables used in formulas DPDirect PaymentCCPYCounter Cyclical Payment Yield DPYDirect Payment Yield0.85Payment Fraction AYActual YieldARPAcreage Reduction Program (percent) TPTarget PriceTECTotal Economic Costs LRLoan RateVCVariable Costs MPMarket PriceMA Maintenance Cost for ARP Program (assumed to be $20/acre)