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Corn+Soybean Digest

Mixed News On Farm Safety Net

A University of Illinois study comparing current and past farm commodity programs returns a mixed verdict, according to one of its authors.

"The good news for Illinois corn and soybean producers is that, under reasonable price expectations, the current programs provide a larger safety net than those provided by past programs," says Robert J. Hauser, a professor in the Department of Agricultural and Consumer Economics. "The bad news is that this increased support creates a political risk that needs to be fully recognized when making long-term investments."

Hauser and colleagues Bruce J. Sherrick and Gary D. Schnitkey prepared the study, "The Good News and Bad news of Today's Commodity Programs," for the Illinois Rural Policy Digest. The full report can be accessed online at:

The present loan-rate and counter-cyclical programs have two general "safety net" effects as commodity prices fall and program payments are made, Hauser explains. The first effect is to raise income beyond that which can be received in the marketplace. The second is a reduction in income variability from year to year.

Each effect was measured for the 1974 through 2001 farm programs triggered by price or income level.

"We found that the 2002 Farm Bill creates a relatively large safety net," says Hauser. "However, to the extent that the resulting income and risk-reducing effects are capitalized into land prices, it also creates a large 'political risk' associated with the potential reduction of support in future farm bills."

Farm programs traditionally addressed revenue variability in Illinois by program payments triggered by the price of corn falling below a threshold level. Revenue variability, however, is caused by changes in both prices and yield. For crop revenues from 1974 through 2001, the effect of crop price on revenue variability is much greater than the effect of yield.

"This relatively large price effect is found for both corn and soybeans," Hauser says. "When the revenue from both corn and soybeans combined is considered, it is found that corn contributes much more to the overall farm revenue variability than soybeans.

"In other words, the market revenue – market price times yield – received by Illinois corn and soybean producers changes from year to year more from varying corn prices than changes from any other effect."

When government payments are considered, the study found that, on average, payments triggered by lower commodity prices increased the net revenue per corn acre by about $23/year during the past three decades. The effects of payments on soybean revenue were much less than the effects for corn because of the traditional farm program emphasis on corn and wheat.

The study shows that "there is no free lunch," Hauser adds.

For instance, one obvious "cost" of the current program is associated with federal outlays. A more subtle cost, however, is the political risk associated with changes in these outlays.

"Given that the income and risk effects are capitalized into land values, a reduction in program support would arguably cause a decline in farmland values," Hauser says.

Three factors make potential political risk larger under a relatively more generous farm program.

"First, the high level of support found in our analysis from current price-responsive programs suggests that the attendant land-price support effect is also high," says Hauser. "The effect of benefits accruing to landowners is not a new feature of the programs, but the magnitude of the effect may be much larger than under past programs.

"Moreover, this higher level of price-responsive support is in addition to the $28 of average direct payments per corn acre, which on their own represent an increase in program benefits relative to past programs."

The second factor is that there may well be strong political incentives to reduce program support driven by budget concerns, World Trade Organization discussions, a change in the political appeal of direct payments, and a favorable farm income environment, he notes.

"Finally, anecdotal evidence strongly suggests that the expected payment being capitalized into current land prices is based primarily on the current program," Hauser says. "In short, a strong 'safety net' that is built into land prices carries with it the risk associated with uncertain changes to that safety net.

"It is important that policymakers clearly recognize that attempts to abate one type of risk can create others. And it is important that producers recognize this risk as they 'pencil out' the value of land."

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