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Analysis of Plan to Cut Direct Payments

Analysis of Plan to Cut Direct Payments

Economic study questions how much federal budget savings would come from eliminating direct payments.

Cutting direct payments to farmers appears to save $4.9 billion per year in the federal budget. However, cutting that USDA program could boost farmer participation in ACRE, a program that offsets losses in farm income.

"Much of the budget savings from cutting direct payments could be offset by sharp increases in ACRE program expenditures," says Pat Westhoff, director of the University of Missouri Food and Agricultural Policy Research Institute, a think tank that maintains computer models of the farm sector.

Carl Zulauf, an agricultural economist at Ohio State University who designed the ACRE program agrees that participation in ACRE would increase if you eliminated direct payments.

"You would eliminate the 20% reduction in direct payments currently required to participate in ACRE," Zulauf says. "All of the evidence I have seen and my own discussion with farmers is that the 20% reduction in direct payments is a key reason for not electing to enroll in acre. It is often the first reason cited, which does not mean that it is the most important but it probably means that it is at least one of the most important reasons for the decision."

A recent report from FAPRI compares payment cuts to expected expenditures in the 2012 MU FAPRI baseline.

"Cutting direct payments would have important effects on federal budgets, farm income and farmland value," says Westhoff. "Impacts on crop production and prices would be small."

A group taking a big hit could be landlords, owners of cropland rented to farmers.

Under provisions of the current Farm Bill, farmers can enroll in ACRE (Average Crop Revenue Election), a farm-income safety net. However, ACRE drew little participation. When enrolling, farmers must give up 20 percent of their direct payments.

"Direct payments became a disincentive to enroll in ACRE," Westhoff says. "Cutting direct payments might drive farmers into the program."

To test that potential, FAPRI economists ran two "what-if" scenarios. The first assumed ACRE participation remained the same as in the current FAPRI baseline. The second run assumed 100 percent of farmers enrolled in ACRE to protect income.

"If there is no increase in ACRE participation from the current 14 percent of base acres, farm program net outlays are cut $41.7 billion from FY 2012 to 2021," Westhoff says. "In contrast, if all producers rush into ACRE when direct payments are cut, federal outlays would fall only $18.9 billion."

"This finding implies that increased participation and thus payments from acre would temper the impact of the loss of direct payments upon farmers' income." Zulauf adds. "Even with increased participation in acre, I would point out that, from the perspective of budget deficit reduction, the analysis finds that there are still budget savings of $1.9 billion per year.  This is not a small amount of savings even from the perspective of the federal budget."

Cuts in direct payments also lower farm income and prices of farmland, according to Westhoff.

Depending on ACRE enrollment, net farm income could drop $1.9 billion to $3.2 billion per year. Farmland values decline an average of 1.8 to 2.7% compared to baseline.

The effects on crop income vary for different farmers. "Direct payments are a much larger share of income for some producers," Westhoff says.

Farmers now receive direct payments averaging about $24 per enrolled corn acre, compared to $11 for soybeans, $15 for wheat, $34 for cotton and $95 for rice. If there is no change in ACRE participation, the increase in market prices would offset only a small fraction of the cuts in direct payments.

"The story becomes more complex if ACRE enrollment increases to 100 percent," Westhoff said. That would eliminate most marketing loans and all countercyclical payments, but ACRE payments would increase.

For new participants, ACRE payments could offset part of the cuts of direct payments.

"I would say for all participants, acre payments could offset part of the cuts in direct payments," Zulauf says. " In other words, this impact applies not just to new participants in acre but also to existing participants in acre."

"ACRE payments are most likely to offset lost direct payments for soybean growers and least likely for cotton growers," Westhoff says.

"Actual participation in ACRE is hard to predict," he says. "It would likely fall between the two FAPRI scenarios, which provide a bracket of outcomes."

Zulauf  agrees that it is unlikely that acre's participation rate would be 100% if direct payments are eliminated.  "I would expect that producers of some crops would be more likely to pick acre while producers of other crops would be more likely to pick the counter-cyclical program," he says. " Given the greater historical importance of the price counter-cyclcial program for cotton, rice, and peanuts, it would be reasonable to expect these producers to look more closely at these programs.  I aslo agree that landlord-tennant relationships will come into play in this decision, although it is hard to figure out exactly what the impact of this interrelationship will be on participation in acre."

Another difference with ACRE is that landlords must agree to allow the renter to participate. "That could affect enrollment," Westhoff says.

Now, direct payments are not tied to acres planted. Under ACRE, payments are based on actual planted acres. This could increase crop acreage and boost production, offsetting some effects of direct-payment cuts.

"A key impact of eliminating direct payments and increasing participation in acre would be that farm program payments would be tied to the occurrence of a farm loss," Zualuf says. "Farmers receive direct payments even if they have record income.  There is no farm loss provision.  Acre has a farm loss provision.  The lack of a farm loss provision for direct payments (and marketing loans and price counter-cyclical programs) is a cause of major concern among many individuals, especially non-farmers.  These individuals are in essence asking whether it is fair that farmers receive farm program payments when they do not suffer a loss?"

"Even with 100% participation in ACRE, the change remains quite small on total area planted to major crops," Westhoff says. "While most crops increase slightly, cotton acreage declines."

Switching to ACRE would bring minimal change to food expenditures. "Food costs are projected to change less than one-tenth of one percent," Westhoff says.

"Potential Impacts of Eliminating Direct Payments," an 18-page report, is posted on the MU FAPRI website:

TAGS: USDA Soybean
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