The U.S. and other industrialized nations subsidize producers
of certain farm commodities with payments linked to commodity prices
and production levels. These subsidy programs, which in the U.S.
originated in the 1930s, were designed to insulate producers from
fluctuations in market prices and raise farm household incomes.
Under such a system, however, producers base their planting decisions
for the subsidized commodities—which ones to grow, how much
acreage for each, and the intensity of cultivation—not only
on information about market values or costs, but also on government
payments. Thus, in responding to distorted market signals, farmers
may produce a different mix of commodities than they would with
no market distortions. In the United States, interest in market
liberalization and obligations under multilateral trade agreements
have prompted policymakers to design and implement less distorting
government programs.
One step in that direction is to “decouple”
farm income support from prices or production. Efforts to decouple
farm income support in the U.S. began in the 1980s, but the most
sweeping changes were introduced in farm legislation in 1996 and
2002. These decoupled payments—originally called production
flexibility contract (PFC) payments in the 1996 legislation—are
lump-sum payments on eligible acres, where the per acre payments
are based on historical plantings of program crops and yields, rather
than on current market prices or production levels of the crops.
Farmers have the flexibility to plant different crops or let their
fields lie fallow, but face some land use restrictions. For example,
acres enrolled in the program cannot be developed for nonagricultural
uses.
Unlike coupled payments, decoupled payments directly
change the income and wealth of a household, without distorting
relative commodity
prices. But questions about the payments’ impact on the farm
business and farm household well-being remain. Specifically, how
much income do farm operators who rent land retain from decoupled
payments, net of what they pay to landowners in increased land
rents?
How do farm households receiving decoupled payments allocate their
increased income among consumption, leisure (decreased work hours),
savings, and investments for the farm and off-farm sectors? Under
what circumstances might income from decoupled payments affect
agricultural
production as well as the nonagricultural activities of farm households?
ERS researchers used a household framework as well as household-level
data from USDA’s Agricultural Resource Management Survey
and the Census of Agriculture to analyze the effects of decoupled
payments
in two recent studies. A 2003 report described preliminary evidence
that decoupled payments enhanced the well-being of participating
farm households, enabling them to increase spending, savings, and
investments with seemingly minimal distortion of U.S. agricultural
production. A more recent report presents new analyses, including
how land tenure arrangements influence the amount farm households
receive from decoupled payments, and how decoupled payments influence
markets for agricultural capital and labor.
Land Rents Increase Less Than Per Acre Decoupled Payments
Approximately 60 percent of U.S. cropland enrolled in
the PFC program in 1996 was leased by farm operators from nonoperator
landowners. ERS research shows that, in 1992, a producer who rented
cropland for cash paid a 21-cent premium per dollar of government
payments received, while the same producer paid a 33-cent premium
in 1997, 1 year after the PFC program went into effect. These findings
suggest that decoupled payments had a stronger influence on land
rental rates than do coupled payments, but also that the rise in
land rents did not fully reflect the amount of government payments
that a renter received. Most observers have assumed that decoupled
payments increase land rents dollar for dollar. These alternative
findings could indicate that land rental markets operate imperfectly
and adjust slowly, and/or that PFC payments and associated land
restrictions affect production in ways that reduce operator profits.
At present, this finding remains a puzzle.
Decoupled Payments Are Likely To Influence Investment Only
During Severe Recessions
For any household—farm or nonfarm—an increase in income
and wealth generally makes it easier to save and invest and may
also increase the household’s access to credit. Households
choose among investment options based on a comparison of their
expected
rates of return. Farm households may choose to increase onfarm
investment, through purchases of equipment or other physical capital,
if the
expected returns to doing so are higher than the returns expected
from off-farm investment opportunities. Since lump-sum decoupled
payments do not directly affect either onfarm or off-farm rates
of return, they would not affect onfarm investment or production
levels through capital market channels as long as these markets
are efficient and households can access credit or capital. Instead,
these payments provide farm households with increased purchasing
power to allocate among a variety of uses, including financial
investment
and consumption.
Financial capital markets are, however, characterized
by imperfections that can induce creditors to restrict producers’ access to
capital or credit. In such cases, farm households that have limited
access to credit may use the payments to increase onfarm investment.
Research indicates, however, that farm investment patterns do not
rely on farm cash income except in relatively rare circumstances,
both for the sector as a whole and for individual farms. In particular,
during severe farm recessions, capital market imperfections are
associated with inefficiently low investment. In addition, survey
data do not indicate that capital constraints have been an important
determinant of U.S. production of program commodities in recent
(nonrecessionary) years. These observations imply that decoupled
payments may raise onfarm investment to more efficient levels in
farm recessions.
Onfarm Work Hours Are Not Changing Significantly
On
average, U.S. farm operators and other members of their families
who participate in government programs allocate about 60 percent
of their total work hours to working on the farm, and earn about
20 percent of their household income from farming. An increase
in
income could lead farm households to increase consumption of goods/services
and leisure by spending less time working. ERS analysis of farm
household labor allocations before and after the introduction of
decoupled payments—taking into account the full range of factors
affecting labor allocations—found no strong evidence that
decoupled payments had a different effect on average hours worked,
on or off the farm, than did traditional coupled payments. Both
coupled and decoupled payments increased the hours worked on the
farm and decreased the hours worked off the farm, when the model
controls for the various factors that affect labor allocations.
In the aggregate, farm households receiving decoupled payments did
not significantly change their time spent working on the farm during
the mid-to-late 1990s. Average off-farm work hours rose by a small
but significant amount between 1996 and 2000—both for farm
households that participated in commodity programs and those that
did not—perhaps indicative of the influence of a strong economy
during that time.
While the analyses of land, capital, and labor markets
suggest that decoupled payments have the potential to indirectly
influence
farmers’ decisions about resource allocation and agricultural
production, the empirical evidence to date indicates that these
impacts are
ambiguous and therefore warrant further study. As farm programs
evolve, so, too, will the analytical framework used to study the
impacts of policy changes, leading to enhanced understanding of
the impacts of these payments on the behavior and well-being of
U.S. farm households.
This article is drawn from...
Decoupled Payments
in a Changing Policy Setting, by Mary Clare Ahearn, Mary E.
Burfisher, Robert N. Collender, Xinshen Diao, David Harrington,
Jeffrey Hopkins, Robert Hoppe, Penelope Korb, Shiva S. Makki, Mitchell
Morehart, Michael J. Roberts, Terry Roe, Agapi Somwaru, Monte Vandeveer,
Paul C. Westcott, C. Edwin Young, AER-838, USDA/ERS, November 2004.