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
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
Justification
• Potential Budget Reconciliation January 2005
• Potential commodity versus commodity
conflicts
Definition of Government Support
Includes
Excludes
Deficiency Payments
Loans
Production Flexibility Payments
Purchases
Market Loss Assistance Payments
Storage and Handling
Loan Deficiency Payments
Other outlays
Direct Payments
Loan Repayments
Counter-Cyclical Payments
Sales Proceeds
Marketing Loan Gains
Other Receipts
Producer Storage Payments
PL 480 costs
Certificate Exchange Gains
Interest Expenditures
Crop Insurance Benefits
Storage Facility Expenditures
Commodity Specific Payments
Disaster Payments
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
Definitions of Support Categories
• 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
• 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
• 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
• 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
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
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
Measures of Equitability
• 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
• 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
• 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
• 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
• 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
• 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
[( DP ( DPY / AY )  (TP  DP  Max ( LR, MP ) * (CCPY / AY )) * .85]  Max ( MP, LR)
VC  MA ARP / 1  ARP / AY
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
[( DP ( DPY / AY )  (TP  DP  Max ( LR, MP ) * (CCPY / AY )) * .85]  Max ( MP, LR)
MA ARP / 1  ARP   (TEC  VC ) /(1  ARP )/ AY
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
[( DP ( DPY / AY )  (TP  DP  Max ( LR, MP ) * (CCPY / AY )) * .85]  Max ( MP, LR)
VC  MA ARP / 1  ARP   (TEC  VC ) /(1  ARP )/ AY
Results
Dollars per acre
Support per Planted acre*
700
600
500
400
300
200
100
0
Average
90-'95 Avg
96-'01 Avg
02-'03 Avg
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Total Annual Support divided by Total Annual Planted Acres
**Source: CCC Expenditures obtained from Farm Service Agency, USDA. Planted acres obtained from National
Agricultural Statistics Service, USDA.
Results
Results
Support per unit of Program Production*
Dollars per unit
1.20
Average
90-'95 Avg
96-'01 Avg
02-'03 Avg
1.00
0.80
0.60
0.40
0.20
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans Peanuts
*Total Annual Support divided by "Program Production". Program Production is program yield multiplied by
base acres.
**Source: CCC Expenditures obtained from Farm Service Agency. Program yield and base acres obtained from
FAPRI and Farm Service Agency.
Results
Dollars per unit
Support per unit of Actual Production*
Average
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
90-'95 Avg
96-'01 Avg
02-'03 Avg
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Total Annual Support divided by Actual Production units.
**Source: CCC Expenditures obtained from Farm Service Agency. Annual Production obtained from National Agricultural Statistics
Service.
**S ourc e
Results
Per Acre Support Relative to Total Economic Costs*
Support Ratio
0.90
0.80
Average
0.70
90-'95 Avg
0.60
96-'01 Avg
0.50
02-'03 Avg
0.40
0.30
0.20
0.10
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Total Annual Support per planted acre divided by Total Economic Costs per planted acre.
**Source: CCC Expenditures obtained from Farm Service Agency. Total Economic Costs obtained from Economic Research
Service, USDA.
Results
Support Ratio
Per Acre Support Relative to Total Variable Costs*
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Average
90-'95 Avg
96-'01 Avg
02-'03 Avg
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Total Annual Support per planted acre divided by Total Variable Costs per planted acre.
**Source: CCC Expenditures obtained from Farm Service Agency. Total Variable Costs obtained from Economic
Research Service, USDA.
Results
Support Ratio
Per Acre Support to Gross Value of Production*
Average
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
90-'95 Avg
96-'01 Avg
02-'03 Avg
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Total Annual Support per planted acre divided by Gross Value of Production per planted acre.
**Source: CCC Expenditures obtained from Farm Service Agency. Gross Value of Production obtained from
Economic Research Service, USDA.
Results
Support per Unit Relative to Price*
Support Ratio
1.20
Average
1.00
90-'95 Avg
0.80
96-'01 Avg
0.60
02-'03 Avg
0.40
0.20
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Divides Support per Actual Production by Price per unit. Support per Actual Production is Total Annual Support divided by
Actual Production.
**Source: CCC Expenditures obtained from Farm Service Agency. Price obtained from National Agricultural Statistics
Service.
Results
Support Ratio
Total Annual Support/Total Value of Production*
1.20
Average
90-'95 Avg
1.00
96-'01 Avg
0.80
02-'03 Avg
0.60
0.40
0.20
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Total Annual Support divided by Total Annual Value of Production.
**Source: CCC Expenditures obtained from Farm Service Agency. Total Value of Production obtained from National
Agricultural Statistics Service.
Results
Target Price to Total Economic Costs*
2.00
Ratio
1.50
Average
90-'95 Avg
1.00
96-'01 Avg
02-'03 Avg
0.50
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*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 in units per acre.
**Source: Target Price obtained from FAPRI. Total Economic Costs obtained from Economic Research Service, USDA. Actual Yield obtained
from National Agricultural Statistics Service, USDA.
Results
Target Price to Variable Costs*
Average
Ratio
4.00
90-'95 Avg
3.00
96-'01 Avg
2.00
02-'03 Avg
1.00
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*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 in units per acre.
**Source: Target Price obtained from FAPRI. Total Variable Costs obtained from Economic Research Service, USDA. Actual Yield
obtained from National Agricultural Statistics Service, USDA.
Results
Loan Rate to Total Economic Costs*
Average
1.50
Ratio
90-'95 Avg
1.00
96-'01 Avg
0.50
02-'03 Avg
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*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 in units per acre.
**Source: Loan Rate obtained from FAPRI. Total Economic Costs obtained from Economic Research Service, USDA.
Actual Yield obtained from National Agricultural Statistics Service, USDA.
Results
Loan Rate to Variable Costs*
2.50
Ratio
2.00
1.50
Average
1.00
90-'95 Avg
0.50
02-'03 Avg
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*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 in units per acre.
**Source: Loan Rate obtained from FAPRI. Total Variable Costs obtained from Economic Research Service, USDA. Actual
Yield obtained from National Agricultural Statistics Service, USDA.
Results
Ratio
Target Price relative to Price*
2.50
Average
2.00
90-'95 Avg
1.50
96-'01 Avg
1.00
02-'03 Avg
0.50
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Annual Target Price divided by Price
**Source: Target Price obtained from FAPRI. Price obtained from National Agricultural Statistics Service, USDA.
Results
Ratio
Loan Rate relative to Price*
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Average
90-'95 Avg
96-'01 Avg
02-'03 Avg
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Annual Loan Rate divided by Price
**Source: Loan Rate obtained from FAPRI. Price obtained from National Agricultural Statistics Service, USDA.
Results
Ratio
Effective Benefits/ Effective Variable Costs
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Average
90-'95 Avg
96-'01 Avg
02-'03 Avg
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Effective Benefits divided by 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.
**Source: Actual Yield and price obtained from NASS, USDA. Farm bill payment provisions obtained from Farm Service Agency, USDA.
Results
Effective Benefits/ Effective Fixed Costs
3.00
Ratio
2.50
2.00
Average
1.50
90-'95 Avg
1.00
96-'01 Avg
0.50
02-'03 Avg
0.00
Corn
Cotton
Rice
Sorghum
Oats
Wheat
Barley
Soybeans
Peanuts
*Effective Benefits divided by Effective Costs. Effective benefits include direct payments, market price or loan rat, and for 2002, countercyclical
payments. Effective total economic costs include fixed costs reduced by ARP percentage and ARP costs.
**Source: Actual Yield and price obtained from NASS, USDA. Farm bill payment provisions obtained from Farm Service Agency, USDA.
Results
Effective Benefits/ Effective Costs*
1.20
Ratio
1.00
Average
0.80
90-'95 Avg
0.60
96-'01 Avg
0.40
02-'03 Avg
0.20
0.00
Corn
Cotton
Rice
Sorghum
Oats
W heat
Barley
Soybeans
Peanuts
Crop
*Effective Benefits divided by 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.
**Source: Actual Yield and price obtained from NASS, USDA. Farm bill payment provisions obtained from Farm Service Agency,
USDA.
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
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.
Definitions of Variables used in formulas
DP
Direct Payment
CCPY
Counter Cyclical Payment Yield
DPY
Direct Payment Yield
0.85
Payment Fraction
AY
Actual Yield
ARP
Acreage Reduction Program (percent)
TP
Target Price
TEC
Total Economic Costs
LR
Loan Rate
VC
Variable Costs
MA
Maintenance Cost for ARP Program (assumed
to be $20/acre)
MP
Market Price