Annex Table 2. Principal Results from Econometric Studies of Time Allocation

1 The authors David Abler and David Blandford are professors in the Department of Agricultural Economics and Rural Sociology at the Pennsylvania State University, University Park, PA 16802, US.

2 Under the Conservation Reserve Program, which was originally introduced under the Food Security Act of 1985, the owners of environmentally sensitive farmland can sign a contract to convert their land to approved permanent conserving uses for 10-15 years. In exchange, landowners receive an annual payment plus cash or payments in kind for up to 50% of the cost of establishing permanent vegetative cover. The 1996 Act provided for a maximum CRP enrollment of 36.4 million acres.

3 The allocation percentages were: corn 46.22%, wheat 26.26%, cotton 11.63%, rice 8.47%, sorghum 5.11%, barley 2.16%, and oats 0.15%. The actual amount available each year was adjusted for refunds to/from the Commodity Credit Corporation (CCC) and to reflect payment limits to individual recipients. Rice was allocated an additional USD 8.5 million per year from 1997 to 2002.

4 PFC payments are sometimes referred to as AMTA payments. AMTA refers to Title I, the Agricultural Market Transition Act, of the FAIR Act. It is that part of the legislation that contains the commodity provisions, including PFC, but also commodity loans and other forms of price support, e.g. for dairy, peanuts and sugar. To avoid potential confusion, we shall refer to the payments as PFC payments. Actual PFC payment amounts under the FAIR Act were adjusted for deficiency payments still owed to farmers, and repayments owed by farmers to the government, under the 1990 Farm Act.

5 The amounts for the 1999 and 2000 crops were both disbursed in federal fiscal year 2000 (i.e. October 1999 – September 2000).

6 MLA payments have sometimes been referred to as “double AMTA” payments (Goodwin and Mishra, 2002).

7In an unpublished conference paper, Chau and de Gorter (2000, p. 6) argue that a producer may decide to do this rather to exit the industry, under the expectation that adjustments by others will eventually cause market prices to rise. If a large number of producers behave in this way, there will only be a short-run effect on production.

8 A key issue is the speed with which land prices change in response to changes in revenue. In the United States, a highly active rental market for land plays a key role in this regard, as is discussed subsequently in the paper.

9 This is the “wealth” effect of support identified by Hennessy (1998) and OECD (2001; 2004). The existence of a wealth effect requires that producers exhibit decreasing absolute risk aversion (DARA), which occurs when the Arrow-Pratt coefficient of absolute risk aversion declines as wealth increases.

10 This is the “insurance” effect of support identified by Hennessy (1998) and OECD (2001; 2004).

11 Some analysts, e.g. Chau and de Gorter (2001), have assumed a priori that the effects of PFC and MLA payments on producer decision-making are equivalent. Others, e.g. Goodwin and Mishra (2002) and Young and Westcott (2000), note the possibility that producers’ expectations and their production decisions may have been altered after MLA payments were introduced.

12 Using USDA data for farm sector accounts and an income capitalization approach, Ryan et al. (2001) estimate that total US government payments increased US farmland values by an average of 25% for the years 1998-2001.

13 Here and throughout this paper, the term unpublished refers to work that has not been published formally in books or in referenced, academic journals. The research in question will normally have been presented at conferences or issued in working paper series by universities or research institutes.

14 Mullen’s (2001) unpublished M.S. thesis uses somewhat lower supply elasticities than Mullen et al. (2001) for the model’s two inputs, land and a composite non-land input, which generates somewhat smaller impacts on production, but the qualitative conclusions are unchanged.

15 The 11 states are Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio, South Dakota, and Wisconsin. These states encompass nearly all of the Corn Belt and much of the Wheat Belt.

16 Commercial farms are those with annual sales of USD 250 000 or more. Commercial farms accounted for more than one-half of all PFC payments and about two-thirds of agricultural production among farms receiving PFC payments in 2001 (Burfisher and Hopkins, 2003).

17 The Heartland region, also known as the Corn Belt, is comprised of a relatively homogeneous grouping of counties in the states of Illinois, Indiana, Iowa, Kentucky, Minnesota, Missouri, Nebraska, Ohio, and South Dakota.

18 These figures and similar figures elsewhere in this paper assume that the estimated magnitudes of the marginal effects of payments hold over the entire range of payments. This assumption may be questioned but we lack empirical evidence on whether marginal effects would be greater or smaller at lower payment levels.

19MLA payments are grouped with other disaster relief payments in the ARMS data.

20 The Northern Great Plains region is comprised of a relatively homogeneous grouping of counties in the states of Colorado, Minnesota, Montana, Nebraska, North Dakota, South Dakota, and Wyoming.

21 As noted above, MLA payments are grouped with other disaster-relief payments in the ARMS data.

22 Farmers who both own and rent land would still realize gains on the land that they own, possibly leading them to increase production as a result of payments associated with the land they own.

23 In the Goodwin et al. (2003a) dataset, MLA payments account for about 90% of total disaster-relief payments.

24 The Prairie Gateway region is comprised of a relatively homogeneous grouping of counties in the states of Colorado, Kansas, Nebraska, New Mexico, Oklahoma, and Texas.

25 The point estimate was 1.34 and was not statistically different from 1.

26 Marginal q, also known as fundamental q, is the expected discounted stream of marginal profits from an additional dollar of investment, i.e. the marginal value of capital to the producer.

27 Constant absolute risk aversion (CARA) occurs when the Arrow-Pratt coefficient of absolute risk aversion for an economic agent is the same regardless of agent’s level of wealth. As noted earlier, decreasing absolute risk aversion (DARA) occurs when the Arrow-Pratt coefficient of absolute risk aversion declines as wealth increases.

28 This study is Goodwin and Mishra (2003). In studying the determinants of wheat acreage, they found that the impact of market price support was about nine times greater than the impact of PFC payments.

29 Two pilot tests have been done to gauge the feasibility of adding a panel component to the ARMS, and there continues to be interest at USDA in adding a panel component.

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