H.R. 2419 and USDA 2007 Farm Bill Proposal Impacts on Arkansas Representative Farms

Jeffrey Hignight, Eric Wailes, Rob Hogan, Brad Watkins

SP 03 2007

August 2007

Department of Agricultural Economics and Agribusiness University of Arkansas, Fayetteville Division of Agriculture

_____________________________________________________________ Jeffrey Hignight is a graduate research assistant and Eric Wailes is L.C.Carter Professor, both with the Department of Agricultural Economics and Agribusiness, Fayetteville. Rob Hogan is an assistant professor and extension economist with the Northeast Research and Extension Center, Keiser. Brad Watkins is a research assistant professor with the Rice Research and Extension Center, Stuttgart.

Introduction Arkansas is the nation’s largest producer of rice, second in cotton, and is the largest grower of soybeans in the southern region. These crops, along with corn, wheat, and sorghum, account for almost all of the row crop acreage in the state. A typical Arkansas farm crop mix will include at least two of the major crops. Corn, wheat, and sorghum are sometimes added to help with diversification. The characteristics and crop enterprises are not only typical for the state, but for the Delta region as well. Although there are differences within the region, all face the same challenges of capital investment and input cost, determining optimal crop mixes, adoption of new technologies, and trying to attain profitability. Access to the safety net provided by government price and income support programs is generally an important dimension of all of these farms. The 2002 Farm Bill expires on September 30, 2007. The U.S. Congress must write new legislation or the farm commodity programs will revert back to the 1949 legislation. Provisions of the 1949 legislation would require exceptionally high government expenditures and a return to farm policy instruments that are no longer relevant for the farm sector in the United States. To help set the stage for the new legislation, the USDA released its proposal for the 2007 Farm Bill in January 2007. It is the first time in history that the Department put forth such a comprehensive proposal for farm legislation. With the release of the proposal, Secretary Mike Johanns said, “(The proposal) saves about $10 billion over the cost of the 2002 Farm Bill excluding disaster aid. I will also tell you that they uphold the President's plan to eliminate the deficit within five years.” The House Agriculture Committee drafted farm legislation over the summer of 2007. On July 27, 2007 the House of Representatives voted and approved its farm legislation H.R. 2419. Upon passage, the House Agriculture Committee Chairman Collin C. Peterson noted that “the U.S. House of Representatives passed a Farm Bill that makes historic investments in fruit and vegetable production, conservation, nutrition, and renewable energy while maintaining a strong safety net for America’s farmers. The bill passed by a vote of 231-191.” The purpose of this report is to provide an analysis of the USDA proposal and House bill in terms of their impact on Arkansas crop farms. Efforts by the President and Congress to reduce the deficit by cutting discretionary funding such as commodity farm programs could cause significant adverse effects on the economic well-being of Arkansas farms, primarily cotton and rice farms. Cotton and rice have higher production costs and depend more on government payments for profitability than do mid-western crops like corn and soybeans. Figures 1, 2 and 3 (in a USDA report by Childs and Livezey (2006)) show large differences in size by acreage and operating and fuel costs among the major farm commodities. The relatively large size of Arkansas and southern states rice and cotton farms means that any Farm Bill reform that reduces payment limits will have more adverse effects on cotton and rice farms. (See Figure 4 also from Childs and Livezey, (2006). Miller et al. (2003) studied stricter payment limits and concluded rice and cotton farms, which are predominately southern state crops, reached payment limits on direct and counter-cyclical payments on less acreage than other commodities.

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Figure 1. Per acre government payments for crops under the 2002 Farm Bill.

Figure 2. Per acre operating costs among major U.S. crops.

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Figure 3. Per acre fuel expenses among major U.S. crops.

Figure 4. Average farm acreage size by major U.S. crops.

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Objectives The objectives of this report are to measure and compare the impacts of the USDA 2007 Farm Bill proposal, each major program component within the USDA proposal, and the House 2007 Farm Bill legislation relative to an extension of current 2002 Farm Bill on the Arkansas representative panel farms economic well-being. The specific objectives of this study are: 1. To evaluate the commodity programs within the USDA 2007 Farm Bill proposal, both individually and cumulatively compared and extension of the current Farm Bill. 2. To evaluate the two alternative options within the H.R. 2419 legislation. 3. To estimate the projected difference in government farm commodity program payments and farm net returns under the alternative scenarios as compared to an extension of the current Farm Bill.

Data and Methods Representative panel farms were constructed based on data collected by economists from the Arkansas Cooperative Extension and Agricultural Food and Policy Center of Texas A&M. Every two or three years, panels of producers work together with these economists to generate representative farms with the characteristics and crop enterprises representative of farms in their area. Eight representative farms have been constructed for Arkansas and they provide the framework to conduct this study. Description of the crop mix, acreage, land tenure arrangement, and government base acreage and yields for each panel farm are presented in Table 1. Projections of US national prices and yields by the Food and Agriculture Policy Research Institute (FAPRI) 2007 report are used in this report to develop the mean prices for the stochastic simulation of representative Arkansas farms and are presented in Table 2. Using historical data, empirical distributions are developed for each variable by means of multivariate empirical distribution as described by Richardson et al. (2000). Policy parameters are adjusted according to each scenario as described by the 2002 Farm Bill, the USDA 2007 Farm Bill proposal, and the House legislation H.R. 2419. Policy parameters of the baseline are given in Table 3. Policy parameters of the USDA proposal are given in Table 4 and policy parameters of H.R. 2419 are given in Table 5.

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Scenarios Application of the multivariate empirical distribution to the data from FAPRI and each representative farm along with alternative farm policies will generate estimates of crop receipts, government payments, cash costs, depreciation, and net taxable income for the simulated years (2008-2012). The following scenarios are analyzed in this study relative to the baseline which is an extension of the current 2002 Farm Bill: 1. The Direct Payment scenario: This scenario uses the USDA proposal on direct payments with all other farm policies described in the 2002 Farm Bill during the simulated years. 2. The Counter-Cyclical Revenue Payment (CCRP) scenario. The 2002 Farm Bill price based counter-cyclical program is replaced with the proposed counter-cyclical revenue program during the simulated years. All other polices are the same as in the baseline. 3. The Loan Rate scenario. This proposal would set the loan rate at the lesser of 85% of the 5-year Olympic average of the market price or the loan rates established by the House-passed version of the 2002 Farm Bill. All other policies are the same as in the baseline. 4. The Payment Limits scenario: This scenario analyzes the USDA proposal to change the 2002 Farm Bill loan deficiency payment, direct payment, and counter-cyclical payment limitations per entity to $140,000, $110,000, and $110,000, respectively. The proposal makes payment limitations binding by eliminating the 2002 Farm Bill 3-entity rule and spousal rule. It is replaced with direct attribution for payments. All other policies are the same as under the baseline. 5. The Adjusted Gross Income (AGI) scenario. The scenario is the same as the Baseline scenario except that the three-year average AGI maximum is changed from $2.5 million to $200 thousand. This proposal also eliminates the exception if 75% of AGI comes from agriculture. 6. The Total USDA Proposal scenario. The scenario analyzes the cumulative impact of the USDA Farm Bill proposal, scenarios 2-6, on the farms through the simulated years. 7. The USDA Proposal Except Limits scenario. This scenario analyzes the impact of scenarios 2-4 on the panel farms. Payment limitations and AGI are the same as in the 2002 Farm Bill baseline. 8. The H.R. 2419 with CCP scenario. This scenario analyzes H.R. 2419 with the producer choosing to participate in the price based counter-cyclical program. 9. The H.R. 2419 with CCRP scenario. This scenario analyzes H.R. 2419 with the producer choosing to participate in the revenue based counter-cyclical program as proposed by the USDA and as proposed as an option in H.R. 2419.

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Results Table 6 presents government payments and net farm incomes (NFI) indexed across the representative farms for the simulation years. The scenarios are indexed against the baseline. The 2002 Farm Bill baseline result is indexed to 100. An improvement over the 2002 Farm Bill of 20 percent is represented as 120. A weighted annual average based upon acreage is also presented in Table 6. This analysis assumes the policies would be implemented from 2008-2012. The results were generated by stochastically simulating farm performance. These results are based on alternative farm yields and prices based on the Food and Agricultural Policy Research Institute (FAPRI) 2007 baseline estimates and the historical variation faced by these farms. Each farm was simulated 500 times for each scenario. The results are indexed for the annual average results over the 5 simulated years, relative to the 2002 Farm Bill extension. The results indicate the USDA loan program proposal would have a moderately negative impact while the CCRP program and increased direct payment proposals would result in small positive increases to NFI. The AGI scenario indicated that 5 of the 8 representative farms would be negatively impacted from the USDA AGI means test proposal and only one farm had less than half of a percent chance of being negatively impacted from the House Agriculture Committee legislation. Severe negative impacts on NFI came from the USDA and H.R. 2419 provisions for stricter payment limitations. The representative panel farms’ net farm incomes rely heavily on government payments. Average NFI during the simulation was entirely from government payments for the 3 farms that had a positive NFI. Table 7 presents the ranking of the scenarios based upon second-degree stochastic dominance criterion. This criterion ranks one proposal relative to another based on the assumption that the producer is risk adverse and prefers more income over less. The majority of panel farms would prefer an extension of the 2002 Farm Bill while all but one would prefer the USDA proposal the least. H.R. 2419 with the revenue-base countercyclical program was preferred by 3 farms over the baseline and 6 of the 8 farms preferred it over the price-based counter-cyclical program. Table 8 presents the probabilities of a positive NFI under each scenario. ARC5000 has the highest probability of a positive NFI under the baseline or any scenario. ARSR3640 has a good probability of a positive NFI under the baseline and H.R. 2419 with CCRP scenario while ARCR6500 has a moderate probability of obtaining a positive NFI under the baseline and both H.R. 2419 scenarios. The table clearly shows however that most farms have a lower probability of a positive NFI under the USDA proposals than the other scenarios. Probabilities for a positive NFI are low for almost all representative farms. This study does not account for the potential contribution of non-program crop or other enterprises or off-farm income that would contribute to household incomes. The results in this report only account for returns to the program crops under government commodity programs, panel farms’ data parameters, and assumptions on yields, prices, and inflation.

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Table 1. Characteristics of Arkansas representative panel farms. Forrest Leachville Osceola Pine Bluff M cGehee Stuttgart Wynne Hoxie City Location ARNC5000 ARCR6500 ARCR4000 ARC6000 ARSR3640 ARWR1200 ARHR3000 ARC4200 Farm Name 5,000 6,500 4,000 6,000 3,640 1,200 3,000 4,200 Total Cropland Acres Owned 1,000 1,950 1,200 1,200 728 360 1,000 1,000 Crop Share Lease 3,200 3,185 2,520 4,800 2,912 740 1,900 1,500 Cash Lease 800 1,365 280 0 0 100 100 1,500 Planted Acres for S imulation Irrigated Cotton 4,500 1,316 1,320 2,000 0 0 0 2,600 Dryland Cotton 500 1,609 0 0 0 0 0 0 Rice 0 1,625 800 2,000 1,620 600 1,750 0 M edium Grain Rice 0 0 0 0 0 0 175 0 Dryland Soybeans 0 1,365 376 0 0 24 125 1,200 Wheat 0 0 0 0 324 60 0 0 Corn 0 0 0 0 0 0 0 400 Grain Sorghum 0 0 0 500 0 0 0 0 Policy Variables Base Acreage Irrigated Cotton 4,050 987 1,320 1,900 0 0 0 780 Dryland Cotton 450 1,207 0 0 0 0 0 0 Rice 0 975 800 1,900 1,620 600 1,750 0 Irrigated Soybeans 0 999 1,504 2,000 1,620 576 1,125 0 Dryland Soybeans 0 2,332 376 0 0 24 125 780 Wheat 0 0 0 0 235 60 0 0 Direct Payment Yield Irrigated Cotton 480 650 800 640 0 0 0 500 Dryland Cotton 480 650 0 0 0 0 0 0 Rice 0 5,000 4,500 4,500 5,500 5,230 4,630 0 Irrigated Soybeans 0 22 19 22 29 31 31 0 Dryland Soybeans 0 22 19 0 0 31 31 20 Wheat 0 0 0 0 44 47 0 0 Counter-Cyclical Payment Yield Irrigated Cotton 725 750 900 920 0 0 0 825 Dryland Cotton 725 750 0 0 0 0 0 0 Rice 0 4,995 5,850 5,500 5,900 5,230 5,600 0 Irrigated Soybeans 0 30 35 30 36 31 37 0 Dryland Soybeans 0 30 35 0 0 31 37 25 Wheat 0 0 0 0 44 47 0 0

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Table 2. FAPRI 2007 baseline national prices and yields. 2008 0.554 0.545 125.74 8.02 7.43 9.79 6.22 7.02 4.07 3.24 2.98 808.42 70.06 41.36 42.31

Cotton Price ($/lb.) Adjusted World Cotton Price ($/lb.) Cottonseed Price ($/ton) Rice Price ($/cwt) Long Grain Rice Price ($/cwt) M edium Grain Rice Price ($/cwt) Adjusted World Rice Price ($/cwt) Soybean Price ($/bu.) Wheat Price ($/bu.) Corn Price ($/bu) Grain Sorghum Price ($/bu.) Cotton Yield (lbs./acre) Rice Yield (cwt/acre) Soybean Yield (bu./acre) Wheat Yield (bu./acre)

2009 0.567 0.557 125.15 8.30 7.78 9.84 6.61 7.01 4.11 3.25 3.01 815.54 70.67 41.72 42.63

2010 0.574 0.568 122.24 8.51 8.04 9.91 6.90 6.90 4.15 3.22 3.02 823.55 71.26 42.09 42.93

2011 0.578 0.570 120.39 8.54 8.12 9.82 6.97 6.83 4.17 3.19 3.02 830.68 71.86 42.46 43.24

Table 3. Commodity variables for the 2002 Farm Bill. Commodity Unit Corn $/bu Cotton cents/lb Sorghum $/bu Soybeans $/bu Rice $/cwt Wheat $/bu

Direct Payment 0.28 6.67 0.35 0.44 2.35 0.52

Loan Rates 2002-03 2004-07 1.98 1.95 0.52 0.52 1.98 1.95 5.00 5.00 5.00 5.00 2.80 2.75

Target Price 2002-03 2004-07 2.60 2.63 72.40 72.40 2.54 2.57 5.80 5.80 10.50 10.50 3.86 3.92

Table 4. USDA proposed Farm Bill commodity variables.

Commodity Unit Corn $/bu Cotton cents/lb Sorghum $/bu Soybeans $/bu Rice $/cwt Wheat $/bu

M aximum Loan Rates 1.89 51.92 1.89 4.92 6.50 2.58

Direct Payment Rate 2008-09 2010-12 0.28 0.30 11.08 11.08 0.35 0.37 0.47 0.50 2.35 2.52 0.52 0.56

Target Revenue $/acre 344.12 516.86 131.28 219.58 548.06 140.42

Table 5. H.R. 2419 commodity variables.

Commodity Unit Corn $/bu Cotton cents/lb Sorghum $/bu Soybeans $/bu Rice $/cwt Wheat $/bu

Direct Payment 0.28 6.67 0.35 0.44 2.35 0.52

Loan Rates 1.95 52.00 1.95 5.00 6.50 2.94

Target Price 2.63 70.00 2.57 6.10 10.50 4.15

Target Revenue $/acre 344.12 516.86 131.28 219.58 548.06 140.42

Note: Producers would have an one time choice between using a target price or revenue for their counter-cyclical program.

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2012 0.582 0.576 118.80 8.72 8.37 9.80 7.26 6.76 4.19 3.15 3.01 838.69 72.46 42.83 43.55

Table 6. Index of government payments and net farm income compared to the baseline. Direct Payment

Farm ARNC5000 LDP 100.0 DP 166.1 CCP/CCRP 64.6 Total Payments 100.8 Net Income 100.8 ARCR6500 LDP 100.0 DP 129.6 CCP/CCRP 55.7 Total Payments 102.3 Net Income 150.9 ARCR4000 LDP 100.0 DP 131.0 CCP/CCRP 69.8 Total Payments 104.2 Net Income 102.4 ARC6000 LDP 100.0 DP 122.0 CCP/CCRP 72.9 Total Payments 101.8 Net Income 102.4 ARSR3640 LDP 100.0 DP 105.1 CCP/CCRP 92.5 Total Payments 102.0 Net Income 104.4 ARWR1200 LDP 100.0 DP 105.0 CCP/CCRP 92.6 Total Payments 101.9 Net Income 101.1 ARHR3000 LDP 100.0 DP 104.9 CCP/CCRP 92.7 Total Payments 101.5 Net Income 100.9 ARC4200 LDP 100.0 DP 154.6 CCP/CCRP 64.1 Total Payments 100.0 Net Income 98.6 Weighted Average of All Farms LDP 100.0 DP 124.1 CCP/CCRP 69.5 Total Payments 101.9 Net Income 105.0 Note: The Baseline is indexed at

USDA HR 2419 HR 2419 Except with with Limits CCP CCRP

Loan Payment Rate Limits

AGI

Total USDA

100.0 100.0 108.6 103.9 102.8

30.0 100.0 122.7 89.3 93.4

35.0 100.0 38.5 53.0 69.9

55.6 61.2 64.3 44.4 61.7

9.8 79.3 28.3 27.1 48.6

30.0 166.1 137.1 112.5 108.3

99.4 99.8 43.5 74.4 83.5

99.4 99.8 43.2 74.3 83.8

100.0 100.0 152.2 109.6 350.9

66.1 100.0 124.4 88.8 -313.8

36.0 61.2 74.9 52.1 -1332.8

87.6 88.5 89.0 88.2 -318.3

30.0 59.4 69.1 47.6 -1574.8

66.1 129.6 181.1 109.7 274.5

100.0 66.7 90.0 86.4 -317.3

100.0 66.7 81.5 84.8 -359.5

100.0 100.0 112.9 103.9 102.9

67.0 100.0 116.2 95.9 94.7

79.6 88.6 76.5 82.5 87.0

100.0 100.0 100.0 100.0 100.0

62.1 88.6 72.8 76.6 80.1

67.0 131.0 133.7 114.4 108.3

100.0 96.6 77.3 91.7 94.2

100.0 96.6 81.4 93.0 95.3

100.0 100.0 104.0 101.1 103.9

70.6 100.0 118.5 96.7 83.9

46.6 53.0 56.7 52.2 -20.9

99.5 99.6 99.7 99.6 96.9

40.6 53.0 53.1 49.4 -134.4

70.6 122.0 127.4 108.6 114.4

100.0 57.8 62.8 71.5 29.1

100.0 57.8 59.5 70.5 27.0

100.0 100.0 135.8 104.8 110.6

96.1 100.0 102.5 99.3 98.0

88.1 89.4 100.0 90.6 78.4

94.9 94.1 94.5 94.4 88.2

82.9 85.5 118.5 89.2 75.8

96.1 105.1 141.1 107.4 116.0

100.0 97.5 106.9 99.4 98.7

100.0 97.5 130.4 102.6 105.7

100.0 100.0 139.2 104.8 103.1

95.8 100.0 102.5 99.0 99.0

100.0 100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0 100.0

95.8 105.0 144.2 106.9 103.9

95.8 105.0 144.2 106.9 103.9

100.0 100.0 69.3 96.3 98.4

100.0 100.0 139.2 104.8 103.1

100.0 100.0 128.0 104.0 102.9

95.8 100.0 103.0 99.0 98.9

59.6 72.0 94.1 71.0 79.5

100.0 100.0 100.0 100.0 100.0

58.1 72.0 91.8 70.2 78.7

95.8 104.9 134.0 106.0 103.5

100.0 78.5 61.0 83.2 88.7

100.0 78.5 104.4 89.4 92.4

100.0 100.0 107.8 102.1 103.6

31.8 100.0 123.7 69.3 23.8

52.2 100.0 100.0 73.9 45.5

99.2 99.4 99.4 99.3 88.9

21.8 154.3 125.2 74.0 28.1

31.8 154.6 137.6 82.9 46.9

100.0 100.0 81.7 95.0 91.3

100.0 100.0 107.8 102.1 103.6

100.0 100.0 117.9 104.5 114.7 100.

65.4 100.0 118.5 92.8 67.3

52.1 75.6 65.0 64.8 -118.5

89.7 93.0 87.6 87.8 60.6

40.7 74.4 63.0 58.4 -148.6

65.4 124.1 141.3 108.2 116.8

100.0 80.7 66.5 83.7 46.9

100.0 80.7 72.1 85.1 51.5

CCRP

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Table 7. Ranking of alternative farm policies.

Farm ARNC5000 ARCR6500 ARCR4000 ARC6000 ARSR3640 ARWR1200 ARHR3000 ARC4200

Baseline 1 1 1 1 2 3 1 2

USDA Proposal 4 4 4 4 4 1 4 4

H.R. 2419 with CCP 3 2 3 2 3 4 3 3

H.R. 2419 with CCRP 2 3 2 3 1 2 2 1

Table 8. Probability of a positive net farm income, 2008-2012. H.R. 2419 H.R. 2419 USDA with with Farm Baseline Proposal CCP CCRP ARNC5000 84.4 63.0 75.0 74.4 ARCR6500 48.4 28.6 43.8 43.4 ARCR4000 1.0 1.0 1.0 1.0 ARC6000 22.6 5.6 11.6 11.4 ARSR3640 70.2 65.8 69.8 71.1 ARWR1200 1.0 1.0 1.0 1.0 ARHR3000 1.0 1.0 1.0 1.0 ARC4200 38.7 31.8 38.0 39.0 Note: Net farm income (NFI) is classified as good (green), moderate (yellow), and poor (red) based upon probabilities: >70 40-70 <40

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References Childs, N. and J. Livezey. 2006. Rice Backgrounder. Washington DC: U.S. Department of Agriculture, ERS Outlook Report RCS-2006-01, December. FAPRI. World Agriculture Briefing Book. 2007. Food and Agricultural Policy Research Institute Report No. 07-FSR 01. Iowa State University, January. Hignight, J. 2007. “An Economic Comparison of Alternative Farm Policies on Arkansas Representative Panel Farms.” MS thesis, University of Arkansas. Miller, J. C., K. H. Coble, O. Vergara and M. E. Broyles. 2003. “Potential Impacts of Changes to Government Payment Limits for Mississippi Farms.” Department of Agricultural Economics Report No. 2003-004. Mississippi State University. Richardson, J. W., S. L. Klose and A. W. Gray. 2000. “An Applied Procedure for Estimating and Simulating Multivariate Empirical (MVE) Probability Distributions in Farm Level Risk Assessment and Policy Analysis.” Journal of Agricultural and Applied Economics 32:299-315. U.S. Congress, House of Representatives, Committee on Agriculture. 2007. Press Release: U.S. House of Representatives Passes Historic Farm Bill. Washington DC, July. U.S. Department of Agriculture. 2007. Transcript of remarks by Agriculture Secretary Mike Johanns as he unveiled USDA’s 2007 Farm Bill Proposals. Release No. 0021.07, Washington DC, January. U.S. Department of Agriculture. 2007. “USDA 2007 Farm Bill Proposals.” Washington DC, January. Westcott, P. C., C. E. Young, and J. M. Price. 2002. “The 2002 Farm Act: Provisions and Implications for Commodity Markets.” Washington DC: U.S. Department of Agriculture, Agriculture Information, Rep. 778, November.

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