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Originally published Vol. 2,
Issue 5 (November 2004)
How Do Decoupled Payments Affect Resource Allocations
Within the Farm Sector?
Mary
C. Ahearn, Robert Collender, Mitchell
Morehart, and Michael
Roberts
When they were initiated in the 1930s, farm
subsidy programs 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 not only on expected market
prices and production costs, but also on government
payments. To reduce the market distortions associated
with government subsidies, efforts to decouple farm
income support from planting decisions began in
the 1980s, but the most sweeping changes were introduced
in farm legislation in 1996 and 2002. Rather than
basing payments on current market prices or production
levels, production flexibility contract (PFC) payments
created in 1996 provide lump-sum payments on eligible
acres, with payments based on historical plantings
of program crops and yields. As a result, these
“decoupled” payments change the income
and wealth of a household without distorting relative
commodity prices.
In theory, decoupled payments
should not influence planting decisions. Nonetheless,
questions about the payments’ impact on the
farm business and farm household well-being remain.
ERS researchers used a household framework and household-level
data to analyze these issues. They found that:
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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. Thus, while decoupled payments had a
stronger influence on land rental rates than
did coupled payments, renters still retained
two-thirds of the amount of government payments
they received, increasing their income from
farming.
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Analysis of farm household
labor allocations before and after the introduction
of decoupled payments found that both coupled
and decoupled payments increased the hours worked
on the farm and decreased the hours worked off
the farm. Thus, the introduction of decoupled
payments had no significant impact on time spent
working on the farm.
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Decoupled payments provide
farm households with increased purchasing power,
which might be used to increase savings and
investment. Farm households with limited access
to credit might use their decoupled payments
to increase onfarm investment. But this is only
likely to occur during economic recessions,
when credit is constrained.
While the analyses of land, labor,
and capital markets suggest that decoupled payments
have the potential to indirectly influence farmers’
decisions about resource allocation and productivity,
the empirical results are mixed and the evidence
of significant impacts is ambiguous. Decoupled payments
are less distorting than coupled payments, but further
study is warranted.
This
finding 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, Economic Research Service,
November 2004.
Decoupled
Payments: Household Income Transfers in Contemporary
U.S. Agriculture, edited by Mary
E. Burfisher and Jeffrey Hopkins, AER-822,
USDA, Economic Research Service, February
2003.
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