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Economic Analysis of Base Acre and Payment Yield Designations
Under the 2002 U.S. Farm Act
C. Edwin Young, David W. Skully, Paul C. Westcott,
and Linwood Hoffman
Economic Research Report No. (ERR12), September 2005
The 2002 Farm Act provided farmland owners the opportunity
to update commodity program base acres and payment yields, which
are used to calculate selected program benefits, namely, direct
and counter-cyclical payments. Farmland owners had five options
from which to select for designating base acres. Four options
involved designating 1996 Farm Act production flexibility contract
(PFC) acreage as base acres, allowing for the addition of oilseed
acres, as applicable. The other option permitted farmland owners
to designate base acres using actual plantings for all program
commodities in 1998-2001. Analysis suggests that farmland owners
viewed the update decision in economic terms: program participants
selected the option that resulted in the greatest expected flow
of program payments.
Acreage bases were originally determined in the early 1980s
and continued through the mid- 1990s as part of the annual acreage
reduction and deficiency payment programs. Base acres were slow
to change as they were determined annually using recent years’
land use on the farm. The 1996 Farm Act eliminated annual base
acres used for calculating program payments, replacing them
with multiyear PFC acreage. The 2002 Farm Act returned “base
acres” to agricultural program terminology but as a multiyear
designation used to determine program payments that do not depend
on current production.
What Is the Issue?
An examination of the underlying economic rationale for base
acre and payment yield designation decisions made under the
2002 Farm Act helps address the issue of whether direct and
counter-cyclical payments are linked to current production decisions.
Base acres are a major determinant of farm program benefits
(or proceeds) from direct and counter-cyclical payments. Was
the updating decision influenced by management of revenue risk
associated with current production choices or alternatively
by efforts to maximize direct and counter-cyclical program payments
independent of current production decisions?
What Did the Project Find?
Results suggest, in general, that farmland owners made base
designation decisions to maximize direct and counter-cyclical
payments. Findings do not support an alternative hypothesis
that participants sought to align base acres and program yields
(and thus payments) to current plantings and production. In
many cases, farmland owners elected crop base acres that differed
substantially from current plantings. Further, the lack of a
strong link between program acres (base or PFC) and year-specific
plantings is consistent with the proposition that direct and
counter-cyclical payments are largely perceived as cash transfers
that are separate from commodity production decisions and output
levels.
Program signup results indicate that a majority of farmland
owners elected not to update program base acres to 1998-2001
plantings. Many farmland owners opted to keep PFC acreage as
base acres and augment them with oilseed acreage when advantageous.
Less than 20 percent of farmland owners updated their base acres,
representing 39 percent of base acres. This higher share of
acres relative to owners indicates that, in general, farmland
owners who updated base had larger-than-average-sized farm operations.
The base designation decision was viewed primarily in economic
terms related to program payments. Case study analysis of decisions
by farmland owners in South Dakota, in upland cotton area, and
in the Heartland region supports the idea that farmland owners
generally chose the option that provided the highest direct
and counter-cyclical payments. If updating base acres for all
crops to 1998-2001 plantings provided a greater flow of payments,
farmland owners opted to update. Base was not updated if it
did not prove to be economically advantageous.
In general, farmland owners replaced low-payment base acres
with high-payment acres whenever possible. They kept or expanded
base acres with high payments, such as rice, cotton, and corn,
and reduced bases acres for commodities with relatively low
payments, such as wheat, sorghum, and barley. Base acres for
oats, the commodity with the lowest per acre payments, were
reduced the most.
A comparison of expected payment flows associated with each
covered commodity shows that optimal rankings of the value of
base acre payments by program commodity are nearly identical
with or without counter-cyclical payments (at maximum expected
levels). Rice base typically pays more than cotton base; cotton
base pays more than corn base; corn base payments exceed those
for sorghum and wheat, etc. Consequently, if one maximizes direct
payments, one nearly always maximizes direct plus expected counter-cyclical
payments.
Producers of cotton and corn who expanded production of these
commodities in 1998-2001 relative to PFC acres tended to update
base acres to these higher paying commodities. Conversely, farmland
owners with cotton and corn PFC acres who reduced plantings
of those crops generally elected to keep their PFC acreage as
base acres to retain the more valuable base acres.
How Was the Project Conducted?
ERS used a statistical modeling approach to analyze county-level
results of farmland owners’ base designation decisions.
The model was applied to three case studies. Case studies focused
on decisions in three counties in South Dakota, to illustrate
county- and farm-level economic incentives of the base designation
choice; the decision to update base for a single commodity—cotton;
and updating decisions for the Heartland region, where corn
and soybeans dominate.
The economic value of each base designation option was calculated
for each commodity and location. The spatial nature of the decision
was illustrated by mapping the results of the base designation
decision relative to plantings. (Maps are available at www.ers.usda.gov/data/baseacres/.
This ERS data product allows you to download and map county-level
farm program and planted acreage data.) The payment maximization
hypothesis was tested using statistical analyses for selected
commodities and regions.
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