The 1996 FAIR Act ended decades of farm programs that relied on annual set- asides and planting restrictions that constrained management decisions. The new Production Flexibility Contract Payments (PFCP's) had little if any impact on 1996 decisions because of the delayed passage of the bill, which was signed by President Clinton on April 4, 1996.

A recent study by ERS-USDA, Farm Foundation and the University of California Agricultural Issues Center in cooperation with the American Society of Farm Managers and Rural Appraisers provides some early insights on potential long term impacts based on 1997 decisions. The study relied on eight panels of farm operators and managers held in North Dakota, Texas, Kansas, Ohio, Illinois, Georgia, Mississippi and California during the winter and spring of 1997.

Four themes emerged from the panel discussions:

.....Owners and managers liked the PFCP's and the flexibility offered by the program.

.....PFPC's are very quickly being capitalized into land prices and rental rates.

.....Direct effects on management decisions have been slow to emerge, but indirect impacts may be more significant over the long haul.

.....Marketing and risk management strategies have become more important under the new programs.

To those who have studied farm policy, none of these findings may be viewed as particularly surprising. But look for politicians to express shock as the bill runs its course. Some observations:

New Policy is Liked: Damn right! When the new law went into effect stocks were low, demand was strong, prices for wheat and corn were at all-time highs. This optimism carried over into 1997. The PFPC's provided a guaranteed, up front payment much larger than would have occurred under the previous target price - deficiency payment program. And farmers could plant nearly anything they wanted. For example, producers who traditionally had planted high cost crops with greater government support like cotton and rice could use the PFPC's to finance a shift to lower cost (and thus less risky) crops like soybeans and corn. With grain and oilseed prices headed south, perhaps some of the luster will wear off the PFPC's, particularly as they phase down during the out years of the program.

PFPC's Drive Up Land Values and Rents. The payments have become an additional factor in the demand for farmland, and their virtual certainty makes them even more important than the deficiency payments of the 1990 and earlier farm bills. Land owners will reap the benefits. Panelists reported that serious reviews of traditional leasing arrangements were occurring. In some cases owners have discontinued renting to capture the entire PFPC, relying on custom work instead.

Indirect Affects on Resource Use May Occur. Panelists reported they were making greater adjustments among crops planted under the new program. This leads to the question of where, in the aggregate sense, will the sum of these individual decisions lead us? Major geographic shifts in cropping patterns could occur. In addition, economic theory suggests that if the program drives up land values relative to the cost of other inputs, those other inputs will be used more intensively. This, in conjunction with new technology will tend to push up average yields.

Increased Emphasis on Marketing and Risk Management. This finding confirms that farm operators and owners understand what extension economists have been preaching since passage of the 1996 Act: namely, that commodity prices are likely to be much more volatile under the new program. The main management change panelists had made was to place more emphasis on marketing and risk management. Panelists also expressed keen interest in revenue insurance. But like the current crop insurance program, farmers use of revenue insurance would depend heavily on the degree of subsidization. Too little subsidization could result in such schemes being little utilized. But too much could destroy the incentive to use existing risk transfer and avoidance mechanisms such as futures, options and contracts, as well as the incentive to develop new tools.

See: Agricultural Outlook, August 1997, (published July 1997) available from ERS in print or on the web at:
http://www.mannlib.cornell.edu/reports/erssor/economics/ao- bb/complete/1997/

Management Marketing Memo Index   Ag Econ Home

updated 8/15/97