Cut direct payments? Be prepared for the trade-offs

By Agri-Pulse staff

© Copyright Agri-Pulse Communications, Inc. 


COLUMBIA, MO., June 29 - Cutting direct payments to farmers appears to save $4.9 billion per year in the federal budget, but not if more producers enroll in the Average Crop Revenue Election (ACRE) program, according to a new analysis from the University of Missouri Food and Agricultural Policy Research Institute (MU FAPRI).


“Much of the budget savings from cutting direct payments could be offset by sharp increases in ACRE program expenditures,” says Pat Westhoff, director of MU FAPRI. The report released today compares payment cuts to expected expenditures in the 2012 MU FAPRI baseline.


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Under provisions of the current farm bill, farmers can enroll in ACRE, however, the program which was new in the 2008 Farm Bill drew little participation. When enrolling, farmers must give up 20 percent of their direct payments.

“Direct payments became a disincentive to enroll in ACRE,” Westhoff said. “Cutting direct payments might drive farmers into the program.”

Eliminating the direct payment program would have important effects on farm income and the value of agricultural land, potentially causing cash flow and balance sheet concerns with lenders. In contrast, estimated impacts on crop production and prices are likely to be small.


International trade agreements could also be impacted. In its annual WTO notifications, the United States has reported the support provided under the direct payment program as a “green box” subsidy which is not subject to limitations, although other countries have challenged this classification. Marketing loan benefits, countercyclical payments and ACRE payments are all “amber box” subsidies that can be subject to limitation.


If eliminating the direct payment program results in an increase in ACRE program expenditures, the net effect would be to reduce U.S. green box subsidies and increase amber box subsidies. It is unlikely that amber box subsidies would exceed current U.S. commitments, but if a new WTO agreement resulted in lower levels of permitted support, it could be an issue, the report noted.


Models maintained by the Food and Agricultural Policy Research Institute at the University of Missouri (FAPRIMU) are used to estimate possible impacts of eliminating the direct payment program effective with the 2012 crop year. Results are presented relative to a baseline prepared in early 2011 that assumes a continuation of the direct payment program and other existing farm policies. Key results include:


·         Impacts on budgetary outlays are very sensitive to ACRE participation assumptions. Ifthere is no increase in ACRE participation, eliminating direct payments reduces projected net outlays on farm programs by $41.7 billion between fiscal years (FY) 2012 and 2021 relative to the baseline.


·         In contrast, if all producers choose to participate in the ACRE program once the direct payment program is eliminated, there would be a large offsetting increase in expenditures on the ACRE program. FY 20122021 net outlays would decline by only $18.9 billion from baseline levels.


·         The reduction in farm program payments results in lower farm income and agricultural land values. Depending on ACRE participation assumptions, net farm income declines by an average of $1.9 billion to $3.2 billion per year. Agricultural land values decline by an average of 1.8 percent to 2.7 percent relative to baseline levels.


·         Crop market effects are small. Producers do not have to produce a crop to receive direct payments, so the program has smaller effects on crop production than do other programs where payments are more directly tied to production decisions.


Effects of eliminating direct payments will differ across crops because of differences in direct payment rates, projected market prices, and expected revenue volatility, FAPRI points out.


 “Potential Impacts of Eliminating Direct Payments,” an 18-page report, is posted on the MU FAPRI website:


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