On Thursday June 29th, the University of Missouri’s Food and Agriculture Policy Research Institute (FAPRI) released a report entitled “Potential Impacts of Limiting Direct Payments.”  The report estimates the economic impacts to farmers, landowners, federal budgetary outlays and consumers if direct payments to farmers are eliminated.

The report comes at a time when Congressional leaders and the Obama administration are looking for ways to trim the federal deficit and find a solution to paying the nation’s debt on time, to avoid significant and widespread effects to the American economy.  Although a select number of congressional offices have proposed cuts to direct payments in the past, the have remained virtually unscathed since being enacted in 1996.  Now, however, it seems as though the end or at least a diminution of direct payments may be closer than ever.

The FAPRI report suggests that zeroing out direct payments will not have the catastrophic impact on farmers that many proponents of the program have proclaimed for years.  Interestingly, it also estimates a far lower cost savings on ten year federal budgetary outlays than has been assumed by Administration and congressional budget negotiators.

An important consideration in the FAPRI report is whether or not farmers who currently earn direct payments will enroll in the Average Crop Revenue Election (ACRE) program once direct payments have ended.  The level at which farmers enroll in ACRE in a post direct-payment world plays a critical role in determining how farmer income, land values, budgetary outlays and consumer prices are affected by the policy change.

The FAPRI report provides economic impact estimates based on both the “baseline” ACRE participation (i.e. current relatively low participation rates) and 100 percent ACRE participation (i.e. participation of all farmers and investors who once received direct payments).  Most observers believe that nearly all farmers and investors who received direct payments will almost certainly enroll in ACRE if direct payments are no longer an option.

With respect to budgetary outlays, FAPRI estimates that the Commodity Credit Corporation (CCC) would save approximately 45 percent or $41.7 billion if ACRE participation remains at baseline between 2012 and 2021 if direct payments are eliminated.  If, however, ACRE participation increases to 100 percent, as is more likely, the CCC would only save $18.9 billion (20 percent) over the same ten year period.  Although $18.9 billion is still a significant savings, it is much less than the $34 billion that the Administration and congressional budget deal negotiators have reportedly been assuming.

Commodity farmers need not worry too much about revenues or crop prices as a result of direct payment cuts, according to the report.  FAPRI estimates that prices for the five major commodity crops (corn, wheat, rice, upland cotton, soybeans) would fall no more than 1.5 percent from today’s prices (in either the baseline or 100% ACRE participation rate scenarios) if direct payments are no longer available.

Acreage planted will also not change significantly either if direct payments are eliminated according to the report.  Plantings of the major commodities listed above would decline by only 0.2 percent per year under baseline ACRE participation, and increase by 0.2 percent under 100 percent ACRE participation.

Consumer prices would also increase by less than 0.1 percent per year, which the reports deems as negligible.

Landowners and bankers may more reason to be concerned, however.  Real estate values would decline by up to 2.7 percent (or $71 per acre) per year over the same time period.  Further, total farm income would decline by $3.2 billion or 3.3 percent pear year under baseline participation in ACRE assumptions and by only 2.0 percent or $1.9 billion per year under the 100 percent ACRE participation assumption.

This report provides an important independent estimate to be added to the mix of official estimates by the White House Office of Management and Budget and the Congressional Budget Office.  How it plays out in the budget negotiations and the congressional deliberations on the budget remains uncertain for now.

NSAC will continue to do its best to keep readers abreast of developments related to the budget and agriculture spending in the coming weeks as the deadline for an agreement on the debt ceiling approaches.