AFPC Working Paper 95-13

James W. Richardson
Edward G. Smith
Allan W. Gray
Joe L. Outlaw
Ronald D. Knutson

Agricultural and Food Policy Center
Department of Agricultural Economics
Texas Agricultural Experiment Station
Texas Agricultural Extension Service
Texas A&M University

June 1995

College Station, Texas 77843-2124
Telephone: (409) 845-5913


In April, AFPC and FAPRI analyzed the economic impacts of a continuation of the current farm program provisions, conversion to a Marketing Loan Only, and termination of all farm programs over the 1996-2000 period. While termination of farm programs would adversely impact all crop farms analyzed, the results were mixed between the current farm program and the Marketing Loan Only option. The Marketing Loan was preferred by those farms which could capitalize on the increased flexibility and the elimination of acreage reduction requirements.

The previous analysis, however, was conducted under the assumption of normal weather. Would the same preferences for these three policy options hold if risk was introduced into the analysis? The present report presents the analysis of the same three policy options under the assumption that the weather pattern experienced during the 1980s would be repeated over the 1996-2003 planning horizon.

The economic results at the farm level did not change materially from the previous analysis without risk. A continuation of the current farm program provisions and the Marketing Loan Only option would be preferred by all 36 of the representative crop farms over the no farm program.

All 18 feed grain and wheat farms would prefer continuation of the current farm program provisions to the Marketing Loan Only option, as would 5 of the 8 rice farms. Seven of the ten cotton farms, however, would prefer the Marketing Loan only option over the continuation of the current farm program. The improved economic outlook for the cotton farms under the Marketing Loan Only option, however, was heavily influenced by the elimination of the acreage reduction requirements.


The Agricultural and Food Policy Center (AFPC) at Texas A&M University working closely with the Food and Agricultural Policy Research Institute (FAPRI), at the University of Missouri and Iowa State, provides an independent third party evaluation of the impacts of policy proposals as requested by the House and Senate Agriculture Committees.

The purpose of this report is to present the results of a farm level analysis of the impacts of three policy options (current program, Marketing Loan, and No Program) when price and yield risk of the 1980s is considered. In April, FAPRI and AFPC completed aggregate and farm level analyses of these three farm policies under the assumption of "normal" weather (ie., ignoring the impacts of risk). (See AFPC Working Paper 95-10 for the "normal" weather analyses.) For the present analyses, it was assumed that the weather conditions observed during the 1980s would be repeated.

The three farm program options analyzed for the present analysis are the same as those analyzed earlier, except that the planning horizon was changed to from 1995-2000 to 1995-2003 and price and yield risk was explicitly incorporated. The policy scenarios are described briefly as follows:

The Aggregate Analysis Modeling System

The aggregate impacts reported in this paper were obtained from analyses completed by policy analysts at FAPRI (University of Missouri - Columbia and Iowa State University). The results of FAPRI's aggregate analyses are summarized in Appendix A. The alternative policy scenarios used a common set of assumptions regarding the annual changes in the rate of inflation for input costs and interest rates (Appendix Table A1). Annual projected crop prices under the three scenarios are summarized in Table A2. These price projections are based in part on the assumed loan rates, target prices, acreage reduction fractions, and non-pay fractions (NFA) in Appendix Table A7 for the alternative scenarios.

1980s Weather Conditions

The FAPRI model uses regional supply response equations and sums regional production to project U.S. production and supply. As a result the FAPRI model includes regional crop yield equations which were used to incorporate regional differences in weather for the aggregate analyses. The weather augmented crop yields for the aggregate analysis indicate that in 1996 (when 1982 weather) corn yields were above the "normal" yields about 8 bushels per acre in the Corn Belt (see FAPRI's report). In contrast, for 1997 (utilizing 1983 drought conditions) corn yields in the Corn Belt were reduced about 39 bushels per acre. The Corn Belt yields for corn in 1998 remained about 7 bushels per acre below trend, but were above the normal weather trend yields for 1999, 2000, and 2001. The 1988 drought (reflected in 2002s yields) reduced corn yields about 46 bushels per acre in the Corn Belt and had a slight (3 bushels per acre) hold over effect in 2003.

Aggregated regional crop yields were used in FAPRI's model to determine annual market prices for crops and livestock under the 1980s weather conditions. Changes in price variability for the Marketing Loan and the No Program scenarios, relative to the Baseline were calculated using similar methodology and used to incorporate changes in price risk into the farm level analysis.

The Representative Farm Modeling System

AFPC has developed and maintains data for 36 representative crop farms chosen from major production areas throughout the United States (Figure 1). The location of these farms results from a consensus discussion with House and Senate Agriculture Committee staff. Information necessary to simulate the economic activity on these farms are developed by panels of producers located in the selected areas. Normally, two farms in each production area are developed with separate panels of farmers: one is representative of moderate size full-time farm operations, while the other is generally two to five times larger. The data collected from these panels are analyzed in a whole farm simulation model (FLIPSIM) that has been developed and refined over more than a decade. The producer panel is provided a five year pro-forma income statement, balance sheet, and cash flow statement. The figure 1 producer panel must approve the pro-forma financial statements as being representative of their operations before the farm data are used for policy analyses. Subsequently, each panel member receives an annual baseline report which includes the representative farm they helped develop. The goal is to update the representative farms every three years. However, if a member of a panel concludes that the farm or ranch is no longer generating representative results, it is not unusual for him or her to call for an update. We update these farms promptly before they are again used in a report to the Congress. The land grant university cooperators and panel members for the farms utilized in this study are listed in Appendix B.

The representative farms were developed using 1992 data indexed to 1995 for the present study. The crop farms are assumed to begin with 20 percent intermediate and long term debt based on information provided by ERS/USDA and the panel members. The crop farms utilize flex alternatives when profitable and are structured so government payments are not reduced by payment limits. It is assumed that the farm will contribute between $25,000 and $50,000 annually to cover family living expenditures. No off-farm related income is included in the analysis.

To replicate the risk associated with the 1980s weather, the farm level simulation model was run in the stochastic mode so price and yield risk faced by producers was incorporated for the present analysis. Each producer panel provided a history of crop yields and prices from which a probability distribution has been computed. Yields provided by the producers were largely from the 1980s so the 1980s weather FAPRI used is incorporated into the farm models. Prices provided by the producers were also largely from the 1980s and were a function of farm program provisions similar to the current farm program. The relative variability (coefficient of variation) of FAPRI's projected prices for each crop under the three farm program options with 1980s weather were computed over the 1995-2003 period. For each crop, the ratio of the coefficient of variation for an alternative program to the Baseline was used to augment the farm level producers price risk for the Marketing Loan and No Program options. The procedure used to incorporate the price and yield risk insured that the historical correlations among prices and yields was maintained and the coefficient of variation for prices reflected the changes in relative price variability reported by FAPRI.

Farm Level Impacts

A key measure of the performance of farm policy options is their impact on farms and ranches throughout the United States. The results of simulating the representative crop farms for the alternative policy scenarios with risk are summarized in the following sections. The results are presented in terms of the projected impacts on average annual net cash farm income over the period, 1996-2003, and the change in real net worth over the same period.

AFPC maintains its representative farms by commodity grouping. For example, if the majority of the farm's revenue is derived from corn, the farm is included as a feed grain operation. The sections that follow summarize the impacts of the weather scenarios by commodity group. Definitions of the economic terminology employed in each section are included in Appendix C. Detailed representative farm results including the statistics (mean, standard distribution, coefficient of variation, minimum, and maximum) are included in FEED GRAIN FARMS









Panel Farms Producing:

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