(Archived document, may contain errors)

No. 98 April 30,1996

WHAT THE NEW FARM BILL WILL MEAN TO STATE ECONOMIES AND FARMERS

By John E. Frydenlund Director, Agriculture Policy Project and David H. Winston Senior Fellow in Statistical Policy Analysis The agriculture legislation recently enacted by Congress and signed into law (P.L. 104-127) by President Clinton marks the most dramatic change in U.S. farm policy since the current command- and-control programs were created during the Depression. Today's system of centrally planned commodity support programs, export subsidies, supply controls, acreage allotments, production quo- tas, and restrictions on trade imports holds back American farmers. This makes it impossible for them to benefit from the growing world market and denies farming-related industries the economic boost of higher farm production. The new legislation was based on bills first debated last year by Congress: the Freedom to Farm Act (H.R. 2195), sponsored by House Agriculture Committee Chairman Pat Roberts (R-KS), and proposals advanced by Senate Agriculture Committee Chairman Richard Lugar (R-IN) during the consideration of balanced budget legislation. These bills called for sweeping changes in American agriculture policy to create freer markets, reduce subsidies, and generally permit farmers to run their businesses to take advantage of market opportunities rather than comply with bureaucratic regula- tions. The bills also were in line with calls for fundamental reform voiced by many farmers and re- search organizations, such as The Heritage Foundation. In Freeing America's Farmers: The Heritage Plan for Rural Prosperity, Heritage analysts proposed last year that Congress immediately end all supply control programs, phase out subsidies, and end other restrictions on farmers.

I

I John E. Frydenlund, Freeing America's Farmers: The Heritage Plan for Rural Prosperity (Washington, D.C.: The Heritage Foundation, 1995).

P.L. 104-127, the Federal Agriculture Improvement and Reform (FAIR) Act of 1996, eliminates federal government programs that manipulate the production and prices of major crops (wheat, feed grains, cotton, and rice) through production subsidies and acreage reduction programs. Farm subsi- dies for these crops are to be replaced by steadily decreasing, but fixed, "market transition" pay- ments. Unfortunately, the FAIR Act failed to reform the Conservation Reserve Program (CRP). Alleg- edly an environmental program, the CRP actually has functioned more as a supply control program, more often than not paying farmers to take potentially productive land out of use. The CRP at least should have been reformed to allow farmers to remove non-environmentally sensitive land from the program. The FAIR Act also failed to reform the sugar and peanut programs, which continue the ar- chaic policy of restrictive allotments and quotas that gouge American consumers; nor did it elimi- nate the milk .... ........ Chan I market orders . . . .. ... ............. . which force Ameri- cans to pay above- New Farm Law Increases Farmer Income market prices for milk. $20 Billions of Dollam Despite these 19 - - - - - - - - - - - - - - - - - - - - - --- - - -- shortcomings, the Net Income Under new farm legisla- 19 Now Farm Legislation - - - - - - - - - - - - - - - - - - - - - - tion will mean greater freedom 17 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - and enormous new 16 - - - - - - - - - - - - - - - - - - - - - - - - - - ---- - - - - -- - - opportunities for rural America. By Is - - - - - - - - - - - - ----- Net Income Under - - - - - - - - - - - - dismantling much Previous Law of this restrictive --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - straitjacket on 13 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - farmers, the new I . . I law will free the 19% 1997 Me 19" 20M 2MI 2002 U.S. farm economy -farmers and re- Sourcei: The Heftge Foundation Farm Income Projecfion Modd USDA Economic Research Ser-wrice- lated businesses- to take full advantage of the growing global market, which would mean huge economic benefits for Americans. According to an analysis by Heritage Senior Fellow David Winston, using an economet- ric model of the agriculture economy developed last year by Heritage, the new law will mean: \u239\'95 Farmers will earn an additional $16 billion in net income between 1996 and 2002. \u239\'95 Suppliers of the inputs used in agricultural production will sell an additional $14.6 bil- lion in products during the same period. \u239\'95 Taken together, the agriculture community as a whole thus will enjoy a rise of $30.6 billion of income. N N n om e U 5 a on @eti @nder Legi I f,

. . . . . . . . . . . . Net Inc, Previous

This increase in agriculture activity will have a "multiplier" effect on other industries, leading to a total economic boost to the nation of $74.6 billion between 1996 and 2002. The states in which farmers will be at least $1 billion better off over the next seven years are:

State Net Farmer Income Rrml $1.7 billion A ............ . . . ...... ....... ...@. ..... .. . . . ....... .. . ....... . Texas $1.6 billion '4ska $ 1.2 billion Nebe ........... Illinois $ 1.1 billion

$ 1,.:0 billion Iowa:%

APPENDIX: THE HERITAGE FOUNDATION MODEL

The Heritage Foundation Farm Income Projection Model, described in detail in Freeing Amer- ica 's Faymers, projects what would happen to future farm income (1996-2002) under the Freedom to Farm Act, based on historical analysis of the farm sector from 1990-1993. In our model we as- sumed that, overall, about 95 percent of ARP and 50/92 land would come back into production. These additional acres would yield only 95 percent as much as land currently being farmed, and costs of production would be 5 percent higher. For all cropland in our analysis, yields would in- crease 0.5 percent each year through 2002 due to productivity gains. Finally, we assumed that be- cause of growing overseas demand, the increase in supply would have a minimal impact on prices. The greatest effect would be in 1996, when prices would drop 4 percent. By 2002 this loss would be more than recouped. In keeping with estimates of the gain in farm income contained in Freeing America's Farmers, the Heritage Foundation's more comprehensive estimates of increased economic activity are conser- vative in their assumptions. In the model to estimate farm income gains, we assumed that future pro- ductivity gains would be only 0.5 percent annually and estimated relatively higher costs of production for new acreage relative to existing acreage. Thus, the model significantly understated potential income gains, and our conclusions about changes in farm income presented the worst case scenario, suggesting that some states would take much longer to become net farm income winners. Some states would take longer because the model assumed that farmers would continue to grow whatever crops they previously produced or currently were producing and that production on new acreage would simply reflect their historical growing patterns, even when this would cause a loss of income. However, if allowed to produce for the marketplace rather than for the government, farmers would not use their acreage to produce any crop that resulted in a negative income. If there is no al- ternative crop available to generate a net profit from production on the new acreage, the farmer's ra- tional decision would be to leave that land idle rather than produce a crop at a loss. Therefore, our model showed income losses for farmers when, at worst, there would have been no gain. In estimating the additional economic activity generated by increases in farm income, we as- sumed that most, though not all, of the new product would be sold overseas to meet the growing de- mand for food in Africa and the Pacific Rim. While it is true that increased production could trigger faster development of new consumer products and new uses for the domestic market as well as for the international market, we estimate only the increase in economic activity that would be derived from increases in exports. The Heritage analysis is based on the gross business multiplier of all agricultural exports devel- oped by Gerald Schluter and William Edmondson of the U.S. Department of Agriculture's Eco- nomic Research Service. Their multiplier factor is based on a recognition that "in a highly interrelated economy like that of the United States, many more people benefit from agricultural ex- ports than just farmers and exporters and their employees." Schluter and Edmondson point specifi- cally to firms that provide materials and services used by farmers and others to provide the export goods as beneficiaries of increased economic activity that leads to business growth, in addition to businesses which sell consumer goods and find that customers spend more when trade expands. 2

2 Gerald Schluter and William Edmondson, USDA's Agricultural Trade Multipliers, U. S. Department of Agriculture, Economic Research Service, Agriculture Information Bulletin No. 697, April 1994. 31 1 .. ... 1 PEPSI . . . . . . . . . . . . . . . . . . TOW", ------

New Farm Law Increases Farmer Income

19% 1"7 1998 1999 2000 2001 20D2 Total AL Total Now Income for Farm Community $26,405.990 $28.804,390 $40,473,596 $43.431,305 $46.163,134 $44.693.660 $50,463,332 $280,435,406 Change in Net Farmer Income -4.684.296 -2,577,553 8.785,488 10.634.114 12,218.041 9,560,489 14,100,500 48,036,783

AR Toad New Income for Farm Community 90,698,314 103,604.328 194,648.212 209.685.679 229,750.741 218.341.855 267.922,430 1,314,651,558 Change in Net Farmer Income 6.625,999 18.743,334 108,959.306 120,997.661 137,958.643 123,337,034 169,592.440 666.214.417

AZ Total New Income for Farm Community 46.693,484 50.813.459 68.998,206 73,898,941 78.465.655 76,493,516 86,037,442 481,400,704 Change in Net Farmer Income 3.387203 7.100,924 24.859,207 28.215,077 3 1.1 BZ856 27,555.819 35.386.926 157.68_2

CA Total Now Income for Farm Community 201.538351 220.046,464 300.811,058 321.526,322 34211864124 338,4671164 382,464.449 Z 107.740.533 Change in Net Farmer Income 41.061.086 58.063,770 137,248.044 152.238.603 167,673,235 157,122,627 194.772,129 9WI79,493

CO Total Now Income for Farm Community 64.79 1 D79 71.148,084 100,129,673 106.856.955 112.998,020 110.651,602 121.008.581 697,563.994 Change in Net Farmer Income 29267.163 35.896.548 64.534.221 70,015.661 74,867,281 71,186.287 80,161,980 426.529.141

CT ToW New Income for Farm Community 317,197 35OD38 481,979 522.406 548,572 535,904 578.117 3,334,213 Change in Net Farmer Income 56,128 86.520 215290 247.OD4 263,531 240,887 272.774 1.382.734

DE Total Now Income for Farm Community 1,223.069 1,354.941 2D 15.476 2,182,791 2.304,253 2,222,988 2,434.754 13,738,273 Change in Net Farmer Income 413.805 538,086 1,190,651 1,329,097 1,420,680 1,308,490 1,488,249 7,689,059

FL Total Now Income for Farm Community 6,526,463 7,114,951 9,132,179 9,781,732 10,311.809 10.207,489 11,163,124 64,237.745 Change in Net Farmer Income -2.451.775 -1.947,512 -18,698 310.575 509,161 61,748 662282 -Z874,2 18

GA Total New Income for Farm Community 55.866,565 60,928,183 79,726,990 85,282.797 90,040,354 88,847.214 97,567.100 551L259,202 Change in Net Farmer Income 3.699.291 8271.531 26.556.614 30,251,458 33D82,918 29.896,268 36,552,871 168,310,949

[A Total Now Income for Farm Community 143.776.219 161,552.311 269,387D88 295,647,634 312,027.864 293.844,665 323,965.427 1,600,201.208 Change in Net Farmer Income 39.644.680 56,443,918 163,253248 185,799,110 198.334.641 176,172,179 202,174,404 1,021,82Z 180

ID Total New Income for Farm Community 20.908,986 23,318.283 44.384,206 47.234,648 50,848367 47,659.935 54.862.459 269.216.885 Change in Net Farmer Income 5,239.386 7,501,687 28.413,301 30.704.762 33,739.935 29.952,708 36.535,479 172.087.259

IL Total Now Income for Farm Community 161.507,209 179.709.073 275.387.178 299,740,498 316,077,000 302,605,932 331,216.092 1,666,24Z982 Change in Net Farmer Income 61.782.218 79,048.567 173.744.617 194,54OA48 207,194.949 189,913,008 214.578.916 1. 1 20,802.n3

IN Total New Income for Farm Community 79.356,384 88P91,692 131,467.330 142,875,821 150.544.788 144,852.274 158.049.726 895,238,015 Change in Net Farmer Income 31.926,126 40,216.493 83,1254155 92,841,566 98,759,334 91,254.330 102,575,854 540,69&757

KS Total Now Income for Farm Community 218,993.676 241,162,134 358.905,342 382,750.271 406,160,406 393.762,148 434,480,506 2.436,214.481 Change in Net Farmer Income 120218.719 141,460,574 258.231,084 278.552.414 298,315,623 282,142,798 318,954,479 1,697,875,691

KY Total New Income for Farm Community 40,454.628 44,281.081 57,243,507 61,453,338 64,585,633 64,001,946 69,072,980 401,093,112 Change in Net Farmer Income 7,600,743 11,118,996 23,757,889 26,795.724 28,715.002 26,875,843 30.647,463 1551511,660

LA Total New Income for Farm Community 68,199.882 75,132.197 126,338.281 135,995.175 147,446.730 140,684,306 168,170,224 861,966.794 Change in Net Farmer Income 5.350.005 11,692.728 62,279,891 69,694,740 78A25.780 69,661.623 94.661.747 392,166.S 15

MA Total New Income for Farm Community 140,265 154,069 200,486 216,389 226.816 224.310 240,246 1.402.SBO Change in Net Farmer Income 26,322 39,057 84,352 96,191 102,411 95.551 106,980 550.862

MD Toad New Income for Farm Community 5.780,616 6.366,459 8,574.390 9,278,768 9.739,692 9,562,558 10.296,768 SUMS I Change in Net Farmer Income 1.318,914 1,862,902 4426.896 4,572,111 4.868,302 4,520,669 5.078.414 26,248,209

ME Total New Income for Farm Community 631,019 689,257 832.076 892213 927.803 935,061 990,515 5,11198,543 Change in Net Farmer Income 158,056 211 A58 350,020 3931184 411.411 400,596 437,344 2,363,169

MI Toad New Income for Farm Community 57.368.926 63,209291 87.272,317 94,168,502 99,020.501 96,866,037 104.819.967 602,725,541 Change in Net Farmer Income 14,041,522 19,475,434 43.111,789 48.462.354 51,714,638 47,904,470 54,144,745 278,854,9S2

MN Total New Income for Farm Community 106.328,752 118,552,577 192,770,566 209,054,432 221,396.392 210,400,823 233,213,739 1,291,717,282 Change in Net Fanner Income 39,651,620 51,249,950 124,811,328 138,716,621 148,596,757 135,053,201 155,228,950 793,308,427

MO Total New Income for Farm Community 59.819,288 66,266,360 105,547.058 113,829,002 121,284,636 115,922.082 130,709.359 713,377.785 Change in Net Farmer Income 18.844,851 24,907,543 63,784,741 70,605,OD4 76,547,798 69,619.454 82.786,140 407.095.529

P'S T., New Income for Farm Community 94.266.910 103,087,541 154,283,460 165,658.571 177,565088 171.005.758 197,937,582 1,063,805.710 Change in Net Farmer Income 10,642,479 18.678,634 69,051.051 77.443,027 86,262,800 76,507,062 100.131,432 438.716,466

MT Total New Income for Farm Communky 68,525,693 75,556.128 119,7584110 127.342,333 135.886,235 130,820.828 146.759,535 804.648,764 Change in Net Farmer Income 21.086,104 27,671,510 71,406.225 77.298.235 84,090,594 77.212,339 91,274,749 450,039.7S7

Sources: The Heritage Foundation Farm Income Projection Model; USDA, Economic Research Service.

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New Farm Law Increases Farmer Income

1"6 W 1998 1999 2WO 2001 2002 Total NC Total New Income for Farm Community $44.051532 $48.150.483 $63.024.412 $67.624,778 $71,253,324 $70,310,985 $76.694,901 $441,110.415 Change in Net Farmer Income -603,199 3,076A47 17,511,034 20,518.431 22,498.255 19,849,489 24,467,252 107.3 1 It I 10 ND Total New Income for Farm Community 92,098.584 102,560,012 188,395,141 200.697,183 215253.976 202,600,331 231.650.140 1,233.2SS.367 Change in Net Farmer Income 33,153,941 43D6Z413 128.317,077 138.516.387 150,896,852 135.990.708 162,709,180 79Z646,560

NE Total Now Income for Farm Community 179,715384 198.984,240 292,340.637 316,470,912 333,675.285 322363,331 351,762,238 l."S.3 1 Z028 Change in Net Farrner Income 74.738,173 93.022,243 185344.864 205,730,287 219D58,738 203,735,205 228,982.128 1,210,611.640

NH Total Now Income for Farm Community 172.731 188,637 227.623 244.201 255,299 256,931 272,393 1.617.814 Change in Net Farmer Income 34.703 49,313 86.940 98,595 104.596 100,953 110,956 586.056

NJ Total Now Income for Farm Community 2.626398 2.869,279 3,481,142 3.736,397 3,907,385 3,927,603 4,168,408 24,716,611 Change in Net Farmer Income 602,522 826.4 17 1.418,350 1,601.407 1,697,670 1,640,548 1,801,307 9,see=

NM Total New Income for Farm Community 17,209,417 18,815210 24.979,612 26.706381 28.191,087 27,798,567 30,354,137 174,054,411 Change in Net Farmer Income 6,362.388 7,866,426 13,924D 10 15.263.833 16,348,050 15,541.024 17,667,580 92.973.312

NV Total New Income for Farm Community 525,5111 570,127 630,643 671,543 701 D75 722269 760.301 4.581,539 Change in Net Farmer Income 234.699 276.517 334,168 364,692 383.484 393,563 420,090 Z407.214

NY Total New Income for Farm Community 20,333.714 22,345,253 29.665,388 31.965,861 33.535,629 33D67,725 35,571,810 206.485,381 Change in Net Farmer Income -3,000.246 -1.207.602 5.882,749 7.350.830 8.059D72 6.699,489 8,280,685 3ZO64.977

OH Total New Income for Farm Community 57.916.372 64,207.651 96,124.728 104,093,644 109,825.593 105,766,535 115,705,940 653,640,464 Change in Net Farmer Income 17.276,833 23.186,874 54,703,748 61,222,930 65,454.405 59.842,355 68,174.413 349,861.559

OK Total Now Income for Farm Community K837.871 60.816.480 109,761,630 116,528,817 125,154,416 117,734,301 134,869578 719,703.093 Change in Net Farmer Income 11.126.108 16,694,659 65209,353 70.417209 77.428,902 68,338,394 83,744,815 39Z9S9.442

OR Total New Income for Farm Community 11.058,690 1 Z326.943 23.590,747 25,019.322 26.923.633 25,211.365 28.976,938 153.107.638 Change in Net Farmer Income 4,146.513 5.349,923 16,545,658 17,727,655 19,376.758 17.400.350 20,892,537 101,439,395

PA Total New Income for Farm Community 11,202,309 12,322,838 16,478,831 17,787,655 18,657,446 18,360,908 19.759,485 11 4.S69.473 Change in Net Farmer Income 1324.454 2,352.319 6.411 P39 7,367.490 7,872.575 7.198,567 8,206.462 40.732,906 Rl Total New Income for Farm Community 1,399 1,548 2,202 2,392 2,514 2,440 2,641 15,136 Change in Net Farmer Income 238 377 1.019 1,168 1,247 1,128 1.285 6,463

SC Total New Income for Farm Community 32,047,808 34,968,437 45,051,981 48,196296 50.780,159 50.322,841 54,824,086 316,191,607 Change in Net Farmer Income -7,464,701 -4,914,737 4,779,703 6,514.488 7,639.488 5.672247 8,610,720 20,837,209

SID Tom] Now Income for Farrn Community 93,571,730 103,045,476 147,449.917 158,149,180 166,811,335 162,630,053 177,824,443 1.009.482,133 Change in Net Farmer Income 35,656,105 44,586,548 88.420,657 97,053,896 103,577.716 97,18325B 110,087.010 576,565.191

TN Total New Income for Farm Community 27.745,267 30,415.925 45,923,877 49,435.523 52,677.479 50,321,368 57,295,030 313.814.469 Change in Net Fanner Income 3.066.830 5,505.981 20,770.909 23,402201 25.732,991 22,433,823 28.431.421 129,344,155

k TX Total New Income for Farm Community 306.985.701 336.584.907 500.649,506 537,558.513 573.680,849 553,011,769 629.368.806 3.437,840.051 Change in Net Farmer Income 66.401,999 93,744,300 255.439,723 283,766,388 311.005,999 281,143,299 347,984,940 1,639,486,648

UT Total New Income for Farm Community 3,260,987 3,586,695 5,413,936 5,762,576 6,135208 5,954,071 6,634,998 36,748,470 Change in Net Farmer Income 668.764 970,154 2.771 A68 3.028D36 3,304,959 3,024,763 3,603,164 17,371,708

VA Total New Income for Farm Community 11.650,329 12,775,488 16,886,643 18,120,036 19D56,695 18,825.953 20.321.077 117,636,222 Change in Net Farmer Income -558,959 451,666 4,442,589 5,240.440 5,726,313 5,029.008 6.041,238 26,37Z29S

VT Total New Income for Farm Community 462,362 506,334 633,902 682.119 714,051 712,394 759,097 4.470.259 Change in Net Farmer Income 89,969 130,447 254,348 289280 307A63 291,575 323,550 1.68(c3

WA Total New Income for Farm Community 38,932.262 43,134.321 74.621.139 79,253.275 84.942D65 80.673.535 91,570,445 493.127.041 Change in Net Farmer Income 15,708.487 19,692.686 50.950,804 54.7S4,479 59,585,811 54.429.812 64,408,191 319,530.270

W1 Total New Income for Farm Community 43,444,055 48,254.490 71,767,433 78.142.558 82,186,115 79.087,B45 86,148,708 489,031,204 Change in Net Farmer Income 10.314,019 14,813,661 38.000,353 43,193.630 46,013.974 41,649,680 47,400.207 241.385,525

WV Total Now Income for Farm Community 1,131.485 1,242,663 1.626.785 1.753,609 1,839.258 IS17.842 1.950,463 11.362.105 Change in Net Farmer Income -428,920 -332,380 36.376 107,535 135,572 54.526 125.432 -301.BSB

WY Total New Income for Farm Community 2.952,264 3,269.974 5,361,115 5,731,790 6,109,276 5,837,389 6,554,786 35,816,593 Change in Net Farmer Income 884,829 1,183.145 3,253.927 3550.850 3,852,003 3,501.111 4,136,738 20,36Z6001

Sources: The Heritage Foundation Farm Income Projection Model; USD& Economic Research Service.

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