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The impact of decoupled payments on the cost of operating capital

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  • Jaclyn D. Kropp
  • James B. Whitaker
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    Abstract

    Purpose – The purpose of this paper is to investigate how decoupled direct payments, paid to farm operators based on historical yields and base acreage, may lead to production distortions by altering a farmer's access to credit or enabling the farmer to receive more favorable credit terms. The authors estimate the impact of decoupled direct payments under the 2002 Farm Bill on the credit terms of farm operators, specifically the interest rate on short-term operating loans. If farm operators are able to obtain more favorable credit terms and reduce their operating cost, then this offers an additional mechanism through which decoupled payments may distort current production. Design/methodology/approach – The authors estimate the impact of decoupled direct payments on the interest rate on short-term operating loans. In the analysis, the authors control for farm financial characteristics, farm operator characteristics, and other factors. Data from the Agricultural Resource Management Survey for the years 2005-2007, are used in the weighted regression analysis. Jackknifed standard errors are also computed. Findings – As the proportion of base acres to total operated acres increases it is found that interest rates decline by a small but statistically significant amount. This implies that direct payments lead to lower operating costs through better credit terms. Research limitations/implications – Lower operating costs may in turn allow some farmers to expand production or produce on land that would otherwise be unprofitable to operate and hence left idle. Ultimately, this distorts current production. However, the small magnitude of the authors' results suggests that the reduction in interest rates, though positive, may have limited distortionary impacts. Originality/value – The paper provides evidence that decoupled payments alter a farm operator's credit terms and hence could lead to current production distortions. The paper contributes to the growing body of research investigating the mechanisms by which decoupled payments have the potential to distort current production.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

    Volume (Year): 71 (2011)
    Issue (Month): 1 (May)
    Pages: 25-40

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    Handle: RePEc:eme:afrpps:v:71:y:2011:i:1:p:25-40

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: Cost of capital; Credit; Farms; Payments; United States of America;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Blandford, David & de Gorter, Harry & Harvey, David, 1989. "Farm income support with minimal trade distortions," Food Policy, Elsevier, vol. 14(3), pages 268-273, August.
    2. Joe Dewbre, 2006. "The Impact of Coupled and Decoupled Government Subsidies on Off-Farm Labor Participation of U.S. Farm Operators," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 393-408.
    3. Hennessy, David A., 1998. "The Production Effects of Agricultural Income Support Policies Under Uncertainty," Staff General Research Papers 1207, Iowa State University, Department of Economics.
    4. Rucker, Randal R & Thurman, Walter N & Sumner, Daniel A, 1995. "Restricting the Market for Quota: An Analysis of Tobacco Production Rights with Corroboration from Congressional Testimony," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 142-75, February.
    5. Sergio H. Lence & Ashok K. Mishra, 2003. "The Impacts of Different Farm Programs on Cash Rents," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 753-761.
    6. C. Edwin Young & Paul C. Westcott, 2000. "How Decoupled Is U.S. Agricultural Support for Major Crops?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 762-767.
    7. Bhaskar, Arathi & Beghin, John C., 2007. "Decoupled Farm Payments and the Role of Base Acreage and Yield Updating Under Uncertainty," Staff General Research Papers 12851, Iowa State University, Department of Economics.
    8. Kirwan, Barrett E., 2008. "The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates," Working Papers 42714, University of Maryland, Department of Agricultural and Resource Economics.
    9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    10. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
    11. Daniel A. Sumner & Christopher A. Wolf, 1996. "Quotas without Supply Control: Effects of Dairy Quota Policy in California," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 354-366.
    12. Baltensperger, Ernst, 1978. "Credit Rationing: Issues and Questions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 170-83, May.
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    Cited by:
    1. Todd Kuethe & Mitch Morehart, 2012. "The Agricultural Resource Management Survey: An information system for production agriculture," Agricultural Finance Review, Emerald Group Publishing, vol. 72(2), pages 191-200, July.
    2. Kropp, Jaclyn D. & Katchova, Ani L., 2011. "The Effects of Direct Payments on Liquidity and Repayment Capacity of Beginning Farmers," Staff Papers 164516, University of Kentucky, Department of Agricultural Economics.

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