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The Effects of Direct Payments on Liquidity and Repayment Capacity of Beginning Farmers

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  • Kropp, Jaclyn D.
  • Katchova, Ani L.
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    Abstract

    U.S. decoupled direct payments, paid to farm operators based on historic yields and base acreage under the 2002 Farm Bill, may alter a farmer’s access to credit or his ability to meet debt servicing obligations. Data from the U.S. Department of Agriculture (USDA) Agricultural Resource Management Survey (ARMS) for the years 2005, 2006 and 2007 are used. We find a positive significant relationship between the level of direct payments (in dollars) and the term debt coverage ratio for experienced farmers, suggesting that direct payments improve repayment capacity. However, this relationship is not significant for beginning farmers. We also find a negative significant relationship between the number of base acres and the current ratio for experienced farmers, while this relationship lacks significance for beginning farmers. We provide evidence that decoupled direct payments impact a farmer’s liquidity and repayment capacity. This paper also 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

    Paper provided by University of Kentucky, Department of Agricultural Economics in its series Staff Papers with number 164516.

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    Date of creation: 2011
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    Handle: RePEc:ags:ukysps:164516

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    Related research

    Keywords: beginning farmers; creditworthiness; decoupled payments; liquidity; repayment capacity; Agricultural and Food Policy; Agricultural Finance; Financial Economics; Q15; Q17; Q18;

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    1. Ashok Mishra & Christine Wilson & Robert Williams, 2009. "Factors affecting financial performance of new and beginning farmers," Agricultural Finance Review, Emerald Group Publishing, vol. 69(2), pages 160-179, July.
    2. 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.
    3. 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.
    4. Katchova, Ani L., 2010. "An Analysis of the Financial Performance of Beginning Farmers," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61513, Agricultural and Applied Economics Association.
    5. Ahearn, Mary Clare & Collender, Robert N. & Diao, Xinshen & Harrington, David H. & Hoppe, Robert A. & Korb, Penelope J. & Makki, Shiva S. & Morehart, Mitchell J. & Roberts, Michael J. & Roe, Terry L. , 2004. "Decoupled Payments In A Changing Policy Setting," Agricultural Economics Reports 33981, United States Department of Agriculture, Economic Research Service.
    6. Barrett E. Kirwan, 2009. "The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 138-164, 02.
    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. Jaclyn D. Kropp & James B. Whitaker, 2011. "The impact of decoupled payments on the cost of operating capital," Agricultural Finance Review, Emerald Group Publishing, vol. 71(1), pages 25-40, May.
    9. 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.
    10. D'Antoni, Jeremy M. & Mishra, Ashok K. & Chintawar, Sachin, 2009. "Predicting Financial Stress in Young and Beginning Farmers in the United States," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46861, Southern Agricultural Economics Association.
    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. Barry K. Goodwin & Ashok K. Mishra & François Ortalo-Magné, 2011. "The Buck Stops Where? The Distribution of Agricultural Subsidies," NBER Chapters, in: The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies, pages 15-50 National Bureau of Economic Research, Inc.
    13. 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.
    14. 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.
    15. Adhikari, Arun & Mishra, Ashok K. & Chintawar, Sachin, 2009. "Adoption of Technology and Its Impact on Profitability of Young and Beginning Farmers: A Quantile Regression Approach," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46830, Southern Agricultural Economics Association.
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    Cited by:
    1. Bruce L. Ahrendsen & Ani L. Katchova, 2012. "Financial ratio analysis using ARMS data," Agricultural Finance Review, Emerald Group Publishing, vol. 72(2), pages 262-272, July.
    2. Ahrendsen, Bruce L. & Katchova, Ani L., 2012. "Financial Ratio Analysis using ARMS Data," Staff Papers 164517, University of Kentucky, Department of Agricultural Economics.

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