An economic analysis of the impact of decoupled payments on farm solvency in the United States

Abstract

This thesis evaluates the effects of decoupled agricultural support payments on the debt-to-asset ratio of farmers in the top five states producing corn, cotton, wheat and soybeans from 1996 to 2011. Building on existing literature, this study estimates the broader impacts of decoupled payments on farm solvency by considering all decoupled payments made since their establishment in 1996. A theoretical model of profit maximization identifies the factors predicted to influence solvency, which include farm assets, income, expenses, scale, production risk, decoupled payments and operator characteristics. Following the literature, the relationship between these factors and farm solvency are estimated empirically using a linear regression model with data from the Agricultural Resource Management Survey, Farm Service Agency and Risk Management Agency. The results indicate decoupled payments have a positive relationship with the debt-to-asset ratio and that the elimination of decoupled payments in the upcoming Farm Bill could lead to decreases in farmers' debt-to-asset ratios by an average of approximately ten percent. Furthermore, an analysis of the effects of decoupled payments by primary crop designation suggests that only corn soybean, corn and wheat farmers' debt-to-asset ratios are significantly responsive to changes in decoupled payments. This study also finds the effect of decoupled payments on solvency is uniform across farm size. In addition to these results, this thesis also contributes to current literature by providing preliminary evidence of an endogenous relationship between acres operated and the debt-to-asset ratio, which appears to introduce a positive bias on the parameter estimate for decoupled payments in the linear regression model. Furthermore, when a two-stage least squares model is used to control for this bias, the results estimate a negative relationship between decoupled payments and the debt-to-asset ratio. Due to the change in the coefficient of decoupled payments between the two models, this study suggests that results from research failing to account for a potential endogenous relationship between acres and the debt-to-asset ratio should be interpreted with caution.