Date of Award

8-2010

Document Type

Thesis

Degree Name

Master of Science (MS)

Legacy Department

Applied Economics and Statistics

Advisor

Kropp, Jaclyn D

Committee Member

Sharp , Julia L

Committee Member

Ward , William A

Abstract

When first introduced, decoupled payments were thought to have minimal impacts on current production decisions and input use. In order to comply with the Uruguay Round Agreement on Agriculture requiring all World Trade Organization (WTO) member countries to reduce trade distorting agricultural policies, in 1996 U.S. agricultural policies began shifting away from coupled payments, based on current prices, production, or output, towards decoupled payments.
However, the literature has identified several mechanisms by which decoupled payments have the potential to distort production in the current period. First, risk averse producers may increase production due to insurance and wealth effects. Second, in imperfect credit markets decoupled payments may ease constraints by increasing total wealth. Third, current production decisions may be influenced by the farmer's expectation of future decoupled payment policies, in particular after policy changes in the 2002 and 2008 Farm Bills. Fourth, input markets are affected through possible changes in the allocation of labor, land, and other inputs. Lastly, exit deterrence may result in fewer people leaving the market due to subsidizing fixed costs, declining average costs, or cross-subsidization.
In the theory section, a typical farmer's expected utility maximization problem illustrates that coupled payments are shown to affect optimal allocations of acreage (extensive margin) and production inputs (intensive margin) because they are linked to current prices, production, or inputs. In theory, decoupled payments do not affect optimal allocations of acreage and production inputs because they are not tied to current prices, production, or inputs. However, when farmers are allowed to update historical base acres and yields upon which future decoupled payments are based, uncertainty creates a coupling mechanism between production decisions and decoupled payments.
Using FCRS and ARMS farm-level data collected by NASS between 1991 and 2008, weighted ordinary least squares regression analysis suggests a positive relationship between both decoupled payments and other government payments and per acre expenditures on agricultural chemicals. However, decoupled payments may affect the intensive margin more than other government payments. Lastly, the 2008 Farm Bill may implicitly create a coupling mechanism because base yield is calculated using an Olympic moving average, meaning that each year the historic period changes. The results suggest that current US agricultural policies are production distorting and thus may be in violation of standing WTO agreements.

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