Tuesday, February 24, 2015

Does Farm Policy Respond to Farm Performance?

Previously I discussed some findings from my recent working paper on ag regulation since 1997. In addition to regulation, we also looked at the effects of farm stabilization spending on profitability and productivity growth. Farm stabilization spending is a "function" category in the White House's Office of Management and Budget historical tables and refers to crop insurance indemnities, direct payments, and other program payments.

The results indicate that there's a statistically significant, negative relationship  between farm stabilization spending and both measures of farm performance. Specifically, profitability declined by -0.027% and productivity growth declined by -0.138% for every 1% increase in farm stabilization spending. Though these effects are statistically significant, they're small. However, the signs of the effects are more interesting than the magnitudes.

I suppose I could make an argument that farm stabilization programs inhibit farm profitability or productivity growth at the margin. The reality, I think, is that we've estimated a measure of the responsiveness of policy, overall, to financial performance in the ag sector. The effects are small, which makes sense given the way farm policy worked from 1997 to 2012. Direct payments were made regardless of yield and price (though the actual payments could be adjusted slightly based on updated data), but crop insurance indemnities are greater when losses are greater and vice-versa. Thus the negative relationships.

I'm certainly no expert on the many farm stabilization policies that existed from 1997 to 2012 and the estimates above are very general. A lot of work has been done evaluating the effects of these specific policies over the years.. Based on the dramatic changes made to crop insurance and program payments in the 2014 farm bill, it will be interesting to see how these relationships change over the life of the bill.

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