The recent WTO Appellate Body decision upholding the ruling against U.S. farm program payments for cotton producers has raised again the issue of how farm program payments influence production decisions of U.S. producers. The WTO ruling concluded that the influences are simple and direct. Economic analysis shows the impacts are much less certain.

The benefits of farm program payments naturally flow to the most limiting factor in production. For farm program crops the two most limiting factors are land and yield per acre. With almost 60 percent of cropland owned by someone other than the operator of the farm, it is reasonable to assume that a significant percentage of farm program payments go to non-operator owners of farmland. Programs like the marketing loan are based on actual production, and higher yields result in higher farm program payments per acre. Higher production resulting in more payments to the producer does not necessarily mean that he or she is the final claimant of the payments.

A November 2001 USDA analysis by Barnard, Nehring, Ryan and Collender estimated the impact on land values of farm program payments in calendar year 2000 under the 1996 farm bill. About 24 percent of the value of land in the Heartland (Ohio to eastern Nebraska) was accounted for by farm program payments. The Prairie Gateway (Texas to southern Nebraska) was similar at 23 percent, as was the Northern Great Plains (northern Nebraska to North Dakota and eastern Montana) at 22 percent. In the Mississippi Portal region (the cotton growing regions of Louisiana, Mississippi, Arkansas and Tennessee) farm programs were estimated to account for 16 percent of the market value of farmland. For the nation as a whole in 2000, farm programs accounted for $62 billion, 20 percent, of the estimated $312 billion value of land used to grow the eight principal farm program crops.

The shift of farm program payments to landowners can also be seen by the increases in cash rents from 1998 to 2003. High commodity prices in 1996 encouraged producers to bid up land rents. By the summer of 1998 commodity prices had declined sharply and remained generally depressed through 2003. Congress provided economic disaster assistance to help protect farm income. Despite low market prices, USDA estimates of average cash rents in the Corn Belt went up 10 percent from 1998 to 2003. Cash rents in the Northern Plains went up 7.9 percent, while cash rents in the Southern Plains went up 9.8 percent. The Mississippi Delta had the largest increase in cash rents at 14 percent.

A study released last fall by Kastens and Dhuyvetter of Kansas State University sheds some additional light on land prices and farm program payments. They started with average land rent-to-value ratios (agricultural capitalization rates) for 39 states for 1951-1972, a period when land values were largely dominated by farming-only activities. They then applied those capitalization rates to 2004 cash rents to estimate todays value of farmland in an agricultural-only environment. For much of the middle of the country which receives most of the farm program payments agriculture accounted for 60-80 percent of the value of land.

Kasten and Dhuyvetter then estimated the percent of the agricultural land values that could be attributed to government payments by taking the average relationship between government payments and cash rents over the 1951-2004 time period. For Corn Belt states like Ohio, Indiana, Illinois, Missouri and Iowa, government farm program payments accounted for 25-30 percent of the agricultural value of land. For the Central and Northern Plains government payments accounted for 40-50 percent of the agricultural value of land. For the Mississippi Delta states farm programs accounted for 50-60 percent of the agricultural value of land.

These are not perfect estimates on the impact of farm programs on land values. Arguments can be made about the assumptions used and the time periods covered. But, they all fit the general thesis that farm program payments do not all go toward encouraging production. As would be expected, much of the farm program payments are capitalized in the value of land because land is one of the limiting factors in crop production.

One other piece of information is of value in thinking about the impact of farm programs on production. Each year USDA does a survey of farmers called the Agricultural Resource Management Survey (ARMS). One of the questions asked on the 2003 survey dealt with the importance of various factors to the acreage allocation decision of U.S. farmers. Farmers were asked to rate on a scale of 1-5, with 1 being very important, production and market factors like crop rotations, input costs and expected market prices and farm program factors like direct payments and loan rates. The results were reported by farm type: wheat, corn, soybeans and cotton.

Corn farmers and soybean farmers gave the highest rating to crop rotations, 1.53 and 1.79 respectively, while cotton and wheat farmers gave the highest rating to expected crop prices, at 1.79 and 1.82 respectively. Input costs were also among the highest rated factors. Loan rates had one of the lowest ratings, averaging from 3.37 to 3.65. This indicates that producers have decoupled payments from production and are focusing on market prices, production costs and agronomic factors in deciding what to plant.

It is easy for WTO panel members and editorial writers to lump all farm program payments into one group and call them production and trade distorting. In the real world of on-farm production decisions and economic returns to land, the relationships are much more complex.