Counter-cyclical Payments Research Articles

Mortgage Design in an Equilibrium Model of the Housing Market

ABSTRACTHow can mortgages be redesigned to reduce macrovolatility and default? We address this question using a quantitative equilibrium life‐cycle model. Designs with countercyclical payments outperform fixed payments. Among those, designs that front‐load payment reductions in recessions outperform those that spread relief over the full term. Front‐loading alleviates liquidity constraints when they bind most, reducing default and stimulating housing demand. To illustrate, a fixed‐rate mortgage (FRM) with an option to convert to adjustable‐rate mortgage, which front‐loads payment reductions relative to an FRM with an option to refinance underwater, reduces price and consumption declines six times as much and default three times as much.

The impact of decoupled payments on U.S. cropland values

AbstractAn extensive literature has shown that various farm programs may influence the value of farmland, but other studies have not examined the cropland price effects of direct, or decoupled, payments separate from countercyclical payments. This study uses nationally representative confidential field‐level panel data with farmer‐reported per‐acre land values. We analyze the impact of decoupled and other farm program payments on farmland values. Using a fixed effects model and controlling for various factors that influence farmland values, we find that an additional dollar of decoupled payments has a large and statistically significant impact on farmland values of about $18 per acre. These results are comparable with similar studies undertaken in Europe.

Systematic Fiscal Policy and Macroeconomic Performance: A Critical Overview of the Literature

Abstract The literature on systematic fiscal policy and macroeconomic performance in industrialized countries is large but fragmented. Based on a broad overview of that literature, several patterns emerge. First, the empirical literature points toward strongly anticyclical policy, which consists of procyclical tax revenues, acyclical tax rates and government purchases, and countercyclical transfer payments. Secondly, consolidation in response to the debt has come primarily through adjustments to taxes and possibly purchases. Thirdly, a large government is associated with reduced macroeconomic volatility. Meanwhile, the theoretical literature on anticyclical fiscal policy has gone from mostly focusing on government purchases and tax rates toward beginning to focus on transfer payments, although more quantitative work remains to be done in linking theory with empirics. In addition, a policy literature has begun to develop, which has applied lessons from the theoretical literature in order to understand different consolidation scenarios and different proposed fiscal rules, particularly in Europe.

Competitiveness of Indian Agriculture Sector: A Case Study of Cotton Crop

This study has critically examined the issue of Cotton subsidies in USA as well made a comparative analysis of cotton sector between USA and India in the background of USA claim that African cotton producers’ plight was not due to the trade-distorting subsidies of USA but was on account of upward trend in cotton production in India and China in defiance of market signals. This study also estimated the comparative advantage in cotton production and cotton export diversification by calculation various indicators. Result shows that India has comparative advantage in production and export of cotton in recent years. This study highlights that USA has 14 percent share in world production, however, its share in world export is 38 percent. USA exports 86 percent of cotton production to other countries. The cost of producing cotton is highest in USA, which is 4.5 to 6 times higher than India. During 1995-2010, USA has given about $37 billion to cotton producers though various programmes like counter-cyclical payments, decoupled income, commodity certificates etc. Despite high cost of cotton production, USA is enjoying artificial comparative advantage in cotton market due to high level of domestic support given to farmers and big corporation in USA.

Counter-Cyclical Payments under Doha Negotiations: An Analysis of Agricultural Subsidy Programme of the US

This study has critically examined different aspects of Counter-Cyclical Payments (CCPs) in the context of commitment of United State of America (US) under the Agreement on Agriculture (AoA) and future obligations under recent Doha Round Negotiations. The study has highlighted the shortcomings in domestic support notifications of US to WTO and their impact on product-specific support to the agriculture sector. Earlier, US has argued that CCPs are not a trade distorting support but a decoupled support. However, due to the upland cotton case, the US notified CCPs as Amber Box support, but as a non-product specific support. The US notifications on domestic support have given a distorted picture of the product-specific support to various crops. In Doha Negotiations, the US seeks flexibilities so that CCPs can be placed under Blue Box. In WTO Notifications, the US has treated CCPs as a non-product specific support, but in Doha Negotiations, CCPs are treated as a product-specific Blue Box support. The study has concluded that it is a clear case of box shifting under Doha Round Negotiations.

Details of the Proposed Stacked Income Protection Plan (STAX) Program for Cotton Producers and Potential Strategies for Extension Education

The new Farm Bill could lead to significant changes for commodity producers. The potential impact of these changes on cotton producers is examined. In particular, the difference between the existing Direct and Counter-Cyclical Payment Program and the new Stacked Income Protection Plan (STAX) for cotton producers is discussed. An illustrative example is provided to show how payments to cotton producers could potentially differ for a specific year under various programs. Detailed information on STAX calculations and a STAX payment calculator is included to assist with the development of Extension programs targeted to cotton producers, landowners, and bankers.

To which extent are counter-cyclical payments more distorting than single farm payments? Evidence from a farm household model

The distinction between single farm payments (SFP) and counter-cyclical payments (CCPs) is mainly based on theory. Due to a lack of empirical comparative studies between these payments, it is difficult to confirm the claim that CCPs are more distorting. This paper provides a comparative analysis of these payments and quantifies the impact of such payments in the presence of debt constraints. The main findings are that CCPs are more distorting than SFP. However, the magnitude of the impact estimates is not as large as suggested by the different treatment received by both support programmes in the WTO negotiations.

How Market-Oriented is United States’ Farm Policy?

Farm policy in the United States has crucial implications for world agricultural markets as the us is a major producer and exporter of many agricultural commodities. This study analyses the economic effects of various farm programmes, as enacted in various Farm Acts. The analysis shows that most of the domestic farm programmes are geared towards affecting production, directly or indirectly. These include the totally coupled programmes like the non-recourse loan programme, partially coupled programmes like the production flexibility contract payments, and largely decoupled payments like the direct payments and counter-cyclical payments. The coupled programmes have the maximum market-distorting effect because they are linked to current production. Decoupled programmes like ccps reduce revenue variability and the risk faced by the farmers. The combined effect of these programmes is to insulate the us farmer from the market to a large extent and stabilise his returns from farming. In addition, there are commodity-specific programmes like the peanut programme, sugar and sweetener policy, etc, which perhaps make the us farm sector one of the most supported farm sectors in the world. This high level of domestic support has implications for production and export surpluses, and in turn, for the world markets.

2008 Farm Bill Decision Tools

This article describes a tool developed by Oklahoma Cooperative Extension Service to aid in the decision to enroll in a new commodity program contained in the 2008 Farm Bill. Producers have the option to enroll in the Direct Counter-Cyclical Payment (DCP) program or the Average Crop Revenue Election (ACRE) program. The choice between ACRE and DCP is an important decision for farm profitability. The ACRE program is complex, and the calculation of potential ACRE payments can be quite daunting. The ACRE decision tool was developed to perform the calculations necessary to estimate potential ACRE payments for the 2009-2012 crop years.

Payments under the Average Crop Revenue Program: Implications for Government Costs and Producer Preferences

This paper develops a stochastic model for comparing payments to U.S. corn producers under the U.S. Senate's Average Crop Revenue Program (ACR) versus payments under the price-based marketing loan benefit and countercyclical payment programs. Using this model, the paper examines the sensitivity of the density function for payments to changes in expected price levels. We also assess the impact of the choice of yield aggregation used in the ACR payment rate on the mean and variance of farm returns. We find that ACR payments lower the producer's coefficient of variation of total revenue more than does the price-based support, although ACR may not raise mean revenue as much. While corn farmers in the heartland states might still prefer to receive the traditional forms of support when prices are low relative to statutory loan rates and target prices, this outcome is not necessarily the case for farmers in peripheral production regions.

An Overview of the U.S. Agricultural Economy and the 2008 Farm Bill

The 2008 farm bill involved 16 months of debate. The end product is similar to the 2002 farm bill in the crops arena, continuing counter-cyclical payments, direct payments, and marketing assistance loans. In addition, however, the 2008 bill adds a new, optional counter-cyclical revenue program (Average Crop Revenue Election, or ACRE), authorizes a new permanent disaster program, and contains various other changes. The new ACRE program provides an entirely new set of dimensions for producers to consider in deciding whether to opt into the program, including the multi-year trade-off between the loss of potential “traditional” payments and the revenue protection provided by ACRE, as well as the producer's own expectations about yield and price trends and variability. The payment calculation associated with the new permanent disaster program appears at first glance to be relatively simple, although the whole-farm nature of the program and the number of variables makes it quite complex.

Distributional and Risk Reduction Effects of Commodity Revenue Program Design*

O of the purposes of U.S. agricultural programs has been to support or stabilize farm incomes by mitigating the effects of low crop prices and yields. Commodity programs such as the counter-cyclical payment and Marketing Loan programs have provided benefits or made payments to producers of several major field crops when crop prices fall short of expected or target levels. At the same time, the federal crop insurance program has provided support that has focused on yield shortfalls but has increasingly included revenue coverage. Several proposals to reform U.S. commodity programs have received attention in the 2007 farm bill debate (American Farmland Trust; National Association of Corn Growers; USDA). Generally, these proposals would alter or replace commodity price programs with programs that would make payments when revenues, that is, prices multiplied by yields, fall short of expected or target levels (Coble, Dismukes, and Thomas). Interest in revenue as the basis for farm programs is not new. In 1983, a national-level revenue program was studied as a way to control federal outlays for commodity programs (CBO). In the early 1990s, a regional-level revenue program was analyzed as a way to mitigate the need for supplemental, ad hoc disaster payments (Miranda and Glauber). More recently, a county-level revenue guarantee program has been promoted as providing protection when it is needed while reducing the chances that annual payments would exceed domestic commodity support limits allowed under the World Trade Organization Agreement on Agriculture (Babcock and Hart).

Use of gross income as a measure of productivity in rice breeding

Rice breeders consider grain yield and milled rice percentages in developing cultivars, but usually do not consider gross income. This study’s objectives were to identify rice genotypes that produced high and stable expected gross incomes using genotype plus genotype × environment (GGE) biplot analysis. Uniform Regional Rice Nursery data on 47 long-grain genotypes grown at five locations (AR, LA, MO, MS, and TX) during 2001 to 2003 were analyzed. Gross income of each genotype was estimated based on grain yield, milled rice percentages, market prices, and direct and counter-cyclical payments. Based on GGE biplot analysis, the genotypes with the highest yield and highest gross income for the main crop were different in 12 out of 13 environments. RU0103184, Francis, and RU0003178 were the genotypes with the highest gross income in six, four, and three environments, respectively. Rice breeders should consider gross income as a selection criterion in the release of new cultivars. Key words: Rice, GGE, GE, breeding, gross income

Risk-Reducing Effectiveness of Revenue versus Yield Insurance in the Presence of Government Payments

Government farm support programs such as Loan Deficiency Payments (LDP) and Counter-Cyclical Payments (CCP) have payoff structures that effectively make them costless price insurance instruments. A combination of these payments with yield insurance may provide a viable alternative to revenue insurance. This paper finds that, contrary to expectations, the revenue product analyzed is uniformly superior to yield insurance under both current (2002) and proposed (2008) Farm Bill structures of government payments. Given minor adjustments, however, yield insurance combined with government payments can provide more effective risk management than revenue insurance in production areas with low yield–price correlation.

Hedging a Government Entitlement: The Case of Countercyclical Payments

This research evaluates whether the introduction of countercyclical payments creates an incentive for program crop producers to hedge the expected government payment using futures and/or options. Results indicate that some level of countercyclical payment hedging is optimal for risk-averse decision makers. However, optimal hedge ratios depend on planting time expectations of marketing year average price as well as on what crop, if any, has been planted on countercyclical payment base acres. These results suggest that the ability to hedge may make these payments more decoupled but also illustrate the distortion of producer behavior induced by farm programs.

Supply Response to Countercyclical Payments and Base Acre Updating under Uncertainty: An Experimental Study

AbstractWe design an experiment to simulate how people make agricultural production decisions under three policy scenarios, each incorporating direct payments (DPs): (a) price uncertainty without countercyclical payments (CCPs); (b) price uncertainty with CCPs; and (c) price uncertainty, CCPs, and uncertainty regarding base acreage updating. Results are the CCP program and perceived possibility of future base updating created incentives for subjects to invest more in program (base) crops, despite payments being decoupled from current production decisions. Those choosing to reduce revenue risk by increasing plantings of base crops may face reduced incomes, suggesting the efficiency of crop markets may be diminished.

Supply Response under Risk: Implications for Counter-Cyclical Payments' Production Impact

This study investigates the role of risk in farmers' acreage decisions for major field crops in the North Central region by revisiting an earlier study by Chavas and Holt. The empirical model is forward-looking and reflects better variable measurement. We test the effects of wealth and revenue risk on supply response. Estimated results are also used to examine the production impact of counter-cyclical payments (CCPs). We find that the effects of risk on supply response are not strong. An increase in initial wealth would lead to greater crop acreage, consistent with decreasing absolute risk aversion. The effect of CCPs on production appears to be negligible. T he 2002 Farm Act offers producers income support and revenue risk reduction through counter-cyclical payments (CCPs). These payments are made available to producers of covered commodities whenever the effective price--the sum of the direct payment rate and the national average farm price or loan rate (whichever is higher)-is less than the target price.' CCPs received by producers do not depend on current commodity production, but on historical base acreage and payment yields. CCPs protect producers from down-side price risk and so might have an impact on their production decisions. The potential for CCPs to cause production and trade distortions due to wealth and risk reduction effects has been noted in the ongoing agricultural trade policy debate. A seminal study by Chavas and Holt has been cited as the primary evidence of potential production and trade distortions caused by decoupled payments (such as direct payments) and partially decoupled payments (such as CCPs). The Chavas and Holt study shows that wealth and price risk have statistically significant effects on U.S. corn and soybean acreage decisions, but the impacts are small. However, the study is outdated because data used in the empirical model extend only through the mid 1980s. Since then, the policy environment has evolved away from supply controls and toward greater planting flexibility.

Agricultural Structural Adjustments to U.S. Policies: Discussion Paper

Chau and de Gorter's paper is focused in the micro-tradition-how do specific price and income policies affect exit/entry, production, and trade. The article is pretty strong on mathematics. However, the graphics greatly clarify the math, and help intuitive thinkers like us. Some further clarification is necessary to show how U.S. policies correspond to the Chau-de Gorter assumptions. First, defining Ps, to be an ad valorem subsidy paid only on the export (over-quota) quantities does not reflect U.S. commodity policies because the U.S. Loan Deficiency Payments are deficiency payments from a fixed price that are paid on all production, not just exports. Nevertheless, their analysis still applies to U.S. LDPs because the critical characteristic of P, is that it is higher than P, at the margin. Secondly, more clarification is needed to establish whether their analysis strictly applies to the U.S. PFCs, Direct Payments, and CounterCyclical Payments. Their theoretical model is derived from analyses involving quotas having in-quota and over-quota prices. In the United States, however, producers get paid the same PFC, Direct Payment, and Counter-Cyclical Payment irrespective of the price they receive or quantity they produce. Hence Chau and de Gorter's subsidy m does not strictly correspond to the PFCs or Direct Payments (which depend on neither) or the Counter-Cyclical Payments (which depend on aggregate season average prices, but not on individual quantities produced). When the subsidy m is paid as a lump sum, both the target price Pd and the base B used to determine m are no longer relevant to producer decision making. Though producers know their own base, and Pd is published; for forward decision making they are both red herrings. First, in both figures la and ib, a rational producer will not produce at any price, P1, less than the minimum of AVC unless he/she perceives m to be conditional on producing B, either in regulation or in production. To do otherwise is to take an avoidable loss on

Do counter‐cyclical payments in the 2002 US Farm Act create incentives to produce?⋆

AbstractAnalytical results in the literature suggest that counter‐cyclical payments create risk‐related incentives to produce even if they are ‘decoupled’ under certainty [Hennessy, D. A., 1998. The production effects of agricultural income support polices under uncertainty. Am. J. Agric. Econ. 80, 46–57]. This paper develops a framework to assess the risk‐related incentives to produce created by commodity programmes like the loan deficiency payments (LDPs) and the counter‐cyclical payments (CCPs) in the 2002 US Farm Act. Because CCPs are paid based on fixed production quantities they have a weaker risk‐reducing impact than LDPs. The latter have a direct impact through the variance of the producer price distributions, while the impact of CCPs is due only to the covariance between the CCP and the producer price distributions. The methodology developed by [Chavas, J.‐P., Holt, M. T., 1990. Acreage decisions under risk: the case of corn and soybeans. Am. J. Agric. Econ. 72 (3), 529–538] is applied to calculate the appropriate variance‐covariance matrix of the truncated producer price distributions under the 2002 Farm Act. Risk premia are computed showing that the risk‐related incentives created by CCPs are significant and do not disappear for levels of production above the base production on which CCPs are paid.

Do counter-cyclical payments in the 2002 US Farm Act create incentives to produce?

Analytical results in the literature suggest that counter-cyclical payments create risk-related incentives to produce even if they are ‘decoupled’ under certainty [Hennessy, D.A., 1998. The production effects of agricultural income support polices under uncertainty. Am. J. Agric. Econ. 80, 46–57]. This paper develops a framework to assess the risk-related incentives to produce created by commodity programmes like the loan deficiency payments (LDPs) and the counter-cyclical payments (CCPs) in the 2002 US Farm Act. Because CCPs are paid based on fixed production quantities they have a weaker risk-reducing impact than LDPs. The latter have a direct impact through the variance of the producer price distributions, while the impact of CCPs is due only to the covariance between the CCP and the producer price distributions. The methodology developed by [Chavas, J.-P., Holt, M.T., 1990. Acreage decisions under risk: the case of corn and soybeans. Am. J. Agric. Econ. 72 (3), 529–538] is applied to calculate the appropriate variance–covariance matrix of the truncated producer price distributions under the 2002 Farm Act. Risk premia are computed showing that the risk-related incentives created by CCPs are significant and do not disappear for levels of production above the base production on which CCPs are paid.