Management Changes and Impacts of the 1996 Farm Act

Management Changes and Impacts of the 1996 Farm Act: A National Study and a California Viewpoint (no. 5, March 1998)

Warren E. Johnston and Lyle P. Schertz

The Federal Agricultural Improvement and Reform Act of 1996 dramatically changed the decision-making environment for U.S. farm operators, land owners and land managers. Major elements of the new federal law—production flexibility contract payments (PFCPs), the end of commodity-specific base requirements, and the elimination of annual set-asides and planting restrictions—are challenging farm decision-makers throughout the nation to rethink their management strategies.

Reactions and comments by those decision-makers were voiced during a series of panels of professional farm managers conducted during the spring of 1997.* These responses provide early indications of change taking place in important agricultural areas, including the Plains States, the Midwest, the Southeast, the Mississippi Delta and—most relevant for this AIC Issues Brief—a rice and cereal growing area of the western Sacramento Valley.

Panelists indicated that the new farm bill’s increased planting flexibility was not fully incorporated into 1996 farming decisions. However, farm managers and operators were beginning to more fully consider the longer-term implications as they faced less optimistic outlooks for the 1997 crop year.

Survey responses and discussions with panelists confirmed that farm owners, operators, and managers favor three particular features of the 1996 Farm Act: (1) the predictability of the program payments, which are no longer tied to farm prices, (2) the unambiguous qualifications for payments, and (3) especially, the elimination of most planting restrictions. Additional issues that emerged from the study include:

• Capitalization of payments into land value and higher land rents in many areas.
• Concerns about more variability of commodity prices, leading to increased interest in marketing and risk management strategies.

Understandably, much of the concern of the Sacramento Valley panel, held at Colusa, was focused on decisions involving the limited alternatives for rice production. The 1996 Farm Act signals real expectations of lower returns for rice and, thus, relatively more attractive returns for other crops. For some farm operators, this implies a need for drastic changes in crop mixes.

This AIC Issues Brief summarizes the findings of the Sacramento Valley panel, with some comparisons to other major U.S. production regions. Readers may examine major findings of the nation-wide study,** including two USDA publications and individual chapters summarizing findings of the other panels through links at the bottom of this webpage.

ANTICIPATED CHANGES

The Sacramento Valley panel was comprised of growers and professional farm managers whose overall crop mix was over half rice, almost 10% wheat or corn, and about one-third other crops. These individuals were generally not optimistic about the longer-range prospects for agriculture in their region (all acknowledged that they had considered quitting farming; some said they still do). They all anticipated substantial economic pressures in the future.

When asked what changes in management they expected to be most pronounced over the next five years, they focused almost exclusively on (1) the need for more attention to marketing, (2) the need for greater acreage adjustment among crops, and (3) the expectation of increased price volatility. As Table 1 shows, panelists elsewhere in the U.S. were concerned with these three issues but also were intrigued with more use of new technologies (e.g., advances in seed genetics, bioengineering and pesticide resistance) and with a number of “other” effects on their management decisions (e.g., higher land values and leases, changing production practices, and increased competition among renters for land.)

Table 1. Panel responses regarding major changes in management for farm resources expected to be the most pronounced in the next five years. California (Colusa) panel and all U. S. panels combined

In discussing marketing, the Sacramento Valley panelists pointed to their historical reliance on cooperatives for marketing rice—in the words of one, “with few options.” Many noted the need for new marketing alternatives. The development of contract production may offer such an alternative, although for a relatively minor share of production. Contracts could tend to shift risk to the marketing firm and provide more security to farm lenders. In the view of the panelists, the marketing contracts would be particularly important for niche products. However, an opinion was also voiced that higher prices currently offered for niche products might result in “everyone jumping into production,” causing price volatility and/or lower prices. In general, panelists saw the need for farmers to be more proactive in marketing, with greater use of tools such as futures, options, and contracts.

Since profit margins are slim, panelists indicated that where possible they will switch to crops judged to have more profit potential—but that they also need to take into account associated adjustment costs. Expectations were that acreages will adjust on a year-to-year basis as farmers determine the most economic crops for their properties. Panelists with no, or very limited, production alternatives said they focused on reduced costs of production and hopes for improved marketing.

The Colusa panelists stated clearly that they expect increased price volatility not only for rice, but also for many of the alternate crops grown on more diversified properties. A specific but not always attainable answer, they said, is “to forward-contract rather than produce on speculation, and to make sure that contracted prices pay for production.”

FORCES DRIVING CHANGE

Forces that underlie, or will underlie, major changes in management decisions by Colusa panelists—most of whom are involved in rice production—are (1) environmental concerns/regulations, (2) higher input prices and (3) concerns about commodity prices. (See Table 2.) The U.S. panelists were also highly concerned about commodity prices. More than the Colusa panel, they focused on issues relating to farm program changes and the impact of world demand and weather on their production decisions.

Table 2. Panel responses regarding major forces expected to influence 2000-2002 management decisions, California (Colusa) panel and all U. S. panels combined.

Environmental Concerns. Panelists said that the combination of very restrictive California and federal environmental and resource regulations puts California agriculture under intense scrutiny and results in limitations that are excessive when compared to other areas of the nation. One reason, they noted, is urban growth, with much of the state’s population lacking understanding of agriculture, and even the origins of food. The urbanization of California also generates air and water resource-related impacts on food producers. For example, farmers are required to comply with clean air and water regulations and restrictions, while urban populations—in the panel’s view—are not held as accountable for air emissions and urban-sprawl externalities that reduce agricultural productivity. Rice producers mentioned the relative lack of regulation in competing areas of rice production such as Arkansas, Mississippi, and Missouri. One panelist commented that regulations could, in the extreme, “transform California agriculture out of existence.”

One panelist made a point, which other panelists ultimately endorsed—changes in acreage of basic, program crops in the midwest do affect crop choices of California producers. High commodity prices for wheat and feed grains will also be attractive to California producers and would indirectly reduce acreages available for other field and row crops (including specialty and niche products), driving up the prices for those crops as well.

Outlook for prices. Higher input costs and lower commodity prices are exerting serious pressure on western Sacramento Valley growers and all panelists were concerned about the problem. In their view environmental concerns and environmental regulations particularly impact California growers, resulting in higher per-unit costs of production that will not be reflected in output prices.

The other component of the producers’ cost-price squeeze is crop prices. These operators expected lower prices, especially for rice, and more price uncertainty in general for non-contracted crops. The panelists believe that global demand will importantly influence commodity prices, even for sales in domestic markets. For example, increased imports can mitigate domestic supply situations that might otherwise result in higher prices to U. S. producers. These are the realities of the global economy. Still, the Colusa panelists, like those of several other panels elsewhere in the U.S., are concerned that the playing field is not level. A particular criticism is the European Union’s subsidization of exports as a way of managing excessive stocks.

However, anticipation of improved marketing, development of “identity” products, and reduced rice acreage as growers search for cropping alternatives underlie a contrasting view that rice prices can be maintained. Given these possibilities, six of eight panelists expected that the price of rice in the terminal years of the Farm Act will be above the 1996 price. Panelists noted that currently low processing tomato prices were due to large inventories, that opportunities for high valued seed crops are good (but only for limited contracted acreages), and that in the search for cropping alternatives growers need to be aware of opportunities for contracting for specialized uses and markets.

Expected crop mixes. Diversification away from sole reliance on rice production was the general theme explored by members of the panel. Their 1997 crop mixes, where possible, included more careful attention to prices, profitability, and rotational needs. Growers appreciated the flexibility provisions of the new law, decoupling payments and permitting management decisions to plant other crops. Some were further along in finding alternatives; others were more solidly locked into a high proportion of rice on their properties. All were looking for niche products with attractive price contracts.

In the longer term, rice growers said they need especially to find quality or quantity contracts for specialty rice varieties, to give up less favorable rice leases, and to search for multiple-use soils to provide flexibility while striving to maintain efficiencies of scale. Growers with specialized rice equipment and machinery will require additional investments in order to expand into many of the alternative crops.

One grower expressed the longer term outlook in a way that summed up the views of the group: “I also hope to be more diversified. I have the acreage available, but I need capital to expand and diversify. For now, I am vulnerable and forced to take more risk than I want.”

*The study project, including a series of eight focus-group panels in early 1997, was conducted by agricultural economists Warren E. Johnston, University of California, Davis, and Lyle P. Schertz, U.S. Department of Agriculture. (Both retired.) The Economic Research Service of the USDA and the Farm Foundation, in addition to AIC, provided support for the research.

**The full report was published by USDA as an ERS Staff Paper titled Managing Farm Resources in the Era of the 1996 Farm Act. Click here for the full report of the USDA Farm Bill Study and individual state and regional summaries