We 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.
Bibliographical noteFunding Information:
We thank the ERS/USDA for financial support on cooperative agreement #43-3AEK-2-80080. Helpful comments were received from reviewers and presentations at University of Minnesota-Duluth, Penn State, and ERS. Shogren thanks the Norwegian University of Life Sciences for the hospitality needed to finish this paper. All errors remain our own. The views expressed here are those of the authors, and may not be attributed to the Economic Research Service or the U.S. Department of Agriculture. 1“Base acreage” refers to a farm’s crop-specific acreage of wheat, feed grains, cotton, rice, oilseeds, or peanuts eligible to participate in commodity programs under the 2002 Farm Act. Base acres and yields determine the level of government (direct and counter-cyclical) payments and reflect a farm’s historical level of acres and yields. Under the 1996 Farm Act, production flexibility contract (PFC) acreage and payment yields for most producers were generally based on—as in prior legislation—the crop mix and
- Base acreage
- Countercyclical payments