Online from: 2000
Subject Area: Economics
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|Title:||The impact of decoupled payments on the cost of operating capital|
|Author(s):||Jaclyn D. Kropp, (Applied Economics and Statistics, Clemson University, Clemson, South Carolina, USA), James B. Whitaker, (USAID, Washington, DC, USA)|
|Citation:||Jaclyn D. Kropp, James B. Whitaker, (2011) "The impact of decoupled payments on the cost of operating capital", Agricultural Finance Review, Vol. 71 Iss: 1, pp.25 - 40|
|Keywords:||Cost of capital, Credit, Farms, Payments, United States of America|
|Article type:||Research paper|
|DOI:||10.1108/00021461111128147 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||The authors thank Robert Dubman of ERS for his assistance in accessing the ARMS data, also the participants of the 2009 AAEA annual meetings and the 2009 NC-1177 conference for their helpful comments and suggestions. The views expressed herein are solely those of the authors and do not represent the views of the US Agency of International Development.|
Purpose – The purpose of this paper is to investigate how decoupled direct payments, paid to farm operators based on historical yields and base acreage, may lead to production distortions by altering a farmer's access to credit or enabling the farmer to receive more favorable credit terms. The authors estimate the impact of decoupled direct payments under the 2002 Farm Bill on the credit terms of farm operators, specifically the interest rate on short-term operating loans. If farm operators are able to obtain more favorable credit terms and reduce their operating cost, then this offers an additional mechanism through which decoupled payments may distort current production.
Design/methodology/approach – The authors estimate the impact of decoupled direct payments on the interest rate on short-term operating loans. In the analysis, the authors control for farm financial characteristics, farm operator characteristics, and other factors. Data from the Agricultural Resource Management Survey for the years 2005-2007, are used in the weighted regression analysis. Jackknifed standard errors are also computed.
Findings – As the proportion of base acres to total operated acres increases it is found that interest rates decline by a small but statistically significant amount. This implies that direct payments lead to lower operating costs through better credit terms.
Research limitations/implications – Lower operating costs may in turn allow some farmers to expand production or produce on land that would otherwise be unprofitable to operate and hence left idle. Ultimately, this distorts current production. However, the small magnitude of the authors' results suggests that the reduction in interest rates, though positive, may have limited distortionary impacts.
Originality/value – The paper provides evidence that decoupled payments alter a farm operator's credit terms and hence could lead to current production distortions. The paper contributes to the growing body of research investigating the mechanisms by which decoupled payments have the potential to distort current production.
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