Decoupling direct payments: potential impacts of the 2014 farm bill on farm debt

Abstract

Purpose – For over 20 years, decoupled agricultural support programs have played a large role in farm policy. The purpose of this paper is to investigate the effects of decoupled agricultural support payments on farm-level debt. Design/methodology/approach – A two-stage least squares model is used to estimate the impact of decoupled payments, farm production characteristics, demographics, regional risk factors, as well as cross-sectional and temporal fixed effects on farm debt, along with weather-related instrumental variables. Findings – Results indicate that a negative and statistically significant relationship exists between decoupled payments and farm debt. This study also provides evidence that research results not accounting for the endogenous relationship between acres operated and farm-level debt should be interpreted with caution. Research limitations/implications – The constantly changing sets of policy options provide a challenge in identifying the impact of a single policy, ceteris paribus. Therefore, one notable limitation is in extrapolating the results in this study to make implications on the elimination of the direct payments program, as part of the 2014 Farm Bill. Practical implications – This implies that farmers likely use annual decoupled payments to reduce their debt, potentially influencing their exposure to financial risks, capacity to withstand financial instability, and access to credit. The methodology used may establish a foundation for continued research that seeks to empirically identify and measure the complex interrelationships among agricultural public policies and farm-level financial measures. Social implications – Decoupled payment programs may indirectly influence debt decisions, which can influence production decisions in the long run. Originality/value – In order to accurately identify the impact of direct payment programs on farm debt levels, this study is the first of its kind to account for the endogenous relationship between production decisions and debt and use a large unbalanced panel of data available from the Agricultural Resource Management Survey.