Statement of

Troy Dumler, Agricultural Economist, Kansas State University

Before the U.S. House of Representatives Committee on Agriculture,

Subcommittee on General Farm Commodities and Risk Management

June 5, 2007

**Introduction**

The challenges of Kansas producers are numerous and varied. The last
five years have seen sustained droughts, brutal winter storms, late
spring freezes, widespread flooding, and massive tornados. These events
by themselves make agricultural production in Kansas interesting. But
those factors are not the only ones to make the last five years
interesting. Rising energy costs and increasing demand for crop and
livestock commodities have also had a significant impact on agricultural
production in Kansas. Currently, a variety of forces are aligning to
shape the future of agriculture in Kansas and the United States. The
immediate future looks brighter for some, but perhaps dimmer for others.
Following is a discussion of the challenges facing Kansas producers.

**Farm Income**

Data from the Kansas Farm Management Association (KFMA) indicates that
net farm income in Kansas has mirrored U.S. net farm income (Table 1).
After experiencing lows in 2002, net farm income, both nationwide and in
Kansas, recovered to record levels in 2004 before dropping each of the
last two years. Though Kansas farm income was barely a record in 2004,
nevertheless it was three times higher than it was in 2002---the only
year in the last five in which net farm income did not cover family
living expenses.

Table 1. Net Farm Income in the U.S. and Kansas (2002-2006).

  ----------------------- ----------------------- -----------------------
  Year                    U.S.                    Kansas\*

                          (Total \$)              (\$/Farm)

  2002                    40.2                    19,106

  2003                    60.4                    51,051

  2004                    85.4                    62,604

  2005                    73.8                    56,982

  2006                    60.6                    46,593
  ----------------------- ----------------------- -----------------------

\* Kansas Farm Management Association farms.

Much of this variability in income can be explained by weather and
fluctuating production costs. Figure 1 shows the annual average yields
for wheat, corn, grain sorghum, and soybeans in Kansas. Widespread
drought in 2002 resulted in low yields for all four crops. Wheat yields
rebounded to near record highs in 2003, but dry conditions that summer
produced low yields once again for the fall crops. While wheat yields
were again below average in 2004, yields of fall crops were above
average. Yields for all four crops were average or above in 2005, before
dropping in 2006.

![](media/image1.wmf){width="5.478472222222222in"
height="3.2916666666666665in"}

The variability of crop production was exacerbated by rising input costs
during this period of time, putting additional pressure on income. As
seen in Figure 2, diesel fuel and natural gas prices increased by 145
and 97 percent, respectively, from 2002 to 2006. Current forecasts from
the Energy Information Administration (EIA) point to slightly higher
costs in 2007. The increasing energy costs have caused crop production
costs to increase as well. Table 2 shows the energy intensive expenses
for non-irrigated KFMA crop farms from 2002-2006. Each year from 2003 to
2005 had double-digit percentage increases for fertilizer and fuel
expenses. Fuel costs continued the double-digit increase in 2006, while
fertilizer expenses increased by a modest 1.55%.

![](media/image2.wmf){width="5.634027777777778in"
height="3.3645833333333335in"}

Table 2. Energy Intensive Expenses for Non-Irrigated KFMA Crop Farms
(2002-2006).

  ---------------------- ---------- ---------- ---------- ---------- ----------
  Expense Category       2002       2003       2004       2005       2006

  [Fertilizer and                                                    
  Lime]{.underline}                                                  

  Crop Expense           \$21,114   \$24,710   \$27,858   \$36,797   \$37,920

  Expense/Crop Acre      \$16.55    \$19.18    \$21.13    \$26.69    \$27.11

  Annual Change (%)                 15.83%     10.20%     26.31%     1.55%

  [Gas, Fuel, and                                                    
  Oil]{.underline}                                                   

  Crop Expense           \$11,584   \$13,257   \$15,806   \$20,901   \$24,127

  Expense/Crop Acre      \$9.08     \$10.29    \$11.99    \$15.16    \$17.25

  Annual Change (%)                 13.27%     16.55%     26.45%     13.75%

  [Total Energy                                                      
  Expense]{.underline}                                               

  Crop Expense           \$32,698   \$37,967   \$43,664   \$57,698   \$62,047

  Expense/Crop Acre      \$25.64    \$29.46    \$33.12    \$41.85    \$45.01

  Annual Change (%)                 14.92%     12.42%     26.36%     7.54%
  ---------------------- ---------- ---------- ---------- ---------- ----------

Source: Kansas Farm Management Association 2006 Databank.

The past five years have not been all negative though. Even after
declining somewhat in 2006, beef cattle prices have remained strong. In
addition, crop prices have increased significantly due to rising demand
for ethanol. At this point, continued demand for renewable fuels
indicates that prices for grains and oilseeds will likely remain strong.
However, those same strong prices will also put pressure on livestock
producers. Evidence of this occurring may already be evident in the 2006
KFMA data. While income on crop farms in 2006 was generally equal to or
greater than income in 2005, beef cattle operations saw declines in
income (Table 3). This drop in income can partially be explained by
lower cattle prices in 2006 and higher forage costs caused by drought.
But it is also likely that the increase in feed grain prices in the fall
of 2006 had a negative impact on cattle returns.

Table 3. KFMA Net Income per Operator by Farm Type (2002-2006).

  --------------------- ---------- ---------- ---------- ---------- ---------- ----------
  Type of Farm          No. of     Net Income                                  
                        Farms      per                                         
                                   Operator                                    

                        \(2006\)   2002       2003       2004       2005       2006

  All Farms             1,554      \$19,343   \$52,410   \$63,491   \$57,584   \$46,804

  Cash Crop Dryland     1,065      20,229     51,424     57,087     49,422     49,366

  Cash Crop Irrigated   73         9,743      57,580     62,729     64,955     92,335

  Stock-Ranch Cowherd   33         9,291      34,148     51,366     45,396     35,986

  Cowherd               21         6,595      22,458     32,088     24,914     13,344

  Dairy                 38         22,426     24,484     71,192     52,658     25,663

  Backgrounding         14         29,220     63,035     82,252     63,279     -5,823

  Cash Crop-Cowherd     155        17,544     33,879     49,613     50,149     31,132

  Cash Crop-Dairy       11         34,201     49,643     81,068     72,799     55,538

  Cash                  33         3,197      87,728     79,308     83,820     1,203
  Crop-Backgrounding                                                           
  --------------------- ---------- ---------- ---------- ---------- ---------- ----------

Source: Executive Summary, 2006 *Profitlink* Analysis, Kansas Farm
Management Assoc.

**Government Payments**

There is little doubt that commodity subsidies have reduced the income
variability of Kansas farms. As shown in Figure 3, from 2002-2006,
government payments averaged 60% of net farm income for KFMA farms. In
spite of the seemingly high dependence on government payments, some care
needs to be exercised in interpreting these numbers. Namely, KFMA
government payment data includes all government payments (i.e.,
commodity, conservation, and disaster assistance.) Because conservation
payments (mainly from the Conservation Reserve Program) are included,
the importance of government payments may be overstated. For example,
according to the 2002 Census of Agriculture, in 2002 nearly 29% of
government payments were CRP or WRP (Wetland Reserve Program) payments.
However, commodity program payments in 2002 were lower than previous or
subsequent years, thereby making CRP/WRP payments a higher percentage of
total government payments. Nevertheless, CRP/WRP payments are a
significant source of government payments in Kansas.

![](media/image3.wmf){width="5.716666666666667in"
height="3.354861111111111in"}

Concerning the relative importance of government payments, a study by
Dumler in 2005 determined that, from 1995-2004, farm program payments
have been a significant factor in farm profitability. However, the study
also determined that other factors, such as cost management and
production have larger effects on profitability than government
payments. Nevertheless, if government payments were reduced or
eliminated, farm profitability would be diminished. Obviously, those
farms that specialize in the production of farm program commodities
would suffer larger losses than those who do not specialize in those
commodities. In addition, larger farms would be able to absorb the loss
of government payments better than small farms, and in many cases even
remain profitable. On the other hand small farms were not profitable, on
average, even with government payments.

Although government payments have contributed a significant portion of
net farm income in recent years, not all the benefits of government
payments go to farmers, as a portion of those benefits gets capitalized
into land values. This reality has two ramifications. First, it
demonstrates that family farms are not the only beneficiaries of farm
subsidies. Second, it indicates that as farm income would decline from a
reduction or elimination of government payments, farm asset and equity
values would also decline.

A 2006 study by Kastens and Dhuyvetter estimated that average cropland
values by state would fall by 2.3% to 40.8% if government payments were
eliminated. Land values in Kansas would be estimated to fall by 30.2% if
government payments were eliminated. Certainly, a reduction in land
values of that magnitude could have a devastating effect on the
financial viability of many farms. The estimated decline in land values,
however, assumes that 100% of government payments are capitalized into
land. In reality, government payments are not likely to be fully
capitalized into land values. Moreover, the study was conducted prior to
the rapid rise in commodity prices in the fall of 2006. Consequently,
the reduction in land values would likely be significantly less. This
point is illustrated by a recent survey on farmland values. The survey
by the Federal Reserve Bank of Kansas City indicates that in spite of
decreasing commodity program payments, non-irrigated farmland values in
Kansas have increased by 7.6% from 2006 while irrigated values have
increased by 10.4%.

Because of the relative importance of government payments in enhancing
farm income, it is not surprising that Kansas producers would generally
support the current three-part commodity safety net. As part of a recent
nationwide survey on preferences for the 2007 Farm Bill, Kansas
producers were asked to prioritize which of several existing programs
are most important to maintain in light of potential funding constraints
or trade-offs. The results for 10 separate programs or program
categories are shown in Figure 4.

![](media/image4.wmf){width="5.706944444444445in"
height="3.354861111111111in"}

Kansas producers placed the highest priority on maintaining funding for
disaster assistance programs. That corresponds with producer preferences
nationwide. The next highest priority was for direct payments, followed
by commodity loans, and counter-cyclical payments. Conservation
programs, including land retirement programs such as the Conservation
Reserve Program (CRP), and working land programs such as the
Environmental Quality Incentives Program (EQIP) and Conservation
Security Program (CSP) ranked lower. Supporting livestock commodities
ranked last in Kansas and nationwide. Given that the primary commodities
grown in Kansas are farm program commodities, it is not surprising that
Kansas producers would rank commodity programs higher than other
programs. It is also not surprising that Kansas producers ranked
disaster assistance over each of the three current commodity programs,
or that direct payments would rank much higher in Kansas than on a
nationwide basis. Overall, the results suggest that Kansas producers may
believe the current safety net may have some significant holes.

Primary support for Kansas producers since 2002 has come in the form of
direct payments. Being decoupled from price and production, the primary
advantage of direct payments is that they result in minimal market
distortion in the global trade arena. For Kansas producers, the primary
advantage of direct payments is that they have, at times, been the only
means of support in the low yield/high price environments which have
predominated since the passage of the 2002 Farm Bill. As previously
mentioned, direct payments get capitalized into land values. But the
assertion that direct payments get capitalized into land values, and
payments from other commodity programs do not, has no economic validity.
The capitalization process may be more transparent with direct payments,
but it is not exclusive to direct payments.

**Counter-Cyclical Revenue Proposals**

Leading up to the 2002 Farm Bill, much debate centered on the need to
provide an enhanced safety net for crop producers when prices decreased.
Crop producers received direct payments and marketing loan program
payments averaging nearly \$10 billion per year from 1999-2001, but that
was deemed insufficient, and Congress intervened to provide a total of
\$19.5 billion in market loss assistance (MLA) payments over those three
years. In the 2002 Farm Bill the counter-cyclical payment (CCP) program
was created, formalizing the MLA payments into a permanent program.

With two of the three commodity safety net programs tied to price, it is
fair to say that producers of commodity program crops should be well
covered in low price environments. But does that imply that the safety
net is now sufficient? Given the fact that an average of \$1.3 billion
in crop disaster aid has been paid out annually from 1999-2006 suggests
that the current combination of safety net programs is not sufficient.
The primary problem with safety net programs that are tied to price is
that they are not very effective in high price/low yield environments.

Economically, there is a strong argument for a redesigned safety net
that more effectively focuses on a bottom line revenue or net farm
income goal instead of the current multitude of safety net tools that
variously focus on price, production, or some mix of the two. Kansas
producers participating in the 2007 Farm Bill preference survey ranked a
counter-cyclical revenue program behind only bioenergy incentives when
asked to prioritize potential new program funding (Figure 5).

![](media/image5.wmf){width="5.696527777777778in"
height="3.3444444444444446in"}

Several proposals have been made to convert the current price-based
counter-cycle program to one in which payments are made when revenue
falls below a predetermined target. These include, but are not limited
to proposals from USDA, American Farm Bureau Federation (AFBF), the
National Corn Growers Association (NCGA), and American Farmland Trust
(AFT). All four of the revenue-based proposals are designed to achieve
the same goal, but use different means to do so. Two of the proposals
(USDA and AFT) trigger payments when national revenue falls below the
target level. The AFBF proposal triggers payments when state revenue
falls below the target level, while the NCGA proposal triggers payments
when county revenue falls below the target level. Since the proposals
use different methods to calculate the revenue target and payment when
revenue falls below that target, they will vary in how much money will
be distributed through them and to whom it will be distributed.

Following are the results of a simple analysis comparing
counter-cyclical revenue proposals from USDA and the AFBF to the current
price-based CCP program. Table 4 shows the net advantage of the USDA
proposal over the current CCP from 2002-2006 for wheat, corn, soybeans,
and sorghum in Kansas, while Table 5 shows the net advantage of the AFBF
proposal for those same crop years. For the primary Kansas crops, the
USDA proposal had a \$231.5 million advantage over the current CCP
program and a \$79.6 million advantage over the AFBF proposal from
2002-2006. The USDA proposal resulted in higher payments for all crops
except grain sorghum. When compared to the current CCP program, corn was
the only crop that received lower payments under the AFBF proposal. Most
of the support under both proposals would have come in 2002, a low
income year for Kansas farmers, while fewer payments would have been
made in 2004 and 2005.

Table 4. Net Advantage of USDA Proposal over Current CCP from 2002-06 in
Kansas.

  ----------- --------------------- ----------- ------------ ---------- ------------
  Year        Wheat                 Corn        Sorghum      Sorghum    Total

              \-\-\-\-\-\-\-\-\--                                       
              Million Dollars                                           
              \-\-\-\-\-\-\-\-\--                                       

  2002        164.6                 103.4       51.0         13.0       332.0

  2003        0.0                   0.0         19.2         0.0        19.2

  2004        0.0                   -36.7       -56.4        0.0        -93.1

  2005        0.0                   29.8        -56.4        0.0        -26.6

  2006        0.0                   0.0         0.0          0.0        0.0

  Total       164.6                 96.5        -42.6        13.0       231.5
  ----------- --------------------- ----------- ------------ ---------- ------------

Table 5. Net Advantage of AFBF Proposal over Current CCP from 2002-06 in
Kansas.

  ----------- --------------------- ----------- ------------ ---------- ------------
  Year        Wheat                 Corn        Soybeans     Sorghum    Total

              \-\-\-\-\-\-\-\-\--                                       
              Million Dollars                                           
              \-\-\-\-\-\-\-\-\--                                       

  2002        76.0                  51.0        99.8         51.9       278.7

  2003        0.0                   0.7         88.3         0.0        89.0

  2004        0.0                   -68.7       -56.4        0.0        -125.1

  2005        0.0                   -34.3       -56.4        0.0        -90.7

  2006        0.0                   0.0         0.0          0.0        0.0

  Total       76.0                  -51.3       75.3         51.9       151.9
  ----------- --------------------- ----------- ------------ ---------- ------------

Tables 6, 7, and 8 show how the current CCP program compares to the USDA
and AFBF revenue proposals using data from the Kansas Farm Management
Association from 2002-2005. As expected, results correspond with state
totals. Both the USDA and AFBF programs would have provided more income
to Kansas farms than the current CCP program. In addition, the USDA
proposal, on average, resulted in larger payments per farm than the AFBF
proposal. Also, the AFBF proposal performs better for sorghum, but worse
for wheat and corn.

Table 6. Estimated Payments for KFMA Farms with 2002 Price-Based CCP
Program.

  ----------- ----------- ----------- ------------ ----------- -----------
              Wheat       Corn        Sorghum      Soybeans    Total

              \-\-\-\--                                        
              \$/Farm                                          
              \-\-\-\--                                        

  2002        0           0           0            0           0

  2003        0           0           0            0           0

  2004        0           3,744       2,701        0           6,445

  2005        0           5,231       2,759        0           7,990

  Average     0           2,244       1,365        0           3,609
  ----------- ----------- ----------- ------------ ----------- -----------

Table 7. Estimated Payments for KFMA Farms with USDA Revenue-Based CCP
Program.

  ----------- ----------- ----------- ------------ ----------- -----------
              Wheat       Corn        Sorghum      Soybeans    Total

              \-\-\-\--                                        
              \$/Farm                                          
              \-\-\-\--                                        

  2002        7,679       4,898       2,355        521         15,453

  2003        0           0           900          0           900

  2004        0           1,539       0            0           1,539

  2005        0           5,497       0            0           5,497

  Average     1,920       2,984       814          130         5,847
  ----------- ----------- ----------- ------------ ----------- -----------

Table 8. Estimated Payments for KFMA Farms with AFBF Revenue-Based CCP
Program.

  ----------- ----------- ----------- ------------ ----------- -----------
              Wheat       Corn        Sorghum      Soybeans    Total

              \-\-\-\--                                        
              \$/Farm                                          
              \-\-\-\--                                        

  2002        3,594       2,546       4,790        2,999       13,929

  2003        0           36          4,255        0           4,291

  2004        0           0           0            0           0

  2005        0           2,519       0            0           2,519

  Average     899         1,275       2,261        750         5,185
  ----------- ----------- ----------- ------------ ----------- -----------

The revenue proposals considered in the analysis offer the opportunity
to provide assistance to producers over a broader array of economic
scenarios. That does not imply that the programs will always be superior
to the current CCP program, but because the proposals are tied to
revenue instead of price, they offer the possibility to provide
assistance when producers need it most and therefore reduce the need for
*ad hoc* disaster assistance.

**References**

Dumler, T.J. 2005. *Impact of U.S. Farm Programs on Kansas Farms*.
Agricultural Lenders Conference. Garden City and Abilene, KS.

Dumler, T.J. 2007. *The 2007 Farm Bill: Kansas Producer Preferences for
Agricultural, Food, and Public Policy*.
[www.agmanager.info](http://www.agmanager.info/). May, 2007.

Henderson, J. and M. Akers. 2007. *Survey of Tenth District Agricultural
Conditions*. Federal Reserve Bank of Kansas City. 1^st^ Quarter 2007.

Kastens, T. and K. Dhuyvetter. *Government Program Payments and
Non-agricultural Returns Affect Land Values.*
[www.agmanager.info](http://www.agmanager.info/). September, 2006.

USDA-NASS. (2004) *2002 Census of Agriculture*. Vol. 1, Part 16.
Washington, D.C., USDA-NASS.