United States 

Department of 

Agriculture

Economic

Research

Service

Economic

Information

Bulletin

Number 103

November 2012

Potential Farm-Level Effects of 

Eliminating Direct Payments

Jennifer Ifft

Cynthia Nickerson

Todd Kuethe

Chengxia You
www.ers.usda.gov

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Ifft, Jennifer, Cynthia Nickerson, Todd Kuethe, and Chengxia You. Potential 

Farm-Level Effects of Eliminating Direct Payments, EIB-103, U.S. Department 

of Agriculture, Economic Research Service, November 2012.
United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

Abstract

Since 2003, direct payments have accounted for a signifi cant portion of farm program 

payments. If direct payments were eliminated, many agricultural producers would be 

affected, both through the loss of income and potential declines in land values and rental 

rates. This report considers the potential contribution of direct payments to farm revenues 

and land values across farm commodities and regions and estimates the magnitude of 

the fi nancial impact on participating farms should direct payments be eliminated. Direct 

payments are highest relative to crop revenues in parts of the Northern Plains, Southern 

Plains, Mountain, Delta, and Southeast regions, and the estimated effect of direct 

payments on cropland values also is relatively high in many of these regions. Overall, 

our analysis suggests that an abrupt end to the direct payment program could reduce 

the number of farms with a favorable fi nancial status (profi table farms having relatively 

low debt burdens) by about 11,000 nationally, or about 2 percent of farms that received 

direct payments in 2009. The estimated effect varies regionally and is more pronounced 

in the Delta and Southeast regions, where direct payments per farm tend to be higher, on 

average, than elsewhere.

Keywords: direct payments, farm policy, farmland values

Acknowledgments

We appreciate the reviews from Joy Harwood and Terry Hickenbotham at USDA’s 

Farm Service Agency; Barrett Kirwan and Gary Schnitkey at the University of Illinois 

at Urbana-Champaign; Kevin Hintzman at USDA’s National Agricultural Statistics 

Service; and Erik O’Donoghue, Ron Durst, Patrick Sullivan, David McGranahan, Utpal 

Vasavada, and Marca Weinberg at USDA’s Economic Research Service. We also appreciate the editorial and design assistance from Angela Anderson, Molly Garber, David 

Nulph, and Cynthia A. Ray.

Jennifer Ifft

Cynthia Nickerson

Todd Kuethe

Chengxia You

Potential Farm-Level Effects 

of Eliminating Direct Payments

Economic

Information 

Bulletin

Number 103

November 2012
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Contents

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background on the Direct Payment Program . . . . . . . . . . . . . . . . . . . . . 2

The Value of Direct Payments Relative to 

Program Crop Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Potential Contribution of Direct Payments to 

Cropland Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Potential Impact of Eliminating Direct Payments on 

Farms’ Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Appendix: Potential Impact of Eliminating Direct Payments 

on Farm Businesses’ Financial Performance . . . . . . . . . . . . . . . . . . . . . 17
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Summary

What Is the Issue?

Direct payments are commodity program payments made to farmers, which 

are not tied to current production or market prices but are based on historical 

cropping patterns of major commodities, or “base acres,” with per-acre rates 

fi xed in legislation. Direct payments have accounted for a signifi cant portion 

of total farm program payments since 2003, ranging from 21-45 percent of 

total farm program payments. In 2010, $4.8 billion in direct payments were 

paid to producers, accounting for 39 percent of total farm program payments 

and 6 percent of U.S. net farm income. A number of proposals for the next 

Farm Act have called for elimination of the direct payment program. This 

report considers the potential contribution of direct payments to farm revenues and land values across commodities and regions and estimates the fi nancial impact on participating farms should direct payments be eliminated.

What Did the Study Find?

Although some farms’ fi nancial position may be adversely affected should 

direct payments end and not be replaced by a program providing similar 

levels of renumeration, our analysis suggests that the majority of farms 

currently receiving direct payments would not see a substantial decline in 

their overall fi nancial well-being. Based on variation in income and cropland 

values, an end to the direct payment program likely would have more of an 

impact in some regions than in others. 

• On a per-acre basis for 2004-08, direct payments were equivalent, on 

average, to 6.8 percent of all direct payment program crop revenues 

(crops that establish eligibility for direct payments). Many counties in 

the Northern Plains, Southern Plains, Southeast, and Mountain regions 

received direct payments per acre that were equivalent to at least 7 

percent of direct payment program crop revenues per acre, on average, 

for 2004-08. 

• Direct payments per acre vary signifi cantly by commodity. In 2008, 

rice and peanuts received the largest direct payments per acre ($96.25 

and $45.85, respectively), but combined they only accounted for about 

2 percent of total base acres. Corn, wheat, and soybeans accounted for 

more than 80 percent of total base acres in 2008, but received lower 

direct payments per acre ($24.39 per acre, $15.21 per acre, and $11.54 

per acre, respectively).

• The estimated contribution of direct payments to cropland values over 

2004-08 has been relatively small in the Corn Belt and Lake States, while 

it was larger in areas of the Northern and Southern Plains and the Delta.

Based on 2009 Agricultural Resource Management Survey (ARMS) data, if 

direct payments were eliminated, some farms receiving direct payments (DP 

farms) could see a negative impact on their fi nancial performance as a result 

of reduced income and land values. 

• About 21 percent of farms received direct payments, which averaged 

$8,700 per DP farm in 2009.
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• Relatively more DP farms were in a stronger fi nancial position in 2009 

than farms that did not receive direct payments. As of 2009, about 64 

percent of farms receiving direct payments enjoyed a favorable fi nancial 

status (defi ned as positive income and a relatively low debt-to-asset ratio 

of less than 40 percent), compared with 55 percent of farms that did not 

receive direct payments.

• The payment loss would lead to about 11,000 DP farms, or 2 percent of 

all DP farms, losing their favorable fi nancial status. This loss appears 

slightly larger, at 4 percent, when measured against just those DP farms 

that had a favorable fi nancial status in 2009.

• Our fi ndings indicate that most shifts in fi nancial status for DP farms 

from elimination of direct payments would be a result of lost income and 

not from lower farmland values.

• The number of farms considered vulnerable—farms with negative net 

farm income, a debt-to-asset ratio greater than 40 percent, and most 

likely to experience fi nancial stress—would increase by about 2,600 (less 

than 1 percent of all DP farms).

• DP farms in the Delta and Southeast regions would be most affected by an 

end to direct payments, which would cause about 13 percent of Delta DP 

farms and 10 percent of Southeast DP farms that had favorable status in 

2009 to lose this status. These farms would see the most impact because 

direct payments per farm are higher, on average, in these regions.

Although the potential loss of income and decline in land values could be signifi -

cant for some farms, new programs (not assessed in this report) that have been 

proposed in Farm Act deliberations could help maintain farm income stability 

if direct payments are eliminated. Producers can also take actions—like diversifying crops or seeking off-farm work—to diminish the loss of direct payments. 

Further, the U.S. farm sector has benefi ted from growth in average farm income 

and farmland values over the last 5 years, and DP farms that have experienced 

this growth would be less likely to see a decline in their fi nancial status from the 

elimination of direct payments now than what our 2009 data show. 

How Was the Study Conducted?

Our analyses were based on data from various USDA agencies. Farm program 

payment information from 2004 to 2008 was provided by USDA’s Farm 

Service Agency (FSA), crop production information was obtained from 

USDA’s National Agricultural Statistics Service (NASS) 2007 Census of 

Agriculture, and annual fi eld crop price, yield, and acreage data from NASS 

Quick Stats (2004-08). Cropland values data for 2004-08 came from the 

USDA/NASS June Area Survey. USDA’s Economic Research Service (ERS) 

provided farm income estimates. Detailed farm survey data came from the 

2009 Agricultural Resource Management Survey (ARMS), a joint effort by 

ERS and NASS. The goal of this study was to identify the potential magnitude of the impacts of ending direct payments rather than to estimate precise 

impacts; as such, our analysis includes a number of simplifying assumptions, including that output prices and most input prices remain fi xed and that 

producers would not make changes to their farm operations as a result of direct 

payments ending. Our approach also drew from previously published studies 

on farm fi nance and management and incidence of Government payments.
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Introduction

For the past 10 years, direct payments (DPs)1 have been paid to producers 

who operate land that historically has been used to produce major agricultural commodities, or base acres.2 Unlike most other farm program payments, 

direct payments transfer income to eligible producers and largely are paid 

without regard to the producer’s current production decisions or commodity 

market conditions. Many proposals for a 2012 Farm Act have called for the 

complete elimination of direct payments. 

We examine the potential impact of an end to direct payments on farm 

revenues and farmland values, and simulate how the loss of DPs could 

impact a producer’s fi nancial position if direct payments were not replaced 

with comparable programs providing a similar level of remuneration. In the 

simulation, we consider two types of impacts on a producer’s fi nancial position. First, program elimination would reduce producers’ incomes. This loss 

could be partially offset for producers who rent most of the land they operate, 

as the loss of direct payments could result in a reduction in rent expenses. 

Second, program elimination could put downward pressure on the value 

of base acres and, hence, farmland values, potentially reducing producers’ 

solvency. Consideration of the latter impact is key to understanding the 

potential impacts of an end to direct payments because the fi nancial health of 

the agricultural sector is closely linked to farmland values. Farmland values 

accounted for 84 percent of total farm assets in 2009 and farmland serves as 

a primary source of farm loan collateral. 

While the impact of eliminating direct payments on the revenues and income 

of participating farms is relatively straightforward to calculate, the impact 

on farmland values are less certain. Over 50 years of research collectively 

has shown that farm program payments have had a positive infl uence on 

farmland values, although estimates of the level of infl uence vary widely (see 

review in Moss and Katchova, 2005). This literature principally addressed 

farm programs for which payment levels were related to production practices 

and market prices. Given the relatively short time period that direct payments 

have been authorized, evidence of how direct payments affect farmland 

values is limited.

We base our analyses on data from current farm operations, but an end 

to direct payments also could impact landowners who do not farm. For 

example, nonoperating landowners who rent out base acres on a share-rent 

basis may receive a share of direct payments, and those renting out base 

acres on a cash basis may charge a higher rate for operators who receive 

direct payments. While we lack the empirical data to estimate the impact of 

direct payments on nonoperating landowners, theoretically, their income and 

solvency could be affected as well. 

1Direct payments, also referred to 

as “fi xed direct payments” and “fi xed 

payments,” were authorized under the 

2002 and 2008 Farm Acts as a part of 

the Direct and Countercyclical Payment 

(DCP) Program and under the 2008 

Farm Act as part of the Average Crop 

Revenue Election (ACRE) Program. 

Production fl exibility contracts (PFCs), 

which were similar to direct payments, 

were paid out under the 1996 Farm Act 

until 2002. In this brief, we focus on the 

impact of changes to direct payments.

2See table 1 for a list of specifi c commodities.
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Background on the Direct Payment Program 

Direct payments are one of many farm income support programs.3 Direct 

payments are considered decoupled farm assistance, as they are not tied 

directly to current production or market prices. Policies that provide greater 

production fl exibility to farmers were fi rst introduced in the early 1990s. 

Decoupled farm assistance grew in favor following ratifi cation of the 

Uruguay Round Agreement on Agriculture and the passage of the Federal 

Agricultural Improvement and Reform Act of 1996, as global efforts to 

reign in trade-distorting farm policies increased. These programs provide an 

income transfer to farm operators and bolster farm incomes. The increased 

income from direct payments may lead to higher farmland values, since 

payments are attached to base acres (see box, “Measuring the Impact of 

Government Payments on Farmland Values”).

 3For more information, see the ERS 

topic page on Farm & Commodity 

Policy at http://www.ers.usda.gov/

topics/farm-economy/farm-commoditypolicy.aspx.

Measuring the Impact of Government Payments 

on Farmland Values

Economic theory suggests that Government program payments raise farmland values through what economists call the “capitalization” of program 

benefi ts. According to capitalization theory, the price of farmland is determined by two factors. 

The fi rst factor: the expected returns from owning farmland. The returns 

include cash fl ow from the production of farm goods and services, the 

potential for converting farmland to residential or commercial use, and 

any other form of income generated from owning farmland. Government 

payments are one form of additional income that increase the expected 

cash fl ow for farmland owners, and direct payments are more constant 

than payments tied to market conditions. Even when payments are made 

to the producer, landowners can adjust rents to capture a greater share of 

the expected returns from Government programs.

The second factor: the opportunity cost of capital, or alternatively, 

a discount rate. This factor refl ects (1) the time value of money (or 

discounting for uncertainty related to future market conditions) and (2) an 

adjustment to the expected returns to represent other less risky investment 

alternatives. For example, farmland owners may consider forgoing 

potential earnings from agricultural production and purchase risk-free 

Government bonds. The model is often referred to as the capitalization 

formula, or the fundamental value equation. 

This model forms the basis for evaluating how changes in expected returns 

resulting from changes in Government program payments leads to higher 

(or lower) farmland prices. Although the capitalization model is widely 

used in economic research, a number of studies identifi ed its potential 

shortcomings, including the failure to account for risk aversion and 

transaction costs (Chavas and Thomas, 1999), persistent excess returns 

over time (Falk, 1991), and infl ation (Burt, 1986).

Expected returns Price of farmland 

Opportunity cost of capital

=
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Direct payments are paid based on historical cropping patterns of major 

agricultural commodities, or base acres (see box, “How Direct Payments 

Work”). According to data reported by USDA’s Farm Service Agency (FSA) 

and Economic Research Service (ERS), $4.8 billion in direct payments were 

paid in 2010, accounting for 39 percent of total FSA farm program payments 

and 6.1 percent of U.S. net farm income.4 Since 2003, direct payments have 

accounted for 21 percent (in 2005) to 45 percent (in 2011) of total farm 

program payments. For 2002-08, on average, 266 million base acres were 

enrolled annually nationwide (about 23 percent of U.S. agricultural land) 

(Nickerson et al., 2011).5 The number of enrolled base acres changes slightly 

year to year for various reasons, including enrollment of base acres in the 

Conservation Reserve Program (CRP) and land-use changes that result in 

loss of eligibility. Base acres are concentrated in major crop production 

regions, though 94 percent of U.S. counties had some base acres enrolled in 

2002-08. Throughout the Corn Belt and the Northern and Southern Plains, 

many counties had over 250,000 base acres.

Direct Payments Vary Based on Historic Production Patterns

Cropping patterns are infl uenced by geographic location through such factors 

as weather, soil quality, and climate. As a result, certain regions specialize 

in the production of particular commodities, and thus base acres, although 

 4Direct payments accounted for the 

largest portion (39 percent) of FSA 

program payments in 2010, followed by 

CRP payments (28 percent).

5To be eligible for direct payments, 

farm producers must enroll eligible 

base acres annually.

How Direct Payments Work 

Direct payments represent a “direct” income transfer not related to current 

market conditions or to current production practices, with certain restrictions related to nonagricultural uses and planting fruits and vegetables. 

Producers receive direct payments based on historical cropping patterns 

which are used to establish a count of acres (called “base acres”) and (payment) yields of selected commodities for each farm.

Under program provisions for 2012 (set in the 2008 Farm Act), total direct 

payments for a crop’s base acres on a farm (as defi ned for FSA program 

purposes) are determined using the formula:

Direct payment = Payment rate x payment yield x payment acres,

where payment acres = Base acres x 85 percent.

For example, the current direct payment rate for corn is $0.28 per bushel 

as set in the 2008 Farm Act. If a farm had 100 corn base acres with an 

historical payment yield of 110 bushels per acre, the farm’s total direct 

payment for corn would be:

$2,618 = $0.28 x 110 bushels x 100 acres x 0.85, regardless of how 

many acres on the farm were planted to corn.

A more detailed description of the direct payments provision can be 

found at http://www.fsa.usda.gov/FSA/newsReleases?area=newsroom&

subject=landing&topic=pfs&newstype=prfactsheet&type=detail&item=

pf_20081219_insup_en_dcp.html and at http://www.fsa.usda.gov/Internet/FSA_File/dcp_wild_rice.pdf.
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cropping patterns can change over time. Figure 1 indicates which commodities accounted for the largest share of total enrolled base acres by county over 

2004-08.6 Base acres always are designated by a particular commodity, and we 

refer to these commodities as “DP program crops.”7 Similar to more general 

production patterns, corn base acres dominated in the Corn Belt,8 while wheat 

base acres were more prevalent in the Northern and Southern Plains, as well 

as parts of the Mountain region. Cotton and peanut base acres were prevalent 

across the South. Rice base acres were predominant in a few counties in the 

Mississippi Delta, as well as in the Pacifi c and Southern Plains.

Direct payments per acre vary signifi cantly by commodity (table 1). In 2008, 

rice and peanuts received the largest direct payments per acre ($96.25 and 

$45.85, respectively), but accounted for a small share of total base acres (1.7 

percent and 0.6 percent, respectively). Corn, wheat, and soybeans accounted 

for more than 80 percent of total base acres in 2008, but received lower direct 

6We limited our spatial analysis to 

counties with more than 5,000 cropland 

acres (as reported in the 2007 Census of 

Agriculture) and 2,000 base acres (2004-

08 average) to exclude counties where 

direct payments were not economically 

signifi cant. Average cropland acres per 

county, for all U.S. counties, were about 

130,000 acres in 2007, based on the 

2007 Census of Agriculture.

7DP program crops were referred to 

as “covered commodities” in the authorizing legislation.

8We refer to USDA Farm Production 

Regions. For more information, see http://

webarchives.cdlib.org/wayback.public/

UERS_ag_1/20111128195215/http://

webarchives.cdlib.org/wayback.public/

UERS_ag_1/20111128195215/http://

www.ers.usda.gov/Briefi ng/ARMS/

resourceregions/resourceregions.htm.
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payments per acre ($24.39, $15.21, and $11.54 per acre, respectively). The 

direct payment rate for each eligible commodity is set in farm legislation and 

revisited about every 5 years.9 9From 2009, farms that enrolled in the 

Average Crop Revenue Election (ACRE) 

Program were subject to a 20-percent 

reduction in direct payments, and most 

farms with less than 10 bases acres were 

not eligible for direct payments.

Table 1

Base acres and direct payments, by commodity, 2008

Commodity

Base acres 

(million)

Percent of total 

base acres

Average direct 

payments per acre

Corn 85.9 32.8 $24.39

Wheat 74.2 28.3 $15.21 

Soybeans 51.3 19.6 $11.54 

Upland cotton 18.2 7.0 $33.86 

Sorghum 11.7 4.5 $16.87 

Barley 8.5 3.3 $9.68 

Rice 4.4 1.7 $96.25 

Oats 3.0 1.2 $0.99

Peanuts 1.5 0.6 $45.85 

Other1 1.0 0.4 —

Total 259.8 100 $19.57

1Other direct payment-eligible commodities include canola, crambe, fl axseed, mustard, 

rapeseed, saffl ower, sesame, and sunfl ower. 

— = Average direct payments per acre are not calculated for these commodities.

Notes: Totals may not sum due to rounding. The 2008 per-acre payments were determined by 

multiplying base acres by payment yields by 0.85 by payment rates. 

Source: USDA, Economic Research Service calculations based on USDA, Farm Service 

Agency Direct and Counter-Cyclical Payment Program farm crop, contract and producer 

payment databases. 
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The Value of Direct Payments Relative to 

Program Crop Revenue

While direct payments account for a relatively small share of total U.S. farm 

income, which includes income from livestock and non-DP program crops, 

they represent a greater source of income and revenue for most producers 

with base acres. The value of direct payments relative to revenues of “DP 

program crops” varies signifi cantly by region, suggesting wide regional 

disparity in revenue impacts should the DP program be terminated.10 Based 

on Census of Agriculture data, DP program crops accounted for over 75 

percent of all cropland acres harvested in 2007, and direct payments were 

concentrated in major program crop-producing areas (see fi g. 1). Figure 2 

illustrates average per-acre direct payments as a percent of DP program crop 

revenue at the county level, using data from 2004 to 2008. DP program crop 

revenues were calculated based on NASS county, district, and State-level 

prices and yields (at the smallest geographic level available).11

Direct payments relative to DP program crop revenues were highest in the 

Northern and Southern Plains, as well as in parts of the Delta, Southeast, and 

Mountain regions. Direct payments also were relatively high when compared 

with DP program crop revenues in rice growing areas. In over half of all 

counties that received direct payments for at least 2,000 base acres, direct 

payments were equivalent to at least 6 percent of DP program crop revenues 

for 2004-08. On average, direct payments were equivalent to 6.8 percent of 

DP program crop revenues, ranging from less than 5 percent in several counties across various regions to over 10 percent in several Southern States and 

across the Plains regions. This analysis considered DP program crop revenues only and did not take into account other revenue sources for U.S. farm 

operations. Farms with more diversifi ed production activities would be less 

affected by a decline in direct payments.12

An end to direct payments may have less of an impact on farm income than 

on revenues if input costs adjust downward, at least for some producers. For 

example, if cropland rents decrease in response to the elimination of direct 

payments, producers who rent a signifi cant portion of the land they operate 

would experience less of a negative impact on their farm income. Various 

studies suggest a less-than-proportional decrease in rents if direct payments 

were eliminated. Westhoff and Gerlt (2011) estimated that the income loss 

from the elimination of direct payments would amount to about 66 percent of 

the actual value of direct payments, mostly as a result of declining rents. This 

estimate is in line with another study that directly examined rental rate impacts 

of Government payments and found that farmland rental rates increased $0.25 

for every $1.00 increase in (total) Government payments (Kirwan, 2009). 

10Ideally, this analysis would examine regional variation in payments relative to DP program crop income. We 

considered gross revenues (price times 

quantity) for DP program crops as opposed to income because county-level 

per acre costs for specifi c DP program 

crops were not available. Nonetheless, this comparison is relevant for 

understanding revenue impacts of an 

elimination of direct payments for 

existing producers of DP program crops 

with base acres.

11To provide a more accurate 

representation of the contribution of 

direct payments to DP program crop 

revenues, the ratio of direct payments 

to crop revenues for each program 

crop was weighted by base acres for 

each DP program crop. It implicitly 

assumes that direct payment recipients 

continue to grow DP program crops on 

their base acres. While not required, 

evidence suggests that this was the case 

for about 75 percent of producers who 

receive direct payments (GAO, 2012). 

Although some non-DP program crops 

may be grown on base acres, data were 

not readily available for specifi c crops 

grown on base acres.

12This compares with a 3.3 percent 

overall net farm-income reduction estimated by Westhoff and Gerlt (2011), 

whose model projected farm income 

levels from 2012-21. Their scenario 

assumed ACRE participation rates as 

of 2010, infl ated them by 5 percent for 

2011 and 2012, and then held them 

constant thereafter. While Westhoff 

and Gerlt (2011) considered aggregate 

national or regional outcomes, we were 

interested in the impacts on producers 

who are more likely to receive direct 

payments.
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The Potential Contribution of Direct Payments 

To Cropland Value

Goodwin et al. (2003) demonstrated that an additional dollar per acre in 

production fl exibility contract (PFC) payments (a decoupled payment program 

similar to direct payments and paid out from 1996 to 2002 under 1996 Farm 

Act provisions) was associated with a $5-per-acre increase in farmland values. 

This measure was associated with a marginal change—a dollar per acre—in 

PFC payment levels, but may not hold for large changes to such payments, 

such as a complete elimination of the program. A review of studies by Latruffe 

and Le Mouël (2009) found that subsidies similar to direct payments and tied 

to land were more likely to cause farmland values to increase than subsidies 

tied to market conditions (i.e., current prices and yields). 

The potential contribution of direct payments to land values can be estimated 

by examining the relationship between cropland values and expected earnings from future direct payments. The ratio of “capitalized direct payments” 

to cropland values provides an estimate of the maximum potential contribution 

of direct payments to land values.13 We calculated capitalized direct payments 

by dividing annual direct payments per base acre per county by an appropriate 

discount rate that refl ected the time value of money (see box, “Measuring the 

Impact of Government Payments on Farmland Values”). Following Nickerson 

et al. (2012), we used a 6-percent discount rate.14 This approach assumes that 

land values have increased by the full capitalized value of the direct payments. 

Average county-level per acre cropland values were calculated using NASS 

June Area Survey data. The measure follows traditional comparisons of cash 

rents with cropland values that use the U.S. 10-year Treasury note rate15

(Schnitkey, 2011), while also allowing for a small-risk premium (Gloy et al., 

2011).

Similar to the concentration of major DP program crops (see fi g. 1), direct 

payments’ estimated maximum contribution to cropland values varies signifi -

cantly by region (fi g. 3). During 2004-08 in the Corn Belt and Lake States, 

estimated capitalized direct payments were relatively low (less than 15 

percent) in relation to per-acre cropland values. In contrast, estimated capitalized direct payments in the Northern and Southern Plains were equivalent 

to more than 30 percent of cropland values in many areas. Direct payments 

also appeared to be signifi cant in relation to cropland values in others areas, 

such as the Delta States and in a handful of counties in the Mountain region. 

Thus, farms in some regions might experience sizable reductions in land 

values if direct payments ended, even if actual reductions were half of our 

estimate. The regional differences observed in fi gure 1 are due to variation 

in both direct payments and land values. Cropland values in the Lake States 

and Corn Belt were at least twice as large as cropland values in the Northern 

and Southern Plains in 2007 (Nickerson et al., 2012). Our estimate of the 

maximum contribution of direct payments to cropland values was comparable with the fi ndings of a study by Latruffe and Le Mouël (2009), which 

referenced a body of work that found that 12-40 percent of farmland prices in 

the United States could be attributed to (total) Government payments.

13The contribution may be overvalued in at least three ways. First, this 

formula assumes that a 6-percent discount rate is an appropriate measure of 

the discount rates of farmland owners. 

If landowners value future income less 

relative to current income, then discount rates would be higher and capitalized direct payments would be lower. 

Second, in addition to landowners, 

direct payments can also benefi t tenant 

farmers, input suppliers, and consumers 

(if output prices adjust) instead of being 

fully capitalized into land values. Third, 

if landowners expect direct payments 

to decrease over time, capitalized direct 

payments would be lower.

14The capitalized value of $1 of 

direct payments with a 6-percent 

discount rate is $16.67.

15In 2008, the U.S. 10-year Treasury 

note rate was 3.66 percent.
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The Potential Impact of Eliminating Direct 

Payments on Farms’ Financial Performance

The analyses of potential impacts on revenues and on land values (see fi gs. 

2 and 3) demonstrate wide regional variation in response to an end to direct 

payments. Taken together, such changes in revenues (and hence, income) and 

land values can affect a farm’s fi nancial performance and its ability to remain 

in business. These impacts would be greatest if direct payments were to end 

and compensating streams of payments were not available from other sources 

(such as from new or modifi ed programs). The most immediate impact 

would arise from the reduction in income from an end to the payments. For 

producers who rent land, some of this income effect may be at least partially 

offset by a reduction in rental payments (e.g., Kirwan, 2009; Westhoff and 

Gerlt, 2011). For producers who own the land they operate, the loss of direct 

payments also could harm the farm’s fi nancial position if land values—and, 

consequently, the value of farm assets and wealth—decline as a result. 

We analyzed the impact of these changes on farms’ fi nancial positions, as 

measured by the combined impact on net income and solvency measures (i.e., 

the debt-to-asset ratio). These estimates were conservative in that they ignored 

the possibility that producers might alter their production activities to maintain 

income levels.16 As a benchmark, we simulated the impact of an end to direct 

payments on the fi nancial position of farms that received direct payments in 

2009 and assumed the direct payment program will not be replaced by another 

source of payments. We used USDA’s Agricultural Resource Management 

Survey (ARMS) data, which provides detailed information on the 466,000 

farm operations that received direct payments in 2009.17

There are a number of differences between farms that receive direct 

payments (“DP farms”) and those that do not. DP farms generated six times 

more net farm income than non-DP farms in 2009, but also tended to have a 

slightly higher debt-to-asset ratio (table 2). Consistent with prior years, most 

DP farms in 2009 were farm businesses—farms where the operators’ primary 

occupation was farming. Farm businesses tended to be more than twice as 

large and generated almost four times the value of production compared with 

other farms (see the Appendix for more information on farm businesses). 

Measures of fi nancial performance that take into account both a farm’s 

income and its debt-to-asset ratio indicate that relatively more DP farms were 

in a stronger fi nancial position in 2009 than farms that did not receive direct 

payments. Financial performance among all U.S. farms varied widely and, 

regardless of whether a farm received direct payments, some farms were in a 

less favorable fi nancial position. 

We classifi ed U.S. farms into four commonly used fi nancial status categories: 

• Favorable: positive net farm income with a debt-to-asset ratio of less than 

40 percent;

• Marginal income: negative net farm income with a debt-to-asset ratio less 

than 40 percent;

• Marginally solvent: positive net farm income with a debt-to-asset ratio 

greater than 40 percent; and 

16Many more subtle economic 

changes are also possible. For example, 

access to credit may be affected for 

certain producers if direct payments are 

removed, which could decrease producers’ ability to make investments.

17Landowners who do not operate 

farms but lease out farmland also may 

receive direct payments, either directly 

from FSA if they are share renters or 

indirectly through higher cash rents. 

Data are not available to examine how 

an end to the direct payment program 

would impact nonoperating landlords 

who receive direct payments.
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• Vulnerable: negative net farm income with a debt-to-asset ratio greater 

than 40 percent. 

The positive income threshold is an indicator of whether a farm is operating 

profi tably (Hoppe and Banker, 2010). While many factors (such as interest 

rates, asset and debt composition, and the availability of off-farm income) 

affect whether farms actually are fi nancially stressed, farms with debt-toasset ratios greater than 40 percent are more highly leveraged than average 

and, therefore, are more vulnerable to fi nancial stress (Melichar, 1984). 

While about 64 percent of DP farms were in a favorable position in 2009, 

compared with 55 percent of non-DP farms, roughly the same proportion of 

farms (6-8 percent) were either marginally solvent or vulnerable. Because of 

their less favorable fi nancial positions, marginally solvent or vulnerable DP 

farms and marginal income DP farms likely would feel the effects of an end 

to direct payments more acutely than would farms in a more favorable fi nancial position.

We simulate the impact of an end to direct payments on the fi nancial status 

of farms that received direct payments in 2009 by estimating the income 

effect (the change in net farm income from the loss of payments and from 

a reduction in rent expenses), but we assume production decisions remain 

fi xed. For producers that owned farmland, we also simulate the effect on the 

Table 2

Financial characteristics of farm operations, by direct payment status, 2009

Characteristic

All 

farms

Did not 

receive direct 

payments

Received 

direct 

payments

Farms that received direct payments: 

estimated impact of elimination of DPs1

Farm type: Number of farms (thousands) 2

Retirement/residential/lifestyle 1,318 1,160 158 —

Farm business 873 566 308 —

 Total 2,192 1,726 466 —

Income measure:

Mean net farm income $20,300 $9,786 $59,259 $51,610

Solvency measure: Percent

Mean debt-to-asset ratio 8.7 7.9 12.0 12.3

Financial position: 3 Percent of farms

Favorable 57.0 55.1 64.2 61.8

Marginal income 36.3 38.4 28.4 30.5

Marginal solvency 2.8 2.2 4.7 4.4

Vulnerable 3.9 4.3 2.7 3.2

1See box, “Simulation Method” for assumptions used. 

2Farm businesses include family and nonfamily farms where the operator reports farming as his or her major occupation (for farm type defi nitions, 

see Hoppe and Banker, 2010). An analysis of the impacts on farm businesses only is in the Appendix. 

3Financial position defi ned by income and solvency measures based on farm income and debt-to-asset ratio. Favorable = positive net farm 

income and debt-to-asset ratio of 40 percent or less. Marginal income = negative farm income and debt-to-asset ratio of 40 percent or less. 

Marginal solvency = positive net farm income and debt-to-asset ratio greater than 40 percent. Vulnerable = negative net farm income and debtto-asset ratio greater than 40 percent. 

— =not relevant. Note: Totals may not sum due to rounding.

Source: USDA’s 2009 Agricultural Resource Management Survey.
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debt-to-asset ratio from a decline in farmland values (see table 2; see box, 

“Simulation Method”). Refer to the Appendix for the effects just on farm 

businesses, which were similar to those for all farms reported in table 2.18

Compared with the status quo (fi nancial status as of 2009), if direct payments 

ended and land values fell for DP farms that owned farmland, 11,000 DP 

farms that had favorable status would move to a less favorable fi nancial 

position. The impact represents about a 2-percent decrease, when measured 

against all DP farms: that is, the relative number of all DP farms in a favorable position would decline from 64 to 62 percent (see table 2). A farm’s 

reduced fi nancial status largely would be a result of the income effect from 

the loss of payments; direct payments averaged $8,700 across DP farms in 

2009. Most DP farms that would lose favorable fi nancial status would move 

into the marginal income category, as the loss of cash fl ow precludes them 

from maintaining a positive net farm income. The number of farms considered vulnerable would increase by about 2,600 farms (less than 1 percent 

of all DP farms).19 Most DP farms were operated as farm businesses; more 

than 66 percent of the farms that would move into an unfavorable fi nancial 

category with the loss of direct payments would be farm businesses (versus 

retirement/residential/lifestyle farms).

The impacts appear larger when examining them just for DP farms that had 

a favorable fi nancial status in 2009. The 11,000 farms moving to an unfavorable fi nancial position represent a 4-percent decline, when measured against 

just the DP farms that had a favorable fi nancial position in the status quo. 

The effects are even greater in some regions, because—even with direct 

payments—some regions have fewer farms with positive incomes and low 

debt-to-asset ratios. To account for this natural variation when considering 

regional impacts, we report DP farms losing favorable fi nancial status as a 

share of DP farms with favorable status in the status quo, as opposed to a 

share of all DP farms. Regionally, about 4,800 farms in the Corn Belt and 

2,300 farms in the Northern Plains, accounting for about 4 percent of DP 

 18In general, the fi nancial performance of farm businesses differed from 

that of retirement and residential/lifestyle farms, suggesting that the impact 

of an end to direct payments could 

differ between farm businesses and 

other farm types. For example, farm 

businesses tend to have higher debt-toasset ratios, and a larger percentage of 

farm businesses are marginally solvent 

or vulnerable. However, relatively 

more farm businesses are in a favorable 

fi nancial position (Hoppe and Banker, 

2010). Nonetheless, a comparison of 

appendix table 1 with table 2 reveals 

that, although farm businesses had a 

higher debt-to-asset ratio and net farm 

income, on average, compared with 

all farms, an end to direct payments 

would impact farm fi nancial positions 

similarly.

19About 60 percent of these farms 

would experience a reduced fi nancial 

status as a result of the income effect 

and 40 percent as a result of the change 

in land value that would cause the debtto-asset ratio to rise above 40 percent.

Simulation Method

Farmland values used in the simulation include land owned by the operation and land rented to others, but exclude houses, buildings, orchard trees 

and vines, and trees grown for woody crops. Data were not available on 

the number of base acres associated with each ARMS farm; our analysis 

assumes that half the value of owned land was generating direct payments 

and would be subject to decline if direct payments ended. The estimated 

decline in land values is based on the average State-level decline calculated using the same data and assumptions reported in fi gure 3. Some farm 

operations rent all or a signifi cant amount of the land they operate. In our 

simulations, full tenants experience no change in their debt-to-asset ratio 

from a loss of capitalized direct payments. To account for the potential 

impact on rents if direct payments ended, we assume that full tenants and 

farms that owned 20 percent or less of the land they operated were renting 

base acres and that land rental expenses would fall by a third of the value 

of direct payments (Westhoff and Gerlt, 2011).
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farms that had favorable status in each region to begin with, would lose their 

favorable fi nancial status with an end to direct payments (fi g. 4). In relative 

terms, farms in the Delta and Southeast regions would be most affected, as 

about 13 percent and 10 percent of DP farms that had favorable status in 

2009, respectively, would lose that status, primarily because larger direct 

payments are made to farms in these regions than in other regions. 

Since 2009, some U.S. regions experienced rapid growth in farmland values 

following several years of high commodity prices and increasing farm 

income (Nickerson et al., 2012). This development is likely to mitigate the 

impact of ending direct payments for many farms. 
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Conclusions

The impacts of an end to the direct payment (DP) program will differ across 

regions and commodities. Rice, cotton, and peanuts received higher direct 

payments per acre than other commodities. Across parts of the Northern and 

Southern Plains, the Mountain, the Delta, and the Southeast regions, direct 

payments were higher relative to DP program crop revenues and cropland 

values. As a result, producers located in these regions who currently operate 

base acres for these commodities might be more affected by an end to direct 

payments than the U.S. farm population at large. 

As of 2009, about 64 percent of farms receiving direct payments enjoyed 

a favorable fi nancial status with positive income and a relatively low debtto-asset ratio (less than 40 percent). The remaining 36 percent of DP farms 

were in a less favorable fi nancial position with negative net income, a high 

debt-to-asset ratio, or both. Our simulations suggested that if direct payments 

were terminated, 11,000 farms would move from a favorable to a less favorable fi nancial position. This would decrease the number of farms in a favorable fi nancial position by about 2 percentage points (from 64 to 62 percent 

of all DP farms), but the impact represents about 4 percent of the subset of 

DP farms that originally enjoyed favorable status. When all 2.2 million U.S. 

farms are considered, roughly 0.5 percent would move to a less favorable 

fi nancial position with the elimination of direct payments. The effect would 

be more pronounced in the Delta and Southeast, where 10-13 percent of DP 

farms with a favorable status are estimated to lose their favorable status. 

Although the potential loss of income and decrease in land values could be 

signifi cant for some farms, the impact could be mitigated if new farm policies were implemented that provide similar fi nancial benefi ts to farm operations. As part of various 2012 Farm Act proposals, many new programs have 

been proposed that would support stability in farmers’ incomes, including 

new revenue-based programs. Farmland values would most likely be maintained if new programs provide a stream of income similar to direct payments. 

Producers also can take actions—like diversifying crops or seeking off-farm 

work—to mitigate the loss of direct payments. Also, overall improvements in 

the U.S. farm sector since 2009 may help moderate our estimates of the impact 

of an end to the direct payment program for many farms. 
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References

Alston, J.M., and J.S. James. “The incidence of agricultural policy,” 

Handbook of Agricultural Economics Vol. 2(2): 1689-1749, 2002.

Burt, O.R. “Econometric Modeling of the Capitalization Formula for 

Farmland Prices,” American Journal of Agricultural Economics Vol. 

68(1): pp. 10-26, 1986.

Chavas, J.P., and A. Thomas. “A Dynamic Analysis of Land Prices,” 

American Journal of Agricultural Economics Vol. 81(4): pp. 772-84, 

1999.

Falk, B. “Formally Testing the Present Value Model of Farmland Prices,” 

American Journal of Agricultural Economics Vol. 73(1): pp. 1-10, 1991.

Gloy, B.A., M.D. Boehlje, C.L. Dobbins, C. Hurt, and T.G. Baker. “Are 

Economic Fundamentals Driving Farmland Values?” Choices, second 

quarter, 2011.

Goodwin, B.K., A.K. Mishra, and F.N. Ortalo-Magné. “What’s Wrong 

with Our Models of Agricultural Land Values?” American Journal of 

Agricultural Economics Vol. 85(3): pp. 744-52, 2003.

Hoppe, R., and D.E. Banker. Structure and Finances of U.S. Farms: Family 

Farm Report 2010 Edition, EIB-66, U.S. Department of Agriculture, 

Economic Research Service, 2010, http://www.ers.usda.gov/publications/

eib-economic-information-bulletin/eib66.aspx.

Kirwan, B.E. “The Incidence of U.S. Agricultural Subsidies on Farmland 

Rental Rates,” Journal of Political Economy Vol. 117(1): pp. 138-64, 

2009.

Latruffe, L., and C. Le Mouël. “Capitalization of Government Support in 

Agricultural Land Prices: What Do We Know?” Journal of Economic 

Surveys Vol. 23(4): pp. 659-91, 2009.

Melichar, E. “The Incidence of Farm Financial Stress,” presentation to the 

Congressional Budget Offi ce, 1984.

Moss, C.B., and A.L. Katchova. “Farmland Valuation and Asset 

Performance,” Agricultural Finance Review Vol. 65, pp. 119-30, 2005.

Nickerson, C., R. Ebel, A. Borchers, and F. Carriazo. Major Uses of Land 

in the United States, 2007, EIB-89, U.S. Department of Agriculture, 

Economic Research Service, 2011, http://www.ers.usda.gov/publications/

eib-economic-information-bulletin/eib89.aspx.

Nickerson, C., M. Morehart, T. Kuethe, J. Beckman, J. Ifft, and R. Williams. 

Trends in U.S. Farmland Values and Ownership, EIB-92, U.S. Department 

of Agriculture, Economic Research Service, 2012, http://www.ers.usda.gov/

publications/eib-economic-information-bulletin/eib92.aspx.
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Schnitkey, G. “Farmland Price Outlook: Are Farmland Prices Too High 

Relative to Returns and Interest Rates?” Farm Economics: Facts & 

Opinions, University of Illinois at Urbana-Champaign, Department of 

Agricultural and Consumer Economics, 2011.

Westhoff, P., and S. Gerlt. Potential Impacts of Eliminating Direct Payments, 

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Institute, 2011.

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Appendix: Potential Impact of Eliminating Direct 

Payments on Farm Businesses’ Financial 

Performance

The fi nancial measures included in table 2 were calculated for all farm 

types, since all farm types are eligible to receive direct payments and would 

be affected by an end to the direct payment program. The fi nancial position measures reported in table 2, however, may be less relevant for farms 

with operators that had signifi cant off-farm income to help them remain 

fi nancially viable without direct payments (i.e., operators who reported a 

major occupation other than farming and/or operators who were retired 

or farmed for residential/lifestyle reasons). To consider the impacts of an 

end to direct payments on farm operators who are more likely to depend 

on farming as a primary source of income, we considered impacts on farm 

business only. The appendix table reports fi nancial measures for farm businesses only. Compared with the measures for all farms reported in table 2, 

farm businesses had higher net incomes, on average, and a larger percentage 

of them were in a favorable fi nancial position—both with and without direct 

payments. Nonetheless, the impact of an end to direct payments on farm 

businesses would be similar to the fi nancial impact for all farm types; the 

relative number of all farm businesses with favorable status would decline 

from 66.7 to 64.3 percent, or by about 2.4 percent. Also, as with all farm 

types, the impact on farm businesses would be slightly larger when measured 

against just those farm businesses that had a favorable position; about 3.6 

percent of farm businesses that received direct payments and exhibited favorable fi nancial status would lose their favorable fi nancial status.

Appendix table 

Financial characteristics of farm businesses, by direct payment status, 2009

Characteristic

All farm 

businesses

Did not receive 

direct payments

Received direct 

payments

Farms that received direct payments: 

estimated impact of elimination of DPs1

Farm businesses (thousands) 2 873 566 308 —

Income measure:

Mean net farm income $46,606 $26,805 $83,032 $72,391

Solvency measure: Percent

Mean debt-to-asset ratio 11.6 10.3 13.9 14.2

Financial position:3 Percent of farms

Favorable 60.4 57.0 66.7 64.2

Marginal income 31.4 35.4 24.1 26.2

Marginal solvency 4.1 3.0 6.0 5.7

Vulnerable 4.1 4.54 3.2 3.8

1See box, “Simulation Method” for assumptions used.

2Farm businesses include family and nonfamily farms where the operator reports farming as their major occupation (for farm type defi nitions, 

see Hoppe and Banker, 2010).

3Financial position defi ned by income and solvency measures based on farm income and debt-to-asset ratio. Favorable = positive net farm 

income and debt-to-asset ratio of 40 percent or less. Marginal income = negative farm income and debt-to-asset ratio of 40 percent or less. 

Marginal solvency = positive net farm income and debt-to-asset ratio greater than 40 percent. Vulnerable = negative net farm income and debtto-asset ratio greater than 40 percent.

4The coeffi cient of variation is greater than 25 and less than or equal to 50, indicating that this estimate is less reliable.

— =not relevant. Note: Totals may not sum due to rounding.

Source: USDA’s 2009 Agricultural Resource Management Survey.