Farms realizing the greatest benefits under Freedom to Farm were those which could take maximum advantage of the full flexibility and were not required to idle land under the annual ARP program. These included cotton (which had a 10 percent ARP) and corn (with a 5 percent ARP). Likewise, farms having high historical government payments relative to those projected under the Baseline tended to realize greater benefits.

Having said this, because of the spending reductions imposed under these options, most farms experience reduced net cash farm income under both the Freedom to Farm and the 30 percent flex options. Cotton farms were the only farms that consistently showed an improvement in net cash farm income under the Freedom to Farm proposal, relative to the Baseline or the 30 percent NFA.

The purpose of this paper is to present the results of analyzing the farm level impacts of three policy options being considered for the 1995 Farm Bill:

• A baseline extension of the 1990 Farm Bill provisions (Baseline).

• The provisions of the Freedom to Farm Act as indicated in H.B. 2195 (FTFA).

• A 30 percent Normal Flex Acres (NFA) or nonpaid acreage with the flexibility to produce other program crops, including oilseeds (30% FLEX).

Parameters for the FTFA and 30% FLEX options were established to achieve a $13.4 billion budget savings over 7 years. The aggregate or crop level impacts of these farm policy options were estimated by FAPRI and used as input for the farm level analyses. Major program provisions for these three options are summarized in Table 1.

Continuation of the current farm bill as the baseline, involves extending the provisions of the 1990 Farm Bill throughout the period 1996-2003. Target prices would remain frozen at their 1995 levels. Loan rates and acreage reduction requirements would continue to be set by current formulas. The soybean loan rate would remain at $4.92 per bushel. Flexibility provisions would remain at 15 percent nonpaid acreage (NFA) with the option to flex an additional 10 percent (OFA). Export enhancement programs for grains, dairy, and oilseed products would be funded at the levels agreed upon in the GATT negotiations. The Conservation Reserve Program (CRP), however, would be reduced in size to approximately 17 million acres by 2002. This level of CRP is in line with Congressional Budget Office (CBO) projections.

The Freedom to Farm proposal would provide farmers with transition payments based upon historical deficiency and marketing loan payments adjusted to a total of $43.2 billion through fiscal year 2002. These decoupled transition payments would be substituted for deficiency and marketing loan deficiency payments, which would be eliminated. The nonrecourse loan rate would be set at 70 percent of the five year Olympic average of market prices but could be lowered by the Secretary as a means of allowing the market to clear and avoiding government acquisition of stocks. Farmers would be allowed complete planting flexibility within their total acreage base (TAB) and soybeans would be included in the TAB.

Acreage reduction authority (ARA) would be eliminated under the Freedom to Farm policy option. As under the baseline, it is assumed that the Conservation Reserve Program would be reduced to 17 million acres by year 2002. Payment limit "person" determinations would remain as under the current farm program. The three entity rule, however, would be eliminated. Government payments would be attributed to an individual's social security number. Budget savings would total the resolution target of $13.4 billion over FY 1996-2002 with approximately $11.0 billion of the savings coming from the major program crops.

The 30% FLEX (Normal Flex Acres) option would increase nonpaid acreage to 30 percent. This increased flexibility would allow farmers to produce alternative crops, including oilseeds, on their base acreage. With this exception, there are no other program changes from the baseline. FAPRI's analyses indicates that 30 percent NFA would achieve the budget resolution target spending reduction of $11.0 B for crops and $13.4 billion over a 7 year period.

The aggregate economic impacts in this working paper were obtained from FAPRI projections of commodity prices, production, acreage, use, and stock levels. These aggregate impacts are summarized in Appendix A for the policy scenarios analyzed. To isolate the economic impacts of the alternative farm policies on the representative crop farms, it was assumed interest rates and inflation rates were equal to the Baseline values for the other policy options.

AFPC has developed and maintains data to simulate 36 representative crop farms chosen from major production areas across the United States (Figure 1). The location of these farms was the result of a consensus discussion with staffers from the House and Senate Agriculture Committees. The information necessary to simulate the economic activity on these representative crop farms are developed from a panel of producers using a consensus building interview process. Normally two farms are developed in each region using separate panels of producers: one is representative of moderate size full-time farm operations, while the second panel represents farms that are two to three times larger.

The data collected from the panel farms are analyzed in a whole farm simulation model (FLIPSIM) that was developed by AFPC and has been refined for more than a decade. The producer panels are provided pro-forma financial statements for their representative farm and asked to verify the accuracy of the past year and the reasonableness of a four to five year projection. The panel must approve of the model's ability to the project economic activity for their representative farm prior to using the farm for policy analyses. AFPC's goal is to update the panel farms every three years. However, if a panel member concludes that the farm is no longer generating reasonable results, it is updated prior to using the farm in another report to Congress. The land grant university cooperators and panel members for the crop farms used for this report are listed in Appendix B.

All farms used in the analysis have been updated through 1992 and indexed up to begin the analysis in 1994. Actual yields and prices reflective of the area for 1994 are utilized for the present analyses. FAPRI projections of prices and yields for 1995-2003 are utilized for the policy analyses. All of the crop farms are assumed to begin 1994 with 20 percent intermediate- and long-term debt, based on information provided by ERS/USDA and the panel members.

The results of simulating the representative crop farms for the Baseline and the alternative farm policies are presented by commodity. The impacts on crop farms that receive a majority of their receipts from feed grains are presented first, followed by the impacts on wheat, cotton, and rice farms. The economic impacts of the policy alternatives are summarized in the next four sections using graphs of key output variables: annual net cash income, annual government payments, real non-land net worth, and real total net worth. The simulated values behind the graphs are presented in Appendix C along with definitions for the variables.

IAG760 a 760-acre Northwestern Iowa (Webster County) moderate size grain farm that grew 360 acres of corn and 360 acres of soybeans in 1994. The farm continued to plant corn on its NFA acreage and received about 59 percent of its receipts from corn.

IAG1500 a 1,500-acre Northwestern Iowa (Webster County) large grain farm that grew 690 acres of corn and 770 acres of soybeans in 1994. The farm planted soybeans on its NFA flex acreage and generated 56 percent of its gross receipts from corn.

MOG1250 a 1,250-acre North Central Missouri (Carroll County) moderate size grain farm with 169 acres of wheat, 350 acres of corn, and 631 acres of soybeans in 1994. The farm generated about 39 percent of its total revenue from corn. The farm flexed its NFA and OFA wheat base to soybeans.

MOG2400 a 2,400-acre North Central Missouri (Carroll County) large grain farm with 338 acres of wheat, 700 acres of corn, and 1,262 acres of soybeans in 1994. The farm generated about 40 percent of its total revenue from corn. The farm flexed its NFA plus OFA wheat base to soybeans.

NEG800 a 800-acre South Central Nebraska (Phelps County) moderate size irrigated grain farm that grew 720 acres of corn, 50 acres of soybeans, and 30 acres of alfalfa in 1994. The farm continued to plant corn on its NFA acreage and generated about 83 percent of its gross receipts from corn.

NEG1575 a 1,575-acre South Central Nebraska (Phelps County) large irrigated grain farm that grew 1,500 acres of corn in 1994. The farm generated 97 percent of its revenue from corn and planted corn to its base acres.

TXNP1600 a 1,600-Northern High Plains of Texas (Moore County) moderate size irrigated grain farm with 642 acres of wheat, 280 acres of sorghum, and 470 acres of corn in 1994. The farm did not flex any base acres and generated about 69 percent of its total receipts from feed grains.

TXNP4500 a 4,500-acre Northern High Plains of Texas (Moore County) large irrigated grain farm with 1,680 acres of wheat, 847 acres of sorghum, and 1,048 acres of corn in 1994. The farm did not flex any of its base acres and generated about 67 percent of its total revenue from feed grains.

SCG1500 a 1,500-acre South Carolina (Clarendon County) moderate size grain farm with 750 acres of wheat, 638 acres of corn, and 863 acres of soybeans in 1994. The farm flexed its NFA corn acres to soybeans. The farm generated about 40 percent of its total receipts from corn.

SCG3500 a 3,500-acre South Carolina (Clarendon County) large grain farm with 1,100 acres of wheat, 192 acres of cotton, 1,450 acres of corn, and 1,825 acres of soybeans in 1994. The farm flexed NFA cotton acreage to corn. About 42 percent of total receipts for the farm came from corn.

• Under the Baseline, government payments represent from 6-13 percent of the total receipts on the 10 feed grain operations monitored. The FTFA would reduce government payments to these operations from 20-40 percent over the 1996-2003 period.

• The improved feed grain price projections, corn ARP reduction, and flexibility associated with FTFA, however, are not enough to offset reduced oilseed prices and the loss in government payments. Therefore, net cash farm incomes (NCFI) decline on all ten farms. The large Missouri operation appears to be the least impacted as it experiences a NCFI drop of approximately 1 percent over the period. Ironically, the hardest hit operation, as measured by the 16 percent drop in NCFI, is the moderate Missouri farm. With the exception of Nebraska, the moderate scale operations are relatively harder hit by the FTFA than the large farm in each region. The moderate size Texas High Plains operation was barely generating positive NCFI under the Baseline; with FTFA, average net cash income is negative.

• NCFI results under the 30 percent flex option mirror those associated with FTFA. All ten farms experience a decline in NCFI under this option. Compared to the FTFA, there appears to be no discernible pattern regarding scale of operation or geographical location. Flex opportunities and the crop mix play a greater role in determining the economic impacts than does scale or geographic location.

• The NCFI reductions associated with FTFA and 30 percent flex are reflected in the farm's ability to retain real net worth. The large Iowa, Missouri, and South Carolina operations appear to grow equity in real terms under all three policy scenarios. An improvement in NCFI relative to receipts of 4 and 7 percent would allow the large Texas High Plains and Nebraska farms to maintain their real equity. Therefore, it appears that all of the large farms are managerially capable of sustaining or growing equity under the alternative proposals. Of the moderate size farms, only the South Carolina operation appears managerially capable of sustaining its real equity under the three policies analyzed.

WAW1276 a 1,276-acre Southeastern Washington (Whitman County) moderate size grain farm that grew 612 acres of wheat, 140 acres of barley, and 498 acres of dry peas in 1994. The farm flexed NFA and OFA barley base acreage to wheat and generated about 69 percent of its revenue from wheat.

WAW4250 a 4,250-acre Southeastern Washington (Whitman County) large grain farm that grew 1,915 acres of wheat, 394 acres of barley, and 1,640 acres of dry peas in 1994. The farm flexed 6 percent of its (NFA) barley base to spring wheat and generated about 68 percent of its receipts from wheat.

NDW1600 a 1,600-acre South Central North Dakota (Barnes County) moderate size grain farm that grew 800 acres of wheat, 400 acres of barley, and 400 acres of sunflowers in 1994. The farm planted NFA barley to barley and NFA wheat base to wheat. Wheat generated about 51 percent of the receipts for the farm.

NDW4000 a 4,000-acre South Central North Dakota (Barnes County) large grain farm that grew 2,200 acres of wheat, 1000 acres of barley, and 800 acres of sunflowers in 1994. The farm planted NFA barley to barley and planted NFA wheat to wheat. The farm received about 58 percent of its receipts from wheat.

KSW1175 a 1,175-acre South Central Kansas (Sumner County) moderate size grain farm that grew 1,100 acres of wheat and 75 acres of sorghum in 1994. The farm did not flex any base acres and generated about 93 percent of its total revenue from wheat.

KSW2800 a 2,800-acre South Central Kansas (Sumner County) large size grain farm that grew 2,680 acres of wheat and 120 acres of sorghum in 1994. The farm flexed 4.3 percent of wheat NFA to sorghum. Wheat generated about 96 percent of the revenue on this farm.

COW2500 a 2,500-acre Northeast Colorado (Washington County) moderate size grain farm that grew 1,100 acres of wheat and 300 acres of millet in 1994. Wheat generated about 71 percent of the total revenue on this farm.

COW4000 a 4,000-acre Northeast Colorado (Washington County) large size grain farm that grew 1,600 acres of wheat and 400 acres of millet in 1994. Wheat generated about 77 percent of the total revenue on this farm.

• Under the Baseline, government payments over the 1996-2003 period represent from 7-24 percent of cash receipts on the eight wheat farms monitored. The Colorado operations are the most dependent on government payments because 70 percent of their receipts come from wheat and they enroll fallow acres in the 0/85 program.

• Under FTFA, government payments decline, relative to the Baseline, by as little as 11 percent on the moderate North Dakota farm to as much as 20 percent on the Colorado operations. The 30 percent flex option reduces government payments from 13 to 16 percent over the study period.

• The moderate size North Dakota operation experiences a slight (less than 1 percent) increase in net cash farm income (NCFI) under the FTFA. Although the farm did not benefit from the flex opportunities, increases in wheat and barley prices offset the 11 percent decline in government payments. NCFI on the remaining seven farms declines under FTFA from as little as 6 percent on the large Washington farm to as much as 83 percent on the large Colorado farm. The Washington farms benefit from enhanced flex opportunities.

• Regardless of the policy scenario, all eight of the wheat farms lose real equity over the 1996-2003 period. The moderate size operations in North Dakota and Kansas go out of business while the larger farms in these states lose two-thirds of their real equity.

• Only the large Washington operation appears managerially capable of sustaining its real net worth over the study period under the Baseline. It, however, will likely lose real equity under FTFA and a 30 percent flex.

TXSP1360 a 1,360-acre Texas Southern High Plains (Dawson County) moderate size cotton farm that grew 812 acres of skip-row cotton in 1994. The farm did not flex any crops and generated all of its receipts from cotton.

TXSP3334 a 3,334-acre Texas Southern High Plains (Dawson County) large cotton farm that grew 2,228 acres of skip-row cotton in 1994. The farm did not flex any crops and generated all of its revenue from cotton.

TXRP1700 a 1,700-acre Rolling Plains of Texas (Jones County) moderate size cotton farm that grew 985 acres of cotton and 200 acres of wheat in 1994. The farm did not flex any base acres and generated about 88 percent of its total revenue from cotton in 1994.

TXRP2500 a 2,500-acre Rolling Plains of Texas (Jones County) large cotton farm that grew 1,508 acres of cotton and 300 acres of wheat in 1994. The farm did not flex any base acres and generated about 90 percent of its revenue from cotton.

TXBL1200 a 1,200-acre Texas Blacklands (Williamson County) moderate size cotton and grain farm with 590 acres of cotton and 540 acres of sorghum in 1994. The farm flexed NFA and OFA sorghum to cotton and generated about 66 percent of its total receipts from cotton.

TXCB1700 a 1,700-acre Texas Coastal Bend (San Patricio County) large cotton farm with 861 acres of cotton and 765 acres of sorghum in 1994. The farm flexed NFA and OFA sorghum to cotton and generated about 73 percent of its total revenue from cotton.

CAC900 a 900-acre Southern San Joaquin Valley California (Kern County) moderate size cotton farm that grew 570 acres of cotton and 225 acres of alfalfa in 1994. The farm did not flex any crops and generated about 75 percent of its total receipts from cotton.

CAC3150 a 3,150-acre Southern San Joaquin Valley California (Kern County) large cotton farm that grew 1,782 acres of cotton and 1,002 acres of alfalfa in 1994. The farm did not flex any crops and generated about 77 percent of its total revenue from cotton.

MSC1635 a 1,635-acre Mississippi Delta (Washington County) moderate size cotton farm that grew 824 acres of cotton and 640 acres of soybeans in 1994. The farm did not flex any crops and generated about 87 percent of its total receipts from cotton.

MSC3620 a 3,620-acre Mississippi Delta (Washington County) large cotton farm that grew 1,515 acres of cotton and 1,620 acres of soybeans in 1994. The farm did not flex any crops and generated about 83 percent of its revenue from cotton.

• Under the Baseline, government payments over the 1996-2003 period represent from 8-15 percent of the total receipts on the 10 cotton operations monitored.

• Government payments relative to the Baseline are reduced from 4 to 17 percent under FTFA. The 30 percent flex alternative results in reduced government payments ranging from 13 to 20 percent.

• On seven of the 10 farms, government payments are reduced less under FTFA than under 30 percent flex. On the three farms where FTFA government payments are reduced more than under the 30 percent flex scenario, the difference is less than 2 percent.

• Zero ARP requirements and enhanced flexibility under FTFA allow 9 of the 10 cotton farms to improve net cash farm income (NCFI) relative to the Baseline. Only the moderate size Southern Plains operation experiences reduced net worth under the FTFA option.

• In contrast to FTFA, all 10 cotton farms experience reduced NCFI relative to the Baseline under the 30 percent flex option.

• Although FTFA results in improved NCFI for 9 of the 10 cotton farms, no farm is able to sustain real net worth over the 1996-2003 period. Under FTFA, however, 4 of the 10 farms would appear managerially capable of sustaining real equity if they could experience an increase in NCFI of 10 percent or less relative to receipts. Three farms appear managerially capable of sustaining equity under the Baseline and one farm could likely sustain equity under the 30 percent flex option.

CAR424 a 424-acre Sacramento Valley California (Sutter and Yuba Counties) moderate size rice farm that grew 400 acres of rice in 1994. The farm did not flex any crops and received all of its revenue from rice.

CAR1300 a 1,300-acre Sacramento Valley California (Sutter and Yuba Counties) large rice farm that grew 1,020 acres of rice in 1994. The farm flexed the NFA rice base acres to idle and generated all of its revenue from rice.

TXR1500 a 1,500-acre West of Houston, Texas (Wharton County) moderate size rice farm that grew 425 acres of rice in 1994. The farm flexed the NFA rice base acres to idle and received all of its total revenue from rice.

TXR3900 a 3,900-acre West of Houston, Texas (Wharton County) large rice farm that grew 1,105 acres of rice in 1994. The farm flexed the NFA rice base acres to idle and received all of its total revenue from rice.

MOR1900 a 1,900-acre Southeastern Missouri (Butler County) moderate size rice farm with 510 acres of rice, 650 acres of corn, and 740 acres of soybeans planted in 1994. The farm flexed NFA rice base acres to corn and generated about 40 percent of its total revenue from rice.

MOR4000 a 4,000-acre Southeastern Missouri (Butler County) large rice farm with 1,020 acres of rice, 256 acres of cotton, 1,080 acres of corn, and 1,600 acres of soybeans planted in 1994. The farm flexed NFA rice base to corn and NFA cotton base acres to corn. The farm generated about 42 percent of its gross receipts from rice.

ARR1260 a 1,260-acre Arkansas (Poinsett County) moderate size rice farm that grew 602 acres of rice, 123 acres of wheat, and 558 acres of soybeans in 1994. The farm did not flex rice or wheat. The farm flexed NFA wheat acreage to rice. The farm generated about 71 percent of its revenue from rice.

LA1100 a 1,100-acre Louisiana (Jefferson Davis, Acadia, and Vermilion Parishes) moderate size farm that grew 500 acres of rice and 400 acres of soybeans in 1994. The farm did not flex rice to another crop and generated about 83 percent of its revenue from rice.

• Under the Baseline, government payments over the 1996-2003 period represents from 15 to 36 percent of the total receipts on the 8 rice farms monitored. The rice farms located in Texas and California receive all their revenue from rice production and government payments make up over 33 percent of the total receipts on these operations.

• The FTFA reduces the rice farm government payments from 30-36 percent over the 1996-2003 period. The 30 percent flex option also substantially reduces government payments from 23-27 percent.

• While FTFA provides for greater cuts in government payments across all the rice farms than does the 30 percent flex option, the impacts on net cash farm income (NCFI) are not transferable. While 7 of the eight farms experience lower NCFI under FTFA and all eight farms experience lower NCFI under 30 percent flex, relative to the Baseline, the FTFA is economically preferred under 6 of the eight farms when compared to 30 percent flex. On the two farms (TXR 1500 and ARR 1260) where 30 percent flex would be preferred to FTFA, the difference averages less than $3,000 annually.

• Due to the increase in rice prices and enhanced flexibility options offered by FTFA, the large Missouri farm actually increases NCFI relative to the Baseline, although the increase is less than 1 percent.

• The large California and both Texas rice farms lose all equity by the year 2003 under all three options. Substantial real equity loss is also experienced on the moderate California, the Arkansas, and the Louisiana operations. Only the Missouri farms, which are the most diversified, are able to maintain real equity over the study period.

Change in Real Net Worth Without Land Inflation: Overall percentage change in operator's net worth for December 31, 1995 - December 31, 2003, after removing the effect of land value and adjusting for inflation.

Change in Real Net Worth: Overall percentage change in operator's net worth for December 31, 1995 - December 31, 2003, after adjusting for inflation.

Annual Net Cash Income: Total receipts (including government payments) less total cash expenses. Operator must pay family living, taxes, principal payments, and depreciation from net cash income.

Annual Government Payments: Total payments including deficiency, marketing loan deficiency, and transition payments.

Annual Real Net Worth Without Land Inflation: Operator's net worth adjusted for changes in land value, adjusted for inflation.

Annual Real Net Worth: Operator's total assets less liabilities, adjusted for inflation.

NIA for Real Net Worth Without Land Inflation: Net income adjustment is the annual increase or decrease in net cash income necessary to cause the change in real net worth without land inflation to equal zero over a specified time horizon. If the change in net worth is negative, the NIA is the annual increase in income to prevent the loss. NIAs are expressed as total dollars or as a percent of average receipts over the period.

NIA for Total Real Net Worth: Net income adjustment is the annual increase or decrease in net cash income necessary to cause the change in total real net worth to equal zero over a specified time horizon. If the change in net worth is negative, the NIA is the annual increase in income to prevent the loss. NIAs are expressed as total dollars or as a percent of average receipts over the period.