This report examines the farm level economic impacts of implementing the Federal Agriculture Improvement and Reform Act of 1996 (FAIR) on 71 representative crop and livestock operations located in U.S. major production regions. Projected prices, yields and inflation on inputs are based on FAPRI's April 1996 Baseline which assumes implementation of FAIR over the 1996-2002 study period. Major highlights include:

• When measuring the representative farm's ability to maintain real net worth through 2002, the results are favorable. Fifty-four of the 71 farms experience real equity growth over the study period. Of the 17 farms that lose real equity, only 3 appear to be incapable of making adjustments, within their current structure, that would keep the farm from losing real equity.

• Averages, however, can be misleading. While real equity is likely to be maintained on most farms, the downward trends in net cash farm incomes and adverse cash flow positions raise additional concerns for at least 24 of the farming operations.

• Of the 10 feed grain farms, four will likely face organizational restructuring before 2002. These farms include both Nebraska farms plus the moderate Texas North Plains and South Carolina operations.

• Three of eight wheat farms are under substantial financial stress. Both Washington farms and the moderate Kansas farm will likely have to make changes in their operations in order to be economically viable.

• Of the 10 cotton farms, the two California and two Mississippi operations appear to be under significant financial stress.

• As a group, the rice farms may face the greatest economic pressure over the next seven years. Five of the eight farms will likely have to make major adjustments in order to remain economically viable; including farms in Arkansas, Louisiana, Texas and California.

• Seven of the 22 representative dairy farms show substantial financial stress. They include three of the four Texas operations, the moderate Central New York, the large Vermont, the moderate Georgia and the large South Florida dairy.

• Contrary to current economic pressures, four of five cow-calf operations show significant improvement with the rebound in cattle prices projected through the study period. Only the South Texas operation appears vulnerable throughout the period.

• Economic conditions of the eight hog farms fluctuate with the hog cycle. All eight farms, however, appear capable of maintaining economic viability throughout the period.

The farm level economic impacts of the Federal Agriculture Improvement and Reform Act of 1996 (FAIR) on representative crop and livestock operations are projected in this report. For this report the FAIR Act will be referred to as the 1996 Farm Bill. The analysis was conducted over the 1996-2002 planning horizon using AFPC's whole farm simulation model. Data to simulate farming operations in the nation's major production regions came from two sources:

• Producer panel interviews to develop economic information to describe representative crop, livestock, and dairy farms.

• Projected prices and input inflation rates from the Food and Agricultural Policy Research Institute (FAPRI) April 1996 Baseline.

This report is organized into ten sections. The first section summarizes the major provisions of the 1996 Farm Bill, the panel farm process, key assumptions for the farm level analysis, and a map showing where the panel farms are located. The second section summarizes the FAPRI April 1996 Baseline and the policy and price assumptions used for the panel farm analyses. The third through sixth sections present the results of the simulation analyses for feed grain, wheat, cotton, and rice farms. The seventh through ninth sections summarize simulation results for dairy, cattle and hog farms. Two appendices constitute the final section of the report. Appendix A provides tables which summarize the characteristics for each of the representative farms. Appendix B provides the names of producers and land grant faculty who cooperated in the panel farm process.

Provisions in the 1996 Farm Bill which were important to the farm level analysis are summarized in Table 1. Major changes from the 1990 Farm Bill included elimination of target prices to calculate income support (deficiency) payment rates, decoupling of income support payments from prices and production, allowing virtually full flexibility in planting decisions, and eliminating acreage reduction program (ARP) authority.

Transitional contract payments for participating cotton, wheat, feed grain, and rice producers will be made to producers based on 85 percent of their historical base acreage times farm program yield times a fixed payment rate to be determined based on the number of acres (eligible production) that enroll in the program and the pool of money available each year for the particular crop.

Planting flexibility was increased from the 15 percent NFA and 10 percent OFA for the 1990 farm bill to 100 percent (Table 1). Producers would be allowed to plant any combination of program and non-program crops (excluding vegetables) on their farmland without the loss of fixed payments. The 0/85 and 50/85 provisions in the 1990 farm bill are eliminated under the 1996 farm bill as producers would be eligible to receive their fixed payments and not produce a crop, i.e., which is roughly equivalent to a 0/100 program.

Marketing loan provisions for cotton and rice are continued under the 1996 Farm Bill. Marketing loans for wheat, feed grains, and soybeans are authorized in the 1996 Farm Bill, with the provision that the Secretary of Agriculture set the loan repayment rates so as to minimize forfeitures, government storage costs, and promote marketing.

The 1996 Farm Bill eliminates the dairy assessments and provides for a reduction in the milk support price. Each year the dairy support price falls 15 cents per hundred weight until the support price reaches $9.90 per hundred weight in 1999.

AFPC has developed and maintains data to simulate 71 representative crop and livestock farms chosen from major production areas across the United States (Figure 1). Characteristics for each of the farms in terms of location, size, crop mix, assets, and average receipts are summarized in Appendix A. The location of these farms was the result of discussions with staffers for the House and Senate Agriculture Committees. Information necessary to simulate the economic activity on these representative farms was developed from panels 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 are asked to verify the accuracy of the past year and the reasonableness of a four to five year projection. Each panel must approve of the model's ability to reasonably reflect economic activity on their representative farm prior to using the farm for policy analyses.

All farms used in the analysis have been updated with the panels through 1992 and indices for input costs for 1993-96 were used to bring the farms to 1996 conditions. Approximately one third of the farms have been updated in 1996 and it is the intent to have all farms updated by September 1996. FAPRI projections of prices and yields for 1996-2002 are utilized for the baseline analyses presented in this report. All of the crop farms are assumed to begin 1996 with 20 percent intermediate- and long-term debt, based on information provided by ERS-USDA and the panel members. Initial debt levels for dairy farms were set at 30 percent, while initial debt levels for beef cattle ranches were 5 percent and initial debt levels for hog farms were 45 percent.

• All farms classified as moderate scale are the size (acres or number of livestock) considered to be representative of a majority of full-time commercial farming operations in the study area. In many regions, a second farm, two to three times larger than the moderate scale farm is developed as an indicator of economies of size.

• The farms are enrolled in the 7 year production flexibility program and take advantage of the flexibility provisions in the 1996 Farm Bill (within the current crop mix). Crop mix changes from 1995 to 1996 and beyond were estimated based on projected net returns for each of the enterprises currently produced on the farms. During the update process most all of the farm panels indicated that they would not flex out of their current crop mix due to rotation and/or other cultural concerns.

• Dairy, hog, and cattle herd sizes are held constant for all farms over the 1996-2002 planning horizon.

• The farm was structured so government payment limits were not effective at reducing contract payments.

• Family living withdrawals were assumed at a minimum base rate of 10 percent of gross receipts or $25,000 annually. Maximum family living withdrawals are set at 50 percent of gross receipts. The farm is subject to owner/operator federal and state income taxes as a sole proprietor.

• No off-farm-related income was included in the analyses.

• Farm program parameters, average annual prices, crop and livestock yield trends, interest rates, and input cost inflation (deflation) are based on the FAPRI April 1996 Baseline which assumed implementation of the 1996 Farm Bill.

• The farm level simulation model incorporates price and yield risk faced by farmers. Historical yield variability for crops and livestock (sale weights and milk/cow) for the past ten years are assumed to prevail for the 1996-2002 planning horizon. Market prices for crops and feedstuffs are assumed to be approximately 20 percent more variable than over the past ten years due to the 1996 Farm Bill provisions. Since cotton and rice already use the marketing loan heavily, price variability is increased by less than 5 percent for these crops.

Projected commodity prices for FAPRI's April 1996 baseline are summarized in Table 2. Assumed loan rates and projected annual contract payment rates, net of deficiency repayments in 1996 and 1997, are summarized in Table 3. FAPRI estimated that the fixed annual contract payment rates for corn will be $0.27/bu. in 1996; increase to $0.51/bu. in 1997 and decrease to $0.27/bu. in 2002. Fixed payment rates for wheat are estimated at $0.91/bu. in 1996 with the payment rate decreasing to $0.48/bu. in 2002. Cotton's fixed payment rate for 1996 is estimated at $0.0929/lb. and is projected to decrease to $0.0561/lb. by 2002. The fixed payment rate for rice is projected to be $2.79/cwt. in 1996; increases to $2.95/cwt. in 1998 and declines to $2.06/cwt in 2002. The farms that grow contract commodities are assumed to have accepted the 1995 advance deficiency payments and will have the repayments offset against 1996 contract payments for wheat, barley, oats, and upland cotton. The corn and sorghum repayments will be offset against the 1997 contract payments.

Projected rates of inflation for variable cash expenses by commodity are presented in Table 4. Annual interest rates paid for long-term and intermediate-term loans and earned for savings are also summarized in Table 4.

• Change in Real Net Worth, 1996-2002 -- The overall percentage change in the operator's net worth from January 1, 1996 through December 31, 2002, after adjusting for inflation. This value reflects the real increase or decrease in net worth or equity for the farm over the planning horizon including changes in real estate values.

• Government Payments to Receipts, 1996-2002 -- The average value of all government payments divided by total receipts received from the market plus farm programs (contract payments, CCC loans, marketing loan gains, and crop insurance indemnities). The average value in the tables is computed over the seven year planning horizon.

• Expenses to Receipts, 1996-2002 -- The ratio of all cash expenses to total receipts received from the market place plus farm programs. Cash expenses include interest costs, fixed cash costs, and variable costs but exclude principal payments, depreciation, income taxes, and family living expenses.

• Average Cash Receipts, 1996-2002 -- Gross receipts are cash receipts from market sales, contract payments, CCC loans, marketing loan gains, crop insurance indemnities, and other farm related income. The values presented in the tables represent the average value of total receipts for each year in the planning horizon.

• Average Net Cash Income -- Net cash farm income equals gross receipts minus all cash production costs including interest payments. Net cash farm income is used to pay family living expenses, principal payments, income taxes, self employment taxes, and machinery replacement costs. The values presented in the tables represent the average value of net cash farm income for each year in the planning horizon.

• Average Government Payments -- The average value of all payments received for farm programs (i.e., contract payments, CCC loans, and marketing loan gains) and payments received from crop insurance indemnities. The values presented in the tables represent the average value of total payments for each year in the planning horizon.

• Average Total Debt -- Ending debt is the sum of land debt, intermediate-term debt for machinery and breeding stock, and operating loan carryover debt at the end of the year. The values presented in the tables represent the average value of total debt for each year in the planning horizon.

• Average Nominal Net Worth -- Total net worth or equity at the end of each year in the planning horizon equals total assets including land minus total debt from all sources. This value of net worth is not adjusted for inflation and is reported for each year in the planning horizon.

• NIA for Total Real Net Worth, 1996-2002 -- Net income adjustment (NIA) is the annual increase or decrease in net cash farm income necessary to cause the change in total real net worth, including land inflation, to equal zero over the planning horizon. If the change in net worth is negative, the NIA is the annual increase in net income necessary to prevent a loss in total real net worth. NIAs are expressed both as total dollars per year and as a percent of average annual cash receipts.

• Eight of the ten feed grain farms experience growth in real equity over the study period (Table 5). The growth in real equity ranges from approximately 2 percent on the large Nebraska operation to 45 percent for the large Texas farm (Figure 3.).

• The moderate Nebraska and Texas farms are projected to lose real equity over the 1996-2002 study period by approximately 3 and 11 percent, respectively (Figure 3.). Both farms, however, are considered managerially capable of sustaining real equity since it would only take an increase in the net cash farm income (NCFI) the equivalent of 4 percent of cash receipts (NIA) for the farms to maintain real equity.

• While all the farms are considered managerially capable of sustaining real equity over the study period, declining net cash farm incomes appear to be a problem for four of the farms (NEG800, NEG1575, TXNP1600, and SCG1500). These operations have to carry over operating debt as early as 1997 for the Nebraska and South Carolina farms and by 1999 for the Texas farm. Thus, while an examination of real equity may not signal a problem, cash flow difficulties on these four operations after 1997 may jeopardize their long-term survival.

• The large Texas farm is also characterized by a declining net cash farm income over the study period. However, the level remains sufficient to meet debt service, pay taxes, replace equipment and meet family living requirements without creating cash flow problems for the farm.

• The moderate Missouri farm experiences cash flow problems as early as 1997 yet the levels are not sufficient to cause significant concern given price and input cost projections.

• The larger feed grain farms experience greater real growth than their moderate size counterparts in each region. Thus, structural pressure toward larger operations will likely persist.

• The projected increase in input cost over the 1996-2002 period are favorable from a historical perspective. Variable cash expenses for corn, soybeans and sorghum are projected to increase by only 5.22 percent, 7.54 percent and 3.81 percent, respectively. In addition, interest rates decline by 9 percent over the period. If these favorable conditions are not realized all farms will be adversely impacted, but relatively more pressure will be felt on the moderate scale operations.

• Six of the eight wheat farms experience growth in real equity over the study period (Table 6.) The growth in real equity ranges from approximately 3 percent on the large Washington farm to 26 percent for the large Kansas operation (Figure 8).

• Two farms lose real equity over the 1996-2002 study period (Figure 8). The moderate Washington farm loses 17 percent of its real net worth. The moderate Kansas operation also shows a loss in real equity, but the magnitude is approximately 5 percent. The NIA, however, is less than 3 percent for the Kansas farm thus it is considered managerially capable of sustaining real equity over the period. The Washington farm, however, has an NIA of over 10 percent. It would be difficult for this farm to sustain real equity without restructuring the farm operation.

• Net cash farm income (NCFI) trends, however, do not paint as positive a picture as did the examination of real growth, as NCFI's decline over the study period for all eight wheat farms (Table 6). By 1997, five of the eight farms (WAW1276, WAW4250, NDW1760, NDW4600 and KSW1495) are having to draw on cash reserves. Although the North Dakota farms have to refinance operating debt after 1999, the levels are not increasing and appear manageable with modest improvements in NCFI.

• With the exception of Colorado, the large farm in each region appears to fare better than its moderate scale counterpart. Thus, structural pressure towards larger operation will likely continue.

• The projected increase in variable cash expenses for wheat appear favorable from a historical perspective. Variable cash expenses for wheat are projected to increase by only 6.29 percent over the study period.

• Seven of the ten upland cotton farms experience growth in real equity over the study period (Table 7). The growth in real equity ranges from 13 percent on the moderate California farm to 76 percent for the large Texas Southern Plains operation (Figure 12.).

• The large California and both Mississippi farms experience a loss in real equity over the 1996-2002 study period. The three farms, however, would be considered managerially capable of sustaining real equity since the NIA is less than 3 percent for the two large farms and less than 7 percent for the moderate Mississippi operation ( Figure 12.).

• Declining NCFIs for all ten farms, however, suggest financial stress. Although the Texas Southern Plains farms appear to maintain cash reserves throughout the period, the other eight farms experience problems as NCFIs decline. By 1999, cash flow problems have surfaced on these farming operations. By 2002, operating debt is having to be refinanced on 7 of the ten farms. The large Texas Rolling Plains farm is still showing positive cash reserves by 2002, but the trend indicates it will be refinancing operating debt carryover by 2003.

• Variable cash expenses are projected to increase approximately 13 percent for cotton production over the 1996-2002 period. Thus, cotton farms experience more of a cost-price squeeze than do the other crop farms simulated in this analysis.

• Four of the eight rice farms experience growth in real equity over the study period ( Table 8). The growth in real equity ranges from 2 percent on the moderate Missouri farm to 19 percent for the moderate Texas operation (Figure 17.).

• The four farms in California, Arkansas, and Louisiana experience declines in real equity ranging from 6 percent on the moderate California farms to approximately 69 percent on the Louisiana operation. NIAs for the California and Arkansas farms indicate that if the farms could improve NCFI by the equivalent of 7 percent or more of cash receipts, the farms could maintain real equity. The Louisiana farm, however, will likely not survive as currently organized.

• Even though 7 of the 8 rice farms might be considered to be managerially capable of sustaining real equity over the 1996-2002 study period, the trends in NCFIs are alarming. All farms experience a loss in NCFI from 1998 to 2002. Only the Texas operations are able to maintain positive cash reserves through the year 2002 and even then, the large Texas farm is on the verge of having to refinance carryover operating debt.

• Five of the rice farms (CAR424, CAR1365, TXR3750, ARR1260, and LAR1100) are experiencing cash expenses that exceed 90 percent of cash receipts by 2002. Experience has shown that the narrow cash operating margin that is generated when expenses exceed 90 percent of cash receipts leaves little room for the farms to rebound.

• Variable cash expenses are projected to increase approximately 10 percent of the 1996-2002 period. This level is not as strong as the 13 percent experienced in the cotton farms but significantly above the 5-6 percent projected for feed grains and wheat respectively.

• The tables and charts in this section include projections for all AFPC panel farms that produce milk (Tables 9 and 10). Milk sales constitute 85 to 95 percent of receipts for these farms. The remainder of cash receipts largely come from sales of dairy cattle.

• To date, nine of the 22 dairies have been updated during 1996. These dairies are indicated in appendix tables A5. and A6. The 13 that have not been updated are all assumed to have adopted BST during at least a portion of the year. During the update process only three (TXCD825, GAD650 and CAD1710) of the nine dairies indicated they are using BST. Therefore, the remaining six updated farms are analyzed assuming BST is not used.

• FAPRI projected the all milk price to declines each year from $12.89/cwt. in 1996 to $12.31/cwt. in 2000; as the price support is reduced and then is eliminated in 2000; and then rebounds to $12.55/cwt by 2002. Producer assessments are eliminated under the new dairy program. No consideration is given to changes in pricing that might result from federal order reform mandated to be implemented by 1992.

• Soybean meal prices decrease by $18/ton from $198.96/ton in 1996 to $180.37/ton in 1999. After 1999-00, soybean meal prices increase each year ending the period at $193.92/ton. Hay prices start the period at $76.72/ton in 1996, and decline each year thereafter, ending the period at $63.70 in 2002.

• Net cash income and growth in net worth is markedly less than has been the case in past years due primarily to high feed costs early in the period and the change in price support policy. The sharpest reduction in equity growth compared with past baselines occurred in California and New Mexico.

• While only four of the 22 dairies had a negative average net cash farm income over the entire period, two others experienced at least one year of negative net cash farm income. Of these six dairies, three are moderate and three are large -- all but one are from the Southeast and Southwest.

• Fifteen of the 22 dairies experienced a positive increase in real net worth over the period. Of these 15, nine represent large dairy operations in their areas. Those dairies that lost real equity over the period tended to be located in the Northeast, Southeast and Southwest.

• All of the dairy farms that are projected to lose equity over the period would require only small increases (less than 7 percent) in annual cash receipts to move them into a situation where they would maintain real equity over the period.

• Two-thirds of the dairies are projected to be in relatively sound financial condition over the next seven years. In general, those that are not considered to be in good financial condition are both moderate and large size dairies located in the Northeast, Southeast and Southwest.

• The beef cattle situation is positively impacted due to the upturn in prices projected over the study period (Table 11). Feeder cattle prices are projected to from approximately $61/cwt in 1996 to over $96/cwt by 2002.

• Four of the five representative cow/calf operations realize an increase in real equity over the 1996-2002 study period. The one ranch (STB400) which experiences a loss in net worth loses less than 6 percent of its real equity (Figure 30.).

• It is estimated that the four farms increasing earned equity over the period can withstand losses in net income the equivalent of 4 to 33 percent of receipts and still maintain earned equity. While the one farm losing earned equity is not considered to be managerially capable of sustaining real equity over the period because the NIA value is 10 percent.

• Net cash farm incomes (NCFIs) show substantial improvement over the 1996-2002 period as cattle prices rebound. However, extremely low to negative net cash farm income in early years for three of the five ranches (WYB300, COB250, and STB400) cause substantial cash flow problems and increasing debt on these farms. This increasing debt suggests financial vulnerability when the cattle cycle turns down again.

• Of the four pure cattle ranches, the three with access to federal lands fare better over the period (MTB200, WYB300, COB250). The diversified feed grain/cattle operation (MOSB150) is able to weather the cattle cycles with crop production.

• All eight hog farms experience an increase in real equity over the 1996-2002 period (Table 12) (Figure 34.). The real equity ranges from 16 percent on the INH150 to 83 percent on the ILH450.

• Only the two farms showing the smallest increase in earned equity indicate signs of vulnerability (INH150 and NCH12400). These two farms are the only hog farms which cannot withstand a decline in net cash farm income equivalent to a 5 percent drop in cash receipts annually.

• Net cash farm income for all eight farms have peaks in 1997 and 2001 with the lowest income in 1999; following the normal hog price cycle. Only the INH150 shows signs of financial vulnerability as increasing debt reflects continuing cash flow problems.

• Illinois and Indiana hog farms indicate some economies of scale with increases in herd size. North Carolina and Missouri, on the other hand, reflect some loss in efficiency on the larger size farms as indicated by the expenses to receipts ratios for these farms over the 1996-2002 period.