This report responds to the request of Senator Harkin to examine the economic impacts on representative feed grain farms resulting from the elimination of the excise tax exemption for fuel ethanol. The Food and Agricultural Policy Research Institute (FAPRI) projected the impact of the tax elimination on grain demand, prices and farm income for the agriculture sector. FAPRI's assumptions and analysis are reported under separate cover titled "Effects on Agriculture of Elimination of the Excise Tax Exemption for Fuel Ethanol - Working Paper 01-97." The sector level changes in prices and land values as reported by FAPRI are utilized in this paper to analyze the impact of elimination of the ethanol fuel tax exemption on the representative feed grain farms maintained by the Agricultural and Food Policy Center (AFPC).

This paper will briefly describe the panel farm process and the assumptions used by FAPRI in arriving at the sector level impacts on prices. The resulting impact of these price changes at the farm level are then compared to the Baseline which assumes the provisions of the 1996 Farm Bill. A more detailed review of the 1997 Baseline is reported under AFPC Working Paper 97-1 titled "Representative Farms Economic Outlook: FAPRI/AFPC January 1997 Baseline."

The feed grain farms used in the analysis (Figure 1) represent 13 of the 76 representative crop and livestock farms chosen from major production areas across the United States. Characteristics for each of the feed grain farms in terms of location, size, crop mix, assets, acreage, and receipts are summarized in Appendix A. The location of these farms are primarily the result of discussions with staffers for the House and Senate Agriculture Committees. Information necessary to simulate the economic activity of these representative farms are 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 usually 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) developed by AFPC. The producer panels are provided pro-forma financial statements for their representative farm and are asked the verify the accuracy of the model's ability to reasonably reflect economic activity on their representative farm prior to using the farm for policy analysis. Land grant cooperators and panel members are listed in Appendix C.

The elimination of the tax exemption is assumed effective for the 1997 crop and extends through the remainder of the baseline. FAPRI assumed that current ethanol production would decline by 50 percent in the first year and that additional capacity projected to be brought on line by the year 2002 under the tax exemption would not be realized. FAPRI concluded, therefore, that corn use for ethanol production would decline immediately from a baseline level of 504 million bushels in 1997 to 252 million bushels. They projected that use would continue to decline until a minimum level of 115 million bushels of corn were being used for ethanol production in 1999. Projected use remained at 115 million bushels through 2002.

At the farm level the impact of the elimination of the fuel tax exemption would be transmitted primarily through the change in crop prices and in the projected land value. Corn prices are projected to decline by $0.10/bushel in 1997 with the elimination of the fuel tax exemption (Table 1). Over the 1997-2002 study period corn prices with the elimination of the fuel tax exemption are projected to average approximately 4.6 percent less than the baseline. While corn takes the biggest hit, all major crops and livestock experience a reduction in prices due to competition with corn or in the case of livestock the increased production due to lower priced feed inputs.

FAPRI projects net farm income for the sector would decline an average 1.9 percent annually over the 1997-2002 study period. This reduction in farm income is projected to result in a slowing of the growth in land values over the 1997-2002 study period from 3.7 percent to 3.4 percent annually.

The 13 feed grain farms maintained by AFPC are diverse geographically and economically. They range from $200,000 in annual cash receipts for the small Kansas operation (KSG728) to over $1,500,000 for the large South Carolina operation (SCG3500). While feed grain/oilseed production is the largest source of revenue for all the feed grain farms they do produce other commodities. For example the moderate scale Northern Missouri (MONG1200) farm is very diversified with approximately 45 percent of its revenue generated by corn/soybeans. Cattle, however, contribute 14 percent with hogs generating another 40 percent of this farms gross revenue. The diversity of the Missouri farm is contrasted to the Iowa operations that generate all their revenue from corn/soybeans or the Texas, Nebraska and Kansas farms that are fully irrigated. As a group, however, the feed grain farms provide a diverse base for which to examine the farm level impact of the elimination of the fuel tax exemption for ethanol production.

The decline in commodity prices projected by FAPRI results in a decline in cash receipts across all feed grain farms (Table 2). Naturally, the greater the dependence on corn the greater the decline in revenue. The irrigated Nebraska and Kansas operations derive over 90 percent of the revenue from corn production and thus experience the largest declines in receipts ranging from 3-3.5 percent. The diversified Northern Missouri farm (MONG1200), on the other hand, generated only 21 percent of its revenue from corn and experiences a 1.2 percent decline in receipts from this tax policy change. As mentioned earlier, all commodities experience declines in prices under this alternative tax scenario, but the greatest impact is on corn, followed by other feed grains, oilseeds, wheat, cotton, and rice.

As a result of the decline in revenue, all farms experience a modest increase in cash expenses under the alternative tax scenario due to increased interest expense on borrowed capital (Table 2). The average increase in cash expenses relative to the Baseline varies from as low as 0.1 percent on the MONG1200 operation to approximately 0.9 percent for the KSG728 operation.

Net cash income declines for all farms as a result of the decrease in revenue and increase in interest expenses (Table 2). The irrigated operations in Kansas and Nebraska project net cash income declines of over 15 percent due to the proposed change in tax policy. The other 9 feed grain farms experience net cash income declines varying from 4 percent for the large South Carolina farm to 9 percent for the moderate Iowa operation.

The combination of reduced land value and declining net cash income reduces the ability of all feed grain farms to sustain real net worth. While this change in tax policy will not change the direction of growth in wealth it does reduce it. That is, under the Baseline 10 of the representative farms were projected to increase real net worth over the study period. The change in tax policy does not change the fact that these 10 farms continue to grow in terms of real equity. They do, however, see their growth in real net worth dampened by approximately 3-8 percentage points.

The three farms that were projected to lose real equity under the Baseline will lose more under the alternative tax scenario. Real net worth on these three farms decline another 6-12 percentage points (Table 2). Additional financial performance data are presented in Appendix B.

While the economic viability of a majority of the feed grain farms analyzed is not threatened by the proposed elimination of the fuel tax exemption they all experience reduced revenue, increased expenses and thus lower net cash income. Structurally, those farms with greater dependence on corn as their primary source of revenue feel the greatest pressure followed by producers of other feed grains, soybeans, wheat, cotton, and rice.

IAG950	A 950-acre Northwestern Iowa (Webster County) moderate size grain farm that plants 475 acres of corn and 475 acres of soybeans. The farm receives 57 percent of its receipts from corn. This farm has been updated for 1996.
IAG2200	A 2,200-acre Northwestern Iowa (Webster County) large grain farm that plants 1,100 acres of corn and 1,100 acres of soybeans. The farm generates 58 percent of its receipts from corn. The farm has been updated for 1996.
MOCG1500	A 1,500-acre Central Missouri (Carroll County) moderate size grain farm with 250 acres of wheat, 550 acres of corn, and 700 acres of soybeans. This farm is located in the Missouri river bottom and supplies feed to the livestock producers in the region at premium to other areas of Missouri. Corn generates about 46 percent of the farm's receipts. The farm has been updated for 1996.
MOCG3000	A 3,000-acre Central Missouri (Carroll County) large grain farm with 300 acres of wheat, 1,350 acres of corn, and 1,350 acres of soybeans. This farm is located in the Missouri river bottom and supplies feed to the livestock producers in the region at premium to other areas of Missouri. The farm generates about 56 percent of its total revenue from corn. The farm has been updated for 1996.
MONG1200	A 1,200-acre Northern Missouri (Nodaway County) diversified grain farm with 525 acres of corn, 525 acres of soybeans, and 150 acres of hay. The farm also has 150 breeding cows and 80 breeding sows. The farm generates about 45 percent of its total revenue from corn and soybeans, 40 percent from hogs, and 14 percent from cattle. The farm has been updated for 1996.
NEG800	A 800-acre South Central Nebraska (Phelps County) moderate size 100 percent irrigated grain farm that plants 770 acres of corn, and 30 acres of alfalfa. The farm also has 100 breeding cows. The farm generates 92 percent of its receipts from corn. The farm has been updated for 1996.
NEG1575	A 1,575-acre South Central Nebraska (Phelps County) large 100 percent irrigated grain farm that plants 1,575 acres of corn. The farm generates about 98 percent of its receipts from corn. The farm has been updated for 1996.
TXNP1600	A 1,600-acre Northern High Plains of Texas (Moore County) moderate size 100 percent irrigated grain farm with 642 acres of wheat, 280 acres of sorghum, 470 acres of corn, and 208 acres fallow. The farm generates 68 percent of its total receipts from feed grains. The farm has been updated for 1996.
TXNP5500	A 5,500-acre Northern High Plains of Texas (Moore County) large 85 percent irrigated grain farm with 1,675 acres of irrigated wheat, 800 acres of dryland wheat in the corners of all pivot irrigated fields, 275 acres of irrigated sorghum, 2,200 acres of irrigated corn, and 550 acres fallow. The farm generates about 72 percent of its receipts from feed grains. The farm has been updated for 1996.
KSG728	A 728-acre Southwestern Kansas (Finney County) 100 percent irrigated grain farm with 128 acres of wheat, and 600 acres of corn. The farm generates 92 percent of its total receipts from corn. This farm is more likely to be considered a small farm rather than our typical moderate size operation. The farm has been updated for 1996.
KSG1652	A 1,652-acre Southwestern Kansas (Finney County) moderate size 100 percent irrigated grain farm with 600 acres of wheat, and 1050 acres of corn. The farm generates 89 percent of its total receipts from corn. The farm has been updated for 1996.
SCG1500	A 1,500-acre South Carolina (Clarendon County) moderate size grain farm with 750 acres of double cropped wheat and soybeans, 600 acres of corn, and 150 acres of full season soybeans. The farm generates about 68 percent of its total receipts from corn and soybeans. This farm enjoys high returns on double cropped acreage but timing will not allow more than 750 acres. The farm has been updated for 1996.
SCG3500	A 3,500-acre South Carolina (Clarendon County) large grain farm with 2020 acres of double crop wheat and soybeans, 350 acres of cotton, 1,130 acres of corn. This farm enjoys high returns on double cropped acreage but timing is a limiting factor. The farm generates 73 percent of its receipts from corn and soybeans. The farm has been updated for 1996.