Income Smoothing Programs

1
Income Smoothing Programs

• Mark Stephenson, Ph.D.
• Cornell Program on Dairy Markets Policy

2
Price Volatility Motivates Policy

• Seasonal price swings of 150 was an early
  motivation for policy action
• Dairy Price Support Program
• 1930s, 1949
• Federal Milk Marketing Orders
• Objective reduce volatility in farm income

3
Commercial Stocks as a Percentage of Milk
Production
4
Farm Income is Most Variable
5
Dairy Price Support Program

• Methods
• Higher support price
• Outcomes
• We know program works
• Resist temptation to enhance farm income
• Tough sell in year with little or no budget
  surpluss

6
Federal Milk Marketing Orders

• More stabilizing before reform
• M-W survey
• Two-month lag with advance pricing
• Current higher of is somewhat stabilizing
• Not everyone benefits equally

7
Federal Milk Marketing Orders

• Methods
• Proposed rule had 6-month weighted average on
  Class I price
• Not everyone benefits equally
• Forward contracting with manufacturing plants

8
Federal Milk Marketing Orders

• Outcomes
• Advantage of being an off-budget item
• Rolling average minimum price for one, or more,
  classes
• May be more workable with class I
• Potential problem of having milk and product
  prices out of synchronization
• Extend forward contracting to all classes
• Retain pool obligation but not uniform price
  payment

9
Dairy Compacts

• Methods
• Relatively high and flat class I price floor
• This strategy could be adopted by FMMOs
• Not everyone benefits equally
• Outcomes
• Congress is trying to close the lid on this
  Pandoras box.

10
Increase Commercial Inventories

• Methods
• Recourse loans on inventories
• National marketing agency
• Funded by producer check-off
• Purchase and hold stocks or export product
• Outcomes
• Government would have to subsidize loan rate to
  make recourse loans interesting
• Marketing agency would have to be mandatory
  participation. We would be in WTO court.

11
Farmer Savings Accounts

• Canada-Net Income Savings Accounts
• Government match producers contribution by up to
  3 percent of farms gross margin (7,500 max per
  year)
• Maximum 20 percent of eligible net sales
  deposited in any year
• Government will enhance savings rate by 3 percent
  over local bank rate
• Withdrawals can be made when gross margin falls
  below rolling 5 year average

12
Farmer Savings Accounts

• Methods
• Farm and Ranch Risk Management accounts (FARRM)
• Individual Risk Management Accounts (IRMA)
• Farm Program Payment Reserve (FPPR)

13
Farmer Savings Accounts

• FARRM (Farm Ranch Risk Management)
• Tax deferment is the incentive
• Deposits of up to 20 percent of eligible farm
  income (schedule F net farm income)
• Interest on accounts is distributed annually
• Withdrawals taken at any time
• Deposits can accrue for up to 5 years but
  penalized 10 percent after that
• New amounts added on a FIFO basis

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Farmer Savings Accounts

• IRMA (Individual Risk Management Account)
• Participating farms required to deposit a minimum
  of 2 percent of schedule F net farm income
• Government would match that 2 percent
• Max total deposit is 150 percent of 3 year
  average net farm income
• Withdrawal only when income drops below 80
  percent of 3 year average
• Can only withdraw enough to bring net farm income
  up to 80 percent of 3 year average

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Farmer Savings Accounts

• FPPR (Farm Program Payment Reserve)
• Idea less well developed then FARRM IRMA
• A portion of direct payments, like AMTA, would be
  made into a savings account.
• Payments accumulate until some level such as 150
  percent of 5 year average net farm income is
  achieved
• After full funding is achieved, all direct
  payments go to farmer
• Withdrawals at triggered when income drops below
  5 year average
• Withdrawals could not cause NFI to exceed 5 year
  average

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Farmer Savings Accounts

• Outcomes
• Low budget exposure and probably green light with
  WTO
• Not a large burden on taxpayers or consumers
• Operate in much the same was as IRAs
• Recent study by ERS shows skepticism that they
  would be very effective.
• FARRM accounts have been looked at more closely
• 80 of all farmers would be limited to annual
  contributions of less than 1,000 (less than
  5,000 total)

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Summary

• Several choices to reduce volatility
• Producer groups are likely to favor programs that
  either have budget implications or transfer
  wealth from consumers rather than self funded
  savings accounts
• Is volatility the problem or is it price level?