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Evidence of Distortionary Effects of Decoupled Payments in U.S. Indica Rice Production

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Abstract

Using a generalized method of moments technique for dynamic panels we estimate the acreage response of indica rice production in the U.S. to decoupled payments under the 1996 and 2002 farm bills. We find that these payments exert significant effects on the number of acres planted and, although the response is inelastic, a given change in decoupled payments may have a greater effect on acreage planted than an equal change in payments directly linked to output. Thus, even purely decoupled payments may be vulnerable to WTO sanction or de minimis limits. This research also suggests that the subsidy formula in the proposed 2014 farm bill will have a reduced distortionary effect compared to existing policies.

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Fig. 1

Notes

  1. 1.

    Source: Authors’ computations based on USDA Data. See http://apps.fas.usda.gov/psdonline/psdHome.aspx, accessed 1/31/14.

  2. 2.

    Because of differences in production methods and soil characteristics, the USDA considers rice production costs on a regional, as opposed to state or national basis. Prior to 2013, indica rice growing regions were the Arkansas Non-Delta region, the Mississippi River Delta region, and the Gulf Coast region. As these interregional cost differences are significant, we retained the aggregation in both our data and our models.

  3. 3.

    Because these price-triggered payments are zero in many years, we follow Gujarati (2003) (pg. 422, note 38) and use dpt i,t-1  = ln(DPT i,t-1  + 1) as shown in (3). However, we do not interpret the coefficient on this variable as an elasticity.

  4. 4.

    Both February and March futures prices showed significant bias as predictors of November price, and had Theil U statistics substantially greater than 1.

  5. 5.

    If m2 shows autocorrelation, an additional lag of the dependent variable may be added.

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Author information

Correspondence to Rebecca P. Judge.

Additional information

The authors wish to thank the Cátedra Victor Sanabria and the Escuela de Economía at the Universidad Nacional de Costa Rica and the sabbatical program of St. Olaf College for support for the initial stages of this research.

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Becker, A.D., Judge, R.P. Evidence of Distortionary Effects of Decoupled Payments in U.S. Indica Rice Production. Atl Econ J 42, 265–275 (2014). https://doi.org/10.1007/s11293-014-9421-7

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Keywords

  • Decoupled payments
  • Agricultural subsidies
  • Rice
  • Farm bill
  • Dynamic panel data

JEL

  • Q12
  • Q17
  • Q18
  • H25