Masters Theses

Date of Award

8-2006

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural Economics

Major Professor

Kelly J. Tiller

Committee Members

Daryll E. Ray, Daniel G. De La Torre Ugarte

Abstract

The purpose of this study is to examine farms’ dependence on federal United States agricultural subsidies in Iowa and Tennessee. As subsidies and their distribution are continually debated, this research considers the effects on farm enterprises if subsidies had not been distributed in 1996, 2000, and 2003. This is achieved by first developing a classification system for farm enterprises in the two states. The classification system that is used segregates farms into modal groups based on land ownership arrangement and solvency class. Quartiles are used to differentiate land ownership arrangement (i.e. the percentage of operated land owned.) Four solvency classes are defined, based on the interaction between net farm income and debt-to-asset ratio, as determined by the Agricultural Resource Management Survey.

After the data are segregated by land ownership arrangement and solvency class, the resulting distribution of farm operations is analyzed. The study then investigates how the distribution of farms among the classification categories would change if annual government payments are subtracted from net farm income. To accomplish this, government payments are first subtracted from net farm income to create a new net farm income; then each farm was assigned a new solvency class based on the new net farm income. After the new data were compiled, a comparison was done between data that include government payments and data that do not include government payments.

The study found that the absence of farm subsidies did not have a large effect on structural and financial characteristics of farms in 1996 and 2003. Specifically, in 1996 if government payment had not been distributed in Iowa, 9.5 percent of farms in solvency class I (positive net farm income and debt-to-asset ratio less than 0.40) would have shifted to solvency class II (negative net farm income and debt-to-asset ratio of below 0.40). In Tennessee, in 2003, a similar shift would have occurred to only 1% of farms in solvency class I. However, in 2000, the year in the study in which the largest amount of subsidies was distributed, the absence of them affected the distribution of farms by structural and financial characteristics dramatically. In many cases, especially in Iowa, the subsidies represented the difference in negative and positive net farm incomes. For instance, a 28% shift from solvency class I to solvency class II would have taken place in Iowa.

In conclusion, the study shows that although farm subsidies may not be a major factor in the financial health of the farm sector in some years; in other years the payments are crucial to the financial well being of the businesses that make up the industry. The study makes no judgements concerning the use of farm subsidies; it merely depicts the structure and financial characteristics of farms in Iowa and Tennessee in their presence and absence.

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