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Farm Savings Account Workshop Summary (03-32)

Farm Savings Account & the Farm Safety Net

Farm savings accounts and their potential to assist U.S. farmers in managing variability in farm income was the subject of a June 2, 2003 workshop in Washington D.C. Farm savings accounts are expected to be one of the policy options discussed in development of future farm bills, as they were in deliberations for the 2002 legislation.

Representatives from Canada and Australia provided input on the experiences of those countries with similar programs. Researchers discussed research in progress on the potential role in the U.S. of farm savings accounts as part of the farm safety net. The workshop was a joint project of Farm Foundation and two USDA agencies, the Economic Research Service (ERS) and the Risk Management Agency (RMA). Here are summaries of the workshop presentations.

The Role of Farm Savings Accounts in Managing Income Variability
Jeff Bazille of RMA, outlined RMA’s interest in farm savings accounts in the context of the RMA mission to help stabilize agriculture through a sound system of crop insurance and other risk management products. He discussed the agency’s interest in products and tools that will assist producers in determining the financial impact of various risk management strategies, including farm savings accounts, and in products and programs for producers not covered by existing programs. He also described the collaborative research on farm savings accounts and risk management tools ongoing with ERS.

Savings and Off-Farm Investment of Farm Households
Ashok Mishra of ERS provided an overview of the differences in savings and off-farm investments of farm households for various sizes and types of farms. Off-farm investments, including savings accounts are an important part of the farm household’s portfolio. Based on a 1999 ARMS survey of farm savings and investment behavior, Ashok reported the ratio of off-farm savings and investments to total assets had increased to 31% in 1999, from 18% in 1992. He suggested that farm households were more likely to invest off the farm as their level of off-farm income and total household income increased. Small, diversified farmers were also more likely to have off-farm savings and investments.

Canada’s Experience with Net Income Stabilization Accounts
Greg Strain of Agriculture and Agrifood Canada, described Canada’s experience with the Net Income Stabilization Accounts (NISA) and a proposed replacement program. Developed in 1991, NISA allows producers to establish savings accounts that are subsidized with matching government contributions and an interest rate bonus on account balances. Deposits can be withdrawn only if farm or household income drops below certain thresholds. While NISA fund balances grew considerably over time, there was a tendency to leave money in the accounts. For small and low performance farms, the safety net was stabilized but at relatively low levels. These, as well as other perceived shortcomings of the accounts, led to development of a proposed replacement program that would shift a larger role to the government in the face of large losses. However, government funds could only be accessed when the need is established, thus preventing the type of account balance built up that occurred under the NISA program.

Australia’s Experience with Farm Management Deposits Program Accounts
Trish Gleeson of the Australian Bureau of Agricultural and Resource Economics (ABARE), provided an overview of Australia’s Farm Management Deposits Program. Under the program, farmers receive an income tax deduction for deposits, but are taxed when the funds are withdrawn. The minimum deposit is $1,000. The maximum amount that can be on deposit is $300,000. Farmers with off-farm income in excess of $50,000 are not eligible for the program. Since the program’s introduction in 1999, the number of farmers and the average deposits have grown. However, despite marginal income tax rates approaching 50%, only about 15% of all farmers currently participate in the program.

Farm Savings Accounts and Variability in Farm Income: Analysis of Farm Management Panel Data
Panelist: Paul Ellinger, University of Illinois; Brent Gloy, Cornell University; Jeff Williams, Kansas State University; Andy Swenson, North Dakota State University
One of the primary goals of farm savings accounts is to provide farmers with a tool to help manage farm income variability; under such a program, farmers contribute to an account in high income years to build a reserve from which they could draw in years when farm income is low. Panelists used farm management panel data to evaluate variability of farm income for various farm types and sizes, and the potential of various farm savings account programs to smooth the variability in farm income.

Swenson reported few differences in farm income variability by size or type of farm, based on analysis of a five-year panel (1997-2001) of North Dakota farms. These farms received most of their income from farming. Average net cash farm income was about $34,000. The average variation from the mean was more than $23,000.

In analysis of a 5-year panel (1997-2001) of New York dairy farms, Brent found large variation in net farm income. An evaluation of the potential benefits from Farm and Ranch Risk Management (FARRM) and counter-cyclical savings accounts suggested that almost all farms would be eligible to contribute to a savings account at least once during the 5-year period, with more than half of all farms eligible to contribute in all 5 years. However, tax benefits under the FARRM account proposal were relatively modest for most farms raising potential questions regarding the actual level of participation under a FARRM account or similar program relying solely on tax incentives to encourage participation.

Williams summarized an analysis of 1,149 Kansas grain and livestock farms for the 1997-2001 period. Average net farm income was about $52,000, ranging from $46,000 to $58,000. Evaluation of FARRM and counter-cyclical account proposals suggested that a majority of farms would be eligible for both plans, with a slightly larger share eligible under the counter-cyclical proposal. In both instances, eligibility and amount of deposit increased with the size of the farm. Both programs demonstrated some potential to stabilize farm income.

Ellinger analyzed 2,104 Illinois grain farm for the 1997-2001 period. These farms averaged $253,000 in gross farm income and $38,000 in net farm income over the 5-year period. Paul documented the importance of government payments relative to net farm income and highlighted the variability of net farm income.

Perspectives on a U.S. Program
Ron Durst of ERS, provided an analysis of the two leading proposals for farm savings accounts in the U.S.—the Farm and Ranch Risk Management (FARRM) and counter-cyclical savings accounts. These plans utilize very different incentives and eligibility criteria, yet the share of farmers eligible to contribute and the potential level of deposit accumulation are very similar. While the analysis suggested that most commercial farmers would be eligible to participate, only a small number of farmers could accumulate meaningful balances. Use of the tax code could be a convenient method of administering the program, but the selection of a particular tax-based measure of income can have a significant impact on eligibility and the potential size of deposits, Durst reported.

What We?ve Learned. What?s Next?
Barry Goodwin of Ohio State University, and Steve Halbrook of Farm Foundation, provided an overview of the main points discussed during the workshop and identified various unanswered questions and issues for possible additional research on farm savingsaccounts.