Staff Paper, Cornell University, Department of Applied Economics and Management 2005-02
Government subsidized farm savings accounts have gained attention as possible risk management tools. These accounts encourage farmers to set aside funds in high income years to be drawn upon in low income years. This study considers two potential savings programs, Farm and Ranch Risk Management (FARRM) accounts and Counter-Cyclical (CC) farm savings accounts. FARRM accounts use tax deferral as the primary incentive for participation and under CC accounts the government would match farmer deposits up to $5,000. This report examines the potential benefits of these accounts for New York dairy farmers. The study illustrates how the selection of different income to define eligibility will impact the potential eligibility and benefits received by the accounts. In particular, if measures do not correct for changes in farm size, the value of the accounts to commercial farmers will be greatly reduced. Although participation and benefit estimates vary by the specific net and gross income measures used to define participation and allow withdrawals, the differences were relatively small. The analysis indicates that most commercial dairy farms would be eligible to build substantial balances in the accounts. The use of net income measures as opposed to gross income measures increases the likelihood that farmers will be able to access the funds deposited in the accounts. The next sections of the study describe the construction of the farm data used to analyze the account programs. Then, the analysis of Farm and Ranch Risk Management (FARRM) and Counter-Cyclical (CC) farm savings accounts is presented. The analysis begins by describing the magnitude and degree of variability in measures of net income and gross farm income. Next, the analysis considers the ability of farmers to contribute to FARRM and CC accounts. Finally, the study considers the likelihood that farmers will be able to withdraw funds from the accounts and provides some very basic estimates of the potential benefits associated with FARRM and CC accounts.