The Effects of Direct Payments on Liquidity and Repayment Capacity of Beginning Farmers

U.S. decoupled direct payments, paid to farm operators based on historic yields and base acreage under the 2002 Farm Bill, may alter a farmer’s access to credit or his ability to meet debt servicing obligations. Data from the U.S. Department of Agriculture (USDA) Agricultural Resource Management Survey (ARMS) for the years 2005, 2006 and 2007 are used. We find a positive significant relationship between the level of direct payments (in dollars) and the term debt coverage ratio for experienced farmers, suggesting that direct payments improve repayment capacity. However, this relationship is not significant for beginning farmers. We also find a negative significant relationship between the number of base acres and the current ratio for experienced farmers, while this relationship lacks significance for beginning farmers. We provide evidence that decoupled direct payments impact a farmer’s liquidity and repayment capacity. This paper also contributes to the growing body of research investigating the mechanisms by which decoupled payments have the potential to distort current production.