Agricultural Sector Study : Impacts of Environmental Regulations on Agriculture

SEPA
             United States
             Environmental Protection
             Agency
             Office of Policv
             Planning and Evaluation
             Washington DC 2CM60
EPA 230-09 88-040
September 1988
The Agricultural Sector
Study

Impacts of Environmental
Regulations on Agriculture
,,,...I"	'


«4,
  •ii,
     ^•'S&JSW
               / /

-------
                   THE AGRICULTURE SECTOR STUDY:

     IMPACTS OF ENVIRONMENTAL REGULATIONS ON AGRICULTURE
                                    by
                               Terry Dinan \J
                               Craig Simons 2/
                               Roger Lloyd 2/
                                Submitted to:
                     U.S. Environmental Protection Agency
                              Washington, D.C.
                                    and
                       Industrial Economics Incorporated
                               Cambridge, MA
                           Contract No. 68-01-7047
                           Work Assignment No. 140
                               September 1988
I/ Office of Policy Analysis, U.S. Environmental Protection Agency

-------
                      Agricultural Sector Study


                          Table of Contents

Executive Summary

Agriculture and Environmental Regulations

Study Method and Limitations

Results of Livestock and Major Field Crop Impact Analyses

Results of Specialty Crops Impact Analyses

Summary and Recommendations
                                                     iv

                                                      1

                                                      3

                                                     11

                                                     27

                                                     39
Appendix A:
Appendix B:
Appendix C:
Appendix D:
Appendix E:
Appendix F:
Appendix G:
Appendix H:
               APPENDICES

EPA Actions Considered in this Study
AGSIM Model and Results
National Price-Quantity Model and Results
REPFARM Model and Results
Income Budget Analysis and Results
Data Problems and Assumptions
Cumulative Probability Cost Curve Distribution
Recommendations for Acquiring Better Pesticide Usage
Data
                                 ii

-------
                          ACKNOWLEDGEMENTS

We would like to thank the U.S. Environmental Protection Agency
Program Offices;for their help in supplying the data necessary for
this analysis.  We are particularly grateful to the Economic
Analysis Branch of the Office of Pesticide Programs for the
extensive amount of time and effort that they contributed to this
study.  We would also like to thank the members of the Economic
Research Service at the U.S. Department of Agriculture who aided in
determining the impact of EPA actions on livestock and major field
crop producers.  Finally/ we appreciate the help of the members of
EPA's Office of Policy Planning and Evaluation who helped in the
preparation of this report.
                                 iii

-------
                          EXECUTIVE SUMMARY

Environmental  regulations affect U.S.  farms  in many ways.
Traditionally/ the most  important of these regulations have been
those that restrict, and in  some cases prohibit/ the use of certain
pesticides.  Pesticides  will continue  to be  the subject of the most
important environmental  regulations for agriculture/ not only of the
traditional  registration and use regulations/ but also of new
regulations  requiring health and safety precautions for farmworkers
using pesticides/ controls on the use  of pesticides in areas with
vulnerable groundwater or near targeted estuaries/ and restrictions
on the use of  pesticides that threaten endangered species.  In
addition/, other proposed and forthcoming environmental programs
affect agriculture.  These include the banning of lead in the
gasoline used  in farm vehicles/ the control  of stormwater and other
runoff from  agricultural lands/ restrictions on agricultural
burning/ standards for the operation and repair of underground
storage tanks  containing petroleum and chemicals/ and the reporting
of toxic chemical use.

This study examined the  cumulative impact of recent and proposed
future environmental regulations on the financial condition of farms
in the United  States.  The regulations included in the analysis are
those that have been undertaken since  1982 or are anticipated to
occur by 1992/ and have  a direct impact on agriculture.  The primary
goal of the  study is not to  determine the aggregate total cost of
EPA actions  on agriculture,  but to examine the impact of these
actions on .the profitability of U.S. farms and their ability to
survive.  Because of the complexity of the agricultural sector and
'the many uncertainties that  still accompany  the new environmental
programs/ this study has had to limit its focus to a few
"representative" farm types  and has had to make many assumptions
about future environmental requirements.  Accordingly/ the study
cannot be considered to  cover all potential  agricultural impacts or
to present the final word on future environmental programs.  It
does/ however/ describe  the  kinds of impacts that may occur and
estimates the  range of potential impacts upon a group of farms that
are likely to  experience relatively large environmental costs.

For livestock.and major  field crops/ three specific farm types were
examined: (1)  an Illinois corn soybean farm/ (2) a Mississippi
cotton soybean farm/ and (3) a Kansas cattle wheat farm.  For
specialty crops/ six crops were selected; apples/ tomatoes/
potatoes/ peas/ caneberries  (e.g./ raspberries/ blackberries/ etc.)/
and peanuts.   There proved to be insufficient information to
complete the analysis for caneberries and peanuts, however, so that
results are  available only for apples/ tomatoes/ peas/ and potatoes.
The difficulty in obtaining  information about producers of specialty
crops was itself a significant finding of the study.

Three regulatory scenarios of future EPA actions were considered in
the agriculture sector study/ ranging from a conservative (low cost)
scenario to  an expansive (high cost) scenario.  In addition/ two
                                  iv

-------
 alternative levels of effects were considered for each of the farms
 that were examined.  In an average impact case it was assumed that
 the farm would incur the average environmental costs of all farms of
 that type and in a.maximum impact case it was assumed that the farm
 would incur all of the environmental costs that a farm of that type
 might face.  The maximum impact cases represent very unlikely worst
 cages,  but provide an upper bound on the potential losses under each
 regulatory scenario.

 For the three types of major field crops and livestock farms
 examined in this study/ the effects of EPA actions on farms in
 different financial conditions were considered.  The loss in income
 incurred by farms in average financial condition under the average
 impact  case (average environmental costs) was 3 percent or less
 under each of the regulatory scenarios considered.  Losses of this
 magnitude resulted in only very small changes in these farms' debt
 to asset ratios (less than 1 percent).  Under the unlikely maximum
 impact  cases/  farms in average financial condition experienced
 substantial losses in income/ but were not forced out of business as
 a result of EPA actions.

 The major field crop and livestock farms in vulnerable condition
 were more sensitive to increased environmental costs than their
 counterparts in avefage financial condition.  Although the absolute
 reduction in income was similar for farms in vulnerable and average
 financial condition under each scenario/ these losses resulted in
 much larger changes in the vulnerable farms' debt to asset ratios.
 Even though the vulnerable farms'! financial conditions were found to
 deteriorate more than the farms,in average financial condition/ only
 one of  the vulnerable farms was predicted to go out of business
 during  the forecast period (1987-1996).   The Kansas wheat cattle
 farm in vulnerable financial condition was predicted to go out of
 business even without any environmental costs and was predicted to
 go out  of business one year earlier than it otherwise would have
 under one of the regulatory scenarios considered.

 Because of limited data availability/ the study did not forecast
 losses  in income or changes in debt to asset ratios for specialty
 crop farms.  Instead/  it examined changes in net returns per acre
 (which  reflect returns to land and farmer provided labor).   Under
 the least costly regulatory scenario/ the changes were generally
 less than 1 percent for farms experiencing average environmental
 costs and less than 8 percent for even the maximally affected farm.
 Under the most costly regulatory scenario/  however/  losses of the
 average impacted producers increased substantially/  particularly for
 apple producers in New York and Michigan, where predicted losses
 were 60 percent and 84 percent respectively.  These dramatic
 decreases in net returns may bring about substantial structural
 changes in the production and market for the crops affected.  Large
 differences in the impact of EPA regulations on crops grown in
 different regions occurred because some of the proposed restrictions
.involve pesticides that are used in some regions and not in others.
 Even though the results of this study must be considered

-------
preliminary, these figures show that EPA actions could create
economic problems for .some specialty crop farms and suggest that the
Agency exercise caution in this area.

The agriculture sector study illustrates the advantages of examining
the impacts of environmental regulations at the farm level as well
as at the aggregate national level.  While national analyses provide
useful information concerning the total losses incurred by different
aggregate types of farmers (e.g., corn farmers as a whole), the
impact of environmental regulations on farms' financial conditions
depends on the distribution of those losses among farmers and on the
initial financial conditions of the affected farms.  In order to
determine the effect of EPA regulations on the ability of farms to
survive, both aggregate and farm level analyses are necessary.

This study highlights the data and analytical requirements necessary
to determine the impacts of EPA actions on agriculture.  Such
requirements include accurate pesticide usage and efficacy data/
improved national commodity price-quantity models/ and better
information on the financial and production conditions of. farmers.
Limitations in data modeling capability are currently much more
severe for specialty crops than for livestock and major field crops
and EPA is seeking improvements in this area.  The importance of
improving data and modeling capabilities is likely to increase in
the future as EPA tries to cost-effectively reduce environmental
risks associated with agriculture..
                                 vi

-------
                      AGRICULTURAL SECTOR STUDY

Environmental regulations affect farms in the United States in many
ways.  Traditionally, the most important of these regulations have
been those that restrict, and in some cases prohibit/ the use of
certain pesticides.  Pesticides will continue to be the subject of
the most important environmental regulations for agriculture/ not
only of the traditional registration and use regulations, but also
of new regulations requiring health and safety precautions for farm
workers using pesticides/ controls on the use of pesticides in areas
with vulnerable groundwater or near targeted estuaries/ and
restrictions on the use of pesticides that threaten endangered
species.  In addition/ other proposed and forthcoming environmental
programs affect agriculture.  These include the banning of lead in
the gasoline used in farm vehicles/ the control of storm water and
other runoff from agricultural lands/ restrictions on agricultural
burning/ standards for the operation and repair of underground
storage tanks containing petroleum and chemicals/ and the reporting
of toxic chemical use.

This study examined the cumulative impact of recent and proposed
future environmental regulations on the financial condition of farms
in the United States.  The regulations included in the analysis are
those that have been undertaken since 1982 or are anticipated to
occur by 1992, and have a direct impact on agriculture.  The primary
goal of the study is not to determine the aggregate total cost of
U.S. Environmental Protection Agency's (EPA) actions on agriculture/
but to examine the impact of these actions on the profitability of
U.S. farms and their ability to survive. ' Because of the complexity
of the agricultural sector and the many uncertainties that still
accompany the new environmental programs/ this study has had to
limit its focus to a few "representative" farm types and has had to
make many assumptions about future environmental requirements and
other factors that may affect the financial conditions of farms/
such as farm support programs under the Food Security Act.
Accordingly/ the study cannot be considered to cover all potential
agricultural impacts or to present the final word on future
environmental programs.  It does/ however/ describe the kinds of
impacts that may occur and estimates the range of potential effects
upon a group of farms that are likely to experience relatively large
environmental costs.

AGRICULTURE AMD ENVIRONMENTAL REGULATIONS

There are a number of environmental and health hazards that may be
associated with agricultural production.   These include:

1.   Surface Water Pollution
     Water running off farm lands may carry soil particles/
     pesticides/ and animal wastes into the surface waters.

-------
 2.    Groundwater Pollution
      Pesticides and sewage sludge applied to fields  and crops/
      as well as petroleum and chemicals  from leaking
      underground storage tanks/  may seep into the groundwater.

 3.    Air Pollution
      Air pollution problems may  result from agricultural burning
      practices  and from the use  of leaded gasoline powered trucks/
      tractors and combines.

 4.    Worker Exposure
      Farm workers who handle pesticides  may be exposed to the
      harmful effects of these chemicals.

 5.    Endangered Species
      Endangered species may be exposed to the harmful  effects
      of pesticides applied to fields and crops in their
      habitat.   Another threat is a reduction in their  habitat
      caused by  agricultural expansion.

 6.    Dietary Risk
      Pesticide  residues may remain on agricultural products
      that reach the consumer.

Pesticides play  a  role  in most of these hazard pathways  and are a
critical  focus of  the environmental  regulations that affect
agriculture.  Every pesticide must be registered with EPA's Office
of Pesticide Programs  (OPP).  OPP reviews the. health/ safety/ and
environmental effects of these pesticides and/ from time to time/
issues  regulations that restrict or prohibit the use of  certain
pesticides that  are  judged  to present an unreasonable adverse
affect.   EPA also  issues regulations controlling the operation and
repair  of underground storage tanks/ and many  other agricultural
activities that may present environmental hazards.

These regulations  affect both large and small  farms in the U.S.
Restrictions on the use of  certain pesticides may  require the
substitution of more expensive pesticides and/or may reduce crop
yields.   Other environmental regulations may impose extra'operating
costs or  may require additional investments in land preparation or
farm equipment.

The ability of farms to comply with these environmental regulations
will depend not only on the costs of each regulation and the effects
of the  required activities  on agricultural yields/ but also on the
financial condition of each farm/ the market conditions at the time
the regulations become effective/ and the number of farms that are
covered.  While some environmental regulations apply to all farms/
most apply to only a portion of all farms/ such as those that use a
certain pesticide or have underground storage tanks.
Although the average net farm income in 1984 was identical to that
in 1971 — $12/000 in constant 1986 dollars — the financial
condition of U.S. farms has fluctuated dramatically over the past

-------
 two decades.   Higher prices/  expanding exports,  and low real
 interest  rates combined in the early 1970s  to produce  not  only
 record farm incomes  ($25/300  average in 1973)/ but  also a  rapid
 expansion in agricultural  production.   Unfortunately/  these trends
 all reversed in the  early  1980s.   Prices declined/  exports
 decreased/  and interest rates rose at  an unprecedented rate.
 Average net farm income fell  to a  low  of $10/200 in 1981 and did not
 surpass the $12/000  level  until 1985.   Declining incomes led to
 declining farmland values  and increasing debt-asset ratios.
 Recently/  this trend has begun to  change.   Decreased production
 expenses/  increased  government payments/  and lower  interest rates
 have allowed net incomes to rise to an average of $14/000  and have
 slowed the decline in farmland values.   The average debt-asset level
 in  1987 is expected  to show a decline  from  1986.

 Trends.for the average farm may belie  significant differences within
 farm size categories and types.  During the 1982-1985  period/  farms
 specializing in vegetables/ melons/  and other specialty crops
 enjoyed average incomes of $60/000 per year.   These farms/  however/
 account for only a small portiqn of all farms.   Farms  producing cash
 grain/  tobacco/  cattle-sheep-and-hogs/  general livestock,  and animal
 specialties all had  average incomes of less than $10/000 per year.
 These farms account  for 70% of all farms and nearly 50% of farm
 marketings.

 The financial condition of a  farm/  and hence its ability to comply
 with environmental regulations/  may vary dramatically  even within
 size categories and  types  of  farms.  For example/ a study  of the
 financial characteristics  of  U.S.  farms in  1985-1986 showed 55% of
 all commercial farms were  in  a favorable financial  situation,  while
 39% were  in a marginal situation/  and  3% were financially
 vulnerable.

 STUDY METHOD AMD LIMITATIONS

 This study consists  of an  in-depth examination of the  cumulative
 impact of environmental regulations on selected  livestock,  major
•field crop,  and specialty  crop producers.   The approach of examining
 only a limited set of producers  was chosen  because  the primary goal
 of  determining the cumulative impact of EPA actions on the financial
 condition of  producers requires  an extensive  amount of data
 collection and analysis.   The approach followed  in  this study is
 summarized as follows:

      1.   Define alternative  scenarios of EPA policies.
      2.   Select a subset  of  livestock, major field crop,  and
           specialty crop producers for analysis.
      3.   Obtain cost and  yield change information  from EPA Program
           Offices.
      4.   Estimate price changes resulting from EPA actions (under
           each scenario) for  each of the selected crops and
           livestock.
      5.   Define "impacts" for selected producers.

-------
      6.    Examine the change in the financial condition of selected
           producers under each scenario.

Definition of Policy Scenarios

Because it is difficult to predict  future EPA decisions  for many
regulations, the  study examined three alternative scenarios
corresponding to  a  range of potential policies.  The scenarios can
be summarized as  follows:

      SCENARIO  1:     Past and current EPA actions plus a conserva-
                     tive  (low cost) set of assumptions  about future
                     actions.

      SCENARIO  2:     Past and current EPA actions plus an  inter-
                     mediate  (mid cost) set of assumptions about
                     future actions.

      SCENARIO  3:     Past and current EPA actions plus an  expansive
                      (high cost) set of assumptions about  future
                     actions.

Past and current  EPA actions that were included in each  scenario
are:

      EDB - cancellation,
      Toxaphene  -  cancellation,
      Dinoseb -  cancellation/
      SARA Title III,
      Leaking Underground Storage Tanks,
      Farm Worker  Protection  Standards,
      Chlorodimeform - cancellation  of yield enhancement,
      Alachlor  - restricted use.

The scenarios also  include alternative assumptions (high, mid, and
low cost)  about EPA actions in the  following areas:

      Fungicides
      Corn Rootworm  Insecticides
      Broad Spectrum Organophosphates
      Grain Fumigants
      Pesticides in  Groundwater Strategy
      Lead in Gasoline Phaseout

Detailed information concerning the assumptions about future
policies made under each scenario are provided in Appendix A.  The
scenarios in this study include only direct impacts of federal EPA
actions.  Indirect  impacts, such as effluent regulations on
pesticide manufacturers, may result in increased costs to farmers,
however, it was beyond the scope of this study to determine the
extent to which higher production costs incurred by agricultural
input industries would be passed on to farmers in the form of higher
input costs.   Environmental protection actions which may be taken at

-------
the state level are also not: considered in this study.  Finally,
this study does not account for voluntary actions taken by farmers
(e.g., voluntarily ceasing to use a pesticide prior to
cancellation).

Crop and Livestock Selection

A crucial step in this study was determining which producers to
focus on.  An effort was made to include those producers who were
likely to experience relatively large impacts under the alternative
policy scenarios considered.  The cases that are examined,
therefore, provide a variety of impact levels, but include worst
case examples.  The selection of livestock and major field crop
producers was enhanced by the availability of an econometric
simulation model, AGSIM, that indicated which crops and livestock
were likely to be most affected.  For livestock and major field
crops, three specific producer categories were examined.  Since the
ability of any given type of producer to survive cost and yield
affects associated with EPA actions is a'function of his initial
financial condition, two alternative financial conditions were
examined for each of the livestock and major field crop producers
considered:

     *     the average  financial condition  of all producers  of the
           commodity and region  considered,  e.g.,  the average of all
           Illinois  corn soybean farmers, and

     *     the average  financial condition  of all producers  of the
           commodity and region  considered  that  are  in a "vul-
           nerable"  financial  position.  Vulnerable  producers are
           defined as those  that have  debt  to asset  ratios greater
           than 0.4  and have a negative  net cash income.

This resulted in the examination of six different representative
livestock and major field crop farms:

     * Illinois Corn Soybean Farm
           -  in average.financial condition
           -  in vulnerable financial condition

     * Mississippi Cotton Soybean Farm
           -  in average financial condition
           -  in vulnerable financial condition

     * Kansas Cattle Wheat Farm
           -  in average financial condition
           -  in vulnerable financial condition
The selection of specialty crops was more difficult than the
selection of livestock and major field crop producers since
specialty crop production is more diverse and information on
pesticide usage is much more limited than for major field crops. In
addition, no information was available on the initial financial

-------
condition of specialty crop producers.  Through discussions with
staff at EPA'3 Office of Pesticide Programs, the following set of
specialty crops was selected:

      *  apples,
      *  tomatoes  (fresh and processing treated  separately),
      *  peas/
      *  potatoes,
      *  peanuts/  and
      *  caneberries.

Analyses were not completed on peanuts and caneberries due to data
acquisition problems.

Obtaining Crop and Yield Effects

The EPA Program Offices provided information on the cost and yield
effects  (by crop and by region) that were expected to result from
each individual action considered.  In addition/ they estimated the
percent of farms of a particular type and region that were expected
to incur each of the effects.

Estimation of Price Changes

EPA actions may increase fixed and variable costs/ decrease yields/
and affect production decisions.  These impacts may in turn be
translated into commodity price changes.   Failure to account for
these price changes would result in overestimation of the impact of
EPA actions on farmers who bear the initial cost of EPA policies and
would overlook the potential gain to producers who are not directly
affected by EPA actions.

In order to estimate the price changes that might occur due to the
impact of EPA actions on livestock and major field crop producers/ a
regional econometric-simulation model/ AGSIM, was utilized.  AGSIM
includes eight major field crops and five types of livestock.  The
effects of EPA policies are entered into AGSIM as per-acre cost and
yield changes for each crop in each of ten United States Department
of Agriculture (USDA) production regions.  A more detailed
description of AGSIM is provided in Appendix B of this report.

A national price-quantity model developed by Erik Lichtenberg/
Douglas Parker and David Zilberman was utilized to estimate price
changes due to the impact of EPA actions on specialty crop
producers.  This model is much more limited than AGSIM.  It does not
account for variation in impacts among different regions (only one
national production cost change is used/  which represents a weighted
average of individual regional impacts).   It also does not account
for impacts on substitute crops that are not affected directly
(e.g./ a regulation that increases the price of broccoli may in turn
increase the demand for,  and price of/ cauliflower).   A more
detailed description of the national price-quantity model used for
specialty crops is provided in Appendix C.

-------
Defining "Impacts" for Selected Producers

Since we are simultaneously examining the effect of several EPA
policies, a fundamental issue to be determined, was:  how is an
"impacted" farmer defined?  For example, an Illinois corn soybean
farmer may be affected by the cancellation of several different
pesticides, may incur insurance costs if he has an underground
storage tank that meets certain criteria, and may incur an expense
to rebuild his leaded gasoline tractor engine if all lead is banned
from gasoline.  How many of these potential costs do we assume the
"impacted" farmer incurs?  For each producer, two alternative sets
of financial impacts were examined:

       *   Maximum Impact  Case;   This  case  assumes  that  the producer
           is  impacted by  every  regulation  that  may possibly  affect
           a producer  of that  type.

       *   Average Impact  Case;   This  case  assumes  that  the producer
           experiences the average  impact of  producers of  that
           type  -  e.g., if 10  percent  of all  producers of  a given
           type  (such  as Illinois corn producers) experienced a  cost
           of  $1000, we would  utilize  a  $100  cost  ($1000 x 0.1)  for
           the average impact  case.

Estimation of Financial Effects on Selected Producers

In order to examine.the effect of EPA policies on the selected
producers of major field crops and livestock, a whole farm recursive
programming simulation model of representative producers,  REPFARM,
was used (see Appendix D for a description of REPFARM).   A REPFARM
model for each of the selected producers was developed by USDA.   The
REPFARM models were simulated over the 1987-1996 period, using the
average and maximum cost and yield impacts for each policy scenario
and the scenario specific prices derived from A6SIM.  The effect of
EPA policies on each of the representative farms'  financial
condition was determined by examining:

     * the change in net cash farm income I/, and
     * the change in debt to asset ratio.

This examination provides  information on the effect of EPA actions
on the producers'  income and ability to survive.  It is  assumed that
a farm goes out of business when its debt to asset  ratio reaches one
— i^e.,  its level of debt is equal to its  assets.
I/   Net cash farm income is defined as cash farm income minus farm
     expenses.  It includes both property tax payments and income
     from government programs.  It does not include depreciation of
     machinery and buildings or off-farm income.

-------
 There  is only  limited  information on the baseline  financial
 conditions of  specialty crop producers.  Therefore, our ability to
 determine the  impact of EPA actions on their  financial condition  is
 more limited than  for  livestock and major field crop producers.   The
 impact of EPA  actions  on  specialty crop producers  was estimated by
 examining the  change in net returns per acre  for producers in
 different production regions.  Net returns/ for the purposes of this
 report/ consist of all farm income minus all  farm  expenses/ with  the
 exception of non-hired labor and land/ on a per acre basis.  Net
 returns per acre/  therefore/ reflect the return to land and farmer
 provided labor.

 Budget information was collected for each of  the selected specialty
 crop producers in  several different production regions to establish
 a baseline level of net returns.  The specialty crop budgets for
 each region were then  projected over the 1987-1996 period using the
 average and maximum impacts for each region under  each policy
 scenario along with the scenario specific prices (determined by the
 national price-quantity model).  This projection provides
 information on the change in net returns per  acre  for producers in
 different regions  under each policy scenario  (see  Appendix E).

 Study Limitations

 The complexity of  the  agricultural sector/ the uncertainty
 associated with many environmental regulations/ and data and
 modeling limitations necessitated the use of  many  simplifying
 assumptions.  Each of  the study's major limitations is discussed  in
 more detail below.

 Examination of a Limited Number of Commodities

 As discussed above/ data and analytical requirements associated with
 the objectives of  this study necessitated choosing a limited set  of
 commodities to examine.  Producers of crops not considered in this
 report will experience different levels of impacts; however/  an
 effort was made to include producers that are expected to experience
 relatively large impacts.

 Limited Information About Producer Baseline Conditions

 In addition to EPA actions that will affect different crops to
 varying degrees/  producers of the same crop will also be affected to
 varying degrees depending on their:   (I)  geographic location (e.g./
 different regions use different pesticides)  and (2) baseline
 production and financial characteristics.   Marginal producers may be
 forced out of production/ while producers in more  favorable
 financial condition will be able to withstand greater impacts.
 Information on the initial financial condition of the representative
 livestock and major field crop producers was  available.   However/
 numerous assumptions about future prices/  government policies/
 interest rates/ and cost and yield trends affect the baseline
projections (predicted under the assumption of no EPA policy

-------
 impacts)  of net cash farm income and debt  to asset  ratios obtained
 from the  REPFARM models.   If these assumptions result  in an
 overestimate of the financial strength of  the representative farms
 in the baseline/  then we'will overestimate the ability of producers
 to survive in the face of EPA actions.  Likewise,  if these
 assumptions result in an  underestimate of  the financial strength of
 the farms, then we will underestimate the  ability  of producers to
 bear the  costs of EPA actions.   More information about the specific
 assumptions used in the REPFARM model is supplied  in Appendix D.

 Sensitivity analysis reveals that assumptions about crop yields and
 future crop prices have a large effect on  the REPFARM  model results.
 For example/  upper and lower sensitivity runs were  made assuming
 that prices were 15% higher and lower respectively  in  the years
 1991-1996.  The resultant estimates of net cash farm income in the
 upper sensitivity runs were double those in the lower  sensitivity
 runs.   This analysis illustrates the sensitivity of the results of
 this study to critical assumptions/  and helps to place the magnitude
 of the predicted effects  in perspective relative to the other
 factors that influence farms'  financial health.

 Only limited information  was available on  the baseline financial
 conditions of specialty crop producers. Crop enterprise budgets for
 the selected specialty crops were collected from the Agricultural
 Extension Service in major producing states/ which  provided
 information necessary to  calculate the net returns  per acre for each
 crop/region examined.   However/  information on the  debt to asset
'ratios of specialty crop  farmers,  or their total net farm income was
 unavailable.   The limited information;on baseline  financial
 'conditions makes it difficult to determine whether  the EPA actions
 assumed in alternative scenarios would actually cause  the specialty
 crop producers examined in this study to go out of  business.

 Uncertainty about Future  EPA/  and other Government  Agency Actions

 In order  to complete this study/  it was necessary to make
 assumptions about what actions EPA might take in the next five
 years. There is obviously a tremendous amount of uncertainty about
 which actions will be undertaken in the future.' This  study does not
 presume to accurately predict future actions of the Agency.  Rather,
 it attempts to define a range of impacts that correspond to a
 plausible range of future policy scenarios.

 In addition/  this study does not account for possible  indirect
 impacts on agricultural producers (through regulation  of
 agricultural input industries)  and does not account for actions
 taken at  the state level.   To the extent that state actions further
 increase  production costs or decrease yields/  failure  to account for
 these actions results in  an underestimate  of the direct effects on
 farms due to environmental and health concerns. State actions may
 be especially significant for the livestock industry,  which is a
 major source of nonpoint  source (NFS)  pollution.  Under legislation
 passed in February,  1987,  states were given grants  to  assess the

-------
magnitude of the NFS problem and to develop management plans/ which
are due at EPA by August 1988.  State actions in the NFS area/
however/ are not accounted for in this analysis.  This omission may
be particularly significant, for the.KS wheat cattle farm.

Another potential bias created by not modeling state level actions
occurs in.the Pesticide in Groundwater Strategy.  In this analysis/
federal Pesticide in Groundwater Strategy actions were assumed.  In
reality, states may take action on their own, circumventing federal
level action.  If state actions are less severe than the federal
level actions assumed in this analysis, then these results may tend
to overestimate the magnitude of the Pesticides in Ground-water
Strategy.

Finally, this study does not account for possible changes in USDA
policies in response to income losses generated by EPA actions.
Agricultural programs may tend to cushion the effects of EPA
regulations.  For example, crop insurance would protect farmers from
the losses caused by removal of important pesticides during periods
of infestation.

Uncertainty About the Incidence and Magnitude of EPA Impacts

Once a policy scenario is defined/ predicting which producers will
be impacted requires an extensive amount of information.  For
example, if a particular pesticide is to be canceled, detailed usage
data is required to predict which producers Will be affected.
Pesticide usage data for major field crops are available at state
and multi-state production region levels (based on statistically
valid samples collected by USDA and other sources).  However/ these
data are not reliable at a county level.  This created problems in
predicting the impacts of the Pesticides in Groundwater Strategy/
since this program was assumed to result in county specific
pesticide cancellations.  Data provided by a contractor were used to
determine the incidence of Pesticides in Groundwater actions.
However/ this data base is composed of information drawn from
available reports and expert opinions of local Cooperative Extension
Service personnel and is not based, on a statistically valid sample.

Predicting the incidence of EPA actions on specialty crops is
especially difficult because there is less information about
pesticide usage on these crops than on major field crops.  Much of
the specialty crop pesticide usage data utilized in this analysis
were derived from private data collection agencies (e.g., Doanes)
that do not provide information on the sampling techniques utilized
in collection.  The lack of reliable pesticide usage information for
specialty crops severely limits the reliability of conclusions drawn
in this study.  A more detailed discussion of the data and
assumptions used in this analysis is provided in Appendix F.

In addition to knowing what types of producers are likely to be
affected by each EPA action/  it is important to determine the extent
of the impact.  For a pesticide cancellation/ this requires knowing


                                 10

-------
what  alternative will be used  in place of the cancelled pesticide
and what cost  and/or yield variations the user will experience with
this  alternative.   These efficacy data are not always readily
available/  and are  based primarily on expert judgement rather than
on  models of farmers' responses to regulations and the resulting
crop  and yield effects.  The lack of reliable efficacy data
increases the  uncertainty associated with predicting impacts of EPA
actions.  Furthermore/ there was not sufficient information to fully
account for changes in quality (e.g./ size/ shape) brought about by
restrictions of pesticides.

Finally/ effects of pesticide  cancellations were projected to
dissipate evenly over a seven  year period as users adjust their
practices and  new pest control products become available.  The use
of  an arbitrary assumption of  this type was necessitated by the lack
of  a  reliable  method to predict the development of substitute pest
control products and the adjustment in agricultural practices over
time.  Clearly this assumption may overestimate the adjustment
process for some cancellations and underestimate it for others.
Some  commodities/ such as apples and oranges/ are less able to
adjust to pesticide cancellations through the use of more pest
resistant species due to the long term structure adjustment problem
associated  with tree removal and replacement.

Model Assumptions

In  addition to assumptions about the incidence and magnitude of
'impacts/ the models themselves utilize assumptions that affect the
results.  For  example/ the assumptions about elasticities of supply
and demand  that are used in the national price-quantity models are
crucial in  determining the extent to which EPA impacts are passed on
to  consumers in the form of higher prices.  Elasticities are often
listed as a range of numbers and are for a wide category of crops
rather for  a specific crop.


RESULTS OF  LIVESTOCK AMD MAJOR FIELD CROP IMPACT ANALYSES

As  previously  discussed/ the change in the financial condition of
selected livestock  and major field crop producers was examined using
USDA's REPFARM model.  Changes in financial condition are measured
by  changes  in  net cash farm income and changes in debt to asset
ratios that are caused by EPA  actions under each of the three
scenarios.  Assumptions about  initial characteristics of the
representative  producers along with the cost and yield effects
assumed for each EPA action are presented in Appendix D.

All of the  different farm types and level of impacts that were
considered  in  our analysis resulted in 36 sets of output;
therefore/  all  the  results are not presented in this report.  Only
the results of  Scenarios 1 and 3 for the farms in average financial
condition are presented here.  These results provide a range a
impacts that are predicted for the case study farms in average
                                  11

-------
financial condition.  A brief discussion  is provided  as to  how  the
results for the farms in vulnerable  financial condition differ  from
those in average financial condition.   In viewing these results it
should be recognized that many  factors  influence the  financial
condition of a farm.  Accordingly/ the  actual impact  that the EPA
policies considered in this study would have on any particular  farm
may differ from the results presented here.

Illinois Corn Soybean Farm

There are 30/837 farms in Illinois that are classified as cash  grain
farms that produce corn and soybeans.   Survey observations  of these
farms were used to develop the  baseline characteristics of  the
Illinois corn soybean REPFARM in average  financial condition  (See
Appendix D for a description of baseline  characteristics of each
REPFARM model).  There are 112/489 farms  in the five  state  Cornbelt
region (Iowa/ Illinois/ Indiana, Missouri/ Ohio) that fit the corn
soybean farm definition.

Illinois Corn Soybean Farm in Average Financial Condition

SCENARIO 1

Figures 1-a and 1-b indicate the net cash farm income and debt  to
asset ratios/ respectively/ of  the representative Illinois  corn
soybean farmer (average financial condition) under Scenario 1.  The
maximum impact case (which.assumes the  producer incurs, all  possible
cost and yield impacts) results in a mean annual decrease in net
cash farm income of $2/900.  This represents an eight percent
average annual decrease from the baseline.  The mean decrease under
the average impact case (which  assumes  the producer experiences the
average costs and yield impacts of all  similar producers)/  however/
is significantly less at $270,  or less  than one percent of  the
baseline net cash farm income.  The substantial gap between the
average and maximum impact cases is due primarily to the underground
storage tank regulation.  The costs associated with this regulation
are substantial/  yet only a small percentage of farmers are
affected. 2/

A reduction in net cash farm income due to EPA policies may result
in increases in farmers' debt to asset  ratios in two ways:  (1) it
decreases the return to land and/ therefore, the value of land
(which is the primary component of farm assets)  and (2) it  may cause
farmers to borrow funds if they are put into a position of  negative
21   Farmers having a petroleum underground storage tank  (>1100
     gallons) were assumed to incur  $2500/yr.  insurance cost  (1988-
     1996) and a $500 charge in 1991 and  1994  for  a tank  tightness
     test.  No costs were included for remedial action and  it was
     not assumed that any farmers would remove their USTs.
                                  12

-------
                   Illinois Corn Soybean Farm: Scenario 1
a.
 CO
 CO
 o>
 0)
 E-3T
.
 C CO
— OT
 ii
 CO
 CO
 O
 <5
b.
O
•s
£
S
CO
 CD
 O
           45
           40
          35
          30
           25
                                                                  Average
                                                                  Maximum
                                                                   Base
                                           Average annual change (1987-1996):
                                              Average Impact Case:  $-270 (-0.8%)
                                              Maximum Impact Case:  $-2,900  (-8%)
                1987    1989     1991     1993    1995
                    1988    1990   ' 1992     1994    1996

                                    Year
         0.45 r-
          0.4
         -0.35
          0.3
         0.25
          0.2
                                          Average annual  change (1987-1996)
                                             Average Impact  Case:  <0.1?;
                                             Maximum Impact  Case:     1%
               1987    1989     1991     1993     1995
                    1988    1990    1992     1994    1996

                                    Year
          Figure 1.  EPA impacts on net cash  farm income and debt asset
          ratio for a representative Illinois corn soybean farm in average
          financial condition:  Scenario 1
                                        13

-------
 cash  flow.  The debt to  asset  ratio  in  each REPFARM model may be
 viewed as an  indicator of the  producer's ability to survive.
 Producers are assumed to go out of business when their debt to  asset
 ratio equals  one.  As seen in  Figure 1-b, the maximum impact case
 results  in a  very slight increase in debt to asset ratios under
 Scenario 1  (one percent) while no significant change in the debt to
 asset ratios  occurred for the  average impact case.

 SCENARIO 3

 Under the expansive set  of EPA actions  (Scenario 3) the maximum
 impact case results in an average annual decrease in net cash farm
 income of $9,200  (Figure 2-a)  and an average annual increase in
 debts to assets of two percent (Figure  2-b).  These substantial
 impacts  are due primarily to assumptions about restrictions on  the
 use of alachlor, triazines and corn  rootworm insecticides.  The
 average  impact case, however,  results in an increase in average
 annual net cash farm income.   This occurs because the larger cost
 and yield changes incurred by  affected  corn and soybean farmers
 under Scenario 3 reduced production  levels and raised corn and
 soybean  prices.  These higher  prices more than offset the cost  and
 yield impacts assumed in the average impact case.  The average
 annual increase in net cash farm income for the average impact  case
 is $4,800 <14 percent increase from  the baseline).  This results in
 a slight improvement in  the debt to  asset ratio.

 The large difference between the results in the average and maximum
 impact"cases highlights  the' importance of understanding the
distributional implications of EPA policies.  Because initial price
 and yield impacts are not distributed evenly among farms, producers
will experience different financial  impacts.  In cases where EPA
actions  result in commodity price increases, farmers who experience
relatively small crop and yield effects may actually benefit from
the policies.  In order  to provide more insight into the
distribution of cost and yield impacts expected under alternative
scenarios,  a cumulative  probability  cost curve was generated for
each of  the representative producer  in average financial condition
under each scenario.  These curves indicate the probability that
each representative farm will  incur  a cost less than or equal to a
given level.  (See Appendix G  for a  complete description of these
curves).   The discounted present value of the cost and yield impacts
 (1987-1996)  incurred under the maximum impact case in Scenario  3 is
over $60,000.  However,  Figure 3-b indicates that under Scenario 3
the representative Illinois corn soybean farm in average financial
position has a .7 probability  of incurring discounted present cost
and yield impacts (1987-1996)   that are less than $23,000; and a .5
probability of incurring impacts of  less than $5,000.   The
cumulative probability cost curves illustrate that the maximum
impact cases described here represent a set of very unlikely worst
cases.   The average impact cases presented in this section provide
insights  into the financial effects that each of the representative
farms examined would have a significant chance of incurring.   As
indicated in Figure 3-b,  under Scenario 3 the representative


                                 14

-------
Illinois Corn Soybean Farm: Scenario 3
a.
CO-
CO
CO
O)

-------
a:
i
ILLINOIS CORN SOYBEAN FARM: SCENARIO 1
AVERAGE FINANCIAL POSITION
12
• 9 10
(Thousand*)
DISCOUNTED PRESENT COST (1887-1898)
14
Kul
l*UCt

US*
ILLINOIS CORN SOYBEAN FARM: SCENARIO 3
AVERAGE nNANQAL POSITION
20 4O
(Thousand*)
DISCOUNTED PRESENT COST (1807-1899)
Anrtg*
Cut
Figure 3. Cumulative probability cost curves for a repre-
sentative Illinois corn soybean farm in average financial
condition: Scenarios 1 and 3
16
-------
Illinois corn soybean farmer has a .45 probability of incurring cost
and yield impacts that are greater than those corresponding to the
average impact case and a .55 probability of incurring cost and
yield impact less than those in the average impact case.

Illinois Corn Soybean Farm in Vulnerable Financial Condition

Results for the Illinois corn soybean farm in vulnerable financial
condition are presented in Appendix D and are only summarized
briefly here. Of the 30,837 Illinois corn soybean farms,
approximately ten percent were determined to be in vulnerable
financial condition. Survey observations on this group of farms
were used to develop the characteristics of the Illinois corn soy-
bean farm in vulnerable financial condition.

The absolute decrease in net cash farm income for the vulnerable
farm under each scenario is approximately the same as the decrease
experienced by the farm in average financial.condition, however, the
percentage reduction is greater because the base income level of the
vulnerable farm is much less than that of the average farm (an
annual average of $550 as opposed to $35,000). Likewise, the change
in net cash farm income experienced by the vulnerable farm has a
greater impact on its debt to asset ratio (e.g., the changes in debt
to asset ratios for the maximum impact case under Scenario 3 are two
percent and 22 percent for the Illinois farms in average and
vulnerable financial condition, respectively). This result occurs
because the lower base income of the vulnerable farm makes it more
^sensitive to changes in cash flow than its counterpart in average
financial condition.

The difference in results observed for the vulnerable and average
farm highlights the importance of understanding the baseline
financial condition of farms when predicting how EPA actions will
affect their ability to survive. Although EPA actions result in
much greater changes in debt to asset ratios for the vulnerable farm
than for the farm in average financial condition, the vulnerable
farm is not predicted to go out of business, even under the most
expansive sets of EPA actions.

Mississippi Cotton Soybean Farm Results

There are 1,798 farms in Mississippi that are classified as field
crop farms producing cotton and soybeans. Survey observations on
these farms were used to develop the Mississippi cotton soybean
REPFARM in average financial condition. There are 3,576 farms in
the three state Delta region (Mississippi, Arkansas, Louisiana)' that
fit the cotton soybean farm definition.
17
-------
Mississippi Cotton Soybean Farm in Average Financial Condition

SCENARIO 1

The maximum impact case for the Mississippi cotton soybean farm in
average financial condition results in a mean annual decrease in net
cash farm income of $10,700 under Scenario 1 (Figure 4-a). The mean
decrease in net cash farm income under Scenario 1 for the average
impact case/ however, is significantly less at $1,700. The gap
between the average and maximum impact cases occurs because
underground storage tank regulations, and dinoseb and toxaphene
cancellations cause significant costs to impacted producers, but
only affect a small fraction of producers. 3/ For example, only 1.2
percent of the soybean acres in Mississippi are thought to be
affected by the cancellation of toxaphene and less than two percent
of the farms are expected to have underground storage tanks.

Both the maximum and average impacted producers experience increases
in their debt to asset ratios under Scenario 1 (six percent and .6
percent increases/ respectively), yet neither producer is forced out
of business (Figure 4-b).