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Acreage response to government support programs : are supposedly decoupled payments really decoupled?



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The primary objective of this dissertation is to investigate whether Canadian whole farm programs with both income-supporting and income-stabilizing attributes, which are considered as decoupled based on the WTO criterion, are actually decoupled from production. The dissertation began with the review of the existing theoretical and empirical literature on the impact of programs designed to be decoupled payments on acreage response including studies related to the wealth and insurance effects. The review revealed that previous studies lack a detailed theoretical model of how acreage decisions will be affected by stabilizing the farm profit (insurance effect) as well as the higher expected profit (wealth effect). Given the nature of Canadian whole farm programs which attempt to smooth income, to examine the whole farm programs, a model is needed to capture the insurance effect arising from these programs as well as the wealth effect. To address this gap, the theoretical framework developed by Chavas and Holt (1990) was extended, in this dissertation, to incorporate the insurance effect into the farmers' acreage decisions under uncertainty. In particular, by developing theoretical restrictions, which consider the relationship between income stabilization compensated and uncompensated acreage decision functions, the insurance effect emphasized in the literature was explicitly derived within the theoretical model. The acreage allocated to each crop was derived as a function of expected crop profits, elements of the variance-covariance matrix of crop profits, expected total wealth (initial wealth plus market profit), and variance of total wealth. The government payments were incorporated into the model through truncation of the probability distribution of profits. Specifically, the whole-farm programs truncated the total (farm) profit distribution which affected the expected total wealth and variance of total wealth. The theoretical model was then used to develop an empirical model. The econometric model was applied to acreage data in the Canadian Prairies from 1970 to 2006 in order to statistically test if the whole farm programs were really decoupled. The results revealed that coefficients of expected total wealth (wealth effect) and variance of total wealth (insurance effect) were statistically significant in the whole system, which implied the whole-farm programs were production and therefore trade distorting and were not actually decoupled, even if they satisfied the WTO criteria. The statistically significant coefficients for expected total wealth and variance of total wealth variables were then used to simulate the impact of recent whole-farm programs—the Western Grain Stabilization Act (WGSA), the Net Income Stabilization Account (NISA) and the Canadian Agricultural Income Stabilization (CAIS)—on crop choices. The results suggested that the WGSA, NISA and CAIS programs have increased the acreage allocated to spring wheat and peas (through both wealth and insurance effects, although the insurance effect appears to dominate) while they have decreased the acreage for barley (through the wealth effect), canola and hay (through the insurance effect) in the prairie provinces. In general, the size of the wealth effect was quite small, while the insurance effect was always significant. Specifically, the acreage allocated to wheat increased by 7.79 percent on average across Prairies while canola acreage decreased by 8.86 percent under the CAIS. Thus, the empirical results revealed that for Canadian whole-farm programs the impact of the effects related to risk is important. Particularly, the results showed the inherent difficulty in divorcing the stabilization effect received by Canadian whole-farm programs from farmers' production decisions.



Canadian whole-farm programs, Decoupling, Wealth effect, Insurance effect



Doctor of Philosophy (Ph.D.)


Agricultural Economics


Agricultural Economics


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