The president’s proposed federal budget that includes features to reduce government farm program spending would cut net income for U.S. farmers.

While the proposed budget cuts farm spending by $9.8 billion over 5 years, net farm income drops by $7.4 billion over the same time, according to a budget analysis by Food and Agricultural Policy Research Institute (FAPRI). FAPRI economists looked primarily at two proposals: Reducing farm payments by 5 percent and restricting access to government commodity loans, said Pat Westhoff, senior policy analyst at FAPRI. When other provisions of the proposed budget, including extended dairy payments, are added, the total federal spending on farm programs would be cut by a slightly smaller $9.5 billion.

The Bush administration’s estimate of budget savings, prepared by the Office of Management and Budget, was $4 billion dollars over fiscal years (FY) 2006 to 2010. The Congressional Budget Office estimated spending reductions for the same period at $7.5 billion.

FAPRI and USDA use different computer models of the agricultural economy.

During the past 5 years, FAPRI developed a stochastic model, Westhoff said. Instead of looking at a single most likely, or deterministic, trend for yields and prices, a stochastic analysis looks at different ways markets could unfold, under varying weather and other random factors.

“It’s a sure bet that we will not have a ‘normal year’ in agriculture,” Westhoff said. “The way current farm programs operate, a deterministic model that assumes ‘normal conditions’ will underestimate likely farm program spending relative to a stochastic model that looks at 500 ‘what-if’ scenarios.” FAPRI averages stochastic outlooks for its projection.

The FAPRI analysis looked primarily at two budget-cutting features in the proposed federal budget.

“The 5 percent cut in all payments to farmers is straightforward analysis,” Westhoff said. “After payments for a farmer are calculated, the amount is reduced by 5 percent. FAPRI shows this cuts federal outlays by $3.1 billion over 5 years while net farm income drops $2.2 billion.

Loan limits have larger effects on planting decisions. This leads to greater impact on agricultural markets, especially in years of large crop yields and lower prices. The limits in this budget proposal cut farm program outlays by $7.2 billion for FY 2006-2010 and reduce net farm income $5.5 billion for that period.