Elimination of federal farm programs would cost Corn Belt farmers double digit losses in land value.

What would happen to land prices (and cash rents) if public policy cut commodity programs?

Since the 1930s, government farm programs have supported land values above what they otherwise would have been. To the extent that cash rents reflect a landowner's return on his investment, rents have also driven agricultural land values.

More recently, such program supports as loan deficiency payments, direct payments, counter-cyclical payments and conservation reserve rentals have substantially impacted land prices in major farming regions.

By how much? To try to answer that question, two Kansas State University  economists, Terry Kastens and Kevin Dhuyvetter, studied the interaction of agricultural returns, non-agricultural returns and government payments in driving land values in 39 states.

"Competition among farmers ensures that agricultural cash rents reflect returns to land used in production," said Kastens and Dhuyvetter. "And, for many crops, agricultural rents reflect both government payments and returns to production. If land had value only as an input to the farming business, a capitalization rate could be calculated by dividing cash rent by land value."

To compute that capitalization rate, the economists went back to the 1951-72 time period, when land values were largely dominated by farming-only activities. Then, they applied those rates to current cash rents to see what today's land values would have been in an ag-only situation, and by subtracting that figure, to determine how much of current value can be attributed to non-ag features.

The KSU economists did not consider crop insurance programs, but eliminating those subsidies would put additional downward pressure on land values.

Using these calculations, Kastens and Dhuyvetter found that returns from farm production plus income from federal payments dominated land values in most of the Great Plains states. For example, North Dakota's land value would be 86.4 percent of what it is today if there were no non-ag features. Land values in Corn Belt states also are driven primarily by returns to production plus farm payments.

"What percentage of this ag-only value should be attributed to government payments?" asked the economists.

The flip side of that question is: how much might land values drop if government payments were eliminated? This would be partly a result of how much rents are impacted by government payments.

According to the K-State economists, the swath of Plains states from North Dakota to Texas would be hardest hit, with land values falling by 30 to 50 percent without government payments.

The Mid-South (Arkansas and Louisiana) would see similar reductions in land prices. Land values in Corn Belt states and the Southeast would fall by 10 to 30 percent if all federal payments were suddenly eliminated.

This is not likely to happen, at least in the near future. But next year, Congress will begin debating the 2007 Farm Bill, and there is considerable pressure on lawmakers to write a less lucrative version this time around.

Farm legislation is not drafted in a vacuum, and a growing budget deficit makes Congress leery of overspending by too many billions of dollars. The Congressional Budget Office recently estimated the federal government will spend $331 billion more than it takes in this fiscal year— that's down from the $412 budget shortfall projected earlier. But that would still be the third largest deficit ever, and it's a safe bet that Congress will be eyeing the $18 billion in federal supports paid to farmers as one place to axe spending.

Throw in international agitation over U.S. farm supports and trading practices, and it dims the hope that the 2007 Farm Bill will be a repeat of the current farm legislation. For example, last summer Brazil brought a complaint to the World Trade Organization (WTO), protesting U.S. subsidies to cotton growers. And they won. The WTO ruled that U.S. cotton programs distorted world prices by encouraging overproduction. Others now are whining to the WTO about U.S. policies for rice and sugar producers.

Most recently, the WTO sided with the United States in a dispute with Mexico about its barriers to sugar markets. Under pressure from a strong farm lobby, Mexico's government imposed a 20 percent tax on imported corn fructose. At stake is the sugar requirements of Mexico's huge soft drink market, where manufacturers pay about $0.25 per pound for sugar in a world market where the benchmark price is about half that. Disputes like these will be common as nation-state agricultural sectors try to carve market share in a world-wide free trade environment.

So, depending on how the economy in general and the international trade situation influence the 2007 Farm Bill, farm supports may be trimmed substantially. And, along with them, farm land values and cash rental rates.