Mark A. Edelman, James Monke, and Ron Durst
Iowa State University, USDA-ERS, and USDA-ERS, respectively

Various incentives can be used to encourage farmers to save for bad times. In Canada, for example, the government matches farmer deposits and provides interest rate bonuses. In Australia, a relatively new program allows farmers to defer taxes on savings deposits in good years so they can be withdrawn at lower tax rates in poor years. Although the concept has been debated in Congress since 1996, the United States has not yet implemented a specific farmer savings account program. However, such a proposal may emerge in the 2002 Farm Bill debate, or as part of a broader tax package developed by Congress and the Administration.

World trade agreements increasingly discourage trade distorting farm policy payments linked to commodity specific prices and production. Farmer savings account incentives represent one approach to potentially meet the emerging criteria.

Six policy alternatives are outlined in this paper to provide some understanding of the role farmer savings incentives might play in future farm policy. A more detailed comparison of the first four options discussed is included in Table 1. The last two choices discussed include making no change in current policy, and creating a new choice from a combination of options.

Canada implemented a NISA program in 1991. Under the program, a farmer who makes a deposit into a NISA account receives a government matching deposit up to 3 percent of Eligible Net Sales (ENS) -- defined as gross sales of qualifying commodities less purchases of seed, plants, and livestock. The Canadian government also pays a 3 percent interest rate bonus over local bank rates on all farmer deposits.

NISA has two rules for triggering withdrawals. Withdrawals can be made under an "Income Stabilization" trigger when the farmer�s current year "Gross Margin" falls below the farmer�s average for up to five previous years. Gross Margin equals Net Sales from all agricultural commodities, plus income from contract work and machine rental, minus eligible expenses. Gross Margin is roughly analogous to Schedule F Gross Farm Income.

Alternatively, withdrawals can be made under a "Minimum Income" trigger when the farmer�s current net income from all sources falls below a threshold level plus a matchable deposit. The current minimum income trigger is C$20,000 per individual or C$35,000 per family.

Participation in NISA is voluntary. Farmers may voluntarily leave and rejoin under specific rules. Farmers are required to opt out if they quit farming or retire.

• Nearly all farm enterprises are eligible. Canadian incentives induce slightly more than half of Canada�s farmers to participate in NISA.
• Income stabilization capability grows over time. For those with NISA accounts, the 1999 average balance per farm was C$16,000. Since NISA withdrawals are counter-cyclical in nature (can only be made in poor years), farmer payments in good years are less likely to cause public concern.
• NISA payments are decoupled for planting flexibility. Matching payments to farmers are based on self-help and whole farm gross income. Therefore, NISA payments are decoupled from commodity specific production, prices, and planting decisions.
• Government spending can become more stable and predictable. Because spending for matching deposits is spread out over several years, government spending on NISA is less variable from year to year compared to most "pay as you go" counter-cyclical programs.
• Other income support programs are still needed. Subsidized crop insurance and government funded NISA incentives are farm program mainstays in Canada. Canada continues to maintain an ongoing supplemental disaster assistance program.

U.S. proposals for FARRM savings accounts originally surfaced during the 1996 Farm Bill debate, and again reappeared in 1998, 1999 and 2000. Under the FARRM concept, deferred taxes provide the incentive for farmer savings.

Farmers take a federal income tax deduction for FARRM account deposits. In the most recent proposal, farmers would be eligible to deposit up to 20 percent of "eligible net farm income," which is taxable net farm income plus capital gains from the farm business, excluding land. Deposits would be held in interest-bearing accounts at approved financial institutions. Interest earnings are distributed to the farmer and are annually taxable in the year earned.

Withdrawals from FARRM accounts are made at the farmer�s discretion and are taxable in the year withdrawn. Unlike the NISA program, there are no price or income triggers. FARRM deposits could stay in an account for up to five years, with new amounts added on a first-in, first-out basis. FARRM deposits not withdrawn in 5 years would incur a 10 percent penalty.

• Maximum farmer flexibility, but no assurance savings used as safety net. Farmers are free to make withdrawals whenever they choose. Taxpayers have no assurances that farmer withdrawals will actually be used as the farmer�s safety net during bad years.
• Farmers in high tax brackets receive greater incentives. Because FARRM uses tax deferral incentives, high tax bracket farmers receive greater benefits and incentives to save. The most recent proposal does not limit annual contributions or account balances.
• Benefits go to relatively few farmers. Deposits based on net income are more limiting than gross income. Over two-thirds of sole proprietors either report a farm loss or have no federal income tax liability, and could neither participate nor benefit from FARRM accounts.
• Agricultural cycles are often longer than five years. While government tax deferral costs on FARRM accounts become more stable after the first five years during which primary account balances are established, livestock and weather cycles often last longer.

The IRMA concept originated from an Alabama Farmers Federation study committee. IRMA accounts are voluntary and contain a combination of deferred tax and government matching deposit incentives. Similar to FARRM accounts, IRMA deposits are deductible from pretax income. Deposits and interest are taxable after withdrawal.

A farmer who wishes to participate deposits a minimum of 2 percent of Schedule F gross farm income each year into an IRMA account. The federal government matches the farmer's 2 percent deposit with another 2 percent deposit, using dollars that would have been used to subsidize the farmer's crop insurance. IRMA farmers receive CAT coverage, but additional crop insurance purchased must be non-subsidized.

Also similar to NISA, farmers can maintain maximum IRMA balances of no more than 150 percent of the farmer�s three-year average Schedule F Gross Farm Income. The IRMA plan contains a specific withdrawal trigger that only allows farmers to make withdrawals if their current year Schedule F Gross Income Falls below 80 percent of the average for the previous three years. The withdrawal can only bring the income up to the 80 percent level.

• Based on the magnitude of the IRMA incentives to save, farmer participation rates and safety net accumulation rates are likely to be greater than under FARRM accounts but less than under the NISA program. Similar to FARRM, IRMA provides greater savings incentives in the form of tax deferral for farmers in higher tax brackets.
• Minimum contribution requirements may cause cash flow problems. The annual minimum matchable deposit requirements may cause cash flow problems for some farmers, particularly those previously not purchasing crop insurance.
• IRMA may shift farm level risk. Encouraging farmers to substitute IRMA for subsidized crop insurance could expose farmers to increased risk, particularly if the farmer's accumulated balances are not sufficient to cover a financial loss.
• IRMA could impact government insurance costs. Government costs for subsidized insurance may rise as low risk farmers exit crop insurance programs in favor of IRMA.

AMTA payments (or other program payments) could be linked and diverted to farmer savings accounts to build safety net reserves for individual farmers. If AMTA payments are diverted to FPPR accounts in good years, they are available for use in bad times. If such FPPR accounts had been in effect with the passage of the 1996 Act, government payments in high-income years would have accumulated so that each farmer receiving AMTA payments would have had a safety net of reserve balances during the lower income years that followed.

For illustrative purposes, suppose a new FPPR proposal emerges during the 2002 debate over AMTA payments and specifies that 50 percent of future AMTA payments (and/or other designated farm program payments) be deposited by the Farm Service Agency into a FPPR account in the farmer's name. In effect, such a proposal would convert part of the fixed AMTA payments into a counter-cyclical payment program.

Similar to NISA, FPPR balances could be capped at 150 percent of the farmer�s five-year average Schedule F gross farm income. Farm program payments would revert directly to the farmer when the FPPR account maximum is reached. Withdrawals could be triggered when current year gross farm income (Schedule F) falls below the farmer�s average for the previous five years. A farmer would be eligible to withdraw up to the difference between the current year�s gross farm income and the five-year average.

• Potentially opens risk management to all farming activities reported on Schedule F. If Congress designates livestock and specialty crops producers to receive government deposits, they, too, would benefit from FPPR accounts in low-income years. However, if deposits are restricted only to AMTA payment recipients, the benefits would be restricted only to farmers producing program crops under AMTA.
• No new funding is required if FPPR deposits come from existing outlays. Government costs for FPPR accounts would be relatively stable if a portion of existing outlays for updated AMTA payments are used for FPPR deposits.
• Farm program benefits are less likely to inflate land prices in good years. The part of the farm program payment diverted to a FPPR is no longer available to bid up land prices during good years. Instead, this portion of a farmer�s program payment goes to building individual farm safety net balances that are then available in poor income years.
• Taxpayers are assured that FPPR accounts provide safety net in bad years. Unlike FARRM accounts, FPPR accounts have withdrawal triggers to assure taxpayers that deposits are withdrawn by farmers in low-income years. Unlike voluntary savings programs, FPPR accounts assure taxpayers that all farmers receiving designated farm program payments will have some reserves. As farmer FPPR participation increases, safety net reserves grow to reach effective levels and dependence on ad hoc disaster programs declines.