This paper discusses the findings of a research project that examined the potential benefits of establishing farm savings accounts for specialty crop growers1. The primary goal of the project was to determine whether farm savings accounts would provide specialty crop growers with a useful tool for managing financial risk. The project examined how various farm savings account proposals ultimately impacted the benefits that specialty crop growers would receive from the accounts.Agricultural Finance, Crop Production/Industries,

Cheng, Mei-luan

Gloy, Brent A.

English

Research Papers in Economics

SP 2006-03 
February 2006 
 
 
Staff Paper 
 
Department of Applied Economics and Management 
Cornell University, Ithaca, New York  14853-7801  USA 
 
 
 
Specialty Crops and the 2007 Farm 
Bill:  The Potential Role of Farm 
Savings Accounts 
 
Brent A. Gloy and Mei-Luan Cheng 
 
  
 
It is the Policy of Cornell University actively to support equality of educational 
and employment opportunity.  No person shall be denied admission to any 
educational program or activity or be denied employment on the basis of any 
legally prohibited discrimination involving, but not limited to, such factors as 
race, color, creed, religion, national or ethnic origin, sex, age or handicap. 
The University is committed to the maintenance of affirmative action 
programs which will assure the continuation of such equality of opportunity. 
  
Specialty Crops and the 2007 Farm Bill:  
The Potential Role of Farm Savings Accounts
* 
 
 
By 
Brent A. Gloy and Mei-Luan Cheng 
Department of Applied Economics and Management 
Cornell University 
 
 
Overview 
This paper discusses the findings of a research project that examined the potential 
benefits of establishing farm savings accounts for specialty crop growers
1.  The primary 
goal of the project was to determine whether farm savings accounts would provide 
specialty crop growers with a useful tool for managing financial risk.  The project 
examined how various farm savings account proposals ultimately impacted the benefits 
that specialty crop growers would receive from the accounts.   
 
Farm Savings Accounts 
Managing the financial risk associated with farming is a central concern for farmers. 
Farm revenue insurance products have shown promise in helping farmers manage income 
risk and comprise an important component of the federal farm safety net.  However, there 
is evidence that specialty crop growers are not completely satisfied with the risk 
protection provided by existing crop insurance policies (White, Uva, and Cheng, 2003).  
Farm savings accounts are a related product that may have considerable appeal to 
specialty crop growers.   
 
Farm savings accounts are based upon the idea of providing producers financial 
incentives to set aside funds in high income years for use in low income years.  Like 
revenue insurance products, most farm savings account proposals rely upon tax records to 
determine eligibility for contributions and withdrawals from the accounts.  Unlike 
revenue insurance products, the producer does not pay a premium, but rather places funds 
in a deposit account.  These funds remain the property of the producer.  Additionally, 
deposits to the account may be tax deferred, and/or matched by a deposit from the 
government.  Although the cost of a savings account program will depend upon the 
specific design, farm savings accounts may also appeal to policy makers because the cost 
to the federal government is likely to be relatively low compared to direct subsidy 
programs and emergency financial assistance.   
 
                                                           
* Funding for this project has been made available by the Governor's Buy California Initiative, the 
California Department of Food and Agriculture (CDFA) and the U.S. Department of Agriculture (USDA). 
The content of this publication does not necessarily reflect the views or policies of CDFA or USDA, nor 
does any mention of trade names, commercial products and organizations imply endorsement of them by 
CDFA or USDA. 
1 Gloy and Cheng provide a complete description of the study.   
  1A variety of farm savings accounts proposals have been advanced in the United States 
and in other countries
2.  The general idea behind farm savings accounts is to provide 
farmers incentives to save funds in high income years for use in low income years.  The 
most commonly suggested incentives include tax deferral and/or a government matching 
deposit.  Proposals for matching deposits often contain provisions that limit withdrawals 
from the accounts to years in which income falls below a specified trigger level.   
 
The research project evaluated two specific proposals, counter-cyclical farm savings 
(CC) accounts and farm and ranch risk management (FARRM) accounts.  Both proposals 
require that the farmer deposit funds into the account.  Under the counter-cyclical savings 
accounts program, eligibility is based upon gross income, the government would match 
the farmer’s deposit up to $5,000, and farmers could withdraw when gross income fell 
below a specified trigger level.  For FARRM accounts, eligibility to participate was based 
upon positive net income and deposits were not matched, but rather were tax deferred.  
Withdrawals from the accounts were evaluated using various historical gross income 
trigger levels.   
 
Objectives of the Study 
The analyses of the programs focused on addressing four broad questions.  Specifically, 
the study analyzed: 
1)  the ability of farmers to contribute to FARRM and CC accounts;  
2)  withdrawals from and benefits obtained by contributing to FARRM and CC 
accounts;  
3)  the impacts of the FARRM and CC accounts on income stabilization; and  
4)  critical program features.   
 
Data and Method 
In order to evaluate the effectiveness of the program for specialty crop growers the case 
of grape farms was considered
3.  The study used data collected by Lake Erie Grape Farm 
Cost Study (LEGFCS) to analyze the proposed farm saving account programs (White and 
Shaffer).  The five year panel data set contains the financial records of 32 grape farms 
that had completed the survey for each of the years 2000 to 2004.  These farms specialize 
in the production of native variety grapes (Concord and Niagara) which are used for 
juice.  The data collection was based upon tax information on the growers’ 1040 
Schedule F (Shaffer and White, 2003).  
The historical financial data for the grape farms was used to quantify the ability of farms 
to participate in the programs, the potential magnitude of deposits and withdrawals to the 
accounts, and the potential risk reduction provided by the accounts over the period from 
2000 to 2004.  The results of the study provide several important findings regarding the 
potential benefits of farm savings accounts for specialty crop farms.   
                                                           
2 Edelman, Monke, and Durst; Monke and Durst; and Ellinger and Gloy provide a discussion and analysis 
of the various types of farm savings account proposals.  Makki and Somwaru describe farm savings 
account experiences in Canada and Australia.   
3 For research on how savings accounts would impact dairy farms see, Gloy, LaDue, and Cuykendall or 
Enaharo.   
  2Eligibility to Make Deposits and Magnitude of Deposits 
 
Key Finding: The eligibility rules for the proposed CC accounts are not restrictive as 
most farms would be eligible to make a contribution every year.  The positive net income 
eligibility criterion for FARRM accounts is much more restrictive and will significantly 
reduce the number of farms eligible to contribute to savings accounts. 
 
The results of the study indicated that 90% of the farms would be eligible to contribute to 
CC accounts in all five years of the study.  This is not surprising because eligibility only 
required 1040 Schedule F gross income in excess of $50,000.  Eligibility to make 
deposits to FARRM accounts was noticeably lower as this program required the farm to 
have positive 1040 Schedule F net income.   In the case of FARRM accounts only 36% of 
the farms would be eligible to make deposits in all 5 years.  However, all of the farms 
were eligible to contribute to FARRM accounts in at least one year and 87% were 
eligible to make deposits in three of the five years.   
 
Key Finding: The average annual farmer contribution to CC accounts was $3,042.  
Based on a maximum deposit rate of 2% of gross income, many of the specialty crop 
farms in this study were unable to take advantage of the full $5,000 government match.  
In other words, many had sales less than $250,000.   
 
For the case of CC accounts, farms were allowed to contribute 2% of gross income up to 
a $5,000 cap.  The analysis shows that on average, 21% of farms in the entire period 
could contribute $5,000 to take full advantage of the maximum government matching 
deposit.  The average deposit over the period was $3,042.  With the government match 
this would result in an average annual deposit to the account of $6,084.   
 
Key Finding: Many farms have little incentive to participate in FARRM accounts because 
the incentives are based completely on tax deferral.  Based on farm income alone, nearly 
half of the farms are in 10% or lower marginal federal income tax bracket.   
 
There are two important financial incentives to encourage farmer participation in 
FARRM accounts.  The most basic benefit is the deferral of tax liability for one year or 
more. The ability to defer taxes to a tax year in which the farm is in a lower tax bracket 
would result in lower taxes, creating an incentive for contribution to a FARRM account. 
For instance, a farmer could contribute to a FARRM account in a year in which the 
income would be taxed at the 27% marginal tax bracket and then withdraw the funds in a 
year where they find themselves in a lower tax bracket. Second, the farmer is able to 
invest the deferred taxes, earning interest on the balances.  The results of the study show 
that this benefit is quite small on average due to relatively small balances and low interest 
rates.   
 
 
 
  3Key Finding: Larger and more profitable farms will receive the greatest benefits from the 
FARRM account program because these farms are more likely to be in higher marginal 
tax brackets.   
 
The marginal tax bracket plays a critical role in determining the value of FARRM 
accounts. The greatest benefit obtained from FARRM accounts occurs when farmers can 
contribute in years with a high tax liability and withdraw in years with a reduced tax 
liability. Although most farmers have a positive net income, many face a relatively low 
marginal tax rate. Based only on farm income, 24% would typically be found with a 0% 
marginal tax rate, meaning that they would owe no federal income tax, and 20% would 
find themselves in the 10% marginal tax bracket.  This would significantly reduce their 
incentive for participation in the program.  On the other hand 16% of the farms generated 
farm income that would place them in the 27% federal tax bracket.  These farms would 
have a much greater incentive to participate in the program. This structure makes the 
program of much more value to large and profitable farms.    
 
 
Key Finding: The average FARRM account deposit was $4,526.  When the government 
match is considered, the average CC account balance was larger than the average 
FARRM account balance.  However, as modeled, the FARRM account balances are more 
variable and large farms are able to place considerably more funds in FARRM accounts 
than in CC accounts.   
 
Farms were allowed to place up to 20% of 1040 Schedule F Net farm income into 
FARRM accounts, without regard to their current tax bracket.  The average amount of 
funds deposited by the farmer was greater under FARRM accounts than for CC accounts.  
Here, the average annual deposit was $4,526.  Because the farmer’s deposit was not 
matched, the total amount placed in the account was generally lower for FARRM 
accounts than for CC accounts.   
 
Withdrawals from Savings Accounts 
 
Key Finding: Withdrawal provisions are critical.  If withdrawal triggers are not indexed 
to allow for growth, few farms will be able to make withdrawals.  Restrictive withdrawal 
rules will significantly reduce the appeal of the accounts as a risk management tool.  
 
While the FARRM account proposal allows farmers to make withdrawals at their 
discretion, the CC account proposal places conditions on when the farmer can make a 
withdrawal.  The results of the study indicate that this is a critical feature of the CC 
program.  Higher gross income withdrawal triggers increase the likelihood that a farm 
can make a withdrawal.  For instance, an 80% gross income trigger would typically allow 
8% of the farms to make a withdrawal in a given year and a 90% trigger would allow 
20% to make a withdrawal.  Additionally, indexing the gross income trigger to adjust for 
changes in farm size allows more farms to make withdrawals.  Here, 30% of the farms 
  4would be able to make a withdrawal under an 80% indexed gross income trigger and 52% 
would be able to make a withdrawal under a 90% indexed gross income trigger.   
 
 
 Key Finding: The use of a net income trigger versus a gross income trigger does not 
appear to significantly alter the likelihood of making a withdrawal.  As a result, a gross 
income trigger is likely preferred because it is more easily indexed than a net income 
trigger.   
 
The analysis of the FARRM account program included a comparison of withdrawals 
under both gross and net income triggers. When a 90% indexed gross income trigger was 
used, slightly over half the farms were able to make a withdrawal.  A 90% net income 
trigger resulted in 48% of the farms being able to make a withdrawal.   
 
 
Key Finding:  Farm savings accounts show some promise in addressing income 
variability, but restrictions on the size of the deposits limits their ability to completely 
mitigate income variability.  Many farms will still experience considerable income 
variability.  The accounts also appear unable to handle back-to-back adverse financial 
outcomes.    
 
The ability of the accounts to manage income variability was assessed by comparing the 
amount by which income fell short of the gross or net income trigger level with and 
without the accounts.  While some farms could build positive account balances over the 5 
years of the study, a significant number of farms that experienced a drop in income 
sufficient to trigger a withdrawal did not have a large enough account balance to resolve 
their income shortfall.  Under a 90% indexed income withdrawal trigger, nearly 40% of 
the farms would be unable to completely manage their income shortfall with the CC 
savings account.  Additionally, the resulting zero balance in the savings account would 
leave these growers with little financial protection for the next year.  Still, the CC 
accounts reduced the typical shortfall from the income trigger by 25 to 46%, which 
shows considerable promise in managing income risk.  Similar results were found for the 
FARRM accounts, although the reduction in income was slightly smaller due to smaller 
account balances.   
 
Although many farms did not have sufficient funds to manage their income risk, many 
finished the five year study period with positive account balances.  Including the 
government match, the average ending balance in the CC accounts with a 90% indexed 
income withdrawal trigger was $9,425.  The ending balance in the FARRM accounts 
with a 90% indexed gross income withdrawal trigger was $7,199.   
 
 
  5Key Finding: Unless larger subsidies are offered, savings account programs are unlikely 
to provide a complete risk management solution for specialty crop growers.  
Additionally, for widest appeal the program should combine both government deposit 
matching and tax deferral of deposits.  
 
While the savings accounts were able to reduce income variability, the funds in the 
accounts were often insufficient to completely mitigate income variability.  While the tax 
deferral benefits of the FARRM account will appeal to high income farms, the relatively 
small amount government matching for CC accounts will provide little income protection 
for larger farms.  The most useful program would likely combine both tax deferral and 
government matching of deposits.  This would broaden the appeal of the accounts and 
make them a more viable risk management tool for larger farms.   
 
The accounts will provide little protection in successive low-income years.  This is a 
critical concern because agriculture often undergoes multiple year price cycles.  In this 
situation additional emergency government deposits to the accounts would likely be 
necessary to reduce income shortfalls.  In fact, the juice grape industry experienced three 
consecutive years of declining prices in 2002-2004 and although data are not available 
for 2005 it is unlikely that prices increased significantly.  Finally, the analysis assumed 
that farmers would have the available cash flow to invest in the accounts.  Unless the 
farmers postpone investment or use additional debt, many would be unable to fully fund 
the accounts. These concerns aside, the accounts show promise in providing a component 
of a comprehensive farm income safety net.   
 
 
Additional Reading: 
Gloy, B.A. and M.L. Cheng  “Farm Savings Accounts for Specialty Crop Growers.”  
Research Bulletin 2006-3. Department of Applied Economics and Management, Cornell 
University.   
 
Edelman, M., J. Monke, and R. Durst. "Can Farmer Savings Accounts Help Save 
Farming?" Choices, vol. 16, no. 3 (2001), pp. 38-41. 
 
Ellinger, P. and B. Gloy.  “Multi-State Efforts to Evaluate Alternative Farm Savings 
Account Programs.”  In Agricultural Finance Markets in Transition.  Proceedings of the 
Annual Meeting of NCT-194.  Editor B.A. Gloy, Research Bulletin 9(2004).  252 pages.  
Department of Applied Economics and Management, Cornell University.  
 
Enahoro, D.  An Assessment of Farm Savings Accounts and the Ability of Farms to 
Participate.  M.S. Thesis Cornell University, 2005. 
 
  6  7
Gloy, B.A., E.L. LaDue, and C. Cuykendall.  “Farm Savings Accounts: Examining 
Income Variability, Eligibility, and Benefits.”  Staff Paper 2(2005). 30 pages.  
Department of Applied Economics and Management, Cornell University.   
 
S.S. Makki and A. Somwaru.  “Review and Analysis of Canadian Net Income 
Stabilization Account and Australian Farm Management Deposit Programs, Report to 
Risk Management Agency (RMA), USDA, September 2004.   
 
Monke, J., and R. Durst. "Tax-Deferred Savings Accounts for Farmers: A Potential Risk 
Management Tool." in Agricultural Outlook, USDA-ERS, May 1999, p. 22-24, 
www.ers.usda.gov/publications/AgOutlook/ May1999/ao261d2.pdf 
 
Shaffer, B. and G. White.  “Lake Erie Grape Farm Cost Survey, 1996-2000.”  Extension 
Bulletin 2003-05.  15 pages.  Department of Applied Economics and Management, 
Cornell University.   
 

Specialty Crops and the 2007 Farm Bill: The Potential Role of Farm Savings Accounts

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