operation without deficiency payments. Without 

 deficiency payments, farm receipts drop 3 percent, 

 partly due to loss of the maximum $50,000 in 

 payments. This loss is partly offset by revenue from 

 planting 10 percent of total corn acres and 20 per- 

 cent of total wheat acres set aside as a requirement 

 for receipt of deficiency payments. Farm expenses 

 increase by the cost of this extra planting, resulting 

 in a 44-percent drop in farm cash income. The pre- 

 sent value of net farm income for tax purposes is 

 negative, so adjusted gross income falls 42 percent 

 and taxes are reduced 27 percent. Overall, the pre- 

 sent value of after-tax income is 26 percent lower 

 without deficiency payments. Thus, the net present 

 cost of the swampbuster sanction is $884 per acre 

 converted, an amount likely to outweigh increased 

 net returns at any conceivable yield level. The 

 operation would be subject to increased risk 

 without price supports and crop insurance, and 

 possibly higher finance costs without subsidized 

 loans, but those program benefits are not quantified 

 in the analysis. 



With up to $100,000 in annual nonfarm income in- 

 vested in the conversion, reduced income taxes are 

 worth $600 in net present value per acre converted, 

 about one-third of the cost of acquisition and con- 

 version. Tax reductions may well play a decisive 

 role in turning economically unjustifiable wetland 

 conversions into financially feasible propositions. 

 For example, on North Carolina's Albermarle- 

 Pamlico peninsula, three corporate farms acquired 

 more than 400,000 acres and have been developing 

 cropland since the mid-1970's (7, 32). These large 

 operations are corporate subsidiaries with substan- 

 tial nonfarm income from transportion, insurance, 

 and foreign sources, so tax sheltering may be their 

 primary motivation. The fact that much of the con- 

 verted acreage is leased or sold to smaller, noncor- 

 porate owners suggests that obtaining tax benefits 

 from conversion, rather than income from farming, 

 is their objective. Converted land is cash-leased for 

 about $75 per acre or share-leased for fixed rates of 

 25 bushels of corn or 8 bushels of soybeans 

 (equivalent to between $45 and $75 per acre). 

 Capitalized at 10-percent interest, these lease rates 

 imply land values of $450 to $750 per acre, less 

 than half of the $1,579 acquisition and conversion 

 cost. Hence, sheltering nonfarm income from taxes, 

 with the expectation of long-term capital apprecia- 

 tion, can subsidize wetland conversions for large 

 corporate landowners. They can then pass the 

 operation of converted land on to tenants at rates 

 that are economically feasible for farming. 



Converting Prairie Pothole Wetlands in North 

 Dakota. Wetland conversion in North Dakota is 



typified by small drainage projects to improve 

 isolated, seasonally wet areas for more intensive 

 crop use. Conversion costs are generally lower than 

 for wooded wetlands such as the North Carolina 

 pocosins, because the pothole area does not have to 

 be cleared and requires less drainage. Farm pro- 

 gram participation in this area is high, with 81 per- 

 cent of wheat acreage base enrolled in 1984 by 73 

 percent of wheat farmers. 



The farm analyzed here has 1,170 acres in wheat 

 production, with variable and fixed production 

 costs totaling $126.59 per acre. Wheat yields 35 

 bushels per acre when the area is drained. A 

 10-acre pothole area is drained at a cost of $187.20 

 per acre. To assess the effect of appreciation, we 

 assume that the 10-acre conversion is sold after 10 

 years for $600 per acre. Details are shown in ap- 

 pendix 2. 



The discounted present value of 10 years' gross 

 farm receipts from sale of wheat, with set-asides 

 under the farm program, is about $1.2 million, and 

 the conversion adds only $17,102 (table 12). The 

 present value of farm cash income is increased only 

 $9,654 and capital gains from sale of the conversion 

 are worth $3,508. The present value of after-tax in- 

 come increases $8,515 or $851 per acre converted. 

 All of the increase is from deficiency payments on 

 the converted acres and the increase is somewhat 

 offset by a tax increase of $2,865. 



Deficiency payments for wheat have been higher 

 than for other crops. The expected season-average 

 price for wheat assumed in this analysis is $2.87 

 per bushel, while the target price is $4.38 per 

 bushel. If eligibility for deficiency payments on the 

 entire 1,180 acres were lost under the swampbuster 

 provisions, the present value of gross farm receipts 

 would fall $193,365, or 16 percent. Annual net farm 

 income would become negative and the present 

 value of adjusted taxable gross income would drop 

 150 percent. After-tax income would fall $374,655, 

 a loss that amounts to a penalty of almost $37,500 

 per wetland acre converted. 



Comparing these two analyses shows that swamp- 

 buster sanctions are likely to be more effective in 

 the prairie pothole region than in the pocosin area 

 for several reasons. First, the rate of farm program 

 participation is higher on wheat farms in the 

 prairie than on corn and soybean farms in eastern 

 North Carolina. For program participants, defi- 

 ciency payments on wheat farms are a larger 

 percentage of net farm income than on corn and 

 soybean farms. Wetlands in the prairie pothole area 

 are small relative to total cropland acreage, so that 



15 



