Farm Bill: Time to Start Over

Last fall we heard breathless reports that the 2012 Farm Bill might be decided in days or weeks, thanks to the bitter debate over growing debt and the congressional ‘super committee’ mandate to cut $1.2 trillion out of federal spending over 10 years.

The Senate Ag Committee came up with $23 billion in proposed cuts, and we waited for the other shoe to drop. And waited.

The super committee failed, and now it looks like the farm bill debate will move on in earnest this summer -- and perhaps be held over until next year.

“There is a strong desire to move forward as quickly as possible at the committee level, but there’s lots of doubt about getting a conclusion in 2012,” says Pat Westhoff, director at the Food and Agricultural Policy Research Institute at University of Missouri. ”With the elections coming, that’s not a surprise.”

As the debate heats up, policymakers will determine what role the federal budget will play in final decisions. Will deficit reduction continue to drive every decision in Washington this year? Or will we have a more intelligent discussion about reforming our mostly antique farm policy?

“The budget is still going to be a major driver, but how much is anyone’s guess,” says Westhoff.

Short term, keep your eyes on the payroll tax cut extension, he adds. The idea of using some farm program savings to help offset the $100 billion needed for that extension is not out of the question. Last December congress agreed to kick that can down the road for only two months, so expect another debate over funding by the end of February.

“No one knows how it will be resolved right now,” he says.

Risk management

Right now most programs focus on a small number of crops. There’s interest in programs that impact fruits and vegetables, beginning farmers, and other things beyond corn, soybeans and cotton.

Ag is a big target in the popular press right now due to record 2011 farm incomes – up nearly 30% over 2010. Expect to hear even more contempt as this spring unfolds.

“We’re in a period of very high farm income levels so there’s a lot of debate whether income support programs are necessary,” says Nick Paulson, University of Illinois Ag economist.

On the other hand, strong demand and high prices make government payments a smaller percent of U.S. farm income. The percent of farm income coming from government – conservation, direct payments, disaster payments – is much, much smaller now than, say, five years ago. Most programs are triggered by low prices so that’s why we have lower government payments as a percentage of overall farm income.

While federal spending on Ag is a big target, it makes up less than 1% of the total federal budget. Even if the super committee had come up with $1.2 trillion in cuts, would the $23 billion in proposed cuts by the Senate Ag Committee have made much of a dent? Medicare and medicaid spending, by comparison, is 20%.

“While we’re willing to bring to the table our fair share of spending cuts to contribute to deficit reduction, this problem is not going to be solved by cutting Ag programs,” says Paulson.

Something good

Something good did come from the frantic call to cut spending last summer. A range of Ag advocacy and Ag groups put proposals out that came up with real spending reductions, ranging from $10 to $40 billion in cuts or savings. While the super committee failed, a lot came from that effort. Everyone proposed something slightly different, but the general themes included:

     *educe or eliminate direct and countercyclical programs, including disaster programs;

     *come up with some form of modified revenue-based program, similar to ACRE (Average Crop Revenue Election) that works for everyone;

      *a better crop insurance program.

Fixed direct payments remain a target for budget-cutters. The government spends $4.9 billion per year on direct payments. If they were eliminated, however, savings would come to less than $4 billion in credited/scored savings, depending on how farmers enroll in alternative programs. Losing direct payments would likely throw a wet blanket over red hot cash rents and land prices.

The public perception of direct payments is negative because farmers get them no matter how much income they make. But they are simple to budget and do not change every year so there’s a lot of stability. Direct payments have green box status in WTO because they do not distort trade.

At the farm level, direct payments to southern states are $30 to $50 per base acre, about twice as much as most Midwestern states. Payments are even lower in the high plains.

Shallow vs. deep loss proposals

Revenue assurance proposals come in two packages: so-called deep loss and shallow loss coverage. A shallow loss is loss between 100% of whatever revenue benchmark you use, down to maybe 75 to 80%. Losses in excess of that level would be considered deep loss.

The American Farm Bureau Federation’s (AFBF) Systemic Risk Reduction Plan (SRRP) is a deep loss proposal. This approach would provide farmers with more down-side protection – a 70 to 80% revenue insurance plan - and allow them to deal with the upside end of the risk profile on their own. It’s based on county level yield data and would replace Direct Payments, CCP, ACRE, SURE, and make disaster payments obsolete. It would give farmers some guarantee against the kind of year that might put them out of business. Farmers could purchase wrap-around insurance that would provide both individual coverage up to the 75% level that the Federal Government insures and would also allow coverage on top of that level.

The National Corn Growers Association’s shallow loss program, ADAP (Agricultural Disaster Assistance Program), builds on the existing structure of ACRE and is designed to address the need for simplification and elimination of overlapping coverage with individual crop insurance. Changes include the use of harvest prices and crop reporting districts to set the crop revenue guarantee and would establish a guarantee based on five-year Olympic average revenues. Payments would be limited to 10% of the guarantee, based on planted acres and adjusted to a farm’s yield. Payments would cover lost revenue between 85 to 95% of the guarantee. Marketing loan rates would be restored to standard levels, rather than being reduced by 30% in ACRE.

ADAP looks strikingly similar to AARM (Aggregate Risk Revenue Management), a proposal put forward by a bipartisan group of senators last summer. It also builds on the ACRE concept but would be more responsive, by determining losses more locally than at current state levels; it also reduces overlap with crop insurance, and simplifies the application and administrative processes. ARRM would take the place of fixed price-support programs (other than the marketing loan programs), by providing a revenue protection program more reflective of changes in market and yield trends.

The shallow vs. deep loss concept is getting a lot of discussion. Deep loss payments would be triggered less frequently, but they would be potentially larger payments. The real issue is how we could design it to work with crop insurance to reduce overlap. Shallow loss payments would be triggered more frequently but have generally smaller pay outs. It’s designed to capture revenue losses that would not be covered except with very high insurance levels.

While existing proposals provide some guidance, speculation remains, says Paulson. There are still many questions for commodity program modification this year and beyond.