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U.S. Farm Bill – Starting Over

Last fall Americans heard breathless reports that the 2012 Farm Bill might be decided in days or weeks, thanks to the bitter debate over growing debt and a U.S. congressional “super committee” mandate to cut $1.2 trillion out of federal spending over 10 years (all figures are in U.S. dollars).

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

Amid great rancour (and humiliation) 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 doubts about getting a conclusion in 2012,” says Pat Westhoff, director at the Food and Agricultural Policy Research Institute at the University of Missouri. “With the elections coming, that’s not a surprise.”

America’s farm bill, a federal statute that regulates production and prices, is re-authorized every five years and is set to expire in 2012.

U.S. farm programs began in 1933 during the Great Depression after farm income had dropped by more than 40 per cent, leaving over six million farming families in despair. Over the years a rising tide of critics have urged reform, saying much of today’s government farm policy is out of touch with today’s marketplace. For example, the current program allots $5 billion for direct payments to farmers, doled out each year, despite current historically high grain prices. American farm income is up 31 per cent from a year ago according to U.S. Department of Agriculture.

“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 agricultural economist.

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

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

Risk management

Washington and the American public want to reduce overlap, increase efficiency, and cut government farm subsidies. Farmers hope for a farm bill that focuses on risk management and the so-called safety net — policies that would pay subsidies or subsidize crop insurance claims to keep farmers in business should weather or market collapse put them in jeopardy.

But two more factors will play into the farm bill debate: how policy impacts trade agreements through the World Trade Organization (WTO), and scope of the safety net itself. 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.

While federal spending for agriculture is a big target, it makes up less than one per cent of the total U.S. federal budget. Medicare and Medicaid spending, by comparison, is 20 per cent.

Although the super committee failed, the effort prompted several proposals from agricultural groups. Everyone proposed something slightly different, but the general themes included:

  •  reduce 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; and,
  •  a better crop insurance program.

Fixed direct payments remain a target for budget-cutters. The U.S. 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 enrol in alternative programs. Losing direct payments would likely throw a wet blanket over red hot cash rents and climbing land prices.

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 versus deep loss programs

Several agriculture groups put forward revenue assurance proposals, building on the concept that began in 2008 with a pilot program, Average Crop Revenue Election (ACRE). Most came in two packages: so-called deep loss and shallow loss coverage. A shallow loss is loss between 100 per cent of whatever revenue benchmark is used in a particular state or county, down to maybe 75 to 80 per cent. 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 per cent 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, the Conservation Cover Program (CCP), ACRE, the Supplemental Revenue Assistance Payments Program (SURE) and make disaster payments obsolete. Farmers could purchase wrap-around insurance that would provide both individual coverage up to the 75 per cent level that the federal government insures and also allow coverage on top of that level.

The National Corn Growers Association’s shallow loss program proposal, the Agricultural Disaster Assistance Program (ADAP), is designed to address the need to simplify and eliminate overlapping coverage with individual crop insurance. Changes include the use of harvest prices and crop reporting districts to set the crop revenue guarantee and establishing a guarantee based on five-year Olympic average revenues. Payments would cover lost revenue between 85 to 95 per cent of the guarantee.

The shallow vs. deep loss proposals are getting a lot of attention in Washington. Deep loss payments would be triggered less frequently, but they would be potentially larger payments. The real issue is how policymakers could design something to work with crop insurance to reduce overlap. Shallow loss payments would be triggered more frequently but have generally smaller pay outs. They would be designed to capture revenue losses that would not be covered except with very high insurance levels.

It looks like the folks in Washington will have plenty of time to debate all of these proposals. †

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