Farm Bill Debate and Prospects for 2012

Roman KeeneyFarm Policy Study Group

December 13, 2011

Overview

• Update on budget and farm bill process

• Prospects for having a farm bill in 2012

• Near term outlook

Update

• Joint Committee on Deficit Reduction–Deadline of November 23 not met– Failure triggers ‘sequestration’• Across the board cuts to defense and

domestic • 50% of $1.2 trillion from each side

Update (cont.)

• House and Senate Agricultural Committees provided a deficit reduction proposal to the joint committee– $23 billion reduction over 10 years

• Ag committees heavily criticized for the closed door process

• Numerous other proposals for specific and not so specific farm bill contributions to deficit reform

Update (cont.)

• Stabenow (D-Mich)– Citing strong public opposition to

direct payments– Premise: Use $4.8 billion in annual

direct payments to meet deficit reduction and reform farm programs

–Objective: Improve risk management• Crop insurance• Shallow loss

Update (cont.)

• Outcome–Not clear what is in the Ag committee

submission to the Supercommittee

• Assumption– Completely eliminate direct payments

• LDP, CCP

–Use some savings for shallow loss program• Revision of ACRE

Update (cont.)

• Shallow Loss–Moving average revenue program

• Features– Payments are larger when revenue

is further from recent history• Price and yield protection

– Triggered by farm and area losses– Limited to amounts not typically

covered by crop insurance

Update (cont.)

• Start over or pick up where they left off?

• Senate and House Ag Committees begin work in the new year–Hearings in late January or early

February–Markup in the early spring– Some are looking at a Memorial Day

completion

Discussion Points: Farm Bill 2012?

• Reasons for optimism on a 2012 Bill– Committee has spent considerable

time on farm bill• An early vote could miss the worst of

election year standoffs

–Broad agreement in• Opposition to direct payments• Promotion of shallow loss programs

Farm Bill 2012?

• Reasons for pessimism on a 2012 Bill

– Everything is magnified in an election year

–Broad agreement is all they really had• The toughest issues in Farm Bills are regional

and rural-urban as opposed to Conservative-Liberal

–What is the baseline that can be spent?

Scenario

• Managing a firm requiring a payroll reduction that must be enacted quickly:–Option 1: Workforce reduction to

the percentage savings required–Option 2: Cut salaries to achieve the

percentage savings required–Option 3: Fire everyone and hire

new staff at the new payroll target

Ag Committee

• If you imagine that your managerial division of the company is having its strongest historical performance that is akin to the scenario faced by the ag committee

Ag Committee

• Facts– Short timeline to develop a less costly

policy– Strong sector performance under

current policy framework– A nearly stable baseline of spending

under the current policy framework

• Decision– Completely overhaul the policy

framework

Ag Policy Web

AG POLICY

COMMODITY POLICY

Environmental Policy

Food/Nutrition

Policy

Rural Policy

Energy Policy

Trade Policy

Tax Policy

2011 Ag Outlook Update / Ag Policy / 8.20.2010

Farm Bill 2012:Direct Payments vs Shallow Loss

• Direct Payments Looking Backward1What were direct payments meant to be?2How have direct payments been used by

farmers/landowners?3How have direct payments affected

agricultural markets?4What contribution have direct payments

made to current prosperity in agriculture?5Who is defending direct payments as a

policy and what reasons are they offering?

Farm Bill 2012:Direct Payments vs Shallow Loss

• Shallow Loss Looking Forward1What are shallow loss pmts. (SLP) meant

to be?2How will SLP’s be used by

farmers/landowners?3How will SLP’s affect agricultural

markets?4What contribution will SLP’s make to

sustained prosperity in agriculture?5Who is promoting SLP’s as a policy and

what reasons do they offer?

Why choose overhaul?

• Presumably the answers for direct payments are better known than shallow loss given the 15 year history.

• Shallow loss programs will have larger budget exposure.

• Farmers have rejected the option to enter shallow loss (foregoing 20% of direct pmts) for four years

• It must be political…

Policy Instrument Continuum

• Decoupling/Coupling– The degree to which policies are

linked to current producer decisions–When payments are linked to

current decisions (yield or area planted) or current prices they are coupled

Fully Decoupled

Fully Coupled

Commodity Policy Instruments(Simple)

• Loan Deficiency Payment– Price Floor• Application varies across commodities• Rice and cotton loan rates are notably

high

• (Fixed) Direct Payments– Lump Sum Transfer• Based on historical production• Fixed yield and area defined as payment

basis

Commodity Policy Instruments(Complicated)

• Counter Cyclical Payment– Target price policy on historical

production• Payments not tied to current farmer

action• Prices fall, more money into agriculture

• Average Crop Revenue Election (ACRE)–Recent price and yield information

establish a crop-specific target revenue• Shortfalls trigger a payment

Views on U.S. Commodity Policy

Domestic Citizenry

Exte

rnal

Cit

izen

ry

DISFAVOR

DISFAVOR

FAVOR

LDP—Floor Price

ACRE—Counter-cyclical Revenue

CCP—Counter-cyclical Price

DP—Fixed Transfer

Public Views on Agric. SupportDirect Payments

• Recent public opinion survey– Subsidies given on a regular basis

regardless of good/bad year?• 40 percent favor when asked about small farms• 15 percent favor when asked about large farms

– Payments in bad years are much more highly favored

• Common editorial quote– “…indefensible program of direct

payments…”

External Views on Agric. SupportWTO Classification System

Amber Box Trade distorting agricultural support▪ Coupled payments that influence current

output and may depress world pricesBlue Box

Trade distorting agricultural support▪ Tied to land retirement which diminishes the

over-supply effectGreen Box

Minimally distorting policies▪ Decoupled commodity payments▪ Environmental/Conservation payments

Politics of Agric. SupportFixed Direct Payments

• These payments were instituted in 1996–Wean agriculture off of government

programs– Culmination of a 10-15 year evolution of

decoupling U.S. farm subsidies

• Direct payments have proven resilient– Certain money to farmers

• Multitude of selling points (recall the web)

• Exempt from WTO disciplines

Farm Bill: Outlook

• Political pecking order…• Dependent on deficit reduction• Lots of interest in avoiding the automatic

across the board cuts– Eric Cantor (R-Va)

• Leading a bipartisan effort to rescale the automatic spending reductions on the defense side attaching measures to end of year tax and spending bills

– White House position• Veto bills that circumvent the automatic reductions

unless they are part of deficit reduction legislation

Outlook (cont.)

• Recently– Payroll tax holiday extension

• Federal non-military pay freeze• Federal workforce reduction• Means testing for social programs• Surtax on wealthy incomes

• The spending on the tax holiday extension and any other similar bills must be offset

Outlook (cont.)

• Members of the House and Senate Agriculture Committees outlined $23 billion in reductions– Someone is likely to propose using those

to keep some other bill deficit neutral– The Ag committee leadership is

increasingly open to this idea if• They can lock in their budget at baseline less

the $23 billion

Outlook (cont.)

• House and Senate Committees $23 billion– This is at the low end for reduced Farm

Bill spending– Tea-Party/Freedom Works/Dick Armey

• End all agricultural subsidies

– House Budget Committee Chairman• Paul Ryan (R-Wisc)• $30 billion over ten years

– Obama Deficit Plan• $33 billion over ten years

Farm Bill 2012:Discussion

• Direct Payments Looking Backward1What were direct payments meant to be?2How have direct payments been used by

farmers/landowners?3How have direct payments affected

agricultural markets?4What contribution have direct payments

made to current prosperity in agriculture?5Who is defending direct payments as a

policy and what reasons are they offering?

Farm Bill 2012:Discussion

• Shallow Loss Looking Forward1What are shallow loss pmts. (SLP) meant

to be?2How will SLP’s be used by

farmers/landowners?3How will SLP’s affect agricultural

markets?4What contribution will SLP’s make to

sustained prosperity in agriculture?5Who is promoting SLP’s as a policy and

what reasons do they offer?

Gardner writing in 1992

Farm policy started in the 1930s to address the farm income problem Stable demand and low prices

“The farm income ‘problem’ has been solved…”

The role of policy in solving it has been small Education, diversification to off-farm work

and investments, etc.