U.S. Agricultural Policy: Issues & Outlook

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A A P P C C A A Agricultural Policy Analysis Center The University of Tennessee ● 310 Morgan Hall ● Knoxville, TN 37996-4519 www.agpolicy.org ● phone: (865) 974-7407 ● fax: (865) 974-7298 U.S. U.S. Agricultural Agricultural Policy: Policy: Issues & Outlook Issues & Outlook March 14, 2007 Dr. Kelly Tiller Agricultural Policy Analysis Center The University of Tennessee Philip Morris USA Richmond, VA

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U.S. Agricultural Policy: Issues & Outlook. Dr. Kelly Tiller. Agricultural Policy Analysis Center The University of Tennessee Philip Morris USA Richmond, VA. March 14, 2007. Agricultural Policy Analysis Center ● The University of Tennessee ● 310 Morgan Hall ● Knoxville, TN 37996-4519 - PowerPoint PPT Presentation

Transcript of U.S. Agricultural Policy: Issues & Outlook

AAPPCCAA Agricultural Policy Analysis Center ● The University of Tennessee ● 310 Morgan Hall ● Knoxville, TN 37996-4519

www.agpolicy.org ● phone: (865) 974-7407 ● fax: (865) 974-7298

U.S. Agricultural U.S. Agricultural Policy:Policy:

Issues & OutlookIssues & Outlook

March 14, 2007

Dr. Kelly TillerAgricultural Policy Analysis Center

The University of Tennessee

Philip Morris USARichmond, VA

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AgendaAgenda

• Overview of U.S. farm policy evolution

• Ag policy today: the 2002 Farm Bill

• Outlook for 2007 Farm Bill

• Farmer decision analysis

• General discussion

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What a Farm Bill DoesWhat a Farm Bill Does

• Provides USDA the authority to operate food and farm programs using provisions specified in the bill– For most programs, authority is temporary; permanent authority

for some

• Provides upfront ALL of the funds needed to provide benefits for a “mandatory” program during its authorized life– Funding can be as needed (entitlement) or a fixed amount

• Authorizes the appropriation of funds for “discretionary” programs

• Must address “permanent law” provisions of the Agricultural Act of 1949 either through a temporary suspension or repeal

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US Farm BillsUS Farm Bills

• Primary vehicle for setting medium-term US agricultural policy– Typically about 4-6 years

• Scope of farm bills has expanded over time– 1981-1990 FBs: separate titles for each commodity– 2002 FB: 10 titles, single commodity title

• Margin of victory shrinking over time– Senate passed 1977 FB 63-8– 2002 FB conference report passed 64-35

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Omnibus PolicyOmnibus Policy

• Usually in a Farm Bill– Commodity programs– Conservation

programs– Ag trade programs– Food stamps & other

nutrition programs– Ag research

• May be in a Farm Bill or separate legislation– Rural development

programs– Crop insurance

programs– Forestry– Ag labor programs– Agri-energy programs

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Why Have Commodity Programs?Why Have Commodity Programs?

• Farmers have the power to extract money from Congress—so they do

• Food is a national security issue

• Supply and demand characteristics of aggregate agriculture cause chronic price and income problems– Uneven growth in supply and demand– Agriculture sector cannot right itself when

capsized by low prices

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Market Failure LogicMarket Failure Logic

• Technology expands output faster than population and exports expand demand

• Market failure: lower prices do not solve the problem

• Little self-correction on the demand side– People will pay almost anything when food is short– Low prices do not induce people to eat more

• Little self-correction on the supply side– Farmers tend to produce on all their acreage

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Ag Policy Did Not Start in 1932Ag Policy Did Not Start in 1932

• Historic policy of plenty– Land distribution mechanisms – 1620 onward– Canals, railroads, farm to market roads– Land Grant Colleges – 1862, 1890, 1994– Experiment Stations - 1887– Cooperative Extension Service – 1914

• This policy of plenty often results in production outstripping demand

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When Policy of Plenty is Too MuchWhen Policy of Plenty is Too Much

• Given agriculture’s inability to quickly adjust to overproduction and low prices, there are 3 policy strategies:– Supply side – Demand side– Just pay money

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Historical Policy ComponentsHistorical Policy Components

• Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means

• Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for consumers’ accrued benefits of productivity gains

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Traditional Farm Policy ElementsTraditional Farm Policy Elements

• From 1973 (or earlier) to 1996, U.S. domestic farm policy generally included the following elements:– Target price for major crop commodities

• Deficiency payments for the difference between target price and market price

– Base acreage– Acreage reduction / set-asides– Nonrecourse loan– Government storage of commodities

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Review: Price Support PoliciesReview: Price Support Policies

• Nonrecourse price support loan– Loan rate becomes price floor– Problems ??

• Where/how to set loan rate• Rates tend to ratchet up

(reduces exports, creates surplus)• Costly to store

• Government purchase program– Dairy products– Problems with price support levels– Problems with capitalization (into price of land, cows)

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Review: Production ControlsReview: Production Controls

• May be voluntary or mandatory

• Acreage allotments and marketing quotas– Slippage– Capitalization into land or quota value

• Land retirement programs– Short term or longer term– Usually have benefits in addition to payments

• Soil conservation, environmental, hunting leases– Slippage– Conservation Reserve Program– Annual acreage set-asides

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Deficiency PaymentsDeficiency Payments

• The difference between the average market price and a target price

• Target price– A guaranteed level of returns per unit of commodity– For a specified time periods– On a portion of acreage (up to 100%)

• Target prices support only income, not price

• Deficiency payment calculation uses base acreage and yields

• Congress generally sets target prices

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All of that changed …All of that changed …

1996 Freedom to Farm

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Key 1996 FB Policy ChangesKey 1996 FB Policy Changes

• Eliminated the target price program

• Decoupled transition payments with virtual flexibility

• Eliminated acreage set-aside program

• Eliminated the Farmer-Owned Reserve (FOR)

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Policy ChangesPolicy Changes

• In the past, farm policies included– Floor price– Supply management tools– Price stabilization

• Recent policy trends (especially since 1996)– Eliminated all three – because of expectations– Set prices free to fall well below cost of production– Provided revenue supplements to compensate when

prices are low

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““Program” CropsProgram” Crops

• Crops for which Federal support programs are available to producers

• Wheat

• Corn

• Barley

• Grain Sorghum

• Oats

• Cotton (ELS & Upland)

• Rice

• Oilseeds

• Peanuts*

• Sugar

• Tobacco**

• Wool & Mohair

• Honey

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Income Support PaymentsIncome Support Payments

• Why movement in 1970s to direct payments?– To lower price supports to restore export competitiveness

• Deficiency payments

• Marketing loan payments– Loan deficiency payment (LDP)– Marketing loan gain (MLG)

• Fixed payment– AMTA contract payments– Direct payments

• Countercyclical payments (CCP)

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Marketing Loan PaymentsMarketing Loan Payments

• Pays farmers the difference between the market price and the loan rate, as a direct payment, when the market price is below the loan rate

• Marketing assistance loans designed to provide producers interim financing at harvest time to meet cash flow needs without having to sell commodities when market prices are typically at harvest-time lows– Designed to facilitate more orderly marketing of commodities

throughout the year

• Were an embedded feature of the nonrecourse loan program until prices plummeted in the mid-1990s

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Loan Deficiency PaymentsLoan Deficiency Payments

• Uses localized posted county prices – Some daily, some weekly

• Uses local (county) loan rates

• Allows a farmer to take the payment without taking out a CCC nonrecourse loan (LDP)– Alternatively, the farmer can put the crop under a 9-month

nonrecourse loan and set the LDP at a later date

• By itself, the loan rate becomes the minimum revenue (per unit) a farmer will receive

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Fixed PaymentsFixed Payments

• Initially established in the 1996 Farm Bill

• Designed to address the over production effect of direct (deficiency) payments

• Annual amount of each payment (1996-2002) was set in the 1996 FB– Payments declined over period– Eligible farmers entered into contracts and received the

payments regardless of which (or any) crops planted

• Benefits still capitalized into land values

• Effect on output?

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40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004

Acreage Response to Lower Prices?Acreage Response to Lower Prices?Acreage Response to Lower Prices?Acreage Response to Lower Prices?In

dex

(19

96=

100)

Four Crop Acreage

Four Crop Price

Since 1996 “Freedom to Farm”• Aggregate US corn, wheat, soybean, and cotton acreage changed little

despite a wide fluctuation in price

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U.S. Gov’t Payments by ProgramU.S. Gov’t Payments by Program

0

5,000

10,000

15,000

20,000

25,000

1990 1992 1994 1996 1998 2000

milli

on d

olla

rs

Deficiency Direct LDP & MLG Emergency Conservation Other

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What about Exports?What about Exports?

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops1979=1.0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

US Population

US Exports

US Domestic Demand

*Adjusted for grain exported in meat

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What about Exports?What about Exports?

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

Th

ou

san

d M

etri

c T

on

s

US

Developing Competitors

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U.S. Federal Deficit/SurplusU.S. Federal Deficit/Surplus

-500

-400

-300

-200

-100

0

100

200

300

1965 1970 1975 1980 1985 1990 1995 2000 2005

US

Def

icit/

Sur

plus

, bi

llion

$

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2002 FB General Approach2002 FB General Approach

• No set-asides

• No stock accumulation

• No market price support

• Some payments decoupled from production, other payments tied to production and level of price

• 6-year lifespan (2002-2007)

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Commodity ProvisionsCommodity Provisions

• Continues fixed annual payments

• Continues deficiency payments when prices go below the loan rate

• Institutes new Counter-Cyclical Program (CCP) with target prices

• Allows for updating acreage and yields and addition of oilseed acreage for CCP

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Countercyclical PaymentsCountercyclical Payments

• New in 2002 Farm Bill

• Pays producers the difference between the target price (set by Congress) and the higher of:– The 12-month average market price, or– The loan rate plus the per unit fixed payment

• Based on farmers’ previous acreage and yields (allowed to update some in 2002 FB)

• Farmer does not have to plant the crop to receive the payment

• “Countercyclical” because they “kick in” when market prices are low

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Fixed Payments & Target PricesFixed Payments & Target Prices

Fixed Payment2002-2007

Target Price2002-2003 2004-2007

Wheat (bu) $0.52 $3.86 $3.92

Corn (bu) 0.28 2.60 2.63

Sorghum (bu) 0.35 2.54 2.57

Barley (bu) 0.24 2.21 2.24

Oats (bu) 0.024 1.40 1.44

Rice (cwt) 2.35 10.50 10.50

Soybeans (bu) 0.44 5.80 5.80

Upland Cotton (lb) 0.0667 0.7240 0.7240

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Marketing Loan RatesMarketing Loan Rates

2001 Rates 2002-2003 2004-2007

Wheat (bu) $2.58 $2.80 $2.75

Corn (bu) 1.89 1.98 1.95

Sorghum (bu) 1.71 1.98 1.95

Barley (bu) 1.65 1.88 1.85

Oats (bu) 1.21 1.35 1.33

Rice (cwt) 6.50 6.50 6.50

Soybeans (bu) 5.26 5.00 5.00

Upland Cotton (lb) 0.52 0.52 0.52

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Direct PaymentsDirect Payments

• Replaces decoupled payments established in 1996 farm bill (AMTA, PFC)

• Paid at a fixed rate per crop on 85% of base acres, includes additional crops

• Receive direct payments whether you plant a crop or not

• Option to update base acres, must use “old” program yields

• DP = (base acres * 85%) * old FPY * DP rate

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To Update Or Not To UpdateTo Update Or Not To Update

• Tradeoffs, primarily because entire farm must be updated, not selected commodities

• Updating often adds income for one commodity at the expense of another

• Decision is extremely farm-specific

• Updated program yields not used to calculate direct payments, just CCPs

• Direct payments and CCPs made on 85% of base acres

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Counter-Cyclical PaymentsCounter-Cyclical Payments

• Establishes a vehicle for “automatically” distributing the emergency/ad hoc payments that have been made since 1998

• Do not have to produce commodity to receive CCP

• Commodity specific based on a national price trigger (target price)

• Payment rate depends on the effective price for the commodity, where effective price is the direct payment rate plus the higher of the market price or national loan rate – Target price - effective price = CCP rate ($/unit)– CCP = (base acres * 85%) * program yield * CCP rate

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Target PricesTarget Prices

• Target price is not a guaranteed price

• Target price is merely a number used to calculate other possible payments

• As price rises, the difference between market price and revenue received narrows

• Maximizing farm program benefits more intertwined with market direction and marketing decisions than ever before

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Corn Price/Revenue Example*Corn Price/Revenue Example*

Revenue Received: $2.54Cash Price: $1.80

Revenue Received: $2.65

Cash Price: $2.50

Target Price

= $2.60

County Loan Rate

= $2.12

Market PriceMarket Price

LDPLDP

Counter-Cyclical PmtCounter-Cyclical Pmt

Direct PaymentDirect Payment

Market PriceMarket Price

Direct PaymentDirect Payment

$1.80

$2.27

$2.12

$2.54

$2.65

$2.50

• “Old” Farm Program Yield = 80• Actual Yield 1998-2001 = 125

• Updated CCP Yield = 117• Payment Limits Not Applicable

• “Old” Program Base Acreage = 1,200• Updated Base Acreage = 1,080

* Assumptions:

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Corn Price/Revenue Example*Corn Price/Revenue Example*

Target Price = $2.60

Revenue = Cash Price + DP + CCP + LDP

Cash Price = Price Received

• “Old” Farm Program Yield = 80• Actual Yield 1998-2001 = 125

• Updated CCP Yield = 117• Payment Limits Not Applicable

• “Old” Program Base Acreage = 1,200• Updated Base Acreage = 1,080

* Assumptions:

County LoanRate = $2.12

$1.30

$1.60

$1.90

$2.20

$2.50

$2.80

$3.10

$3.40

$3.70

$4.00

$1.30 $1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50

Cash Corn Price

Pri

ce

Re

ce

ive

d

National LoanRate = $1.98

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Implications of Commodity PoliciesImplications of Commodity Policies

• No price floor

• No emergency reserves

• No price ceiling

• Supports incomes, not prices

• Subsidizes livestock and other users

• Subsidizes agribusiness input suppliers and output processors

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Conservation ProvisionsConservation Provisions

• Total conservation price tag: $17.1 billion

• Basically expands most existing conservation programs and adds several new programs

• Emphasis of conservation spending shifts from land retirement to working lands

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Conservation ProgramsConservation Programs

• Conservation Reserve Program (CRP)– Cap raised from 36.4 to 39.2 million acres– Land automatically eligible for re-enrollment

• Wetlands Reserve Program (WRP)– Cap raised from 1.075 to 2.275 million acres– Permanent easements, 30-year easements

and/or restoration cost-share

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Conservation Programs, cont’dConservation Programs, cont’d

• Env’l Quality Incentive Program (EQIP)– $9 billion mandated– 60/40 split between livestock and crop

producers– Priority areas eliminated– Animal unit cap eliminated– Conservation plan requirement retained– 1 to 10 year contracts– Total payments capped at $450,000

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Conservation Programs, cont’dConservation Programs, cont’d

• Farmland Protection Program (FPP)– Purchase conservation easements– $985 million– Requires partnership with non-profits

• Wildlife Habitat Incentive Program (WHIP)

• Grasslands Reserve Program (GRP)

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Conservation Programs, cont’dConservation Programs, cont’d

• Conservation Security Program (CSP)– Incentives to maintain and increase

stewardship practices– $2 billion– Begins in FY03– Land in CRP, WRP, GRP and animal waste

facilities not eligible– 3-tiered participation, up to 10 year contract,

annual cap up to $45,000

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Payment LimitsPayment Limits

• The maximum amount of commodity program benefits a person can receive annually by law

• First enacted in 1938 farm bill, reinstated in 1970

• “Persons” are individuals, members of joint operations, or entities, such as limited partnerships, corporations, associations, trusts, and estates, that are actively engaged in farming

• “3 entity” rule

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Payment LimitsPayment Limits

• Current maximums– $40,000/person/FY for direct payments– $65,000 for counter-cyclical payments– $75,000 for marketing loan benefits

• Effective annual cap is $360,000 per person per year– In reality, virtually unlimited

• Producers with 3-yr average adjusted gross income > $2.5 million not eligible for payments– Unless > 75% of AGI is from agriculture

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Other ProvisionsOther Provisions

• Peanut quota buyout

• Maintains/increases most trade, rural development and nutrition programs

• Adds new energy title to the legislation

• Addresses bioterrorism / biosecurity

• Relaxes rules to make more borrowers eligible for federal farm credit assistance

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Outlook for 2007 Farm BillOutlook for 2007 Farm Bill

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What/Who Influences Policy?What/Who Influences Policy?

• Ag producer lobby– General farm organizations– Commodity organizations– Cooperatives

• Agribusiness lobby– General agribusiness organizations– Commodity agribusiness organizations

• Public interest lobby– Consumer food lobby– Nutrition, food safety, and quality lobby– Hunger lobby– Resource and environmental lobby

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Broader Interests RepresentedBroader Interests Represented

• USDA—first substantive set of policy proposals in decades

• Inside agriculture– Specialty crop producers– American Farmland Trust

• Outside agriculture– Chicago Council on Global Affairs– American Enterprise Institute– Oxfam USA

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(What/Who)’s MOST Influential?(What/Who)’s MOST Influential?

What counts is relative influence at the time the bill is being developed

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Increasingly Important InfluencesIncreasingly Important Influences

• Budgets and deficits

• Farm economy (prices, trends)

• Trade / WTO considerations

• Expanding/competing ag interests

• Balance of power in Congress

• Energy prices / renewable energy

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Farm Bill TimelineFarm Bill Timeline

• 2002 Farm Bill expires September 30, 2007

• Trade Promotion Authority expires June 30, 2007

• Budget baseline haggling through April

• Likely to mark up bills through May and June

• Need to have bills passed in both Senate and House and ready for conference by August recess

• Must resolve differences in Conference quickly in September

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Budget ConstraintsBudget Constraints

• Very different budget situation than in 2002– Got $79 billion ABOVE the baseline in ‘02 Farm Bill– January CBO baseline $30 billion less for commodity

title spending over last year’s baseline

• Diverse groups attempting to obtain more funds in FY08 budget resolution

• Even if Congress doesn’t cut, it won’t increase, affects how the pie is sliced– Divisive for the ag sector– But maybe not as bad as 2012, 2017 ??

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US Budget Projections, 2008-2017US Budget Projections, 2008-2017

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

Bill

ion

$

2005 2007 2009 2011 2013 2015 2017

CBO status quo CBO realistic

Source: CBO: The Budget & Economic Outlook:Fiscal Years 2008-2017, Jan. 2007

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Future “Current” SituationFuture “Current” Situation

• What matters most is the situation At The Time the bill is written

• Crop prices much higher– Up from historical lows, reduces “costs” of continuation – Driven largely by non-ag demands (ethanol)– Export prospects (China) improving ??

• Costs of production high– Especially energy-related costs– Interest rates higher

• Labor/immigration policy pressures

• Doha negotiations in WTO may not be resolved, but trade issues still very important

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U.S. Corn Ethanol ProductionU.S. Corn Ethanol Production

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Mill

ions

of

Gal

lons

of

Eth

anol

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: Renewable Fuels Association

2012 RFS: 7.5 B gallons

Total Capacity (as of 11/27/06) = existing + under construction + under expansion

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Expected Net ReturnsExpected Net Returns

0

50

100

150

200

250

300

350

Exp

ect

ed

Ne

t Re

turn

s/A

cre

($

)

Corn Soybeans Wheat Rice UplandCotton

2006 2007

Source: USDA, OCE, January 2007

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U.S. Corn Ethanol ProductionU.S. Corn Ethanol Production

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Mill

ions

of

Gal

lons

of

Eth

anol

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

0

3,000

6,000

9,000

12,000

15,000M

illio

ns o

f G

allo

ns o

f E

than

ol

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Source: Renewable Fuels Association

2012 RFS: 7.5 B gallonsTotal Capacity (as of 11/27/06) =

existing + under construction + under expansion

There’s a limit to the amount of corn-based

ethanol we can sustainably produce

without disrupting the ag sector

• Could potentially double corn-ethanol capacity

• Crop farmers benefit from corn-ethanol, wherever plants are located

• Livestock farmers face higher costs

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Distribution of SubsidiesDistribution of Subsidies

• Renewed push for payment limits– Last year: necessary to hold down costs– This year: some reform necessary for damage control

• Pressure to shift funds from program crops to specialty crops while reducing overall spending– 39% of farms receive government payments (Source: ERS, 2006)

– 10% of farms receive nearly 75% of payments (Source: EWG, 2005)

• Agricultural voting impact– Number of farms and farmers continues to shrink– Many representatives in the House do not have farm

constituents

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Distribution of Subsidies, cont’dDistribution of Subsidies, cont’d

• Pressure to shift payment basis from production to conservation– Influenced by WTO commitments

• Pressure to address WTO compliance challenges

• Pressure to reduce the impacts of subsidies on land values and cash rents (transfers to landowners)– Since 2000, Illinois farm real estate values have increased 68%

• 1994-1999: increased between 4.2% and 9%• 2000-2003: increased between 1.3% and 3.4%• 7.4% in 2004, 27.6% in 2005, 14.1% in 2006

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USDA FB ProposalUSDA FB Proposal

• Proposal developed by the Secretary of Agriculture, released 6 weeks ago

• A continued “safety net”– “Similar” programs, lower loan rates

• Addresses “inequities” in payments– Eliminates planting restrictions– Reduces payment limits (lower AGI cap, eliminates 3-

entity rule)

• Moves toward more WTO compliance– More conservation dollars, higher direct payments,

larger energy title

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Possible 2007 FB ReformsPossible 2007 FB Reforms

• Farm income– Revenue, rather than price, programs– May be only current program crops, may include

specialty crops and livestock

• Conservation– Continued shift toward green payments, especially

those that are clearly WTO green box

• Renewable energy– Expand programs in 2002 FB, add incentives to move

from corn-based ethanol to cellulosic ethanol

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Farmer Decision AnalysisFarmer Decision Analysis

• Price expectations

• Expected returns– Includes government payments

• Labor

• Rotations

• Expectations beyond next year

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Expected Net ReturnsExpected Net Returns

0

50

100

150

200

250

300

350

Exp

ect

ed

Ne

t Re

turn

s/A

cre

($

)

Corn Soybeans Wheat Rice UplandCotton

2006 2007

Source: USDA, OCE, January 2007

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2002 Total Cropland2002 Total Cropland

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2002 Base Acres2002 Base Acres

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Share of Base Acres PlantedShare of Base Acres Planted2005, Corn2005, Corn

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Share of Base Acres PlantedShare of Base Acres Planted2005, Corn2005, Corn

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Share of Base Acres PlantedShare of Base Acres Planted2005, Cotton2005, Cotton

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Share of Base Acres PlantedShare of Base Acres Planted2005, Cotton2005, Cotton

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Share of Base Acres PlantedShare of Base Acres Planted2005, Soybeans2005, Soybeans

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Share of Base Acres PlantedShare of Base Acres Planted2005, Soybeans2005, Soybeans

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