PERSPECTIVE: Is it Time to Rethink Key Provisions of New Farm Bill?

January 3, 2013 06:42 AM
 

via a special arrangement with Informa Economics, Inc.

Some say refocus needed on including 'shallow loss payments' in era of huge deficits and debt


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


Veteran farm bill observes believe some farm-state lawmakers and definitely some farm and commodity group lobbyists overreached in their 2012 efforts. Those efforts included some controversial safety net and other provisions in a hard-to-get new farm bill approach that has not garnered support from some Senate and House Republican leaders.

And with an opportunity for a fresh look at farm policy, some conclude that the best Title I (safety net) policy may be a far simpler program. They say it should be catastrophic and crop/revenue insurance coverage already offered by the private sector, plus Supplemental Coverage Option (SCO) (one analyst said the move should be called, "SCO and Let's Go"). They say lawmakers should do away with shallow loss and offer a target price option to some or all program crops, at least until more viable crop and revenue assurance programs are available for some crops like rice and peanuts. For example, for rice, industry contacts say there is not a cost-effective buy-up policy for coverage beyond catastrophic crop insurance.

There are growing budget and policy doubts about the proposed shallow loss, a revenue assurance program that is part of a commodity safety net in the Senate-passed bill and a similar provision in the House bill that never saw a vote. The program was pushed by Midwest and northern-tier lawmakers and groups representing corn, soybeans and wheat.

The question some have is why in an era of record to near record farm income, and more importantly huge annual deficits and a bloated US debt of over $16 trillion, would a new farm bill even include a safety net to protect against so-called "shallow losses." Some recall that early in the new farm bill debate, the American Farm Bureau released a letter warning about the "moral hazard" of going to a shallow-loss program because it could lead some farmers to plant certain crops because of the safety net protection of the program.

Veteran farm policy analysts say they have learned the best farmer safety net is one which protects a farmer when commodity prices are low for an extended period of time – not when prices have been and remain at levels much higher than in the past.

But there are also naysayers to target prices. Some opponents say the recommended levels pushed by the House Ag Committee may well be set too high for some commodities, especially if they pay out for most of the ten years in a ten-year baseline. However, a farm policy analyst called that misleading and said "target prices should be based on their likelihood of triggering given past price history. In fact, they may not trigger at all going forward."

Targeting target prices in the Senate Ag Committee. During a recent Senate Ag Committee get together, sources say, Chairwoman Debbie Stabenow (D-Mich.) reportedly told panel members of a plan to propose target prices, but she was surprised how many of the Republican and Democratic members of her panel negatively reacted to her comments.

Then there is the controversial dairy policy provision included in both the Senate and House farm bills that would significantly alter current dairy policy and move to a gross margin safety net that includes the price of corn in a support calculation. But the most controversial provision is an "optional" dairy supply management program that would curtail dairy production to help limit payouts under the gross margin safety net program when supply becomes burdensome. A look at the Congressional Budget Office's latest projections for this program show payouts during the "out years" of a ten-year baseline and thus the need to implement the supply management program more often than its supporters acknowledge. Dairy industry officials say this would negatively impact the competitiveness of US dairy exports after recent years have shown strong growth in such exports.

The recent entry of Senate Republican Leader Mitch McConnell (R-Ky.), along with Vice President Joe Biden and Senate Majority Leader Harry Reid (D-Nev.), into the farm policy arena, some say, should be a wake-up call to the ag industry – and to farm-state lawmakers, and even to USDA Secretary Tom Vilsack because, as it turned out, congressional leaders rejected the suggestions by the "aggies" and instead successfully pushed a one-year extension of the 2008 Farm Bill. McConnell (some say with a push from House Speaker John Boehner, Republican from Ohio) helped push, as part of the Senate's fiscal cliff measure, a partial extension of the 2008 Farm Bill that extended current dairy policy rather than include the controversial new dairy policy provisions pushed by some key farm-state lawmakers and the National Milk Producers Federation (NMPF). And sources stress that those that say McConnell took directions on the farm bill do not realize how much McConnell and his staff were involved. And, McConnell has been a member of the Senate Ag Committee for more than 20 years. But still others stressed, again, the roles also played by Obama, Biden and Reid.

Rep. Collin Peterson (D-Minn.), the top Democrat on the House Agriculture Committee, had warned the White House that it must tread carefully on the dairy and farm bills issues or risk a backlash. And Peterson didn’t hide his anger with the administration for helping to roll Stabenow and the agriculture committees, according to a Politico article. "Upset is an understatement," Peterson told Politico. "I’m not going to talk with those guys. I’m done with them for the next four years. They are on their own. They don’t give a s#*%. about me, anyway."

Another farm policy analyst gave this detail regarding the eventual decision for a relatively "clean" 2008 Farm Bill extension: "The entire fiscal cliff bill as posted on the House Rules website was 154 pages – 18 of those were for agriculture. The 'extension' proposed by the two (Ag Committee) chairs that was introduced in the House and posted on the calendar was 78 pages. Had that been included in the final cliff agreement, the total bill would have been 214 pages and over a THIRD of it would have been the farm bill 'extension.' Anybody still wonder why the leadership said no?"

"Farm-state lawmakers are not used to losing, ditto for some aggressive farm industry lobbyists," said one industry contact. "But McConnell and Boehner and now the White House have made clear that what many thought would be some new farm bill provisions may not be so after all."

That some farm and industry group lobbyists have been aggressive is an understatement. Several groups have via emails sent to their members targeted Boehner. Perhaps, it seems, they should have had their focus on McConnell.

One recent example of the focus on Boehner came from the NMPF. The following was sent by NMPF's CEO Jerry Kozak on Dec. 31, 2012, to the NMPF Board & GM's: " ...It has been nearly 3 and ½ years of work on our membership’s part and unprecedented unity amongst producers – this is what it has come down to and we must fight against Speaker Boehner’s unprecedented personal opposition. Our staff is doing everything we can but Congress needs to hear from constituents! We can’t give up – we must let them hear our voice. Thanks."

But one farm policy observer countered: "I thought dairy had done a decent job of revamping a broken system, avoiding adverse impact of the stabilization program on exports, etc. Clearly, the House Speaker does not think so. I am not sure that substance was the factor for the Senate Minority Leader (McConnell) as much as a pure (2008 Farm Bill) extension was easier to argue for. Once you alter an extension, it is no longer an extension. Whether dairy needs to tweak here and there to address concerns, I don’t know."

One ag industry executive with close ties to key Washington officials said, "In my monitoring of seven farm bills, I have never seen such personal attacks on a House Speaker (Boehner) and such infighting among some farm groups and farm-state lawmakers. And don't get me going on how I feel about the media's overall reporting on the farm bill debate to date – they talk way too much to agriculture interests and not nearly enough to other power brokers in the debate."

A veteran farm bill analyst said, "Taking the cake move was soybeans hiring (Bruce) Babcock to assail the House farm bill on target prices when he (Babcock) has spent the better part of two years assailing soybean’s revenue program as well as crop insurance. Revenue programs are a threat to crop insurance. Babcock and the EWG, AEI, etc., want to merge the two, which would end up killing both."

Beyond advocacy of shallow loss was the Senate's initial insistence that besides SCO that it be the only game in town and the manner in which they have advocated for it. One source said, "There are a couple of capes I would have never tugged on but some farm groups went there. Poor judgment. They have repair work to do and also an adjustment in attitude that they can command Congress to do exactly as they want."

While of course there has been a huge focus on the shallow loss program, the main program that farmers focus on is crop insurance. The program figures to have record payouts for the 2012 crop year, with indemnities already surpassing the $10 billion mark (as of Dec. 31, 2012), less than $1 billion away from the prior record of $10.8 billion paid out on 2011 crops.

And this is not the "crop insurance" that most may think of -- the yield protection component which had been the mainstay of the program, but that has dwindled as the crop insurance tool of choice by producers. Producers instead have flocked to the revenue protection options as their main tool. The program, after all, has paid out in recent years even when "regular" farm program components such as counter-cyclical payments (CCPs) and loan deficiency payments (LDPs) were non-existent due to prices.

The crop insurance program has flourished as a risk management tool due to two key factors: One factor is the premium subsidy. This amounts to around 60 percent for most types of policies and has attracted farmers in the heart of the Corn Belt to participate in the program. Getting their participation was key for having the program move from one that focused primarily on areas of the country where losses were typically greater. But it's come at a multibillion-dollar price tag some years.

Private sector crop insurance innovation is another factor. The development of revenue protection programs by the private-sector crop insurance companies have moved the program to where it is today. And those private interests are the ones developing the options that will be coming for southern producers of cotton, rice, peanuts and more. Those companies are obviously not doing this out of the goodness of their hearts, but rather with an eye on profits from offering farmers options that work. Some southern interests say that until they have revenue assurance and crop insurance that helps their producers as much as other regions of the country, there is a need for target prices. For example, 69 percent of the rice acres covered by crop insurance for 2012 were via a yield protection policy. For a crop like corn, less than 12 percent of acres were covered by a yield protection policy with the balance covered by a revenue-based product.

Both versions of last year's farm bill provide more funding for crop insurance with funds from the coming end of direct payments. This of course has caught the attention of those who are against any type of farm subsidy program. But the difference is that even with around a 60 percent subsidy, farmers still are contributing around 40 percent of the premium costs so they have some "skin in the game." But that level of subsidy is ripe for opponents to zero in on. And they are. The key remains whether farmers will still opt to use the program to the level that they do now if that subsidy is reduced – or if the government offers very similar programs at zero cost. But high prices will help to keep farmers utilizing the program and again they do have their own money put into the program.

There are some hurdles ahead. With sequester/across-the-board cuts suspended until March 1, with the Fiscal Year 2013 continuing resolution (CR) expiring March 27, and with the debt ceiling debate happening in late February, early March, one farm policy expert said, "Farm groups might consider getting over themselves and unifying so if there is another bite at the apple in a couple of months they are ready. It is not hard to reject a five-year bill generating so much controversy in and out of farm circles. It is best if all producers and groups embrace a common policy." But a veteran farm bill lobbyist said, "It's a good idea for all the groups to get together, but it's not going to happen. Not a chance in he--."

A new baseline. Layer on top of the current farm policy situation will be the updated baseline from CBO due to be released later this month. That update from CBO will be another potential wildcard in the farm bill debate. CBO has used the March 2012 baseline as the measuring stick to assess the now-thwarted new farm bill. And, given a look at current price forecasts from USDA compared to the CBO March baseline, there will be some different figures at play.

The following table compares the latest USDA price projections for 2011/12 (2011 crop) and the mid-point of their price projections for 2012/13 (2012 crop) for corn, soybeans, wheat and cotton to the 2011 crop and 2012 crop projections from the CBO March baseline. Clearly the CBO could not have forecast the dramatic runup in corn, soybean and wheat prices seen from the 2012 drought. But there will be higher prices plugged into their projections due later this month and that will likely translate into some different budget assumptions.

Crop/Year

USDA (12/11/12)

CBO (March 2012))

Corn – 2011/12

$6.22/bu.

$6.12/bu.

Corn – 2012/13

$7.40/bu.

$4.96/bu.

Soybeans – 2011/12

$12.50/bu.

$11.70/bu.

Soybeans – 2012/13

$14.55/bu.

$11.00/bu.

Wheat – 2011/12

$7.24/bu.

$7.30/bu.

Wheat – 2012/13

$8.00/bu.

$6.05/bu.

Cotton – 2011/12

88.3 cents/lb.

90 cents/lb.

Cotton – 2012/13

68 cents/lb.

82.42 cents/lb.

CBO forecast corn prices for crop years 2013 through 2022: $4.54 to $4.82/bu.
CBO forecast of soybean prices for crop years 2013-2022: $10.47 to $11.05/bu.
CBO forecast of wheat prices for crop years 2013-2022: $5.63 to $6.05/bu.
CBO forecast of cotton prices for crop years 2013-2022: 70.15 to 71.99 cents/lb

A number of long-time farm bill analysts said there are a lot of people wondering why there has to be shallow loss AND SCO. "Couldn't SCO work for everyone – even cotton?" they ask. Then everyone would have "skin" in the game. Risk. Not just a totally free government program with moral hazard galore. Some say target prices should also be offered as an option – but at levels guaranteed not to skew planting and at levels using Congressional Budget Office price estimates that are not projected to pay out too many years.


Bottom line: The proposed move to a taxpayer-paid revenue assurance/shallow loss program was seen as an intermediary step to a new farm policy ahead. But focusing on what is already available now, private-sector crop and revenue assurance plans, which farmers have to pay for to some degree, is the step some veteran farm policy analysts say should be the prudent move ahead for the new farm bill. As for as putting more focus on crop revenue and SCO, some say while that makes logical sense, the fear is that farm policy opponents will keep attacking the subsidies for buy-up and if that occurs, the safety net will become very weak. As for the recent move to those pushing a shallow loss program, some say the impetus for that is for farm groups to capture as much of the coming end to direct payments as they can.

The major reason for a Title I farmer safety net is to do things that crop/revenue assurance cannot do – and that is to deal with multi-year price declines.  Also, relying too much on heavily subsidized crop insurance/revenue assurance programs at least raises the potential for some WTO-related problems.


 

 


 

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


 


 

 

 

 

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