Perspective on House Farm Bill Proposal

July 5, 2012 10:04 AM
 

via a special arrangement with Informa Economics, Inc.

More equitable bill than Senate for southern crops | $35 bil. in savings, including $16 bil. In food/nutrition


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


The House Ag Committee today released language and a summary of its long-awaited farm bill proposals, which look to be more balanced than the Senate-passed version relative to southern crops, even though it saves far more, around $35 billion over ten years compared with the Senate's around $24 billion in savings. Like the Senate measure, the House proposal eliminates direct payments. There are also key payment limitations changes in the House version than those in the Senate, as well as giving producers a choice between risk management programs.

Links: Text of bill. Highlights of bill.

The bill is entitled the Federal Agriculture Reform and Risk Management (FARRM) Act of 2012, and runs 557 pages considerably shorter than the nearly 1,000-page Senate bill.

The savings include $14.2 billion in combined Title 1 (farm programs) and crop insurance, around $16 billion from food and nutrition (food stamps), and nearly $6.5 billion in conservation spending.

Unlike the one-size-fits-all Senate approach, the House proposal offers producers choosing the PLC option a one-time opportunity to update yields used to determine price loss coverage payments. The farm risk management portion allows a one-time election for producers to choose between two options on a crop-by-crop and farm-by-farm basis. Under either option, the risk management tool provided is only there for producers when they suffer a significant loss. Options include Price Loss Coverage (PLC), Revenue Loss Coverage (RLC) and/or Supplemental Coverage Option (SCO). However, unlike the Senate, if a producer chooses RLC, then SCO is not available for that crop. Once PLC or RLC is selected, that election holds for the remaining crops under the farm bill. SCO is an add-on option for those selecting PLC or for upland cotton producers.

Of note, the House bill does not include an on-farm calculation relative to the revenue coverage program, limiting it to a county basis.

Price Loss Coverage (PLC) is a risk management tool that addresses deep, multiple-year price declines:

• PLC will complement federal crop insurance, which is not designed to cover multiple-year price declines.

• PLC uses modern yields and an index of below cost of production prices to establish a market-oriented, price-based risk management tool for producers.

• PLC limits budget exposure by only addressing deep, multiple-year price losses, and prevents the need for costly and unbudgeted bailouts when markets collapse.

Revenue Loss Coverage (RLC) is a risk management tool that addresses revenue losses, similar to the Senate's Agriculture Risk Coverage (ARC) proposal with key improvements, according to the House Ag committee, which listed the following:

• RLC requires a producer to experience at least a 15 percent loss, helping ensure that all risk is not removed from farming and that no growers are guaranteed profits.

• RLC offers coverage based on county-wide losses to ensure that a government program is not set up to duplicate, for free, what farmers should pay for under crop insurance.

• RLC uses yield plugs and an index of below cost-of-production prices as a benchmark in establishing this revenue-based risk management tool for producers.

FARRM’s PLC and RLC apply to planted acres up to total base acres on a farm in order to contain costs.

Upland cotton producers are ineligible for PLC or RLC, but will have their own program – the Stacked Income Protection Plan (STAX), with some key differences from the Senate-passed measure and changes that echo what the National Cotton Council (NCC) first proposed for the program.

The reference/target prices for the PLC are as follows:

PROPOSED REFERENCE PRICES IN HOUSE FARM BILL DRAFT

Crop

Current Target Price

House Proposed
Reference Price

Last Fall Proposed
Reference Price

Wheat (bu.)

$4.17

$5.50

$5.50

Corn (bu.)

$2.63

$3.70

$3.64

Grain Sorghum (bu.)

$2.63

$3.95

$3.87

Barley (bu.)

$2.63

$4.95

$3.64

Oats (bu.)

$1.79

$2.40

$2.40

Rice, Long grain (cwt.)

$10.50

$14.00

$13.98

Rice, Medium grain (cwt.)

$10.50

$14.00

$13.98

Soybeans (bu.)

$6.00

$8.40

$8.31

Peanuts (ton)

$495

$535.00

$534.00

Dry peas (cwt.)

$8.32

$11.00

$10.97

Lentils (cwt.)

$12.81

$19.97

$16.90

Small chickpeas (cwt.)

$10.36

$19.04

$13.66

Large chickpeas (cwt.)

$12.81

$21.54

$17.40

Sunflower seed * (cwt.)

$12.68

$20.15

$16.65

Rapeseed * (cwt.)

$12.68

$20.15

$16.65

Canola * (cwt.)

$12.68

$20.15

$16.65

Safflower * (cwt.)

$12.68

$20.15

$16.65

Flaxseed * (cwt.)

$12.68

$20.15

$16.65

Mustard seed * (cwt.)

$12.68

$20.15

$16.65

* = Defined as "other oilseeds" via the 2008 Farm Bill, including sunflower seed, canola, rapeseed, safflower, mustard seed, flaxseed, crambe and sesame seed.  

PLC payments would be made to participating producers when the calculated price for the first five months of the marketing year for the applicable crop falls below the designated levels detailed in the accompanying table of reference prices. The new House PLC option would cost about $12 billion in 10-year subsidies.

Of note, those who enroll in this program would be allowed also to update their yields.

 

The Revenue Loss Coverage (RLC) makes payments to producers for each planted crop when countywide crop revenue is below 85 percent of historical revenue (I.e., the producer absorbs the first 15 percent of the shortfall). The government then pays for the next 10 percent of the loss. Any remaining losses are backstopped by crop insurance if purchased by the producer. The Senate's ARC would pay on losses exceeding 11 percent. And under the Senate approach, payments would be triggered on either a county- or farm-based loss. There is no farm-level coverage option in the House bill. The RLC is estimated to cost about $9 billion.

Payment acres for PLC and RLC. Payments are on 85% of total acres planted for the year to each covered commodity on the farm and 30% of approved total prevented from being planted for the year to each covered commodity on the farm. 

Upland cotton producers have the STAX program, offered as a crop insurance product. Producers pay a premium for coverage and receive indemnities when a calculation of county revenues balls below a trigger level determined by historical yields and futures market prices. STAX can be used to cover revenue losses between 10 percent and 30 percent of expected county revenue. The STAX payment rate can be selected by the producer. The maximum is 120 percent.

Marketing Loans. Producers remain eligible for marketing loans under the same repayment terms except in the case of cotton. For cotton, loan rates may be reduced from current levels, consistent with the STAX proposal.

Payment Limitations: Under the House proposal, there is a unified adjusted gross income cap for farm program payments of $950,000. There is a payment cap of $125,000 (double for husband and wife).

The Conservation Reserve Program (CRP) maximum acres would be phased down from current 32 million acres to 25 million acres by FY 2017.

Dairy policy is replaced with a new, voluntary risk management safety net for dairy producers. Dairy producers will have the option to sign up for the basic margin program, helping them to better manage risk when milk prices and feed costs converge. Producers that sign up for the margin program would then be subject to supply management controls, wherein proceeds of milk sales normally received by the producer would be reduced for the production which exceeds an applicable percentage of their designated base. Funds collected by this program will be used by USDA to purchase surplus dairy products for donations to food banks and other programs.

The two main components of the program will be margin protection and a market stabilization program meant to manage milk supply. The basic margin protection provides a base level of margin protection for 80 percent of production history when the margin falls below $4.00 for a consecutive two-month period. The producer will also be able to purchase additional supplemental coverage up to an $8.00 margin. The first 4 million pounds of milk marketed will have a lower premium rate, which will be particularly beneficial to small producers. The supply management program will activate when the margin is below $6.00 for two consecutive months and reduces producers’ payments by 2 to 8 percent depending on market conditions. The program contains a number of market-based triggers to terminate the program when domestic or international markets demand U.S. products.

Summary of dairy policy reforms:

• Saves $37 million over 10 years, nearly a 10 percent saving from the current baseline;

• Creates one new program: the voluntary risk management, which is tied to a supply management program;

• Reauthorizes 3 programs: (1) Dairy Forward Pricing Program; (2) Dairy Indemnity Program; and (3) Dairy Promotion and Research Program; and

• Eliminates 4 programs: (1) Dairy Product Price Support Program; (2) Milk Income Loss Contract Program (MILC); (3) Dairy Export Incentive Program; and (4) Federal Milk Marketing Order Review Commission.

The sugar program is left unchanged in the House Ag Committee bill, but is expected to be the topic of some committee markup amendments offered, and during any House floor debate.


Perspective: The draft House version certainly will be received far more warmly by southern-based producers than the more Midwest-friendly Senate version. Controversial features in the House draft include higher payment caps and the big cut in food and nutrition (largely food stamp) funding.

Upland cotton producers will embrace the changes in the House STAX version as they follow the National Cotton Council's original proposals.

Meanwhile, southern-state rice producers will definitely favor the House approach that includes reference prices, as will perhaps some wheat producing state producers. The House bill also adds some flexibility regarding acres and yields not seen in the Senate version.

The House Ag Committee will markup its bill on July 11. Several important amendments could be offered dealing with sugar and dairy policy programs which, if accepted, would significantly alter the current House Ag Committee draft for those commodities.

The recommended reference prices are interesting because in some cases they are higher than those recommended in last fall when Ag Committee leaders wanted to link a new farm bill as part of the Super Committee process, which failed. Think of the influence of Rep. Collin Peterson (D-Minn.) relative to the increases in dry peas and lentils and chickpeas. Ditto for barley, which was set as it should be at 90 percent of wheat. In some cases, it just looks like they were rounded up.


 

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


 


 

 

 

 

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