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Time is Not Running Out on Farm Bill

03:48AM Dec 18, 2012

via a special arrangement with Informa Economics, Inc.

Negotiators know what they must do, but friction, overreaching are blocking compromise

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

While some media report time is running out on farm bill negotiations, inside farm bill contacts signal such is not the case, as negotiations continue on reaching a farm bill end zone on lingering farmer safety net questions and disagreements.

Some charge an overreaching farm bill is in the making with a debt-laden country and recent record to near-record farm income for key crops. With the US facing a debt of over $16 trillion, outside observers are beginning to ask questions as to why the new farm bill has to protect farmers from "shallow losses" when the historical reason for a safety net is for times of sustained very low prices. Some observes signal this is overreach by both Ag panels, but notably the Senate's latest safety net proposal which puts far more funding for revenue assurance, notably for corn and soybean crops, versus what some believe is a more balanced approach in the House plan which includes a more realistic and real option for farmers to choose either revenue assurance or target/reference prices.

Private sector crop insurance may be targeted, impacted in years ahead. Outside observers are also questioning why the revenue assistance programs in part provide farmers with a safety net that is very similar to revenue assurance plans already being offered in the crop insurance sector, with farmers partially paying for those plans, albeit with a hefty US government subsidy. The concern, some note, is that if and when commodity prices tumble, farmers in a cash-flow bind will simply not renew their private crop insurance policies and instead, rely on the free government programs. This is why some analysts wonder why US crop insurance officials have been so quiet regarding the possible long-term negative impacts on their sector – especially with groups like the Environmental Working Group (EWG) establishing a multi-year plan targeted at crop insurance program reform. Others want to put conservation compliance and payment limits on crop insurance.

Moral hazard? When the Senate Ag Committee first released their revenue assurance plan called Ag Risk Coverage (ARC), without a farmer option to choose a target price plan at levels above current rates, the American Farm Bureau Federation released a letter warning about a "moral hazard" that could lead to some farmers planting crops due to the reduced risk via the program. The Farm Bureau since that letter has not mentioned the concern.

The latest farm bill counterproposals are being spun by both Senate and House farm bill aides and lawmakers. A look at the details shows the Senate plan is not a compromise with the House, as was billed. The reason, sources say, is that the ARC uses 90 percent of the available funding and the price loss option gets 10 percent (details to follow). And, farmers would not be able to truly choose between revenue and price as the Senate proposal limits the price loss coverage with higher rates to just three crops – wheat, rice and peanuts. Corn and soybean producers in some states have indicated they prefer a choice of programs.

House Ag Committee ranking member Collin Peterson (D-Minn.) has frequently noted that the Senate's reliance on ARC is not a true safety net because it will not be there if and when market prices collapse. Peterson has stated that farmers and farm-state lawmakers can no longer count on Congress to approve ad hoc emergency spending to stop the bleeding if crop prices fall apart. While some say crop insurance will help, analysts say crop insurance coverage is based on the price in the market. If it is falling, so will the value of crop insurance, they reason. ARC is also of minimal help, covering only a 10 percent band with the protection based on a calculation that also falls over time as prices fall.

Some believe that the Senate plan in part was designed to get an annual payment to replace, albeit a lower amount, the end of direct payments. These analysts say this could be the reason for the Senate's restrictive payment limit on any ARC payouts. Payments under ARC would not necessarily be lower on a per acre basis compared to direct payments. While that is certainly true for rice, peanuts, wheat… payments for corn and beans have the potential to be much higher under ARC. Thus, the argument is true that some groups see this as a replacement for direct payments.

House farm bill leaders and some outside farm policy veterans have wondered why the Senate plan is so restrictive regarding a farmer choice, adding that this says Washington knows best as opposed to letting a producer choose among options regarding which safety net option best fits his or her operation and risk management strategy.

Those supporting the Senate ARC admit they do not want it to have low acceptance like the anemic participation in the ACRE program that was part of the 2008 Farm Bill. This is why some believe the ARC proponents are stacking the deck in favor of ARC over a price loss coverage option.

Another thorny issue is that the latest Senate offer insists that price loss protection be paid on base acres while the ARC program be paid on full planted acres. Senate aides and lawmakers and some commodity groups favoring the ARC conjecture that unless the price loss option is geared to base acres, it could distort plantings. But all mainstream analysis to date, including reports from the Food and Agricultural Policy Research Institute (FAPRI), have shown that neither of these programs are likely to impact planting decisions. Thus, making one program pay on old base acres while the other pays on current planted acres is not based on mainstream analysis and would likely favor one option (ARC) over the other (price loss coverage).

One farm bill analyst asks, "Why is putting relatively lower reference prices into law somehow worse than your picking the best five years of prices and yields for a crop via a robust revenue guarantee?"

To help explain the base versus planted acreage issue and whether they could drive planting decisions, take a look at peanut growers. The Senate ARC program would set a guarantee at 89 percent of the 5-year Olympic Average price (or roughly $470/ton). That is 5 percent less than the $495/ton target price set five years ago in the 2008 Farm Bill. By contrast, the Senate ARC program would set a guarantee for soybeans at roughly $10.60/bu., which is 76 percent higher than the $6/bu. target price set in 2008. This is why the equity question is being raised on this hot topic.

Checkoff dollars having a farm bill impact? Some farm bill analysts conjecture that the reason why some commodity groups want as much acreage as possible planted to their crops is because their checkoff dollars are paid on planted acreage. But that is a charge aggressively denied by commodity group officials.

A commodity group recently noted that the House farm bill would resurrect the time before the 1996 Farm Bill when farmers had to plant a certain crop. Before 1996, if a farmer had base for a crop, he or she generally had to plant that crop to get a payment. But neither the House or Senate farm bill says that – both of the proposals say farmers can plant what they want and any payment under a farm bill will follow that decision.

Budget aspects of farm bill debate. Ag Committee leaders are trying to retain control over likely cuts to programs under their jurisdiction by writing a measure that could provide more than $20 billion in deficit reduction over 10 years. The Congressional Budget Office has scored the House bill (HR 6083) at $35 billion in savings over 10 years and the Senate bill (S 3240) at $23 billion in savings for the same period. What is needed is word from top congressional officials dealing with fiscal cliff issues to give an exact funding cut figure that could be used as part of a package of spending cuts and tax provisions to avert the fiscal cliff.

"The only commitment I’ve had from my leadership is that the farm bill issue will be addressed before the end of the year," House Ag Chairman Frank Lucas (R-Okla.) said Dec. 13. "Does that mean a farm bill extension? Does that mean a farm bill? Does that mean a part of the big [fiscal] package? That’s not been clarified."

"At what point is there a big understanding? And if that is the case, what will be the numbers, savings-wise assigned to us. By the same token, if there is not a big agreement, at what point are we turned loose to finish our work?" Lucas added.

Senate Ag Chairwoman Debbie Stabenow (D-Mich.) said that without deadlines and directions it will be difficult for the principals to reach compromises. "This is a very difficult situation because we know, all four Agriculture leaders have differences in philosophy that we could bridge if we were being told by our leadership this needs to get done," she said.

A review of the latest Senate and House farm bill offers shows the following:

Senate Offer: The Senate’s offer spends 90 percent of the commodity dollars on shallow loss revenue programs and just 10 percent on price protection and producers are given no choice between revenue and price options. Instead, the current target price program is added as a complement to revenue, with some higher targets for only three crops – wheat, rice and peanuts. Opponents note there is no equity in spending, and ask where is the price protection for farmers who may not grow wheat, peanuts, or rice "but want meaningful price protection because they would be limited to today's target prices which are well under market values and needed safety net levels."

Details of Senate Offer

1. Continue the current counter-cyclical program for all commodities (except for cotton) on existing base acres but raise target prices for selected crops to increase their baselines:

• Increase wheat baseline (relative to Senate farm bill) by approximately $950 million (this is about 75 percent of the difference between Senate wheat spending ($4.458 billion) and House wheat spending ($5.683 billion). This would keep the bulk of the spending in the Senate ARC option).

• Increase rice baseline (relative to Senate farm bill) by approximately $1.3 billion (this is about 75 percent of the difference between Senate rice spending ($1.494 billion) and House rice spending ($3.261 billion). This would keep the bulk of the spending in Senate ARC).

• Increase peanut baseline (relative to Senate farm bill) by approximately $375 million (this is about 75 percent of the difference between Senate peanut spending ($699 million) and House peanut spending ($1.2 billion). This would yield a reference price less than the target price levels in 2008 because the direct payment rate is no longer included in the Counter-Cyclical Payment – CCP -- calculation) and would keep the bulk of the spending in Senate ARC).

2. Revise ARC to achieve the necessary savings to fund the new counter-cyclical program and increased target prices.

3. Proposal contingent upon accepting the Senate package of reforms.

House Offer shows 50 percent of spending for shallow loss and 50 percent for price protection where the grower makes the choice. House sources say Senate Ag claims about interaction with crop insurance are not correct. The effect on crop insurance under the House proposal is half of what it is in the Senate bill, sources argue. Analysts say that if the Senate is concerned about the effect on crop insurance, "dump ARC and just do price protection. Then the interaction will be zero." Others note that the effect on crop insurance is largely because the Senate is trying to duplicate much of what crop insurance does – something that supporters of the current paid crop insurance program are concerned about behind the scenes.

Details of House Offer

The House offer takes HR 6083 and increases the loss threshold in the shallow loss program (RLC) from 85 percent to 87 percent. The House offer also adds a farm-level triggered shallow loss option with a 65 percent payment factor (the grower who wants shallow loss could choose a county- or farm-level trigger, which is the approach taken in the Senate farm bill). All other aspects of the House bill remained the same.

The House offer would spend $2.8 billion more than HR 6083. Some say this is a non-issue because the payment factors for all programs could be adjusted (House payment factors are still 85 percent compared to 80 percent in the Senate). In addition, the House bill spends $4.5 billion more on crop insurance than the Senate, so there is additional flexibility. 

So what's ahead? Stabenow has publicly stated that they must reject the House offer because of "interaction with crop insurance," but the CBO says that offering free shallow loss coverage will cause growers to buy less crop insurance. They say the Senate bill will reduce participation by $2.5 billion. By offering a farm-level trigger, the House offer reduces crop insurance participation by an additional $600 million (for a total of $1.2 billion in the House bill). This reduction in crop insurance participation is still half of that in the Senate bill, House sources argue. "If we are truly concerned about protecting crop insurance, the best way to do that is to get rid of these shallow loss revenue programs and go with price loss coverage only plus crop insurance products to cover shallow losses," said one contact.

The House offer reduces the cost of the Supplemental Coverage Option (SCO) by almost $700 million (bringing the cost of SCO down to $3.3 billion relative to the original House bill) which is very similar to the Senate SCO cost of $3 billion.

And what about 2013 crops and the likely need for some kind of extension of the 2008 Farm Bill. House GOP leaders have language subject to change that would extend the 2008 Farm Bill for one year, with various budget offsets being reviewed that would help resurrect the lapsed livestock disaster programs and the Milk Income Loss Contract (MILC) program.

Renewing the current law would stop 1938 and 1949 farm commodity laws from taking effect. Without an extension or a farm bill, dairy price supports would rise on Jan. 1 to twice the current market prices of $16 to $19 per 100 pounds of milk.

But Stabenow has repeatedly nixed the idea of an extension, especially one that includes another payout of $4.8 billion in direct payments. The pending Senate-passed bill and the House measure would end the yearly payments and shift the money into new safety net programs.

Lucas believes that a one-year extension may be more practical this late in the session because USDA officials would have to propose rules, seek comment on key farm bill changes. Besides, USDA's Risk Management Agency (RMA) has told farm bill leaders that the new cotton STAX program would not be ready to be implemented until the 2014 crop. Also, a one-year extension would allow farmers time to understand the new farm bill programs and to see how they may interact with their existing private sector crop insurance policies. Already, wheat growers have more than 15.6 million net acres of 2013 production covered by crop insurance, with 85 percent of those being revenue protection coverage.

Dissecting the key farm bill issues:

  1. A true farmer safety net choice is needed, most argue. The Senate bill lacks this; the House bill offers all major farm program crops a true choice between ARC or price loss coverage (PLC) with higher reference prices than current levels, not just limited to wheat, rice and peanuts.

  2. What acres should safety net programs be based on? The Senate prefers base acres for PLC but actual plantings for ARC, something the House says is not equitable as their bill keeps the same payment acreage structure the same for both options.

  3. Price/guarantee/percentage farm and county yield parameters/bands of the ARC and PLC. The percentages can and have already been tweaked to meet policy goals and budget needs. That can continue to occur.

  4. Need for extending the 2008 Farm Bill for 2013 crops, and refunding lapsed disaster programs and the MILC for dairy producers. Most farm bill observers believe a partial or full extension is needed, perhaps with a lower base percentage of base acres for direct payments to help offset the costs of extending lapsed programs. And with most spring-planted 2013 crops having a sales closing date on crop insurance of March 15, USDA would not likely be able to develop regs for the new program options and have farmers understand them in time to adjust their 2013 crop insurance coverage to reflect the new farm bill options.

  5. Food stamp funding. The wide difference between the Senate (around $4 billion in cuts) and the House ($16 billion in spending reductions) can only be resolved by an agreement among House and Senate leaders, along with the Obama administration.

Bottom line:
It looks like the best route is for a one-year farm bill extension with a net farm bill savings number provided to the Ag Committees to meet by a designated date in 2013, as part of the process and timeframe laid out in any fiscal cliff deal.


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