Will 'Shallow Loss' Provision in Senate Farm Bill Cause Deep Budget Exposure?

May 30, 2012 04:58 AM

The Senate farm bill proposal to some veteran farm bill observers is controversial and a potential budget-buster on several fronts, including the lack of equity for some crops and regions, and a potential flaw relative to leaving already cash-strapped taxpayers footing the bill for a so-called shallow-loss provison that some say was largely designed to temper the loss of direct payments.

Today will be the first of several likely events that will delve into some of the problems with the Senate approach to farm policy. The event, hosted by the conservative American Enterprise Institute (AEI) is entitled, "Will shallow-loss programs throw taxpayers in the deep end?"

The farm bill is now expected to be included as a key vote by several conservative groups - and this could mean more negative votes when the nearly $1 trillion measure comes up for debate and a possible vote in early June.

Background: The official name for the shallow-loss program is Ag Risk Coverage (ARC). Generally, ARC is a shallow-loss program that would cover a percentage of program crop losses for a band of revenue losses from 11% to 21%; such losses are typically not deep enough to be covered by existing crop insurance. Producers make a one-time election to receive coverage based on historic individual yields or based on historic county yields (where available). This one-time decision applies to all covered commodities grown by the producer within a county; this is a change from the election for the Average Crop Revenue Election (ACRE) program, where election of program enrollment could be made for each crop rather than for each producer. For producers who make the one-time election to participate in ARC and who also have more than one covered commodity, payments are made for each crop separately. The payment rate will cover losses ranging from 11% to 21% of benchmark revenue. Therefore, payments for producers with individual and county coverage are not expected to be equal across producers, crops, or years. Payments cannot exceed the difference in the producer's actual revenue and the agriculture risk coverage guarantee.

The budget exposure all depends on one's commodity price projections. And that is where ARC/shallow loss could really be an expensive proposition should or when commodity prices enter bear market territory, and stay there for awhile. Payments under the program would then surge.

Moral hazard? When the shallow-loss concept first surfaced, the American Farm Bureau pointed out the moral hazard of possibly encouraging some producers to plant on fragile acres because of the program's "safety net" allure.

Others, however, say that the concept does not qualify as a true safety net if one considers that to be support when prices plunge and stay at low levels.

The ARC/shallow loss provision has largely been pushed and written by the same people who authored the Average Crop Revenue Election (ACRE), which most farmers shied away from because of its complexity and not wanting to have their direct payments reduced.

Some trade policy observers predict some World Trade Organization (WTO) members will eventually challenge any US move to this type of policy on grounds it uses actual plantings and relatively current prices to make any payments. They also note that the US farm bill is moving away from making farm program payments on base acres and instead moving to planted acres - no longer decoupled.

The Congressional Budget Office late Tuesday issued crop-level detail of estimated farm bill commodity payments under Title I of the Senate farm bill, and that table could eventually be used by some WTO members who want to challenge soybean farm policy, as that crop clearly scores big time in the move from base to planted acres.

 05 30 12 CBO Payments

AEI, in commenting on its session, said "shallow-loss programs would give farmers subsidies, ensuring that farm revenues do not dip below 90 to 95 percent of the average revenues those farmers received over the past five years - even if crop prices fall. This program is being portrayed as a safety net, but there are significant questions that must be examined before the program is enacted. How much would shallow-loss programs really cost and how are they structured? How accurate are Congressional Budget Office estimates of these costs? Are there limits on potential taxpayer liabilities in shallow-loss programs? And, finally, would large, wealthy farms benefit disproportionally from these programs?"

At the event, Vince Smith and Barry Goodwin will discuss these questions and will release new research and analysis on the cost of shallow-loss programs. Barry Goodwin is the William Neal Reynolds Distinguished Professor in the Department of Agricultural and Resource Economics and the Department of Economics at North Carolina State University. Vincent H. Smith is a professor of economics in the Department of Agricultural Economics and Economics at Montana State University (MSU) and co-director of MSU's Agricultural Marketing Policy Center.

Comments: On budget exposure, one should be a little skeptical about second-guessing CBO. CBO is the nonpartisan analysis group for Congress. However, they are not infallible. Their assumptions can be affected by a reality that doesn't match the expectations laid down by the agency years ahead of the actual timeframe. That said, the shallow loss program is what it looks like: a freebie to cover shallow losses and it is legitimate to ask whether taxpayers should have to foot the bill for something like that. Why can't producers pay for coverage if they want it? Conversely, the real budget exposure to shallow loss revenue is what happens if and when prices collapse and everyone flocks to Washington for emergency disaster aid? That's where things get spendy. We can say it won't happen ever again because times have changed but that is momentary thinking. If things get bad enough, don't count it out. So, that's what makes shallow loss so objectionable. It shoots money out when it is not needed and dries up when it is.

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