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Update on Farm Bill Deliberations, January 2014
 

Update on Farm Bill Deliberations, January 2014

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A report on the political debate in Washington over passage of a new Farm Bill, as the situation existed on January 7, 2014. Presented by UNL Extension Educator Jessica Johnson at a Crop Production ...

A report on the political debate in Washington over passage of a new Farm Bill, as the situation existed on January 7, 2014. Presented by UNL Extension Educator Jessica Johnson at a Crop Production Clinic in Gering, NE. Based on Powerpoint authored by Bradley D. Lubben, UNL Policy Specialist.

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  • This slide is optional if you want to take the time to discuss the budget setting and the framework for the farm bill deliberations and cuts to farm programs.The baseline is the projected spending for the ten year period from fiscal year 2014 to 2023 if all current programs in place as of the end of the farm bill authorization were to remain in effect for the entire 10-year budget period. The projections were from the March 2013 budget forecast and represent spending projections and price/production forecasts as of that time.It shows commodity programs and conservation programs to both be about $60 billion in spending projections over 10 years. Commodity program spending dropped as prices rose. Remember projections were as of March 2013 and while it did not forecast high prices for 10 years, it did start with a higher price level from where we are now. The bulk of commodity program spending was forecast to be in Direct Payments, at about $5 billion per year. Cutting them, as everyone projected, would save about $45 billion, given that 9 years of Direct Payments could be eliminated over the next 10 years (the October 2013 Direct Payment is in fiscal year 2014, but was already authorized by the existing/extended farm bill, so new legislation would only save money in future years). Both the Senate and House proposals cut Direct Payments, but used some of the savings to revise remaining commodity programs and increase the crop insurance programs.The crop insurance area is expected to grow. Existing programs were largely left alone, with some minor revisions that will increase coverage and spending (such as enterprise coverage split for irrigated and nonirrigated production, a benefit for Nebraska). New programs, including the Supplemental Coverage Option (SCO) and the STAX program for cotton add to the spending under the crop insurance title included in this farm bill legislation. The crop insurance title also includes reauthorization and funding for the disaster assistance programs minus SURE, the crop disaster program which was not reauthorized given the growth in crop insurance. The reauthorized disaster assistance programs include the Livestock Indemnity Program (LIP) for abnormal death losses, the Livestock Forage Disaster Program (LFP) for forage losses due to drought for livestock herd owners, the Emergency Livestock Assistance Program (ELAP) for other livestock disaster losses, and the Tree Assistance Program (TAP) for orchard/tree nursery losses.In total, the spending on safety net programs (commodity programs and crop insurance) is projected down about $10-12 billion from the original baseline, with 25%+ cuts in commodity programs partially offset by increases in crop insurance.Conservation spending has grown substantially and is expected to continue to grow, albeit at a slower pace with the proposed cuts of less than 10%. The CRP is expected to be cut to a cap of 24 million acres, which results in budget savings that recognizes the shrinking general enrollments (a smaller CRP doesn’t save money on budget unless the authorized acreage cap is reduced). While the CRP shrinks and saves money, the working lands programs and the easement programs (WRP, FPP, GRP) are projected to grow.The big budget item is of course nutrition programs, with most of the money directed to SNAP, the Supplemental Nutrition Assistance Program. This is about 80% of the projected spending and has been the primary source of debate over the fate of the farm bill. While the Senate proposed and passed a small cut to nutrition, the House in June failed to pass a bill that contained $20 billion in proposed cuts, with opponents on both sides of the aisle that saw the cuts as either too much or not enough. This led to the House split of farm and food legislation, with farm legislation (everything but the nutrition title) passing in July and the nutrition title reintroduced and passed in the Republican-controlled House in September with $39 billion in proposed cuts. The final version apparently will target around $8 billion in proposed cuts, taking the Senate proposal for increasing program requirements relating to SNAP payments to persons receiving assistance from the Low Income Home Energy Assistance Program (LIHEAP) and increasing those requirements further. Coupled with SNAP payments that were reduced in November due to expiring economic stimulus bill provisions that increased payments, the total reduction in SNAP payments is projected at $17 billion+ over 10 years from current payment rates. The scheduled reduction in November was already in the budget baseline, so it doesn’t count as additional budget savings, but it does affect the political posturing, with some arguing the $8 billion in scheduled cuts are minimal or not enough while others arguing the more than $17 billion in reduced SNAP benefits are too far. This seems to be a settled matter in the conference committee negotiations, but still could be a sticking point in final passage in both the Senate and the House.
  • The outlook for the farm bill continues a long-term evolution toward risk management.The original legislation of the 1930s forward focused on propping up farm income by supporting price levels. It used supply control tools to manage supplies in an attempt to manage prices and government program costs such as acreage allotments, marketing quotas, and nonrecourse commodity loans and eventually acreage reduction programs (set-aside) as part of annual program participation requirements. As these programs became more expensive to run and less effective in supporting price levels as international competition replaced much of whatever the U.S. cut back on production, the programs shifted to a focus on direct income support, not price support. The income support programs maintained incomes even while allowing prices to fluctuate below support levels. The target price/deficiency payment program of the 70s-90s, the marketing loan program introduced in the 1985 Farm Bill, the direct payments of the 1996 Farm Bill, and the counter-cyclical payments of the 2002 Farm Bill all fit this category. As farm income has strengthened and the federal budget has become even more constrained, income supports no longer garner the political support they once did and the transition appears to be accelerating toward a focus on risk management. The substantial growth in crop insurance since the 1980 crop insurance legislation that privatized delivery, the additional reforms in the 1990s-2000s that increased both crop insurance products and support levels, and now the introduction of ACRE in the 2008 Farm Bill and the proposals for further commodity programs tied to average revenue guarantees are representative of this shift. While price support gradually became expensive and ineffective as a policy and income support gradually lost political favor, risk management remains a politically viable policy goal at the present time with a recognition of the inherent and unique risks of agricultural production. However, as the budget dollars devoted to risk management programs has also increased, risk management itself is facing more of the political battle long associated with commodity programs, with continual efforts to address total support levels and support going to large producers.In this environment, the future direction for farm programs and the farm income safety net looks like:A primary focus on crop insurance as the foundation of the safety net.A continued battle on commodity programs between those moving in the direction of risk management with the average revenue safety nets and those attempting to hang onto the income support elements of price safety netsA marketing loan that continues to provide short-term cash flow for producers at below-market interest rates, but is so far below current price levels that it effectively provides no income support for most commoditiesSupplemental crop insurance to add to the insurance portfolioDisaster assistance for livestock and other commodities for which crop insurance is not well positioned to provide supportNo direct payments if and when a new farm bill is complete
  • The proposals for the commodity program in both the Senate and the House legislation provide details of how the programs would work. From apparent agreement in the farm bill conference committee negotiations, it appears that we will see a price vs. revenue option in the commodity programThe price option is expected to follow the House price proposal called Price Loss Coverage (PLC). It continues traditional income support features of the current Counter-Cyclical Payment Program and updates the target prices (called reference prices in the House legislation). It was proposed to cover price losses for crops in planted acreage, but the negotiations appear to have shifted the formula to base acreage.The revenue option is expected to follow the Senate revenue proposal called Agriculture Risk Coverage (ARC). In the Senate legislation, ARC was proposed as an option at the farm or county level. It is not clear how this will end up and whether there will or will not be an option. The ARC guarantee is a moving average revenue guarantee tied to 88% of the 5-year Olympic average yield times the 5-year Olympic average price. Payment acres were proposed to be 65% or 80% of planted acres dependent on the choice of farm or county protection. Where these final parameters end up remains a question for the moment.
  • The proposals for the commodity program in both the Senate and the House legislation provide details of how the programs would work. From apparent agreement in the farm bill conference committee negotiations, it appears that we will see a price vs. revenue option in the commodity programThe price option is expected to follow the House price proposal called Price Loss Coverage (PLC). It continues traditional income support features of the current Counter-Cyclical Payment Program and updates the target prices (called reference prices in the House legislation). It was proposed to cover price losses for crops in planted acreage, but the negotiations appear to have shifted the formula to base acreage.The revenue option is expected to follow the Senate revenue proposal called Agriculture Risk Coverage (ARC). In the Senate legislation, ARC was proposed as an option at the farm or county level. It is not clear how this will end up and whether there will or will not be an option. The ARC guarantee is a moving average revenue guarantee tied to 88% of the 5-year Olympic average yield times the 5-year Olympic average price. Payment acres were proposed to be 65% or 80% of planted acres dependent on the choice of farm or county protection. Where these final parameters end up remains a question for the moment.
  • The proposals for the commodity program in both the Senate and the House legislation provide details of how the programs would work. From apparent agreement in the farm bill conference committee negotiations, it appears that we will see a price vs. revenue option in the commodity programThe price option is expected to follow the House price proposal called Price Loss Coverage (PLC). It continues traditional income support features of the current Counter-Cyclical Payment Program and updates the target prices (called reference prices in the House legislation). It was proposed to cover price losses for crops in planted acreage, but the negotiations appear to have shifted the formula to base acreage.The revenue option is expected to follow the Senate revenue proposal called Agriculture Risk Coverage (ARC). In the Senate legislation, ARC was proposed as an option at the farm or county level. It is not clear how this will end up and whether there will or will not be an option. The ARC guarantee is a moving average revenue guarantee tied to 88% of the 5-year Olympic average yield times the 5-year Olympic average price. Payment acres were proposed to be 65% or 80% of planted acres dependent on the choice of farm or county protection. Where these final parameters end up remains a question for the moment.
  • In the crop insurance title, the big addition for most commodities is the authorization of the Supplemental Coverage Option (SCO). It would be a county-based revenue insurance policy that mimics the coverage of GRIP currently available to producers. But, at present, producers must current choose to either buy individual coverage with a maximum protection level of 85% or buy a county-based policy such as GRP or GRIP with a maximum protection level of 90%. They can’t buy both.SCO is proposed to be a supplemental policy that can be added on top of an individual plan to cover part of the deductible portion of the individual plan. SCO would effectively allow producers to couple the farm-level protection of individual policies with county-level protection on the deductible to achieve higher levels of overall coverage.
  • Putting all of these options on a graph should make the programs easier to understand, but it clearly demonstrates that it is still very complex. All of the safety net proposals essentially assume crop insurance as the foundation of the safety net. The supplemental coverage (SCO) builds on top of crop insurance, except for what is covered by ARC in the Senate proposal or where SCO is not allowed under RLC in the House proposal.The axis cannot tell the whole story, as crop insurance could be a farm or county level policy with a guarantee tied to average yields and current prices. SCO would be a county level plan with a guarantee tied to average yields and current prices. ARC or RLC would be a farm or county plan with a guarantee tied to average yield and average prices. And PLC falls somewhere else on a price axis, presumably far below other safety net tools given proposed target prices and current market prices for Nebraska crops.
  • Looking at details,the expected price option follows the House proposal with an increase in the target price. Some proponents of the price plan argued against the revenue proposals as covering shallow losses and instead argued that the plan should cover deep losses such as when prices fall below some level and stay there. The price plan provides that protection with a fixed target (reference) price that would pay out supports to producers if prices fall below the target levels and would continue to make those payments as long as prices stayed below the target.The projected target prices are based on the House legislation and represent substantial increases in target price levels. These remain far below expected price levels for most commodities, reinforcing the deep loss argument, but for rice and peanuts, the biggest proponents of the price plan, the proposed target prices are in fact rather close to current price expectations, implying protection that starts with very shallow losses, not deep.The question of payments on planted acres, base acres, or some updated base acres remains, but regardless, the program has the potential to substantially influence planting decisions if prices fall to levels near or below the target prices, creating the potential for large distortion of market signals and production decisions.
  • This chart provides one more picture of the proposed target (reference) prices as proposed in the House legislation. As noted earlier, the proposed target price for peanuts and rice (and barley too) is actually very shallow compared to current price expectations (as of June 2013). This translates into larger expected price-based program supports for these commodities over the 10-year budget window, something these commodity groups were focused on as they faced the elimination of rather large direct payments for rice and peanutes.
  • For Nebraska producers, the analysis of the price option can be compared to existing programs and price expectations. The graph shows the existing target (reference) price under the Counter-Cyclical Payment program for 2004 through 2013. For 2014, the graph shows the proposed target (reference) price under the Price Loss Coverage program as proposed in House legislation.For corn, the target price for counter-cyclical payments has been irrelevant for most of the last 10 years as prices were far above the existing protection levels. This was a major part of the push for a revenue-based safety net (ACRE) in 2008 and remains the rationale for a focus on revenue programs by corn producers in the current farm bill debate.The price option would substantially raise the target price from $2.63 to $3.70 while the marketing loan remains in place at $1.95. Those protection levels are still far below current price levels, although the reduction in market prices in 2013 and current projections for similar prices in 2014 make the price safety net more relevant. Based on analysis in early 2013, when market price projections were coming off record 2012 highs and were projected in the mid-$5.00 range, the impact of a increasing the target price to $3.70 was negligible, with simulation research failing to predict prices ever dropping low enough in 2013 to trigger price-based support payments. Now, with market price projections in the mid $4.00 range, the $3.70 target price is meaningful, although update simulation research for 2014 still suggests the chances of corn prices falling low enough to trigger a price-based support payment is about only 10%.Remember that payments are tied to the marketing year average price falling below the trigger, or in the case of the House legislation, the first 5 months of the marketing year. Payments are not tied to the daily cash price, so harvest-time lows in the $3.00 range would not necessarily result in payments.
  • Looking at the revenue option, it appears the farm bill conference committee negotiations are pointing to the Senate proposal for ARC.The details and parameters are uncertain. The protection level guarantee, protection band, and payment rate are all still a question at this time, as is the fundamental issue of whether the protection will be farm or county or an option between the two. The question of payment acres appears likely to follow the same path as that set for PLC, with a decision yet to be announced on planted acres, base acres, or updated base acres.The revenue option proposes to cover shallow revenue losses below an average revenue guarantee. As proposed, it would kick in at 88% and cover up to 10% of the revenue loss, stopping at 78%. Thus, it relies on the producer having a risk management plan for the deeper losses, whether crop insurance, hedging, or some other risk management strategy. Another important distinction between ARC and PLC is that ARC is tied to a moving average revenue, similar to how ACRE current works. It can provide substantial income protection and even large expected payments in a year where expected revenue falls below the guarantee, but the guarantee is recalculated every year from the 5-year moving average prices and yields, so the guarantee will follow expectations over time. It might provide substantial income support in a given year, but over the long run, should largely provide risk protection instead of income support, reducing, but not eliminating the potential distortion of market signals and production decisions.
  • This chart shows revenue guarantees under ACRE for 2009-2013 compared to actual or projected revenue at the state level for irrigated and nonirrigated production. The revenue guarantee for 2014 is projected for illustration based on the proposed ARC parameters applied at the state level for illustration purposes (ARC is proposed at the farm or county level).When ACRE was introduced in 2009, it protected 90% of the 5-year Olympic average yield times the 2-year simple average price. The ACRE guarantee changed each year, but was limited in how fast it could rise (or fall) by the 10% cap on changes year-to-year. It appeared to provide less and less protection each year, but the large yield losses on nonirrigated production in 2012 translated into large ACRE payments. As prices have fallen in 2013, the ACRE protection is also relevant, although not expected to pay at present.For 2014, the projection of ARC is based on the calculation of a guarantee equal to 88% of the 5-year Olympic average yield times the 5-year Olympic average price using current price and yield estimates for 2009-2013. It shows the guarantees for corn would be very relevant in 2014 given that prices have fallen such that revenue projections are down in 2014 compared to previous years.Although the ARC protection is based on farm or county protection, not state as illustrated, the ARC program certainly looks very relevant for corn producers in Nebraska. Actually, it should be even more relevant than shown, as the revenue risk at farm or county levels is greater than the state level due to the increased yield variability. This would translate into even more downside revenue risk protected by the ARC program.
  • The Supplemental Coverage Option (SCO) is the last part of the farm bill proposals to add to the discussion. Both the Senate and the House propose similar mechanics for SCO. Essentially, it would work like GRIP current does, but only on the deductible portion of a producer’s loss not covered by their individual insurance purchase (it is presumed that if an individual did not buy any individual insurance, they could buy SCO from 90% and cover losses down to 0, just as GRIP currently does (but at a slightly different premium subsidy rate).As proposed in the Senate legislation relative to ARC, SCO would only be available on losses below the band covered by ARC, so with ARC proposed for 88-78%, SCO could only begin at 78%, not 90%.There are several questions about SCO that are not detailed in the legislation, so some of the interpretation would have to wait for rulemaking and implementation. Because the 2014 crop insurance standard reinsurance agreement is already in force, it appears SCO could not be offered to producers before the 2015 crop year.
  • Moving beyond SCO to the broader crop insurance portfolio, there are some farm bill questions. As noted, crop insurance is expected to be the foundation of the safety net moving forward. But, as federal spending on crop insurance (premium subsidies, insurance company administration and operating expenses, and reinsurance) has grown, so to has the political debate over that spending.The farm bill could contain conservation compliance provisions that are required of crop insurance users in the same manner that current commodity program participants must comply. These provisions on conservation of highly erodible land, as well as Sodbuster and Swampbuster provisions, have the potential to impact many producers. Particularly in areas where sod has been broken out for crop production, or where tile has been installed to drain wet areas for crop production, crop insurance is currently available even if the producer does not follow a conservation plan. That would change if this provision is in place. There remain several questions about how conservation compliance would work for crop insurance or whether it might start with a new effective “grandfather” date for recently-converted cropland (as the original conservation compliance provisions in the 1985 Farm Bill did with a 1985 grandfather date).The other battle has been about attaching means testing provisions to crop insurance, with proposals to use an adjusted gross income (AGI) test to either eliminate or reduce the federally-subsidized portion of the crop insurance premium. This is currently in the Senate version of the farm bill, but could disappear in the final conference committee language and debate.Regardless of how it is implemented, it is clear that crop insurance will be the foundation of the safety net. How it interacts with the commodity program in terms of crop insurance, SCO, and ARC will be an important issue for producers to consider in future program and insurance decisions.
  • Refreshing the discussion, it is worthwhile to repeat the gradual evolution of farm programs from price support and supply control toward risk management, even as elements of income support programs are expected to remain.More importantly, the challenge for producers will be to integrate farm program and crop insurance tools in a portfolio for analysis and decision making in the future. As commodity programs like ARC look more and more like insurance policies and SCO is dependent on farm program decisions, the optimal decision making in the future will only come from looking at the programs as a whole.Further education, analysis, and decision tools will be critical and will be coming from UNL Extension if and when a farm bill is completed and details emerge.
  • As of the writing of these notes on January 2, we are awaiting details of a farm bill conference committee package expected to be released the week of January 6. So, some of the details will either be confirmed or rebutted during the time the Crop Production Clinics are being held. Stay tuned to the daily news for any emerging details.At the moment, expectations are high for wrapping up a farm bill in January, first through the conference committee and then for a vote in the Senate and the House before going to the President for a signature. There are several hurdles yet, but large issues seem to have been resolved among the ag committee leaders that have negotiated the conference committee compromise behind closed doors in December. There is a question as to whether a compromise that can get the support of conferees to pass in a final conference report will get enough support to pass either the Senate or the House, where it seems bound to lose support from both the right and left end of the spectrum (largely over the issue of what it does cut from nutrition and whether that is too much or not enough). Thus, the final farm bill will need to again manage to craft a coalition of the middle and garner bipartisan support if it is to achieve final passage.As I noted, expectations are high to get this wrapped up in January. High enough in fact to not push through an extension of current legislation. The fact that the current farm bill expired officially in September was not critical as parts of permanent legislation tied to dairy weren’t due to trigger until January. But, the decision to not even push a short-term extension during the December discussions was based on the stated position that the farm bill could be wrapped up in January before USDA could get permanent dairy programs implemented, so the “milk cliff” on January 1 really wasn’t binding, at least not immediately.If the bill is wrapped up in January, we will likely be writing rules and implementing a commodity program for the 2014 crop year with sign-up to take place late spring into the summer, but for some provisions like SCO to be delayed until 2015 (actually Fall 2014 for winter wheat seeding and insurance decisions).If the process still fails, then we would likely look to another extension of current legislation for 1 or 2 years, creating yet another ACRE v. DCP decision. However, even an extension of current legislation could come with at least cuts to the Direct Payments (DPs), if not outright elimination. A smaller or eliminated DP would change the economics of the ACRE v. DCP decision substantially.Stay tuned!