US Agricultural Policy and the Current “Farm Bill” Debate

Andrew M. Novakovic, PhDThe E.V. Baker Professor of Agricultural Economics

Charles H. Dyson School of Applied Economics and ManagementCornell University

March 2013

U.S. Agricultural Policy – An Overview

Why does the government intervene in agricultural and related markets?

What is a “Farm Bill”?What is the magnitude and forms of these

interventions?What is under discussion and debated today?

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Historical basis for government intervention, or What is the “Farm Problem”?

Ultimately the justification for intervention in Farm level markets hinges on a belief that There is an income problem That is largely determined by a price problem

Inelastic supply and demand means small changes in quantities can result in big changes in price

And, farmers are victims of circumstances beyond their control Weather events which play havoc with yields, planting, harvesting, etc. Market power of output buyers and/or input sellers Larger issues that do not take into account farming

– Environment, trade, animal welfare, etc. etc.

These concerns were forged in the economics of the Industrial Revolution, the Great Depression, and the Dust Bowl – and later tempered by needs and opportunities related to nutrition, trade, conservation, energy, etc.

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Why all the fuss about US Agriculture Now?

How much does ag matter to the U.S. economy? Farming accounts for 1% of workforce and less than 1% of GDP Entire food and fiber system accounts for 17% of workforce and

13% of GDP

Most of the U.S. is Farm or Forest About 50% is cropland and pasture About 30% is forest

How big a player is U.S. agriculture in the world? #1 exporter of ag products in the world Over 30% of crop acreage basically for export Consistently positive trade balance for the US account

How much money does the U.S. spend on agriculture? About $20 billion in discretionary, budgeted expenditures About $80 billion in mandatory, program-driven expenditures

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What is “Agriculture”?The “Program” or “Major” Crops

WheatCornGrain sorghumBarleyOatsUpland cottonRiceOilseeds - sunflower seed, rapeseed, canola,

safflower, flaxseed, mustard seedSoybeansSugar, peanuts, (and tobacco)

Got Milk?

What is the “Farm Bill”The first “Farm Bill” was the Agricultural Adjustment Act of 1933

After that, agricultural policy and related programs were fine-tuned, fixed or finished almost annually until 1949

It has become an exercise taken every 5 years.

A “Farm Bill” amends other, original legislation, it is “omnibus” and multi-year Without a new Farm Bill to amend it, many programs would revert

to the provisions of the permanent law Other programs would cease to exist

May replace, revise, continue or delete farm programs – or more properly the array of programs administered primarily by USDA 6

What Does a Farm Bill Cover?Much of the Farm Bill isn’t about agriculture

Consumer nutrition and food security

Forestry Land use,

conservation and environment

BiofuelsStatistics in DC and

states, research and extension in DC and Land Grant Universities

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Conservation – 8%

Other – 12%Commodities – 11%

Food Security and Nutrition – 68%

Maybe we should call it the Food Bill

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Methods of Support for Agriculture1. Price Supports

a) Purchasesb) “Loans”

2. Income Supportsa) Target Prices and

Deficiency Paymentsb) Income subsidies

3. Insurancea) Yieldb) Pricec) Revenued) Other/Derivatives

4. Disaster Assistance

5. Supply Controlsa) Input restrictionsb) Marketing restrictionsc) Farm retirement

6. Demand Stimulation a) Product/Process

Developmentb) Promotionc) Consumption Subsidyd) Export Subsidy

7. Regulating Competitiona) Price reportingb) Minimum pricesc) Marketing rules

Are these all subsidies? By whom? To whom?

Like any other legislation….

There is an ebb and flow to agricultural and food policy that changes in response to: Sector needs and challenges Federal budget Popular related issues – free trade,

sustainability, health, immigrationPolitics plays its role, but less so and more subtly than

in most other areas of legislationRegional/Sector issues are more important – South vs.

Midwest, California, corn vs. cotton, etc.

A.M. Novakovic, AEM 4310, 2013 9

Agricultural Policy 1996: Let’s Not Support Prices

1996 - “Freedom to Farm”Concept:

• Markets are strong

• We have a high baseline (planned spending without change in policy) for ag budget, let’s use it to phase out subsidies and supports over the life of the bill and be blissfully free market by 2000

• Consistent with Uruguay Round Green Box rules and expanded trade outcomes

Challenge?: sticking to the plan10prepared by A.M. Novakovic

Agricultural Policy 2002: Let’s Support Prices

2002 - “Freedom to Spend”Concept:• Markets are weak

Market Transition payments, now called Direct Payments, contribute to strong production and weak prices

• Budgets are strong Enough money available to restore costly programs

• Farmers don’t want free markets when prices are low, so bring back the subsidies and supports

Challenges?: can we really go back to the future?

11prepared by A.M. Novakovic

Agricultural Policy 2007: Let’s Support Farmers -- Incomes, Prices, Demand -- and worry about other problems later

2008 - “Freedom to Pay Later”Concept:• Markets are strong, output prices are high, but so are input prices

Weak dollar, short energy, very strong international demand

• Budgets are weak Have to get creative on coming up with “new” money

• Lot’s of loose policy threads (environment, energy, trade, food aid) but let’s worry about that later. Pass a bill that will help Democrats win elections Change only what absolutely must be changed

• Keep most old programs going but find some new ways to help farmers

Challenge?: Having to actually pay later

12prepared by A.M. Novakovic

Agricultural Policy 2012, no-2011?, no-2013?, uh?: Let’s get what we can, however we canConcept:• Markets are strong, output prices are high

Major program crops are mostly doing well, but Weather reminds agriculturists (more than consumers) how risky agriculture is Livestock sectors have high input prices that make for low profits

• Federal budget and deficit dominate program design “agricultural subsidies” vs “food stamps”

• Direct payments indefensible, crop insurance is the rallying cry, but both raise question of how much taxpayer should contribute

• Southern crops aren’t satisfied• Collateral issues, like the Doha Round, still exist but are deep in the background• If we wait long enough, maybe we’ll decide we need something else?

Challenges?: money and politics on the surface, but is the tide turning on the underlying justification for ag and food policy?

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The FCEA of 2008 - Crop Highlights

Commodity (Major Crops) ProgramsTarget Prices and Loan Rates

Crops covered continued all and expanded to include pulses Some rates increased, some reduced by trivial amounts

Direct Payment rates reduced somewhatCrop Insurance

Reduces reimbursement rates (surprise)Tightens AGI eligibility test

No DP if AGI > $750,000 No benefits if non-farm income exceeds $500,000

Payment Cap $40K on DP, $60K on CCP

Three-entity rule repealed Payments tracked to individuals (natural persons), cannot gain payments

by incorporation, partnership, or splitting farmsCreates ACRE - Average Crop Revenue Election - Program

Payment trigger based on State average yield times national average price

– 5 year Olympic average on yield– Last 2 years on price (this could get us into trouble)

Compares “actual” state average (per bu.) revenue against trigger, makes supplemental payment to target

Uses individual’s base acres to determine payment Substitute for CCP => 20% cut in DP, 30% cut in CCP payment limits

Permanent Fund for Disaster Assistance ($3.7 billion) Intended to “complement” crop insurance, more crop insurance means

proportionately large assistance Covers lost revenue from crops, livestock or trees

Old programs

Payment restrictions

The new idea/approach

14prepared by A.M. Novakovic

Basic Ideas for 2012

Cash in Direct and Countercyclical Payments – DP & CCP (who thought of this dumb idea in the first place (DP) – what’s a WTO and where is Doha? (CCP))

It’s all about risk – production and revenue; hence, it’s all about risk management. Crop insurance is the fair haired child of ag policy

What if crop insurance doesn’t quite work for your crop Southern crops – cotton, rice, peanuts: awkwardness of insurance tools

vs larger payments with CCPs Livestock – not much production or (gross) revenue risk but lots of

margin risk “Specialty” or green crops – tell me more about how this insurance thing

works?

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Just How Much Help Should be Given?

• Payment Limitations and Income Eligibility• Conservation Compliance• Shallow Loss vs. Deep Loss• Multi-year, low level prices• Magnitude of insurance premium subsidies• Magnitude of insurance provider cost subsidies (A&O)• The ethanol mandate

A.M. Novakovic, AEM 4310, 2013 16

The FCEA of 2008 - Dairy Highlights

Calendar year purchase prices (instead of a support price for farm milk), no less than Cheddar blocks = $1.13 Cheddar barrels = $1.10 Butter = $1.05 Nonfat dry milk = $0.80

Sellback Prices set at no less than 110% of (statutory) purchase prices (previously by USDA decision, not legislated)

Sale of product for unrestricted use (anyone can buy, do with it as they will Harder to move surplus product into foreign or domestic donations now (partly WTO, partly political)

can be tricky and controversial implies a ceiling on upward price movements until government net removals decline.

Temporary price adjustments may be triggered if net removals exceed certain triggers, e.g., If rolling 12-month cheese net removals exceeds 200 M (but < 400 M), drop price 10¢ the next month, following month

goes back up, but subject to trigger again If rolling 12-month equal or exceed 400 M, drop price 20¢

If rolling 12-month butter net removals exceeds 450 M (but < 650 M), drop price 10¢ the next month, following month goes back up, but subject to trigger again

If rolling 12-month equal or exceed 650 M, drop price 20¢

If rolling 12-month nonfat dry milk net removals exceeds 600 M (but < 800 M), drop price 10¢ the next month, following month goes back up, but subject to trigger again

If rolling 12-month equal or exceed 800 M, drop price 20¢

17prepared by A.M. Novakovic

The FCEA of 2008 - More Dairy Highlights

Dairy Market Loss (MILC)

Payment rate trigger = $16.94

Payment rate adjustment for Feed CostsUses “national average dairy feed ration costIf actual > $7.35, trigger price is increased by 45% of the relative difference

E.g., if dairy ration cost is estimated to be 10% above $7.35, the milk payment trigger rises 4.5% (or $16.94 times 1.045 = $17.70)

Payment rate adjustment and amount capFY2007-08 = 34% & 2.4 M lbsFY2008-12 = 45% & 2.985 M lbsFY2012-xx = 34% & 2.4 M lbs

Allows forward contracting on any federally regulated milk that is not Class I

Extends Dairy Export Incentive Program

Extends Dairy Indemnity Program

Extends National Dairy Board authority & expands promotion assessment to HI, AK, PR, DC

Modifies administrative rule requirements and establishes timetable for steps in a Federal Order Hearing

Requires report on NDM price reporting

Requires FMMO Review Commission and report (not going to happen)

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Did anyone see the truck that hit me?

Before the ink is dry on the 2008 Farm Bill, dairy gets hit with• Skyrocketing feed prices, lifted by the ethanol boom

and strong foreign demand• Plummeting purchasing power during the Great

Recession (compounded by a cyclical decline in milk prices)

We need a new plan – a really new plan – and soon!• Margin insurance devised by traditional coop

leadership• Growth management devised by grassroots farmers

A.M. Novakovic, AEM 4310, 2013 19

The Leading Dairy PlanFoundation for the Future – an industry plan developed

by the National Milk Producers Federation after 2009 Eliminate current programs and replace with A new Margin Insurance program A new Growth Management program And make changes to Federal Milk Marketing Orders as well

Adopted by Congressman Collin Peterson, formally introduced by him as the Dairy Security Act of 2011 on 23 September – H.R. 3062

Federal Order stuff is dropped, other things tweaked.Virtually identical versions embraced by Senate and

House Ag Committees in 2012

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Status of the 2012 Farm BillA Farm Bill Passed by the Senate in April 2012A Farm Bill Passed by House Ag Committee in September

2012(They’re not the same but close enough to see a

compromise)Blocked by House leadership through end of 20122008 Farm Bill extended on 1 January 2013 to avoid

reverting to permanent lawAg Committees are more or less happy to pick up where they

left off, but: New baseline and budget will make it harder Old politics aren’t any easier Lot’s of bigger issues need to be resolved Is that light the end of the tunnel or a train? 21

US Agricultural Policy and the Current “Farm Bill” Debate

Andrew M. Novakovic, PhDThe E.V. Baker Professor of Agricultural Economics

Charles H. Dyson School of Applied Economics and ManagementCornell University

March 2013