U.S. Agricultural Policy: Issues & Outlook

1. U.S. Agricultural Policy:Issues & Outlook Dr. Kelly Tiller Agricultural Policy Analysis Center The University of Tennessee Philip Morris USARichmond, VA March 14, 2007 Agricultural Policy Analysis Center ● The University of Tennessee ● 310 Morgan Hall ● Knoxville, TN 37996-4519 www.agpolicy.org ● phone: (865) 974-7407 ● fax: (865) 974-7298

2. Agenda • Overview of U.S. farm policy evolution • Ag policy today: the 2002 Farm Bill • Outlook for 2007 Farm Bill • Farmer decision analysis • General discussion

3. What a Farm Bill Does • Provides USDA the authority to operate food and farm programs using provisions specified in the bill • For most programs, authority is temporary; permanent authority for some • Provides upfront ALL of the funds needed to provide benefits for a “mandatory” program during its authorized life • Funding can be as needed (entitlement) or a fixed amount • Authorizes the appropriation of funds for “discretionary” programs • Must address “permanent law” provisions of the Agricultural Act of 1949 either through a temporary suspension or repeal

4. US Farm Bills • Primary vehicle for setting medium-term US agricultural policy • Typically about 4-6 years • Scope of farm bills has expanded over time • 1981-1990 FBs: separate titles for each commodity • 2002 FB: 10 titles, single commodity title • Margin of victory shrinking over time • Senate passed 1977 FB 63-8 • 2002 FB conference report passed 64-35

5. Usually in a Farm Bill Commodity programs Conservation programs Ag trade programs Food stamps & other nutrition programs Ag research May be in a Farm Bill or separate legislation Rural development programs Crop insurance programs Forestry Ag labor programs Agri-energy programs Omnibus Policy

6. Why Have Commodity Programs? • Farmers have the power to extract money from Congress—so they do • Food is a national security issue • Supply and demand characteristics of aggregate agriculture cause chronic price and income problems • Uneven growth in supply and demand • Agriculture sector cannot right itself when capsized by low prices

7. Market Failure Logic • Technology expands output faster than population and exports expand demand • Market failure: lower prices do not solve the problem • Little self-correction on the demand side • People will pay almost anything when food is short • Low prices do not induce people to eat more • Little self-correction on the supply side • Farmers tend to produce on all their acreage

8. Ag Policy Did Not Start in 1932 • Historic policy of plenty • Land distribution mechanisms – 1620 onward • Canals, railroads, farm to market roads • Land Grant Colleges – 1862, 1890, 1994 • Experiment Stations - 1887 • Cooperative Extension Service – 1914 • This policy of plenty often results in production outstripping demand

9. When Policy of Plenty is Too Much • Given agriculture’s inability to quickly adjust to overproduction and low prices, there are 3 policy strategies: • Supply side • Demand side • Just pay money

10. Historical Policy Components • Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means • Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for consumers’ accrued benefits of productivity gains

11. Traditional Farm Policy Elements • From 1973 (or earlier) to 1996, U.S. domestic farm policy generally included the following elements: • Target price for major crop commodities • Deficiency payments for the difference between target price and market price • Base acreage • Acreage reduction / set-asides • Nonrecourse loan • Government storage of commodities

12. Review: Price Support Policies • Nonrecourse price support loan • Loan rate becomes price floor • Problems ?? • Where/how to set loan rate • Rates tend to ratchet up(reduces exports, creates surplus) • Costly to store • Government purchase program • Dairy products • Problems with price support levels • Problems with capitalization (into price of land, cows)

13. Review: Production Controls • May be voluntary or mandatory • Acreage allotments and marketing quotas • Slippage • Capitalization into land or quota value • Land retirement programs • Short term or longer term • Usually have benefits in addition to payments • Soil conservation, environmental, hunting leases • Slippage • Conservation Reserve Program • Annual acreage set-asides

14. Deficiency Payments • The difference between the average market price and a target price • Target price • A guaranteed level of returns per unit of commodity • For a specified time periods • On a portion of acreage (up to 100%) • Target prices support only income, not price • Deficiency payment calculation uses base acreage and yields • Congress generally sets target prices

15. All of that changed … 1996 Freedom to Farm

16. Key 1996 FB Policy Changes • Eliminated the target price program • Decoupled transition payments with virtual flexibility • Eliminated acreage set-aside program • Eliminated the Farmer-Owned Reserve (FOR)

17. Policy Changes • In the past, farm policies included • Floor price • Supply management tools • Price stabilization • Recent policy trends (especially since 1996) • Eliminated all three – because of expectations • Set prices free to fall well below cost of production • Provided revenue supplements to compensate when prices are low

18. “Program” Crops • Crops for which Federal support programs are available to producers • Peanuts* • Sugar • Tobacco** • Wool & Mohair • Honey • Wheat • Corn • Barley • Grain Sorghum • Oats • Cotton (ELS & Upland) • Rice • Oilseeds

19. Income Support Payments • Why movement in 1970s to direct payments? • To lower price supports to restore export competitiveness • Deficiency payments • Marketing loan payments • Loan deficiency payment (LDP) • Marketing loan gain (MLG) • Fixed payment • AMTA contract payments • Direct payments • Countercyclical payments (CCP)

20. Marketing Loan Payments • Pays farmers the difference between the market price and the loan rate, as a direct payment, when the market price is below the loan rate • Marketing assistance loans designed to provide producers interim financing at harvest time to meet cash flow needs without having to sell commodities when market prices are typically at harvest-time lows • Designed to facilitate more orderly marketing of commodities throughout the year • Were an embedded feature of the nonrecourse loan program until prices plummeted in the mid-1990s

21. Loan Deficiency Payments • Uses localized posted county prices • Some daily, some weekly • Uses local (county) loan rates • Allows a farmer to take the payment without taking out a CCC nonrecourse loan (LDP) • Alternatively, the farmer can put the crop under a 9-month nonrecourse loan and set the LDP at a later date • By itself, the loan rate becomes the minimum revenue (per unit) a farmer will receive

22. Fixed Payments • Initially established in the 1996 Farm Bill • Designed to address the over production effect of direct (deficiency) payments • Annual amount of each payment (1996-2002) was set in the 1996 FB • Payments declined over period • Eligible farmers entered into contracts and received the payments regardless of which (or any) crops planted • Benefits still capitalized into land values • Effect on output?

23. Acreage Response to Lower Prices? Four Crop Acreage Index (1996=100) Four Crop Price Since 1996 “Freedom to Farm” • Aggregate US corn, wheat, soybean, and cotton acreage changed little despite a wide fluctuation in price

24. U.S. Gov’t Payments by Program

25. US Domestic Demand US Population US Exports *Adjusted for grain exported in meat Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0 What about Exports?

26. What about Exports? US Thousand Metric Tons Developing Competitors Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam 15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

27. U.S. Federal Deficit/Surplus

28. 2002 FB General Approach • No set-asides • No stock accumulation • No market price support • Some payments decoupled from production, other payments tied to production and level of price • 6-year lifespan (2002-2007)

29. Commodity Provisions • Continues fixed annual payments • Continues deficiency payments when prices go below the loan rate • Institutes new Counter-Cyclical Program (CCP) with target prices • Allows for updating acreage and yields and addition of oilseed acreage for CCP

30. Countercyclical Payments • New in 2002 Farm Bill • Pays producers the difference between the target price (set by Congress) and the higher of: • The 12-month average market price, or • The loan rate plus the per unit fixed payment • Based on farmers’ previous acreage and yields (allowed to update some in 2002 FB) • Farmer does not have to plant the crop to receive the payment • “Countercyclical” because they “kick in” when market prices are low

31. Fixed Payments & Target Prices

32. Marketing Loan Rates

33. Direct Payments • Replaces decoupled payments established in 1996 farm bill (AMTA, PFC) • Paid at a fixed rate per crop on 85% of base acres, includes additional crops • Receive direct payments whether you plant a crop or not • Option to update base acres, must use “old” program yields • DP = (base acres * 85%) * old FPY * DP rate

34. To Update Or Not To Update • Tradeoffs, primarily because entire farm must be updated, not selected commodities • Updating often adds income for one commodity at the expense of another • Decision is extremely farm-specific • Updated program yields not used to calculate direct payments, just CCPs • Direct payments and CCPs made on 85% of base acres

35. Counter-Cyclical Payments • Establishes a vehicle for “automatically” distributing the emergency/ad hoc payments that have been made since 1998 • Do not have to produce commodity to receive CCP • Commodity specific based on a national price trigger (target price) • Payment rate depends on the effective price for the commodity, where effective price is the direct payment rate plus the higher of the market price or national loan rate • Target price - effective price = CCP rate ($/unit) • CCP = (base acres * 85%) * program yield * CCP rate

36. Target Prices • Target price is nota guaranteed price • Target price is merely a number used to calculate other possible payments • As price rises, the difference between market price and revenue received narrows • Maximizing farm program benefits more intertwined with market direction and marketing decisions than ever before

37. LDP Corn Price/Revenue Example* Cash Price: $2.50 Cash Price: $1.80 Revenue Received: $2.54 Revenue Received: $2.65 $2.65 Target Price= $2.60 Direct Payment $2.54 $2.50 Counter-Cyclical Pmt $2.27 Direct Payment County Loan Rate= $2.12 $2.12 $1.80 Market Price Market Price * Assumptions: • “Old” Farm Program Yield = 80 • Actual Yield 1998-2001 = 125 • Updated CCP Yield = 117 • Payment Limits Not Applicable • “Old” Program Base Acreage = 1,200 • Updated Base Acreage = 1,080

38. Corn Price/Revenue Example* National LoanRate = $1.98 County LoanRate = $2.12 Revenue = Cash Price + DP + CCP + LDP Target Price = $2.60 Cash Price = Price Received * Assumptions: • “Old” Farm Program Yield = 80 • Actual Yield 1998-2001 = 125 • Updated CCP Yield = 117 • Payment Limits Not Applicable • “Old” Program Base Acreage = 1,200 • Updated Base Acreage = 1,080

39. Implications of Commodity Policies • No price floor • No emergency reserves • No price ceiling • Supports incomes, not prices • Subsidizes livestock and other users • Subsidizes agribusiness input suppliers and output processors

40. Conservation Provisions • Total conservation price tag: $17.1 billion • Basically expands most existing conservation programs and adds several new programs • Emphasis of conservation spending shifts from land retirement to working lands

41. Conservation Programs • Conservation Reserve Program (CRP) • Cap raised from 36.4 to 39.2 million acres • Land automatically eligible for re-enrollment • Wetlands Reserve Program (WRP) • Cap raised from 1.075 to 2.275 million acres • Permanent easements, 30-year easements and/or restoration cost-share

42. Conservation Programs, cont’d • Env’l Quality Incentive Program (EQIP) • $9 billion mandated • 60/40 split between livestock and crop producers • Priority areas eliminated • Animal unit cap eliminated • Conservation plan requirement retained • 1 to 10 year contracts • Total payments capped at $450,000

43. Conservation Programs, cont’d • Farmland Protection Program (FPP) • Purchase conservation easements • $985 million • Requires partnership with non-profits • Wildlife Habitat Incentive Program (WHIP) • Grasslands Reserve Program (GRP)

44. Conservation Programs, cont’d • Conservation Security Program (CSP) • Incentives to maintain and increase stewardship practices • $2 billion • Begins in FY03 • Land in CRP, WRP, GRP and animal waste facilities not eligible • 3-tiered participation, up to 10 year contract, annual cap up to $45,000

45. Payment Limits • The maximum amount of commodity program benefits a person can receive annually by law • First enacted in 1938 farm bill, reinstated in 1970 • “Persons” are individuals, members of joint operations, or entities, such as limited partnerships, corporations, associations, trusts, and estates, that are actively engaged in farming • “3 entity” rule

46. Payment Limits • Current maximums • $40,000/person/FY for direct payments • $65,000 for counter-cyclical payments • $75,000 for marketing loan benefits • Effective annual cap is $360,000 per person per year • In reality, virtually unlimited • Producers with 3-yr average adjusted gross income > $2.5 million not eligible for payments • Unless > 75% of AGI is from agriculture

47. Other Provisions • Peanut quota buyout • Maintains/increases most trade, rural development and nutrition programs • Adds new energy title to the legislation • Addresses bioterrorism / biosecurity • Relaxes rules to make more borrowers eligible for federal farm credit assistance

48. Outlook for 2007 Farm Bill

49. What/Who Influences Policy? • Ag producer lobby • General farm organizations • Commodity organizations • Cooperatives • Agribusiness lobby • General agribusiness organizations • Commodity agribusiness organizations • Public interest lobby • Consumer food lobby • Nutrition, food safety, and quality lobby • Hunger lobby • Resource and environmental lobby

50. Broader Interests Represented • USDA—first substantive set of policy proposals in decades • Inside agriculture • Specialty crop producers • American Farmland Trust • Outside agriculture • Chicago Council on Global Affairs • American Enterprise Institute • Oxfam USA