Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
10/25/99
Contacts:
Mark Edelman, Extension Economics, (515) 294-3000, x1edelma@exnet.iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
dkmarks@iastate.edu
PLAIN ECONOMIC SENSE
For release Oct. 25, 1999
Column 386
Future Farm Policy: Beginnings of the 2002 Farm Bill Debate
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
The National Commission on 21st Century Production Agriculture recently conducted field hearings across the nation to take input for its recommendations for future farm policy. The Commission was set up by the Federal Agricultural Improvement and Reform (FAIR) Act of 1996. It includes a bipartisan group of diverse representatives from farm and commodity interests and is chaired by a former professor, Barry Flinchbaugh at Kansas State University.
At least two themes appear to be emerging from recent testimonies and discussions of future farm policy directions. First, no one appears to have a problem with the planting flexibility provided by the 1996 farm bill. Second, both critics and supporters of "freedom to farm" appear to be interested in examining "counter-cyclical payments."
The FAIR Act created Flexibility. Why? Farm program payments were partially "decoupled" from planting decisions. Prior to 1996, for example, corn producers planted a minimum number of corn acres to maintain their corn base and to receive program payments. The same was true for wheat, cotton, and other program crops. The 1996 farm bill decoupled payments by basing the payments on each farm's historical acreage base and program yields--instead of the current year's crop mix. Thus, a farmer received the same Agricultural Marketing Transition Act (AMTA) payments, whether corn or any other crop was planted.
Opponents of the FAIR Act criticize the 1996 farm bill for providing large payments during the first two "good" years under the 1996 FAIR Act and declining payments during the last two years--not counting $6 billion emergency farm assistance in 1998 and $8.7 billion in 1999. This gives rise to interest in "counter cyclical payments." At one of the recent National Commission hearings, an Iowa Farm Bureau representative called for study of "counter cyclical payments." So now, both critics and supporters of the 1996 Farm Bill are interested.
What are the "Counter Cyclical Payment" options? Counter-cyclical payments increase when farmer income declines and payments decline when the farmer income increases.
Option 1. Return to Traditional Programs. Some FAIR Act opponents favor returning to traditional supply management programs, claiming they provide counter cyclical payments. They criticize AMTA payments because the historical crop bases are more out-of-date each year.
Traditional programs also have many critics. They say having deficiency payments would recouple farm programs and eliminate planting flexibility. They also say returning to farmer-owned reserves would reduce marketing loan gains, loan deficiency payments, and reduce market prices in two to three years when the grain that went in comes out of reserve.
Option 2. Increase Loan Rates. Not all provisions of the current farm program are decoupled from planting decisions. USDA shifted the nature of Commodity Loan Programs by establishing County Posted Prices that vary daily with local market prices. When the local county posted price is below the local Loan Rate, farmers receive the difference as an additional payment on the quantity of that commodity they harvested in the current year. So, commodity loan programs under the existing policy do, in fact, represent counter cyclical payment systems.
Opponents of increasing loan rates suggest raising loan rates would increase government costs and send U.S. farmers price signals to expand production simultaneously while surpluses are dumped onto markets forcing prices further down to market clearing levels. This approach also exports instability and raises questions about compliance with World Trade Organization rules long term. Less planting flexibility also results as loan rates increase because current loan program benefits are linked to planting decisions of the current year instead of a historical base.
Option 3. Revenue Loss Payments. This approach to counter-cyclical payments would provide a farm payment to each producer based on a calculated revenue deficiency per acre. The payment rate would be based on the difference between the farmer's actual yield and price and a program target price and yield based on the county average. A form of this approach is used for soybean revenue loss payments. Supporters say this option doesn't arbitrarily reward farmers for good weather and penalize producers for poor weather like existing Commodity Loan Programs.
Others might suggest this option possesses some characteristics similar to disaster programs without requiring disaster declarations. Government spending would become more unpredictable and would be higher in years of larger farm revenue losses. Also, some planting flexibility is lost because benefits are linked to planting decisions of the current year crop mix.
Option 4. Subsidized Revenue Insurance. Another concept is for the government to simply purchase a larger share of revenue insurance premiums for crops and livestock enterprises that farmers are engaged in. This would allow government to smooth out year to year expenditures, but allows large counter-cyclical farm payments in years of large revenue losses.
However, some planting flexibility would be lost under this option because benefits are linked to planting decisions and a farmer's current year enterprise mix. This approach also encourages more production in marginal production areas and insurance products do not cover many livestock enterprises or specialty crops.
Option 5. Net Income Stabilization Accounts. Government would match farmer contributions into special savings accounts up to a specified amount. The savings could only be withdrawn when the net income of the farmer fell below the farmer's five year average net farm income. Similar to the insurance option, this approach would allow government to smooth out annual expenditures yet provide for large payouts during years of large farm revenue losses. Unlike the insurance option, this option would provide total flexibility for planting decisions because payments are decoupled from the crop mix and based on net farm incomes. In Canada, this concept works for livestock enterprises and specialty crops where insurance products don't exist.
However, some may oppose this approach because it can easily be targeted to reward small and medium size producers or those who are financially vulnerable. Unlike other entitlement recipients, some farmers simply do not want to have their net incomes used as part of the eligibility criteria for farm programs.
Anyone can review the activities of the Commission on 21st Century Agriculture by clicking on the web at: http://www.agcommission.org/.
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