Farm Bill Debate and Prospects for 2012 Roman Keeney Farm Policy Study Group December 13, 2011

Overview Update on budget and farm bill process Prospects for having a farm bill in 2012 Near term outlook

Update Joint Committee on Deficit Reduction – Deadline of November 23 not met – Failure triggers ‘sequestration’ Across the board cuts to defense and domestic 50% of $1.2 trillion from each side

Update (cont.) House and Senate Agricultural Committees provided a deficit reduction proposal to the joint committee – $23 billion reduction over 10 years Ag committees heavily criticized for the closed door process Numerous other proposals for specific and not so specific farm bill contributions to deficit reform

Update (cont.) Stabenow (D-Mich) – Citing strong public opposition to direct payments – Premise: Use $4.8 billion in annual direct payments to meet deficit reduction and reform farm programs – Objective: Improve risk management Crop insurance Shallow loss

Update (cont.) Outcome – Not clear what is in the Ag committee submission to the Supercommittee Assumption – Completely eliminate direct payments LDP, CCP – Use some savings for shallow loss program Revision of ACRE

Update (cont.) Shallow Loss – Moving average revenue program Features – Payments are larger when revenue is further from recent history Price and yield protection – Triggered by farm and area losses – Limited to amounts not typically covered by crop insurance

Update (cont.) Start over or pick up where they left off? Senate and House Ag Committees begin work in the new year – Hearings in late January or early February – Markup in the early spring – Some are looking at a Memorial Day completion

Discussion Points: Farm Bill 2012? Reasons for optimism on a 2012 Bill – Committee has spent considerable time on farm bill An early vote could miss the worst of election year standoffs – Broad agreement in Opposition to direct payments Promotion of shallow loss programs

Farm Bill 2012? Reasons for pessimism on a 2012 Bill – Everything is magnified in an election year – Broad agreement is all they really had The toughest issues in Farm Bills are regional and rural-urban as opposed to Conservative- Liberal – What is the baseline that can be spent?

Scenario Managing a firm requiring a payroll reduction that must be enacted quickly: – Option 1: Workforce reduction to the percentage savings required – Option 2: Cut salaries to achieve the percentage savings required – Option 3: Fire everyone and hire new staff at the new payroll target

Ag Committee If you imagine that your managerial division of the company is having its strongest historical performance that is akin to the scenario faced by the ag committee

Ag Committee Facts – Short timeline to develop a less costly policy – Strong sector performance under current policy framework – A nearly stable baseline of spending under the current policy framework Decision – Completely overhaul the policy framework

Ag Policy Web AG POLICY COMMODITY POLICY Environmental Policy Food/Nutrition Policy Rural Policy Energy Policy Trade Policy Tax Policy

2011 Ag Outlook Update / Ag Policy /

Farm Bill 2012: Direct Payments vs Shallow Loss Direct Payments Looking Backward 1What were direct payments meant to be? 2How have direct payments been used by farmers/landowners? 3How have direct payments affected agricultural markets? 4What contribution have direct payments made to current prosperity in agriculture? 5Who is defending direct payments as a policy and what reasons are they offering?

Farm Bill 2012: Direct Payments vs Shallow Loss Shallow Loss Looking Forward 1What are shallow loss pmts. (SLP) meant to be? 2How will SLP’s be used by farmers/landowners? 3How will SLP’s affect agricultural markets? 4What contribution will SLP’s make to sustained prosperity in agriculture? 5Who is promoting SLP’s as a policy and what reasons do they offer?

Why choose overhaul? Presumably the answers for direct payments are better known than shallow loss given the 15 year history. Shallow loss programs will have larger budget exposure. Farmers have rejected the option to enter shallow loss (foregoing 20% of direct pmts) for four years It must be political…

Policy Instrument Continuum Decoupling/Coupling – The degree to which policies are linked to current producer decisions – When payments are linked to current decisions (yield or area planted) or current prices they are coupled Fully Decoupled Fully Coupled

Commodity Policy Instruments (Simple) Loan Deficiency Payment – Price Floor Application varies across commodities Rice and cotton loan rates are notably high (Fixed) Direct Payments – Lump Sum Transfer Based on historical production Fixed yield and area defined as payment basis

Commodity Policy Instruments (Complicated) Counter Cyclical Payment – Target price policy on historical production Payments not tied to current farmer action Prices fall, more money into agriculture Average Crop Revenue Election (ACRE) – Recent price and yield information establish a crop-specific target revenue Shortfalls trigger a payment

Views on U.S. Commodity Policy Domestic Citizenry External Citizenry DISFAVOR FAVOR LDP—Floor Price ACRE—Counter-cyclical Revenue CCP—Counter-cyclical Price DP—Fixed Transfer

Public Views on Agric. Support Direct Payments Recent public opinion survey – Subsidies given on a regular basis regardless of good/bad year? 40 percent favor when asked about small farms 15 percent favor when asked about large farms – Payments in bad years are much more highly favored Common editorial quote – “…indefensible program of direct payments…”

External Views on Agric. Support WTO Classification System  Amber Box  Trade distorting agricultural support ▪ Coupled payments that influence current output and may depress world prices  Blue Box  Trade distorting agricultural support ▪ Tied to land retirement which diminishes the over- supply effect  Green Box  Minimally distorting policies ▪ Decoupled commodity payments ▪ Environmental/Conservation payments

Politics of Agric. Support Fixed Direct Payments These payments were instituted in 1996 – Wean agriculture off of government programs – Culmination of a year evolution of decoupling U.S. farm subsidies Direct payments have proven resilient – Certain money to farmers Multitude of selling points (recall the web) Exempt from WTO disciplines

Farm Bill: Outlook Political pecking order… Dependent on deficit reduction Lots of interest in avoiding the automatic across the board cuts – Eric Cantor (R-Va) Leading a bipartisan effort to rescale the automatic spending reductions on the defense side attaching measures to end of year tax and spending bills – White House position Veto bills that circumvent the automatic reductions unless they are part of deficit reduction legislation

Outlook (cont.) Recently – Payroll tax holiday extension Federal non-military pay freeze Federal workforce reduction Means testing for social programs Surtax on wealthy incomes The spending on the tax holiday extension and any other similar bills must be offset

Outlook (cont.) Members of the House and Senate Agriculture Committees outlined $23 billion in reductions – Someone is likely to propose using those to keep some other bill deficit neutral – The Ag committee leadership is increasingly open to this idea if They can lock in their budget at baseline less the $23 billion

Outlook (cont.) House and Senate Committees $23 billion – This is at the low end for reduced Farm Bill spending – Tea-Party/Freedom Works/Dick Armey End all agricultural subsidies – House Budget Committee Chairman Paul Ryan (R-Wisc) $30 billion over ten years – Obama Deficit Plan $33 billion over ten years

Farm Bill 2012: Discussion Direct Payments Looking Backward 1What were direct payments meant to be? 2How have direct payments been used by farmers/landowners? 3How have direct payments affected agricultural markets? 4What contribution have direct payments made to current prosperity in agriculture? 5Who is defending direct payments as a policy and what reasons are they offering?

Farm Bill 2012: Discussion Shallow Loss Looking Forward 1What are shallow loss pmts. (SLP) meant to be? 2How will SLP’s be used by farmers/landowners? 3How will SLP’s affect agricultural markets? 4What contribution will SLP’s make to sustained prosperity in agriculture? 5Who is promoting SLP’s as a policy and what reasons do they offer?

Gardner writing in 1992  Farm policy started in the 1930s to address the farm income problem  Stable demand and low prices  “The farm income ‘problem’ has been solved…”  The role of policy in solving it has been small  Education, diversification to off-farm work and investments, etc.