US Agricultural Policy and the
Current “Farm Bill” Debate
Andrew M. Novakovic, PhD
The E.V. Baker Professor of Agricultural Economics
Charles H. Dyson School of Applied Economics and Management
Cornell 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?
2
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
4 There is an income problem
4 That is largely determined by a price problem
 Inelastic supply and demand means small changes in quantities can
result in big changes in price
4 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.
3
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
4
What is “Agriculture”?
The “Program” or “Major” Crops
Wheat
Corn
Grain sorghum
Got Milk?
Barley
Oats
Upland cotton
Rice
Oilseeds - sunflower seed, rapeseed, canola,
safflower, flaxseed, mustard seed
Soybeans
Sugar, peanuts, (and tobacco)
5
What is the “Farm Bill”
The first “Farm Bill” was the Agricultural Adjustment Act of
1933
After that, agricultural policy and related programs were finetuned, 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
4 Without a new Farm Bill to amend it, many programs would
revert to the provisions of the permanent law
4 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
 Biofuels
 Statistics in DC and
states, research and
extension in DC and
Land Grant
Universities
7
Maybe we should call it the Food Bill
Other – 12%
Commodities – 11%
Conservation – 8%
Food Security and
Nutrition – 68%
Methods of Support for Agriculture
1. Price Supports
a) Purchases
b) “Loans”
2. Income Supports
a) Target Prices and
Deficiency Payments
b) Income subsidies
3. Insurance
a)
b)
c)
d)
Yield
Price
Revenue
Other/Derivatives
4. Disaster Assistance
5. Supply Controls
a) Input restrictions
b) Marketing restrictions
c) Farm retirement
6. Demand Stimulation
a) Product/Process
Development
b) Promotion
c) Consumption Subsidy
d) Export Subsidy
7. Regulating Competition
a) Price reporting
b) Minimum prices
c) Marketing rules
Are these all subsidies? By whom? To whom?
8
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, immigration
Politics plays its role, but less so and more subtly than
in most other areas of legislation
Regional/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 plan
prepared by A.M. Novakovic
10
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?
prepared by A.M. Novakovic
11
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
prepared by A.M. Novakovic
12
Agricultural Policy 2012, no-2011?, no-2013?, uh?:
Let’s get what we can, however we can
Concept:
•
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?
prepared by A.M. Novakovic
13
The FCEA of 2008 Crop Highlights
Old programs
Commodity (Major Crops) Programs
Target 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 somewhat
Crop 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 restrictions
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 farms
Creates 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)
The new idea/approach
 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
prepared by A.M. Novakovic
14
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?
15
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.
prepared by A.M. Novakovic
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¢
17
The FCEA of 2008 - More Dairy Highlights
Dairy Market Loss (MILC)
Allows forward contracting on any federally regulated
milk that is not Class I
Payment rate trigger = $16.94
Extends Dairy Export Incentive Program
Payment rate adjustment for Feed Costs
Extends Dairy Indemnity Program
Uses “national average dairy feed ration cost
If 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 cap
FY2007-08 = 34% & 2.4 M lbs
FY2008-12 = 45% & 2.985 M lbs
FY2012-xx = 34% & 2.4 M lbs
prepared by A.M. Novakovic
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)
18
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 Plan
Foundation 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
20
Status of the 2012 Farm Bill
A Farm Bill Passed by the Senate in April 2012
A 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 2012
2008 Farm Bill extended on 1 January 2013 to avoid
reverting to permanent law
Ag 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, PhD
The E.V. Baker Professor of Agricultural Economics
Charles H. Dyson School of Applied Economics and Management
Cornell University
March 2013