Published: May 02, 2008 10:21 am            

Farm Programs: U.S. House, Senate ‘very close’ to farm bill compromise

Originally published in the May 2, 2008, print edition.

If you have traveled across farm country in the past few weeks, the biggest issues being discussed are probably the cold, wet weather that is delaying spring planting in many areas.

Those thoughts are compounded by the rapidly rising input costs for fertilizer, fuel and seed, negative profits in hog production, changes in grain marketing alternatives, the future of the ethanol industry, the sharp increase in land values and cash rental rates.

You’ll notice that passage of a farm bill was not listed as one of the issues currently on the “front-burner” for a lot of Midwest farmers. That is because the provisions in the commodity title of the farm bill will likely have little impact on the profitability for most corn, soybean and wheat producers in 2008, and probably in 2009.

The current commodity prices for corn, soybeans and wheat are well above the target prices in the 2002 farm bill, or the proposed target prices in the new farm bill. The only expected farm program payments in 2008 for most grain producers will be the guaranteed direct payments.

Late in the week of April 20-26, it appeared as if Congress is very close to finalizing a compromise for a farm bill; however, there are still some items to be worked out by the U.S. House and Senate conference committee before the farm bill is finalized. On April 25, Congress also passed their fifth extension of the current farm bill since Sept. 30, 2007, when the 2002 farm bill originally expired.

The extension continues the existing programs and funding baselines that existed in the 2002 bill. These extensions do not authorize 2008 sign-up for commodity farm programs or any farm program payments. Without the farm bill extensions, there would be no farm bill in place, and farm programs would revert back to “permanent farm law,” which is based on the “Agricultural Act of 1949.” This legislation is suspended each time that a new farm bill is passed.

Since the beginning of discussions on the new farm bill, the main obstacle in reaching resolution on the new legislation has been where to find additional funding for needed new programs and initiatives, without seriously impacting the commodity title programs and other popular programs.

The “pay-as-you-go” legislation adapted by Congress to address the federal budget deficit requires Congress to offset any potential spending increases on federal programs with either budget reductions in other programs, or enhanced revenues through tax increases and other sources. It now appears that Congress may be getting closer to reaching resolution on some of the key funding issues, which could lead to a compromise, and the ultimate passage of a new farm bill by Congress.

New farm bill summary

The following is a brief summary of some of the provisions that Congress has agreed upon for the farm bill and some provisions that are still being worked on.

• The tentative agreement calls for an additional $10 billion over the 10-year farm bill budget baseline, most of which will be targeted to additional funding for programs under the food and nutrition title in the farm bill. Programs under this title include food stamps, school lunch programs, WIC programs, etc. The extra $10.3 billion being proposed would be in addition to the $286 billion that was already allocated for food and nutrition programs, which accounts for about two-thirds of the funding allocation in the proposed farm bill.

The extra funding for the food and nutrition title was important to members of Congress who represent urban areas, which have seen increased demand for U.S. Department of Agriculture food assistance programs in recent months due to the sagging U.S. economy.

• The federal budget offsets to fund the extra $10 billion being proposed in the farm bill would come primarily from added customs user-fees for certain imports entering the United States. Under federal budget guidelines the proposed customs fees count as user-fees and not as increased taxes. The Bush administration has been opposed to any tax increases that are designated as offsets for federal budget increases.

The farm bill would also reduce funding from current levels to subsidize federal crop insurance. This will likely result in higher crop insurance premiums for producers in future years.

• Direct payments, which are the guaranteed portion of the farm program payments, would be reduced by about 2 percent over the next four years, resulting in a federal budget savings of between $200 million to $400 million over four years. Currently, direct payments paid to crop producers total about $5.2 billion per year. Current direct payment rates are $0.28 per bushel for corn, $0.44 per bushel for soybeans and $0.52 per bushel for wheat.

Payments are determined by calculating 85 percent of the crop base acres times the long-standing base yields for each crop on individual farms. Most farmers currently receive approximately $22 to $30 in direct payments annually for each corn base acre, $11 to $15 annually per acre for each soybean base acre and $15 to $20 per acre annually for each wheat base acre.

• A new “Average Crop Revenue” program will be included in the farm bill as an option to the current “price-based” counter cyclical payments. The CCPs under the ACRE program will be “revenue-based” (price and yield). The ACRE program will not be implemented until the 2009 crop year at the earliest, and could be delayed until the 2010 crop year.

To participate in the ACRE program, producers would have to give up 15 to 35 percent of their direct payments, and access to current marketing loans and loan deficiency payments. This is projected to save about $1.0 billion to $1.6 billion in farm bill spending in the next four years.

• A new “Permanent Disaster Program” will likely be included in the farm bill, with $3.85 billion allocated in new funding. The inclusion of a permanent disaster provision was important to some senators and congressmen from the Midwestern and Plains states. It is hoped that the addition of this program will alleviate the need for Congress to pass an “ad-hoc” disaster program every year or two, in order to address crop and livestock losses from natural disasters around the United States.

• A “Farm Tax Package” is also likely to be part of the farm bill. The provision will make it easier for farmers to qualify for social security benefits. The proposal would also restrict non-farmers from using losses on agricultural investments as a way to reduce the federal tax implications of gains from non-agricultural investments.

The proposed tax changes for agricultural operating losses would not affect most typical farmers. Special tax benefits for timber owners and horse breeders were also included in the proposed legislation.

• The proposed farm bill would provide approximately an extra $4 billion for programs under the conservation title. This includes an additional $1.1 billion for the Conservation Stewardship Program, currently named the Conservation Security Program. It is hoped to increase CSP acreage from the current 16 million acres to about 80 million acres by 2012. The farm bill would also allocate $2.4 billion for the Environmental Quality Incentives Program, and $1.3 billion for the Wetlands Reserve Program.

Most of the added conservation funding would be achieved by lowering the maximum Conservation Reserve Program acres down from the current 39.2 million acre maximum over the next few years.

• There were few changes proposed in the commodity title of the proposed farm bill. Crop base acres, payment yields, payment formulas and planting flexibility would remain the same as with current farm programs. There would be approximately a 2 percent reduction in direct payments, as discussed earlier. Target prices for soybeans and wheat would increase slightly for 2010, while the target price for corn would remain at the current level.

An additional $1.35 billion would be allocated to specialty crops under the farm bill; however, it does not appear that the restrictions of raising canning crops on crop base acres will mean changes in the new legislation.

• It appears that the current CCC marketing loan and LDP program will remain close to the same as the current program. The farm bill will give the USDA more authority to adjust the formulas for posted county prices following marketing distorting events, such as Hurricane Katrina in 2005. It does not appear that there will be any changes in “beneficial interest” in the grain, as it relates to claiming potential LDPs at harvest time, and selling the grain at a later date.

• There are few changes in the proposed sugar and dairy provisions in the farm bill. There would be a small increase in the sugar loan rate for 2010, and some funding for development of a sugar-to-ethanol program. There are still some negotiations going on regarding the dairy provisions and possible changes in the Milk Income Loss Contract program.

• The new farm bill enhances some incentives for renewable energy, while reducing other incentives. There was big push to encourage cellulosic ethanol, with the blenders credit for producing cellulosic ethanol being increased to $1.01 per gallon. At the same time, the ethanol blender credit for corn-based ethanol would be reduced from the current level of $0.51 per gallon to $0.45 per gallon. The current ethanol import duty for foreign ethanol coming into the United States would be continued through 2010. The biodiesel tax incentive program would be extended one-year, through 2009.

• The farm bill would fully implement country-of-origin labeling for all meat products. There are provisions to make the COOL implementation more flexible for both livestock producers and the meat industry.

• Final agreement in the farm bill has not yet been reached on proposed changes in payment limits as of this writing; however, there seems to be some agreement on an AGI limit of $500,000 to be eligible for farm program payments. The proposed AGI limit would be a substantial change from the current $2.5 million AGI limit. It has not been resolved if this $500,000 limit would be a “hard-cap,” with no exceptions, or if there would be a higher limit if the income is primarily derived from production agriculture.

Also not resolved, is whether or not the proposed AGI limit would just be for commodity program payments, or if the limit would also apply to conservation and land set-aside programs. Also not resolved is what the payment limits per individual would be for direct payments, CCPs and marketing loans or LDPs. It appears that the so-called “triple-entity” rule and the use of “generic certificates” will be eliminated in the farm bill.

Bottom line

We are a lot closer to finalizing a new farm bill than we were a few weeks ago, but there are still a few issues to be worked out by the House and Senate conference committee, before the final version of the farm bill is voted on by both houses of Congress. If the farm bill passes Congress, it must still be signed by President Bush before it becomes law.

The administration has raised several issues with the farm bill relative to the increased spending levels and budget offsets, payment limits and the proposed target price and loan rate increases for some crops. So, there is still a possibility of a presidential veto of the bill, which would again force its development back to Congress.

        

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