1. U.S. Agricultural Policy: Issues & Outlook
Dr. Kelly Tiller
Agricultural Policy Analysis Center
The University of Tennessee
Philip Morris USA Richmond, VA
March 14, 2007
Agricultural Policy Analysis Center ● The University of Tennessee ● 310 Morgan Hall ● Knoxville, TN
● phone: (865) ● fax: (865)

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
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. Omnibus Policy 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

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

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 ( )

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
Wheat (bu)
$0.52
$3.86
$3.92
Corn (bu)
0.28
2.60
2.63
Sorghum (bu)
0.35
2.54
2.57
Barley (bu)
0.24
2.21
2.24
Oats (bu)
0.024
1.40
1.44
Rice (cwt)
2.35
10.50
Soybeans (bu)
0.44
5.80
Upland Cotton (lb)
0.0667
0.7240

32. Marketing Loan Rates 2001 Rates 2002-2003 2004-2007 Wheat (bu) $2.58
$2.80
$2.75
Corn (bu)
1.89
1.98
1.95
Sorghum (bu)
1.71
Barley (bu)
1.65
1.88
1.85
Oats (bu)
1.21
1.35
1.33
Rice (cwt)
6.50
Soybeans (bu)
5.26
5.00
Upland Cotton (lb)
0.52

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 not a 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. Corn Price/Revenue Example*
Cash Price: $1.80
Cash Price: $2.50
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
LDP
$1.80
Market Price
Market Price
* Assumptions:
“Old” Farm Program Yield = 80
Actual Yield = 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 Loan Rate = $1.98
County Loan Rate = $2.12
Revenue = Cash Price + DP + CCP + LDP
Target Price = $2.60
Cash Price = Price Received
* Assumptions:
“Old” Farm Program Yield = 80
Actual Yield = 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 to 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

51. (What/Who)’s MOST Influential?
What counts is relative influence at the time the bill is being developed

52. Increasingly Important Influences
Budgets and deficits
Farm economy (prices, trends)
Trade / WTO considerations
Expanding/competing ag interests
Balance of power in Congress
Energy prices / renewable energy

53. Farm Bill Timeline 2002 Farm Bill expires September 30, 2007
Trade Promotion Authority expires June 30, 2007
Budget baseline haggling through April
Likely to mark up bills through May and June
Need to have bills passed in both Senate and House and ready for conference by August recess
Must resolve differences in Conference quickly in September

54. Budget Constraints Very different budget situation than in 2002
Got $79 billion ABOVE the baseline in ‘02 Farm Bill
January CBO baseline $30 billion less for commodity title spending over last year’s baseline
Diverse groups attempting to obtain more funds in FY08 budget resolution
Even if Congress doesn’t cut, it won’t increase, affects how the pie is sliced
Divisive for the ag sector
But maybe not as bad as 2012, 2017 ??

55. US Budget Projections, 2008-2017
Source: CBO: The Budget & Economic Outlook: Fiscal Years , Jan. 2007

56. Future “Current” Situation
What matters most is the situation At The Time the bill is written
Crop prices much higher
Up from historical lows, reduces “costs” of continuation
Driven largely by non-ag demands (ethanol)
Export prospects (China) improving ??
Costs of production high
Especially energy-related costs
Interest rates higher
Labor/immigration policy pressures
Doha negotiations in WTO may not be resolved, but trade issues still very important

57. U.S. Corn Ethanol Production
Total Capacity (as of 11/27/06) = existing + under construction + under expansion
2012 RFS: 7.5 B gallons
Source: Renewable Fuels Association

58. Expected Net Returns
Source: USDA, OCE, January 2007

59. U.S. Corn Ethanol Production
Total Capacity (as of 11/27/06) = existing + under construction + under expansion
2012 RFS: 7.5 B gallons
Could potentially double corn-ethanol capacity
Crop farmers benefit from corn-ethanol, wherever plants are located
Livestock farmers face higher costs
There’s a limit to the amount of corn-based ethanol we can sustainably produce without disrupting the ag sector
Source: Renewable Fuels Association

60. Distribution of Subsidies
Renewed push for payment limits
Last year: necessary to hold down costs
This year: some reform necessary for damage control
Pressure to shift funds from program crops to specialty crops while reducing overall spending
39% of farms receive government payments (Source: ERS, 2006)
10% of farms receive nearly 75% of payments (Source: EWG, 2005)
Agricultural voting impact
Number of farms and farmers continues to shrink
Many representatives in the House do not have farm constituents

61. Distribution of Subsidies, cont’d
Pressure to shift payment basis from production to conservation
Influenced by WTO commitments
Pressure to address WTO compliance challenges
Pressure to reduce the impacts of subsidies on land values and cash rents (transfers to landowners)
Since 2000, Illinois farm real estate values have increased 68%
: increased between 4.2% and 9%
: increased between 1.3% and 3.4%
7.4% in 2004, 27.6% in 2005, 14.1% in 2006

62. USDA FB Proposal
Proposal developed by the Secretary of Agriculture, released 6 weeks ago
A continued “safety net”
“Similar” programs, lower loan rates
Addresses “inequities” in payments
Eliminates planting restrictions
Reduces payment limits (lower AGI cap, eliminates 3-entity rule)
Moves toward more WTO compliance
More conservation dollars, higher direct payments, larger energy title

63. Possible 2007 FB Reforms Farm income Conservation Renewable energy
Revenue, rather than price, programs
May be only current program crops, may include specialty crops and livestock
Conservation
Continued shift toward green payments, especially those that are clearly WTO green box
Renewable energy
Expand programs in 2002 FB, add incentives to move from corn-based ethanol to cellulosic ethanol

64. Farmer Decision Analysis
Price expectations
Expected returns
Includes government payments
Labor
Rotations
Expectations beyond next year

65. Expected Net Returns
Source: USDA, OCE, January 2007

66. 2002 Total Cropland

67. 2002 Base Acres

68. Share of Base Acres Planted 2005, Corn

69. Share of Base Acres Planted 2005, Corn

70. Share of Base Acres Planted 2005, Cotton

71. Share of Base Acres Planted 2005, Cotton

72. Share of Base Acres Planted 2005, Soybeans

73. Share of Base Acres Planted 2005, Soybeans