USDA’s policy analysis sets the stage for the next farm bill debate

It is labeled as a “risk management analysis paper,” and USDA is careful to say that it is not a farm bill proposal, but the document released early in May in Washington certainly explores the potential for three policy proposals that are leading candidates for becoming the basis for the 2007 farm bill.
USDA’s “risk management analysis paper” was developed from all of those farm bill hearings across the country that allowed farmers and agribusiness folks to speak their piece about the state of the farm economy and what could be done to change it.
International backdrop. Exploring the current state of the farm economy, the paper details a wide number of financial issues and offers three policy perspectives that are cross-checked against the current international environment for U.S. farm policy.
Is it some insight into what you might expect for 2007 and beyond? You bet!
The USDA’s paper explores price, production, income, financial, and institutional risks that farmers face every day with a brief overview of how they might be managed, as well as the financial impact of current farm programs, and how those programs clash with the direction being taken by the World Trade Organization.
It is within that WTO context that the three USDA sample policy alternatives are evaluated.
ALTERNATIVE 1:
Use the existing structure of farm programs, but make them more WTO consistent, reduce their effects on resource use and structure, and better target them to producers with the greatest need for assistance.
This would involve: reduction of the marketing assistance loan rates, compensate producers with direct payments, reduce counter-cyclical payments, and create a payment limitation that targets payments to smaller and mid-sized farms.)
Objections. So how would that fly with our trading partners and what would be the impact on farmers? USDA believes the payment regime would still be vulnerable to international complaints and trade penalties, but it would be reduced from where we are currently.
The farm income safety net would be weakened, and reliance on revenue insurance and risk management marketing tools would increase.
With the help of direct payments, land values would be maintained.
Every region would be affected by reductions in payment limitations, but crop production would not be affected.
ALTERNATIVE 2:
Replace marketing assistance loans and counter-cyclical payments with a program that pays producers based on revenue shortfalls.
Lots of questions. With the elimination of such loan and payment programs, several questions arise of how they should be replaced in any income transfer process. Should target revenue be based on individual commodities or whole farm revenue? At what level of aggregation should the revenue level be determined? What should be the level of the revenue guarantee? Would a revenue-based program replace or complement the current crop insurance program?
Again, how would that fly with our trading partners and what would be the impact on farmers? The WTO would like the concept, as long as the revenue guarantee did not exceed 70 percent, which U.S. farmers may find too low. USDA believes such a change “would likely result in cost savings if the level of the revenue guarantee were set to provide protection similar to current programs.” However, if the program were extended to all farmers, regardless of commodity and region, there would be increased budget exposure and those funds would ultimately increase land values for producers who have never before received farm program subsidies.
ALTERNATIVE 3:
Phase out marketing assistance loans, direct payments, and counter-cyclical payments, and use savings to expand crop insurance coverage, fund farm savings accounts and/or expand conservation, rural development, or other programs.
(This is where farmers would not be paid for producing a commodity, but for using conservation tillage, for example, on a specific number of acres. Additionally, there would be government tax incentives for development of special savings accounts that would be built in good financial times and tapped in stressful financial times.)
Reaction. Again the question, how would that sit with our trading partners and what would be the impact on farmers?
The WTO would like the phase out of farm subsidy programs, but would want a 70 percent cap on withdrawals from the farm savings accounts.
Crop insurance programs would be a supplemental tool for financial risk management, and a wider number of farmers would be eligible for financial payments based on their conservation practices.
However, USDA believes, “Due to potential adverse effects on the land and asset values of program crop producers from such a proposal, program implementation would be gradual over a number of years.”
On the horizon. USDA’s risk management analysis paper is the first of several that will be issued as part of the build up to the 2007 farm bill. Obviously, the USDA staff is concerned about how any policy proposals will dovetail or clash with the rules of the World Trade Organization.
Keeping a close eye on protecting land values and spreading farm program benefits to a wider number of producers were also significant goals that could be identified by reading between the lines.
(Stu Ellis is farm gate blogger with the University of Illinois Extension.)