U.S. Farm Policy: Overview and Farm Bill Update. Jason Hafemeister 12 June Office of the Chief Economist. Trade Bureau

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1 U.S. Farm Policy: Office of the Chief Economist Trade Bureau Overview and Farm Bill Update Jason Hafemeister 12 June 2014

2 Agenda Background on U.S. Agriculture area, output, inputs, income Key Elements of U.S. Domestic Farm Policy Changes with New Farm Bill

3 Background on U.S. Agriculture 2.1 million farms, 3.2 million farm operators 87% of farms are operated by families or individuals 2.7 million hired farm workers 13.9 million ag related jobs Crop Acreage: 132 million hectares Value of Agricultural Production: $363 billion 5% of farms account for 50% of production Net Farm Income: $130 billion 2013 data, USDA/ERS

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27 Key Elements of U.S. Farm Policy Farm Programs have evolved over time Farm Bill Elements Producer safety net Other programs Key Issues in Farm Policy Decoupling payments from farmer decisions Coupling payments to environmental requirements Focusing payments on farmers in need

28 Evolution of Farm Bills First comprehensive program developed in the 1930s to respond to the depression, low farm prices, and dust bowl. Post war farm programs adjusted to try to balance producer flexibility and market management, including use of administered prices and supply control. Broader range of programs added to Farm Bill (not just commodity programs). Starting with 1985 Farm Bill, commodity programs emphasize production flexibility and cash payments. Current Farm Bill emphasizes risk management, including through crop insurance and partially decoupled payments for major commodities.

29 1. Commodities 2. Conservation 3. Trade 4. Nutrition 5. Credit 6. Rural Development 7. Research 8. Forestry 9. Energy 10. Specialty Crops 11. Crop Insurance 12. Miscellaneous Farm Bill Titles

30 Commodities: Payment Programs Price Loss Coverage (PLC) paid on historical base, partially decoupled Payments when prices fall below fixed targets. Payments made on basis of historical production, not current production. Target prices around cost of production, significant payments currently not considered likely Marketing assistance loans paid on output, coupled. Farmers can forfeit commodity loans on crops when prices fall below a fixed loan rate (or just receive a payment and market the crop directly) Loan rates very low, few forfeitures forecast as of now Covered commodities: wheat corn grain sorghum barley dry peas oats rice soybeans peanuts other oilseeds lentils small chickpeas honey wool mohair cotton (marketing loan and STAX only)

31 Revenue Based Programs Crop Insurance based on particular insurance product (e.g., revenue) Crop revenue and yield programs, multiple policy types Premium subsidies to encourage participation Agriculture Risk Coverage (ARC) paid on historical base payments when prices falls below recent levels. Payments made on basis of historical production, not current production or farm individual farm revenue. county or individual option Supplemental Coverage Option (SCO) revenue insurance, paid on county averages payments based on county level revenue. insurance program with premium subsidies Stacked Income Protection Plan (STAX) revenue insurance, paid on county averages for upland cotton producers only Revenue insurance program, premium subsidies

32 Livestock Programs Margin Protection Program (MPP) for dairy Margin insurance paid on historical production levels Base coverage with option to purchase higher levels Lower subsidies for higher production Producers much choose between MPP and Livestock Gross Margin for dairy program, but not both Dairy Product Donation Program Triggered when prices are below $4.00/cwt for two consecutive months Government will purchase consumer ready products at market prices Program terminates after two months of purchases or if prices rise Not a price support program Livestock disaster assistance Livestock Forage Assistance (LFP) Livestock Indemnity Program (LIP) Emergency Assistance for Livestock, Honeybees, and Farm raised Fish Program (ELAP)

33 Other Programs Conservation Nutrition Research Disaster Assistance

34 New Farm Bill: Budgetary Scoring (CBO: 10 year totals (CRS)) billion dollars Other Titles, 2.06 Crop Ins., 8.91 Nutrition, Other Titles, Other Titles, 1.79 Crop Ins., 5.00 Crop Ins., 5.72 Nutrition, 3.94 Nutrition, 8.00 Commodities, Commodities, Conservation, 3.51 Conservation, Commodities, Conservation, House Bill, Net: $51.82 billion Senate Bill, Net: $17.84 billion 2014 Farm Bill, Net: $16.50 billion

35 Program Changes with New Farm Bill Repeals: Direct Payments (DP) Counter Cyclical Payments (CCP) Average Crop Revenue Election (ACRE) Supplemental Revenue Assistance (SURE) Dairy Product Price Support Milk Income Loss Contract (MILC) Dairy Export Incentive Program (DEIP) New Programs: Price Loss Coverage (PLC) Agriculture Risk Coverage (ARC) Dairy Margin Protection Program STAX for cotton Supplemental Coverage Option for crop insurance (SCO) Continuation: Marketing Loan Crop Insurance Livestock disaster assistance

36 Concern: Farm Prices Real Commodity Prices / / / / / / / / / / / / / /15f 2019/ /24 Corn Soybeans Wheat Rice 2005=100 Source: USDA Agricultural Projections to 2023 and OCE, February 2014

37 Price Loss Coverage (PLC) Price based payment program (not unlike repealed Counter Cyclical Price Program (CCP) program) Makes payment when prices fall below a trigger level Like ARC, payments determined by base acres not planted acres Unlike ARC, payments based on reference yield, not actual county yield Payment rate max(12 month national marketing year price, loan rate) Less the reference price Payment yield 90% of the farm yield (updated) Paid on 85% of eligible base acres

38 Concern: Farm Revenue Cash Receipts Market Direct govt payments Net crop insurance indemnities

39 Agriculture Risk Coverage (ARC) Revenue based payment program Would make payments when per acre revenues (Actual Crop Revenue) for a particular crop fall below a trigger level (ARC Guarantee) Available at the county level or individual farm level County Level Actual Crop Revenue = max(12 month national marketing year price, loan rate) * county yield ARC Guarantee = 86% of: 5 year Olympic average yield * 5 year Olympic average price Paid on 85% of eligible base acres Individual farm level Actual Crop Revenue = max(12 month national marketing year price, loan rate) * total farm production ARC Guarantee = 86% of previous 5 year average of: planted yield * national market price Paid on 65% of base acres (weighting by actual crop plantings) Maximum of 10% of benchmark revenue, covers losses between 76% and 86% of ARC guarantee

40 Concern: Dairy margins

41 Dairy Margin Protection Program Payment made when production margin falls below coverage level over a two consecutive month period Margin = All milk price Average feed cost All milk price is the average price received per cwt for all milk sold to plants and dealers Average feed cost a weighted average of corn, soybean meal and alfalfa hay prices Producer can select coverage levels from $4.00 to $8.00 in $0.50 increments, Producer has no premium for minimum $4.00 per cwt coverage but increase with additional coverage to $8.00 per cwt Premiums (at all coverage levels) higher for production above 4 million pounds No supply control feature, lower subsidies for production above Annual decision to purchase coverage Payment based on base production, not actual production

42 Dairy Margins Jan 12 Sep 12 May 13 Jan 00 Sep 00 May 01 Jan 02 Sep 02 May 03 Jan 04 Sep 04 May 05 Jan 06 Sep 06 May 07 Jan 08 Sep 08 May 09 Jan 10 Sep 10 May 11 $/cwt Source: Office of the Chief Economist, February 2014

43 Crop Insurance Crop Insurance Continued Tied to conservation compliance Supplemental Coverage Option (SCO) Insurance covers losses between 10% and 25%. 10% deductible. Premium subsidy: 65%. Other insurance products available to cover deeper losses. Not eligible for cotton. Not eligible for ARC participants. Begins in 2015.

44 Cotton Revenue Insurance Stacked Income Protection Plan (STAX) for upland cotton only. No access to PLC, ARC or SCO. Covers between 10% and 30% of expected county revenue Traditional crop insurance continued for larger losses Payment multiplier between 80% and 120% Premium subsidy: 80% Transitional payments for cotton producers in lieu of STAX for 2014

45 Payment Limitations Payment limitations on crops other than peanuts $125,000 for combination of PLC, ARC, marketing loan gains and loan deficiency payments across all crops, except peanuts $125,000 specific limit for peanuts over the same programs Adjusted Gross Income (AGI) limit of $900,000 for receiving payments No payment limits on crop insurance, SCO and STAX payments USDA to define actively engaged farmers eligible for payments

46 Producer Choice 1: PLC or ARC Title I: Commodities One time decision for each crop for the life of the Farm Bill Agricultural Risk Coverage Price Loss Coverage Decoupled from actual production ARC County Coverage Decoupled from actual production ARC Individual Coverage Coupled to actual production on whole farm basis

47 Producer Choice 2: Base Updating Base acres tied to historical production Cotton base acres become generic base acres, non program Farmers allowed to reallocate remaining program crop base acres based on recent 4 year acreage allocation ARC and PLC payments (largely) calculated on base acres and decoupled from production Crop Base Acres 2008 Farm Bill Planted Acres Avg Wheat Corn Minor Feed Grains Soybeans Upland Cotton Rice Peanuts

48 Producer Choice 2: Updating 400 AC Cotton Base 500 AC Soybean Plantings avg 400 AC Generic Base 400 AC Soybean Base 200 AC Corn Base 500 AC Corn Plantings avg 300 AC Soybean Base 300 AC Corn Base

49 Producer Choice 3: Insurance Dairy Crops Program Crops Upland Cotton Traditional Crop Insurance Traditional Crop Insurance Livestock Gross Margin Insurance Based on actual production Dairy Margin Protection (above $4/cwt) Decoupled from actual production Supplemental Coverage Option (if not in ARC) Stacked Income Protection (STAX) Based on county revenue Based on county revenue

50 Extra slides to illustrate key points, as needed

51 Nutrition Programs Growth in Nutrition Programs School Breakfast Child and adult care Source: USDA, Food and Nutrition Service. Other WIC National School Lunch SNAP

52 Context: 2013 Economic Issues Budgetary Pressure 7,000 U.S. Budget Balance, $ billion 6,000 5,000 Outlays 4,000 3,000 Revenues 2,000 1, (f) 2016 (f) 2018 (f) 2020 (f) 2022 (f) 2024 (f) Source: CBO

53 Farm Bill Legislative Process House Budget Committee sets budget targets House Agriculture Committee House passes conference bill Stakeholders testify and lobby for provisions. USDA provides consultation on technical details: Farm organizations Agri-business Environmental groups Taxpayers Rural communities Research scientists House debate and passage of House bill Senate debate and passage of Senate bill Senate Agriculture Committee Conference Committee Senate passes conference bill President signs bill into law USDA establishes rules and regulations to implement Farm Act

54 WTO: AMS Limit $ billion Aggregate Measurement of Support (AMS) AMS Ceiling U.S. WTO domestic support notifications

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