Review of U.S. Farm Programs

2. Review of U.S. Farm Programs Stephanie Mercier November 16, 2011

3. AGree Goals • AGree is a new initiative to transform food and agricultural policy over the next eight years. Our goals are to: • Improve agricultural productivity and environmental performance; • Enhance the availability of and access to nutritious foods; and • Promote opportunities for rural communities to succeed economically. • We recognize that this complex challenge requires work over the long term and cannot be solved quickly or through a single policy vehicle. AGree will take a deliberative, inclusive approach to developing policy solutions. We will use rigorous, grounded research to understand problems and define solutions. We will engage a broad array of stakeholders, from whom we will seek insights, guidance, and ideas that lead to meaningful solutions.

4. AGree Backgrounder Presentation • This presentation is part of a series of background resources intended to lay the groundwork for a common understanding of the complex issues and policies related to food and agricultural policy at the national and global levels. It was authored by Stephanie Mercier, former chief economist for the Senate Agriculture Committee, and does not necessarily represent the views of AGree. • This piece is intended to provide a comprehensive overview of federal farm programs, in order to create a shared starting point for further discussions on food and agricultural policy. For more in-depth background and detail, please consult the full Mercier report, Review of U.S. Farm Programs. • We hope you find this presentation a helpful resource and background. And we hope you will join us as we seek to transform federal food and agricultural policy to meet the challenges of the future.

5. The Beginning of U.S. Farm Programs • Farm safety net programs started in the throes of the Great Depression, when farmers were facing: • Historically low commodity prices, • Lost crops due to the ravages of the Dust Bowl, and • Household incomes one-third of the national average. • Agricultural Adjustment Act of 1933 was enacted with the main goal of: • Reducing agricultural output by paying farmers to withhold some of their land from cultivation, in order to raise crop prices.

7. Subsequent Policy Refinements • Congress tinkered with support levels for crops over the decades that followed. • Farmers could use commodities as collateral for loans at set commodity loan rates, could forfeit to government if prices fell and loan value > market value of crops. • Provided for deficiency payment to farmers if prices fell below program target prices. • Set soil conservation as a main goal of programs, • Established annual set-asides to combat over-production.

9. Watershed of 1996: Federal Agriculture Improvement and Reform (FAIR) Act • The FAIR Act represented a significant change in the way U.S. farm policy was structured: • Eliminated annual set-aside requirement for program eligibility. • Ended deficiency payment/target price system that discouraged shifting crop mixture in response to market signals (had to plant base crop to receive payment). • Established fixed, decoupled payments linked to past production (base acres), with implication that that would be limited in duration. • Retained marketing assistance loan program, but with high projected crop prices that was not expected to kick in.

10. Current Structure of U.S. Farm Safety Net • Price/income support programs • Agricultural disaster programs, including crop insurance • Decoupled income support (direct payments) • Farm loan and related credit programs • Specialty crop programs • Biofuels policy • Conservation/environmental programs • Additional authorities

11. How Did We Get to Current Structure? • Within a few years after passage of the FAIR Act, Congress began to resume its old habits of piling on top of existing policy framework. • Asian financial crisis of the late 1990s led to a decline in demand for U.S. agricultural exports, and a drop in commodity prices and farm income. • Congress responded in 1998–2001 by providing “market loss assistance (MLA) payments” (totaling $19 billion) • Price-based countercyclical payment (CCP) program in the 2002 farm bill was statutory replacement for ad hoc MLA payments • CCP supplemented by revenue-based Average Crop Revenue Election (ACRE) option in 2008 farm bill

13. Income Support for All Program Crops • Marketing Assistance Loan Program: Provides loans on commodities to help smooth cash flow, generates income support when prices are extremely low. To minimize forfeitures, farmers can instead request payment (LDP) on gap between market price and loan rate. (1985) • Direct Payment Program (DP): Provides payments based on historical production, regardless of prevailing market conditions. (1996)

14. Income Support for All Program Crops • Countercyclical Payment (CCP) Program pays on fixed acres and yields when the price for a given program crop falls below the fixed target price. Does not require that the crop in question be planted but does require that land be in “agricultural use” (2002). • Average Crop Revenue Election (ACRE) pays when state average revenue falls below target level. It pays on actual planted acres. Enrollment is optional; it requires giving up CCP, accepting lower direct payments and loan rate. Must also have minimal farm-level loss to qualify (2008).

16. Components of Sugar Price Support Program • Loan Program: Loans available to processors holding semi-processed product (cane and beets are perishable and not amenable to long-term storage). Product can be forfeited if price falls below loan rate. • Marketing Allotments: Divides up allowable share of domestic sugar beet and cane production between processors of those two crops, on a state-by-state basis. Crop produced in excess of allotments cannot be marketed. • Feedstock Flexibility Program: Allows excess sugar to be sold by USDA at discount to ethanol producers. Has not been implemented, as some processors have shifted from using high-fructose corn syrup to sugar and domestic sugar output has been reduced due to bad weather. • Price support system supported by Tariff Rate Quota (TRQ) system under World Trade Organization (WTO), which limits sugar imports, but faces erosion with additional access under future Free Trade Agreements. • Sugar support provided largely by consumers paying higher prices; industry takes pride in “no net cost” label for program

17. Components of Dairy Price Support Program • Product Price Supports: System establishes price floor for main products (butter, cheese, nonfat dry milk powder). The USDA can purchase at support prices to take off market, if product meets specifications. • Milk Marketing Order System: Segments milk price by the final use of the product, and is designed to foster orderly marketing in regions of the country. • Milk Income Loss Contract (MILC): Provides deficiency payment for dairy producers, based off of Northeast Class I price ($16.94/cwt). Payments limited by production of up to 160-cow operation. Pays on 45% of gap on monthly basis (2002). • Except for MILC, most of cost burden of program falls on consumers in form of higher prices, not taxpayers. • Price support system is enabled by TRQs on imports of most major categories of dairy products under WTO. • Regional differences between dairy farm structures (small in Northeast, Midwest, large in West) has led to heated policy debates in recent farm bills.

18. Average Dairy Farm Size by State (2007 Census of Agriculture) 65 298 New Hampshire Washington 68 115 45 66 Maine 89 Vermont Montana North Dakota Minnesota 196 Oregon 49 Massachusetts 662 110 88 132 Idaho New York Wisconsin South Dakota 54 130 34 Wyoming Michigan Rhode Island 66 90 77 110 Pennsylvania Iowa Connecticut 75 Nebraska 64 494 Ohio 0 New Jersey 82 190 82 Nevada District of Columbia 850 Indiana 283 Utah Illinois 32 California 79 86 Colorado West Virginia 149 Delaware 42 Virginia 40 Kansas Missouri Kentucky 86 103 50 Maryland North Carolina Tennessee 67 1010 877 49 Oklahoma Arizona 168 New Mexico Arkansas South Carolina 121 83 Georgia 128 Alabama Mississippi 313 95 Texas Louisiana 21 0 Alaska Guam 284 Florida Number of dairy cows 153 0 0 to 32 Hawaii Virgin Islands 0 32 to 49 Puerto Rico 49 to 65 65 to 75 75 to 83 83 to 90 90 to 130 130 to 200 200 to 400 400 to 1011 No data

19. Agricultural Disaster Assistance Programs • Almost every new ag disaster program over the last few decades has been established with the goal of ending the use of ad hoc programs passed by Congress to satisfy the demands of constituent groups who have recently faced a serious natural disaster. But through FY 2010, that goal had not quite been met. • As with farm support programs, the process of developing agricultural disaster assistance programs has been one of accretion, with programs being added over time to address perceived gaps in coverage, with few if any of them being eliminated.

20. Major Components of Agricultural Disaster Assistance • Federal crop insurance program: Made widely available in 1981, has expanded greatly since. Required to be actuarially sound (expected losses = total premium paid), but government pays portion of premium. Delivered by private companies, who are reimbursed for expenses and able to capture underwriting gains. Policies available for >100 crops, but 75% of coverage is for 3 crops (corn, soybeans, wheat). • Noninsured Crop Disaster Assistance Program (NAP): Available for crops for which federal crop policy is not provided. Administered by Farm Service Agency. Provides modest indemnity (up to 27.5% value if crop is entirely lost), for fee of $250 per crop per county. Established in 1996 Farm Bill.

22. Major Components of Agricultural Disaster Assistance • Even with crop insurance available, Congress often stepped in with sizeable ad hoc disaster assistance programs (17 bills spending at least $300 million on agricultural disasters between 1988 and 2006). Hit hurdle in G.W. Bush Administration, which required offsets for the first time. • Standing disaster assistance program, with 5 components, added in 2008 farm bill: • SURE (whole farm crop disaster assistance) • Livestock Indemnity Program • Livestock Forage Disaster Program • Tree Assistance Program • Emergency Assistance for Livestock, Honey Bees, and Farm-raised Fish (ELAP) • Package not popular in South, because SURE works best in combination with buy-up crop insurance coverage, and a lot of Southern farmers buy minimal crop insurance coverage (catastrophic coverage (CAT)). • Funding runs out a year early (Sept. 2011). Will be struggle to get new money in current budget environment, especially since projected cost of programs has increased (estimated $9 billion for next five years).

23. Implications of High Crop Prices for Farm Safety Net Programs • At current high price levels for crops, expect very little payout from countercyclical farm support programs such as marketing assistance loan program, CCP, and ACRE over next several years. • ACRE could still pay out for 2011 crops in states suffering from significant yield losses, such as the drought-stricken wheat crops in TX, OK. Won’t know until 2012 because requires full marketing year prices to calculate. • Crop insurance outlays will remain high, because premiums are assessed based on crop values. • Direct payments will continue to pay out regardless of market conditions, unless changed in budget reform legislation or 2012 farm bill. • Disaster program outlays expected to be high in 2011, with both flooding and drought harming crops in key regions of the country. • CBO forecasts crop insurance outlays to exceed farm support program outlays over next 10 years.

25. USDA Loan Programs • The USDA provides loans to farmers for four basic purposes: • Annual operating expenses, • Ownership of farmland and construction/repair of structures, • Construction of farm storage facilities, and • Cope with emergencies due to natural disasters. • Except for farm storage, all programs are funded through annual appropriations process. • Loans under the first two categories can be direct (through Farm Service Agency) or guaranteed (through local banks). • For beginning farmers, special provisions include set-aside of USDA loan funds for a portion of the year, plus down payment loan assistance and preferred access to farmland held in USDA inventories due to defaults.

26. Provisions for Specialty Crop Producers • In the 2008 farm bill, groups representing specialty crop producers formed effective political coalition for first time, demanded their “piece of the action.” • The coalition declined to seek direct subsidies or similar forms of support (such as row crop producers receive); instead sought funds to help increase demand for products or reduce production costs. • Maintained strong opposition to allowing specialty crops to be planted on base acres from row crop programs. • Specialty crop title funded at about $1 billion for the 2008–2017 period, plus had additional programs in other titles.

27. Main Components of Specialty Crop Assistance • Specialty Crop Block Grants: Provided to state governments based on share of overall specialty crop production. Can be used to “improve the competitiveness of U.S. specialty crops.” ($466 million) • Pest and Disease Management Research Programs ($397 million+) • Early pest detection and surveillance • Provision of “clean” propagative material to growers • Specialty crop research initiative ($230 million in ag. research title) • Organic programs ($107 million) • Organic conversion cost-share • Data collection and reporting • Organic research and extension (in ag. research title) • Technical Assistance for Specialty Crops (TASC): Grants to help resolve trade SPS issues. ($59 million in trade title)

28. Federal Biofuels Policy • Although not strictly part of the farm safety net and largely outside of Agriculture Committee jurisdiction, biofuels policy has had outsized effect on U.S. agriculture in recent years. • Since 2002, U.S. ethanol demand for corn has increased by 3 billion bushels, which translates to nearly 20 million acres of cropland at U.S. average yields (about 25 percent of current corn crop). • Corn use for ethanol is projected by the USDA to exceed livestock feed use in 2011, although industry disagrees somewhat.

29. Major Components of Federal Biofuels Policy • Blender’s Credit: Tax subsidy to help ethanol and biodiesel to compete with petroleum-based fuels. Current level for ethanol is $0.45/gallon. Expires at end of 2011. • Ethanol Import Tariff: $0.51/gallon tariff discourages imports. Assessed because imports are eligible for blender’s credit. • Renewable Fuel Standard (RFS): Establishes requirement for minimum use of biofuels in U.S. transportation fuel sector. • Biomass R&D, including BCAP: Focused largely on developing and growing feedstocks and making conversion technology for “2nd generation” biofuels from cellulosic materials economical. • Bio-refinery grants and loans: Both USDA and DOE. Limited to “2nd generation” facilities.

31. Implication of U.S. Biofuels Policy • Land Use Impacts: 92 million acres of corn planted in 2011, 14 percent increase over level in 2004 prior to withdrawal of MTBEs from market. Gain initially from other row crops, but big factor right now is land made available from increased double-cropping of wheat/soybeans in Midwest. • Price Impacts: Crop prices rose dramatically in 2007–2008, biofuels cited as driving force in “food vs. fuel” criticism. More recent analysis now suggests biofuels demand was only one of many contributing factors. • Farm Program Spending: Higher prices due to all factors led to drop in farm program spending, increase in crop insurance spending; net decline of 79 percent between 2004 and 2009. • Impact on Livestock Sector: Total feed costs for 2011 are forecast by the USDA at $54.6 billion, up 98 percent since 2003.

32. Conservation/Environmental Programs • Improved soil conservation practices have been a goal of farm support programs from the beginning, but conservation-focused programs are relatively new. • Programs to retire environmentally sensitive land came first; also intended to relieve pressure on annual set-asides. (1985) • Numerous small programs designed to encourage farmers to adopt better conserving cultivation practices (“working land programs”) consolidated into one large program, EQIP. (1996) • Farmers using most farm support and loan programs must also abide by rules restricting cultivation on wetlands and highly erodible cropland (conservation compliance). Does not apply to crop insurance program. (1985)

33. Land Retirement/Easement Programs • Conservation Reserve Program (1985): Main focus is removing land prone to soil erosion from production. Farmers contract to retire land for 10–15 years. Qualify through centralized bidding process (EBI). • Wetlands Reserve Program (1990): Aimed at keeping wetlands out of agricultural production. Contracts can be for easements (30 years or permanent) or for 10-year cost share to rehabilitate wetlands. Funds allocated to state conservation directors, who make decisions on enrollment. • Grassland Reserve Program (2002): Established to provide incentives to owners of grassland, rangeland, or pastureland to restore or conserve such land. Not more than 60 percent of enrolled acres can go into easements, the remainder into rental agreements of 10–20 years.

34. Working Lands Programs • Environmental Quality Incentives Program (1996): Provides cost-share financial assistance and technical assistance to farmers to promote environmental quality on farmland still in production. By law, 60 percent of funding goes to livestock operations. • Conservation Stewardship Program (2002): Designed to treat agricultural conservation in a more comprehensive manner, and is intended to reward farmers and ranchers who already meet very high standards of conservation and environmental management on their operations. Also cost-shared.

36. Forestry Programs • Most policies to encourage certain activities or practices in privately owned forests (430 million acres) done through federal tax code. • Healthy Forest Reserve Program (2003): Designed to help reduce the risk of wildfires by thinning dense undergrowth and brush in forested areas. Provided through 10-year cost share or 30-year easement contracts. • Forest Stewardship Program (1978): Provides technical assistance to nonindustrial private forest owners to encourage and enable active long-term forest management.