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Farm Bill Capsule

Wednesday, February 1, 2012
filed under: Marketing/Risk Management

By Dale Thorenson*

A Look Back…

At the risk of sounding like my dad and uncle, who used to tell me cautionary tales about farming back in the Great Depression — or the “Dirty ’30s,” as they always described that era — let me offer some background prior to getting into the “Farm Bill update” that is found in the second half of this article. Many will remember well what I am about to describe.

The first time I fully realized that actions by Congress could adversely affect my farm was back in the spring of 1982, when the Agricultural Stabilization and Conservation Service office — aka the ASCS — forwarded the new rules established by the 1981 farm bill for enrolling into the farm program. Among the many notable “changes” was a return to fixed acreage bases in lieu of the “plant what you want, doesn’t matter anymore” mantra of the 1977 farm bill, which had followed the explosion in commodity prices in the mid-’70s that was caused by the “Great Russian Grain Robbery” of 1972.

Much to the surprise of all farmers, the congressional agriculture policy makers, in their infinite wisdom, had decided that these new crop base acres would be established by using the historical planting history for the 1980 crop year. Period. And if that was a wee bit too harsh for those who had been experimenting with rotations, an option was made available to average 1980 and 1981 plantings.

It was a sour deal for any producer who had followed market signals and planted an attractive alternative crop in 1980 — and especially sour if that alternative crop happened to not be a “program” crop. So at best, assuming the farm had been rotated back into a program crop in 1981, that farm had only half its acreage covered by base acres — which in turn meant no safety net on the non-base acres should commodity prices decline. And decline they did, during the 1980s.

Another provision of the 1981 farm bill allowed for “base building” for those who chose not to follow the production controls of the times, but rather to stay out of the program and seed the entire farm solid for a year. That year’s acreage was then averaged with the 1980 and 1981 acreage, resulting in a larger program crop base acreage the following year. Conversely, any farm that did not plant a crop up to its total base acres on a particular year (not including the required “set-aside” that was considered planted) would lose base acres the following year through the same averaging process.

As a result, during the 1980s and early 1990s, farms were, for the most part, either planted to a program crop up to their base, or overplanted as producers tried to average up their farm base acres as they chased the most favorable target price. (Because unlike men, all target prices were not created equal.) The artificially-set support prices that distorted plantings that resulted in over-production . . . that in turn increased government costs . . . was why this era helped coin the phrase “farming the program” — because we certainly weren’t “farming for the market.”

Base building was available up until the enactment of the 1996 farm bill, when the program base acres were fixed until the oilseeds base update of the 2002 farm bill.

But wait, I’m getting ahead of myself. We need to talk about planting flexibility, which was/is the most innovative and important farm policy reform ever adopted by Congress. Planting flexibility was made possible when artificially established support prices were decoupled from production.

Planting flexibility through decoupled support started out in baby steps, with the “0-92” program in the 1990 farm bill, which allowed wheat and feed grain producers to plant all or some of their base acres to a minor oilseed and still receive up to 92% of the wheat or feed grain deficiency payment on the planted minor oilseed acres.

Then with the passage of the 1996 farm bill, planting flexibility was fully implemented. Historical support for base acres was transformed into a seven-year contract that provided declining “Agriculture Market Transition Act” (AMTA) payments without the requirement of planting the base acre crop at all. The market now ruled, and producers were able to follow market signals rather than chase target prices.

The 2002 and 2008 farm bills continued this concept of planting flexibility through decoupled support with the enactment of direct (replaced AMTA) and countercyclical (replaced the double AMTAs of the disaster bills) payments. Planting flexibility has spurred the development of sustainable, agronomically sound rotations in various regions of the country. Those farms that adopted these rotations have increased overall production and profitability and are supporting new industries surrounding these crops, including job-supporting processing facilities in rural areas.

I can hear many producers thinking, “The market rules, yeah right. It about broke me during the 1998-2001 collapse in commodity prices.” Indeed it did. And most farms would not have survived but for massive amounts of government aid through the ad-hoc disaster programs adopted during those years. But planting flexibility was not the culprit.

This fear of another collapse in commodity prices from much loftier levels with equally sky-high production costs hovers in the background now as policy makers struggle to write the 2012 farm bill. How do you put in place an adequate safety net that bridges the gap between price and cost in the event of a market collapse without distorting planting decisions? That is the question the agriculture community currently finds itself debating.

2012 Farm Bill Update

Congress passed the Budget Control Act (BCA) last August 2 as a means to increase the federal debt ceiling to avoid a government default — and with hopes that the Joint Select Committee on Deficit Reduction created by the BCA would actually reduce the deficit by at least $1.2 trillion. The BCA also had a fall-back plan to impose the deficit reduction starting in 2013 through automatic cuts to non-exempt programs, including agriculture, if this so-called Super Committee failed to approve a plan to do so by November 23. And by all accounts, the Super Committee failed miserably.

However, much effort was expended by the House and Senate agriculture committee leaders to develop a deficit reduction package to submit to the Super Committee. They sent a letter on October 17 that committed to reducing spending on mandatory farm bill programs by $23 billion over the next 10 years (FY 2012-2021). The committee leaders indicated they would continue to work on how to distribute these cuts among the various farm bill titles, including commodities, conservation and, possibly, nutrition (the other titles, such as energy and rural development have, little spending to cut) — and that they would provide a legislative package to the Super Committee by November 1.

The agriculture committees (or at least the staff for the chairs of the committees) did work seven days a week to craft a bill. However, November 1 came and went with no finished farm bill to submit. In fact, staff continued working through the weekend prior to the deadline trying to finish up the commodity title and keep its costs constrained to offer the Super Committee $23 billion in savings. But with the failure of the Super Committee almost a certainty on November 23, the agriculture committees ultimately chose not to submit a deficit reduction package.

However, there are many who would like to examine the product the agriculture committees were working on. Rumors ran wild the last couple of weeks prior to the collapse of the BCA effort over the content of the commodity title:

• Direct Payments, Average Crop Revenue Election (ACRE) and the Supplemental Revenue Assistance Program (SURE) were to be eliminated. To replace them, producers were to be given two options — either a revenue program or a target price program — that supposedly would be chosen at the start of the farm bill, and by crop.

• The revenue program option would have provided crop-specific coverage at the farm level starting at 87% of a producer’s five-year Olympic average revenue, down to 75%. Once the 13% loss threshold was hit, producers would have received payments on 60% of planted and prevented planted acres, up to the farm’s aggregate combined base.

• The target price option would have provided price-only protection on 85% of the production of the program crops, up to the aggregate combined crop base of the farm, if the national average price fell below the target prices. The target price option was quite controversial in that it would have recoupled payments to production of crops, impacting planting decisions and distorting production in years when prices are near or below support levels.

Furthermore, based on the experience of the 1980s and early 1990s noted above, it has been proven impossible to set target prices in a way that accurately reflects the value of crops relative to each other over time. The end result would be farmers once again “farming the program” instead of following market signals, just like they did “back in the ’80s.”

And since all program base acres would have been available to the highest supported crop, it is highly likely that crops with relatively high target prices would have been planted on most if not all base acres on a farm, to the exclusion of other crops that are currently grown in rotation with them. Such a program would be devastating to small-acreage crops such as dry beans.

The National Sunflower Association joined six other commodity groups, including the American Soybean Association, National Corn Growers Association, National Association of Wheat Growers and the U.S. Canola Association, in writing the agriculture committees to raise their concerns about the target price option. The groups stated: “We will not support a farm policy that distorts planting decisions and incentivizes producers to plant for a farm program rather than the marketplace. We know this is bad policy — costly, ineffective and simply unacceptable to our members and the American public.” Indeed, this target price program will face continued debate as the process of writing a farm bill begins anew under regular order.

Writing a new farm bill will not be an easy process. The current farm bill authorization expires on September 30, 2012, one month before the general elections. It will be extremely difficult for the agriculture committees to write a bill, pass it in each chamber, conference it to reconcile the differences, and then pass a conference bill by that date. It will also be difficult to pass a simple one-year extension, given the budget problems facing the federal government.

But failure to pass an extension would impose “permanent farm law” on production agriculture — an arcane set of price supports and allotments dating back to the Depression era — since farm bills are actually temporary amendments to various provisions of the Agricultural Adjustment Act of 1938, the Commodity Credit Corporation Charter Act of 1948 and the Agricultural Act of 1949.

The combination of all the above will make the coming months more than interesting for those involved in agriculture policy work here in D.C. Stay tuned.

* Dale Thorenson is on the staff of Gordley & Associates, which provides representation for the National Sunflower Association in Washington, D.C. Prior to coming to Washington as an aide to then-Sen. Byron Dorgan of North Dakota, Thorenson managed his family’s farm in Bottineau County, N.D. His practice areas include farm policy, budget and appropriations.
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