Posted by: Phillip Fraas
February 12, 2007

USDA's lengthy farm bill proposal released on January 31 pursues several major reforms: Moving the farm support payment programs away from price-based support toward decoupled income support; toughening program payment limits; and eliminating program abuses of the types highlighted in a series of articles run by The Washington Post in recent months. USDA, however, does not completely rewrite the farm support playbook entirely. Rather, it proposes to continue the structure of the current farm bill to a large degree.

Perhaps as a result of the moderate tone of the package he was presenting, Secretary of Agriculture Johanns had what almost could be considered a love fest at the Senate Agriculture Committee hearing on February 7, which was the first airing of the USDA proposal before Congress. The objections to what senators didn't like weren't strident, and the atmosphere in general was cordial.Maybe a good sign that the USDA proposal will get thorough consideration as Congress begins drafting the farm bill.

Following are some thoughts on specific aspects of the USDA bill:

The legislation would increase the use of "direct payments" not tied to--or "decoupled" from--how much the farmer is producing, while decreasing "counter-cyclical payments" and "marketing loan payments," which are tied to production. It is no coincidence that the direct payments can be considered "green box" payments for World Trade Organization (WTO) purposes (green is good because those programs are not considered trade-distorting), while many argue that the counter-cyclical and marketing loan payments belong in the "amber box" (bad because trade-distorting). By emphasizing green box programs, USDA signals its continued commitment to achieving agricultural trade reform in the Doha Round trade negotiations. Of course, if the Doha Round is to bear fruit, the United States might have to reduce amber box payments even more than USDA has proposed so far; but if so, the USDA farm bill proposal sets up a framework for doing so--all it would take is changing the numbers.
The USDA proposal will tackle what some consider excessive farm program payments by toughening the rules on who can get payments, and how much they can get. It will reduce the adjusted gross income a person can have any year and still qualify to get the payments--from $2.5 million to $200 thousand. And, it will change arcane payment limit rules dealing with the "three-entity" limitation and the contribution of management to qualify for program payments. I anticipate it will be tough for USDA to win on this issue. Certainly, look for a good fight on it.
While USDA is considered a major player in the Administration's energy independence initiative discussed by the President in the State of the Union address a couple of weeks ago, the USDA farm bill proposal doesn't pump in huge amounts of new resources for the effort. In fact, some in Congress argue that the proposal doesn't increase funding for biomass energy development efforts at all. I would look for Congress to add resources to USDA's energy programl.
A proposal bound to be controversial would allow recipients of direct payments to plant program acres in fruits, vegetables, or wild rice. USDA believes this is needed keep these payments in the WTO green box, but current producers of these commodities will not welcome the competition from program participants looking to maximize income from their land and the farm bill programs.

Some winners and losers under the USDA proposal

Winners: Supporters of the existing sugar and dairy programs, which would be extended without much change (which is what producers want), even though they are considered high-cost amber box programs. Also winning, reformers who want to eliminate waste and abuse in the farm programs.

Losers: Farmland values, which have been steadily rising in recent years. The bill takes dead aim at excessive increases in value by toughening the payment limit rules and excluding from payments owners of land purchased in an Internal Revenue Code sec. 1031 exchange (under which owners of high-priced farm land being converted to urbanization can defer taxes on their profit by using the proceeds to buy other farmland farther away from the city). Cotton will lose its so-called "step 1" and "step 3" programs designed to keep U.S. cotton competitive in the world markets; but no one should be surprised as these moves are mandated by a recent WTO ruling.

Budget considerations

USDA estimates that its proposed program changes will increase farm bill outlays by $500 million a year over the next 10 years. Interestingly enough, however, if the current farm bill is just extended without change, commodity program outlays will take a big dip from $21 billion in fiscal year 2005 to just $12 billion in fiscal year 2008. Why? The increased use of corn for ethanol is providing real strength to market prices for corn and related commodities, and so the amount of payments made to combat low prices is shrinking drastically. USDA's $500 million annual increase will be measured off of this reduced budget projection. So, even with the increase, projected farm bill costs under the USDA proposal are substantially less than actual program costs of just a couple of years ago.

What's next

Look for more farm bill hearings, and for members of Congress to start coming out with their own proposals, either modifying what USDA has proposed or advancing different approaches to updating the farm programs.

And, look for additional postings at this blog site to report on these developments. Next posting: How the House Agriculture Committee reacts to the USDA proposal.

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