Posted by: Phillip Fraas
June 11, 2007
Topic: REPORTS ON FARM BILL STATUS--First Half of 2007

A major disagreement is shaping up between the Bush Administration and Congress on a key element of the 2007 farm bill--what to do with direct payments? It is too early to tell whether this disagreement will grow into a real impediment to enacting the farm bill. If it does, right now it is hard to see the outlines of a compromise.

BACKGROUND: The heart of any farm bill is its price and income support program. The current support program under the 2002 farm bill uses both price support loans and payments to farmers. The payment part of the program is like a three-legged stool.

One leg of the stool is "direct" payments, which are tied to a farmer's historical production base and made to the farmer without regard to what he grows in any year. They are made in the same amount every year.

Then, there are "countercyclical" payments, which are tied to what a farmer produces and which endeavor to make up the difference between low market prices and an established target price for the crop involved. They are countercyclical in nature because they provide benefits when market prices are in the trough of the typical market cycle. The amounts paid out in the form of countercyclical payments will vary tremendously from year to year, depending on where we are in the cycle. For example, right now countercyclical payments for grains and oilseeds are relatively low because market prices are high (in the case of corn, at very high levels relative to historical prices).

The third leg is the marketing loan benefit, or loan deficiency payments. With marketing loans, the farmer can take out a price support loan at a set price and, if market prices fall below that, can repay at the lower market price instead of forfeiting the crop that served as collateral for the loan. The loan deficiency payment shortcuts this process and allows the farmer to get the difference between the loan rate and market price directly without taking out a loan.

Direct payments are by far the most expense leg of the stool. USDA has projected costs for the 2002 farm bill if it is continued for the next 10 years, and estimates that direct payments would cost $52.5 billion, countercyclical payments $11.2 billion, andmarketing loans/loan deficiency payments $8.8 billion.

Many argue that countercyclical payments and marketing loans/loan deficiency payments are "amber box" programs under World Trade Organization (WTO) rules, that is, they tend to distort trade and thus are subject to limits under the WTO Uruguay Round agreement (to which the United States is a signatory). Direct payments, on the other hand, can be constructed in a way to avoid being considered trade distorting, that is, can be consider as a "green box" program.

THE CURRENT DISAGREEMENT: USDA, in its farm bill proposal made early this year, recommended increasing direct payments by $5.5 billion over 10 years, and decreasing countercyclical payments by $3.7 billion and marketing loans/loan deficiency payments by $4.5 billion over the same time period. Among the reasons advanced for this were that the current payment programs tend to under-compensate when yields decline and over-compensate when yields increase, and that the United States should reduce the level of its amber box programs to facilitate a new WTO agreement to further liberalize trade in agricultural products.

However, the currents have been running against the USDA position. The chairmen of both the Senate and House agriculture committees have expressed dissatisfaction with direct payments. For one thing, it is harder for supporters of agriculture in Congress to convince their urban colleagues to spend billions in payments to farmers if there is no market problem (i.e., low prices) requiring the payment. Also, Congress is restricted from spending new money on the 2007 farm bill; so if the chairmen are to fund new initiatives not included in the farm bill budget baseline, the hugh amounts of direct payments are a relatively attractive source for that funding.

Also, other than the wheat growers, none of the farm or commodity organizations are supporting an increase in direct payments. And recently, former Senate leaders Tom Daschle and Bob Dole came out with their farm bill proposal, which would eliminate direct payments entirely.

Just last week, this simmering disagreement on direct payments surfaced when Secretary of Agriculture Mike Johanns, at a meeting with commodity groups on June 5, spoke out against the trend in Congress away from direct payments to the other forms of payments. In a sort of counterpoint, two days later, on June 7, a House Agriculture subcommittee approved a peanut support program of the 2007 farm bill that calls for incrased loan deficiency payments and lower direct payments. And, the same day, the Chairman of the House Agriculture Committee, Collin Peterson (D-Minn.) spoke out again for reducing direct payments.

WHAT WILL HAPPEN TO DIRECT PAYMENTS: Congress has the job of drafting the 2007 farm bill, not the Administration. So, it is very likely that the bill will reduce direct payments to some degree. However, the farm bill can't become law until the President signs it, so Congress can't ignore the Administration entirely. And, given the hardening of positions on this issue, it could be a roadblock to a presidential signature. At the very least, the Administration will want to negotiate across the table from the congressional agriculture leadership on this issue. Beyond that, it is too early to try to answer the ultimate question--what will happen to direct payments? We will have to revisit the matter later in the year.

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A Farm Bill Disagreement Surfaces: What To Do With Direct Payments?

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