REVENUE-BASED COUNTER-CYCLICAL PAYMENTS: A POSSIBLE NEW ELEMENT OF FARM BILL POLICY
Posted by: Phillip Fraas
August 27, 2007

During the course of this year's farm bill debate, there has been considerable discussion of revenue-based counter-cyclical payments (CCPs). The concept is new and--since it increasingly looks as if Congress might include some form of these revenue-based payments in the farm bill it finally approved--it might be this farm bill's main contribution to the evolution of Federal farm policy.  

BACKGROUND ON THE ELEMENTS OF THE FARM BILL "SAFETY NET" AND THE PERCEIVED FLAW IN CURRENT CCP'S: The current Federal "safety net" for row crop commodities (primarily grains, oil seeds, and cotton), which takes up the bulk of farm policy spending under the farm bill, has three elements.

First, there are direct payments, which are made to all participating farmers regardless of what and how much they produce. At one time, they were referred to as "decoupled payments," because they aren't tied to production.

Then, there are marketing assistance loans and loan deficiency payments. Farmers take out loans at a set rate per unit of production (commonly designated in bushels), using their harvested crops as collateral; but if market prices fall below the loan repayment rate, the farmer only has to repay the loan at that lower market price. Loan deficiency payments short-cut the process and allow the farmer, in lieu of taking out a loan, to take a payment that represents the difference between the market price and loan rate.

Then, there are counter-cyclical payments, similar to the marketing assistance loans in that payments are triggered if market prices are low. The CCP rate or "target price," paid on each unit of production is somewhat higher than the marketing assistance loan rate and traditionally has been tied to the cost of production. If the higher of the market price or the loan repayment rate is below the target price, the participating farmer receives a payment on the difference between the market/loan price and the target price for each unit of covered production, determined by multiplying covered acreage times the farm's per-acre payment yield. Payment yields do not change from year to year to reflect actual production figures, but are static, based on yields set in the early 1980s.

USDA and others have argued that the current CCP program has a structural flaw related to the simple economic facts that, in years when production is low, prices typically rise and CCPs are not triggered and, conversely, prices fall when production is good and CCPs are triggered. What that means is that, for example, in a drought year when many farmers are wiped out, production goes down and prices go up, either reducing the CCP payment rate or eliminating CCPs entirely. Yet, the farmer whose crop was wiped out by the drought needs safety net payments even more so than in a year when his or her production was normal. On the other hand, in a non-drought year when production is so fruitful that the extra supplies depress market prices, CCPs are paid, even for the farmer who has perhaps his or her best yield ever and doesn't really need the government assistance. 

WHAT IS BEING PROPOSED AND THE OUTLOOK: To remedy this perceived inequity in current policy, USDA earlier this year proposed redesigning the CCP program to protect farmers from declines in revenue (which, it argues, is the real harm farmers should be protected from), not declines in commodity prices. Thus, USDA recommended that, under the new farm bill to be enacted this year, CCPs be made only when actual national revenue per acre for the commodity involved is less that the national target revenue per acre. On both sides of the calculation, revenue per acre would be calculated by multiplying price (either market/loan price or target price) times yield.

Several farm groups have endorsed the concept of revenue-based CCPs and the House of Representatives included in the farm bill it passed on July 26 a provision to give farmers the right to elect revenue-based CCPs instead of traditional commodity price-based CCPs. More recently, reports are that Senator Tom Harkin, Chairman of the Senate Committee on Agriculture,  is considering the USDA approach of making all CCP payments revenue-based. However, it also is reported that some commodity groups oppose revenue-based CCPs because they would result in less money to their farmers.

Nonetheless, there is a fair chance the Senate farm bill will contain either optional revenue-based CCPs similar to the House provisions, or mandatory revenue-based CCPs. If so, the odds are great that the final farm package sent to the President for his signature later this year or next will have one form or the other of this new concept in farm policy. Then, it will be "field-tested" by farmers over the next few years, and if it is well-received, it likely will become a feature of future farm bills.

Thus does farm policy slowly evolve from one farm bill to the next, with outmoded programs being discarded and new ones that work better put in place.  

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Some Thoughts On The Timing Of Congressional Consideration Of The Farm Bill
Posted by: Phillip Fraas
August 20, 2007

The current farm bill covers the 2002 through 2007 crops, so the new farm bill being considered by Congress now should be passed before the end of this year. Farmers in the southern areas of the country begin serious field work on the 2008 crops in January or February and are entitled to know what the terms of the new farm programs are before they do so.

Congress can meet this end-of-the-year deadline, but it has a lot of work ahead of it and its recent track record for recent farm bills isn't encouraging. Nonetheless, if the money can be found to adequately fund the legislation and the Bush Administration's concerns can be assuaged, a farm bill before Christmas is very possible.

WHERE IT IS NOW: Congress is roughly one-third of the way through the second half of the farm bill process. The first half of the process was the conduct of hearings to receive testimony and gather information on what should and should not go into the new farm bill. That work effectively concluded in early spring of this year.

The second half of the process is the actual drafting of the bill, and there are three main parts to that: House consideration, Senate consideration, and conference meetings to resolve differences between the House and Senate versions of the bill.

The first third is done--the House passed its farm bill on July 27.

As to the middle third of the drafting process--Senate consideration--likely, the Senate Committee on Agriculture, Nutrition, and Forestry would already be moving to get the legislation ready for floor action, but Congress left on August 5th for an extended recess, putting off until September the next chance the Senate has to act on the farm bill. 

Current reports are that Senator Tom Harkin (Dem.-Iowa), Chairman of the Senate Committee on Agriculture, Nutrition, and Forestry, will table his "chairman's mark" (which sets out the details of what he proposes to go into the new farm legislation) during the first or second week of September. Then, later in September or in October, his committee is expected to meet to consider amendments to, and vote on, the chairman's bill.

Once the Committee finishes its work, the bill heads to the Senate floor for consideration. At this time, it is unknown when the Senate leadership will schedule it for floor debate. Unless the Senate bill hits a major snag, however, it is reasonable to think that the Senate would complete work on the farm bill later in October.

That would give Congress a good six or seven weeks to complete the last third of the drafting process--conference consideration. Whenever the House and Senate pass legislation and there are differences in what they pass (which is unquestionably what will happen with the farm bill), the two bodies appoint a joint conference committee to resolve their differences. If the conference committee can work out a compromise on the House-Senate differences, it drafts a third version of the bill incorporating those compromises, which Congress debates and votes on. Once the conference report is agreed to by both bodies, the legislation then is sent to the President for his signature. 

CONGRESS'S TRACK RECORD ON PREVIOUS FARM BILLS: Since 1977, Congress has drafted six farm bills: the 1977, 1981, 1985, 1990, 1996, and 2002 farm bills. With the first four, Congress completed its work and the legislation became law before the previous farm bill expired. The earliest enactment was in 1977, when the President signed it on September 29, 1977, effective for the 1978 through 1981 crops. The latest was in 1981, when the farm bill didn't become law until December 23, 1981, to cover the 1982 through 1985 crops. 

In contrast, the last two farm bills were not finished on time. The 1996 farm bill didn't become law until April 4 of that year, even though the previous farm bill had expired with the completion of the 1995 crop year. Similarly, there was extended debate over the 2002 farm bill, and it wasn't signed until May 13 of that year, effective for the 2002 through 2007 crops. In both cases, farmers were substantially inconvenienced having to go through spring planting not knowing for sure what the terms of the new farm legislation would be; but, in both cases, at least the law was in place well before harvest.

There hasn't been a structural change in the way Congress handles the farm bills to explain the 1996 and 2002 delays; the roadblocks leading to the delayed passage of those two farm bills related to issues that are not present in 2007 or in years before 1996. So, there is no reason to expect a similar delay this time around. In fact, based on where things stand now, this farm bill is on a flight path much closer to those of the four timely farm bills.

WHAT COULD PUSH THINGS INTO 2008: Given, however, that there will be just ten or eleven weeks for Congress to complete work on the farm bill after its returns in September, it wouldn't take much of a delay to push things into 2008. And, once legislation is pushed into a new year, typically it isn't until March or April that Congress gets back to it, as January and February typically are taken up with organizing for the new session of Congress.

What could cause a delay to push the farm bill debate into 2008? First and foremost, funding. Both the House and the Senate agriculture committees are seeking money to pay for new priorities while using existing funding to continue the current programs, which farmers are content with and want extended. However, both the Administration and Congress are committed to reducing deficit spending, and it is unclear where the money will come from to pay for the farm bill add-ons the committees are insisting on. The House proposed to raise the money by taxing earnings of foreign-based businesses, but the Administration has threatened a veto of the House bill, largely based on its concerns about that provision. And, reports are that the Senate has not yet found attractive alternative sources for the needed new funds.

The Administration threat of a veto also could force the farm bill process to a halt this year. Whatever farm bill the House and Senate come up with probably will not have the votes sufficient to override a veto by the President, so Congress has to accommodate enough of the Administration's concerns to remove that threat. Yet, finding a way to bridge any differences between the Administration and Congress that surface (and one already has surfaced as to new farm bill funding) could run out the clock for this year. 

IS AN EXTENSION OF THE CURRENT FARM BILL POSSIBLE? Yes. If Congress is deeply bogged down and not close to an agreement on a new farm bill at the end of the year, the calls for just extending the current farm bill will grow louder. If farmers generally are pleased with the current farm programs, a straight extension becomes an attractive alternative in that it avoids the funding issues and likely the veto threat as well.

However, it is worth reviewing the six previous farm bills, including the 1996 and 2002 bills. Even when Congress didn't get them done on time, it didn't opt for a simple extension. Based on Congress's track record, then, it might not be appropriate yet to throw a straight extension into the mix of alternatives.

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Farm Bill Update: COOL Is In, NAIS Is Not
Posted by: Phillip Fraas
August 08, 2007

Two government programs relating to animal agriculture have been the subject of discussion recently in connection with the drafting of the 2007 farm bill: country-of-origin labeling ("COOL") and the national animal identification system ("NAIS"). Break-through amendments to the COOL law were included in the version of the farm bill passed by the House of Representatives on July 27, and I have gotten several inquiries about whether NAIS provisions will be included in the farm bill.

NAIS NOT IN THE FARM BILL: USDA's national animal identification system, in operation as a voluntary program for several years now, is designed to facilitate rapid and effective animal disease traceback. It has three components: premises registration, animal identification, and tracing. Over 406,000 premises have been registered to date. 

While NAIS has been the subject of debate in agriculture, the House-passed farm bill did not include any provision dealing with the matter. The Senate won't draft its version of the farm bill until September or October, and we don't know yet whether it will include a NAIS provision.  

It is worth noting that the Government Accountability Office (GAO) recently released an audit of the NAIS program identifying several issues of concern and suggesting that implementation of the program needs improvement, but made no recommendations for legislation on the program. You can review the GAOreport by going to www.gao.gov/cgi-bin/getrpt?GAO-07-592.

COOL IS IN THE FARM BILL: The 2002 farm bill included a provision requiring retailers other than restaurants to label meat, fish, perishable commodities, and peanuts by country of origin. This turned out to be controversial, especially for meat products, so that the requirements were never implemented. However, just before the farm bill was taken up by the House of Representatives last month, a compromise was reached by the warring parties on the issue, and the compromise was included in the House-passed bill. If the compromise holds together, the same language likely will be added to the Senate version as well and COOL finally will be implemented.

The labeling rules under the compromise include the following:

--Beef, lamb, pork, and goat meat can be labeled by a retailer as exclusively having a U.S. origin only if the animal from which it is derived in fact is exclusively born, raised, and slaughtered in the United States or was present in the U.S. on or before January 1, 2008.

If an animal is born, raised, or slaughtered in the U.S. but not exclusively so, the retailer can designate the origin of meat from the animal as all of the countries in which the animal was born, raised, or slaughtered.

---If an animal is brought into the United States for immediate slaughter, the retailer must designate the origin of meat from the animal as the country of import and the United States.

--For meat from all other animals (that is, not born, raised, or slaughtered in the U.S.), the retailer must designate a country other than the U.S. as country of origin.

--For ground beef, pork, and lamb, the country of origin notice must include a list of all countries of origin or a list of all reasonably possible countries of origin. 

--The rules governing fish, perishable agricultural commodities, and peanuts remain essentially the same as under current law. A U.S. country-of-origin designation can be given only if the fish is hatched and raised (if farm-raised), harvested, and processed in the U.S., or if the perishable commodity or peanut is produced in the U.S. The House farm bill, however, will allow the labeling of U.S. perishable commodities by state, region, or locality.

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