Posted by: Phillip Fraas
August 27, 2007
Topic: REPORTS ON FARM BILL STATUS--Second Half of 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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REVENUE-BASED COUNTER-CYCLICAL PAYMENTS: A POSSIBLE NEW ELEMENT OF FARM BILL POLICY

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