Farm Bill OutlookNorman L. Dalsted, Ph.D.

ProfessorDepartment of Agricultural and Resource Economics

Colorado State University

Source: Dr. Brad Lubben

Policy Specialist

University of Nebraska

Lincoln, NE

Drivers of Ag Policy

Economy

Budget

Trade

Politics

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

Net Farm Income (Less Govt Pay) Government Payments

The Economic SettingU.S. Net Farm Income

and Government Payments

Source: USDA Economic Research Service

1996 Farm Bill

2002 Farm Bill

2008 Farm Bill

1985 Farm Bill

1990 Farm Bill

Data file: ag value added – nebraska and us.xlsx

Federal Budget Challenges

Source: Congressional Budget Office, March 2012

Data file: budget and economic numbers.xlsx

Federal Spending Federal Revenue0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Net Interest; $224

Defense; $673

Social Security; $754

Medicare; $485

Medicaid; $258

Other Mandatory; $604

Other Discretionary; $630

Individual Income Taxes; $1,159

Corporate Income Taxes; $251

Social Insurance Taxes; $825

Other Taxes and Receipts; $221

Borrowing; $1,172

Total Federal Spending and Revenue, FY 2012

$ B

illio

ns

Federal Budget Challenges

Source: Congressional Budget Office, March 2012

Data file: budget and economic numbers.xlsx

19701973

19761979

19821985

19881991

19941997

20002003

20062009

20122015

20182021

14%

16%

18%

20%

22%

24%

26%

Total Federal Revenues and Outlays

Pe

rce

nt

of

Gro

ss

Do

me

sti

c P

rod

uc

t

Outlays

Revenues

Average Revenues,1970 to 2009

Average Outlays,1970 to 2009

Actual Baseline Projection

Significant Tax Law Changesfor 2012 and 2013

If Congress does not act to extend certain provisions.

2012 AMT (Congress had temporarily raised exemption

levels). Levels expire and replaced with lower levels.

Tuition and Fees Deduction: eliminated Section 179: Expense up to $139,000 in 2012

(down from $500,000 in 2011). Drops to $25,000 in 2013.

Significant Tax Law Changescontinued

2013 New Tax Brackets: Currently 10, 15, 25, 28,

33, and 35 percent. Increase to 15, 28, 31, 36 and 39.6 percent

Marriage penalty: Change back to double in 2013 (enjoyed a 33% discount prior)

Estate Tax: rate increases from 35 to 55% and exemption drops from $5mm to $1mm.

Significant Tax Law Changescontinued

Capital gains: currently 0 rate for 10% & 15% tax brackets. Will apply to 15% bracket next year and rate increases 20%.

Short Sales and Foreclosures: no tax on amount of debt forgiven but expires this year (2012).

Payroll Taxes: 2% cut in social security taxes ends this year.

Significant Tax Law Changescontinued

Health Insurance Tax: Under new law an additional 0.9% in Health Insurance Tax applied to wages of $250,000 for married filing joint return, $125,000 for single filers.

Medical expenses: currently can take expenses above 75% of adjusted gross income. In 2013 rate increases to 10%.

Recommendations to the Super Committee in 2011

From the Agriculture Committee Leadership

Total spending cuts of $23 billion over 10 years from baseline

AreaProposed

Cut2012-2021 Baseline

% Cut

Commodities $15 billion $64 billion 24%

Conservation $6 billion $63 billion 10%

Nutrition (SNAP) $4 billion $700 billion 0.6%

Farm Bill Development in 2012

AreaUpdated

2013-2022 Baseline

Super Committee Proposed

Cut

Senate Proposal (S3240)

House Proposal (HR6083)

Commodities$60 billion $15 billion -$19.4 billion -$23.6 billion

Crop Insurance$89.5 billion +$5.0 billion +9.5 billion

Conservation$64 billion $6 billion -$6.4 billion -$6.1 billion

Nutrition (SNAP)

$772 billion $4 billion -$4.0 billion-$16.1 billion

Farm Bill Outlook

Commodity program safety net has evolved over time

Price support and supply control Income support tied to price and revenue Risk management

Expected future program directions Crop insurance as the foundation Revenue safety net to complement crop insurance Price safety net for as alternative? No direct payments Irrelevant marketing loan?

Understanding Shallow Loss Coverage vs. Safety Net Coverage

Shallow Loss Coverage Safety Net Coverage

Market Receipts

Market Price * Yield

Crop Ins Guarantee

Exp Revenue

Avg Revenue

Producer Loss

Crop Ins Indemnity

Shallow Loss Coverage

Market Receipts

Market Price * Yield

Crop Ins Guarantee

Exp Revenue

Avg Revenue

Producer Loss

Crop Ins IndemnitySafety Net Guarantee

Safety Net Coverage

Farm Bill Safety Net Proposal Comparison

Component Senate Proposal (S3240) House Proposal (HR6083)

Guarantee Farm revenue County revenue County revenue National price

Benchmark

5-yr Oly average yield x 5-yr Oly average national price*

5-yr Oly average yield x 5-yr Oly average national price*

5-yr Oly average yield x 5-yr Oly average national price

Fixed reference pricesCorn = $3.70Soy = $8.40Wheat = $5.50

Payment trigger Revenue<89% of benchmark

Revenue<89% of benchmark

Revenue<85% of benchmark

National price< reference price

Payment coverage

79 - 89% of benchmark

79 - 89% of benchmark

75 - 85% of benchmark

Loan rate -reference price

Payment rate65% of planted acres (45% of prevent-plant)

80% of planted acres (45% of prevent-plant)

85% of planted acres (30% of prevent-plant)

CCP yield x 85% of planted acres (30% of prevent-plant)

Loan rate Same as 2008: Corn = $1.95, Soybeans = $5.00, Wheat = $2.94

* Minimum benchmark reference price for peanuts ($530/ton) and rice ($13.00/cwt)

Additional Safety Net Proposals – Crop Insurance

Crop insurance Supplemental Coverage Option (SCO)

• Shallow-loss area-based coverage available on top of individual insurance

Stacked Income Protection Plan (STAX) supplemental revenue coverage for cotton

• Shift from commodity program to crop insurance for cotton to address WTO issues

• But, a minimum price of $0.6861/pound in House proposal Other proposed provisions

• Organic price• Enterprise units

– permanent authorization– Irrigated vs. dryland split

• Premium subsidy reduction on native sod converted to crop production

Safety Net ComparisonExpected Program Payments plus Changes in

Crop Insurance Net Indemnities

ARC/RLC/PLC plusChanges in Crop Insurance

SenateARC/STAX/SCO

HousePLC/RLC/STAX/SCO

$/acre

Corn $21.05 $17.23

Soybeans 10.35 8.61

Wheat 7.79 13.61

Upland Cotton 39.73 40.89

Sorghum 6.60 7.24

Rice 16.88 94.30

Barley 7.76 28.28

Peanuts 15.45 85.62

Source: FAPRI, University of Missouri. Report #05-12, August 2012.

Additional Comments Existing federal safety net is already overly

generous. (60% subsidy of crop insurance premiums)

Increased from $200 million in 1991 to 5.4 billion in 2009.

Also disaster assistance is available with extreme crop failure (due to weather).

Record net farm income in 2012—expected 11 billion in federal subsidies. - net income closed to $100 billion to $122 billion.

Shallow Loss Program

Shallow loss would significantly reduce risk and provide an income guarantee.

Congressional Budget Office estimates spending would reach 28.5 billion over 10 years. ($3.2 billion per year).

If prices fall to the average levels observed in 1996-2011—expenditures could reach $50 to $75 billion over 10 years

Issues

1) Taxpayer subsidies so heavily mitigate farmers’ risk as they lack any incentive to make prudent decisions.

2) Could violate WTO rules as payments are tied to production. (e.g. cotton objections by Brazil)

3) Benefits primarily to large operations.

Additional Safety Net Proposals – Disaster Assistance

Livestock Indemnity Program (LIP) Coverage for mortality losses above normal due to disaster

conditions Livestock Forage Disaster Program (LFP)

Coverage for livestock producers for forage losses due to drought conditions

Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish (ELAP)

Coverage for producers due to disaster losses including weather, disease, etc.

Tree Assistance Program (TAP) Coverage for orchardists and nursery growers for tree, bush, and

vine losses due to natural disaster

Farm Bill Outlook Potential compromise and safety net

implications Revenue vs. price safety net option No direct payments Existing loan rates Expanded role for crop insurance Re-authorized disaster assistance

Farm Bill Outlook Conservation

Consolidation of programs – 23 into 13 Conservation Reserve Program

• Cap cut to 25 million acres by FY2017 Agricultural Conservation Easement Program

• WRP, FPP, GRP combined• Authorized with expanded budget in Senate bill

Working Lands Programs• CSP and EQIP (WHIP merged into EQIP)• Reauthorized with reduced budget growth

Conservation compliance• Proposed delayed linkage to crop insurance in

Senate bill

Farm Bill Outlook Timing

No farm bill in September or October• No consideration of full bill in House• Disaster assistance bill for 2012 and 3-month

extension likely before September 30 expiration of current farm bill

Full farm bill finished later• Negotiations on-going• Final bill in late 2012 attached to must-have

legislation?• Delay into 2013 with more temporary extensions,

more potential budget challenges, and a new Congress?

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