Farmers face big decisions under Farm Bill commodity programs

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MANHATTAN, Kan. – The May 13 signing of a new farm bill by President George Bush means legislators’ wrangling is done, but farmers and government agencies still have plenty of work – and some big decisions ahead of them.

“It’s the most complicated farm bill in history,” said Barry Flinchbaugh, agricultural economist with Kansas State University. “And it offers less than advertised.”

“The new commodity program legislation locks in payments for farmers. It’s an entitlement, whereas in the past four years, agriculture has had to ask for emergency supplemental payments,” said Flinchbaugh, comparing the new farm bill, formally called the Farm Security and Rural Investment Act of 2002, to the existing program that would have expired at the end of September.

In theory, this will eliminate the need for emergency supplementals.

The new bill provides a safety net under farm income and preserves planting flexibility. It also allows growers to update the base acreage and yield data they use when they sign up for participation – all clear benefits for farmers, he said.

“It’s also the most conservation-minded farm bill in history,” Flinchbaugh said.

The benefits of other parts of the legislation are less clear, he said. It is less market-oriented than the ’96 farm bill and it encourages production that can in turn, depress prices.

Safety net with holes. The “safety net” written into the program is composed of three parts, including a marketing loan program and fixed payments that will continue just as they have under the current bill.

The new component is a counter-cyclical payment based on a target price, said Brad Lubben, another Kansas State agricultural economist.

“The main problem with the marketing loan is it pays you when you don’t need it and it doesn’t pay you when you do need it,” Flinchbaugh said. “That marketing loan is going to be absolutely worthless for that farmer that doesn’t get a crop this year. The marketing loan is based on current production – no production, no payment.”

Another concern, he said, is that payment to producers this October will be relatively small. “There won’t be a supplemental in October this year as in past years. And the counter-cyclical payment, which takes the place of the supplemental, is paid out in installments, with two-thirds not due to producers until 2003. It’s going to cause a decline in government payments this year and it’s going to cause cash flow problems,” Flinchbaugh said.

Decisions, decisions. “Even when the USDA gets everything in place, the farmer will still have to make several complicated decisions,” Lubben said.

* Each farm operation has to decide if it wants to participate. As in previous programs, sign-up automatically means producers must meet conservation compliance to qualify for program benefits. Growers did not have to participate in the ’96 program to sign up for this one, he added.

* Each participating operation must then decide what base acreage to use, either:

a) existing program base which uses program acreage established 20 years ago, plus average oilseed acres from 1998-2001 (“old base”); or

b) average acres for all covered crops for 1998-2001 (“new base”).

* If a grower chooses to sign up using new base acreage, he or she may then select program yields from one of three options:

a) existing program yields, which have been frozen since 1985;

b) updated yields, based on 70 percent of the difference between existing program yields (“old yields”) and average yields from 1998-2001 (“new yields”) – the formula used to calculate these yields is (new yield – old yield) x 70 percent + old yield; or

c) updated yields based on the formula new yield x 93.5 percent.

“Those are the three [yield] options. Participants make one decision per farm, so they make a farm decision, not a crop-by-crop decision,” Lubben said.

“When updating yields, you can use the higher of actual farm yield per planted acre or 75 percent of the average county yield per planted acre for each year,” Lubben said.

What about soybeans? All oilseeds are eligible for the program, however, since oilseeds did not have a base acreage and yield under the previous program, farmers will have to initially calculate yields for oilseeds that are equivalent to the old yields for other crops.

That’s done, Lubben said, by taking the average yield per planted acre in the ’98-’01 period (new yield), excluding years when an oilseed crop wasn’t planted. The new yield is then multiplied by the ratio of the national average yield during 1981-1985 to the national average yield for 1998-2001.

“For soybean growers that works out to an adjustment whereby the calculated old yields will be about 78 percent of new yields,” Lubben said.

Spreadsheets and other decision aids will be available from universities and agencies that may help farmers calculate the most beneficial base acreage and yield numbers for their operations, he said.

Trade impacts. Under World Trade Organization rules agreed to in the Uruguay Round Agreement on Agriculture, the United States committed itself to limits on the amount of domestic supports that fit within the category of “amber box” programs, Lubben said.

“Amber box” programs are those that are shown to distort international trade. The U.S. limit agreed to is approximately $19.1 billion in “amber box” program spending per year.

“To facilitate the support programs in the new Farm Bill and also remain in compliance with the WTO commitments, the new legislation says the Secretary [of Agriculture] shall reduce government payments as necessary to ensure that total “amber box” payments do not exceed the $19.1 billion limit,” the economist said.

“As such, the support levels advertised in the payment rates in the safety net remain subject to possible reduction under scenarios of low market prices and high government spending levels that threaten to exceed WTO limits.”

“If low prices persist, it is very possible at some point we will exceed our WTO obligations,” Flinchbaugh agreed. That’s why this bill is riskier for farmers, because growers will not know when they sign up whether the $19.1 billion limit will be exceeded, which could force cuts in government payments.

“The safe thing to say is, this thing’s very complicated,” he said.


Funds for new farm bill are less than before

MANHATTAN, Kan. – Something’s been missing in much of the information circulating about the new farm bill: The funds budgeted for the new program are actually less than the total monies that were spent in the 1996-2002 program.

Crunching numbers. The Congressional Budget Office provides an official score of what the new bill will cost, said Kansas State University agricultural economist Barry Flinchbaugh.

CBO staffers have a baseline and they projected ahead what the baseline would be under the ’96 legislation. Then they estimated the additional cost to this bill above the ’96 legislation and the baseline for the 10-year period.

The budget agreement had a 10-year baseline in it of $100 billion. The estimate now is, that this will add $90 billion.

“So the press is told that this will be an 90 percent increase,” Flinchbaugh said.

Not true picture. “But none of those baseline numbers include those emergency ad hoc payments we got over the last four years. If you add them in, this is a cut, at least for this year.”

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