President’s budget cuts ag spending; hits net income

COLUMBIA, Mo. – The president’s proposed federal budget that includes features to reduce government farm program spending would cut net income for U.S. farmers.
While the proposed budget cuts farm spending by $9.8 billion over five years, net farm income drops by $7.4 billion over the same time, according to a budget analysis by Food and Agricultural Policy Research Institute at the University of Missouri.
Narrow parameters. Institute economists looked primarily at two proposals: reducing farm payments by 5 percent and restricting access to government commodity loans, said Pat Westhoff, senior policy analyst.
When other provisions of the proposed budget, including extended dairy payments, are added, the total federal spending on farm programs would be cut by a slightly smaller $9.5 billion.
Estimated savings. The Bush administration estimate of budget savings, prepared by the Office of Management and Budget, was $4 billion dollars over fiscal years (FY) 2006 to 2010.
The Congressional Budget Office estimated spending reductions for the same period at $7.5 billion.
Smaller savings estimates are caused, in part, by different outlooks for future farm prices, Westhoff said.
“The better the farm prices, the lower the outlay for crop payment assistance.”
In a 10-year baseline projection given to Congress earlier this month, the institute’s economists had a generally optimistic, but slightly lower, outlook for net farm income than projected by USDA at its annual outlook meeting.
The institute’s analysis looked primarily at two budget-cutting features in the proposed federal budget.
Across the board. “The 5 percent cut in all payments to farmers is fairly straightforward analysis,” Westhoff said. “After payments for a farmer are calculated, the amount is reduced by 5 percent before the check is cut.
A 5 percent cut has only modest effects on supply, demand and prices for major commodities, Westhoff said.
FAPRI shows this cuts federal outlays by $3.1 billion over five years while net farm income drops $2.2 billion.
Loan limits. Loan limits have larger effects on planting decisions. This leads to greater impact on agricultural markets, especially in years of large crop yields and lower prices.
The limits in this budget proposal cut farm program outlays by $7.2 billion for FY 2006-2010 and reduce net farm income $5.5 billion for that period.
Loan limits have the greatest impact on crops most affected by government payments. Cotton and rice growers would see the greatest reductions in benefits.
The limits on marketing loan programs would have the greatest impact on years with above average yields and lower prices.
“You have to look back no further than the 2004 crop year,” Westhoff said. “Record-breaking yields caused commodity prices to drop drastically and government payments to increase sharply.
The report, “The President’s Budget: Implications of Selected Proposals for U.S. Agriculture” will be on the Internet at www.fapri.missouri.edu.