A closer look at the new farm bill

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A big change in the new farm bill is the elimination of direct payments. This change does not surprise anyone; it has been one provision that has been agreed upon by almost all policymakers since the discussions about the farm bill began. However, the change will probably have an impact.

In past years, direct payments totaled between $4.5 billion and $5 billion per year, and it was money that fell through to the bottom line with no offsetting costs. At least in years when farmers don’t see a big drop in revenue due to low prices, low yields or any other combination, the loss of direct payments will reduce net cash farm income.

But policymakers have added provisions to help farmers deal with low prices or low revenue. Farmers will make a one-time choice between a policy that protects against falling revenue (Agricultural Risk Coverage—ARC) and one that provides payments when crop prices fall below levels set in the farm bill (Price Loss Coverage—PLC). The PLC is the default option if the farmer fails to make a choice. These two programs—ARC and PLC—are totally separate from the crop insurance programs, which essentially continue unchanged from previous years.

The ARC is sometimes called the Shallow Loss program because payments start when crop revenue falls just 14 percent below a five year rolling Olympic average benchmark. A farmer will chose whether the benchmark is based on county yield times crop year average prices or his individual crop yield times the price. The payment is based on 85 percent of the farmer’s base acres planted to the crop.

The program provides protection down to a 24 percent loss. Below that crop insurance provides revenue protection. Payments large enough to offset the loss of direct payments could be triggered with corn prices near $4.25 per bushel for 2014/15. But over time the payments could disappear if corn prices stay low, causing the benchmark revenue to erode.

The Price Loss Coverage program is very close to the counter-cyclical program that was in operation in the 2008 Farm Bill. Reference prices are set at $3.70 per bushel for corn, $8.40 for soybeans, $5.50 for wheat, $14 per hundredweight for rice, and $535 per ton for peanuts. These prices are significantly higher than the Target Prices used in the last farm bill. Once prices fall below the reference price, payments are triggered, again using 85 percent of a farmer’s base acres.

A third program—called the Supplemental Coverage Option (SCO)—is an insurance coverage that farmers choosing the PLC can buy. Except for the fact that there is a cost for farmers, this program acts essentially like the ARC program previously discussed. Farmers will pay 35 percent of the premium cost while the other 65 percent is subsidized by the government. The SCO program will not be available until the 2015 crop year.

Cotton growers are not eligible for the ARC or PLC. A special insurance program was developed for cotton to try to bring our cotton program into compliance with WTO trade rules. The cotton insurance program—called Stacked Income Protection Plan (STAX)—will be developed in time for the 2015 crop year and cotton growers will receive modified transition payments this year and next year. Premiums for STAX will be subsidized at the 80 percent level.

The dairy support programs and the Milk Income Loss Contract (MILC) will be replaced with a new margin insurance program. A producer can elect coverage for between $4 and $8 margin between the milk price and the feed cost. There is no premium for coverage at the $4 level, but producers can buy and pay for coverage up to $8 or between 25 percent and 90 percent of their production history. USDA will buy up dairy products and donate them to food assistance programs when milk production is excessive and margins are squeezed.

The cap on the Conservation Reserve Program is set at 27.5 million acres in fiscal 2014 (current enrollment is 25.6 million acres, and contracts covering nearly 2 million acres expire in September). The cap falls to 26 million acres in fiscal 2015, to 25 million acres in fiscal 2016 and to 24 million acres in 2017 and 2018.

The new farm bill limits total commodity support program payments to $125,000 per individual or $250,000 per couple. There is no cap on the individual payments such as the ARC or PLC programs. Crop insurance payments are not subject to the payment limit.

In total, the farm bill is projected to cost $956.4 billion over 10 years. About 80 percent of the cost of the program is for nutrition programs, especially the Supplemental Nutrition Assistance Program (SNAP). Changes to the nutrition title are estimated to save about $8 billion over 10 years, compared to what costs would have been without changes.

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Ohio  |  February, 17, 2014 at 04:51 PM

The notion that this farm bill will cost less than the last is so far fetched its laughable. Using the record high grain prices of the last five years as the basis for future subsidies is really convenient for grain farmers. How is it that they make record profits and still feel entitled to pick taxpayers pockets? How is that supply and demand works great to determine prices for eggs, beef and pork but not for cotton, grain or milk? This crony capitalism needs to end

February, 17, 2014 at 05:11 PM

Also this "shallow loss" insurance will effectively make a farmer whole no matter what happens. Why even try to do your best if the government is going to make you whole anyways. I see a moral hazard in that.

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