U.S. Farm Policy, A Review
Prepared for PDIC
Montreal, Quebec, Canada
April 23-25, 2003
Neil Conklin
Economic Research Service
U.S. Department of Agriculture
A Review of U.S. Farm Policy
• Farm Bill
– Provisions
– Effects
• The Decoupling Debate
• Where do we go from here?
A Difficult Process in 2002
Calendar days from appointment of
conference members to a final Bill
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1985 farm bill: 12 days
1990 farm bill: 33 days
1996 farm bill: 11 days
2002 farm bill: 69 days
2002 Farm Act:
Broad and Complex Legislation
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TITLE I: Commodity Programs
TITLE II: Conservation
TITLE III: Trade
TITLE IV: Nutrition Programs
TITLE V: Credit
TITLE VI: Rural Development
TITLE VII: Agricultural Research,
Education, and Extension
and Related Matters
• TITLE VIII: Forestry
• TITLE IX: Energy
• TITLE X: Miscellaneous
2002 Farm Act:
In Perspective
Baseline $ 699 billion
2002 Farm Act $ 83 billion
Commodity
Trade
Other
Sources: Congressional Budget Office, March 2002 Baseline and
May 2002 Farm Act Score
Conservation
Nutrition
Agricultural Spending Levels
Close to those of Recent Years
$ billion
Commodity Credit Corporation (CCC) net outlays
40
Additional funds provided by
2002 Farm Act
CBO March 2002 baseline for
1996 Farm Act
Actual outlays
30
20
10
0
1980
1985
1990
1995
Source: CCC Budget and Congressional Budget Office March 2002 forecasts.
2000
2005f
2010f
2002 Farm Act Doesn’t Change
• U.S. commitment to obligations under the
Uruguay Round Agreement on Agriculture
• U.S. commitment to an ambitious trade
negotiating result in agriculture
What the 2002 Farm Act does
• Covers a wide range of
programs
• Extends and modifies recent
legislation
Provisions With Largest Direct
Impact on Agricultural Markets
• Commodity programs
• Trade issues
• Conservation programs
Marketing loans: coupled
• Marketing loan program
– Paid on current production
– Depend on market prices
– Benefit options
• Forfeit crop to Government
• Marketing loan gain
• Loan deficiency payments
• 2002 Farm Act changes
– Loan rates increased for most covered crops
– Crop coverage expanded
Marketing loan rates
$6.00
2001
2002-2003
2004-2007
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Wheat
Corn
Soybeans
Direct payments: fixed and
decoupled
• Replace former Production Flexibility
Contract payments
• Do not depend on current production or
market prices
– Fixed base
– Fixed payment yield
– Fixed payment rates
• Coverage extended to more crops
Counter-cyclical payments:
mostly decoupled?
• New program
• Affects revenue risk
• May encourage
production
• Effects are price
dependent
Counter-cyclical
payment for Corn
• Payment rate corn =
(Target price) corn
– (Direct decoupled payment rate) corn
– (higher of commodity price or loan rate) corn
• Counter-cyclical payment corn =
0.85 *(Base acres) corn
* (Payment yield) corn
* (Payment rate) corn
Maximum Counter-cyclical
Payment Rates
$/bushel
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
2002-03
Corn
2004-07
Wheat
Soybeans
Direct Payment Effects
• Fixed, decoupled payments
• Wealth effect
• Increased investment
• Small production impacts
Direct Payment Rates
$/bushel
1996 Act
2002 Act
1.00
Production Flexibility
Direct Payments
0.90
Contract Payments
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Corn
Wheat
Soybeans
Farms with Base and Yield Designations**
Percent of farms*
Less than 25
25.1-50.0
50.1-60.0
60.1-70.0
70.1-80.0
80.1-90.0
09.1-95.0
95.1-100
* Counties with less than 25 farms are excluded
**As of April 10, 2003
Other Commodity Provisions
• Peanuts
• Dairy
• Sugar
Trade Related Provisions
• Export programs
• WTO “Circuit
Breaker”
U.S. AMS Is Under WTO
Ceiling
Billion dollars
30
AMS
Unused AMS ceiling
25
20
15
10
5
0
86-88
1995
1996
1997
Years
1998
1999
2000 f*
Conservation Funding Shifts
To Working Land
Billion Dollars
6
Ag Land Preservation
5
Working Land Conservation
4
Land Retirment
3
2
1
0
1986
1990
1994
1998
2002
2006
Source: Office of Budget and Policy Analysis, USDA, and Congressional Budget Office
2010
Conservation Security Program:
Conservation for everyone?
• Wide ranging objectives; focus on land-based practices,
livestock waste management facilities excluded
• Entitlement funding
• Three “tiers” for participation; higher tiers require
greater conservation effort and offer larger payments
• No environmental benefit-cost targeting
• Must use practices that meet standard at least cost
• Existing practices can be enrolled
• Cropland eligible only if farmed 4 of 6 years prior to
2002
Conservation Reserve Program
Expanded
45
2002 Farm Act
million acres
40
35
30
1996 Farm Act
25
20
1996
1998
2000
2002
2004
2006
Source: The 2002 Farm Act: Provisions and Implications for
Commodity Markets, ERS/USDA, AIB 778 (November 2002).
2008
2010
Market Effects of FSRI
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•
•
•
Acreage and Production
Prices
Government Payments
Farm Income
Planted Area: Eight Major Crops
Million acres
254
253
252
251
250
2002 Act
249
248
1996 Act,
formula
loan rate
247
246
2001
2003
2005
2007
Source: The 2002 Farm Act: Provisions and Implications for
Commodity Markets, ERS/USDA, AIB 778 (November 2002).
2009
2011
Direct Government Payments
Billion dollars
25
2002 Act
20
15
1996 Act,
formula
loan rate
10
5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: The 2002 Farm Act: Provisions and Implications for
Commodity Markets, ERS/USDA, AIB 778 (November 2002).
Net Farm Income
Billion dollars
50
45
2002 Act
40
35
1996 Act,
formula
loan rate
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: The 2002 Farm Act: Provisions and Implications for
Commodity Markets, ERS/USDA, AIB 778 (November 2002).
Debate on Decoupled Subsidies
Lump sum payments argued to be production and
trade distorting because:
• may increase on-farm investment
• may increase risk-tolerance of farmers
• may create expectations about eligibility rules
for future payments
• may interact with “market failures” and be
effectively coupled
• [different preferences of recipients/taxpayers]
Decoupled Payments
• Government program
payments to farmers
– Not linked
– Production decisions based on
market returns
• Examples
– Production Flexibility Contract
Payments
– Direct Payments
– Counter-cyclical payments ?
Coupled vs. Decoupled Programs
• Coupled programs
– Linked to production
– Linked to specific crops
– Increases overall
production
• Decoupled programs
– Not linked
– Raise total revenue more
generally
Impacts of PFC Payments
• No evidence of increased farm investment at the
aggregate level
– Decoupled payments increased land values about 8 percent
– Investment and Production impacts are under 0.2 percent in the medium
run
• Decoupled payments increased well-being of
participating farm households
– Higher income and wealth, higher and more smooth consumption, and
more leisure
• Up to 60 percent of program benefits may be
passed through to landlords - most of them
nonfarming landlords
Who Received PFCs
Commercial farms are fewer but account for over half of PFC
payments and two-thirds of production on recipient farms in 2001
Percent
70
Farms
60
Production
PFC
50
40
30
20
10
0
Commercial Farms
Intermediate Farms
Residential Farms
How Farms Allocate Their Assets
Operator
dwelling
8%
Liquid Assets
5%
Farm Assets
70%
Note: Average assets = $768,710
Source: ARMS, 1999
Other
Nonfarm
6%
Retirement
Assets
6%
Stocks and
Bonds
5%
Capitalization is an Issue
Crop prices trended down and flattened over 1996-2001, but the
cost of buying cropland went up over the same period
Index 1998 = 100
120
Prices received index - all crops
Indexed value of land per acre
110
100
90
80
1996
1997
1998
1999
2000
2001
Conclusions
$ billion
1996 Farm Act
35
2002 Farm Act
• Production impacts are
mostly from
– Marketing loan changes
– Larger Conservation Reserve
Program
30
25
20
• Agricultural spending
similar to recent years
• Financial and
Distributional impacts
15
10
5
0
1996
1998
2000
2002f
2004f
2006f
Additional Resources
• USDA’s Farm Bill web site
– http://www.usda.gov/farmbill/
• Economic Research Service (ERS) web site
– http://www.ers.usda.gov/
– Side-by-side comparison of 1996 and 2002 Farm bills
http://www.ers.usda.gov/Features/farmbill/
– Farm bill impacts
http://www.ers.usda.gov/publications/aib778/
http://www.ers.usda.gov/briefing/FarmPolicy/