Farm Bill Epilogue
Friday, March 28, 2014
filed under: Marketing/Risk Management
Two years, six months and five days . . . a little over two and one-half years . . . 920 days. These are the various ways to state the elapsed time between the enactment of the Budget Control Act of 2011 on August 2, 2011 — the recognized start of the effort to write the new farm bill — and February 7, 2014, the date President Obama signed the Agricultural Act of 2014 (AA14) into law at Michigan State University. It was an inordinate amount of time, no matter how you parse it.
Once the logjam finally broke in late January, the bill cleared both the House and Senate in less than a week. But that was almost bittersweet after the long slog it took to get a final vote in Congress, considering all the water that passed under the bridge, so to speak, during the previous months and years of gridlock. And reliving the torturous path to completion involves way too much drama to get into now — especially when all are focused on an explanation of the final product.
But while serious divisions plagued the agricultural community during this lengthy debate, it’s a safe bet to say that the vast majority of those who worked on this legislation are all relieved it is finally finished. Hallelujah!
USDA has geared up to implement the new law, but a signup prior to spring planting is next to impossible, since farmers in the southern growing regions already are in the fields. Implementation will require some patience, given the multiple choices, updates and new programs contained within the law, coupled with the tardy nature of its completion, i.e., four months plus a week after the expiration of the one-year extension of the 2008 farm bill.
The Congressional Budget Office estimates that AA14 will reduce the federal deficit by $16.5 billion over 10 years — or by $23 billion if cuts mandated by the Sequester are included in the tally. Total outlays are projected to be $956.4 billion during the 2014-2023 fiscal years. Of that total, $756.4 billion is for nutrition title, $89.8 for crop insurance, $57.6 billion for conservation, $44.5 for commodities and $8.1 billion for other titles.
But what is actually contained in this new farm bill? Below are some highlights of the major titles.
Title I - Commodities
Direct Payments (DPs) are eliminated for all program crops, except cotton, which is no longer a covered commodity because its support will now come from the new cotton Stacked Income Protection Program (STAX). However, cotton will receive a portion of their DPs in 2014 and 2015 while STAX is developed and implemented.
The Counter-Cyclical Program (CCP) and the Average Crop Revenue Election (ACRE) are eliminated. Instead, growers will have a one-time choice on a commodity-by-commodity basis between two new but similar replacement options: the Price Loss Coverage (PLC) or the Average Revenue Coverage (ARC) programs.
Eliminating DPs, the CCP and ACRE saves $47 billion. Then, $13.1 billion is used to fund PLC; $14.1 billion to fund ARC; and $3.7 billion to fund a livestock disaster assistance program. The other major expenditures from the savings are a $912 million increase for the Dairy program and $558 million for the transitional DPs for cotton. After other minor costs are accounted for, the Commodity Title ends up saving a net $14.3 billion, bringing the 10-year cost for commodity support programs down to $44.5 billion.
AA14 continues the full planting flexibility that has been in place since the 1996 farm bill. PLC and ARC support for covered commodities will both be paid on historical base acres, regardless of what is planted in the current year, just as DPs and the CCP were paid in the past. (The only exception to this continued decoupling from current year plantings is for generic cotton base that is planted to a covered commodity, which will receive support from the program chosen for the crop to which they are planted.) Growers will have a one-time option to reallocate base acres to the simple average of planted and prevented plant acres during the crop years 2009-2012, not to exceed the aggregate of current base acres.
PLC will be paid on a farm’s established program yields. A farm will have a one-time option to update program payment yields on a commodity-by-commodity basis to 90% of the average 2008-2012 yields per planted acre. Payment acres will be 85% of base acres. Payments will be triggered if the 12-month national average price of a covered commodity is determined to be lower than the reference price for that commodity. If a payment is triggered, the following formula would be used: 85% X base acres X program payment yield X (reference price minus the 12-month national average market price).
If the PLC program sounds rather familiar, it’s because the “CCP” and “target prices” have just been rebranded as “PLC” and “reference prices,” albeit with the option to update crop bases and program yields.
Producers choosing to participate in the ARC program will have a one-time option to choose either county or farm level* revenue support. Producers who choose farm level* coverage must enroll all crops in the ARC program. Payment acres equal 85% of base acres at the county level and 65% of base acres at the farm level.
At the county level, the ARC guarantee is equal to 86% of the previous five years Olympic average of revenue obtained by multiplying the average yield times the national average price during those years. ARC payments will be triggered when the actual crop revenue during a current crop year is less than the ARC guarantee, but limited to the 10% band of revenue between 86% and 76%. Actual crop revenue for a current year is determined by multiplying the actual county yield times the national average market price during the 12-month marketing year for the crop. If a payment is triggered, the following formula would be used: 85% X base acres X (the difference between the ARC guarantee and the actual crop revenue, but not to exceed 10 percent of the ARC guarantee).
At the individual farm level, the ARC guarantee is equal to 86% of the sum of all the previous five-year Olympic average revenues of all the covered commodities grown on the farm. The actual crop revenue is the sum of the products of the actual yields and national average market prices for all the covered commodities grown on the farm. Generally speaking, the same formula is used as the county level except that the payment acres are reduced to 65% of base acres.
ARC provides for a yield plug of 70% of a farm’s crop insurance T-Yield when the yield per planted acre or historical county yield for any of the five most recent crop years is less than 70% of the T-Yield. ARC also provides for a price plug equal to the reference price when the national average market price received by producers for a covered commodity during the 12-month marketing year for any of the five most recent crop years is lower than the reference price.
Because both the PLC and ARC programs require calculations using a 12 month national average of prices, payments for a crop year will be paid on or shortly after October 1 of the following crop year. In other words, if 2014 conditions trigger support payments for covered commodities, the payments will be received beginning October 1, 2015.
The Fruit & Vegetable (F&V) planting restriction has been modified due to the elimination of DPs. F&Vs can now be planted on up to 15% of a farm’s base acres without forfeiting PLC or ARC payments. However, F&V plantings in excess of 15% of base acre will not be eligible for PLC or ARC payments.
The Marketing Loan Program was reauthorized unchanged except for the cotton loan rate, which will be set at the simple average of the world price for the two preceding marketing years, but not less than 45 cents/lb or more than 52 cents/lb.
Payment limits are combined into a single limit of $125,000 per person for the programs of the Commodity Title, or $250,000 total for a producer and spouse. USDA will be required to define “actively engaged in farming” within 180 days of enactment. The Adjusted Gross Income (AGI) cap for payment eligibility is $900,000.
Title II – Conservation
Funding for the Conservation Reserve Program (CRP) is cut by $3.3 billion by reducing acreage enrollment to 24 million by 2017. For reference, as of October 1, 2013, 25.3 million acres were enrolled in the CRP.
The Conservation Stewardship Program (CSP) is cut by $2.3 billion, with $596 million saved by incorporating the Wildlife Habitat Incentives Program (WHIP) into the Environmental Quality Incentives Program (EQIP). These savings are then used to increase funding in several other conservation areas, including $1.2 billion for the new Agriculture Conservation Easement Program (ACEP) that was created by combining the Wetlands Reserve Program, the Grasslands Reserve Program and the Farmland Protection Program; a $497 million increase for EQIP; and a combined $454 million for several other conservation programs.
Bottom line, AA14 consolidates 23 existing conservation programs into 13 with an increased emphasis on working lands rather than land retirement. And while net spending is reduced by nearly $4 billion, overall spending comes in at $57.6 billion for the Conservation Title, outpacing the Commodity Title by $13.1 billion.
Title III – Trade
Export Programs —
Export promotion programs including the Market Access Program (MAP) and the Foreign Market Development Cooperator Program (FMD) were reauthorized in full. MAP is authorized for $200 million and FMD is authorized for $34.5 million.
The Export Credit Guarantee Program (GSM-102) was reauthorized. The maximum tenor for loan guarantees is reduced from three years down to 24 months and allows the USDA to adjust program fees. These changes are included to facilitate resolution of the Brazil Cotton Case.
Food Aid Reforms —
The maximum allowable cash assistance for Title II of P.L. 480 (emergency and non-emergency assistance) is increased from 13% to 20%, giving USAID the flexibility when responding to food aid demands of various countries and regions and to build resiliency in areas of common food shortages and drought.
The “safe box” (portion of Food for Peace funds used on development) is changed from $450 million to a window of 20% to 30% of program funds, with a minimum of $350 million.
The agreement responds to a 2011 GAO report criticizing monetization practices by including a reporting mechanism addressing: how funds are being used, the rate of return, associated costs, and explanation if a commodity’s rate of return falls below 70%.
The McGovern-Dole International Food for Education and Child Nutrition Program is reauthorized with no changes.
The Local Regional Purchase pilot program from the 2008 farm bill is authorized as a new program with the intent to complement existing food aid programs, in particular the McGovern Dole program.
Title III does not accommodate the President’s proposal to move funding to International Disaster Assistance (IDA) and to eliminate P.L. 480.
Title VII – Research
AA14 increases mandatory research spending by $1.145 billion, bringing total spending to $1.256 billion over 10 years. The Specialty Crop Research Initiative captured the lion’s share of this funding, receiving $745 million. Some $200 million was invested in the newly formed Foundation for Food and Agriculture Research, which will be used to supplement USDA’s basic and applied research activities.
Title IX – Energy
AA14 increases the Energy Title mandatory spending by $879 million, up to $1.1 billion over 10 years. The Biodiesel Fuel Education Program, which supports outreach to fleet managers, truckers and engine manufacturers, was funded at $1 million per year for five years. The Biobased Market Program, which supports and promotes increased production and use of biobased products through a federal procurement preference and a biobased product label, was funded at $3 million per year for five years. The Bioenergy Program for Advanced Biofuels, which supports biodiesel production, was also funded at $15 million per year over five years. Among the other programs funded in the Energy Title are the Biorefinery Assistance Program, the Rural Energy for America Program (REAP), the Biomass Research Development Initiative (BRDI) and the Biomass Crop Assistance Program (BCAP).
Title XI - Crop Insurance
AA14 creates two new major crop insurance products - the Stacked Income Protection Program (STAX) and the Supplemental Coverage Option (SCO) at a cost of $3.3 billion and $1.7 billion respectively.
The STAX policy will be available only for cotton. A 90% coverage level will be offered with 80% of the premium subsidized by the federal government.
The SCO policy will be made available to all covered commodities (and cotton acres not enrolled in STAX) beginning with the 2015 crop year. However, covered commodities enrolled in the ARC program are not eligible for SCO coverage. SCO will provide county-wide area coverage on top of individual farm level coverage policies up to 86%. Producers must buy, at a minimum, Catastrophic (CAT) crop insurance coverage. The federal government will subsidize 65% of the SCO premium cost.
The Enterprise Unit subsidy is made permanent, and Enterprise Units are allowed to be split by irrigated and non-irrigated acres. Different crop insurance coverage levels by practice will be allowed on individual units. The latter two changes cost $700 million.
Conservation Compliance from the Commodity Title was extended to the Crop Insurance Title, and producers will need to comply with those rules to be eligible for premium subsidies when buying federal crop insurance. However, the compliance was made forward looking from date of enactment for wetland conversions. Sod-saver language is also included for only the following states: Minnesota, Iowa, North Dakota, South Dakota, Montana and Nebraska. The subsidy reduction for sod-saver is 50 percentage points and is in effect for four years after land is broken out of sod and is expected to save $114 million.
Premiums for Catastrophic Coverage are increased to more accurately reflect the cost of coverage; expected to save $426 million.
To mitigate the negative effects of disaster years on Actual Production History (APH) yields, producers will be allowed to drop a year of history for a crop in any year in which the yield of that crop in the county the producer farms is at least 50% below the simple average of the county’s previous 10 years; and then divide the remaining nine years of APH history by nine (instead of 10). The Manager’s Statement that accompanied AA14 expressed intent that more than one year could be dropped in a 10-year period. This APH yield adjustment is projected to cost $357 million.
When all the changes are tallied up, funding for the Crop Insurance Title increased by $5.7 billion, bringing the 10-year cost for the federal crop insurance program to $89.8 billion.