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August 3, 2001

Economists analyze farm bill proposal

By Lana Robinson
Field Editor

At the conclusion of field hearings last year in which various constituencies offered detailed testimony regarding the crafting of a new farm bill, the House Agriculture Committee developed those ideas into a draft farm bill. A recurring theme coming forth in the hearings was the need to retain the flexibility and export enhancement provisions of the 1996 Federal Agriculture Improvement Act (FAIR) while doing something to address the downside risk exposure under the current program.

Agriculture Committee Chairman Larry Combest (R-Lubbock) and Ranking Member Charles Stenholm (D-Stamford) authored the plan. They hope to complete a bill by Aug. 3, when Congress goes home. The draft proposal would maintain the production flexibility of the 1996 farm law and continue the basic payment structure. But it would also provide new counter-cyclical assistance through an old mechanism: the target price and deficiency payment system that was in effect until 1997.

Recent analysis by economists at the Agricultural and Food Policy Center (AFPC) at Texas A&M University and the Food and Agricultural Policy Research Institute—a joint institute between the University of Missouri and Iowa State University—concludes that the draft farm bill would increase acreage among grain and cotton crops, while having little impact on supply and demand.

"If we analyzed the program at the national level, the impacts that we would see are very little regarding the supply and demand situation," said Dr. Ed Smith, an economist with the Texas Cooperative Extension. "Overall, we would see less than a 1 percent change in plantings of program crops and we would see very little change in price according to our analysis."

Smith reiterated that the scope of the analysis was limited to provisions relative to impacts on wheat, feed grains, cotton, rice, oilseeds, and the conservation reserve program.

Smith said two important additions were made under the proposed draft bill. One includes allowing producers to update their base acreage on which program payments would be paid, if they so choose.

"They can either accept what their current base acres are under the current AMTA (Agricultural Market Transition Act) payment, or they can adjust their base acreage to be equivalent to the average plantings in the 1998-2001 period," Smith said. "We concluded that rolling forward of the base, would bring in about 50 million more payment acres in the program, primarily soybean acres— an increase from 211 million acres to 262 million acres."

According to Dr. Steve Klose, Extension economist who analyzed 300 farms that are part of Extension's Farm Assistance program, more than 80 percent would take advantage of updating at least a portion of their base acreage.

"One thing we were curious about was being able to update a person's base acreage. We wanted to look at the database of farms we had and see what kind of impact it would have on Texas producers, Klose said. "That updating alone represented about a 20 percent increase in those base payments to those producers. In Texas, we have a lot of cotton production, so a lot of those areas don't have a lot of alternatives as to what they can grow. We'll see a lot of those producers who may not see a significant jump due to this update in base acreage, whereas if you get some of the feed grains up north, they might have the opportunity to move into some soybeans."

Also included is a target price program retaining target price levels in the 1990 farm bill, while adding a target price program for soybeans at $5.76 a bushel.

A counter-cyclical program was also added in the draft bill. A counter-cyclical program essentially acts as an income support for farmers and is tied to a target price. If the market price is less than the target price, the difference would be made up to the farmer.

"That counter-cyclical provision provides the downside safety net that was missing in the 1996 farm bill and the hope is that it will offset the pressure on Congress to pass ad hoc disaster legislation each year," Smith said, noting that Congress had approved $25 billion in emergency assistance over the past three years.

Dr. James Richardson, professor of agricultural policy at Texas A&M, said of the 44 farms that were studied in the analysis, all would benefit through increased net income, a reduction of a cash flow deficit, and an increased chance of retaining or increasing net worth.

"We individually looked at each representative farm and made an analysis of the farm, assuming they maintain current base, and then compared the change base according to new concept base papers. The Texas cotton farms (in the study) saw an increase of net cash income from $40,000 to $90,000 a year if the concept program were to be put into place," Richardson said. "The feed grain farms would see an increase of $15,000 to $35,000 a year, and the rice farms included in the study would see an increase of $40,000 to $90,000 in net cash income."

In a July 25 teleconference, the team of economists told media participants the draft farm bill concept offers farmers "staying power."

"The concept piece is truly a counter-cyclical program—while prices are high, farmers would receive no payments," said Richardson. "When prices are low, they are to receive income support payments. This type of program affects the probability of cash flow deficits. The probability of cash flow deficits was running 80 percent to 99 percent on Texas High Plains farms. On the larger farms, the probability of a deficit was running about 95 percent. With the proposed program, it's around 75 percent."

The Southern High Plains cotton farm represented in the study would see an increase in net cash income "enough to reduce the chance of cash flow deficit from 70 percent to 40 percent," Richardson said.

At the national level, he said 30 of 34 farms were better off if the base acres were changed.

The proposal spends all the available money ($73.5 billion over 10 years, 2002-2011). The Congressional Budget Office (CBO) estimates $50.3 billion is for grains, cotton, oilseeds, and CRP.

CBO estimated spending for other programs over the next 10 years: Conservation, $15.05 billion; Trade, $1 billion; Research, $700 million; Nutrition, $2.3 billion; and Rural Development $785 million.

Another major change involves payments for oilseeds, which the 1996 farm law didn't provide. There would be a 34 cents per bushel payment rate for soybeans. Under the proposal's counter-cyclical payment provision, there would be a new soybean target price of $5.76 per bushel. The soybean loan rate would drop from the current $5.26 to $4.92.

Counter-cyclical payments would be based on target prices of $4 per bushel for wheat, $2.75 for corn, $2.61 for sorghum, 72.9 cents per pound for upland cotton, and $10.71 per hundredweight for rice—the target prices in effect in 1995. Transition (AMTA) payment rates would be the same as for 2002.

The draft proposal would extend the milk price support of $9.90 per hundredweight. A new unspecified peanut support program would be developed, providing producers with about $340 million a year. A non-recourse loan program would be developed for wool and mohair producers.

The draft plan would increase spending on conservation programs by 75 percent, providing $15 billion over 10 years for various programs. The Environmental Quality Incentives Program would see a big hike, with $1.2 billion in annual funding, half of which would be earmarked for livestock producers. The proposal also calls for an expanded conservation reserve program, with a 40 million acre enrollment.

Regarding trade, the proposal calls for an increase in export promotion programs. Spending for the Market Access Program would double, from $90 million to $180 million a year.

For more analysis, go to the Web at http://www.afpc.tamu.edu.