July | August 2017



 

 
By John Anderson, Deputy Chief Economist, American Farm Bureau Federation
Although the 2014 Farm Bill was signed into law more than a year ago, it still feels new to many stakeholders. This is largely because some of the bill’s key provisions have yet to be implemented. A year might seem like a long time for rolling out a new program, but there are good reasons for the deliberate pace.
Farm programs always have been rigorously scrutinized and criticized by farm and nonfarm interests alike. This is a good thing. In fact, you would be hard-pressed to find another sector where government involvement and spending is vetted as thoroughly and as frequently. Farmers and ranchers themselves are regularly adapting to changing weather and fluctuating markets. It makes sense that farm programs also would be responsive to both the changing needs of stakeholders and the changing fiscal realities facing government.
Agricultural policy is evolutionary, not revolutionary, and changes in farm programs tend to be incremental. No two farm bills are completely alike. They may carry similarities, but these bills are meant to adapt to the changing needs of the market. Even though the 2014 Farm Bill hasn’t undergone an extreme makeover, its implementation looks daunting because of the sheer number of program changes being made at once.
Two of the most complicated program changes yet to roll out are the Price Loss Coverage and Agricultural Risk Coverage programs. These are the types of programs traditionally associated with farm bills. Both are geared for commercial row crops, like corn and soybeans, and likely will impact the most farmers across the largest geographic area.
Before signing up for either program, farmers have the option of updating their farms’ base acreage and yield information, which in turn are used to determine specific coverage that the program will provide. Farmers haven’t had a chance to update this since 2002.
Farm program payments are not based on current production, but on a historic base of production for an individual farm. Payments based on historic production give farmers a safety net, but leave them motivated to respond to market signals rather than potential program benefits. Tying these payments to current production could distort planting and other business management decisions.
Updating farm bases of production is a cumbersome and comp-licated process. The decision is made by the landowner, who is not always the farmer. Many farms have multiple landowners spread all over the country given traditions to pass land down from generation to generation. Managing a decision like base updating can become complicated quickly, but once the decision is complete, farmers can choose one of three programs in which to enroll their crops.
Price Loss Coverage is a relatively straightforward price deficiency program. If the market price for a crop falls below the reference price established in the farm bill, the farmer gets a payment based on the difference.
Agricultural Risk Coverage, by contrast, guarantees revenue based on historic county revenue. Here, a five-year history of national average prices and county yields is used to establish a revenue benchmark. If actual revenue for the county (i.e., county average yield multiplied by the national average price) falls below the revenue guarantee, the farmer gets a payment based on the difference.
A farmer can also choose Agricultural Risk Coverage with a revenue guarantee based on his or her own historic revenue. This program differs from the others in that the farmer’s entire revenue, from all crops on all farms, is combined in establishing the revenue guarantee and determining a payment. With the first two options, a farmer could enroll different crops in different programs. This menu of options for farmers is one of the more unique features of the 2014 Farm Bill, but it’s also what makes implementation so complicated.
Farmers are evaluating their options, but the decision is not simple or quick. Many complex variables come into play—for example, the assumed path of commodity prices over the next five years, recent county yield experience, and the relationship between county crop losses and individual farm losses. Farmers can’t predict how the markets and weather will behave, but these options will help them navigate the many risks they face each season.
The protection offered by these programs is particularly important in the many rural parts of the country where production agriculture remains a key economic driver. Here, decision support for farmers in the form of educational programs and information offered through federal, state and local partnerships such as the Cooperative Extension Service and state departments of agriculture serve a vital economic development function.
Although we’re still waiting to see how the Price Loss Coverage and Agricultural Risk Coverage programs play out, some other risk management tools in the 2014 bill already have been implemented. Several standing disaster programs for livestock and specialty crop producers were renewed from 2008, as they proved to be valuable risk management tools for farmers and ranchers who don’t have many other tools available. The U.S. Department of Agriculture made these disaster programs a high priority; sign-up began just 60 days after the bill passed.
The 2014 Farm Bill also included a new dairy margin protection program to provide dairy farmers with a new tool to manage milk price and feed cost risks. Farmers began signing up for that program last fall, about six months after the bill passed.
Looking ahead, a few things are certain. First, not all farmers will choose the same programs, even on the same crop in the same county. Under past farm bills, farmers of the same crop generally had the same program to protect them. Now, farmers in very similar situations could see widely different results from these programs.
Second, farmers will rely more and more on crop insurance to manage risk since new farm bill programs no longer offer the same level of protection. Farm program payments probably will amount to less than 15 percent of net farm income, even under the Congressional Budget Office’s March 2015 baseline budget estimates, which projected larger farm program payments than when the bill was passed. This is a dramatic shift in 10 years. As recently as 2005, farm program payments accounted for more than twice that share of farm income. Farmers have responded though by turning to flexible, market-based options and that trend likely will continue under this farm bill.
Finally, farm programs will continue to evolve as they have in the past. The certainty a five-year farm bill provides is vital to the stability of agriculture. However, it is highly unlikely that even the latest programs like Price Loss Coverage and Agricultural Risk Coverage represent the ultimate end state for farm programs.
ABOUT THE AUTHOR
John Anderson is deputy chief economist for the American Farm Bureau Federation.