Understanding US farm policy

HARD FOR AMERICANS, WORSE FOR EVERYONE ELSE

it’s a mistake to think of the US farm bill as a logical, consistent plan for agriculture.  Imagine it instead as a strange, rambling mansion where owner after owner has reconfigured rooms, added turrets, combined closets and papered over outdated features.

The building began with the Agricultural Adjustment Act of 1938.  It established a permanent program intended to make sure the US always had enough corn, cotton and wheat, and it provided for a long list of additional support programs ranging from barley and butter to tobacco and turpentine.

About every five years, the US Congress revisits the farm bill.  Each time it makes changes that reflect the demands and pressures particular to that time.  As a result, the farm bill now includes at least eight energy programs, the largest single US environmental program and food assistance and nutrition programs that get more funding than the commodity programs.  Most recently, crop insurance has been incorporated into the farm bill.

Programs have developed down different tracks for different commodities.  Milk and sugar programs still include supply management provisions harking back to the original farm bill.  Specialty crops don’t have commodity payments at all, although pressure is building to divert funds to encourage fruit and vegetable production.

The crops eligible for commodity program payments are the grains (wheat, corn, grain sorghum, barley, oats, rice), oilseeds (soybeans, canola, canola, crambe, flaxseed, mustard seed, rapeseed, safflower, sunflower, sesame), peanuts, various pulses and upland cotton.

These programs have also evolved.  For example, pressure to comply with World Trade Organization commitments prompted Congress to drop production controls such as set-asides in 1996.  The result was direct payments and counter-cyclical payments, which were altered yet again in the 2002 and 2008 farm bills.  

Currently, US farmers can opt for either direct and counter-cyclical payments or for the Average Crop Revenue Election (ACRE) Program, a new alternative established in the 2008 farm bill.  Here’s how each one works:

direct and counter-cyclical payment (DCP)?program
Each farm has an established base acreage and yield for its program crops.  The farm bill sets a direct payment rate for each commodity – currently $0.52 per bushel for wheat, $0.28 per bushel for corn, $0.44 per bushel for soybeans and $0.80 per hundredweight for other oilseeds.

The payment is calculated by multiplying 83.3 percent by the farm’s base acreage by the farm’s direct payment yield.  The calculation for a farm with a 100 acre corn base could be:

100 acres x 83.3% x
110 bushels direct payment yield
x $0.28 per bushel = $2,566 payment.

Since direct payments are tied to a historic farm base, they will be made even to farms where the base crop is not currently being grown – which is controversial with many Americans.

Counter-cyclical payments use the same base acreage and an established yield but are only paid if the effective price for a commodity falls below the target price established in the farm bill.  Current target prices are: $4.17 per bushel for wheat, $2.63 per bushel for corn and $6.00 per bushel for soybeans. 

The effective price is calculated according to whichever is higher:  a commodity’s direct payment plus the national average market price for the market year or the direct payment plus the national loan rate for the year.  Factoring out the direct payment, that means the average annual price or the national loan rate must fall below $3.65 (wheat), $2.35 (corn) or $5.56 (soybeans) to trigger a counter-cyclical payment.

average crop revenue election (acre) program
The National Corn Growers Association and the American Farmland Trust proposed the ACRE concept and championed its adoption in the 2008 farm bill.  ACRE represents an effort to replace programs linked to commodities with a program linked to revenue. 

ACRE has won significant initial support among grain and oilseed growers in the Midwest and northern states where the evolving farm economy has pushed recent crop prices high enough that counter-cyclical payments are unlikely to be triggered.  Farmers who choose ACRE cannot receive counter-cyclical payments but will receive reduced direct payments.

ACRE payments are calculated from the acres planted to a commodity and are capped at the combined total of all commodity base acres for the farm.  Payments are only issued if two triggers are tripped for the commodity. 

First, the state ACRE guarantee must exceed the average state revenue.  The ACRE guarantee is 90 percent of the five-year average state yield (top and bottom years omitted) multiplied by the national average market price for the previous two years.  The average state revenue is the actual state yield multiplied by either the national average market price or 70 percent of the national loan rate (whichever is higher).

Next, the ACRE benchmark for a farm must exceed the actual farm revenue.  Benchmark farm yield is a five-year average for the farm (top and bottom years excluded) multiplied by the national average market price for the previous two years, multiplied by the crop insurance premium per acre that the farmer paid.  Actual farm revenue is the actual farm yield multiplied by the national average market price or 70 percent of the national loan rate.

If both triggers are met, the ACRE payment involves two calculations: First, planted/considered planted acres are multiplied by 83.3 percent, then by a farm productivity factor (benchmark farm yield divided by benchmark state yield).  The result is multiplied by either the state ACRE guarantee minus actual state revenue or by the state ACRE guarantee multiplied by 25 percent (whichever is smaller).
 
Programs like ACRE and DCP may be in the farm bill’s commodity title, but for many US farmers, other government programs are more important.  Renewable fuels policy, including requirements for ethanol use, are widely credited with moving corn prices to a new plateau and making counter-cyclical payments obsolete for corn growers.  The top four conservation programs represent almost $6 billion in federal funding for agricultural practices, and disaster relief has become increasingly common.  

The US government now spends more on crop insurance than on the commodity programs, and for many grain and oilseed farmers, crop insurance is a better  safety net than DCP or ACRE.  Don’t be surprised if the next US farm bill debate brings a push to drop direct payments in return for stronger crop insurance. •