More protection against low prices, while fixed payments ended
decade-long shift to subsidized crop insurance reinforced

By David Orden, IFPRI

After more than three years of oft-times tumultuous positioning, posturing, and negotiations, the U.S. Congress has passed a new five-year Farm Bill: the Agricultural Act of 2014. The bill, which the President will sign into law on February 7, reaffirms the government’s longstanding support to farmers through 2018.

In terms of the support programs, the new law offers several options farmers sought; as a result, farm operators will need to decide which programs to opt for, crop by crop, as program parameters and operational rules become clear. However, the complexity can be boiled down to a few basic points. Essentially, the new law eliminates about $4.5 billion annually in fixed direct payments to farmers; such payments have been made since 1996. In place of these payments, greater protection against low prices or declining revenue will be offered. This is a trade-off that farm producers largely accepted and promoted early in the farm bill debate. The new programs offer support that is less certain from year to year, but that provides more downside risk protection. Current budget scoring assesses that this shift, along with other support policy changes, will somewhat reduce the expected cost of farm subsidies over the next ten years (if the law continues that long). But in reality, anything can happen—from substantially lower spending to much higher support costs depending on how market prices and farm revenue turn out.

The new Farm Bill’s default crop support option is a Price Loss Coverage program in which farmers receive higher target prices for key commodities than were included in the 2002 and 2008 farm bills. For example, the corn target price is increased from $2.63 to $3.70 per bushel. If market prices fall below this target, farmers receive a payment of the difference on a “base” quantity of their output. While the new level is still below today’s market prices, the increased target price raises the probability of farmers receiving a payment. The new law allows farmers to update both the base acreage for specific crops and base yields per acre according to production in the past five years. Thus, while not a payment guarantee on every bushel, the updated target price links future payments to recent production decisions.

The alternative crop support option that farmers can select is an Agricultural Risk Coverage (ARC) program. Under this option, there is a cushioning guarantee against declining revenue, not a fixed target price guarantee. With recent high prices, the revenue guarantee works out to a higher implied price guarantee in the coming year for some crops. For example, for corn, ARC payments would be triggered (assuming yields at typical levels) by prices below $4.55 per bushel. But the ARC guarantee adjusts according to a rolling average of revenue over five previous years. Thus, if prices fall and stay low for multiple years, the revenue guarantee declines. Hence the calculus facing producers in deciding which support option to select.

The new Farm Bill also reinforces recent years’ increased support through subsidized within-year yield and revenue crop insurance programs. These increases have been due both to policy decisions that increased coverage and subsidization levels and to the higher prices seen since 2008, which increased premiums with the higher value of insured output. With these increases, the insurance premium subsidies have exceeded direct fixed payments each year since 2008. In the 2014 Farm Bill, a new insurance program is available to farmers opting for Price Loss Coverage. The Supplemental Coverage Option allows farmers to purchase subsidized insurance for yield or revenue losses greater than 14 percent up to the level of losses met by their other insurance coverage. Farmers choosing the ARC are ineligible because its revenue guarantee covers similar downside risk.

Reliance on insurance programs is also extended in two additional ways: through the elimination of past support programs for cotton and their replacement by subsidized within-year insurance and through the introduction of a new voluntary Margin Protection Program for Dairy Producers, which replaces the traditional dairy price and income support programs. The shift to insurance for cotton, another change supported by producers quite early on in the farm bill debate, is intended to circumvent the WTO dispute settlement ruling against previous cotton support programs and bring the U.S. into compliance with WTO requirements under that case.

Under the new dairy program, participating dairy farmers receive a payment without incurring any insurance premiums if the margin between average national milk prices and representative feed costs falls below $4 per hundred pounds over two consecutive months, with an option to insure a margin up to $8 per hundred pounds by paying a premium. A proposal to incorporate dairy supply controls designed to keep prices above the minimum fixed margin proved controversial and is not included in the law. Instead, the Secretary of Agriculture has been directed to increase government purchases of dairy products for distribution through domestic food programs whenever prices fall low enough to trigger margin guarantee payments.

What is the political economy of this new Farm Bill? For all the delays and difficulty achieving it, the final outcome fits the old adage that the more things change, the more they stay the same. U.S. farm programs have historically been countercyclical in character, providing the most support in times of falling or low prices, as the new programs will do. The new Farm Bill passed with overwhelming bipartisan majorities in both the House of Representatives and the Senate; the bill provides benefits to numerous constituencies. While controversy swirled around reducing expenditures for food-based support to low-income consumers, the new bill reauthorizes these programs with only a 1 percent reduction in anticipated expenditures. Farm groups receive the various support options they proposed. In a divided Congress (Democratic control of the Senate; Republican control of the House) where little legislation is being enacted, the farm lobby once again prevailed. The Depression-era permanent legislation that each new farm bill temporarily supplants is retained, setting the stage for another farm bill before the end of the decade: next time with the stronger protection against downside risks already enshrined in the law to be reconsidered.

From an international perspective, while the case can be argued that the cotton program would not have been changed so sharply without the WTO dispute ruling, there is little else to point to in the new law that moves in the policy direction implied by the idea of WTO disciplines on trade or production distorting support. Indeed, the structure of the new support programs regresses sharply toward those distortions. With the loose disciplines still existing under the U.S. $19.1 billion cap on certain distorting support, it is unlikely that its international commitment will be violated. However, rather than blame the new U.S. Farm Bill on the failure of international negotiations, we should recognize that both the very limited Doha commitments on agriculture reached late in 2013 and this new U.S. bill are symptomatic of the times. After the severe recession and slow recovery of recent years, and with the long commodity boom since 2008 possibly waning, there is little political appetite for reining in farm support either in the United States or elsewhere.

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