File: REPORT.TXT
Sent: October 13, 1995 11:43 am PDT Item: R00FIRa
ANALYSIS OF SELECTED PROVISIONS OF THE HOUSE AND SENATE AGRICULTURE BUDGET RECONCILIATION BILLS
By Chuck Hassebrook and Kelly O'Neill
The commodity program provisions of the budget reconciliation bill passed by the Senate Agriculture Committee and the House reconciliation bill developed by Agriculture Committee Chairman Pat Roberts would undermine family farm agriculture and diminish the nation's commitment to protecting natural resources.
Simply put, they are unfair. They cut costs by reducing payments to moderate-size farmers while imposing no cuts on the nation's largest farms and agribusinesses. Once again, the wealthy and powerful are exempted from the rigors of deficit reduction leaving families of modest means to shoulder the burden.
House Bill - Chairman Pat Roberts' Freedom to Farm Act decouples payments from production by providing farmers fixed but declining payments over seven years. Over that period, direct payments to farmers would be cut by an average of eleven percent, relative to projected deficiency payments under current law, though the size of the cuts vary widely by commodity. Farmers would have greater flexibility to plant the program crop of choice without sacrificing payments, though they would have less flexibility to plant crops for haying and grazing. Direct payments would be set according to budget targets, rather than based on the difference between market prices and target prices. They would no longer offset fluctuations in the commodity markets by going up in years of low market prices and down in years of high market prices.
Senate Agriculture Committee Bill - The Senate Bill eliminates the Acreage Reduction Program, which in some instances requires farm program participants to idle land; provides some additional flexibility to wheat and feed grain producers; and reduces farm program costs through a combination of measures including, but not limited to:
Increasing "flex acres" on which farmers are denied farm program deficiency payments from 15 percent to 30 percent;
Prohibiting farm program payments on land not enrolled in the farm program during at least three of the five years from 1991 to 1995; and
Capping deficiency payments for each commodity at the levels projected under current law in the February 1995 Congressional Budget Office baseline.
DISTRIBUTION OF BENEFITS
House Bill: Less Than Meets the Eye to Payment Limitation Reform - On the surface, the House bill appears to reduce payments to the nation's largest farms by reforming farm program payment limitation rules. Under current law, large farms avoid the $50,000 limitation on deficiency payments by subdividing their operations into three legal entities and thereby qualifying for up to $100,000 of payments. The House Agriculture Committee ostensibly removes this loophole by requiring that all payments received through legal entities be attributed to the ultimate beneficiaries and counted against their personal $50,000 limitation.
That is a good and necessary step, but it does not get the job done. Without two other reforms, those affected by the attribution rule may simply shift to other means to receive payments in excess of $50,000. The simplest for married persons is to take advantage of the spouse rule passed as part of the 1990 Farm Bill. Under that rule, each spouse in a farm family may receive $50,000, for a combined $100,000 payment, as long as he/she is not also using the three entity rule to exceed the payment limitation. That loophole could be closed by retaining elements of the spouse rule that provide for greater equity by allowing each spouse to receive payments in his/her own name, but limiting combined total payments to the husband and wife to $50,000.
Furthermore, payment limitation reform will remain ineffective unless Congress toughens the so-called "actively-engaged" rules. Those rules ostensibly require farm program participants to be actively engaged in the operation of the farm on which subsidized crops are grown, but fall far short of that objective. In fact, landowners are exempted from that requirement and tenants may meet it simply by making some decision important to the profitability of the operation.
That lax test leaves operators of large farms with several options for restructuring their operations to indirectly benefit from payments in excess of $50,000. For example, a large farm could switch from rental arrangements to farm management/custom farming contracts. The large farmer could make management decisions and perform all field operations on behalf of the land owner and receive his/her payments in the form of management fees based on the profitability of the farm and payments for field operations. The landowner could qualify as actively engaged and receive government payments even if he/she rarely laid eyes on the farm. The large farmer would continue to benefit indirectly from the farm program payments, even though they were made in the name of the landowner.
The net effect of retaining payment limitation loopholes is that the nation's largest wheat and feed grain farms would take no cuts, while family-size farms, on average, would sacrifice eleven percent of their payments (See Table 1). The largest farms and agribusinesses have sufficient acreage to continue to qualify for the maximum $100,000 payment, even as benefits are reduced on moderate-size farms.
The only large farms that would take cuts in direct payments are those that would have received net gains from marketing loans under current law, but lose them under Freedom to Farm Act. According to FAPRI projections, that is limited to rice farms and cotton farms. Marketing loan gains would account for about fifteen percent for rice and ten percent for cotton of total direct payments over the next seven years.
The Senate Bill: Still Too Big to Cut - The Senate Bill does not even bother to pretend to address payment limitation reform. The nation's largest farms would take no cuts. They have sufficient acres to receive the maximum $100,000 deficiency payment even with the increase in unpaid flex acres.
Meanwhile, family-size farms sacrifice payments on 30 percent of their acres, up from 15 percent under current law. (See Table 1). They would lose more if prices drop below expected levels and threaten to drive deficiency payments beyond the levels projected under current law. That is because deficiency payments would be capped at the per bushel rate projected for each year in the February 1995 baseline of the Congressional Budget Office.
Table 1. Payments to medium-size and large farms under Senate Budget Bill and House Freedom to Farm Act, as a percentage of projected payment under continued current legislation.
Senate House
Farm description Budget Bill Freedom to Farm Act
Medium Iowa farm with 86% 71%
275 acres corn,
275 acres soybeans
Large Iowa farm with 100% 100%
3600 acres corn,
3600 acres soybeans
Medium Kansas farm with 82% 99%
950 acres wheat,
50 acres sorghum
Large Kansas farm with 100% 100%
7352 acres wheat,
428 acres sorghum
A Fairer Alternative: The Family Farm Option - Were Agriculture Committee members committed to strengthening family farm agriculture and serving the interests of the many, rather than the few, they would have chosen alternative means for reducing farm program costs.
Analysis of USDA data by Dr. Stewart Smith1 reveals more family farm friendly approaches for reducing the cost of the wheat and feed grains program - which we call the Family Farm Option. Closing the payment limitation loopholes discussed earlier and limiting deficiency payments on wheat and feed grains to each farm's first $100,000 worth of program crop production would save sufficient funds to eliminate the need for the 15 percent flex acre increase included in the Senate Bill on those crops. We propose applying this Family Farm Option to farms that receive deficiency payments only on wheat and feed grains.
Based on Dr. Smith's analysis, we project that 94 percent of the nation's wheat and feed grain producers would be better off under this alternative proposal than the flex acre increase passed by the Senate. (See Table 2). That includes all corn farmers producing less than 42,750 bushels of corn, and wheat farmers producing less than 29,400 bushels of wheat. In comparison, the Senate committee's bill would provide greater payments only to the largest six percent of the nation's wheat and feed grain producers.
Table 2. Percentages of wheat and feed grain farms in following states that would receive greater payments under Family Farm Option than the Senate Budget Bill.
CO 90% ND 91%
IA 94% NE 91%
ID 92% NM 89%
IL 95% OH 96%
IN 95% OK 97%
KS 95% SD 96%
MN 93% TX 94%
MO 98% WA 88%
MT 92% US 94%
Likewise, this alternative proposal would more than equal the savings from the reduction in direct payments to wheat and feed grain producers embodied in the Freedom to Farm Act, if those reductions were equitably distributed among commodities.
Not only would this alternative approach protect moderate-size family farms from reductions in deficiency payments, it would enhance their ability to compete for land. In fact, one of the single most important steps the Congress could take to strengthen moderate-size family farms would be to stop subsidizing large farms to bid land away from them.
INEQUITIES BETWEEN COMMODITIES
House Bill: Freedom to Spend on Cotton and Wheat - The Freedom to Farm Act embodies a major shift in spending between commodities, relative to projections under current law.
According to our analysis, direct Freedom to Farm Act payments to corn producers would fall by 29 percent, relative to deficiency payments projected in the Food and Agricultural Policy Research Institute (FAPRI) January 1995 baseline. In contrast, payments to wheat producers would remain constant and payments to rice and cotton producers would increase by 15 and 29 percent respectively.
Two caveats are in order. The FAPRI baseline overstates near term deficiency payments under current law, because it was developed prior to recent commodity price increases. Furthermore, the above projections do not take into account reductions in commodity program spending for purposes other than deficiency payments, including costs associated with marketing loans, the Farmer Owned Reserve and payments to cotton processors. But even assuming all those costs are eliminated, total expenditures on cotton and wheat would fall by only two percent from projected levels, while spending on rice and corn would fall by 15 and 30 percent respectively.
The reason for the inequity between commodities is that Freedom to Farm Act payments are distributed between commodities according to their share of farm program benefits from 1991 to 1995, a period when cotton and wheat received a much larger share of payments than is projected for the next seven years.
CROPPING FLEXIBILITY
House Bill: Flexibility, But Not For Resource Conserving Crops - Advocates of the Freedom to Farm Act claimed that it would help the environment by removing impediments to resource conserving crop rotations. It has turned out again to be far less than meets the eye. In fact it penalizes some resource conserving crop rotations even more than current law.
While the Freedom to Farm Act provides farmers with greater flexibility to choose which program crop or oilseed to plant, it actually reduces flexibility to plant resource conserving forage crops for haying and grazing. Under current law, farmers are allowed to hay and graze such crops on the 15 percent of their base acres that are flex acres. Integrated Farm Management Program participants can also hay and graze half of their set-aside acres without penalty.
The Freedom to Farm Act would eliminate even the limited flexibility that these two provisions provide for improving rotations and producing resource conserving crops for haying and grazing. Haying and grazing such crops would be flatly prohibited on all base acres of participating farms during the principal growing season. That prohibits the most environmentally beneficial form of crop rotation. Soil building forage crops are among the best alternatives for reducing soil erosion and reducing the need to use petro-chemicals to control pest and provide soil fertility.
Senate Bill: In Some Ways More Flexible, In Some Ways Less - The Senate bill's increase in flex acres to 30 percent, though detrimental to family farm income, does provide farmers additional flexibility to plant the crop of choice, including forage crops that are hayed and grazed. Farmers would largely be free to plant the crop of choice on 30 percent of their acres, without sacrificing any payments that they would not have sacrificed had they planted the program crop.
The Senate Bill would provide some additional flexibility by allowing wheat and feed grain producers (but not cotton and rice producers) to plant the crop of choice on all base acres without loss of deficiency payments, except for cotton, rice and crops hayed or grazed during the principle five months of the growing season.
At the same time, the Senate Bill strikes a blow against flexibility and against environmental stewardship by repealing the Integrated Farm Management Program, passed in 1990 to provide additional flexibility for resource conserving crop rotations. Wheat and feed grain producers lose the flexibility for summer haying and grazing of forage crops interplanted with small grains on acres on which deficiency payments are received. Cotton and rice producers lose much more, since the Bill's general flexibility provisions do not apply. They would no longer be able to plant, much less harvest, resource conserving crops on base acres without sacrificing deficiency payments normally made on those acres.
IDLING FARMLAND: WHAT'S IN IT FOR THE ENVIRONMENT?
House Bill: Freeing Farmers to Idle More Acres? - The Freedom to Farm Act would idle more farmland than the existing commodity program, according to Food and Agricultural Policy Research Institute (FAPRI) projections, but use it to achieve little environmental good. The FAPRI analysis was of the initial draft of the Freedom to Farm Act, which included deeper commodity program cuts and smaller Freedom to Farm Act payments than the proposal ultimately proposed by Roberts.
Roberts' final proposal also includes substantial cuts in the Conservation Reserve Program, which would offset the increase in acres idled through commodity provisions. The net effect would be to increase the number of acres idled through programs that achieve no environmental objectives and to reduce the acres idled to achieve conservation objectives.
The Bill was initially touted as a vehicle to free farmers to maximize production for export markets, in part through the elimination of the Acreage Reduction Program which requires farm program participants to idle land in years of heavy surpluses. Nonetheless, it is projected to idle more acres than current law because it allows farmers to receive the full farm program payment on land voluntarily idled. Under current law, farmers who voluntarily idle base acres sacrifice from 15 to 30 percent of the payments.
The Freedom to Farm Act would pull many economically marginal acres into retirement. FAPRI projects that base acres idled or planted to crops other than the eight major crops would grow from an average 18 million acres under current law to 22 million acres under the House Bill.
Were those acres targeted to conservation practices such as farmed wetlands planted to wildlife habitat, contour grass strips for erosion control, soil building rotation crops, wildlife habitat, and grass buffer strips along waterways, they could achieve substantial environmental good without increasing the cost of the farm program. They are not. A better approach would be to reduce the payment on idled land without conservation practices, and shift the dollars and acres to the Conservation Reserve Program or to a newly created Environmental Reserve that pays farmers to reduce production in ways that benefit the environment.
Senate Bill: More Status Quo But No Better - The Senate Bill would eliminate set-asides and cut spending on the Conservation Reserve in half by the end of the seven year period. Consequently fewer acres would be idled to achieve conservation objectives and fewer total acres would be idled.
This decrease in idled land combined with the Senate Bill's cap on deficiency payments creates a dangerous situation for family farm income. Should surpluses mount and price begin to plummet, we will have no policy mechanisms to restrain production and thereby support prices, nor the capacity to make deficiency payments to compensate for low prices. The result could be years of very low net farm income and further destabilization family farm communities.
CONSERVATION COMPLIANCE AND SWAMPBUSTER
The House Farm Bill takes a step backward in weakening the contract between farmers and society on soil conservation and wetlands protection. Ten years ago, the 1985 Farm Bill established "Conservation Compliance", which requires farmers to implement conservation plans on highly erodible land to receive farm program benefits, and Swampbuster, which prohibits farm program participants from draining previously undrained wetlands.
The House Farm Bill could effectively eliminate these requirements because it makes their enforcement by the Secretary of Agriculture discretionary. Under the House Bill, the Secretary may reduce or eliminate payments to farmers who violate these provisions. Current law requires the Secretary to do so.
That sacrifices common sense to ideology. Seventy-eight percent of farmers support conservation compliance, according to a recent American Farmland Trust poll. They know that societies that squander their soil cannot survive. Congress should listen to them and the majority of the American public that supports environmental protection, rather than the vocal minority that opposes conservation.
IN CONCLUSION
The Senate Agriculture Committee Budget Bill and the House Freedom to Farm Act further divorce farm programs from legitimate public purposes and erode their credibility. There are critical policy objectives to be served in agriculture, including fostering resource stewardship and enhancing widespread economic opportunity.
The bills spurn those objectives and instead advance the interests of the nation's largest farms and agribusinesses, at the expense of small and moderate-sized family farms and the environment.
1 Dr. Stewart Smith is a University of Maine Agricultural Economist, former Deputy Administrator of the USDA Agricultural Stabilization and Conservation Service and former Senior Economist with the Joint Economic Committee of the US Congress.