High farm income and deep federal budget deficits set the stage for the 2014 Farm Bill negotiations. Two objectives were voiced in that process – eliminating fixed direct payments and contributing to deficit reduction. Now, weak farm income has brought the policy focus back asking if the new commodity programs which replaced direct payments will suitably support the farm sector. A recent Policy Pennings by Schaffer and Ray1 claims the 2014 Farm Bill is failing to deliver adequate assistance in the time of greatest need, noting that farm payments are forecast only slightly higher in 2015 than in 2013’s record farm income year, yet farm income is down over 50% (farm income dropped $67.4 billion from 2013 to 2015). That article concludes that for all their faults, at least direct payments did not decline in years of low farm income. 

Any discussion of the effectiveness of the 2014 Farm Bill must begin with the budget environment. Beginning with 2011’s super-committee budget reform process, the Senate and House Agricultural committees were tasked with finding deficit reductions from federal farm and nutrition programs. The final score of the Farm Bill identified some $1.7 billion (approximately 2%) in annual savings relative to continuing previous farm and nutrition programs. In some respect, success of the 2014 Farm Bill will have to be judged on whether real spending on farm and nutrition declines over the life of the bill. Current projections indicate that commodity program spending will exceed the baseline forecast for payments, thus eroding the contribution to deficit reduction that were calculated at time of passage. 

Federal budget reform remains a significant issue and continues to pressure agricultural spending, with crop insurance serving as the new target for cuts2. Current legislation under debate would trim nearly $2 billion dollars per year in projected spending through elimination of the harvest price option, cutting premium subsidies and limiting guarantees to insurers. While the prospects for that particular legislation is uncertain, the message is clear –agriculture continues to be a target for spending reduction. With this level of attention to the budget in Washington DC, it should be acknowledged that agricultural support might be lower than under previous legislation even as farm income falls precipitously.

However, this does not appear to be the case. Low farm crop incomes in 2015 are set to trigger large farm payments in late 2016, when the marketing year for 2015 crops ends and national average prices can be determined. This lag in support may stress cash-flow management, but income support is increasing as income falls. 

The increased government spending on agricultural support in 2015 and 2016 is set to occur because of the 2nd consensus objective of the farm bill process, eliminating direct payments. All of the programs newly created to replace direct payments are counter-cyclical, meaning that payments tend to increase as income falls. The Agricultural Risk Coverage – County Option (ARC-CO) program dominates Midwest signups for corn and soybeans and makes payments using recent revenue (specifically, a five year Olympic moving average of price and yields) as a benchmark. The swap of a fixed direct payment for a counter-cyclical revenue program that may incur large spending runs counter to the first objective of deficit reduction. Current farm programs function as supports that are not subject to annual appropriations and thus budget goals may be undercut by economic conditions that trigger larger payments than expected. 

However, the nature of a program like ARC-CO is that persistent low revenues will deliver payments only for a short term (2 to 3 years). In this manner, they are designed to provide transition income to farmers as they adjust to new market realities. A recent FarmDocDaily blog post highlights this feature of the program, and encourages farm managers to begin planning for a declining stream of farm payments3. It will be important for policymakers to understand that farm program payments will likely rise for the 2015 crops but decline in the longer run. This may help to dilute some of the interest in cutting crop insurance or making major changes in the next farm bill. 

So, we are left with the question of whether the 2014 Farm Bill’s crop programs are working. The preceding discussion does not identify any unintended or unforeseen consequences of new farm bill programs. Thus, at this early stage the simple answer is “yes”, commodity programs are working for traditional Midwest and Indiana crop farms. Specifically, the ARC-CO program by design: a) provides growing support as income falls; and b) delivers that income support with a lag of approximately one year following harvest. As discussed in Zulauf and Schnitkey, farm management within the new program designs will require adjustments in planning and communicating those adjustments to associated lenders, landlords, etc. 

The only qualification to answering “yes” is the likelihood of increased agricultural spending relative to the baseline forecast for the 5 years the 2014 farm bill is in effect (2014 to 2018 crops). The 5 and 10 year baseline forecasts are never correct, so the immediate realization is that any set of programs where spending depends on market outcomes can differ dramatically. Ironically, only the old direct payment program would succeed against the objective of matching baseline spending. The real test of the 2014 Farm Bill programs will be whether they deter the ad hoc supplemental support that so often accompanied direct payments in times of farm income stress. Will these programs provide enough support for farmers to adequately transition from higher to much lower incomes? This question will take longer to answer even as we assert that for now, the 2014 Farm Bill’s crop programs appear to be “working as designed.” 

References

Brownfield Ag News. “New cuts to crop insurance proposed.” November 5, 2015.  

Schaffer, H.D. and D.E. Ray. 2015. “Farm income expected to plummet—current mix of farm programs of limited help,” Policy Pennings (Oct 23 issue). Agricultural Policy Analysis Center, University of Tennessee, Knoxville.  

Zulauf, C. and G. Schnitkey. 2015. “Understanding ARC-CO: Transition Assistance vs. Support Assistance.” UIUC, FarmDoc Daily (5):220.