2008 Farm Bill Ready for House, Senate Votes

The farm bill covers many different topics, but Title I, the "commodity title," tends to have the most impact on farmers' production decisions and incomes. Some highlights of Title I are:

Fixed and Counter-Cyclical Payments

For all of the talk of significant "reform" in the new farm bill, to most farmers, it will look pretty familiar. Fixed annual payments are retained, as are the marketing loan and counter-cyclical programs. The fixed payment rates appear to be the same as in the 2002 farm bill. The counter-cyclical payment program looks much the same as what we are used to, except that some target prices are a bit different. For cotton, the target is lowered from 72.4 cents per pound to 71.25 cents per pound beginning with the 2008 crop. Target prices for the other covered crops are kept the same in 2008 and 2009 as under the old farm bill; but beginning in 2010, the wheat target price is raised from $3.92 to $4.17 per bushel, while the soybean target price is raised from $5.80 to $6.00 per bushel. The counter-cyclical program would be extended to cover lentils, dry peas, and chickpeas beginning with the 2009 crop year.

For the first few years of the new farm bill, fixed and counter-cyclical payments would be paid out as under the old farm bill. Farmers would be able to request a partial fixed payment beginning with the December prior to the crop's planting, and the final balance paid at harvest (October). Partial counter-cyclical payments would be available at harvest, with the final balance due after the end of the crop marketing year, when the season-average market price has been determined. The payment schedule changes toward the end of the five-year farm bill period. For the 2012 crop year, fixed payments would not be made until harvest, while for the 2011 and 2012 crop years no partial counter-cyclical payments would be made—instead, all payments would be made after the crop marketing year is over.

These changes in the payment schedule will cause the payments to be delayed until at least October 2012, which is at the beginning of the 2013 fiscal year for the government. They also represent the "budget gimmicks" that the president has cited as part of the rationale for his threatened veto of the farm bill. There is no good policy-related reason to treat the 2011 and 2012 crop years any differently from the others, except to keep the payments off the books for the 2012 fiscal year for budget scoring purposes.

Marketing Loans

The proposed farm bill keeps the marketing loan program much like it has been, with some notable exceptions. Loan rates are kept at current levels for the 2008 and 2009 crops, and then are "rebalanced" in 2010 and beyond, with loan rates being raised for wheat, barley,and oats. There had been indications that the soybean loan rate would be raised as well, but that is not the case.

Perhaps the biggest change to the marketing loan program is that the generic certificate program appears to have been eliminated, but it also appears that there are no payment limits for marketing loan gains and loan deficiency payments. The two actions go hand in hand, because the certificate program provided a way for large producers to circumvent payment limits by putting their crop under loan, converting the loan to generic certificates while forfeiting the crop, and then exchanging the certificates for cash. This change probably makes sense for USDA because it spares them having to dispose of the physical commodity, but it also is another aspect of the bill that cannot be considered a "reform."

The marketing loan program also provides "economic adjustment assistance to users of upland cotton." This new program provides payments of three cents per pound to domestic users of upland cotton, and appears to be a partial replacement for the Step-2 Marketing Program, which was eliminated in response to a WTO complaint lodged by Brazil. The new program may well be needed by domestic mills, but it is highly likely to trigger another round of WTO litigation.

Average Crop Revenue Election (ACRE) Program

Perhaps the biggest feature of the commodity title, and one that has received surprisingly little attention recently, is a new program that would base support on revenues (production times price) instead of the traditional approach of basing support on price levels. Beginning with the 2009 crop year, farmers could elect to participate in the ACRE program, which would make payments to farmers based on their state's yield for a covered crop and the national average price of the crop. Unlike the counter-cyclical and marketing loan programs, the support level of the ACRE program would be based on the market price of the previous two years.

Farmers who enroll in the ACRE program would be required to give up their eligibility for the counter-cyclical payment program, and also have a 20% reduction in fixed annual payments and a 30% reduction in the marketing loan rates. Farmers would be able to enroll at specified times prior to any crop year between 2009 and 2012, and the decision is irrevocable. In other words, once you're in you're in, so farmers cannot get in and out of the program based on their market expectations for each year.

The ante for the ACRE program is fairly substantial, but given recent market prices, the potential payments could be rather large. Based on USDA's current outlook for the 2007 and 2008 crop years, the price component of the corn revenue equation could easily be $5 per bushel. The target revenue level would change every year in response to market conditions, but the revenue level can only change by 10% (up or down) from one year to the next.

Possible Outcomes for 2008 Farm Policy

Global Insight will have much more to say about the proposed 2008 farm bill if it is enacted. The House is scheduled to vote on the bill on Wednesday, May 14, with the Senate voting the next day. President Bush has already indicated that he will veto the bill, and there is no reason to believe he is bluffing. Therefore, it seems likely that the only way this bill will become law is via a Congressional override of the veto, which would require a two-thirds affirmative vote in both houses of the Congress. That certainly is possible, but is probably not the most likely outcome.