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2014 Farm Bill Drilldown: Subsidy Reform and Fair Competition

February 14, 2014


With the 2014 Farm Bill recently signed into law, NSAC is doing a blog series that delves into the details of the bill for sustainable food and farming systems.  This post discusses the highlights and the missed opportunities for commodity and crop insurance reform and agricultural market competition.  Previous “drill down” posts on a wide variety of farm bill topics can be found here.

I.  Crop Insurance

With crop and revenue insurance taking center stage as the most prominent and well-funded farm bill safety net programs, NSAC’s objectives for crop insurance programs and policies in this farm bill were two-fold: (1) to create appropriate and accessible risk management tools for all producers in all regions, particularly diversified farmers using sustainable systems as well as organic farmers, and (2) to reform existing crop insurance policies to foster family farms, eliminate wasteful spending, protect the productivity of American agriculture, and help support the next generation of family farmers.

A. Crop Insurance Access

NSAC’s farm bill platform put forth several proposals to improve crop insurance options for diversified and organic producers.  We are very pleased to report that the new farm bill contains several provisions that will enhance crop insurance options for diversified and organic producers, reducing barriers for these producers to access risk management products and leveling the playing field across agricultural sectors.

1. Whole Farm Insurance for Diversified Farming Operations – NSAC has long championed the need for risk management products that are appropriate for highly diversified farms.  Crop and revenue insurance policies exist for agricultural monocultures, but not diversified operations, which keeps diversified growers uninsured and at a competitive disadvantage.  Originally introduced as part of the Local Food, Farms, and Jobs Act, Whole Farm Diversified Risk Management insurance would meet this critical need by providing a nationally-available revenue insurance for diversified operations that would include, but not be limited to, specialty crops, mixed grain/livestock or dairy operations, and both organic and conventional farms.

We are happy to report that the final bill authorizes USDA to develop a whole farm revenue risk management product for diversified farms with at least a $1.5 million liability limit.  This product is to be available nationwide and include a strong diversification bonus.  This insurance option is an important step toward recognizing and rewarding farmers who use diversified systems to reduce risk and create environmental benefits.

The bill also contains an important provision allowing RMA to include coverage for the value of certain on-farm activities necessary to make a crop ready for market.  The Manager’s statement to the conference report specifies that this provision is meant to include incidental post-production processing activities that occur soon after harvest, including packing, packaging, washing, sorting, and other such activities that are essential to producing a marketable crop.  The statement recognizes that these activities do not add additional value to the crop other than making the crop market ready.  This provision opens the door to a workable crop insurance product that is attractive and accessible to diversified producers, including specialty crop growers, who are insuring their crop based on a fair market value that includes such processing.

RMA has already started drafting the policy, which is anticipated to be available in time for the 2016 crop insurance cycle, if not sooner.  NSAC has been providing comments and suggestions to RMA as the implementation process unfolds.

2. Organic Crop Insurance — NSAC’s farm bill platform put forth several important proposals to level the playing field for organic producers through changes and improvements to organic crop insurance.  At the time we issued our platform, USDA was imposing a discriminatory 5% surcharge for coverage on organic crops based on the assumption that organic production methods result in more risk.  NSAC worked hard to eliminate this penalty against organic growers and, in May of 2013, USDA announced the removal of the surcharge starting in the 2014 crop insurance cycle.

Organic producers have also faced a disadvantage because organic price elections have not been established for all insurable organic crops.  This means that should an organic producer suffers a loss, he or she would receive a payout rate at the conventional price, which is generally considerably lower than the organic price.  USDA has issued organic price elections for a few organic crops, but not all.

The Senate version of the farm bill required the completion of the organic price series within two years of enactment of the farm bill.  The House version made no mention of these needed improvements to organic crop insurance offerings.

We are also pleased to report that the final bill directs USDA to complete the series of organic price elections by the 2015 crop insurance year.  This timeline (the 2015 insurance year starts in July 2014) is likely too quick to expect USDA to be able to fully comply, but the message has nonetheless been delivered that rapid acceleration is both needed and expected.  This is incredibly important for organic producers, who with limited exceptions are stuck insuring crops at prices far below the organic premium.

B. Crop Insurance Subsidy Reform

Our platform for the farm bill also set forth basic proposals for crop insurance reform.  First, to ensure that crop insurance does not subsidize environmentally destructive behavior that increases risk within the operation and threatens long-term agricultural productivity.  Second, to place reasonable limits on the amount of subsidies that large farming operations receive, which would ensure that crop insurance provides a safety net for vulnerable small and mid-sized family farms and avoid inadvertently underwriting the expansion of already large farming operations.  Through our work on the Beginning Farmer and Rancher Opportunity Act of 2011, we also added a plank to improve crop insurance options for beginning farmers and ranchers.

1. Compliance and Sodsaver – A key component of NSAC’s farm bill platform was to require crop insurance subsidy recipients to adhere to the same conservation compliance requirements as beneficiaries of commodity, credit, and conservation programs.

Conservation compliance was decoupled from crop insurance in 1996, and NSAC has argued for both the reattachment of basic conservation requirements to the receipt of federal crop insurance subsidies, and for enacting a national Sodsaver provision to make producers who convert native prairie and grasslands to crop production ineligible for farm subsidies on that land.

We are very pleased to see conservation compliance reattached to crop insurance premium subsidies in the final bill.  Sodsaver was a partial win in the final bill – the provision is strong but is limited to only six states in the Prairie Pothole Region and therefore will not apply to some of the areas of our country that need it most.  For a deeper analysis of compliance and Sodsaver, read our conservation drill down on the subject.

2. Subsidy Limits and Means-Testing – We are disappointed the Farm Bill failed to include subsidy limits or even means testing for crop and revenue insurance premium subsidies.

Taxpayers currently subsidize over 60% of the cost of crop insurance premiums on average, including much higher subsidy levels for some of the most popular insurance products, and paid out over $7 billion dollars in premium subsidies in both FY 2011 and FY 2012.  Both before and after the passage of the 2014 Farm Bill, farmers, landowners, and investors in farms have and will continue to receive unlimited crop insurance premium subsidies on each and every acre and for every bushel of production without limit and regardless of their income or ability to pay.  This policy artificially underwrites and encourages the expansion of large farming operations, drives up land prices, and makes it increasingly difficult for young and beginning farmers to break into the market.

NSAC has long advocated for sensible reforms to crop insurance subsidies and, going into conference, the Senate-passed bill included an amendment voted in during floor debate that would have very modestly reduced crop insurance premium subsidies by up to 15 percentage points for farmers with an adjusted gross income over $750,000 (or $1.5 million for married couples filing separately).

The amendment, introduced by Senators Dick Durbin (D-IL) and Tom Coburn (R-OK), was approved by a strong bipartisan majority of the Senate in both 2012 and 2013, and would have required the wealthiest of farmers and farm investors — less than 1% — to foot just a little bit more of the cost of their crop insurance premiums themselves.  This provision also would have required USDA to make information on who receives these subsidies publicly available.  Lamentably, this very modest yet important step toward reform was left out of the final bill.  Even the basic reporting requirement was not included.

Meanwhile, the taxpayer cost of the overall crop and revenue insurance program was increased by an estimated $5.7 billion over the next 10 years, to an expected total of about $9 billion a year.  In addition to $3.4 billion over 10 years in new crop insurance costs for new cotton and peanut programs, an additional $1.7 billion is estimated to flow to a new Supplemental Coverage Option (SCO) that offers a higher level of guaranteed income protection for commodity crops receiving commodity subsidies under the farm bill’s new Price Loss Coverage program, itself estimated to cost over $13 billion over the coming decade.   The actual cost of these programs will depend both on sign-up rates and actual commodity market conditions over the next decade.  Some expert observers believe the cost of SCO in particular may be underestimated.  Time will tell.

3. Beginning Farmers – Both the House and Senate-passed bills included a 10 percent premium subsidy bonus for any farmer during the first five years they have a potentially insurable interest in crops or livestock, whether as an owner, tenant, or sharecropper.  This measure is retained in the final bill, at a projected cost of $261 million over the next decade.  Though we proposed a different way to provide and distribute this assistance, we are pleased nonetheless that beginning farmers are being recognized for the very first time within either the crop insurance or commodity titles of the farm bill as eligible for differential coverage.  For a detailed analysis of the new farm bill’s provisions for beginning farmers, see our beginning farmer drill down.

II. Commodity Program Reform

NSAC’s farm bill platform called for ending direct payments for the major commodity crops; reforming all commodity subsidies to provide reasonable and clear payment caps that provide a safety net for farming operations without subsidizing unlimited farm expansion and consolidation; lowering the total payment cap to $30,000 for all forms of payments based on market conditions; closing all loopholes to the payment cap system and requiring ongoing, substantial, and direct involvement with the farming operation to qualify for payments; retaining payments based on base acres (not actual planted acreage); and creating planting flexibility for fruit and vegetable production on base acres but with no subsidy payment.

With respect specifically to payment limit reform and targeting payments to working farmers by closing loopholes that make payment limits ineffective, we helped develop and champion the bipartisan Farm Program Integrity Act, a bill that eventually became part of both the House and Senate-passed farm bills.

A. Direct Payments and the New Program Options

The 2014 Farm Bill eliminates direct payments, finally ending an 18-year long experiment with paying commodity production incentives without regard to market conditions or farm income.  While popular with many landowners, direct payments have been roundly criticized since the very beginning by progressive farm groups, the press, and many policymakers and think tanks on both the left and the right.

In place of direct payments, the new bill builds on the counter-cyclical payment program and the average crop revenue payment program that existed alongside direct payments, ramping them up and turning them into the new Price Loss Coverage and Agriculture Risk Coverage options that farmers and other subsidy recipients will now have to choose between.  The Price Loss Coverage (PLC) option comes with an additional option of purchasing the subsidized revenue insurance to be called Supplemental Coverage Option (SCO), as well as the opportunity to update the yield history of the farm for PLC payment purposes.  The Agriculture Risk Coverage (ARC) option itself contains the option of choosing either farm-based coverage or area coverage.  In all cases, subsidized revenue insurance (or more traditional crop insurance for those who choose it) forms the foundational layer of commodity safety net support, with PLC/SCO and ARC added on on top.

Given the range of options and near-term choices commodity farmers are going to need to make, there will be a lot written in the agricultural press and by extension economists to inform those choices.  For early examples, see here and here.

B. Base Acres and Planting Flexibility

While both the House and Senate-passed farm bills geared their preferred version of commodity support to actual planted acres rather than historic base acres, the final bill emerging from the House-Senate conference retained a modified version of base acres.  NSAC had opposed the move to actual planted acres on environmental and other grounds, so we are pleased with this turnaround and will be watchful during implementation to ensure the best possible outcomes.

Another very positive breakthrough in the conference was the inclusion of a significant degree of planting flexibility for fruit and vegetable production on commodity program base acres.  Farms with commodity base acres will now be allowed to plant fruits and vegetables without any penalty up to the percentage of base acres that do not receive commodity support.  For Price Loss Coverage and for the county option for Agriculture Risk Coverage, that means up to 15 percent of base acres.  For the individual farm-based Agriculture Risk Coverage option, that means up to 35 percent of base acres.  Planting fruits and vegetables on base acres above those limits requires a 1:1 reduction in payment acres.

C. Payment Limit Reform

Perhaps the single most distressing outcome of the House-Senate conference that shaped the final farm bill was the near total elimination of the bipartisan payment limit and actively engaged in farming reforms that were included in both the House and Senate-passed farm bills.

In place of the $50,000 payment limit included the Farm Program Integrity Act, and ultimately included in both the House and Senate farm bills, the conference agreement created a $125,000 limit.  This limit — 150 percent larger than what was contained in the House and Senate-passed bills — includes marketing loan payments, for which the earlier bills had set a separate $75,000 limit.  Since no marketing loan payments will be made in the coming years, according to official budget projections, the $125,000 single limit effectively raises the payment limit for the Price Loss Coverage and the Agriculture Risk Coverage to very high, historically unprecedented levels.

The $125,000 limit is automatically doubled for married couples to $250,000 (and for peanut producers who also grow other commodities, doubled again), and then this statutory payment limit in turn can be multiplied again for each general partner in a farming operation determined to be “actively engaged in farming,” even if that engagement is extremely limited.  There is no limit to the addition of passive general partners who qualify as “actively engaged” through the “active personal management” loophole.  The US Government Accountability Office has issued numerous reports highlighting the abuses of the program and the legal loopholes used to dodge the farm bill’s payment limit.  For more information, see this fact sheet.

The House and Senate-passed farm bills closed the loophole by removing the management-only option but allowing each farming operation to include for payment one additional manager beyond those who are actually operating the farm.  The operators and manager together would all be eligible to receive payments, but not beyond a single payment limit worth of payments.  That loophole-closing provision was completely scrapped by the conference agreement.

Instead of closing the loophole and thereby making for an effective payment limitation – albeit at the super high level of $125,000 a year – the conference agreement gave limited discretionary authority to USDA to write new rules that could, possibly, make it a bit tougher to abuse the system and evade the limit.  However, in giving USDA the discretion to do so, the final bill also tied USDA’s hands in a way that quite likely makes effective outcomes impossible.

First, the bill prohibits USDA from closing any loopholes or fixing other problems with current regulations other than addressing the management loophole, thereby negating a variety of other loophole closing provisions contained in the House and Senate-passed farm bills.  Second, it directs USDA to consider how any new rules it may decide to issue would impact the “long-term viability” of mega farming operations.  Third, and most importantly, it prohibits USDA from closing the management loophole with respect to any siblings, spouses, ancestors, or descendants of any member of a farming operation.  Should USDA crack down on passive investors and general partners who are not related by blood or marriage to the primary beneficiary of the subsidies, those mega farm businesses can re-arrange their partnerships to include everyone in the extended family and thus continue to evade the payment limitation.

NSAC issued a statement on this issue as the conference negotiations were continuing and reaching a climax and again after the deal went down to remove subsidy reform from the bill.

III. A Win for Livestock Competition and Fair Practices

The 2008 Farm Bill for the first time (and so far the only time) contained a livestock title.  The title covered a wide array of issues and amended a number of federal laws governing livestock and poultry marketing, animal health, food safety, and other livestock issues.  Several of the most important provisions directed USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA) to develop regulations to implement the 1921 Packers and Stockyards Act, the Act which authorizes USDA to protect farmers and ranchers from unjust, unfair, deceptive, and fraudulent practices in livestock and poultry markets.  Ever since these important and protective provisions were included in the 2008 bill, however, powerful meat industry interests have worked to derail USDA’s efforts to comply with the law and protect vulnerable producers from concentrated market forces.

Following the 2008 bill, USDA undertook a rule-making in 2010 and finalized some rules relating to poultry contract practices, but each agricultural appropriations bill for fiscal years 2012, 2013, and 2014 have included legislative policy riders that restrict USDA’s ability to finalize the remaining GIPSA rules by prohibiting the use of any funds to complete them.

During the House Agriculture Committee mark up of the farm bill, the most restrictive and chilling GIPSA rider yet was incorporated into the House version of the farm bill by voice vote.  This provision not only would have prohibited USDA from finalizing the pending regulations from 2010, but also would have repealed the 2008 farm bill language, rescinded the poultry producer protection regulations that USDA had already finalized from the 2010 rulemaking, and placed a broad prohibition on USDA’s ability to issue any “similar regulation or policy,” in essence shutting down Packers and Stockyards Act enforcement.  The Senate version of the farm bill contained no similar provision.

In a great win for livestock and poultry producers, and despite significant pressure from the meatpacking industry, the final farm bill does not include any provisions to undermine USDA’s authority under the Packers and Stockyards Act.  This is a very significant victory – sometimes what is not in a bill is as important as what is in a bill.  Although removing the bad GIPSA rider from the agricultural appropriations process this year and in the future will require a vigilant campaign to protect the basic rights of contract farmers, we nonetheless can celebrate the defeat of one of the worst anti-regulatory amendments among the many added by the House Agriculture Committee to their version of the farm bill.  Many thanks to all the groups who signed on in opposition.


Categories: Commodity, Crop Insurance & Credit Programs, Competition & Anti-trust, Farm Bill


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