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Path to the 2012 Farm Bill: Senate Markup – Commodity and Crop Insurance Subsidy Provisions

May 4, 2012


Note to Readers: This is the tenth in a series of posts on the 2012 Farm Bill reported out of the Senate Agriculture Committee on April 26.

Commodity Title

The main storyline of the commodity title emerging from Senate Agriculture Committee markup of the 2012 Farm Bill is the elimination of direct payments and counter-cyclical payments and the creation of a new replacement program to be known as Agriculture Risk Coverage (ARC) payments.  ARC builds on and replaces the Average Crop Revenue Election (ACRE) program option from the last farm bill.  ARC would cover wheat, corn, sorghum, barley, oats, rice, soybeans, other oilseeds, pulse crops (dry peas, lentils, chickpeas), peanuts, and possibly popcorn.

The marketing loan program would continue without change, including the possibility of the government making loan deficiency payments if prices should fall to  low levels.

Cotton would be given its own special program known as Stacked Income Protection Plan (or STAX).  Just prior to markup, a target or reference price for cotton and an acreage cap were both removed from the plan.

The Committee bill does not include the National Farmers Union proposal for a new type of farmer-owned grain reserve they call the Market Driven Inventory System.

ARC Basics

ARC payments guarantee 89 percent of the moving multi-year average revenue benchmark.  Within ARC, there are two coverage options.  The producer may choose county coverage or individual farm coverage.  The choice is made one time and will lock the producer into the coverage level chosen for five years.  Those choosing county average coverage will get paid on 80 percent of their planted acres, while those choosing the more expensive individual farm coverage will get paid on 65 percent of their planted acres.   The 65 and 80 percent coverage levels came by way of an expensive amendment proposed by Senator Baucus (D-MT) during markup which raised the original levels by five percent.

For rice and peanuts only, rather than calculating from a moving average market price, the bill includes a price prescribed in statute below which coverage cannot fall, making coverage for rice and peanuts somewhat of a hybrid between ARC and the current counter-cyclical payment program with its fixed, statutory price protections.  The rice and peanut reference prices were added to the bill in the days immediately before markup.

Unlike direct payments, which were paid as a fixed amount regardless of whether prices or farm revenue was high or low and regardless of whether the crop was planted or not, ARC payments will be made when revenues (price times yield) fall below a moving market average.  Also unlike direct payments, which were paid on historic “base” acres, ARC will pay based on actual planted acres.

Flexibility

Among other things, these changes mean that the new payments will no longer be considered “green box” or fully trade compliant under international trade rules as was the case with direct payments.  At home, the changes also mean that farmers who have utilized current commodity “flexibility” rules to convert crop base acres to grass-based agriculture or to use a portion of base acres for non-program crops in order to implement resource-conserving crop rotations, will now be left with no commodity program benefits for land they “flexed” and on which until now have received direct payments.

While the farmers who adopted resource-conserving crop rotations will no longer receive any payments on the forage, cover, and green manure crops in their rotations, the Senate Committee bill does include such “flexed” acres in the definition of land eligible for the new ARC program.  ARC acres cannot exceed average acres planted to program crops in 2009-2012, except that acres that were flexed into non-program crops for rotation purposes or that were left fallow to conserve moisture may be included in the average.  Thus those who flexed acres into resource-conserving crop rotations are not penalized under the new program in terms of total program crop acres.  However, they only receive ARC support if that land in the future is planted to the program crop.

The clear incentive under the new program, based as it is on actually planted acres, will be to grow nothing but program crops supported by the new ARC program.  While provision was made to count acres that were flexed for rotation purposes as eligible acres under ARC, no provision was made for payments or any type of transition plan for producers who used flex provisions to improve their conservation and environmental performance.  Those farmers are left high and dry unless they convert their resource-conserving crops into resource-depleting program crops.

With respect to a different flexibility issue, the current planting flexibility restrictions prohibiting fruits and vegetables from being planted on program cropland (under most circumstances) will also no longer apply under ARC.  Should a producer want to use a portion of his or her former program base acres for vegetable production, there is now no penalty under the Senate Committee bill.  In previous farm bill debates, a variety of proposals to allow farmers to plant specialty crops on program base acres provided they would forgo any payment were met with fierce resistance from the specialty crop industry and were rejected.  In contrast, under the Senate Committee-passed bill, there is in essence an unlimited flex potential for fruit and vegetable production.

Payment Caps

ARC payments are limited to $50,000 per year for single farmers and $100,000 a year for married farmers, with the exception of peanut farmers who, if they grow peanuts as well as another program crop may receive up to $100,000 per year ($200,000 if married).  These limits are higher than the existing direct payment caps of $40,000/$80,000 but lower than the existing counter-cyclical payment caps of $65,000/$130,000 (each of which is doubled in the case of peanuts).

There is no good explanation for why payment caps should double based on marital status; it is simply a carryover from previous law.  Elimination of the doubling allowance would improve program fairness and also increase budgetary savings.  The same goes for the extra special doubling for peanuts.

The Committee bill includes an amendment put forth by Sen. Chuck Grassley (R-IA) and backed by NSAC to limit the currently unlimited number of “managers” a farm can have, each of whom is eligible for payments up to the cap, to a single farm manager per farm operation.  Under current law and its wide open “management” loophole, mega farms collect multiple times the payment cap through passive investors, landowners, and relatives and employees who are counted as farm managers.  Under the new language, one manager that is not doing actual farm labor can qualify, but only if they are the only person qualifying the farm, they are only qualifying a single farm, and they are not in combination with others qualifying multiple “farms” that are operating with the same equipment, labor or management.

This is a different approach to payment limit reform than the approach in the Grassley-Johnson Rural America Preservation Act marker bill (S. 2217), but one that should be nearly as effective.  NSAC support for the farm bill will hinge in part on whether this provision remains intact.

The Committee bill fails to provide any limit on marketing loans, marketing loan gains, or loan deficiency payments.  If prices fall dramatically and these payments kick back in, there will be no limit at all on the amount of benefits any one farm can receive in any given year.

With the new STAX program for cotton, which moves cotton production incentive support funding from the commodity title to the crop insurance title, cotton will no longer have any payment limit whatsoever.  Subsidies for cotton alone will be made without limit on every last acre a corporation or general partnership can lay their hands on.  The only commodity title program left with relevance to cotton will be marketing loans, which also have no cap under the Senate Committee bill.

As with STAX, the Committee bill fails to provide any caps or limitations on crop insurance premium subsidies for any commodity.  Under the proposal, as under current law, the taxpayer is called on to pay the majority of the farmers’ premiums on every last acre and every last bushel, bale, or pound of commodity, regardless of the size of the farm or the wealth of the beneficiary.

AGI

The Committee bill combines the current separate farm and non-farm adjusted gross income (AGI) thresholds for participation in commodity programs (but not crop insurance programs) at $750,000 AGI (based on a three-year average).  For most married couples, this would double to $1.5 million AGI.  Adjusted gross income, especially amongst wealthy taxpayers, can be manipulated from year to year to avoid eligibility limits such as these, including through the purchase of additional farmland, herds, equipment and related costs that get deducted as part of the adjustment of income process.

Conservation Requirements

The Senate Committee bill applies the Highly Erodible Land and Wetlands conservation requirements to the new ARC program and continues it for the marketing loan programs.  The bill also prohibits commodity program benefits on land that is native sod or for which the producer cannot substantiate that the ground has ever been tilled.  This latter “sodsaver” principle was partially applied with respect to crop insurance subsidies, but the former HEL and wetland requirements were not attached to crop insurance subsidies.  NSAC supports the Senate sodsaver compromise, but strongly opposes the refusal to extend HEL and wetlands conservation requirements to insurance subsidies.  Read more on this subject in our earlier post.

Commodity and Crop Insurance Funding

According to Congressional Budget Office estimates of the Committee bill, the totality of the changes made to the commodity title will save $17.6 billion over the course of the next decade relative to what would have been spent if current law continued without any changes.  Whether or not any actual savings occur will depend entirely on the accuracy of the CBO predictions of what commodity prices and yields will be over the course of those ten years.  Often in the past, the CBO estimate of commodity title costs have been considerably less than the actual cost of the program when viewed in hindsight.

To create a fair assessment of costs, the commodity title cost estimates must be combined with the crop insurance title cost estimates.  Crop insurance subsidies are now larger than commodity subsidies and will remain so.  CBO estimates that crop insurance will now cost the taxpayer over $9 billion a year, versus under $5 billion a year for commodity and disaster payments.

The CBO estimate for the crop insurance title includes a new $3.2 billion 10-year cost for the new cotton STAX program, a new $239 million 10-year cost for a special new peanut revenue insurance option, and a new nearly $700 million 10-year cost for a new supplemental coverage option for all crops to cover up to 85 percent of individual yield or 95 percent of area yield.  CBO also estimates the insurance title will save $2.5 billion over 10 years as participation in the new ARC program on the commodity side drives producers to lower their insurance coverage.  The net effect is a projected 10-year additional cost of $2.75 billion for the new crop insurance title.

Putting both sets of subsidy programs together, the combined project 10-year savings for the commodity and crop insurance titles is $14.9 billion, or less than a 10 percent reduction relative to a hypothetical continuation of current law.

Whole Farm Revenue Insurance

NSAC has been championing whole farm revenue insurance for diversified farms throughout the recent farm bill debate.  This was a key provision included in the Local Farms, Food, and Jobs Act (S.1773, H.R.3286).  We applaud Chairwoman Debbie Stabenow (D-MI) for including this provision in the new farm bill reported out of Committee.

As was the case with the draft farm bill prepared last fall for the ill-fated congressional super committee process, the crop insurance title of the Senate Committee bill includes a directive to the Federal Crop Insurance Corporation to develop a whole farm risk management insurance plan that would allow diversified crop and livestock farmers to qualify for insurance that would pay an indemnity if actual gross farm revenue fell below 85 percent of average gross farm revenue.

The Corporation is encouraged to provide for diversification-based enhanced benefits to reflect the important risk management benefits that accrue from crop and enterprise diversification.  The Corporation is also encouraged to include coverage for the value of packing and packaging that is required to move the crop off the farm.

This new insurance product would not replace the existing Adjusted Gross Revenue (AGR) and AGR-Lite products, but it does improve on them and may ultimately replace them as a product of choice, especially as the expectation is that the new Whole Farm Risk Management Insurance would be available nationwide, rather than in just certain states and certain counties.

The one change that was made to the provision between last fall and Senate markup was the addition of a $1.5 million liability limit.  This is a considerably lower limit than is the case for AGR though similar to the one for AGR-Lite.

Organic Crop Insurance

The Local Farms, Food, and Jobs Act also contains two improvements to crop insurance for organic producers.  Organic producers currently face the double penalty of being forced to pay a five percent surcharge for insurance coverage and then, should disaster strike, being forced to accept conventional prices rather than the usually higher organic price in the calculation of indemnity payments.  The 2008 Farm Bill directed the Department to make progress on correcting these biases, and some limited progress has been made, but for the bulk of organic crops the situation remains unchanged.

Unfortunately, the Senate Committee bill does not make any progress on this front.   For more on organic farming provisions in the new Senate bill, read our earlier post.


Categories: Farm Bill, Risk Management


2 Responses to “Path to the 2012 Farm Bill: Senate Markup – Commodity and Crop Insurance Subsidy Provisions”

  1. [...] in order to grow crops.”  The NSAC blog covered this important change as well, saying: The Senate Committee-passed bill caps [Agricultural Risk Coverage] payments at no more than $50,000 per farm per year, and also [...]

  2. [...] Crop Insurance and Commodities Eliminating direct payments to farmers, the new Farm Bill creates a replacement program, crop insurance, for farmers: Agriculture Risk Coverage (ARC). The Senate markup on the Commodities title incentivizes farmers to only grow crops supported by the new ARC program. [...]

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