March 20, 2017
Editor’s Note: As a lead up to the 2018 Farm Bill, around which discussions and debate in Congress have already begun, the National Sustainable Agriculture Coalition is previewing some of the major programs and policies advocates need to know in order to effectively engage. The third post in our series, “Path to the 2018 Farm Bill,” covers the commodities title, focusing on support programs for staple, non-perishable, and generally storable commodities (e.g., corn, soybeans). Future blogs will address programs for value-added and organic agriculture, local and regional food systems, and beginning and underserved farmers and ranchers.
If the farm bill is long freight train, commodity support programs could be seen as one of two very powerful engines – the second being the Nutrition Title (predominantly the Supplemental Nutrition Assistance Program), which we covered in our first Path to the 2018 Farm Bill post. Since the 1930s, farm bills have focused largely on farm commodity program support for staple crops such as corn, soybeans, wheat, rice, peanuts, cotton, and dairy. Following the 2014 Farm Bill, many in agriculture proclaimed that commodity programs had been supplanted by crop insurance programs as the new mainstay of the farm safety net. Commodity prices were fairly good at the time, and hence that was a relatively easy position to take. Since that time, however, commodity prices and farm income have declined, and farm interest groups are likely to try and shift the balance between the programs once again.
How We Got Here
Over the decades, the approach to the “farm safety net” has experienced significant shifts. In the early farm bill days (farm bills began in the 1930s) through to the 1980’s, farm policy generally involved removing commodities from the market to bolster prices. The supply management tools used included quotas, land idling programs, and grain reserves. In the 1970s and 1980s, the policy shifted to emphasize payments and income support more than strict price support, though with continuing use of supply control mechanisms.
All this changed with the 1996 Farm Bill; supply management tools were disbanded entirely and direct payments were introduced. Direct payments, designed to be crop neutral and non-distorting so as to comply with international trade obligations, sent annual checks to farmers regardless of whether farm prices/income was high or low. This way of doing this did not have much staying power, however, and even before the next farm bill was written policymakers had begun bringing back payments that fluctuated with market conditions. By the time we reached the 2014 Farm Bill direct payments had been tossed out entirely, and two different types of fluctuating payments were enacted – the Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) programs.
PLC and ARC are commodity support programs that can be used alone or in conjunction with traditional crop insurance options. Crop insurance covers yield loss and price volatility, while ARC best helps with price volatility, and PLC is most generous when there are extended periods of low price. Farmers can participate in crop insurance and ARC or PLC, but cannot participate in both ARC and PLC. The 2014 Farm Bill included a provision that required farmers to elect to participate in either PLC or ARC for the life of the bill (five years). Most farmers elected ARC because commodity prices were high during the sign up period.
Just as the views on and structure of the commodity programs have evolved over the years, so too has the federal crop insurance program. While federally backed crop insurance has been around since 1938, it only started to become a major part of the farm safety net in 1994, when participation was made mandatory in order to qualify to take part in the commodity programs and receive disaster assistance. The requirement to purchase crop insurance was soon repealed, but by 1998, 180 million acres were already covered. Coverage further increased in 2000 when the Agriculture Risk Protection Act significantly increased crop insurance’s subsidy levels. As a result, farmers have moved from buying only catastrophic coverage (which covered 50 percent of a farmer’s losses), to significantly higher levels of coverage today (75 percent coverage level is currently the most popular).
For many years crop insurance was available only for a small handful of commodity crops, and thus had little appeal for diversified growers. Today, however, – thanks in large part to the advent of the Whole Farm Revenue Protection Program (WFRP) in the 2014 Farm Bill – crop insurance is available for around 120 crops (including organic options). In contrast, commodity programs are restricted to a dozen or so commodity crops. There is still a long way to go, however before conventional, diversified, and organic growers see equal access to appropriate and effective risk management tools. The National Sustainable Agriculture Coalition (NSAC) fought for the inclusion of WFRP in the 2014 Farm Bill, and is committed to continuing to advocate for a federal crop insurance program that supports all farmers and functions in a transparent and accountable way for the American taxpayer.
Issues to Watch for in the 2018 Farm Bill
At the request of the cotton industry, the 2014 Farm Bill did not make cotton eligible for ARC and PLC. Instead, the bill created a new, special crop insurance program for cotton to take the place of traditional commodity program support. The result was the STAX program, which is a shallow loss crop insurance program with a high subsidy. STAX provides an 80 percent subsidy on the premium for coverage from 75 percent to 90 percent. This program was created in part to avoid a violation of World Trade Organization rules concerning subsidies that distort planning decisions – in 2010 the US agreed to pay Brazil more than $100 million a year to avoid retaliation for 2005 and 2008 findings that subsidization of cotton in the United States amounted to a violation of WTO rules; the US and Brazil reached an agreement in 2014 that ended these payments.
Unfortunately for the cotton industry, STAX enrollment has not met expectations. Only about 20 percent of cotton acres have been enrolled in STAX. Part of STAX’s struggle to reach a reasonable level of enrollment has been prolonged periods of low cotton prices; insurance does not pay out when there are extended periods of low price. As a result, the cotton industry sought to have cottonseed be designated as an oilseed, a re-designation that would allow cotton producers to once again utilize ARC and PLC. Former USDA Secretary Tom Vilsack determined that this was not legally possible; therefore this (potentially extremely expensive) proposition remains left to the next farm bill to resolve.
The 2014 Farm Bill also resulted in major changes for dairy farmers. The bill eliminated several dairy support programs designed to address different regional issues and replaced them with the Dairy Margin Protection Program (MPP). MPP is designed to provide a payment to participating dairy farmers when the difference between the “all milk price” and the average feed cost falls below $4.00. To participate in the basic version of this program, farmers must pay a $100 service fee; they can also pay a premium and buy up more coverage. At the highest premium, a producer receives a payment if difference between the all milk price and feed price falls below $8.00.
Problems have plagued MPP since its inception. First, the program has provided few payments to the farmers that have participated. The feed cost differential in 2015 hovered around $8.00, which meant that only those farmers who had bought the highest level of coverage had a chance of receiving a payment. The number of farmers with the highest coverage levels represented only a small fraction of the ~25,000 who had signed up for the program in 2015, as a result only about $1 million in payment went out in 2015.
Because of the program’s low pay out rate, enrollment plummeted. In 2016, the number of dairy farmers purchasing buy up coverage was cut by more than half, falling from 56 to 23 percent. Overall, enrollment in MPP has never exceeded half of all dairy farms.
The dairy industry is now seeking changes to encourage participation in the program and thereby increase the likelihood of a payment. The most significant change they are seeking is the restoration of a 10 percent cut to the formula used to calculate feed costs. During debate on the 2014 Farm Bill, the formula was altered to reduce the overall cost of the program, which was originally projected to cost over $1 billion per year. The industry is also seeking adjustments in the premium levels to encourage greater participation. Any fix to the MPP is likely to add significantly to the program’s price tag and the growing list of expensive changes to the 2014 Farm Bill.
Shift to PLC
Given the extended period of low commodity prices farmers have been struggling with, and the expectation that low prices will continue into the near future, there is a great likelihood that we will see a major shift from the ARC program to PLC (assuming both programs are continued in the 2018 bill). Years of high prices leading up to the 2014 Farm Bill resulted in the vast majority of corn and soybean farmers (and over half of wheat farmers) electing to participate in ARC because of its higher likelihood of providing a payment. Because ARC uses a running average to set payment prices (and prices have remained low over the last several years) and the PLC price is set in the farm bill through a political process, PLC has increasingly become the more attractive option.
What this shift will mean for the cost of the entire farm bill is unclear. However, given the potential cost implications for a farm bill that is already short on funding, it is an issue that NSAC will follow closely.
Payment Limits and Actively Engaged Requirements
To be eligible to receive commodity program benefits, the USDA requires an individual must provide significant contributions to the farming operation to be considered “actively engaged” in farming. According to the USDA: “Contributions can consist of capital, land, and/or equipment, as well as active personal labor and/or active personal management. The management contribution must be critical to the profitability of the farming operation and the contributions must be at risk.”
In addition to the actively engaged requirement, there is also an annual per farm limit to the size of payments. The 2014 Farm Bill versions approved by the House and Senate contained reforms to the actively engaged requirement and payment limit: a $50,000 payment cap on ARC and PLC benefits was proposed as were the elimination of loopholes in the actively engaged standard. Despite strong bipartisan support for these changes, negotiations between the chairs and ranking members of the House and Senate Agriculture Committees stripped the inclusion of the democratically enacted provisions and replaced them with a weak rule that continues to allow for the per farm payment to be effectively unlimited.
The issue of payment caps will surely be debated again as part of the 2018 Farm Bill negotiations. Significant bipartisan majority support continues to exist for effective payment limits, but opposition to effective reform from House and Senate Agriculture Committee leadership remains strong.
Farmers’ commodity payments are based on their plantings on “base acres,” a set of acres assigned to a particular commodity crop measured at a certain time in the past. Planting flexibility is an option that allows farmers to plant other commodity crops on their base acres; this is particularly useful for farmers who want to use cover crops on their base acres as a way to improve soil health.
Planting flexibility has existed since the 1990s, but during the last farm bill debate there was a strong push to return to payments based on “actual planted acres.” Under that system, payments to farmers would be calculated according to what they actually plant versus what they had planted in the past. In the end, Congress stuck with base acres and planting flexibility.
Planting of fruits and vegetables on base acres is treated differently than commodity crops. For most commodity producers, up to 15 percent of a farm’s base acres can be planted to fruits and vegetables without the producer suffering any commodity payment penalty.
In conjunction with removing cotton from the commodity programs (other than marketing loans), the 2014 Farm Bill converted cotton base acres to generic acres, meaning that cotton farmers can receive payments for other crops planted on former cotton base. The bill also provided a high reference price for peanuts, leading many farmers to plant generic acres with peanuts. As a result, the cost of the PLC program for peanuts has skyrocketed well above the original 2014 Farm Bill’s estimated cost for the program.
The next farm bill is very likely to include measures to scale back the cost of the peanut program. We are likely to also see the debate over planting flexibility vs. actual planted acres arise again.
Crop Insurance Subsidy Limits
While the farm bill has long included nominal payment caps on commodity subsidies, there have never been any caps on crop insurance premium subsidies – despite the fact that crop insurance subsidies have far exceeded those for commodity programs for years. In order to have a functioning payment limit on either program, a proposed cap must be paired with a strong actively engaged provision to ensure that subsidies are targeted at active farmers and cannot be evaded. This issue is sure to receive considerable attention in the coming farm bill debate, as will a variety of other proposed approaches to address the structural inequities and cost of the crop insurance program.
The Future of Commodity and Crop Insurance Programs in the 2018 Farm Bill
Excluding the Nutrition Title, the commodity and crop insurance programs represent the bulk of farm bill spending. Given the cost to American taxpayers, and the fact that farmers and ranchers are currently struggling under years of low commodity prices and market uncertainty, these programs will continue to receive a great deal of focus as the farm bill debate ramps up. Though these programs are among the most complex of all farm bill programs, understanding them is a critical part to actively and effectively engaging in the development of the 2018 Farm Bill.