The 2007 US Farm Bill: Analysis of the USDA proposals Agricultural Trade Policy Analysis DG for Agriculture and Rural Development European Commission

The 2007 US Farm Bill:The 2007 US Farm Bill:Analysis of the USDA proposalsAnalysis of the USDA proposals

Agricultural Trade Policy AnalysisDG for Agriculture and Rural DevelopmentEuropean Commission

AGRI G5 USDA 2007 Farm Bill proposals 26 February 2007 2

What is a “Farm Bill”?What is a “Farm Bill”?

The process…– A “Farm Bill” formally signifies a proposal for US farm legislation– A Bill is introduced (in Congress) to replace expiring legislation– A Farm Act is the final legislation that reflects decision by Congress

…and its content– Farm legislation covers many areas (titles)

• ...a total of 13 were recently proposed by USDA, 10 are in current legislation

– Most USDA outlays (50-60%) are spent under Title IV - Nutrition …• ...mainly for food stamps, but also for school lunches and women’s programmes

– Farm support falls under Title I – Commodity Programmes…• …which covers both market price support and all cash payments

– Conservation (II), Rural Development (VI), Research (VII)… • ...are titles that have gained attention and some additional funding in 2002

– The Energy Title (IX) is essentially driving current debate… • …with oil prices above 70 $/barrel and corn prices above 4 $/bu in the foreseeable future


A reminder: components of US crop policiesA reminder: components of US crop policies

1996 Farm Act AMTA payments (PFC)

– decoupled, historical and declining

Loan programme– loan at loan rate (crop is collateral)

or

– loan deficiency payment = LR-P (but no loan, crop kept by farmer)

Other payments– ad hoc payments (MLA)

– crop insurance (for yield, price, or revenue loss)

2002 Farm Act Fixed payments

– decoupled, updated and fixed


or

– loan deficiency payment = LR-P (but no loan, crop kept by farmer)

Other payments– CCP = TP-DP-max(LR,P)

– crop insurance (for yield, price, or revenue loss)


Loan programme detailsLoan programme details

Eligibility requirements– Meet conservation requirements, report land use, meet quality standards– Have “beneficial interest” in crop on date of claim of loan or payment

Loan rates– Vary by county, and are based on rate of county where crop is stored

• could be adjusted for quality standards

– Loans are settled either by• repaying loan with interest (if price higher than loan rate plus interest)• receiving payment (marketing loan gain) if price below loan rate• forfeiting commodity to CCC

– Eligible producers who forgo loan may obtain a loan deficiency payment• LDP equals the LDP rate times quantity for which LDP is requested


Direct and counter-cyclical payment detailsDirect and counter-cyclical payment details

Eligibility requirements– producer has base acres and payment yields (historical support)– eligible commodities: cereals, oilseeds, rice, peanuts, cotton

Direct payments– Replace production flexibility contract payments (at similar rates)

• Soybeans and peanuts added to the list• DP = (85% of base acres) X (payment yield) X (DP rate)

Counter-cyclical payments– issued if effective price is below target price– effective price equals direct payment plus higher of

• average market price or national loan rate• CCP = target price – direct payment – max (LR, P)


US support policy instruments - maizeUS support policy instruments - maize

0

20

40

60

80

100

120

140

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$ per mt

Loan pmts CCP pmts Target P Loan rate Max CCP PFC/DP Farm P


US maize and the loan programmeUS maize and the loan programme

50

60

70

80

90

100

aoû

t-99

sep

t-99

oct-

99

nov

-99

déc

-99

jan

v-00

févr

-00

mar

s-00

avr-

00

mai

-00

juin

-00

juil-

00

aoû

t-00

sep

t-00

oct-

00

nov

-00

déc

-00

$/mt

farm price loan rate

LDP

MLG


US maize and the countercyclical programmeUS maize and the countercyclical programme

60

70

80

90

100

110

120

130

aoû

t-05

sep

t-05

oct-

05

nov

-05

déc

-05

jan

v-06

févr

-06

mar

s-06

avr-

06

mai

-06

juin

-06

juil-

06

aoû

t-06

sep

t-06

oct-

06

nov

-06

déc

-06

$/mt

target price effective target price farm price loan rate

LDP

CCP

DP

CCP


The source of US maize farm returns The source of US maize farm returns

0

30

60

90

120

150

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07e

$ per mt

Direct payment Farm price MLA/CCP Loan Payment


Main direction of USDA proposalsMain direction of USDA proposals

Structure of farm support remains– No dairy reform; minor sugar programme revisions – Loan rates to follow moving average of prices, with lower max ceiling

• For most crops, declines are small, but cotton and rice feel impact – Countercyclical support shifts from a price-trigger to a revenue trigger

• Per acre target revenue determines shortfall to be compensated• Yields for revenue trigger are updated, but payment yields remain

Effort to shift to decoupled support very timid– In general, increase for most crops are minor, except for cotton

It is now up to the US Congress to decide– First reactions indicate USDA got what it wanted, a basis for discussion…

• …in a debate that is essentially remains domestic and DDA-detached…• …but in which USDA plays a more active role in all Farm Bills since 1990


Main changes proposed by USDAMain changes proposed by USDA

2002 Farm Act Fixed payments

– decoupled


or– loan deficiency payment = LR-P

(but no loan, crop kept by farmer)

Countercyclical programme– Price shortfall trigger – CCP = TP – DP - max (LR, P)– current price triggers programme

2007 Farm Bill proposals Fixed payments

– variable increases in most crops

Loan programme– moving loan rate– basis 5-yr market price avg – maximum rate set at 1996 levels

Countercyclical programme– target revenue set per acre– shortfall based on (price x yield) – revenue yield updated– payment still based on old yield


(recent US farm Bills)

0

300

600

900

1200

1500

1800

96WHEAT

02 prop07 96MAIZE

02 prop07 96SOYBEANS

02 prop07 96COTTON

02 prop07 96RICE

02 prop07

$ per hectare

Direct payment Loan rate Target price

Implied area support for US cropsImplied area support for US crops


How to analyse the impact of USDA’s proposalsHow to analyse the impact of USDA’s proposals

Focus on commodity programmes– Identify main changes in loan and countercyclical programme – Ignore impact of changes at farm level (capping; pricing adjustments)– Identify national level implications

Focus on past– USDA proposals are driven by high price assumptions– US farm policy costly when prices are low– Assume 2007 USDA proposals applied in 2000-2005 period

Identify scenarios that cover several possibilities – Limit analysis on loan rate level and countercyclical revenue yield– Look into absolute price gap between LP/CCP and average price– Simulate new price gap if new LP/CCP rules applied


US wheat market and support pricesUS wheat market and support prices

0

40

80

120

160

200

240

Jan

-91

Jul-

91

Jan

-92

Jul-

92

Jan

-93

Jul-

93

Jan

-94

Jul-

94

Jan

-95

Jul-

95

Jan

-96

Jul-

96

Jan

-97

Jul-

97

Jan

-98

Jul-

98Ja

n-9

9

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-

01Ja

n-0

2

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

$/mt

farm price loan rate target price


US maize market and support pricesUS maize market and support prices

0

40

80

120

160

200

240

Jan

-91

Jul-

91

Jan

-92

Jul-

92

Jan

-93

Jul-

93

Jan

-94

Jul-

94

Jan

-95

Jul-

95

Jan

-96

Jul-

96

Jan

-97

Jul-

97

Jan

-98

Jul-

98Ja

n-9

9

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-

01Ja

n-0

2

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

$/mt



US soybeans market and support pricesUS soybeans market and support prices

0

60

120

180

240

300

360

Jan

-91

Jul-

91

Jan

-92

Jul-

92

Jan

-93

Jul-

93

Jan

-94

Jul-

94

Jan

-95

Jul-

95

Jan

-96

Jul-

96

Jan

-97

Jul-

97

Jan

-98

Jul-

98Ja

n-9

9

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-

01Ja

n-0

2

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

$/mt



US cotton market and support pricesUS cotton market and support prices

0

300

600

900

1200

1500

1800

2100

Jan

-91

Jul-

91

Jan

-92

Jul-

92Ja

n-9

3

Jul-

93Ja

n-9

4

Jul-

94

Jan

-95

Jul-

95

Jan

-96

Jul-

96

Jan

-97

Jul-

97Ja

n-9

8

Jul-

98Ja

n-9

9

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-

01

Jan

-02

Jul-

02Ja

n-0

3

Jul-

03Ja

n-0

4

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

$/mt



Simulation scenarios and their underlying assumptions

Variable Scenario 1 Scenario 2 Scenario 3 Scenario 4

Loan rate moving average moving average maximum rate maximum rate

CCP revenue yield 2002-06 average 1997-01 average 2002-06 average 1997-01 average

Note: Both yield and loan rate averages are Olympic averages.


Actual (USDA) and simulated US 8-crop payments Actual (USDA) and simulated US 8-crop payments

0

3

6

9

12

15

2002/03 2003/04 2004/05 2005/06

billion $

LP+CP actual LP+CP Scenario 1 LP+CP Scenario 2

LP+CP Scenario 3 LP+CP Scenario 4


Evolution of US AMS (1995-2006 crop years)Evolution of US AMS (1995-2006 crop years)

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e

billion $

Market Price Support Loan Programme Other Product SupportCounter-cyclical payments Insurance Subsidies Disaster PaymentsMarket Loss Assistance Other de minimis AMS ceiling


How do USDA proposals on Farm Bill and OTDS match?How do USDA proposals on Farm Bill and OTDS match? (Scenario 4)

0

5

10

15

20

25

30

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

billion $

Market Price Support Loan Programme Other Product SupportInsurance Subsidies Other de minimis CCPOTDS (US prop.) AMS ceiling (US prop.)


Tentative conclusionsTentative conclusions

Loan programme savings if USDA proposals accepted– Maize and cotton main recipients in future– Are wheat and soybeans about to move out of loan support?

Countercyclical support changes nature– Generally becomes less costly when prices are low…

• …provided that price shocks are internal (high yields)– New revenue target insulates US farmers from markets even more…

• …but costs of programme could become less variable

USDA Farm Bill proposal not enough for DDA– Market price support for dairy and sugar needs to decrease– Effective product-specific disciplines important in new blue box

• Concentration of CCP in maize and cotton a real risk

– Other type of support (crop insurance) also important in overall equation


ANNEXES

The 2007 US Farm Bill:The 2007 US Farm Bill:Analysis of the USDA proposalsAnalysis of the USDA proposals


1. US total loan programme payments 1. US total loan programme payments

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 2001 2002 2003 2004 2005

billion $

Corn Wheat Soybeans Cotton Rice Peanuts Sorghum Barley


1a. US loan deficiency payments 1a. US loan deficiency payments

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 2001 2002 2003 2004 2005

billion $



1b. US marketing loan gains1b. US marketing loan gains

0.0

0.2

0.4

0.6

0.8

1.0

2000 2001 2002 2003 2004 2005

billion $



1c. US certificate exchange gains 1c. US certificate exchange gains

0.0

0.5

1.0

1.5

2.0

2.5

2000 2001 2002 2003 2004 2005

billion $



2. Total MLA/countercyclical support 2. Total MLA/countercyclical support

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000 (MLA) 2001 (MLA) 2002 (CCP) 2003 (CCP) 2004 (CCP) 2005 (CCP)

billion $



3. Total decoupled support 3. Total decoupled support

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000 2001 2002 2003 2004 2005

billion $


Documents

The 2007 US Farm Bill: Analysis of the USDA proposals Agricultural Trade Policy Analysis DG for Agriculture and Rural Development European Commission