The Farm Bill: What is the The Farm Bill: What is the Current Status?Current Status?

Paul D. MitchellPaul D. Mitchell

Assistant ProfessorAssistant Professor

Agricultural and Applied EconomicsAgricultural and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

Western Wisconsin Ag Lenders Western Wisconsin Ag Lenders ConferenceConference

January 10, 2008January 10, 2008

Goal TodayGoal Today

What is the Farm Bill’s current status?What is the Farm Bill’s current status? Current legislative state of farm billCurrent legislative state of farm bill

What’s new for corn and soybeans?What’s new for corn and soybeans?

Review changes in crop insurance Review changes in crop insurance programprogram

Current Farm Bill StatusCurrent Farm Bill Status

Administration's/USDA Farm Bill Administration's/USDA Farm Bill released in early 2007released in early 2007

House passed the “Food, Nutrition, House passed the “Food, Nutrition, and Bioenergy Act of 2007” in July and Bioenergy Act of 2007” in July 20072007

Senate passed the “The Food and Senate passed the “The Food and Energy Security Act of 2007” in Energy Security Act of 2007” in December 2007December 2007

What’s next?What’s next?

Congress reconvenes January 21, 2008Congress reconvenes January 21, 2008 Conference committee will begin Conference committee will begin

meeting to settle the differencesmeeting to settle the differences We will get a farm bill through We will get a farm bill through

Congress probably this springCongress probably this spring Will the president sign it or veto it?Will the president sign it or veto it?

Administration advisors note “hidden tax Administration advisors note “hidden tax increases” to create budget offsets and increases” to create budget offsets and “gimmicks” to hide true cost“gimmicks” to hide true cost

Where do the House and Senate Where do the House and Senate agree?agree?

Keep direct payments, countercyclical Keep direct payments, countercyclical payments and loan deficiency paymentspayments and loan deficiency payments

Create option to receive revenue-based Create option to receive revenue-based payments payments

Lower adjusted gross income eligibility capsLower adjusted gross income eligibility caps Increased support and research for Increased support and research for

horticultural/specialty crops and organic aghorticultural/specialty crops and organic ag Increase funding for conservation programsIncrease funding for conservation programs Increase funding for crop-based biofuelsIncrease funding for crop-based biofuels

Income Support ProgramsIncome Support Programs

Both bills continue the three income Both bills continue the three income support programs from 2002 Farm support programs from 2002 Farm Bill: Bill: Loan deficiency payments (LDP)Loan deficiency payments (LDP) Counter cyclical payments (CCP)Counter cyclical payments (CCP) Direct payments (DP)Direct payments (DP)

Administration/USDA farm bill also Administration/USDA farm bill also supported these programssupported these programs

Small ChangesSmall Changes LDP’s: Increased loan rates for wheat, LDP’s: Increased loan rates for wheat,

barley, oats, minor oilseedsbarley, oats, minor oilseeds Wheat: $2.75 to $2.94Wheat: $2.75 to $2.94 Oats: $1.33 to $1.39Oats: $1.33 to $1.39

CCP’s: Increased target prices for wheat, CCP’s: Increased target prices for wheat, barley, oats, soybeans, and other oil barley, oats, soybeans, and other oil seeds, decreased for cottonseeds, decreased for cotton Soybeans: $5.80 to $6.00Soybeans: $5.80 to $6.00 Wheat: $3.92 to $4.20Wheat: $3.92 to $4.20 Oats: $1.44 to $1.83Oats: $1.44 to $1.83

Direct Payments: same as 2002 Farm BillDirect Payments: same as 2002 Farm Bill

Planting FlexibilityPlanting Flexibility As before, Base Acres for Direct Payments As before, Base Acres for Direct Payments

and CCP’s cannot be planted to trees, and CCP’s cannot be planted to trees, perennial plants, fruits, vegetablesperennial plants, fruits, vegetables

Important in WI, as it limits new grain farmers Important in WI, as it limits new grain farmers from planting processing vegetablesfrom planting processing vegetables Some exceptions: double cropping, previous Some exceptions: double cropping, previous

historyhistory Processors have trouble getting farmers for Processors have trouble getting farmers for

processing vegetable contractsprocessing vegetable contracts Planting flexibility on base acres looseningPlanting flexibility on base acres loosening

Pilot in IN: plant processing tomatoes on up to Pilot in IN: plant processing tomatoes on up to 10,000 base acres annually10,000 base acres annually

Senate’s revenue support program allows Senate’s revenue support program allows processing crops on 10,000 base acres in WI and processing crops on 10,000 base acres in WI and more statesmore states

Payment LimitsPayment Limits Current Farm BillCurrent Farm Bill

$360,000 max with 3-entity rule and spouse$360,000 max with 3-entity rule and spouse < $2.5 million AGI, unless > 75% farming< $2.5 million AGI, unless > 75% farming

Both drop 3 entity rule, must be “natural Both drop 3 entity rule, must be “natural person”person”

HouseHouse $250,000 max with spouse only$250,000 max with spouse only < $1 million AGI, $500,000 if < 67% farming< $1 million AGI, $500,000 if < 67% farming

SenateSenate $200,000 max with spouse only$200,000 max with spouse only < $1 million AGI for 2009, unless > 67% farming< $1 million AGI for 2009, unless > 67% farming < $750,000 AGI after 2009, unless > 67% farming< $750,000 AGI after 2009, unless > 67% farming

Conservation ProgramsConservation Programs Both House and Senate maintain or Both House and Senate maintain or

increase funding for existing conservation increase funding for existing conservation programprogram

Little change: CRP, WRP, GRP, WHIPLittle change: CRP, WRP, GRP, WHIP Disagree on which to flat fund and which to Disagree on which to flat fund and which to

increaseincrease Big differences for Environmental Quality Big differences for Environmental Quality

Incentives Program (EQIP) and Conservation Incentives Program (EQIP) and Conservation Security Program (CSP)Security Program (CSP) House adds $1.9 billion to EQIP, Senate flat House adds $1.9 billion to EQIP, Senate flat

fundsfunds Senate adds $2 billion to CSP, House flat fundsSenate adds $2 billion to CSP, House flat funds

Compromise likely, with mix of the twoCompromise likely, with mix of the two

Bioenergy/BiofuelsBioenergy/Biofuels Both continue almost all energy programs Both continue almost all energy programs

and increase funding for most of themand increase funding for most of them Both require federal agencies to continue Both require federal agencies to continue

to purchase bio-based energy productsto purchase bio-based energy products Both continue grants program to finance Both continue grants program to finance

cost of developing and constructing cost of developing and constructing biorefineries and biofuels production plantsbiorefineries and biofuels production plants House mandates $800 million, Senate $300 House mandates $800 million, Senate $300

millionmillion Bioenergy Program (producer subsidies): Bioenergy Program (producer subsidies):

Currently $150 million, Senate mandates Currently $150 million, Senate mandates $245 million, House $1.4 billion$245 million, House $1.4 billion

Horticultural/Specialty CropsHorticultural/Specialty Crops

Increase state Block Grants about $145 Increase state Block Grants about $145 millionmillion Allows states to fund marketing, research, Allows states to fund marketing, research,

education, pest/disease management, etc.education, pest/disease management, etc. $30-35 million increase to expand/promote $30-35 million increase to expand/promote

farmers marketsfarmers markets Increase fruits, vegetables, and nuts bought Increase fruits, vegetables, and nuts bought

for nutrition programs $200-$225 million for nutrition programs $200-$225 million annuallyannually

Quadruples cost sharing funding for farms Quadruples cost sharing funding for farms transitioning or adopting organic practicestransitioning or adopting organic practices

Summary So FarSummary So Far

Same direct payments, CCP’s and Same direct payments, CCP’s and LDP’sLDP’s

Lower payment limits and lower AGI Lower payment limits and lower AGI eligibility requirementseligibility requirements

More money for specialty crops & More money for specialty crops & organic agricultureorganic agriculture

Increase funding for biofuels and Increase funding for biofuels and current conservation programscurrent conservation programs

Pause for QuestionsPause for Questions

These all represent modifications of These all represent modifications of existing programs and policiesexisting programs and policies

We haven’t discussed new directionsWe haven’t discussed new directions Any Questions?Any Questions?

New DirectionsNew Directions

Both House and Senate create alternatives for Both House and Senate create alternatives for price support programs as a new “safety net”price support programs as a new “safety net”

House: Revenue-Based Counter Cyclical House: Revenue-Based Counter Cyclical Payments Payments In lieu of CCP’s, keeps LDP’s and Direct PaymentsIn lieu of CCP’s, keeps LDP’s and Direct Payments

Senate: Average Crop Revenue Payments Senate: Average Crop Revenue Payments In lieu of CCP’s, LDP’s and Direct PaymentsIn lieu of CCP’s, LDP’s and Direct Payments

Both are voluntary but irrevocable choicesBoth are voluntary but irrevocable choices House: one-time sign-upHouse: one-time sign-up Senate: annual sign-up (but irrevocable)Senate: annual sign-up (but irrevocable)

House’s Revenue-Based House’s Revenue-Based Counter Cyclical PaymentsCounter Cyclical Payments

NationalNational target revenue specified for each target revenue specified for each program cropprogram crop

If actual national revenue for a crop is less If actual national revenue for a crop is less than this target revenue, farmer per-acre than this target revenue, farmer per-acre support payments equal the differencesupport payments equal the difference

Example: National Target revenue for Corn Example: National Target revenue for Corn is $344.12/ac. If actual national revenue is is $344.12/ac. If actual national revenue is $300, farmers receive $44.12/ac$300, farmers receive $44.12/ac

Creates a revenue floor at the Creates a revenue floor at the nationalnational levellevel

House’s Revenue-Based House’s Revenue-Based Counter Cyclical PaymentsCounter Cyclical Payments

National Target RevenuesNational Target Revenues Corn = $344.12Corn = $344.12 Soybeans = Soybeans =

$231.87$231.87 Wheat = $149.92Wheat = $149.92 Oats = $92.10Oats = $92.10

Actual National RevenueActual National Revenue National average yieldNational average yield Maximum of (a) national average market Maximum of (a) national average market

price received by producers during the 12-price received by producers during the 12-month marketing year and (b) the loan ratemonth marketing year and (b) the loan rate

YearYear

YieldYield

PricePrice

Actual Actual RevenueRevenue

Target Target RevenuRevenu

ee

PaymentPayment

20020022

129.129.33

2.322.32 299.98299.98 344.12344.12 44.1444.14

20020033

142.142.22

2.422.42 344.12344.12 344.12344.12 0.000.00

20020044

160.160.44

2.062.06 330.42330.42 344.12344.12 13.7013.70

20020055

148.148.00

2.002.00 296.00296.00 344.12344.12 48.1248.12

20020066

149.149.11

3.043.04 453.26453.26 344.12344.12 0.000.00

20020077

153.153.00

?????? > 344.12> 344.12 344.12344.12 0.000.00

Historical Yields, Prices and Historical Yields, Prices and Revenues and Revenue-Based Revenues and Revenue-Based Counter-Cyclical Payments for Counter-Cyclical Payments for

CORNCORN

YearYear

YieldYield

PricePrice

Actual Actual RevenueRevenue

Target Target RevenuRevenu

ee

PaymentPayment

20020022

38.038.0 5.535.53 210.14210.14 231.87231.87 21.7321.73

20020033

33.933.9 7.347.34 248.83248.83 231.87231.87 0.000.00

20020044

42.242.2 5.745.74 242.23242.23 231.87231.87 0.000.00

20020055

43.043.0 5.665.66 243.38243.38 231.87231.87 0.000.00

20020066

42.742.7 6.436.43 274.56274.56 231.87231.87 0.000.00

20020077

41.341.3 ?????? > 231.87> 231.87 231.87231.87 0.000.00

Historical Yields, Prices and Historical Yields, Prices and Revenues and Revenue-Based Revenues and Revenue-Based Counter-Cyclical Payments for Counter-Cyclical Payments for

SOYBEANSSOYBEANS

SummarySummary Corn: Low yield in 2002, low prices in 2004 and Corn: Low yield in 2002, low prices in 2004 and

2005 would have triggered payments2005 would have triggered payments Soybeans: Low yield and low prices in 2002 Soybeans: Low yield and low prices in 2002

would have triggered paymentswould have triggered payments Given current futures prices, only low Given current futures prices, only low nationalnational

yields would triggered payments, which would yields would triggered payments, which would drive prices higher, making payments unlikely drive prices higher, making payments unlikely

Payments based on national prices and yieldsPayments based on national prices and yields No formal process for updating target revenuesNo formal process for updating target revenues

Senate’s Average Crop Revenue Senate’s Average Crop Revenue PaymentsPayments

Structured similar to GRIP crop insuranceStructured similar to GRIP crop insurance GRIP: if county revenue less than the chosen GRIP: if county revenue less than the chosen

revenue guarantee, farmer receives revenue guarantee, farmer receives indemnityindemnity

If actual If actual statestate revenue is less than state revenue is less than state revenue guarantee, farmer payment revenue guarantee, farmer payment equals the differenceequals the difference

Creates a revenue floor at the Creates a revenue floor at the statestate level, level, with the guarantee updated each yearwith the guarantee updated each year

Senate’s Average Crop Revenue Senate’s Average Crop Revenue PaymentsPayments

Guarantee = 90% of expected state yield Guarantee = 90% of expected state yield per per plantedplanted acre x pre-planting crop price acre x pre-planting crop price

Expected state yield: linear trend of yield Expected state yield: linear trend of yield per per plantedplanted acre for NASS data 1980-2006 acre for NASS data 1980-2006

Pre-planting crop price: average of pre-Pre-planting crop price: average of pre-planting prices for crop revenue insurance planting prices for crop revenue insurance policies for current and past two yearspolicies for current and past two years Basically 3-year moving average of APH priceBasically 3-year moving average of APH price

Guarantee updated annually based on Guarantee updated annually based on technology trends and market conditionstechnology trends and market conditions

Senate’s Average Crop Revenue Senate’s Average Crop Revenue PaymentsPayments

Actual Yield: USDA-NASS state yield Actual Yield: USDA-NASS state yield per per plantedplanted acre acre

Harvest Price: Same as used for crop Harvest Price: Same as used for crop revenue insurance policiesrevenue insurance policies Average CBOT settle prices for month Average CBOT settle prices for month

previous to harvest month futures previous to harvest month futures contractcontract

November average of December cornNovember average of December corn October average of November soybeansOctober average of November soybeans

Actual state revenues: multiply these Actual state revenues: multiply these twotwo

YearYear

ExpecteExpected Yieldd Yield

Pre-Pre-Plant Plant PricePrice

Revenue Revenue GuaranteGuarante

ee

ActuaActual l

YieldYield

ActuaActual l

PricePrice

Actual Actual RevenuRevenu

ee

PaymePayme

ntnt

20020022

103.6103.6 2.432.43 226.59226.59 107.3107.3 2.522.52 270.30270.30 0.000.00

20020033

104.9104.9 2.402.40 226.56226.56 98.098.0 2.262.26 221.57221.57 4.994.99

20020044

106.2106.2 2.522.52 240.80240.80 98.298.2 2.052.05 201.36201.36 39.4439.44

20020055

107.5107.5 2.522.52 243.71243.71 112.9112.9 2.022.02 228.15228.15 15.5615.56

20020066

108.7108.7 2.582.58 252.49252.49 109.7109.7 3.033.03 332.39332.39 0.000.00

20020077

110.0110.0 2.992.99 296.07296.07 144.1144.1 3.583.58 408.39408.39 0.000.00

Historical Yields, Prices and Historical Yields, Prices and Revenues and Average Crop Revenues and Average Crop Revenue Payments for CORNRevenue Payments for CORN

YearYear

ExpecteExpected Yieldd Yield

Pre-Pre-Plant Plant PricePrice

Revenue Revenue GuaranteGuarante

ee

ActuaActual l

YieldYield

ActuaActual l

PricePrice

Actual Actual RevenuRevenu

ee

PaymePayme

ntnt

20020022

39.739.7 4.834.83 172.56172.56 43.443.4 5.455.45 236.69236.69 0.000.00

20020033

40.140.1 4.814.81 173.58173.58 27.227.2 7.327.32 199.00199.00 0.000.00

20020044

40.540.5 5.495.49 200.11200.11 33.433.4 5.265.26 175.80175.80 24.3124.31

20020055

40.940.9 5.845.84 214.97214.97 43.243.2 5.755.75 248.29248.29 0.000.00

20020066

41.341.3 6.146.14 228.23228.23 43.743.7 5.935.93 259.34259.34 0.000.00

20020077

41.741.7 6.606.60 247.71247.71 38.738.7 9.759.75 275.24275.24 0.000.00

Historical Yields, Prices and Historical Yields, Prices and Revenues and Average Crop Revenues and Average Crop

Revenue Payments for Revenue Payments for SOYBEANSSOYBEANS

SummarySummary

Corn: Unexpected low harvest prices Corn: Unexpected low harvest prices with average or below trend yields in with average or below trend yields in 2003-2005 would have triggered 2003-2005 would have triggered paymentspayments

Soybeans: only in 2004 did below Soybeans: only in 2004 did below trend yields occur with unexpected low trend yields occur with unexpected low harvest prices, which would have harvest prices, which would have triggered paymentstriggered payments

Comparing the Two Comparing the Two ProgramsPrograms

Three major differences between themThree major differences between them

1) House and Senate’s Safety Nets 1) House and Senate’s Safety Nets provide different types of protection provide different types of protection

2) Basis Risk for House’s program2) Basis Risk for House’s program

3) Momentum Effect for Senate’s 3) Momentum Effect for Senate’s programprogram

Comparing Safety NetsComparing Safety Nets House program: Absolute Revenue Floor House program: Absolute Revenue Floor

unaffected by markets and tech. trendsunaffected by markets and tech. trends When revenue is low, receive paymentsWhen revenue is low, receive payments Protects vs. low revenue Protects vs. low revenue as govt. defines itas govt. defines it

Senate program: Relative Revenue Floor Senate program: Relative Revenue Floor responding to markets and tech. trendsresponding to markets and tech. trends When revenue lower than expected by tech. When revenue lower than expected by tech.

trends and futures prices, receive paymentstrends and futures prices, receive payments Protects vs. Protects vs. unexpectedlyunexpectedly low revenue low revenue

Comparing Safety NetsComparing Safety Nets Senate: Farmers plant knowing payments Senate: Farmers plant knowing payments

will come only if revenues lower than will come only if revenues lower than expectedexpected

If expected revenue high at plantingIf expected revenue high at planting House: Farmers plant knowing payments are House: Farmers plant knowing payments are

unlikelyunlikely Senate: Payments more likely to comeSenate: Payments more likely to come

If expected revenue low at plantingIf expected revenue low at planting House: Farmers plant, knowing payments will House: Farmers plant, knowing payments will

come if low revenues occur as expectedcome if low revenues occur as expected Senate: Payments less likely, since low revenue Senate: Payments less likely, since low revenue

already expectedalready expected

Basis Risk DifferencesBasis Risk Differences

House uses National RevenueHouse uses National Revenue Senate uses State RevenueSenate uses State Revenue Farm revenue tracks state revenue Farm revenue tracks state revenue

closer than national revenuecloser than national revenue More “basis risk” with House programMore “basis risk” with House program More likely receive payments when More likely receive payments when

needed with Senate programneeded with Senate program

Momentum EffectMomentum Effect Senate uses three-year moving average Senate uses three-year moving average

of expected pre-planting prices, so slow of expected pre-planting prices, so slow to respond to rapidly changing marketsto respond to rapidly changing markets

High pre-plant futures prices for 2-3 High pre-plant futures prices for 2-3 years and then a sharp dropyears and then a sharp drop Senate revenue guarantee will remain high, Senate revenue guarantee will remain high,

though expected revenue at planting is lowthough expected revenue at planting is low Low pre-plant futures prices for 2-3 Low pre-plant futures prices for 2-3

years and then a sharp increaseyears and then a sharp increase Senate revenue guarantee will remain low, Senate revenue guarantee will remain low,

though expected revenue at planting is highthough expected revenue at planting is high

SummarySummary

House: “Revenue-Based Counter House: “Revenue-Based Counter Cyclical Payments” and Senate: Cyclical Payments” and Senate: “Average Crop Revenue Payments”“Average Crop Revenue Payments”

Historical Analysis of 2002-2007Historical Analysis of 2002-2007 Both averaged about same (House Both averaged about same (House

higher)higher) Absolute vs. Relative revenue floorAbsolute vs. Relative revenue floor Basis Risk and Momentum EffectsBasis Risk and Momentum Effects

Quick Highlights: Changes in Quick Highlights: Changes in Federal Crop Insurance Federal Crop Insurance

ProgramProgram Farm Bill: Both use crop insurance to save Farm Bill: Both use crop insurance to save

money in order to pay for other programsmoney in order to pay for other programs Cut A&O subsidy by 2-3 percentage pointsCut A&O subsidy by 2-3 percentage points Changes re-insurance requirementsChanges re-insurance requirements Double cost of CAT policiesDouble cost of CAT policies Creates almost $1 billion in savingsCreates almost $1 billion in savings

USDA’s Farm Bill had Supplemental USDA’s Farm Bill had Supplemental Deductible Coverage and House Ag Deductible Coverage and House Ag committee had Supplemental GRP: maybe committee had Supplemental GRP: maybe revive to counter a presidential veto?revive to counter a presidential veto?

Crop Insurance Changes Crop Insurance Changes ComingComing

Combo Policy: Released in 2009Combo Policy: Released in 2009 One basic policy with multiple optionsOne basic policy with multiple options Combines APH, CRC/RA, GRP, GRIPCombines APH, CRC/RA, GRP, GRIP No longer sell APH, CRC, RA, GRP, GRIP, No longer sell APH, CRC, RA, GRP, GRIP,

IPIP Will mean RA-like policy for WI (finally)Will mean RA-like policy for WI (finally)

AGR-Lite and AGR combined into AGRIAGR-Lite and AGR combined into AGRI Whole farm revenue insurance that can Whole farm revenue insurance that can

combine with crop-specific policiescombine with crop-specific policies Released in 2010Released in 2010

Crop Insurance Changes Crop Insurance Changes ComingComing

Biotech Yield EndorsementBiotech Yield Endorsement Approved Sept 12, 2007Approved Sept 12, 2007 If plant triple stack (Bt CB, Bt RW, RR) on If plant triple stack (Bt CB, Bt RW, RR) on

at least 75% of corn, premium reduction at least 75% of corn, premium reduction for APH/CRC/RA (up to 23% decrease)for APH/CRC/RA (up to 23% decrease)

Piloted in IA, MN, IL, and IN starting in Piloted in IA, MN, IL, and IN starting in 20082008

Expect expansion if proves popularExpect expansion if proves popular

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied Economics

Office: (608) 265-6514Office: (608) 265-6514

Cell: (608) 320-1162Cell: (608) 320-1162

Email: pdmitchell@wisc.eduEmail: pdmitchell@wisc.edu

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm