As we enter 2012, there are a lot of unknowns regarding the next Farm Bill, but one apparent known is that farm programs covered by the new legislation will be different from current programs. Budget pressures and political support are pushing farm programs in new directions.
For cotton, there is the unique challenge of resolving the longstanding trade dispute with Brazil. The potential implications of these pressures became evident during the extensive Farm Bill activity last fall.
The following attempts to highlight a few issues that producers should expect regarding this legislation.
The next Farm Bill will be designed with less money than current programs. Budgets and baselines always have been a factor in shaping the Farm Bill debate. However, in no previous Farm Bill has the debate been hostage to the budget situation in the manner dictated by the Budget Control Act.
The August ‘11 approval of the deficit reduction legislation established a process that will reduce funding for farm programs. The first phase of that process involved the establishment of a joint committee charged with trying to craft a $1.5 trillion deficit reduction package.
Contributions To Deficit Reduction
The House and Senate agriculture committees’ leadership suggested that Farm Bill programs would contribute $23 billion to the 10-year total of $1.5 trillion. For commodity programs, the cut would have resulted in a budget reduction of roughly one-third relative to the expected spending under current commodity programs.
However, the joint committee failed to meet its Nov. 23 deadline of developing a comprehensive package, and, as a result, the next phase, known as sequestration, has been triggered. Sequestration is a complicated mechanism through which automatic, across-the-board spending cuts are made, and those cuts are scheduled to begin on Jan. 2, 2013. However, across-the-board is a bit of a misnomer since a number of programs are exempt from sequestration.
Commodity support programs are not exempt, and, as a result, will be subject to reductions. Unfortunately, exact percentages or mechanisms are not known at this time, but sequestration simply reinforces the fact that farm programs under the new bill will offer less support than current programs.
The days of direct payments are numbered. Payments not tied to price or production have been a fixture of commodity programs since being first established in the 1996 Freedom to Farm legislation. These payments have served cotton producers well by providing confidence to agricultural lenders in times of volatile markets. In addition, direct payments are the most compliant with our international trade obligations.
However, high commodity prices have brought increased scrutiny to direct payments, particularly as they now represent the vast majority of projected farm program spending. Direct payments not only are falling victim to philosophical questions but are increasingly the target of budget hawks. It also is worth noting that direct payments were eliminated in last fall’s package of recommendations developed by the House and Senate agriculture committees.
Changes to cotton programs must resolve the Brazil case. As mentioned earlier, cotton faces the unique challenge of resolving the longstanding trade dispute with Brazil. As a reminder, a World Trade Organization (WTO) dispute panel ruled that the combined effects of the marketing loan, counter-cyclical payments (CCPs) and the Step 2 provision violated U.S. trade obligations.
While the Step 2 program was terminated in 2006, the United States still must make changes to the marketing loan and the CCP, and under an agreement between the United States and Brazilian governments, a resolution is expected with the development of the new Farm Bill.
This fact became a driving force behind the cotton industry’s deliberations and subsequent adoption of a farm policy position that expands the role of insurance programs in the overall safety net for cotton farmers.
An affordable revenue-based crop insurance program designed to cover shallow losses will best utilize reduced budget resources, direct benefits to producers who suffer losses resulting from factors beyond their control and build on existing crop insurance – thus ensuring no duplication while offering program simplification potential.
The industry also recommended the elimination of the target price and changes to the marketing loan that will allow the loan level to adjust lower in times of low prices.
Different Priorities For Crops
One size does not fit all crops and regions. While simplifying and streamlining farm programs should be objectives of the next Farm Bill, these should not dictate that one program is the answer for all crops and regions. Program commodities are characterized by dramatic differences in production practices, input costs, price volatility and weather risks.
As we’ve seen in the debate that occurred last fall, designing one program that effectively addresses those differences can be difficult at best. Ultimately, the farm program recommendations that emerged from last fall’s debate acknowledged those differences and contained a choice of programs for many commodities.
Expect a long and difficult debate. Although the unsuccessful joint committee process created unprecedented circumstances for a Farm Bill development, it offered opportunities to 1) develop the new legislation in a timeframe that would allow ample time for implementation and 2) avoid damaging amendments during floor debate.
Those opportunities are gone, and agriculture can expect a more traditional Farm Bill debate. If past debates are any indication, we can expect a lengthy and contentious process that gives critics numerous opportunities to impose harmful amendments.
That means a united and concerted effort from U.S. agriculture will be required to garner a successful Farm Bill – one that provides an effective safety net.
Gary Adams is the National Cotton Council’s vice president for economic and policy analysis. Contact him at email@example.com.