Economists weigh effects of opening the farm bill

When the Food Security And Rural Investment Act of 2002 became law, U.S. farmers had reason to believe they had a farm policy they could count on at least until 2007.

But when that law passed, the government still had a budget surplus. As 2005 sputters to life, that surplus has long disappeared, leaving a huge deficit and calls to cut programs that appeared safe from the budget axe.

“Opening the farm bill is a term we hear a lot,” says Texas A&M University Extension economist Joe Outlaw. “It has already been opened up somewhat, with cuts in the Conservation Security Program and a delay in implementing the COOL (Country of Origin Labeling) legislation.”

Outlaw and James Richardson, co-directors of Extension Agriculture and Food Policy at College Station, discussed ramifications of opening the farm bill during the recent Texas Commodity Symposium in Amarillo, held in conjunction with the Amarillo Farm And Ranch Show.

The goal, Outlaw says, is to find changes in programs that will hurt farmers the least. They say available tools include target prices, loan rates, direct payments, payment fraction and payment limitations.

“Cuts in farm spending, because of budget reconciliation, are likely,” Outlaw says. “Reconciliation affects only mandatory spending and agriculture has a lot of those. A key is that the president has taken an aggressive stance on making tax cuts permanent. That's costly.”

Outlaw and Richardson develop models, based on a 10-year baseline, to determine how cuts in certain aspects of the farm program will affect producers.

“We used a 2005 baseline to score projected changes,” Outlaw says. A 2004 baseline would result in different numbers since prices in 2004 were “significantly higher than for 2005.”

A major challenge for anyone tweaking the farm bill, both economists say, is the thought that went into devising the law in the first place.

“It's a well-crafted law and programs are inter-related,” Outlaw says. Tinkering with one commodity or one aspect of the program could result in serious and perhaps unintended changes in another program.

Richardson and Outlaw expect no changes for the 2005 crop. Impact likely will occur in 2006.

They also say that a record year for farm income makes agriculture a big target for budget cutters. They caution that their models are predicated on moving targets. “Prices (for commodities) change every day so our numbers are not concrete,” Outlaw says.

“We want to get an idea of what various changes will mean to the farmer,” Richardson says. “We want to evaluate the effect on net income.”

He says their models estimate how changes in target prices, direct payments and payment fractions would change farm income potential. In some instances, decreasing one payment type would actually increase farm income as another payment goes up, based on how the law and payment structures were created.

Richardson says they worked on the assumption that agriculture would take a 10 percent cut. “That's a pessimistic view,” he says.

“Decreasing the direct payment rates actually increases the counter cyclical payment,” he says. “With the direct payment at zero, the counter cyclical rate hits its maximum and actually increases government payments. Reducing loan rates also increases counter cyclical payments.”

Reducing the payment fraction takes the biggest chunk out of farm income.

Richardson says a number of changes would achieve a 10 percent savings but cautions against across the board cuts.

“We run into equity issues,” he says. “Across the board payment reductions (a 4 percent target price reduction for all crops, for instance) may be an easy way to make the cuts but it may not be fair (to all commodities).”

Surveys across the country indicate how farmers prefer to take their cuts. A majority prefers no cuts at all. The second choice for Texas would be a 2 percent reduction in the target price and no direct payment. Third would be a 3 percent target price cut. The last would be reduction in the payment fraction.

Richardson says wheat areas prefer a target price cut. Cotton regions like a 2 percent cut in the target price and no direct payment.

“Farmers in Arkansas and North Carolina would decrease the direct payment and increase the counter cyclical,” Richardson says. “In that scenario, they make more money. More than half of U.S. rice farms would do away with direct payments and cut target prices by 2 percent.”

“Our results vary with different baselines,” Outlaw says, “and equity issues may arise. Also, a 10 percent reduction in farm program spending hits larger farmers harder than smaller ones. The easiest way to achieve a 10 percent reduction is to reduce the payment fraction but no farm prefers that. Reducing payment fraction makes a big impact on income every year.”

Richardson and Outlaw say their studies develop models but farmers can't expect concrete numbers from these evaluations. They hope to give producers and legislators an idea of the magnitude of proposed cuts before those cuts begin to affect farm income.

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