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Farm policy and disaster aid programs: The path looking forward

Farm policy and disaster aid programs: The path looking forward

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Five standing or permanent disaster programs were established by the 2008 Farm Bill but were only funded through the end of 2011.
Five standing or permanent disaster programs were established by the 2008 Farm Bill but were only funded through the end of 2011.

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Published by: American Enterprise Institute on May 06, 2013
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1
CHOICES
1stQuarter201328(1)
The magazine of food, farm, and resource issues
1st Quarter 2013 • 28(1)
©1999–2012 CHOICES. All rights reserved. Articles may be reproduced or electronically distributed as long as attribution to
Choices
and the Agricultural &Applied Economics Association is maintained.
Choices
subscriptions are free and can be obtained through http://www.choicesmagazine.org.
AAEA
Agricultural & AppliedEconomics Association
A publication of theAgricultural & AppliedEconomics Association
Farm Policy and Disaster Aid Programs: ThePath Looking Forward
Vincent H. Smith and John P. Hewlett
 JEL Classifcation: H30, Q18Keywords: Agriculture, Policy, Subsidies
F
ive standing or permanent disaster programs were es-tablished by the 2008 Farm Bill but were only undedthrough the end o 2011. In 2012, thereore, while theve programs remained on the legislative books, withoutunding they had become vacuous as vehicles or providing disaster aid to armers and ranchers, at a time when theCorn Belt, exas, Oklahoma and other mid-Western statesexperienced severe drought. For producers in the drought-stricken regions and without crop insurance, the nancialconsequences were harsh. In the context o the current de-bate o the 2013 Farm Bill, thereore, we examine what islikely to happen with respect to a new arm bill and disas-ter aid policy over the next ve years. Tere appears to bestrong support or continuing disaster aid loan programsand disaster programs or livestock operations. However,not least because o the availability o other lucrative gov-ernment programs—including ederal crop insurance—and a near record-high level o arm incomes in 2012, thepermanent or standing crop disaster program establishedby the 2008 Farm Bill—the Supplemental Revenues As-sistance Payments (SURE) program—appears to have beenpermanently discontinued.
Disaster Aid in the 2012 Debate over Farm Policy
Between May and July 2012, with respect to the livestock sector, the Congressional agriculture committees indicatedthey were willing to oer some disaster aid relie to the ag-ricultural sector. Both the Senate, in a bill passed by the en-tire body, and the House Agriculture Committee proposednew unding or the our disaster aid programs targetedat livestock, arm-raised sh, and tree and orchard enter-prises. Te eort oundered in late July 2012 when, withsupport rom anti-poverty and environmental lobbies con-cerned about nutrition and conservation program unding,the agricultural lobby argued that the disaster aid measuresbe included in a comprehensive arm bill package. Tey hoped that the Midwest drought could be used as a meanso obtaining a ve-year arm bill that would involve only relatively modest cuts to arm subsidies.Te House leadership, however, chose not to bring thearm bill proposed by the House Agriculture Commit-tee to the oor or a vote beore the 2012 summer recess.Congress also accomplished very little in September andOctober with respect to any legislation beore the Novem-ber presidential and congressional elections. During thesubsequent lame-duck session, the Congressional ocus was largely on taxation and overall spending issues asso-ciated with the so-called “scal cli,” a set o mandatory tax increases and spending cuts authorized by Congress inthe Budget Control Act o 2011 to take place on January 1, 2013, i a substantial decit reduction package was notauthorized beore that date. Te last-minute compromisenegotiated by Senator Mitch McConnell and Vice Presi-dent Joe Biden on January 3, 2012, included an extensiono the 2008 Farm Bill provisions through September 30,2013, but only or programs with baseline unding. Nonew resources, thereore, were provided or the disaster aidprograms established in 2008.
 
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CHOICES
4rdQuarter201227(4)
The House and Senate Disaster AidProposals
Funding would have been reestab-lished or our “permanent” disasteraid programs by the Senate and Houseor 2012 and, most likely, 2013. Tey included the Livestock Indemnity Program (LIP); the Livestock ForageProgram (LFP); the Emergency Assis-tance or Livestock, Honey Bees, andFarm-Raised Fish Program (ELAP);and the Orchard and Nursery ree Assistance Program (AP). Apartrom AP, the disaster aid programsto be renewed were targeted at ad-dressing loss o orage and excessivemortality and morbidity rates inlivestock operations. However, theSURE program that provided disasteraid or crops was excluded rom the2012 Senate and House agriculturalcommittees’ disaster aid proposals, asit has been in more recent 2013 FarmBill proposals, and appears to havebeen permanently discontinued.Te omission o the SURE pro-gram was linked to three main issues.First, most broad-based agriculturaland commodity groups argued thatCongress needed to develop a new arm bill that renewed the livestock-and tree-oriented disaster programs,but urged the adoption o shallow loss or new quasi price support pro-grams to provide an improved “armsaety net” or crops. Second, theSURE program was initially scoredat about $450 million a year by theCongressional Budget Ofce (CBO),but proved to be much more expen-sive over the 2008-2011 period or which it was unded, involving over$2 billion in expenditures in its rstyear, largely because o the requency  with which counties were declared tohave experienced disasters (Becker-man and Watts, 2012).Tird, in 2012, over 90% o armers in the Corn Belt purchaseda ederally subsidized multiple-perilrevenue insurance product with whatis called a “harvest price option” toprotect themselves against crop lossesat relatively high levels o coverage. As a result, they received more in-come rom insurance indemnities orcrop losses and rom the marketplaceor the crops they were able to har-vest than they expected when they planted their crops, even i they ex-perienced a major crop loss becauseo the drought. Te reason: the “har-vest price option” increases a arm’srevenue coverage as illustrated in theexample Harvest Price Option Insur-ance box shown below. Tis is exactly  what happened or crops like corn,soybeans, and wheat in 2012. Short-alls in expected yields resulted in a “natural hedge” o higher crop pric-es whose eects were embedded inthe indemnities received by armers who experienced insured crop losses.Policy makers understood what hadhappened and, thereore, were reluc-tant to provide additional disaster aidunds or crop producers.
The Policy Backdrop to a 2013Farm Bill
Congresss path to a arm bill in 2013continues to be difcult, in part be-cause some politically inuentialgroups are strongly opposed to cur-rent levels o spending on arm sub-sidies, not least because most o thesubsidies go to large and relatively  wealthy arm households (Goodwin,2011; Gardner and Wright, 1995).Delays in the development o armbills are not new phenomena. Farmlegislation scheduled or 1995 be-came the 1996 Freedom to Farm Act while the arm bill scheduled or2007 did not arrive until May 2008. What makes the current hiatus dier-ent is the broader political and mac-roeconomic context within whichthe (now) 2013 Farm Bill is being developed.Since early 2011, in relation toall existing and any new programsinvolving ederal expenditures, theoverarching ocus in Congress andthe White House has been on decitreduction. In the House, the Repub-lican leadership appears to have beenconcerned with reducing spending onmost programs while protecting out-lays in what the Republican caucushas viewed as critical areas. Anotherchallenge or arm interest groups hasbeen the act that, along with otherleading members o the House andSenate, House Speaker Rep. JohnBoehner’s legislative history could beinterpreted as reecting skepticismabout the need or arm subsidies. Forexample, he has never voted in avoro a arm bill.In addition, the White House andthe Senate Democrat leadership, as well as Minority Leader Rep. Nan-cy Pelosi in the House, have consis-tently opposed substantial cuts to the
The Harvest Price Option Insurance Product
Consider the ollowing example o how the harvest price option multiplemultiple-peril insurance product works. Te projected price or a bushel o corn in Adair County, Iowa, at the 2012 Spring sign-up date was $5.68 butthe approved harvest price or the contract in the Fall o 2012 was $7.50,an increase o 34%. Using the corn utures market and adjusting or basis, a armer located in that county with an expected yield o 200 bushels wouldhave expected a per-acre revenue o $1,136 when the crop was planted inthe spring. However, i the armer purchased an 80% percent coverage con-tract and experienced a total loss as a result o the drought, then the armer would have received a per-acre indemnity check or $1,200, equal to the160 bushels or which losses were paid multiplied by the payment rate o $7.50 per bushel. Te armer also saved some operating costs because thearmer neither had to harvest nor market a crop.
 
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CHOICES
4rdQuarter201227(4)
and the disaster set-aside programthat allows armers to deer the re-payment o interest and principal onFarm Service Agency (FSA) loans incounties declared as disaster-aid-el-igible by either the President or theSecretary o Agriculture. Tey alsoinclude the Non-Insured Crop Disas-ter Assistance Program (NAP) man-aged by FSA that has been availableor many years. Under this program,armers can obtain coverage againstcatastrophic losses or crops that can-not be insured through the ederalcrop insurance program. All three o these programs, along  with the Secretary o Agriculture’s au-thority to allow haying and grazing on lands enrolled in the Conserva-tion Reserve Program, are likely tobe retained in a new arm bill, notleast because they typically involvevery modest annual outlays. Many producers also view the subsidiesthey receive through the Direct Pay-ments program as a critical part o theederal arm nancial saety net, andclearly crop insurance subsidies are widely used as both a way o increas-ing arm incomes and managing armlevel income risk.nutrition programs included in thearm bill proposals. Further, a consid-erable proportion o Republicans inthe House serve districts that includeurban as well as suburban constitu-ents. Tey, too, may be reluctant tovote or substantial reductions in theSupplemental Nutrition AssistanceProgram (SNAP) and the ederalschool meals programs.Finally, a broad coalition o inter-est groups has been ormed to lobby or substantial reductions in armsubsidies. Tese range rom organi-zations such as the Environmental Working Group and Bread or the World, which are concerned aboutprotecting unding or conservationand nutrition programs, to the Heri-tage Foundation and Americans orax Reorm, which simply want tosee lower levels o government spend-ing. Tus, in the 2013 Farm Bill de-bate, largely because o the broaderocus on decit reduction, the tradi-tional players—arm-based organiza-tions, agribusiness lobbies, poverty groups, and environmental lobbies—have been augmented by some new players with very dierent objectivesand vocierous Congressional constit-uencies that include some tea-party representatives.
The Current Farm Subsidy Budgetand the Future of CurrentlyFunded Disaster Aid Programs
Federal arm programs require ed-eral unds and so the scope o thoseprograms is undamentally linked tothe budget Congress is willing to pro-vide to the House and Senate agricul-tural committees. Farm bill spending is scored at about $100 billion a yearover the period 2013-2017 underthe programs authorized by the 2008Farm Bill by the CBO. However, i nomajor changes can be made to spend-ing on SNAP and school lunch andbreakast programs, which seems likely to be the case, about $77 billion willbe unavailable as a source o potentialCongressional budget cuts.Tereore, any substantial budgetcuts are likely to come rom the re-sidual $23 billion in expected annualarm bill outlays on arm subsidy,conservation, research and develop-ment, and other programs. As shownin able 1, these include the DirectPayments program (scored by CBOat about $5 billion a year), the Coun-tercyclical Payments program (about$200 million), the Milk IncomeLoss Contract (about $200 million),the Average Crop Revenue (ACRE)program (about $650 million), theloan rate program (negligible out-lays because o CBO assumptionsabout baseline commodity prices),the ederal crop insurance program($9.1 billion), conservation programs($6.4 billion), and over 80 other pro-grams, including public research anddevelopment and extension programs(scored at a net o $0.5 billion). With respect to drought aid, cur-rently those programs do not includeany o the ve standing disaster aidprograms established by the 2008Farm Bill. However, they do includetwo long standing disaster aid initia-tives: the ederal emergency loan pro-gram (with loans o up to $50,000)
Table 1:
CBO Estimated Annual Average Expenditures Under theProvisions of the 2008 Farm Bill: 2013-2017
Expenditure CategoryCBO Annual AverageExpenditure Estimates
($billions)CommodityPrograms(includingDirectPayments,CountercyclicalPay
-
ments,MilkIncomeLossContractOutlays,LoanDefciencyPayments,andACREPayments)$6.29ConservationPrograms(includingConservatoinReserve,WetlandsReserveandotherConservationPrograms)$6.41NutritionPrograms(includingSNAPandSchoolMealsExpenditures) $77.11FederalCropInsurancePrograms $9.09OtherPrograms(excludingcreditprograms) $0.55
Total Outlays B
$99.28ASource:CongressionalResearchService.(July,2012)
 
BThecategoriesdonotsumtothetotalbecauseCBOestimatesthatvariousUSDAcreditprogramswill,onaverage,generateabout$266millionayearinnetincome.

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