Do Farm Bills Drive or Deter Change?

February 5, 2014
By Chuck Benbrook

Farm bills over the last forty years have shaped today’s agriculture systems and technology.  They have done so by setting the “rules of the road” and defining or shaping research and investment priorities.

The new farm bill provides farmers, agribusiness, rural communities, and the food industry a more stable policy framework in which to make investment and planting decisions.  But my sense is this farm bill could mark a historically significant inflection point. Farm bills since the 1970s have tried to become more market-driven, by lessening the impact of USDA farm programs on the choices made by farmers. 

The commodity, conservation, and crop insurance provisions in the 2014 farm bill reverse this trend and will draw the USDA, and especially its Risk Management Agency (the part of USDA that runs the crop insurance program), more deeply into the business of both shaping on-farm choices and marketing strategies. Prior farm bills have attempted to shift risk management to futures markets and private contracting, while this farm bill expands the share of risk-management expenditures driven by policy and borne by taxpayer dollars.

In addition, for several decades now, the farm bill has been the primary opportunity for new program and policy priorities to find their way into farm, conservation, commodity, nutrition, and ag research programs. Farm bill provisions have created and refined the institutions and programs supporting agriculture, altered their scope and function, and tried to balance benefits against costs, while also meeting new or emerging threats or opportunities.

While a few policy changes were embodied in the bill, most were foregone conclusions made necessary by fiscal pressure (e.g., consolidation of conservation programs, SNAP reforms) or erosion in political support (e.g., direct payments).  Other important reforms that have garnered Congressional majority votes on multiple occasions – like new payment limitation provisions and reform of food aid programs – were casualties of a process overloaded with conflicts over spending and opportunities for partisan brinkmanship.

Perhaps farm bills have become too big — and politically divisive — to serve their historic policy-reform function.  In the years ahead, don’t be surprised to see Congress take up and address tough, cutting edge issues in stand alone legislation crafted and passed between farm bills.  More issues are likely to be delegated to states, and private sector activism in pursuit of “sustainability” is clearly on the rise.  If these trends continue, federal farm bills will serve to integrate a series of policy changes into the stable fabric of the laws and regulations governing the agricultural sector, and adjust program obligations and mandatory spending to match budget allocations.

Given the pace and scope of changes here and abroad buffeting the food and farming sectors, it seems increasingly foolish to rely on a single, omnibus bill passed once every four or five years to keep the American food system healthy and on track. For example, fiscal pressures in 2014 and 2015 will be extreme, and will likely lead to a re-consideration of sections of the just-passed farm bill.  Prime examples include payment limitation policy, long overdue reforms to the crop insurance program, how food aid is delivered, and options to more effectively align food and nutrition program spending with nutrition and public health goals.

But crop insurance stands out as a uniquely volatile policy arena that is likely to attract lots of attention from deficit hawks, especially if and as market conditions drive up USDA spending by several billion dollars above baseline expenditures (a likely scenario).  It will also help determine what share of USDA resources is available to cover other key needs, like responding to drought in California, dealing with new pests in Florida, or managing some new threat to food safety.

As the primary mechanism through which public dollars are spent to support farm income in the major commodity sectors, the crop insurance program will exert growing influence over what gets grown, where, and how. The long-run political and economic argument for the program is vested in the degree to which crop insurance is actuarially sound, i.e. each insurance policy that is offered for sale to farmers more or less pays for itself via premiums collected from farmers, with a declining role for the government in covering loses and administrative costs.  In short, the goal is a crop insurance program that works like every American’s car insurance.

This long-run vision of a market-driven, actuarially sound crop insurance program bears little resemblance to today’s program, in which USDA (and taxpayers) covers most of the administrative costs, pays for 38% to 100% of farmer premiums, and then also picks up most of the tab when heavier than expected losses are incurred.  Unlike car insurance, taxpayers bear most of the program’s costs and risk, while farmers benefit from a government-backed guarantee of a certain income per acre—a guarantee that no other business enjoys in the United States.

Crop yield and market price volatility has been rising for decades.  As a result, the complexity of setting crop insurance program policies, rules and payment rates have mushroomed, along with program costs.  If the program is too generous and guarantees a level of crop revenue per acre that is unsustainable for whatever combination of reasons (bad weather, market fluctuations, new pest problems), taxpayer-supported program expenditures will rapidly escalate and the program’s political support will collapse.

Building Farm Management into the Equation

In a perfect world, changes in farm management practices that tend to increase or reduce sources of yield or revenue variability would be taken into account in setting and adjusting crop insurance program rules, payouts, and premiums.

Take the case of corn and the well-documented impacts of crop rotation on attainable yields and yield variability.  The “rotation effect” has been recognized for half a century, and in the American Midwest, is becoming a highly consequential driver of agronomic system performance. An interesting, recent research paper in Agronomy Journal is entitled “Identifying Factors Controlling the Continuous Corn Yield Penalty” (Gentry et al., 2013; Vol. 105, No. 2).  This technical paper is summarized nicely for non-scientists in an April 8, 2013 article from Corn and Soybean Digest.

The paper documents clearly the extensive yield penalty associated with continuous corn, in contrast to a corn-soybean (CS) or longer rotation.  This difference in yields is called the “continuous corn yield penalty” (CCYP).  According to the Agronomy Journal paper, this penalty fell in the 30-50 bushel range in the Midwest in 2012.

Clearly such a huge impact on corn yields should be taken into account in the crop insurance program, especially if one policy goal is to lessen the degree of public subsidies supporting the program.  Each corn producer wanting to participate in the program must establish an insurable yield goal based on “Actual Production History” (AHP) over 10 years. For farmers lacking a 10-year yield history, average county yields are relied upon in setting a field’s AHP.

Consider the case of a farmer following a CS rotation for many years, thereby avoiding the CCYP.  The higher yields would be locked into the AHP of the fields managed by this farmer.  But suppose the farmer decides to switch to continuous corn in response to high corn prices.  Any of today’s popular crop insurance policies would be a great deal for such a farmer, since the impact of the CCYP on average 10-year yields will only gradually lower the AHP on any field now planted to continuous corn.  This added per acre revenue from the crop insurance program constitutes a sizable subsidy for continuous corn.

Across the fence, consider a farmer that has been growing continuous corn for several years and now recognizes the magnitude of the CCYP, which has resulted in a substantially lower AHP on the fields under his/her management compared to neighbors following a rotation.  The farmer decides to adopt a corn-soybean rotation, increasing attainable yields by say 30 bushels in the first year.  This extra production, however, will fall outside a given field’s AHP, and will not be covered.  Yields would have to drop much more on such a field to trigger payments under any of today’s existing crop insurance policies.  This constitutes a penalty for farmers contemplating a shift to a corn-soybean rotation.  The magnitude of the penalty will gradually fall over 10 years as each field’s AHP rises, but lost crop insurance revenue in that 10years will be a significant deterrent for some farmers.

Such unwelcomed impacts arising from crop insurance policies are good examples of policy failures.  The good news is that a provision in the new farm bill directs the USDA’s Risk Management Agency to assess new crop insurance program options offering coverage for the production of whole farms, across all crops and livestock produced on a farm. Doing so will create an opportunity to reward crop rotations, and diversification, instead of penalizing both, as the current program does in multiple ways.

The yield enhancement benefits of crop rotations justify building sizable economic incentives favoring rotations into crop insurance policies.  From a policy perspective, there are other important reasons to do so including several long-term agronomic benefits (more N cycling in soil; improved soil health; breaking disease/insect/weed cycles) and environmental benefits (higher fertilizer and water use efficiency; less chemical use; prevention of resistance; greater biodiversity).

Traditionally, crop insurance product offerings have lagged behind changes in cropping patterns and farming technology.  Congress could reverse this polarity, by directing the Risk Management Agency to work with the industry to develop new rotation and conservation system-based insurance policies.  The need to turn to such novel crop insurance policies would be greatest in areas where environmental, economic, water supply, water quality, or other exogenous drivers of change are forcing farmers to shift enterprise types and cropping patterns.

If such innovative provisions are implemented wisely in the future with the benefit of solid data on specific risk factors, crop insurance policies might legitimately be called transformative, because they would help resolve several agronomic and environmental problems with their roots in farming system choices, while accomplishing their core mission of keeping farmers in business through periods plagued by unexpected and uncontrollable loss of yields or revenue.

February 17 2014 – UPDATE

A preview of what might lie ahead with crop insurance costs and corn prices is presented in a 2/13/14 story in Politico by David Rogers.  His story is based on a new USDA analysis of likely farm bill costs.

The big news is that the USDA is now projecting a corn price of $3.65 per bushel for the 2014-2015 marketing year beginning Sept. 1. This will create all sorts of problems, since it is well below the cost of production on many farms.  Even more worrisome, USDA is projecting even lower corn prices for the next several years, down to a low of $3.30, before beginning to rise again up to $4.10-$4.20 per bushel by 2023 and 2024.

According to the Politico piece –

“If the revised projections prove accurate, it will surely impact the cost of new counter-cyclical programs signed into law last week by President Barack Obama.”

“As crop prices decline from recent high levels…the [USDA] report shows that total government payments to farmers would jump by about $21 billion over what the department had forecast a year ago.”

A $21 billion jump in USDA crop insurance program expenditures over baseline would likely create a political meltdown in Washington, and indeed over-budget spending a quarter of that size could trigger a revolt by deficit hawks and would assuredly lead to crop insurance program reforms. Such overspending will crowd out other high priority or emergency relief funding, and perpetuate the dominance of corn, soybeans, and cotton as the primary beneficiary of public support via USDA programs.

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