FCC Economic Update: Keeping an eye on U.S. farm bill discussions

by Jean-Philippe Gervais, senior agriculture economist, Farm Credit Canada

The United States government is in the early stages of rewriting its farm legislation – a complex web of policies spelling out food assistance, nutrition and conservation programs, as well as support for agricultural producers.

Although the U.S. political landscape is unpredictable, lawmakers need to produce a 2012 farm bill by early August; otherwise, the 2008 farm bill legislation will extend into next year. There is currently lots of momentum in the U.S. to address a ballooning debt and a widening deficit, so the next farm bill could be quite different than previous legislation.

Why is the 2012 farm bill important for Canadian agricultural producers?

We routinely repeat that the Canadian agri-food industry is evolving in the context of a globalized world. But before thinking about global agri-food markets, many Canadian businesses first make decisions in a continental market.

Despite some bottlenecks, like the country of origin labelling, there are many examples that demonstrate how Canada and U.S. markets are closely tied. For example, the recent drought in the southern U.S. resulted in higher cattle prices in Canada. Increases in American acreage for a particular crop lead to lower prices for Canadian producers growing the same crop.

What could the next U.S. farm bill look like?

Let’s look at some of the most important programs and subsidies of the 2008 farm bill and possible impacts to the 2012 bill based on today’s budgetary pressures.

Under the 2008 bill, price support mechanisms compensate producers if market prices fall below pre-determined reference prices. Thanks to strong crop prices, few payments have been required recently. Subsidies to crop insurance premiums represent the largest subsidies offered to crop producers under the 2008 bill, but it would be politically risky to cut such a popular program.

Some limited savings could come from reducing the size of the Conservation Reserve Program, which pays producers to set aside environmentally sensitive lands. A prime candidate that would cut the size of the farm bill budget is direct payments. These are made regardless of market prices or

actual production on farms, and mostly benefit landowners as opposed to producers. Eliminating direct payments would result in savings of roughly $5 billion per year.

In theory, direct payments create few distortions in the market and provide little advantage to U.S. producers. In reality, they can help manage cash flows and risk.

The interesting question is what, if anything, will replace direct payments? A possibility is to launch revenue loss coverage that otherwise is not covered by the existing crop insurance program. Unlike direct payments, a revenue loss insurance program would likely be based on actual planted acres and involve higher reference prices than existing programs.

This is the conundrum facing those working on the U.S. farm bill, and a source of risk for Canadian agriculture.

Eliminating direct payments would provide immediate savings of $5 billion per year and would satisfy demands to reduce public spending. A revenue loss program is dependent on market conditions and would not likely generate payments in the short term, given forecasts of strong crop prices. But what if market conditions turn and prices drop — closer to their historical averages? Subsidies would be triggered, and Canadian producers could find themselves at a disadvantage. In essence, U.S. crop producers would give up guaranteed payments in return for locking in their recently strong profit margins.

Financial assistance for U.S. crop producers is more generous than what is available to livestock producers. Yet, insurance programs are increasingly popular and available to American cattle and hog producers. It would not be surprising to see the budgets for these programs increase if savings can be found elsewhere in the legislation.

There are some efforts to broaden a profit margin protection program for U.S. dairy producers in lieu of the current milk support price mechanism.

The current system does not offer dairy producers any protection from rising feed costs. What is innovative from the U.S. perspective is that some lawmakers propose that margin protection involve some form of supply management. Producers would only be guaranteed a payment if they agreed to limit production when prices are low.

This production limitation component would be voluntary, but nevertheless could be structured so that it would be in a producer’s best interests not to overproduce.

What will the impact of the next U.S. farm bill be on Canadian producers?

On the one hand, budgetary pressures on the U.S. government present opportunities to make changes to U.S. farm policy.

On the other hand, a likely outcome is new programs tied to actual plantings with higher reference prices.

U.S. support to agriculture not tied to actual production decisions would be in the best interest of Canadian agricultural producers. Any other farm support program could result in unfair competition for Canadian producers and could potentially result in trade disputes.

Discussions around the U.S. Farm Bill can be monitored through the websites of the U.S. Senate Committee on Agriculture, Nutrition and Forestry at http://www.agriculture.senate.gov and the U.S. House Committee on Agriculture at http://agriculture.house.gov.

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