Political and Economic Issues Affecting the 2007 Farm Bill Debate

Will Snell, Agricultural Economist, University of Kentucky
July 2006

The farm bill is our nation's most comprehensive piece of ag legislation, affecting not only farmers, but also agribusinesses, educators, environmentalists, rural communities and even consumers. The 2002 farm bill is set to expire in September 2007. Without legislation, many provisions related to farm income and commodity price support will revert back to permanent statutes, which are no longer compatible with today's farm structure, budget constraints, global trading rules, or regulatory policies. Thus, policymakers will need to address the farm bill prior to September 2007. However, some analysts believe that an impasse over trade policy deliberations could simply result in extending the current farm bill until these trade issues (discussed below) are resolved.

Preliminary 2007 Farm Bill Discussions

Policy analysts anticipated that 2006 would be a busy and pivotal year in the 2007 farm bill debate. Focus on other national issues such as the war on terrorism, energy prices, immigration reform, and rebuilding the Gulf following last year's hurricanes have somewhat limited national attention to the farm bill. Secretary Johanns, along with other USDA officials, held 52 farm bill forums in 48 states (including Kentucky) late last year to gauge public sentiment on various farm bill issues. While opinions ranged across the board, farmers, in general told the Secretary that they liked the structure of the 2002 farm bill and requested minor modifications in designing the 2007 farm bill. Comments from the forums, along with USDA fact sheets on farm bill issues can be found online at: www.usda.gov. In addition to the USDA forums, the Senate and House Ag Committees are holding regional field hearings across the country this spring and summer.

Background/Policy Process

The farm bill is usually divided into several different titles. The 2002 farm bill had titles for commodity programs, conservation, agricultural trade and aid, nutrition programs, farm credit, rural development, research, forestry and energy. But most of the political debate on the farm bill usually focuses on the commodity program title.

As usual, there are several economic and political factors that direct the early farm bill discussions. Obviously, policymakers will evaluate the financial conditions within agriculture as it unfolds during the farm bill debate. The overall U.S. agricultural economy during the early years of the 2002 farm bill was characterized with record net farm income, expanding exports, and improved debt positions. But lower commodity prices, weather-related events, higher energy costs, and lower government payments, among other factors, caused U.S. net farm income to fall from its record $82.5 billion in 2004 to a preliminary $72.6 billion in 2005, and a forecast $56.2 billion for 2006. Despite this dramatic decline, the forecast value for U.S. net farm income in 2006 is near the 1996-2005 average.

While policymakers will be closely monitoring the financial well-being of farmers during the farm bill debate, certainly they will be forced to consider the federal budget situation. The 2002 farm bill was debated in a favorable environment of budget surpluses, which provided opportunities for policymakers to maintain, and even expand some programs. However, the current and projected future budget deficit will likely affect future funding for most federal programs, including agriculture. Concerns over the growing federal budget deficit have occurred during a period when farm program payments have been relatively high. Direct government farm payments soared to a record level of $23 billion in 2004, before falling back to preliminary estimates of approximately $18.5 billion in 2005 – still significantly above the average of $15.7 billion over the past ten years.

Another closely related issue that will affect the farm bill debate will be the current round of multinational trade negotiations, more commonly referred to as the Doha Round. Many lower income countries that make up the majority of the membership in the World Trade Organization (WTO) and whose governments cannot afford to subsidize their domestic farmers, claim that the U.S and other high income countries develop agricultural policies that unfairly depress world commodity prices, distort trade flows, and drastically limit their ability to earn valuable foreign exchange. Under the 1995 Uruguay Round (the last completed round of WTO trade negotiations), the U.S. agreed to keep ag spending for trade-distorting programs (such as price supports, marketing loans, LDPs, crop insurance, and other payments linked to production) under $19.1 billion annually. On March 3, 2005, a WTO Dispute Appeals Panel ruled against the U.S. in a claim by Brazil that part of the U.S. cotton program violated international trade rules. Potentially other nations may initiate additional claims against the U.S, which could threaten the structure of other farm programs. Currently there are debates within the international community on what is classified as trade-distorting and whether the U.S. has exceeded its $19.1 billion ceiling. A critical issue will be the treatment of counter-cyclical payments. Ongoing trade policy discussions as part of the Doha Round could further clarify the U.S. trade commitments to the WTO, limit future spending on ag programs in the United States, and potentially shift farm bill programs away from the trade-distorting policies to less trade-distorting policies such as environmental programs and direct payments that are not coupled with production.

The U.S. does not appear willing to reduce agricultural subsidies substantially until other countries provide greater access to their markets for U.S. farm products. Alternatively, other countries do not appear willing to open up their markets until the U.S. and some of the other higher income countries significantly reduce their subsidies. Given this ongoing stalemate, it is unclear whether the Doha Round will be completed in the near future. Some policy strategists argue that the U.S. should not develop a revised farm bill in the midst of all this uncertainty. Consequently, one policy option could be to extend the current farm bill at least one year and wait to pass new farm policy legislation once the WTO negotiations are completed. Alternatively, others claim that passing a farm bill prior to September 2007 would potentially provide more direction and leverage for our trade policy negotiators, assuming the Doha Round is still being debated.

How Does the Farm Bill Affect Kentucky?

Historically, Kentucky has not been a major beneficiary of government payments for agriculture relative to most states. While ranking fourth in the number of farms and around 20th in ag sales, Kentucky typically is around 30th in terms of government payments. In recent years, government payments for agriculture have been around $150 million, approximately 10 to 15% of our net farm income. 1 In fact since 1980, government payments have accounted for 11.8% of Kentucky's net farm income, compared to nearly 27% of U.S. net farm income coming from U.S. taxpayers. Of course these statistics reflect the type of farming in Kentucky where the average farm is about 1/3 of the national average farm size, and the state's top four agricultural enterprises, equine, cattle, poultry, and tobacco, have (other than for emergency disaster payments) typically received limited direct benefits from farm bill legislation. Alternatively, Kentucky Farm Business Management (KFBM) operations, comprised primarily of larger/commercial, grain farms, are much more dependent on government payments. In 2005, 2/3 of the net farm income earned by KFBM cooperators came from government payments, compared to 46% in 2004 and 21% in 2003.

Historically most of the government payments evolving from the farm bill have been devoted to crops. But the 2002 farm bill increased conservation-related payments, which has tended to benefit a state like Kentucky. So far during the tenure of the 2002 farm bill, around ¼ of Kentucky's government payments have been conservation-related compared to less than 15% nationally and around 11% during the 1996 farm bill. Given that conservation payments are viewed as acceptable within international trade negotiations, conservation programs could expand relative to commodity programs in the next farm bill. Energy may also receive a lot of attention in the 2007 farm bill given the recent escalation in fuel prices and other energy-based input prices such as fertilizers and chemicals, which of course could benefit Kentucky grain farmers.

Specific Commodity Policy Issues

The changing structure of U.S. agriculture, coupled with the growing interest of non-farm groups in the farm bill deliberations, will certainly induce debate on many issues including:

Magnitude of farm payments considering that average farm household income has now surpassed average non-farm household income
Distribution of farm program payments (i.e. large vs. small, crop vs. livestock, program vs non-program ag enterprises, differences in payments across regions)
Payment limitations which do not affect many Kentucky farmers, but are big issues for cotton, rice, and corn producers
Commodity payments vs. funding for conservation, rural development, energy, and other programs
Effects of farm programs on land rental rates, land prices, and entry of new/young farmers
Effects of farm programs on U.S. agricultural trade
The demands of fruit and vegetable producers to be part of commodity support programs
Agriculture's role in enhancing the national energy supply by increasing the use of renewable fuels

Policy Alternative Approaches

Recently, USDA identified some policy alternative approaches to initiate discussion on policy development options to consider. These alternatives are:

Alternative #1: Use existing structure of farm programs, but make them more WTO consistent, reduce their effects on resource and farm structure, and target them to producers in greatest need of assistance by:
- Reducing marketing loan assistance programs, price supports, and counter-cyclical payment rates
- Increasing direct payment rates
- Providing stricter payment limitations
- Targeting payments to smaller and mid-sized farms
- Greater reliance on crop insurance
Alternative #2: Replace marketing assistance loans and counter-cyclical payments with a program that pays producers based on revenue shortfalls.
Alternative #3: Phase out current programs (to limit effects on land and asset values) and use savings to expand crop insurance coverage, fund farm savings accounts, or expand conservation, rural development, or other programs.

1 These data for Kentucky for 2005 and the next nine years will be skewed since tobacco buyout payments will be reported as government payments despite the fact that tobacco manufacturers and importers are the original source for these funds and not taxpayers.

For More Information

For additional information about the 2007 Farm Bill from the University of Kentucky Agricultural Economics Department, please contact one of our Farm Bill Contacts.