Preliminary Issues Affecting the 2007 Farm Bill: Implications for Kentucky
Following the completion of the tobacco buyout, the next major national agricultural policy debate affecting Kentucky agriculture will be the upcoming farm bill. The farm bill is our nation's most comprehensive piece of ag legislation which not only affects farmers, but also impacts agribusinesses, the environment, our rural communities and even consumers. The current farm bill, which was passed in 2002, is not set to expire until 2007. However, farmers, farm leaders, and policymakers are already beginning discussions related to the next farm bill. In fact, Secretary of Agriculture Mike Johanns visited Kentucky this past August as part of the USDA's Farm Bill "listening" sessions.
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 disproportionately on the commodity program title.
As usual, there are always several economic and political factors that direct the early farm bill discussions. Obviously, policymakers will evaluate the financial conditions within agriculture as they unfold during the farm bill debate. While there have been certain commodities and regions that have faced difficult economic conditions in recent years, the overall U.S. agricultural economy has been characterized in recent years as one of record net farm income, expanding exports, and improved debt positions. But lower commodity prices, drought conditions in parts of the country, along with tropical storms will likely cause farm cash receipts to fall in 2005. Plus higher energy costs, among other factors, will elevate production costs for this year. Nevertheless, 2005 U.S. net farm income, accounting for cash receipts, production costs, and government payments, is expected to remain relatively high by historical levels. What will happen to the ag economy in 2006 -- a Congressional election year and also a year when a lot of the farm bill debate will occur, remains very uncertain, but obviously will have a lot of impact on shaping the 2007 farm bill.
While policymakers will be closely monitoring the financial well-being of farmers during the farm bill debate, certainly they will pay even greater attention to 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 anticipated escalating future budget deficit (in response to the ongoing war on terrorism, escalating cost of social and health programs, plus the cost of rebuilding the Gulf Cost following recent hurricanes) will likely affect future funding for most federal programs, including agriculture, The growing federal budget deficit is occurring during a period when farm program payments have also been increasing. Government payments are projected to increase to more than $21 billion in 2005, compared to an average of around $14 billion over the past ten years.
Another closely related issue that will affect the farm bill debate will be the ongoing multinational trade negotiations. Many lower income countries who make up the majority of the membership in the 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 existing trade agreements, the U.S .is committed to keep ag spending for certain designated trade-distorting programs under $19.1 billion. Currently there are debates within the international community on what is classified as trade-distorting and whether the U.S. has exceeded this level. Ongoing trade policy discussions as part of the Doha Round could further clarify this issue and limit future spending on ag programs in the United States. Despite what many countries claim was a reversal in the 2002 farm bill, the U.S. government claims to continue their support of liberalizing agricultural trade policy. However, the U.S. does not appear willing to reduce ag subsidies substantially until other countries provide greater access to their markets for U.S. ag 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. Thus, much uncertainty exists whether the Doha Round will be completed prior to the 2007 farm bill, and if so, will there be any "meaningful" reforms that will shape the parameters contained in the next U.S. farm bill.
Another issue that will likely play a role in the 2007 farm bill will be the solidarity among farm and commodity groups in the political process. Given the continuing declining farm-dependent population, along with the growing influence of consumer and environmental groups, U.S. farm and commodity groups have realized that unity and the willingness to compromise are vital in accomplishing many of their policy goals in Washington D.C. But ¾ of U.S. farmers do not directly benefit from commodity programs, with most of the payments going to relatively larger farms (who also take on relatively more risk). Consequently, there appears to be greater tension among some farm/commodity groups (and other outside entities) in recent years over the distribution of benefits (i.e., large vs small farmers, crop vs livestock, program crops vs non-program enterprises) which could affect the outcome of the upcoming national farm bill debate.
How will this affect Kentucky agriculture? Historically, Kentucky has not been a major beneficiary of government payments for agriculture. 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. 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. Last year, nearly ½ of the net farm income earned by KFBM cooperators came from government payments, compared to 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. In addition, there will likely be continued efforts to push the adoption of risk management tools as means to support agricultural income without violating international trade agreements and reducing U.S. taxpayer assistance to federal farm programs. Energy may also receive a lot of attention in the 2007 farm bill given the recent escalation in gasoline, diesel, and the prices for energy based inputs such as fertilizers and chemicals, which of course could benefit Kentucky grain farmers. And finally, the 2007 farm bill could place a greater emphasis on funding for rural economic development/ rural infrastructure programs which some argue have more far-reaching economic impacts in supporting rural economies than commodity programs. While it still is 2005, the farm bill debate has started, and with all the external factors complicating the situation, it certainly promises to a very interesting debate as the next chapter in agricultural policy begins to unfold.
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.