The 2007 Farm Bill and Beyond
About This Event

Since the Great Depression, lobbying by farmers has proved particularly lucrative but has threatened to detach agricultural production from the objective of efficiently producing food for consumers. Today, farm policy consists of an array of subsidies, regulations, spending programs, and land-use restrictions which are widely blamed for the increased cost Listen to Audio


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of food, environmental degradation, fiscal burdens, and the failure of global trade negotiations.

For several decades, AEI has brought together researchers to assess the impact of existing farm programs and to help provide the analytical underpinning for future reform efforts. This year, prior to a new round of legislation, AEI commissioned twenty-one working papers from the nation’s leading agricultural economists to evaluate the legitimacy of specific rationales for government intervention in the marketplace.

Contributing authors will present their findings at this AEI event.

Agenda
8:45 a.m.
Registration and Breakfast
9:00
Introduction:
Henry Olsen, AEI
9:15
Panel 1: Title 1 Commodity Programs
Panelists:
Julian M. Alston, University of California, Davis
Bruce A. Babcock, Iowa State University
Bruce L. Gardner, University of Maryland, College Park
Daniel A. Sumner, University of California, Davis
Discussants:
Daren Coppock, National Association of Wheat Growers
Charles W. Stenholm, former House representative (D-Tex.)
Moderator:
M. Ann Tutwiler, William and Flora Hewlett Foundation
11:05
Break
11:15
Panel 2: Specialty Crops and Dairy
Panelists:
Joseph V. Balagtas, Purdue University
Mechel S. Paggi, California State University, Fresno
Discussant:
Moderator:
Matt McInerney, Western Growers Association
Kevin A. Hassett, AEI
12:35 p.m.
Luncheon
1:05
Panel 3: Conservation
Panelists:
John M. Antle, Montana State University
Ralph E. Heimlich, Agricultural Conservation Economics
Discussants:
Ken Cook, Environmental Working Group
Katherine R. Smith, USDA Economic Research Service
Moderator:
Bruce L. Gardner, University of Maryland, College Park
2:30
Break
2:40
Panel 4: Crop Insurance and Trade
Panelists:
Bruce L. Gardner, University of Maryland, College Park
Daniel A. Sumner, University of California, Davis
Discussants:
Stephen Frerichs, AgVantage LLC
Ralph E. Grossi, American Farmland Trust
Mark D. Lange, National Cotton Council of America
Moderator:
Philip I. Levy, AEI
4:05
Break
4:15
Panel 5: Policy Roundtable
Panelists:
Jon Doggett, National Corn Growers Association
Scott Faber, Environmental Defense
Bruce L. Gardner, University of Maryland, College Park
Moderator:
James K. Glassman, AEI
5:30
Adjournment
Event Summary

May 2007

The 2007 Farm Bill and Beyond

Since the Great Depression, lobbying by farmers has proved particularly lucrative, but has threatened to detach agricultural production from the objective of efficiently producing food for consumers. Today, farm policy consists of an array of subsidies, regulations, spending programs, and land-use restrictions that are widely blamed for the increased cost of food, environmental degradation, fiscal burdens, and the failure of global trade negotiations.

For several decades, AEI has brought together researchers to assess the impact of existing farm programs and to help provide the analytical underpinning for future reform efforts. This year, prior to a new round of legislation, AEI commissioned twenty-one working papers from the nation's leading agricultural economists to evaluate the legitimacy of specific rationales for government intervention in the marketplace.

Contributing authors presented their findings at this AEI event.

Panel I: Title 1 Commodity Programs

Bruce L. Gardner
University of Maryland, College Park

In order to address the underlying economic situation regarding Title 1 commodity programs over the period of the last farm bill we must look at three aspects of the economic situation: farm families, farm enterprises and businesses, and the situation in rural areas.

Farming has gone from being a traditionally poor industry to a robust one. Average incomes are much higher than those of average Americans. The bipartisan consensus on farming is that the government should move away from stocking programs, which have already become less prevalent but once resulted in price insecurity and year-to-year risk for farm businesses. It is apparent that commodity programs are not sensible development policies for rural areas. It is not good to invest in the riskiest areas, and the bulk of rural areas do not depend on these programs.

All of these elements point to a dynamic sector in which productivity is growing. It is competitive and debt is low, signifying a decreasing need for commodity programs. Overall, the forecast is rosy, as projections say that commodity prices will persist for the next ten years.

Daniel A. Sumner
University of California, Davis

We need to look back at our country's history in terms of these economic programs. If we go back to the Lincoln Administration, with the Homestead Act, the emphasis was on competition. This changed with the New Deal, as programs began to transfer income to particular groups of farmers. What is the rationale now for program like these? Are the beneficiaries particularly deserving, and are the industries particularly vulnerable?

Those who do receive commodity payments are not especially deserving, considering that their incomes range from five to six times that of the average American. It is also apparent that the industry is not particularly vulnerable. Commodity program crops (cotton, rice, corn, soybeans, and wheat) do not seem to have any special features that classify them as particularly deserving. We can allocate our resources much more effectively in nutrition policy, conservation programs, and rural programs.

Bruce A. Babcock
Iowa State University

There is significant speculation about to the effects of the Farm Bill. Some say it will put African farmers out of business, and others say it will induce us to eat more calories. But are we actually getting anything for the payments? What would crops be like without the payments?

By removing the decoupled payments, corn, wheat, and soybeans would be mostly unaffected by payments and yields would be nearly identical. For cotton and rice, studies indicate the yields were a little higher, essentially leaving us with only one food--rice, which is actually quite small in the grand scheme of food production--affected by subsidy policies. Nothing good or bad came from this program, meaning we can get better returns from other investments. We need to design a program that acknowledges farming as a risky business and allocates Title 1 money to other purposes, which would translate into more public good, save taxpayer money, and use taxpayer dollars efficiently and rationally.

Julian M. Alston
University of California, Davis

These programs result in deadweight losses for taxpayers and consumers. Any economic analysis of the existing situation is prone to produce disparate conclusions, due in part to the large number of observable factors and variables. This study looked at eliminating the subsidy program entirely while holding other countries constant, looking at numbers from 2005 in a medium- to long-term scenario while keeping conservation programs in place.

Payments should reflect land value, but even in the long run this is not the case. This may mean the payments are not fully decoupled, but on another level, econometric estimates are imprecise; however, the findings indicate that subsidies capitalized on land values.

Based on 2005 data, it is likely that subsidy reduction would decrease production by 7.3 percent. This essentially means that changes in output would be small. Significant debate persists on the question of whether farmers or landowners enjoy the benefits. In reality, the middle ground between static land models and econometric models shows that for every dollar in subsidies, 40-60¢ goes to landowners, 20¢ to consumers, 15¢ to farm companies, and 5¢ is a deadweight loss. There is perhaps another 20 percent wasted in policy implementation. Elimination would mean reduced costs with very little effect on output but with savings of $400-800 million.

Daren Coppock
National Association of Wheat Growers

The consensus is that payments should not go to those that do not need them, but to get a more accurate picture of where the payments go, we must look at the myths of farm policy analysis. First, the result of including all farms is skewed numbers. Farm policy should not be directed at those that simply want to live in a rural area, but rather at farms that want to succeed. Averages must also be looked at with greater scrutiny. Averages can make the farming industry look much better than it is because they ignore regional disparities, establishing a need for better revenue assurance methods.

In reality, farms are only successful half the time, while the ratio between farm equipment and bushels has skyrocketed, requiring farmers to obtain money from increased productivity, equity, or government payments. This combination has preserved farmers' economic viability. We spend one-third of 1 percent of our overall budget on commodity programs, yet we appropriate so many resources on such a small budget component. Perhaps our resources could be better allocated.

The Honorable Charles W. Stenholm (D-Texas)
Former member of the U.S. House of Representatives

Concerning the 2002 Farm Bill, the reduction in farm subsidies was a move in the right direction, but there is still no policy approved by the World Trade Organization (WTO). There was also no way to predict such exorbitant oil prices and the desperate need for alternative fuel sources like ethanol, which is causing a boom in the corn industry. For a 2007 Farm Bill, we must eliminate all subsidies on feed grains, and create a safety net. The American people are concerned about rising fuel prices. It is, however, a significant problem when consumers who do not want to pay high prices do not want the United States to drill, and when those who do not want nuclear power still want low fuel prices. In terms of Title 1, we must gradually transition to a market-oriented world. We must also find our way to a WTO agreement before it is too late.

Panel II: Specialty Crops and Dairy

Joseph V. Balagtas
Purdue University

There are two reasons to focus on dairy policy: first, the government's role is as pervasive as in any other agricultural market, and second, it illustrates principles about U.S. farm policy previously discussed at this event. For dairy farming, the market conditions have changed, but irrelevant policies that cater to past conditions remain. In turn, new policies have to fix the leaks created by past policies.

Like other agricultural sectors, dairy farming is not particularly vulnerable, meaning commodity support policies cannot be justified in terms of welfare or equity. Programs like the Milk Marketing Order Regulation and the Milk Deficiency Payment cost taxpayers, consumers, and farmers. Eliminating these programs would benefit everyone, and the status quo policies do not address the issues we want to address, but rather distract us from what needs to be done.

Mechel S. Paggi
California State University, Fresno

Specialty crops are unique for program crops in that they represent only 3 percent of cropland about 40 percent of the value on the land worked. The support they do receive is insignificant and inefficient. Specialty crops also face unique obstacles like import competition.

Advocating the specialty crop industry may be a good way to support agriculture in a way that addresses public needs. Future policy programs should be designed to consider specialty crops. There is no basis to argue for specialty crops on grounds of receiving less money than for rice or cotton. But if we look at public goods from public money, if we look at specialty crops with diseases and nutrition in mind, we might be able to be serious about redirecting resources through public policy.

Matt McInerney
Western Growers Association

Specialty farmers have prided themselves in not wanting governmental support, but the explosion in global trade has highlighted the need for continued investment in areas that can provide development. The Farm Bill should receive support on grounds that it provides public good. Government can play a significant role in partnering with the private sector for food safety and security, trade programs, research and development, and education programs.

Specialty crop farmers face many challenges, including pest and disease mitigation and lack of access to foreign markets. Specialty crop teams have, however, discussed and developed sound policy ideas that could effectively accommodate this diverse group of farmers. Policies like the Flex Acreage Act could generate heavy consequences since so few acres significantly affect the price that farmers receive, but ideas like state block grants could bring the money closer to production so that it could be used and distributed more effectively, based on needs in particular regions.

Panel III: Conservation

John M. Antle
Montana State University

We must strive for an agricultural policy we can be proud of. Agriculture has a large and growing impact on ecosystems, but policies that affect them are not fundamentally market-oriented, leaving farmers with little incentive to make costly investments above and beyond normal ones--investments that will benefit surrounding ecosystems.

One important issue is that there are so many inefficent programs. We must work toward a cost-effective program that pays farmers for doing things the rest of us value. In addition, we must move away from conservation and land retirement, and toward wildlife protection and greenhouse gas mitigation. In order to implement such a policy, policymakers and land managers need better information.

Ralph E. Heimlich
Agricultural Conservation Economics

While the Conservation Reserve Program (CRP) has been successful in many respects, some still believe that potential benefits may not be fully realized. CRP's original focus was on retiring highly erodible cropland, but it has since added multiple goals, including water quality, wildlife habitat, and surface waters. With this growth, however, gauging what land qualifies for retirement has become markedly difficult. The existing index does not split up averages, creating one score in an effort to evaluate for all of these criteria.

We should create more stringent erodible criteria or simply put less emphasis on land retirement. The existing program excludes the benefits of retiring certain parts of land. In addition, a multitude of offshoot programs (Wetland Reserve Program, Farmable Wetlands Pilot Program, Grassland Reserve Program, etc.) have confused landowners and split responsibility for the existing problems. We must consider permanent easements on the land, transforming CRP into a smaller, tighter, permanent program. Simply changing the name of existing programs will not suffice.

Ken Cook
Environmental Working Group

We should move any subsidies toward promoting conservation. It seems that farmers will only respond to conservation efforts if they are in some way incentivized, and one of the best ways to move money from commodity programs is by putting it into something more effective. We also need to establish a pilot program to collect necessary data on conservation needs at an affordable cost.

In addition, we must take a closer look at conservation because other countries are suspicious that we will dump the existing subsidy money there, resulting in another round of unproductive investments on our end and distortions to trade. The CRP is a large investment, and the way we have overextended ourselves with ethanol is quite dangerous. Conservationists will tell you that CRP already does good things, but there are many issues that require our attention.

Katherine R. Smith
USDA Economic Research Service

Good public policy begins with good ideas, but there is still considerable work that must be done to finish the conceptual framework for a new policy and better understand potential unintended consequences. Carbon sales could foster competition within the private and public sectors, resulting in difficulty for effective and efficient conservation programs.

Panel IV: Crop Insurance and Trade

Bruce L. Gardner
University of Maryland, College Park

The United States is now at a point where 80 percent of insurable acres are covered by crop insurance, but problems remain. One of the major issues has been getting farmers to participate in the programs. They are tempted by the many other risk strategies that allow them to diversify. Another issue is that of adverse selection, whereby only those that are the most at risk will buy the insurance; this raises premiums and shrinks the market. Other issues include moral hazard--which means that farmers neglect their land when it is insured--and program management, which is quite inefficient according to cost-benefit analysis. These issues have translated into ad hoc disaster bills in Congress.

According to Glauber's working paper, there are four viable reforms: reform crop insurance, increase competition, and reduce delivery costs; make the purchase of crop insurance mandatory for those who receive program payments; focus more on area yields and revenue insurance, rather than on individuals; and eliminate crop insurance, knowing that ad hoc disaster bills are inevitable.

Daniel A. Sumner
University of California, Davis

There has been a major role reversal in WTO negotiations, leaving the United States as the country that wants to maintain agricultural trade-distorting policies. Many nations have vastly reduced their subsidies, but ours have gone up, causing distrust in trade talks. Removing programs would allow us to open markets, which is critically important to farmers.

Recent cases against the United States by a number of WTO countries have illuminated two major issues: our compliance with obligations we have already signed and getting others to agree to obligations of our choosing. In the short run, cotton is the only major commodity crop that has been singled out by the WTO in the case brought by Brazil, but in the long run all of our programs are vulnerable to these types of challenges.

We must also be wary of the effects that our production-stimulating programs have on other markets. There is also evidence that our farms adversely and seriously affect the poorest African farmers. These are the kinds of things we need talk about concerning trade policy.

Stephen Frerichs
AgVantage LLC

We must address two problems with crop insurance. It has not prevented ad hoc disaster relief from Congress, and there is an inefficient transfer of funds to farmers. With its disaster relief bills, Congress has been soft-hearted, essentially giving in even after existing law necessitated offset payments. We need to have a meaningful discussion about the actual numbers behind crop insurance and the disaster payments. Also, only 51¢ of every net indemnity payment goes to the farmer, which has led farmers away from yield insurance and toward revenue insurance.

In order to achieve a functional policy, we must understand the fundamental disparity between public and private insurance programs. While they are comparable, differences exist in that public programs require payment at harvest, rather than up-front, as well as in the procedures of writing their specific policies. Private-sector companies cannot underwrite moral hazard or adverse selection programs. In addition, private companies' payments are expense-loaded, which is not the case for federal crop insurance.

Crop insurance profitability is not unequal to what private companies generally expect, but full participation by the private sector necessitates a reasonable rate of return.

Ralph E. Grossi
American Farmland Trust

Future goals for trade policy should minimize government influence on farms in our country in addition to treating all crops equally and fairly. We must also must recognize the importance of safety nets and reward stewardship in a cost-effective way.

We must recognize the dichotomous relationship between systemic and idiosyncratic risk. Systemic risk is more appropriate for government to handle, while idiosyncratic, or individual, risk should be left to private companies. Presently we have two different safety nets that create confusion and inefficiency; we must integrate these in a way that recognizes the separate types of risk.

Mark D. Lange
National Cotton Council of America

In farming, unlike other industries, a number of factors are out of the owners' control. While any situation becomes more confusing when government funding is involved, the loudest claimants have not been program crops, and an increasing number of farmers have invested in crop insurance, which was the hope of the government. There are many reforms that will yield an efficient program.

The conclusions in Sumner's paper regarding the elimination of program crops are much too simple, and they fail to acknowledge the procedural injustices that occurred in the WTO cases. The decisions of the WTO panel were quite vague and plagued with serious prejudice. Economists also continually argue elasticities, and a few different numbers can produce substantially different price effects.

While Sumner's concern for African farmers is legitimate, his belief that changes in cotton prices will aid their situation is not. The true problems rest in corrupt governments that steal from their people.

Panel V: Policy Roundtable

Bruce L. Gardner
University of Maryland, College Park

We have seen that agriculture is a robust industry where there is little risk in eliminating subsidies. There are, however, other roles for government in a more free-market-oriented environment, which include being an agent of international trade interests, working toward conservation and environmental improvement, focusing on bio-energy, researching, investing in rural development, and enhancing long-term agricultural productivity.

Daniel A. Sumner
University of California, Davis

A few noteworthy topics that have not been addressed in this conference include sugar policy, food aid, and broad environmental policy. Sugar policy is not a Farm Bill issue, but rather a matter of tariffs. Food aid, which does not fall under the subsidy umbrella, is wildly inefficient in providing aid in emergency situations. We should think more about broad environmental policy.

Jon Doggett
National Corn Growers Association

The corn industry has experienced substantial transition since the 2002 Farm Bill, including growth in yields per acre. While increasing demand for ethanol has surely played a role, it is only part of the epic increase in prices from $1.80 to $4.00 in only thirteen months. In response, we must come up with a revenue-per-acre safety net at a reasonable rate using a market-based approach.

Scott Faber
Environmental Defense

There are powerful issues influencing the 2007 Farm Bill that were not mentioned in the 2002 negotiations, including equity, environmental problems, and health. While these issues are important steps in the right direction in policy, they may also cause legislators who would not normally pay attention to the Farm Bill to become involved.

AEI intern Jonathan Flugstad prepared this summary.

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