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Washington to cut subsidies

They mean it this time. Cuts to subsidies for commodity crops are virtually certain, even if the exact new farm programs haven't been hammered out by the congressional agriculture committees charged with writing a new farm bill.

By Thanksgiving, the 12-member Joint Select Committee on Deficit Reduction must show how it will cut more than $1 trillion from the deficit over 10 years.

At press time, agriculture was likely to contribute just over $20 billion to that in Congress. And three major groups battled to influence the 12 deficit cutters known as the Super Committee: farm and commodity groups, conservation and wildlife groups, and supporters of spending on food stamps and other nutrition programs for the poor.

They're not one big happy family.

Most Republicans in Congress want bigger cuts in general, with nutrition programs paying for a share of them. One of their top goals is avoiding any more cuts to federal subsidies for crop insurance.

To protect their programs, conservation and nutrition groups want to end or reduce direct payments, limit payments from any new commodity program to modest-size farms, and tie crop insurance to conservation compliance rules.

The nonfarm critics

Even before the October 14 deadline for members of Congress to submit ideas to the Super Committee, serious farm bill proposals were being written.

The Congressional Research Service looked at a dozen of them and broke them into four categories: minor policy changes, revised revenue programs, enhanced crop insurance, and other ideas such as going back to a Farmer-Owned Reserve and acreage set-asides.

To get a feel for how activists outside of farm country view all this, consider the way the Environmental Working Group (EWG) describes some of the new ideas.

Here's how David DeGennaro, a former staffer for Representative Ron Kind (D-WI) who now works for EWG, describes revenue programs proposed by the American Soybean Association and the National Corn Growers Association: “The plans proposed by the Soybean Association and Corn Growers would set a revenue guarantee for each participating farmer. They want a new government program to supplement existing crop and revenue insurance. The guarantee would be based on the five-year rolling average income, meaning that for most crops, the program would start out guaranteeing the record income levels of the last five years. If a farmer's revenue should fall back down to a more normal historical average, he or she could triple-dip by making decent money in the marketplace, collecting crop insurance, and cashing in on the new revenue guarantee.

“The audacity of these proposals would be breathtaking if they had come from any other industry,” he adds.

DeGennaro contends that when commodity groups say they'll give up direct payments, which cost about $5 billion a year, “they are striving to shift most or all of the money for direct payments into some other, less obviously unfair and wasteful program.”

Real-world reductions

Others say the cuts are real. Agricultural economists have crunched the numbers on some proposals and found they will likely be less generous than in the past.

One bill getting a lot of attention is the Aggregate Risk and Revenue Management Act (ARRM) introduced in September by two Democratic Senators, Dick Durbin of Illinois and Sherrod Brown of Ohio, and two Republicans, John Thune of South Dakota and Dick Lugar of Indiana. The legislation drew praise from the Corn Growers.

ARRM would replace direct payments, countercyclical payments, ACRE, and SURE. Coverage would be similar to ACRE (Average Crop Revenue Election) but based on revenue in crop-reporting districts – not an entire state. And settlement would be based on the current year's district yield times the crop insurance harvest price.

Kansas State University economist Art Barnaby sees ARRM as less generous.

“In the case of wheat, it pays about 30% of the time. But that could be a payment as small as $1,” Barnaby says. “That means 70% of the time it does not pay. That's OK, because it's supposed to be risk management. Under risk management, one would expect no loss in most years.

“However, when there is a loss, the payment is big. But commercial farmers cannot cover their loss because of the $65,000 payment limit,” he adds. “With a frequency of claim less than 30%, commercial farmers would be better off collecting a $40,000 direct payment every year,” Barnaby says.

“Unless you are willing to do something with payment limits, then where is the risk management? I have suggested a floating payment limit that would float based on the size of loss,” he says.

“For example, for every 1% loss under ARRM, Congress would add $10,000 to the payment limit,” he says. “The maximum payment under ARRM is 15%, and that would add $150,000 to the payment limit in years when the maximum is hit (about 5 out of 36 years for Kansas wheat). Nobody wants to talk about payment limits, but if the policy is risk management, then one needs to talk about payment limits.”

Fewer corn belt payouts

University of Illinois economist Gary Schnitkey has calculated how ARRM would have paid compared to existing programs for corn and soybeans.

“Over the 1995 through 2010 period, actual commodity payments average $42 per acre, while simulated ARRM payments are $11 per acre, 75% less than actual commodity program payments,” he says.

Revenue proposals like ARRM would enhance risk protection from crop insurance. But is crop insurance safe from more cuts?

The Obama administration has proposed cutting federal support for crop insurance by another $8 billion over 10 years, on top of $12 billion in projected cuts already made in the 2008 Farm Bill and USDA's 2010 standard reinsurance agreement with the industry. House Ag Committee chairman Frank Lucas (R-OK) and Senator Pat Roberts (R-KS), the ranking Republican on the Senate Ag Committee, have said the Obama plan “puts the entire program at risk.”

Tom Zacharias, president of National Crop Insurance Services, hopes cuts can be avoided. “All the farm groups, in their proposals, emphasize crop insurance as fundamental,” he says. “We have to believe and be hopeful that the members of the Super Committee realize this as well.”

If farmer subsidies are reduced, farmer participation could drop, he says. This year, 80% of field crops were insured on 260 million acres. In 1993, only about 85 million acres were insured.

Partly because of low participation, “in the early 1990s, the program was criticized for poor actuarial experience,” Zacharias says. Steep cuts to the program could bring back such criticisms.

If factions fighting over farm spending can't agree, it could affect crop insurance, says a Democratic congressional staffer.

“Republicans, in general, are pushing for a quite large overall-spending reduction number out of the Agriculture Committees' programs,” says the staffer. “This push is stronger on the House side, with perhaps at least $50 billion or so sought in cuts. To get to those big numbers, they have to take substantial money out of conservation and nutrition. Although to be fair, I don't think they exempt farm commodity programs entirely…. What's not so much mentioned (except by the administration) is crop insurance, which is expected to cost about $8 billion a year on into the future. The more the Republicans push for very large cuts out of the Agriculture Committee programs, the greater the pressure to draw in crop insurance spending and start cutting it seriously.”

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