7 top farm bill debate questions
Farm bill markup likely will begin soon in both the Senate and House Agricultural committees. Much of the focus for traditional program crops will be around three programs: a revenue program, a target price program, and a supplemental crop insurance program. While the exact nature of the programs will depend on negotiations, what is almost certain is that the programs' rationale will be risk management. Given a risk management focus, Farm Bill negotiations will need to debate and somehow resolve the following seven questions.
Question 1: Will support provided to some crops be greater than the support provided strictly by risk management considerations?
Risk management programs provide a level of payments that more closely follows gross revenue than do the historical Farm Bill Title 1 programs. For example, a continuation of the current direct payment program results in higher payments for rice and peanuts than for corn, soybeans, and wheat. Modifications of the risk management focus may be needed to gain political support for differing regions and crops.
Preferential treatment can be implemented by various measures. For a revenue program, minimum prices could be put in place, as was done for rice and peanuts in the 2012 Senate Farm Bill. Target prices can be set higher relative to expected market prices for some crops than other crops, as was done for rice and peanuts in last year's House Agricultural Committee Farm Bill. In a supplemental crop insurance program, higher subsidy levels and higher loss multiples can be given to some crops over other crops, as was done for cotton in their STAX program compared to the Supplemental Coverage Option (SCO) proposed for other program crops in the 2012 Senate Farm Bill and 2012 House Agricultural Committee Farm Bill.
Question 2: Will the programs focus on across-year or on within-year protection?
A supplemental crop insurance program will enhance crop insurance protection, thereby increasing within-year protection. A revenue and target price program respectively protect against revenue and price declines that occur across years. Because all three of the programs must fit within budget parameters, the greater the focus on a supplemental insurance program the lower across-year protection will be, and vice versa.
The discussion in the preceding paragraph presumes that the supplemental insurance coverage provided by STAX and SCO programs is the same proposed in last year's farm bill drafts. Both of these programs based their revenue guarantees on crop insurance's preplant projected prices. These projected prices are based on harvest futures prices for the crop year. This design choice results only in within-year protection. An alternative design option is to base prices on historical prices, which would introduce the potential for across-year protection.
Question 3: Will the across-year programs focus on price or revenue protection?
It is easier to forecast payments with a price program. Prices lower than the support price will results in payments. In contrast, payments by a revenue program depend on low revenue, not low price. Low prices may be offset by high yields resulting in no payments. Thus, forecasting payments by a revenue program requires consideration of the interactions of yield and price when determining revenue and thus revenue program payments. On the other hand, low revenues, not low prices, are generally a more accurate indicator of poor financial performance. So revenue programs generally are viewed as targeting payments better to years in which revenues are low.