With Congress in the early stages of drafting the 2012 farm bill and the Nation at a fiscal crossroads, there will be calls for reductions in disbursements to the agriculture sector – everything from conservation programs and crop insurance to renewable energy and rural development programs will be under the microscope. There will be a healthy debate in Main Street cafes and grain elevators across the country as to how the next farm bill should look and the structure of a proper safety-net for American agriculture.
Case-in-point: the issue of direct payments. Direct payments (otherwise known as fixed or decoupled payments) are a holdover from the Federal Agriculture Improvement and Reform Act of 1996 (Public Law 104-127) and were meant to be phased-out over time. Instead, they have become one of the most controversial issues whenever the legislation is up for renewal. At a cost of $4.9 billion per year, the payments were seen as the least trade distorting mechanism and are intended to provide income support during periods of low prices for corn, wheat, soybeans, cotton, rice, and other crops. Based on a producer’s historical acreages and yields, geographical and philosophical divides often manifest themselves whenever agriculture policy becomes part of the public discourse.
The effect of direct payments is the same as a lump-sum payment; revenue rises but output is unaffected because per-unit net returns do not change. The increased revenue is likely to raise the producers’ consumption, investment, and savings – with the largest percentage usually going to consumption. Direct payments are also the most likely to be capitalized in land costs, thereby holding the potential to artificially inflate land values.
In the past, reduction or elimination of direct payments has been a political “non-starter” for some producers and their affiliated stakeholder organizations; the call to do so has not always been politically viable. Producers and agricultural lenders appreciate the certainty of direct payments and have come to view them as a steady source of revenue. As such, they much prefer this mechanism over more uncertain (and market related) payment mechanisms. Producers in states such as Iowa, Illinois, Minnesota and Texas have traditionally benefited the most from direct payments, while producers from outside the Midwest (i.e. east and west coasts) typically benefit from other farm programs.
This viewpoint, however, is not universally shared by stakeholders and communities throughout the heartland. As with the 2008 farm bill debate, there is likely to be a push to end direct payments in lieu of some other mechanism such as an enhanced crop or revenue insurance program. In fact, some commodity groups and rural interests are exploring options along these lines but even this approach has its detractors. A reallocation of funds away from direct payments and towards enhanced risk-management tools such as crop insurance is seen by some as another benefit to larger farm operations at the expense of small and mid-size farms. Instead, some interests would prefer to retain a small direct payment program that is well targeted to small and mid-size farms rather than shift the money to what they view as “uncapped” crop insurance subsidies.
Farm bill politics and issues related to the agriculture sector are complex, with the issue of direct payments being only one of many examples. The challenge then becomes one of engaging in a rationale discourse between stakeholders that integrates practical policy alternatives with fiscal discipline. An understanding of dynamics such as these will lead to a greater understanding and appreciation that rural America is not of one mind when it comes to the issue of USDA programs.
Please send questions, comments and suggestions to:
Dave Ladd, President
RDL & Associates, LLC
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