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Spotlight on Economics: Issues and Challenges of the 2012 Farm Bill

Economic conditions under which the 2012 farm bill is being discussed are different from previous farm bills.

By Won W. Koo, Chamber of Commerce Distinguished Professor and Center for Agricultural Policy and Trade Studies Director

NDSU Agribusiness and Applied Economics Department

The U.S. farm bill has played a very important role in protecting producers from rapidly changing economic conditions across the world since 1933. The purpose of the farm bill has been to stabilize net farm income from weather and commodity market uncertainty.

The U.S. Congress should pass another farm bill in 2012 to replace the current farm legislation (2008 farm bill). However, economic conditions under which the 2012 farm bill is being discussed are different from previous farm bills.

In 2002, corn prices averaged $2.32 per bushel and there was a federal budget deficit of $410 billion. Today, corn prices are averaging $6.60 per bushel and there is a federal budget deficit of $1.1 trillion. Commodity prices have increased significantly since 2008. High commodity prices, along with the large federal budget deficit, could make it difficult to formulate a new farm bill

The Center for Agricultural Policy and Trade Studies in the NDSU Department of Agribusiness and Applied Economics and U.S. Sen. Kent Conrad organized a conference titled “2012 Farm Bill: Issues and Challenges” in November 2011 to discuss the direction of a new farm bill under the large federal budget deficit.

During the conference, U.S. Sens. Conrad, John Hoeven and Amy Klobuchar; U.S. Rep. Rick Berg; and U.S. Department of Agriculture Undersecretary of Agriculture Michael Scuse, as well as national leaders of commodity groups, concluded that the new farm bill should be centered on a safety net and cost efficiencies.

Because crop insurance is a main program providing a safety net for producers and is not trade distorting under the World Trade Organization rules, the speakers said it should be the main component of the new farm bill.

However, a large challenge is to reduce spending under the federal budget deficit. As of now, there are no proposals supported by Democrats or Republicans, mainly because of political and economic reasons. It is more likely that current legislation will receive a one-year extension.

Conrad proposed a farm bill alternative called the Revenue Loss Assistant Program (RLAP).The purpose of the RLAP is to provide better income protection and protection from shallow loss, which is a decrease in farm revenue stemming from a gradual decrease in commodity prices before the revenue levels under federal crop insurance can be determined.

The RLAP would cover 65 percent of the revenue loss not covered by crop insurance. The direct payment and Average Crop Revenue Election program (ACRE) under the 2008 farm bill would be eliminated under the RLAP. It is simpler in terms of program operation and easier to understand than the current farm legislation because the program eliminates direct payments and ACRE. In addition, government spending under the RLAP is less than under the current program because of the elimination of various payments.

The goal of farm legislation is to provide income protection for producers under increasing uncertainty stemming from intertwining macroeconomic conditions and commodity markets under globalization.

Also, it must be constrained by the federal budget deficit. Currently, agriculture is experiencing a period of high prices, high income and general prosperity. However, history tells us that when commodity prices soften, production costs generally do not, which causes a significant drop in farm income.

That scenario happened after high commodity prices in 1973, 1974 and 1996, so a new farm bill is needed to protect producers adequately from that condition and increasing uncertainty stemming from globalization.

NDSU Agriculture Communication – April 25, 2012

Source:Won Koo, (701) 231-7448, won.koo@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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