The Devil is in the Details: Base Updating and the Cost of New Farm Bill Programs

Vincent H. Smith Montana State University Barry K. Goodwin* North Carolina State University

January 7, 2013

*This policy brief is part of AEIs American Boondoggle: Fixing the 2013 Farm Bill series. Vincent H. Smith is Professor of Economics at Montana State University and a visiting scholar at the American Enterprise Institute. Barry K. Goodwin is the William Neil Reynolds Professor of Agricultural Economics at North Carolina State University.

Introduction Hopes for a 2012 farm bill are now ancient history. Instead, there will likely be a new farm bill in January 2014. One thing is more certain: in Congress, there is extensive agreement that a major program embedded in successive farm bills since 1996, the $5 billion-a-year Direct Payments Program, will be discontinued in any new farm legislation. This program provides substantial subsidy payments, mainly to wealthy farmers and landowners, based largely on what was produced on the land in the early and mid-1980s. However, one feature of that programthe base acres and base acre yields for each crop that are used to determine the subsidies a farm receivesis likely to be retained in some form and linked to two new subsidy program proposals included in the Senate and House bills. One is the price-support program called Price Loss Coverage (PLC), which links price supports more closely to the record and near-record agricultural commodity prices for major crops that farmers have enjoyed over the past four years. The other is a revenue support program called Agricultural Risk Coverage (ARC) that, especially over the next three or four years, would guarantee farmers minimum levels of gross farm incomes that are also close to the near-record levels they have enjoyed over the past five years. It is likely that farmers will be given the opportunity to choose which of these two new programs will best serve their perceived needs. Most are likely to pick the program that provides them with the largest subsidies. Regardless of any implementation details and rules built into the two programs, both are likely to be more expensive for the taxpayer and provide larger subsidies to mainly wealthy farm households than the current Direct Payments Program. The new programs would pay out more in subsidies as crop prices (and farm revenues) fall. Because recent and current prices for major feed and food-grain crops (for example, corn and wheat) have recently been historically high but
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are likely to trend downward in the coming years, the programs are likely to impose a substantial burden on taxpayers. However, program implementation details and rules could substantially affect the size of those payments. With farm subsidy programs, as with many other government programs, it is often necessary to delve through the legislative and implementation details to understand how costly they may become. This analysis examines the impact of the definitions of base acres, base yields, and base levels of production on the potential costs of the proposed ARC and PLC programs. Base Acres, Base Yields, and Base Production Eligible for Farm Subsidy Payments For each crop eligible for subsidies under the current Direct Payments Program including major crops such as corn, soybeans, wheat, rice, cotton, barely, and peanutsa farm has a given amount of base acres and base per-acre yield. For most farms, these base acres and base yields were established almost 30 years ago using areas planted and yields obtained for each eligible crop between 1983 and 1986. Current base acres and base yields for crops eligible for direct payment subsidies were therefore established using data on the acres planted to those crops and their yields between 1983 and 1986. Under the provisions of the 2002 farm bill, however, some farms chose to update their base acres and yields, especially if they raised crops such as sunflower and lentils that, before 2002, had not been eligible for direct payments. Whether or not farmers continue to raise the crops for which they have production bases (base acres multiplied by base yields), they still receive a direct payment check. The amount of the check depends on the base acres, base acre yields, and the Direct Payment Program payment rate for the eligible crop. Suppose, for example, a farmer in Iowa has 1,000 base acres of corn
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with a base yield of 100 bushels per acre. She would then have a direct payment base of 100,000 bushels of corn (not corn she raised in 2012, but the amount of corn raised on her 1000 acres of land in an average year in the mid-1980s). In 2012, under the terms of the 2008 farm bill, the federal government would then give that farmer a direct payment of 28 cents per bushel on 85 percent of the farms payment base of 100,000 bushels of corn, or $23,800. A larger amount of base production (more base acres or a higher base yield) would mean that the farmer would receive a larger check. Payment limits do apply: a typical farms Direct Payment Program subsidies are capped at $80,000, but because farmers are often able to redefine the scope of their operations, that cap is largely ineffective. The Basis for Payments under New Farm Subsidy Programs In recent months, a vigorous debate has taken place among farm bill conference committee members and between the House and Senate agricultural committees about the basis on which new PLC and ARC program payments should be made to farmers. Some, like Representative Colin Peterson (D-MN), have urged that the new payments be made on every acre planted to each eligible crop and every bushel of crop raised by farmers each year; that is, on a farms current production of eligible crops. The proponents of the current production approach argue that the general public is willing to support subsidies tied to farmers current farming efforts. They seem to believe that the political optics for such subsidies are positive, but that the general public has a strongly negative view of welfare subsidies like direct payments, which are tied to past production. Opponents of the current production approach to administering subsidies under the new ARC and PLC programs, such as Senator Pat Roberts (R-KS) and agricultural commodity groups
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that lobby for farmers who raise crops like wheat and corn that heavily rely on export markets, have a different perspective. They argue that the current production approach transparently violates U.S. World Trade Organization commitments on domestic agricultural subsidy programs because it directly links ARC and PLC subsidies to current production. The new subsidy programs would then be unambiguously viewed as trade distorting, and the United States could face serious international trade relations problems in the future. Accordingly, opponents of the current approach prefer to link PLC and ARC payments to historical production using the concept of base acres and base yields. The compromise that appears to be emerging from the farm bill conference committee is to allow farmers to update their base acres and base yields using production information for the most recent four years prior to the passage of a new farm bill (presumably in 2014). Moreover, if the history of the 2002 farm bill is any guide, farmers will be allowed to choose whether they update their base acres and yields. The choice option turns out to be potentially important, because if base updating were mandatory for all crops, payments for some commodities such as wheat, barley, rice, and cotton would be considerably lower while payments for other crops such as corn and soybeans would increase substantially. While yields per acre have increased for all major crops since the mid1980s, the areas planted to crops such as wheat, barley, cotton, and peanuts have declined substantially. For soybeans, for example, both the area planted to the crop and crop yields have increased dramatically.

The Potential Taxpayer Costs of Permitting Base Updating To explore which major crops would be winners versus losers from base updating, we carried out the following experiment. We obtained data from the US Department of Agriculture (USDA) on the total amount of base acres, base acre yields, and base production eligible for subsidies after base updating was permitted in 2002 for eight major crops barley, corn, cotton, peanuts, rice, grain sorghum, soybeans, and wheat. Using data from the USDA National Agricultural Statistical Service on nationwide, county-level production yields and harvested acres for 200912 (data for 2013 are not yet available), we then estimated what the levels of new base acres, base yields, and production eligible for subsidies would be under base updating for all crops and compared the 2002 bases with the estimated updated base acres. These data are presented in Table 1. Under base updating, with one exception (grain sorghum for which yields would increase by only 2 percent), per-acre base yields for all crops would increase by more than 20 percent. For example, base wheat yields would increase by 26 percent and base corn yields by 28 percent. However, between 2009 and 2012, much less land was planted to crops such as wheat (39 percent fewer acres), cotton (51 percent fewer acres), rice (37 percent fewer acres) and peanuts (18 percent fewer acres). Somewhat less land was planted to corn (4 percent fewer acres) but much more land was planted to soybeans (41 percent more acres).

Table 1
Changes in Base Acres, Base Yields and Base Production Eligible for Subsidies between 2002 and 2014
2002 Base Acres (000s) 2014 Updated A Base Acres (000s) Percent Change in B Base Acres 2002 Base Yields per acre 2014 Updated Base Yields A per acre Percent Change in B Base Yields Percent Change in Base C Production

Crop

Barley Corn Cotton Peanuts Rice Sorghum Soybeans Wheat

8807 88140 18939 1521 4538 12142 53538 76463

2741 85013 9328 1242 2844 5096 75558 46851

-68.9% -3.5% -50.7% -18.3% -37.3% -58.0% 41.1% -38.7%

49 bu 114 bu 639 lbs 2990 lbs 51 bu 58 bu 34 bu 36 bu

70 bu 146 bu 825 lbs 3675 72 bu 59 bu 42 bu 46 bu

43.7% 27.7% 29.2% lbs22.9% 41.0% 2.1% 23.5% 26.3%

-55.3% 23.1% -36.4% 0.4% -11.6% -57.2% 74.3% -22.6%

Estimates for 2014 base yields and acres obtained using USDA National Agricultural Statistical Service data on county level yields and harvested acres for each crop over the four year period 2009-2012. Note that bu represents bushels and lbs represents pounds.
B

Percent changes in base acres and base yields are obtained by dividing the changes in those base acres and yields between 2002 and 2014 by their 2002 values.
C

Percent changes in the base production eligible for subsidies for each crop are calculated as the difference between the estimated 2014 base production (2014 estimated base acres multiplied by 2014 estimated base yields) and 2002 base production (2002 base acres multiplied by 2002 base yields) divided by 2002 base production. Source: Authors calculations.

Figure 1

Percentage Change in Production Eligible for Subsidies under Base Updating

80.00%

60.00%

40.00%

20.00%

0.00%

-20.00%

-40.00%

-60.00%
Series1

BARLEY -55.26%

CORN 23.13%

COTTON -36.36%

PEANUTS 0.37%

RICE -11.65%

SORGHUM SOYBEANS -57.16% 74.25%

WHEAT -22.62%

Under base updating, with one exception (grain sorghum for which yields would increase by only 2 percent), per-acre base yields for all crops would increase by more than 20 percent. For example, base wheat yields would increase by 26 percent and base corn yields by 28 percent. However, between 2009 and 2012, much less land was planted to crops such as wheat (39 percent fewer acres), cotton (51 percent fewer acres), rice (37 percent fewer acres) and peanuts (18 percent fewer acres). Somewhat less land was planted to corn (4 percent fewer acres) but much more land was planted to soybeans (41 percent more acres).

Base updating would therefore substantially benefit some crops in terms of the amount of production eligible for the new ARC and PLC subsidies, but would hurt other crops. In the aggregate, corn and soybeans would be substantial winners from base updating, with production eligible for subsidies increasing by more than 20 percent for corn and more than 70 percent for soybeans; peanut producers would roughly break even, while wheat, cotton, rice, barley, and grain sorghum producers would experience substantial decreases. These data are shown in Figure 1. Giving farmers a choice about base updating would almost certainly mean that only farmers who benefit would update their base acres and yields. To estimate base updatings impact on government outlays, we consider two issues. First, we estimate the impact on government expenditures on the current Direct Payments Program if all farmers were required to update base acres and base yields for all crops to their averages over 200912. Then, we estimate the impact on government expenditures on that program if farmers only update their base acres and yields for the crops for which base updating is beneficial. To obtain estimates of the impact on government expenditures on Direct Payment Program subsidies when base updating is mandatory for all crops, we multiplied the 2002 production base and the updated production base for each of the eight crops by the 2012 Direct Payments rate for those crops (in each case multiplied by 85 percent, the amount of base production eligible for a subsidy). The result is an increase in total Direct Payment Program subsidy expenditures of 5.4 percent, but there are big winners (corn and soybeans) and big losers (wheat, cotton, and peanuts).

We also examine the regional effects of requiring all farmers to update their bases using total subsidy payments by county (the sum of the difference in direct payments for each crop under mandatory base updating). Figure 2 shows that on average, farmers in counties colored in red, green, and dark blue would receive fewer, and in many cases substantially fewer, direct payments (and for that matter, ARC or PLC subsidies) under mandatory base updating. Only farmers in the light blue counties would be net beneficiaries, but would generally enjoy substantial gains. Not surprisingly, the winner counties are in corn belt states; the loser counties are located almost everywhere else (especially in wheat and cotton-growing areas of the northern, central, and southern Great Plains and in the Southeast). Politically, mandatory base updating would be no more viable in 2014 than it was in 2002.

Figure 2

Percentage Change in Program Benefits

Eight Major Program Commodities, 2002 Base vs. 2009-2013 Production

d_cost

-100.00000 - -99.17201 -38.93426 - 2.33350

-99.11920 - -38.94396 2.38408 - 367.22784

However, voluntary base updating is a different story. Assuming farmers only update their bases for crops where the production base increases (essentially, corn and soybeans), but do not update their bases for other crops, the total cost of the Direct Payments Program to the taxpayer would increase by 18.2 percent, a substantial increase by any standard. Impacts would likely be similar for payments made under the ARC and PLC programs. Clearly, the taxpayer would be better off if no base updating were allowed, but equally clearly, all farmers have a major stake in encouraging Congress to allow voluntary base updating rather than mandatory base updating. Summary The agricultural sector of the US economy is currently enjoying record profits that have increased by more than 100 percent over the last few years. Therefore, is there any rationale for providing billions of dollars of support to a wealthier segment of society that enjoys higher incomes than other businesses? As observers of farm policy for the last 25 years, we still do not have a reasonable answer to this question. The shallow-loss programs that seem certain to be a part of the new farm legislation operate in a manner that increases income guarantees as incomes rise. This is a perverse feature of the current Average Crop Revenue Election (ACRE) program, which offers a glimpse of how the shallow-loss programs would operate. Guarantees are based on prices in the most recent twoyear period. Higher prices and higher yields translate into higher revenue guarantees. Nationalaverage corn prices in 2011 and 2012 were $6.22 and $6.89 per bushel, respectively; in contrast, current corn futures prices for early 2014 (the March 2014 contract) are $4.24, nearly 40 percent lower than they were in 2012. Such low prices would certainly trigger shallow-loss payments,
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even though market conditions are similar to what they were just a few years ago. For example, the 2009 marketing year average price for corn was $3.55 per bushel. Ideally, these new shallow-loss programs would not be implemented. If Congress insists on introducing them, certainly the farm sector should not be allowed to voluntarily update the bases on which it receives such subsidies. Voluntary base updating would enable largely wealthy farmers to pick and choose the production numbers that maximize their subsidies, and would leave taxpayers holding the bag. This creates more space for a combination of inaccurate and outdated methods for calculating subsidies for which there is no convincing policy rationale in the first place.

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