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Federal Farm Spending: Budget Issues and the Farm Bill

Although U.S. Secretary of Agriculture Mike Johanns did not appear on Thursday before the House Agriculture Appropriations Subcommittee (his appearance has been postponed), he did testify before the House Budget Committee on Thursday. Sec. Johanns was joined by Deputy Secretary Charles F. Conner,
U.S.D.A. Budget Officer W. Scott Steele and U.S.D.A Chief Economist Keith Collins.

According to a transcript of his remarks, Sec. Johanns indicated that, “Farm program spending can be highly variable, largely reflecting changes in commodity markets as well as emergency spending to address natural and economic disasters in the agriculture and rural economy. Mandatory spending on farm programs funded through CCC [Commodity Credit Corporation], including the Conservation Reserve Program (CRP), has decreased from a record-high of $32.3 billion in 2000 to just over $20 billion in 2006. We expect this trend to continue with CCC outlays estimated to decline to $11.7 billion in 2008 under current law, which assumes a simple extension of the 2002 Farm Bill. CCC outlays under the current law baseline are estimated to increase to an average of $12.4 billion annually from 2008 to 2017.

“The reduction in CCC outlays in 2007 to 2008 is driven largely due to higher crop prices. Prices are higher because of the dramatic increase in the demand for corn for ethanol production. Additionally, most of the other major commodities are also at relatively high price levels. These high commodity prices have lead to a significant reduction in CCC outlays, which indicates that farmers are relying more on the market for revenue than payments from the Government. Both the Administration and the Congressional Budget Office January baselines for CCC commodity programs show this effect. The rising demand of farm products for biofuel production coupled with strong export demand are expected to keep prices of most of the major CCC supported commodities at high levels for the coming years.”

Recall that this same trio, Sec. Johanns, Deputy Sec. Connor and Dr. Collins, also testified before the House Agriculture Committee on Wednesday. A news release issued yesterday by the National Association of Wheat Growers reminded readers that at the Ag Committee hearing on Wednesday, Committee Chairman Collin Peterson (D-MN) “noted that the budget baseline would provide 42.8 percent less for the commodity title in the 2007 Farm Bill than was provided for the 2002 Bill, even while the overall bill would receive more budget authority.

“Later in the day, Peterson and Ranking Member Bob Goodlatte (R-Va.) testified before the House Budget Committee on budget needs for the 2007 Farm Bill, urging Committee members to increase the financial resources available over the amount provided in the most recent CBO baseline.”

Despite budget estimates indicating a lower baseline, Successful Farming Business Editor Dan Looker reported on Thursday, “What will be in the 2007 Farm Bill? It could be a commodity title that looks much like today’s program, help for beginning farmers to get started in organic farming, and an expanded conservation program that’s tied to making ethanol from grasses and other biomass crops.

“Those were some of the hints that House Agriculture Committee Chairman Collin Peterson (D-MN) shared with reporters at a press conference Thursday.

“Peterson and the ranking Republican on the Ag Committee met with the House Budget Committee Wednesday to ask for more funds for the next farm bill. Because commodity prices have been driven up by demand for ethanol and biodiesel, the Congressional Budget Office last month made a projection, or baseline, that the new farm bill will need $60 billion less over the next 10 years for commodity programs than was projected for the 2002 Farm Bill.”

Mr. Looker added that, “Peterson said Thursday that he explained to the committee that farm programs haven’t used all the money allotted to them in 2002 and that they’ve helped keep the federal deficit from growing more. ‘We feel like we should have some consideration in that regard.’”

The article noted that, “Peterson said he sees little interest in cutting loan rates in the marketing loan program. The USDA’s recent farm bill proposal advocated making cuts there and increasing direct payments. It also has a revenue-based component, but the USDA proposal would base revenue payments on national-level prices and yields. Peterson questioned Thursday whether that would really be a better safety net instead of just having a permanent disaster program.

“‘If worse comes to worse, if we just extend the commodity title as is, it wouldn’t be the end of the world,’ Peterson said.”

In a related development, DTN Political Correspondent Jerry Hagstrom reported on Friday (link requires subscription) that, “House Agriculture Chairman Collin Peterson, D-Minn., said Thursday he will propose the upcoming Iraq war supplemental appropriations bill include a provision to extend the Milk Income Loss Contract program for one month so it would be included in the baseline for the 2007 farm bill.

“In a conference call to reporters, Peterson said he also expects the supplemental to include the agriculture disaster aid he has proposed. That would provide aid to Midwestern farmers and ranchers who experienced drought or flooding in 2005 or 2006 as well as aid for producers who have losses from snowstorms in 2006 and 2007.

“Under congressional budget rules, the baseline for future spending includes only those programs that exist at the end of the fiscal year on Sept. 30. The MILC program expires Aug. 31. If Congress extends the MILC program for one month at a cost of $40 million, CBO will include $3.4 billion over 10 years for the MILC program in the baseline for the 2007 farm bill, Peterson said.”

Reuters writer Christopher Doering who also reported on this issue, added that, “Establishing a baseline would extend the MILC program for five more years without requiring the House Agriculture Committee to come up with additional money to fund it.

“MILC sends a check to dairy farmers when the price for fresh milk bound for grocery stores falls below $16.94 per 100 lbs. Each farm is eligible for payments on up to 2.4 million lbs of milk a year, equal to the production from 123 cows.

“USDA proposed reviving the MILC subsidy as part of its $87.3 billion farm bill plan released last month. Payments, made on up to 2.4 million lbs of milk per year per farm, would begin at 34 percent, and decline to 20 percent over five years.

“The House and Senate Agriculture Committees are both in the early stages of crafting a farm bill to replace the 2002 measure that expires in September. Peterson said he expected to know within two or three weeks how much money to request from the House Budget Committee for the House plan.”

Interestingly, as the Ag Committees prepare Budget Committee requests that will presumably exceed budgetary baseline estimates, the U.S. farm economy appears to be in relatively healthy condition. The explanation for the positive signs from the agricultural economy is largely the same as the reason for lower budget projections: firm market prices.

Associated Press writer Roxana Hegeman reported on Thursday that, “When the spring planting season arrives, Vance Ehmke will toil in his wheat fields in the comfort of a new John Deere 8330 tractor.

“He won’t be the only farmer breaking in new equipment.

“Farmers who have nursed along aging equipment through tough years of drought are now jostling to replace it in time for spring planting. Moist winter weather across the Great Plains coupled with high grain prices driven by ethanol demand have sparked an economic boom here in farm country.

“‘We haven’t seen commodity prices like this for years,’ said Mike Woolverton, an agriculture economist at Kansas State University. ‘This is a golden opportunity for agriculture. Someday we will look back and think these are the golden years.’”

And an item posted on Friday at Barron’s Online reported that, “We attended the National Farm Machinery Show in Louisville, Ky., on Feb. 15. Overall, the tone was pretty upbeat relative to the past few years.

“Deere & Co. noted that its dealers often ‘get an ear full’ from customers at this show, but this year farmers are focused on equipment and potential purchases.

“[Case New Holland unit] Case IH noted that it now has a six-week backlog for over 100 horsepower tractors, and 100% are pre-sold versus the same time last year when the order backlog was about four weeks and only about half were pre-sold.

“Deere also noted that it has a 90-day backlog for its 8000 series tractors.

“Several contacts noted that as non-traditional corn growers switch into corn, they need to access corn harvesters, by either acquiring equipment or renting corn harvesters. This is driving sales of both new and used equipment.”

And the U.S. Department of Agriculture’s Economic Research Service recently indicated that, “In 2007, net farm income is forecast to be $66.6 billion in 2007, up $6 billion from 2006 and $9 billion above its average for the previous 10 years. Market prices for corn, wheat, and soybeans are forecast to remain above 2006 levels. In addition, prices for sorghum and hay are projected to be higher in 2007 as higher prices for corn result in increased demand for these commodities as feed substitutes. The farm income forecast reflects an expected increase in the production of corn and declines in the production of soybeans and sorghum as high corn prices encourage farmers to switch production to corn. The value of livestock production is forecast to be $125.7 billion, up $3.1 billion from 2006. Government payments to farmers are expected to total $12.4 billion in 2007, down from the $16.3 billion paid out in 2006.”

For more complete E.R.S. forecast estimates, just click here.

And Steve Jordon reported in today’s Omaha World-Herald that, “The rural economy in the Midwest is strong and has a healthy outlook for the next six months, according to a survey of small-town bankers.

“The MainStreet Economic Index calculated from the survey, developed by Creighton University economist Ernie Goss and Greeley, Neb., banker Bill McQuillan, was 60, down slightly from January but still well above the level of 50, which indicates growth. A year ago, the index was 48.1.

“For the coming six months, the bankers’ survey showed an outlook index of 73.5, a record for the survey, which began in late 2005. Farmland prices, loan volume, ag equipment sales, hiring and bank deposits all showed growth, while home sales and retailing improved but still indicated declines.

“Goss said ethanol production and strong grain prices are prompting the economic improvement, which is creating labor shortages in some areas. The bankers in the survey are from Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, North Dakota, South Dakota and Wyoming.”

***

A Farm Bill covers several years and it is hard to predict if the renewable fuels-demand driven surge in the market prices of some program crops will continue over the span of the 2007 Farm Bill. But as the debate over budget allocations unfolds, it seems likely that some participants may point out that additional resource allocations for Title I commodity payments are not warranted in this high price environment. As Secretary Johanns stated in his testimony before the House Budget Committee, “These high commodity prices have lead to a significant reduction in CCC outlays, which indicates that farmers are relying more on the market for revenue than payments from the Government.”


-Keith Good