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Devolution of Farm Programs Could Broaden States' Role
in Ag Policy
USDA/NRCS |
Click photo to enlarge
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U.S. farms vary greatly in size, specialty, and household
characteristics. U.S. regions differ markedly in natural resource
endowments. And States themselves are widely divergent in terms
of their preferences as to how funds from agricultural programs
should be spent. Given this diversity, can the delivery of agricultural
programs be better tailored to distinct State and local circumstances?
Devolution, or the transfer to States of Federal funds and/or control
of those funds, is one way of adapting national policies to suit
local preferences more closely and of recognizing that program delivery
costs can vary geographically.
Devolution is not a new idea. Education is a classic
example. Decisionmakers at the local level—in county governments
and school boards—control the distribution and use of Federal
funds, under broad mandates from the U.S. Department of Education.
A recent example is the 1996 bipartisan “welfare reform”
legislation, which transferred financial resources and authority
for Federal income assistance to the States. Within the context
of agricultural policy, and especially with respect to conservation
programs, USDA has already provided States with latitude in designing
and delivering programs to meet their particular requirements, as
has been the case with EQIP, the Environmental Quality Incentives
Program.
In an international setting, European Union (EU) reforms
of its Common Agricultural Policy (CAP) move in the direction of
devolving farm and especially rural development policy to member
states. According to a July 2004 policy directive from the European
Commission, member states will be given more freedom in implementing
their programs through simplified rules, eligibility conditions,
and financial management arrangements. This European example may
be particularly instructive because of growing similarities between
the EU and the U.S. in shared goals for sustainable, competitive
agriculture and a healthy rural economy (see “U.S.
and EU Agricultural Policies Now Bear Similarities”).
As much as a third of current USDA spending could provide
the financial basis for further devolution from Federal to State
control. Representing about $22 billion annually, this candidate
funding is now associated mainly with commodity and natural resource
programs. Although these funds could be transferred to States based
on the existing, commodity-based distribution, alternative distribution
mechanisms could be designed to better address local environmental
or rural development preferences. Federal policymakers would continue
to provide direction on broad policy aims.
Devolution is worth considering whenever it has the potential
to make program delivery more cost effective and to better satisfy
citizens. When preferences and implementation costs vary across
the country, devolution may enable States to better respond to local
circumstances. Improvements may be possible because a central agency
administering a program at the national level may lack the information
needed to accommodate State-level differences. Political pressures
may dictate that a central government provide a more uniform level
of services, even when local communities would prefer lower or higher
levels of services. Another source of gain from devolution can arise
from large differences in costs across local areas. For example,
costs of cleaning up a groundwater aquifer may differ among jurisdictions,
depending on geology and the source of the contamination. So, even
if preferences for clean water were identical, economic considerations
may lead different jurisdictions to choose different methods to
clean up the site.
U.S. and EU Agricultural Policies Now Bear Similarities
The 2003-2004 comprehensive reform of the
EU Common Agricultural Policy (CAP) alters the way support
is provided to producers
of arable crops (grains, oilseeds, and protein crops), rice,
nuts, potatoes for starch, dried fodder, beef, sheep, milk,
tobacco, cotton, olive oil, and hops. All other commodity
regimes—such as fruit and vegetables, potatoes, and
sugar—remain unchanged, although reform of the sugar
program has been proposed.
Main features of the reform agreement include:
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Beginning in 2005, a direct income, or single-farm, payment
based on historical payments for arable crops, rice, beef,
and sheep will replace existing payments (mainly compensatory
and livestock headage payments) that are tied to current
production of commodities. Under an earlier reform, dairy
producers will receive a direct payment in partial compensation
for dairy support price cuts beginning in 2004. The dairy
payment will be included in the single-farm payment in
2007. Support for producers of cotton, tobacco, olive
oil, and hops will be partially converted to the single-farm
payment.
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To minimize risk of land abandonment,
member states may opt to retain support coupled to
production of arable
crops and beef for some proportion of direct payments.
The maximum proportion of payments that may remain
coupled
to production varies by commodity. The reform expands
a program (“modulation”) established in
2000 that allowed member states to reduce payments
for larger
farms and use the savings to fund rural development programs.
All member states will be required to implement such
programs.
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Support will be available to help farmers adapt to environmental,
animal and plant, health, animal welfare, and occupational
safety standards. Support will also be provided to defray
the cost associated with improving the welfare of farm
animals.
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Producer payments will be contingent on compliance with
environmental, food safety, and animal health and welfare
standards.
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Farmers are not required to produce any crop, and will
have increased flexibility regarding what they can produce,
with the exception of explicitly excluded products (perennial
crops, fruits and vegetables, or crops for which they
receive payments under certain sectors that have not yet
been reformed or for which there are restrictions on new
plantings).
The new features adopted in this agreement
bear many similarities to U.S. commodity programs, particularly
in two areas: emphasis
on income support decoupled from current production and focus
on the interactions between agriculture and the environment.
Both U.S. policy and the new EU policy feature—for a
group of commodities—direct payments based on historical
payment levels and not linked to current production. The EU
also joins the United States in providing farmers with greater
production flexibility. Both systems increase the policy focus
on protecting the environment through programs on working
lands. In addition, cross-compliance, which requires producers
to comply with environmental regulations and standards to
receive direct payments and has been required in the United
States for some time, would now be mandatory in the EU. Finally,
both the U.S. and EU continue to maintain commodity-specific
income support—the EU through its partial retention
of coupled payments and the United States through the marketing
loan program.
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U.S. Farms Diverse in Resources and Economic Activity .
. .
ERS has documented U.S. agriculture’s diversity
with respect to farm business and household structure and across
a number of
dimensions that characterize the natural resource base and rural
economies. The ERS farm typology documents variation across farms
with respect to financial size and household goals. The nine
farm
resource regions devised by ERS are based on geographic specialization
in the production of farm commodities, which derives from variation
in underlying climate, soil, water, topography, and other factors.
For example, the Northern Great Plains, which specializes in
wheat
and cattle, has the largest farms in terms of acreage and the smallest
farm population. The Eastern Uplands, with cattle, tobacco, and
poultry farms, has more small farms than any region.
At the county level, ERS classifies all U.S. counties according
to discrete categories of economic dependence on agriculture and
seven overlapping policy-relevant themes (housing stress, low education,
low employment, persistent poverty, population loss, nonmetro recreation,
and retirement destination). These
classifications provide a picture of diversity across regions,
States, and counties. Low-education counties, for example, predominate
in the rural South, while recreation counties predominate in the
rural West.
. . . And in Preferences and Goals
While the ERS classifications focus on environmental,
demographic, and economic factors, intangible differences across
States are in
play too. Preferences and goals are articulated in States’
own explanations of the aims of their departments of agriculture.
Differences in State funding levels for the same program or in tax
policies could also indicate a State’s agricultural and rural
agenda. A sampling of Midwestern States’ goals for their
agriculture departments reflects these differing aims.
The goals of the Iowa Department of Agriculture
are focused on farming and farmers and include increasing Iowa’s domestic
and foreign market share, developing and encouraging agricultural
education, and preserving Iowa’s soil. The Missouri Department
of Agriculture has a broader mandate. According to its strategic
plan, the department values a prosperous agricultural economy,
preservation
and enhancement of its environment and agricultural resources,
but also consumer confidence in a quality product at a fair price
and
opportunities for personal growth, professional development, and
organizational advancement for farmers. The Kansas Department of
Agriculture, by contrast, emphasizes its regulatory role in ensuring
food safety and environmental quality.
Based on their differing perspectives, States may look for different
emphases in policy or in the mix of programs they would provide
if given additional flexibility by devolution. For example, some
States may place more importance on environmental issues and, therefore,
may want to set aside more agricultural land than possible under
the existing Federal Conservation Reserve Program. Some States may
have many farms experiencing financial difficulties with little
opportunity for recovery. These States may choose to invest in job
training and education for farmers to help them move from farming
to other professions. Conversely, other States may view farm distress
as temporary and design subsidies to help farmers weather short-term
financial problems. Existing county administrative offices could
support delivery of this kind of program.
Still a Role for National Policies and Programs
Despite evidence of heterogeneity in preferences across States,
some policies are better maintained at the national level. Macroeconomic
policies, such as monetary policy and defense spending, are typically
more effective as Federal mandates. International trade agreements
that affect broad portions of the economy are best negotiated and
enforced at the Federal level. In agriculture, such national consistency
would be necessary to ensure compliance with trade agreements that
prohibit use of certain kinds of market-distorting policy instruments.
Establishing regulations to safeguard human health and to protect
environmental quality are usually national responsibilities, in
order to ensure consistent levels of protection regardless of political
boundaries. In addition, programs that provide fiscal stability
or that redistribute income usually require the deeper pockets of
the Federal Treasury.
But would devolution undermine national farm
policy goals such as income stability for farmers and the economy
or food security?
Probably not. Programs that allocated payments based on production
of supported commodities might once have had broad stabilizing
effects.
This is not the case today given the relatively small number of
U.S. farmers and the relatively small share of farming in the
national
economy. Stabilization of farmers’ incomes can be addressed
through Federal programs but also by private means, such as forward
pricing, crop yield or revenue insurance, futures, and options.
And, in contrast to the 1930s when the programs were initiated,
commodity programs have little redistributive effect, as the bulk
of payments go to farm households with incomes above the U.S. nonfarm
average. Food security for the U.S. no longer depends exclusively
on domestic production, which means that national commodity policies
are not the only determinant of whether Americans have enough to
eat.
With these considerations, which USDA programs
might be candidates for devolution to the State level? USDA’s budget outlays were
about $75 billion in fiscal year 2003. Of this total, $45 billion
was allotted to food and nutrition assistance programs and the Forest
Service, programs that will not be considered here because their
size (in terms of dollars and/or personnel) makes them deserving
of separate treatment and because they are less directly related
to farm, rural development, and agri-environmental goals. In addition,
USDA funding for food safety, animal and plant health protection,
and interstate and international market regulation will not be considered
candidates, nor will research spending on Federal intramural activities
aimed at national problem solving or information gathering. These
programs represented nearly $6 billion of USDA outlays in fiscal
2003. Another $2 billion in spending through direct research and
technical assistance grants is already deemed to be devolved. The
remaining $22 billion of USDA’s 2003 outlays for domestic
commodity and natural resource programs are candidates for devolution
to the States.
Potentially, then, “devolvable” Federal
programs represent about a third of annual USDA spending. What
might devolution look
like? One option would transfer program authority, but not financial
resources, to States. Another might transfer authority and require
States to match Federal funds. A third would give States the
authority
to design and administer their own programs and divide up the Federal
funds, allowing States to augment Federal contributions with
State
spending. This last option, block grants without a matching requirement,
would likely be most palatable to States.
Three Possibilities for Allocating Federal Funds
As the devil is always in the details, the next question concerns
how Federal funds are distributed across States. Allocations could
be made based on the current distribution, as the EU CAP reform
has done. While this might represent the political path of least
resistance, it is worthwhile to consider alternatives. Devolution
would not mean the Federal Government had lost interest in the broad
aims of farm, rural development, and natural resource policy.
Federal decisionmakers might decide to distribute
resources in a way that emphasizes environmental or economic
development goals
rather than commodity production. In that case, a second option
might be a more equal distribution among States based on a formula
derived from the Hatch Act, which divides Federal funding for
agricultural
research among the agricultural experiment stations in the States
and U.S. territories. The formula is intended to recognize variation
across States in the importance of farming and rural communities.
A quarter of the research funds is divided equally among the
States,
about half is allocated based on the shares of a State’s
population in rural areas and living on farms, and another quarter
goes to
States according to their participation in multi-State, multidisciplinary
projects.
A third method for distributing Federal commodity
and natural resource funds might be via means testing or an allocation
based
on the needs of farmers as defined by their income levels, similar
to other income assistance programs. Distribution of such “safety
net” funding could be determined by figuring the amount required
to raise each farm household’s income above the poverty line.
Thus, the distribution of funds would depend on the number of farm
households in a State that met this income assistance criterion.
Any distribution rule ought to consider the relevance of the current
definition of a farm (one with sales over $1,000 annually) to policy
goals.
Where Would Funds Flow?
How would funding by State vary with each distribution rule? For
each rule, ERS researchers identified the 10 States that would receive
the most funding, the middle 20, and the 20 States receiving the
least funding. Texas and Iowa are among the five largest recipients
under all three distribution rules. Under the current distribution
rule, the 10 largest recipients, mainly Great Plains and Heartland
States, receive about two-thirds of the $22 billion identified as
potentially devolvable spending. Using the Hatch Act rule, States
with relatively large farm and rural populations, such as North
Carolina, Pennsylvania, Ohio, and Illinois, would garner the most
payments, with about one-third of the $22 billion going to the top
10 States. Using a farm safety net rule would send half the money
to the top 10 States, which include States such as Kentucky, Missouri,
California, and Tennessee with relatively large numbers of farms
and, as it happens, relatively larger numbers of poorer farm households.
Comparing the distributions under the three rules illustrates
some important points about any potential devolution. First, devolution
by any block grant scheme makes the distribution of Federal support
much more transparent than when it is determined by individual commodity,
rural development, or national resource program requirements. Such
transparency did not likely provide much new information in the
EU, where the distribution of CAP funds had been scrutinized over
many years. In the U.S., the distribution of USDA funds to States
is not transparent to the average American. Second, both the Hatch
Act and the safety net options move the funding distribution away
from large commodity producers and toward smaller farmers and greater
numbers of rural people. Any time that the benefits of public policy
are directed away from one group and toward others, debate can be
expected.
Ultimately, the extent to which devolution of
Federal programs would produce more highly valued outcomes at
lower costs is an empirical
question. Some States may make unwise choices or suffer from administrative
inefficiencies. Nonetheless, States—like the Federal Government—would
be held accountable for achieving the intended outcomes of their
programs. But the tremendous diversity across States with respect
to policy preferences and farm, rural, and natural resource circumstances
suggests that more tailored farm programs could be more efficient.
How Federal payments are allocated to States would be important
as an expression of national goals, and would, of course, determine
the scale of a State’s program.
Devolution would not introduce a new concept into USDA programs,
but it could further the degree to which States have discretion
over the use of Federal funds. Several USDA program agencies have
already devolved programs to the extent permissible under existing
legislation and have developed different approaches to devolution
that address local preferences. For example, the notion of empowering
local decisionmaking is embodied in the Farm Service Agency County
Executive Committees, which date back to the 1930s. These locally
elected committees are responsible for making national farm programs
fit the needs and situations faced by local farmers. A more recent
example from the 2002 farm bill is the Farm and Ranch Land Protection
Program, which provides matching funds to help local governments
and entities purchase development rights to keep productive farm
and ranch land in agricultural uses. Further devolution might well
focus on the $22 billion in USDA programs that have not been similarly
tailored to local requirements.
As ERS analysis shows, farm characteristics, natural resource endowments,
and rural economies vary widely across States, as do preferences
for farm, food, environmental, and rural development policies. These
circumstances indicate that further devolution may result in gains
in efficiency and citizen well-being, but the potential for improvement
must be studied more closely. A changing policy agenda and the prospect
of trade liberalization and policy reform suggest such an analysis
might be more than a strictly academic exercise.
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