Analysis: How does Alternative Farm Bill impact state’s farmers?

By Kent Olson and Matt DalSanto, University of Minnesota
Feb. 18, 2008

Last week’s announcement by the House Ag Committee of a framework for an Alternative Farm Bill may help push the negotiations to an end after more than a year of debate. Perhaps.

Compared to the 2002 Farm Bill, the framework announced by Chairman Collin Peterson, D-Minn., and Ranking Member Robert Goodlatte, R-Va., leaves most aspects of the commodity title the same, adds an optional revenue protection program for commodities, and sets a lower Adjusted Gross Income (AGI) limit on receiving payments.

But the umbrage created among senators and commodity groups signal that the debate is not over. Sen. Max Baucus, D-Mont., says any new farm bill needs to include a permanent disaster program – a provision that is not in the new framework.  And commodity groups consider the amount of funding for commodity programs as too low, thus, in their view, providing an inadequate farm income safety net. However, inclusion of a disaster provision and the expansion of commodity programs funding would push the total cost of the bill over the limit proposed by the House.

In our analysis of the impact on government payments to example Minnesota farms, we estimate total government payments to be very similar under all of the current major proposals. The nationally-based revenue protection program provides very similar payment levels to the current price-based system.

This similarity in projected payment amounts is primarily due to current market forces which have pushed commodity prices to historically high levels. These high prices have reduced the counter-cyclical payments to virtually zero under any of the alternatives. But the direct payments will be paid at their fixed payment rate regardless of the current price level. Thus the projected total government payments, given the current commodity prices, are almost entirely attributed to the fixed direct payments.

That is, even though current market prices are over $4 per bushel for corn, $10 for soybeans, and $10 for new-crop spring wheat (well above their historical levels and their target prices--$2.63 for corn, $5.80 for soybeans, and $3.92 for wheat), the direct payments of $0.28 per bushel for corn, $0.44 for soybeans, and $0.52 for wheat will be paid anyway.

These high price levels are forecast to remain high into the future due to fundamental changes in the marketplace, such as more affluent consumers demanding more meat, which translates into higher demand for feed grains, and the rise in production of corn ethanol and soy diesel, which has increased the demand for corn and soybeans. Higher wheat prices are due to a worldwide decrease in wheat production as well as a decrease in domestic production caused by farmers shifting land from wheat to corn and/or soybean production.

The market-based revenue system being supported by the corn growers would provide a better safety net given the forecasted higher price levels. But this market-based revenue system is not in the House alternative which proposes the current, lower price levels or a revenue system based on those lower price levels.

Another change in the new framework is lowering the eligibility limit based on Adjusted Gross Income (AGI). Under the current $2.5 million rule for three-year average AGI, less than 50 Minnesota returns (0.1 percent of all Minnesota individual farm returns) would have been ineligible for farm program payments. We estimated this using publicly-available IRS data tables for 2004, the most recent year with data available, and assuming the 2004 incomes accurately reflected three-year AGI averages.

Kent Olson is a University of Minnesota Extension economist and farm management and farm policy issues expert. Matt DalSanto is a research assistant with the University of Minnesota’s Department of Applied Economics.

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URL: http:// www.extension.umn.edu/extensionnews/2008/farmbillanal.html  This page was updated Feb. 19, 2008 .
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