If you squeeze your hand in your shop vise, you’ll probably try a different approach in the problem you are solving. That is what USDA has done with some elements of the farm program. The US farm program is being squeezed by budgetary constraints on one side and the WTO trade rules on the other. US farm policy is feeling the pinch and USDA is proposing a change that would increase direct payments, reduce the loan rate, and convert the countercyclical payment into a national per-acre revenue program that is not based on production. Whether those fly in farm country is anyone’s guess, but instead of guessing about the impact, let’s consult with some thinkers.

The Food and Agriculture Policy Research Institute (FAPRI) at the University of Missouri analyzed the financial impact of those three proposals on farmers and on the federal budget. The direct payment for corn remains at 28¢ per bushel through 2011, then rises for three years to 30¢. The direct payment for soybeans begins at the present 44¢, then gradually rises to 50¢ per bushel. The direct payment for wheat begins at the current 52¢ and after three years rises to 56¢. Additionally the loan rate would the lesser of two amounts. It could be the loan rates which are part of the 2002 Farm Bill. Or the rates would be a calculation of 85% of season average farm prices with the high and low years discounted in a running five year average. Finally, a countercyclical revenue payment would be made in years when a target price was not reached. The complex formula is found in the FAPRI analysis.

Impact of higher direct payments:
Direct payments are made on base acres, not on increased production, which make them more acceptable to the expected WTO rules. FAPRI says the average increase would be less than $2 per base acre for wheat, feed grain, and soybean producers, “In the higher direct payments scenario, direct payments for grains increase for the 2010/11, 2011/12, and 2012/13 crop years only. For both corn and wheat, this results in a slight increase in total receipts and payments per harvested base acre in those three years. Producers with soybean base acreage benefit from a direct payment increase in all years, but the increase is largest from 2010/11‐2012/13.” Subsequently, the increased direct payment reduces the potential for a countercyclical revenue payment.

Impact of the lower marketing loan:
The current USDA baseline prices for the next 7 years are well above the calculated rates for marketing loans, consequently, loan benefits decline for producers of wheat, feed grains, and soybeans. FAPRI believes, “ For grains and soybeans, marketing loan benefits are small in the baseline, so the modest effects shown are largely a result of cross‐commodity effects on market prices and receipts.”

Impact of the countercyclical revenue program:
Since prices and revenue are generally above trigger levels in the USDA baseline for the next 7 years, the countercyclical revenue program has only modest benefits for wheat, feed grain, and soybean producers. FAPRI says the reason for this is rooted in the rising yield trendline, “ Crop yields tend to increase over time, so any given market price is associated with rising per‐acre market revenues. Because the revenue target used to compute countercyclical revenue payments is fixed, based on 2002‐2006 observed yields, the likelihood of such payments generally declines over time.

Impact on acreage:
The amount of acres farmers devote to a specific crop depends on the revenue that crop generates, whether it is from the marketplace or from government programs. FAPRI says programs not connected with the number of bushels produced are going to have little impact on planting decisions. The higher amount of direct payments has little impact on crops, and because the loan program has only modest benefits, it, too, will have little impact on cropping decisions.

Impact on prices and demand:
Because the proposed elements in the new farm program would create little change in crop acreage, FAPRI expects the farm program to have minimal impact on prices, and since the supply is not driven by the farm program, there would be little impact on overall demand for the specific crops.

Impact on the federal budget:
Since direct payments would be rising, the USDA would be spending an average of $649 million more per year than the current farm program. However, because there would be fewer countercyclical payments made, USDA would save an average of $379 million per year over the span of the program. When all three elements are aggregated the total cost over the span of the ten year USDA baseline is $1.25 billion.

Other notable results of the proposal include:
• The increase in direct payments increases returns to land, and part of that increase is captured by landlords, some of whom are not operators. The average annual increase in net farm income is $224 million over the 2008‐2012 period, relative to the baseline.
• Net rental payments to non-operator landlords also decline in response to the decline in returns to land. The 2008‐2012 average annual reduction in net farm income is $170 million.
• Relative to the baseline, the average annual increase in net farm income over 2008‐2012 is $260 million. Net farm income actually declines relative to the baseline beginning in 2013.
• In general, farm real estate values change in the same direction as net farm income, albeit with lags.
• Only 1% of the time would the financial benefits included in this program exceed the maximum US amount of industry subsidization as defined by the expected WTO rules.

Summary:
The USDA has proposed Congress consider a commodity support program composed of higher direct payments, a lower loan rate, and a countercyclical program based on a national per acre revenue calculation. The budget impact of this program is minimal, and has been calculated at only $1.25 billion over ten years, as well as within the parameters being proposed by the WTO.