The US House of Representatives and its Agriculture Committee have been drawn and quartered by critics wanting major reforms in agricultural policies and programs. While wholesale reform could upset a basic industry and the consumer food system with unforeseen and unintended consequences, there is a potential for evolutionary change that has marked US farm policy since it began in the 1930’s.

Going from nothing to something was revolutionary, but Depression Era economics that were bringing the US food system to a halt signaled the need for a radical change that would keep farmers on the farm and food choices in front of consumers. Since the first elements of farm support policies, change has been more moderate, including the switch from supply management agriculture to market oriented agriculture. The change proposed by the House, which will possibly be included in the Senate Farm Bill proposal, gently nudges farm supports from a price orientation to a revenue orientation, that includes both price and yield. And for that matter, that is exactly what the World Trade Organization wants to see happen or it will continue to dismantle US farm policy.

Extension Farm Policy Specialist Brad Lubben of the University of Nebraska says the change uses the familiar Counter Cyclical Payment concept in the 2002 Farm Bill, but instead of it based on price, it is based on revenue, providing producers with a financial safety net. In his Cornhusker Economics newsletter, Lubben says, “The revenue-based program would add yield to the safety net calculation and would make a payment to participating producers when the combination of national average yield and national average price produced a revenue calculation that fell below a target established in the legislation.”

Each program crop would have a target price fluctuating with a 5-year Olympic average (high and low discarded) that is multiplied by the existing price-based Counter Cyclical Payment. Lubben says the House plan, which has the potential to be adopted by the Senate, calls for “Any shortfall below this target for each crop would be paid out on participating base acres for the respective crop, after adjusting for differences in farm versus national average CCP yield levels, and accounting for payment on only 85% of base acres as with the existing direct and CCP programs.”

If a producer did not like the concept, the current farm program formulas could be retained, or the new revenue concept could be adopted, and that is a one-time decision which producers will have to make at the local FSA office. Sign up would be handled similar to sign up for the 2002 Farm Bill when decisions had to be made about details of participation. Lubben says the House concept does not affect direct payments or the loan program, except for some adjustments to loan rates. “The marketing loan would continue to provide price protection below the loan rate and would be the lower (limit) on the price factor used in the revenue-based CCP, the same as currently exists for the price-based CCP.”

Lubben believes the concept will be attractive to those concerned with the budget, since there will be less variability of revenue than variability of price, which means less stress on the federal budget. The attractiveness of the plan to producers will depend on how it works. With current pricing, corn growers would have a $344.12 target revenue, and the safety net would be only 69% of the current expected revenue from a $3.22 corn price and a 155 bushel average yield. Under the price-based option, the Counter Cyclical Payment would be made at $2.35, which is 73% of the same $3.22 corn price expectation. Lubben says there is a lower chance of a payment under the revenue-oriented proposal than the price-oriented proposal if the program was currently in effect. He says, “As proposed, the revenue-based CCP would not kick in as quickly as the price-based CCP, but it would make larger payments once it does kick in. And, the revenue-based CCP would pay for revenue losses due to price and yield, covering a greater degree of risk than the price-based CCP.”

When the Senate resumes its Farm Bill deliberations, one proposal that will be considered in the formula for farm program payments is the Durbin/Brown proposal to add an additional multiplying factor to have a target price based on 90% of the state trend yield multiplied by a 3-year moving average price. This would bring payments more in line with prices and yields in a given state, instead of national averages. While Lubben says that might make payments more relevant to producers, the 3-year average slowly tracks the market, and any extended period of low market prices such as 1998 to 2001 would result in a lower safety net for that extended period of time.

The current House Farm Bill proposal does not link the revenue safety net to any type of supplementary crop insurance, but the Durbin/Brown proposal contains a payment trigger that Lubben believes “would be a better substitute for farm or county-level crop insurance products currently on the market. As such, it is formally linked with crop insurance, such that any payments received under the revenue-based CCP would reduce any payments received on crop insurance for the crop on the farm.” He says the idea is not designed to eliminate the role of crop insurance, but to allow the farm program payment to address major revenue shortfalls, and to allow individual crop insurance policies to address individual farm production issues.

Summary:
The next evolutionary step in farm policy could see farm program payments switch from price to revenue based which would not only ease international trading tensions, but federal budget issues. While the impact on producers would likely be lower annual income from the USDA, years with low prices and yields would result in larger payments. Since the Senate has yet to decide on its policy, the concept could be discarded or refined further, to link the idea not only with crop insurance protection, but triggered by more localized circumstances than national averages.