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Understanding the Farm Bill: Counter-Cyclical Payments, Base Acres, and Other Things Most People Don't Understand

Every time the Farm Bill comes up for debate, there are numerous ideas about how to “fix” the commodity programs. Calls abound to add new programs, scale back existing ones, tweak the payments here and there, and even scrap subsidies entirely (this recent New York Times editorial caused a bit of a stir). Not all of these ideas are new, however, and some of them have been tried before. As more people become interested in the Farm Bill and its impact on what we grow and consume, I think it’s important to understand a bit of the history behind why these programs are they way they are in order to talk about how we might want to change them.

Coupled and Decoupled Payments

First, we’ll need a few definitions. Farm program payments fit into one of two categories: coupled payments or decoupled payments. Farm programs are called “coupled” if there is a direct link between what a farmer plants and how much he receives in subsidies. For example, say the price of corn has been low. The government decides to pay farmers a certain amount of money for each bushel of corn they produce to make up for their falling incomes. So if Farmer Ralph plants corn on 80 acres of his land, he can count on getting a certain amount of money. This gives him an incentive to plant more corn, although falling prices signal that there’s more than enough corn on the market to meet demand. He may even decide to plow up his daylily beds and plant corn everywhere he can because the government is offering him a deal.

On the other hand, decoupled payments don’t depend upon a farmer’s current production or current market conditions. Direct payments, which are allotted to farmers who grow an eligible crop regardless of the market price, are decoupled. Decoupled payments are considered to be less market distorting because the benefits aren’t calculated per unit of production.

“Freedom to Farm” in the 1996 Farm Bill

Up until 1996, commodity programs focused on managing supply by paying farmers to produce less in times of surplus. 1996 marked a shift in commodity program policy. In the 1996 Farm Bill, commonly called “Freedom to Farm” by those who liked it (or “Freedom to Fail” by those who didn’t), the cropland retirement programs were replaced with fixed payments. Unlike previous subsidies, the fixed payments weren’t tied to the current price of a crop or which crop a farmer planted; they were tied to “base acres,” the average number of acres and average yield of a certain crop that a farmer had planted in the 1981-1985 seasons. Farmers who have base acres in corn do not need to grow corn on that land in order to receive the payments – in fact, they don’t have to plant anything at all.

It seems paradoxical that it’d be better to pay people regardless of whether or not they plant corn, but the argument is that it allows farmers to respond to market conditions as they make planting decisions. Before, Farmer Ralph was required to plant corn in order to receive the payments, even if the price of corn was low or if he wanted to try growing flax on part of his land. Under this system, a farmer is guaranteed a certain income for his base acres in corn, but is free to grow another crop if the price is high.

The Origin of Counter-Cyclical Payments           

The fixed payments in the 1996 Farm Bill were designed to gradually decline – or, put another way, to wean farmers off of government payments. However, record world production and falling crop prices in the late ‘90s caused farmers to call for emergency measures, and by 1998 Congress could no longer keep the disciplined schedule of declining payments it had set out in 1996. Some applauded Congress for restoring an important safety net for farmers, but others criticized it as a step backward. The emergency payments became a large part of the program payments to farmers, and in the 2002 Farm Bill, emergency payments became permanently enacted as the counter-cyclical payments we have today.

Counter-cyclical payments are considered partially decoupled because they depend both on base acres and the current market price of a crop. This distinction is important because as a member of the World Trade Organization, the U.S. agrees to limit trade-distorting agricultural subsidies (but that’s a topic for another day).

Planting Flexibility – How Flexible is It?

The 1996 and subsequent Farm Bills have allowed for planting flexibility, meaning that a farmer may grow crops other than the base crop on her base acres and still receive payments. It’s important to note that not we’re not talking complete flexibility: farmers cannot plant fruits and vegetables on base acres.

This restriction has many nutrition and local food advocates up in arms - wouldn’t subsidizing

fresh produce on commodity cropland be a great way to encourage farmers to grow more of what we should be eating anyway? Maybe, but the current restrictions are designed to protect existing unsubsidized fruit and vegetable producers from competition. In 2008, a pilot program was introduced to allow farmers in Midwestern states to grow certain fruits and vegetables to be canned or frozen in exchange for reduced program payments.

In general, economists and others who believe in “the market” favor farm programs that are minimally distorting, meaning that they have little impact on prices. Now that we understand a little better where it came from, the question is if the current system of fixed and counter-cyclical payments, base acres, and planting flexibility is the best way to achieve this.

Sources:

  • Monke, Jim. Farm Commodity Programs in the 2008 Farm Bill. CRS. September 30, 2008
  • Eidman, Vernon R. The 2002 Farm Bill: A Step Forward or a Step Backward? Center for International Food and Agricultural Policy Working Paper WP02-9. September 2002.
  • Westcott, Paul C. and Young, Edwin C. Farm Program Effects on Agricultural Production: Coupled and Decoupled Programs. Chapter 1 in Decoupled Payments in a Changing Policy Setting. USDA ERS Agricultural Economic Report No. 838. November 2004.

Ann Butkowski is happy to be back in her native Minnesota after spending the last two years in Boston. She’s learning to bike the streets of Minneapolis and grow tomatoes in her backyard. Ann has a master’s degree in nutrition science, but doesn’t let that stop her from eating ice cream right out of the carton. Ann is Simple, Good, and Tasty's resident Farm Bill expert. Her most recent post for us was "The Herb Box Brings Tasty Local Foods to Life Time Fitness."

Comments

Ann,

I have been following your post for sometime now and they are always extremely helpful too me further try thing understand this very complicated issue. One question i have had lately and think you might have begun to answer it within this article. Its been to my understanding that Earl Butz once stated "Get Big or Get Out", more or less squeezing out the small scale farmers by not giving them enough government subsidies to survive forcing them to give up their farm to a large farmer (please correct me if I have miss interrupted this).
What I really need to know is the understanding what this threshold between small and large farms are and their allotment that is allocated between the two.
My current understanding is what we have received this year on our family farm. On our 200 acres planted this year in rice we received $20,000 this comes to about $100 an acre. What I would like to know is if was to farm 600 acre would my price per acre be going up? This is what I think Earl was saying "If I farm more, I'll get paid more", also I need to compare this to the other spectrum. If I was to farm only 50 acres will I be receiving less $'s per acre?

Thanks once again and I can not wait to read your next article.

I'm glad to see this, to help explain some of these confusing things. It's hard to do.
So this, then shows why Direct Payments, which farmers recently have been getting even though prices have averaged above full costs, are considered good by WTO and groups who share the WTO viewpoint. That's rare! Farmers would have generally needed direct payments every year 1981-2006 except 1996, years below zero. But subsidies that farmers get because they really need them are considered bad.
Decoupling is a conservative theory, and Daryll E. Ray asked: "Payments Are Decoupled From Production But Is Production Decoupled From Payments?" I think the theory is wrong, and he gives some reasons.
One thing wrong with the assumptions is that farm prices do NOT self correct (very well or very quickly under most market conditions), as Ray emphasizes. They lack price responsiveness on both supply and demand sides, so farmers have incentives to plant under low prices even with no subsidies.
Recent government documents, as sourced here, (CRS 2008, ERS 2004) and others leave out crucial historical information about price floors and supply management, because crucial programs weren’t in the 1996, 2002 and now 2008 farm bills. Prior to 1996 we had price floors (with unpaid supply management) to fix the lack of price responsiveness. No subsidies were needed or meant to be there. These price floors, however, were lowered from fair trade, living wage levels (parity) that we had when the farm bill was used as an economic stimulus in the private sector. (parity standard, 1942-1952, then lowered more and more 1953-1995, then eliminated in 1996). Price floors (etc.) created wealth without government spending, with no subsidies. Subsidies were only added later, after farmers complained. Corn prices x production fell more than $1.6 trillion ($1,600 billion, 2009 $, GDP deflator) below the Steagall standard, but compensatory subsidies have been less than $160 billion. So that's how good "the deal" was. It was done to secretly subsidize corp. buyers, and the US lost hugely on exports, even though we could set world prices, even with double the market share of OPEC in oil, (for corn and soybeans).
Note that base acres from the 81-85 seasons represent yields (ie. corn) only about 70% of 2005-09 (ERS), so formulas moved to 70% reductions, then 85% of that, etc. The 2008 farm bill had no cost of living increase for LDP or CC subsidies, so as costs have rapidly risen (ie. 64% 02-09, ERS), the gap between break even and any subsidy has grown a lot. Corn costs could hit $5 this year or next. At a price of $2.62 you'd then lose $2.38/bu. and get a subsidy of $0.01 x 85% x historical bushels, etc. Plus about a $0.16/bu (est. after calc) Direct Payment.
A huge problem with planting flexibility, is that by lowering and ending price floors, we've had the lowest prices in history (since 1990, the 17 lowest corn prices to 1866, and 16 lowest wheat prices, and 15 lowest rice prices (to 1904), which were huge hidden subsidies to CAFOs, so most farmers lost the value added of livestock, losing hay and pasture and straw to row crops, so they now have fewer choices.
For Will Tietje: It's the same rate whatever size of farm. Butz wanted zero price floors and low prices for agribusiness buyers like Ralston Purina, where he worked. He was hot air, and made administrative changes for the worse, but we had better programs then than now. Anyone who, for 2008, did NOT support price floors and ceilings and supply management including reserves, supported worse (cheap corn, etc.) farm programs than what Nixon signed and Butz administered. Click my name for info on the solution, NFFC's Food from Family Farms Act, where no subsidies are needed, and we profit on exports, but also protect consumers and other buyers. It's essentially supported by the Africa Group at WTO and by Via Campesina, as in my recent blogs elsewhere.

Hi Ann,

That is the type of question that is probably best answered by your local FSA office. But from my understanding, your countercyclical payments would go up, because the more bushels you produce the more payment you receive, IF prices are low enough to trigger countercyclical payments.

But direct payments are based on your historical acreage in each commodity crop (corn, soybeans, wheat, rice, cotton), and so the number of acres planted would not have a bearing on your direct payments. You could risk losing your direct payments, however, if you don't have adequate acreage planted in commodity crops.

Again, please take this solely as conjecture, and your FSA office would be able to give you a much more solid analysis.

best,

mark

Mark, thank you for helping us answer Will's great question. We appreciate it!

The formula for Direct Payments (for corn, for example,) is a particular farm’s historic Crop Acreage Base (based upon how much corn was planted historically), times the farms historic Program Payment Yield (based upon how much yield the farm got historically) timess 83.3% times the payment rate (28¢ for corn). As Ann has explained, you get it no matter what prices are for the year, and that is good (that you get it no matter what), according to WTO and similar viewpoints. The total cannot surpass the payment limit of $40,000. Example 1a: 2,000 Base acres x 120 Historic Yield x 83.3% x 28¢ = $55,978 - excess above limit = $40,000. Example 1b: for 200 base acres it would be $5,597.80.

The formula for CounterCyclical Payments (for corn, for example,) is a particular farm’s historic Crop Acreage Base (based upon how much corn you planted historically), times your farms historic Program Payment Yield (based upon how much yield you got historically) times 85% times the payment rate (How much the Marketing Year Price falls below $2.63, up to a maxim of 40¢ ie. the rate is 1¢ at $2.62, 2¢ at $2.61, 40¢ at $2.23 and all lower prices). The total cannot surpass the payment limit of $65,000. Example 2a at $2.33 with a more recent Yield: 2,000 x 150 x 85% x 30¢ = $76,500 - excess above limit = $65,000. Example 2b: for 200 base acres it would be $7,650. Plus Direct Payments.

The formula for Loan Deficiency Payments (for corn, for example,) is a particular farm’s current production (based upon how much corn you planted times it’s current yield), (then there is no reduction to 83.3% or 85%) times the payment rate, which is how much corn prices have fallen below the loan rate (ie. below the Marketing Loan rate of about $1.95, theoretically down to zero, ie. 1¢ at $1.94, 2¢ at $1.93, etc.). You get it only when you severely need it. There is no payment limit. Example 3 at $1.90: 150 acres x 180 bu. x 5¢ = $1,350. Plus Direct and CC payments.

Note that, depending upon market prices, all examples could represent large losses. Only the first example could show a profit or a loss, given recent costs of production ie. at $3.50+. The more the subsidy, the greater the losses. This is not mentioned at the Farm Subsidy Database.

These various numbers (ie. for other crops) are found online in “Appendix to Form CCC-509, 2009-2012 Direct and counter-Cyclical Program Contract,” last 2 pages. Note that some Bases were updated, changed or added in 2002.

Please post any miscalculations.

Will –

Thanks for the comment and great question! I’m going to qualify this response by saying that I’m not an expert – I’m just learning all this along with you – but here’s my take on it.

Commodity program payments (direct payments, counter-cylical payments, and loan deficiency payments) are calculated based on yield (and as I mentioned in this post, now they are based on historical yield, or “base acres”). For rice, the direct payment rate set in the 2008 Farm Bill is $2.35 per hundredweight. A rice farmer receives this amount whether he plants 50 acres of rice or 600. A farmer planting 600 acres will receive a larger subsidy check than a farmer planting 50 acres, but the amounts will be proportional.

When Earl Butz (USDA secretary during the Nixon administration) famously told farmers to “get big or get out,” I think he was talking about economies of scale. The equipment required to farm 50 acres and 600 acres or more is the same – for example, you’re going to need a tractor either way, and as technology improves, it’s likely to be a very expensive tractor. It’s more efficient, then, to plant a larger area of land, both because you have the tractor anyway, and because you’re going to have to plant more in order to cover the cost of that tractor. I don’t think there’s any argument that it’s more efficient, but we have to consider if efficiency is our only goal with farm policy. Efficiency doesn’t take into account whether or not we want to produce vast supplies of only five major crops, diminish rural communities, or deplete the soil.

I hope this answers your question – though for specific questions about your planting decisions, your cooperative extension agent will be a good resource. And if anyone else has more insight into Will’s question, or any other topics you’d like to see me address, feel free to join the discussion!

Here are some related issues for Will. First, in my examples where the large farm hit the payment limit, it got a lower rate of pay than the small farm, otherwise they were the same.

My examples do not show the whole farm size, and I’m in Iowa, and I did not show soybeans. The pay limits must include all crops. For example, where I showed the limits were hit, if there were an equal amount of soybeans there would be no Soybean Direct and CC payments for those examples, (except for loopholes, another issue).

Ok, so our Iowa farm has had about 316.5 tillable acres, plus creek area, fence rows, and waterways and we had a 172.8 acre corn Crop Acreage Base. The corn base, then, was 54.6% of tillable acres. There was no soybean Base until we were allowed to add one in the 2002 farm bill. (We also had another small farm with different, lower Base and Yield, except that the corn base was 87% of tillable acres.) Our numbers have been recalculated to give us a smaller corn Base plus a 95 acre soybean Base.

But consider types of farms. First what if a farm planted corn every year for historic Program numbers during the 1980s. It’s more expensive. You need more fertilizer if you don’t follow soybeans, and you have more pests, so you use more poisons. The result is bigger subsidies for a long time after that. The same holds for the late 1990s, the years used to calculate revised Program numbers in 2002.

In contrast, with a 5 year organic rotation, oats-hay-corn-beans-corn, your base would be only 40% as much. With oats-hay-corn-beans, it would be 25%. Oats has a Base, but it has been much lower than corn. With corn-soybeans, it would be 50%, etc.

If you also used optimal fertilizer amounts, you would be more profitable (not counting subsidies), but your yields would be lower, so you’d again get less in the subsidy formulas for farming more sustainably, and might make less money overall.

To make enough money on a small farm you would want more livestock, with more hay and pasture, so you’d likely be more sustainable, but get the lesser subsidy rates.

Behind all of this is the lowering and elimination of price floors. Originally we had fair prices instead of subsidies. That made livestock on pastures and hay relatively more profitable compared to fully priced grain feed, plus you had the manure for fertilizer, and could turn livestock onto grain fields after harvest. It was better for the small farm. With zero price floors since 1996 CAFOs have taken away most value added livestock, leaving small, formerly diverse farms only with low value crops and low Program numbers, low subsidy rates.

On Mark's point that "You could risk losing your direct payments ... if you don't have adequate acreage planted in commodity crops." There is no restriction of that type. On the other hand, we don't know what the programs will be in the future, so a new type of historical base and yield could be implemented. There are political obstacles to that technicality vs others, however, as well as political assets. When historical Base and Yield were first created, farmers didn't know in advance, nor did they know in advance that it would be opened in 2002 (ie. favoring overfertilization (Yield) and the main commodity crops (Base)).

Also, on Ann's original discussion of decoupling: it sounds like more than advocates may want to know, too wonkish, etc., which it is, but I think it's very important to generally explain these sort of things anyway. Decoupling theories makes huge difference. Countries at WTO take each other to WTO courts on this basis. There was a lot of discussion of those cases prior to the last farm bill, but I haven't seen much lately. I think a main argument against decoupling is that none of the subsidies have practically significant effects on farm prices, so WTO, in suggesting ways to end export dumping (below cost, ie. 1981-2006) by restricting some (or eliminating all) subsidies is a false hope for poor farming countries. They are only helped (bottom side of price) by the presence of price floors and supply reductions (as needed). Thus WTO's Africa Group and Via Campesina favor such policies. They are not helped to get fair prices by any subsidy changes (except that it could shake things up politically in places like the US, because without subsidies, US farmers would need price floors to survive, [under most market conditions we've had]). Poor countries also need the topside protections I've discussed.

The Institute for Agriculture and Trade Policy, (IATP,) has now posted a great historical piece on decoupling, and Cargill's role in the theory. It's called: “The ‘De-Coupling’ Approach to Agriculture: History and Analysis of ‘Decoupling’ Policy Proposals. The links are:

Summary: http://www.iatp.org/documents/the-de-coupled-approach-to-agriculture

Full document PDF: http://www.iatp.org/files/decoupling88MR.pdf

QHow did we get this convoluted mess of a farm bill? Self serving corporate exploiters with strange theories, along with their Congressional spokesmen.

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