I had the privilege of serving as a chief economist for the U.S. Senate Committee on Agriculture, Nutrition, and Forestry during the last farm bill debate. The cost of legislation was paramount with the mandated goal of reducing the Congressional Budget Office (CBO) score of the bill. Roughly speaking all the program crops were asked to take about a 30% reduction in the CBO estimate of farm program spending. Note that CBO looks forward 10 years and compares the cost of new legislation to a continuation of existing legislation. One must also understand that the CBO agricultural baseline changes from year to year as market conditions change. One should understand predicting program costs that far into the future is a highly imprecise process.
Many groups have turned their attention to the expiration of this bill. So it is fair to ask where will the baseline for the big three farm support programs (ARC, PLC, crop Insurance) be at when CBO is asked to score a new farm bill. Figure 1 shows the March 2016 CBO baselines for County ARC, PLC, and crop insurance. Examining this chart, one can see that from 2018 on:
- CBO assumes that at expiration of this bill producers will be allowed a ‘do over’ on the ARC vs PLC choice. Some switch from ARC to PLC is expected.
- Crop insurance is projected to increase slowly and average around $9 billion/year.
- PLC a program widely adopted by rice, peanuts and a substantial amount of wheat is projected to remain at around $3 billion/year in out years.
- County ARC annual cost is expected to slide 85% from a peak of $6 billion to around $1 billion. This especially affects corn, soybeans and some wheat producers. This is primarily due to the fact that the 5-year Olympic average price used in ARC will fall dramatically as the high prices of a few years ago are dropped.
- The baseline is likely to shrink in the next 24 months primarily due to dropping the recent high ARC payment levels and replacing them with out-years with lower payment levels. For example, the $6,099 Billion for ARC in 2017 will likely be replaced with a value near one billion. This reduces money available for the next farm bill.
So what does this mean?
- Crop insurance will likely remain a focal point for policy because it is the biggest pot of funds. That also means it will be attached as a source of funds for other programs.
- Three commodities are facing dramatic declines in baseline funding – corn, soybeans, and to a lesser degree wheat.
- Participation rates affect these outcomes. For example, the fact that actual STAX participation has been below what CBO expected, means expected increases in cotton crop insurance program cost in the last farm bill did not materialize.