Hearings on the next farm bill will begin this year. For several reasons this farm bill is likely to be under budgetary and programmatic pressure. The reasons include the federal budget deficit, pending retirement of the baby boomers, international trade negotiations, and uncertainty surrounding farm policy leadership. I briefly examine each of these factors. I then examine potential implications.
Federal Budget Deficit:
The budget deficit for the recently completed 2004 Fiscal Year (FY) was $422 billion. The Congressional Budget Office currently estimates a deficit of $298 billion for FY 2010 and $65 billion for FY 2014. These projections do not include the cost of the Iraq war. They also assume that, consistent with the original legislation, many of the tax cuts enacted in President Bush’s first term will be allowed to expire. However, President Bush has indicated that making these tax cuts permanent will be a priority in his second term. In short, the potential budget deficit most likely exceeds the current projections. Pending Retirement of Baby Boomers:
The Congressional Budget Office recently projected that by 2019 annual revenue to the Social Security Trust Fund will fall below payouts. The importance of this event can be illustrated by noting that the budget deficit for FY 2004 is actually composed of a $149 billion surplus in the Social Security Trust Fund and a deficit of $571 billion in all other spending. Thus, at about the time experts expect the economy to outgrow the current deficits, a Social Security driven deficit emerges. This sequential deficit has attracted the attention of many in Congress.
Budget Deficits and the Farm Bill
History suggests that federal budget deficits of the size forecast by the Congressional Budget Office will trigger cuts in farm program. Unlike the 2002 Farm Bill, the 1996 farm bill was enacted in an atmosphere of budgetary constraint. My calculations suggest the 1996 Farm Bill cut average annual farm program spending by 10% to 20%. This cut did not materialize because budget surpluses replaced budget deficits shortly after the 1996 farm bill was passed. It is arguable whether the economic assistance packages enacted in 1998 through 2001 and then codified into the 2002 Farm Bill would have occurred if surpluses had not emerged.
The lesson from history is consistent with the current actions of Congress to bring the federal budget deficits under control. In FY 2004, 31% of the cuts in mandatory program spending involved agricultural programs. In contrast, agricultural programs account for only 2% of federal spending. The disproportionately large cut in spending on mandatory agricultural programs indicates that Congress currently believes that agricultural programs can be targeted for cuts.
International Trade Negotiations:
The reelection of President Bush means that international trade negotiations will continue. In particular, the current round of multi-lateral trade talks likely will end in a new agreement. The working outline of the proposed agreement for these trade talks contains cuts in the maximum amount the U.S. and other developed countries can spend on farm programs. Furthermore, international efforts to challenge U.S. farm policy are growing, as best illustrated by the case that brought against the U.S. cotton program before the World Trade Organization. It is pre-mature to conclude that these international trade events will force the U.S. to revise its farm policy, but it is not pre-mature to conclude that the next U.S. farm bill will be watched closely by the international community. It is also not pre-mature to note that, if the final agreement follows the current working outline, the possibility increases that current U.S. farm programs may be out of compliance during years of large government expenditures. In short, concern over international trade obligations will overhang the next farm bill, thus at least indirectly impacting the farm bill deliberations.
Farm Policy Leadership Uncertainty:
Arguably the three most important members of Congress in terms of impact on the 2002 Farm Bill no longer are members of Congress. Representative Larry Combest, a Texas Republican who was chair of the House Agriculture Committee during the 2002 farm bill debate, retired. Representative Charles Stenholm, a Texas Democrat and Ranking Minority Member on the House Agriculture Committee during the 2002 farm debate, was defeated in the 2004 elections. Senator Tom Daschle, a Democrat from South Dakota and Minority Leader in the Senate, was defeated in the 2004 elections. Leadership is critical in a bill as complex as the farm bill. Who will fill the role of Representative Stenholm, who was able to reach out to all the various and diverse farm bill constituencies? The loss of a seat at the leadership table (i.e., Senator Daschle) raises additional concerns. These questions and concerns do not mean that leadership will not emerge, but at present it is not clear who will provide leadership.
As of the present time, these factors, especially the federal budget deficit, suggest to me that the 2007 Farm Bill will be under intense scrutiny, with spending cuts of 10% to 40% as a distinct possibility. Obviously, many factors can alter this assessment, including the major unknown of weather (i.e., prices). I also think that the recent annual expenditures of $2 billion plus on crop insurance make it possible that insurance provisions could be brought into the farm bill umbrella. The role of conservation programs will be intriguing. Will farmers embrace stronger conservation compliance rules in exchange for smaller cuts in farm program spending? Will the Conservation Security Program be folded into another program or will funding be found from some other source?
Two concerns are sure to arise if cuts in farm programs approach the level mentioned above: what will be the impact on land prices and what will be the impact on farmers’ ability to survive? The likely answers will vary by area of the U.S. and by whether or not a new era of prolonged and permanent increases in farm input prices is underway. For Ohio, the impact of cuts in farm program spending will be moderated by Ohio’s strong urban land market and by the fact that, as a group, Ohio farmers are currently in fairly good financial condition, with reasonable debt loads. Furthermore, recent studies suggest that only 10% to 30% of farm program payments are being capitalized into land values. This capitalization rate is much smaller than previously thought, and again will moderate any decline. However, the recent increases in fertilizer prices and the likely need to spray for Asian Soybean Rust in the future underscore that speculating about a new era of higher crop input prices is not an academic exercise. Such a situation would clearly compound the negative effects of cuts in farm program spending, both on annual income and on land prices. This situation bears close watching as deliberation on the next farm bill gets underway.
Given the potential combination of higher input prices and cuts in farm programs, farmers may want to take a conservative approach to financial management until they see the outcome of the next Farm Bill debate. Adjustments in farming operations may be necessary on more than a few farms if cuts approach 40% and input prices remain high. Furthermore, some farmers who are currently experiencing cash flow problems may have difficulty surviving a 10% cut in farm program spending. Hopefully, the farm bill will recognize the need to help these farmers adjust if cuts in the 10% to 40% range materialize.
Last, while my current farm bill scenario raises difficult questions about the future, it also offers farmers and others an opportunity to recast farm programs for the 21 st century rather than just tinkering with programs developed for the 20 th century. Risk management has become a bigger issue, as illustrated by the growth in spending on crop insurance programs. For most Ohio farmers, it would be desirable if the farm support programs and crop insurance would be integrated into a coherent program. Hopefully, farmers will see the opportunity that lies in front of them.