FARE-talk is to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.
The U.S. Farm Bill: Past, Present and Future Issues
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[0:05] Brady: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host.
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[0:25] Brady: Today I'll be talking about the U.S. Farm Bill with David Schweikhardt, professor of agricultural, food and resource economics at Michigan State University. David, welcome to FARE Talk.
David: Thank you.
[0:37] Brady: David, I want to talk about the current setting and the current dynamics around the U.S. Farm Bill, but perhaps before we start that, for this audience, tell us a little bit about kind of what the Farm Bill is and where are it's origins.
David: Well, modern farm bills are rather large pieces of legislation. We give them the name Farm Bills as if everything that's in them had to do with farm policies directly at the farm level. But over time, farm bills have become very comprehensive in that they include a lot of different programs. They do of course include commodity programs, price supports and other programs for farmers. They include conservation programs for farmers that make payments for certain conservation and resource preserving practices. But it also includes a wide variety of other topics, all the way from nutrition programs such as the supplemental nutrition and assistance program, SNAP program, used to be called to Food Stamp program which is basically an income supplement for lower income persons. That was added in 1973. You have programs like Women, Infants and Children which is a nutrition program aimed at pregnant and mothers, pregnant mothers, and at children and infants. We have school lunch programs, which are aimed at feeding of school aged children. We have some elderly feeding programs, we have farmers’ market programs. Much of it is related to food but it actually encompasses many different parts of what we might call the food system, which includes everything from the input supply level all the way up to the retail level. And so there, we call the Farm Bill basically is a historical shorthand, but we, it encompasses much more than simply the farm level.
[3:00] Brady: Alright, and these, you know, the origin, this is a twentieth century, in the 1930s this emerges, or?
David: Right. The first Farm Bill was passed in 1933. It included basically two elements, price support programs for farmers and supply control, acreage control programs. And it had one simple objective; it had the objective of increasing farm income. That was the start of the policy, that was the end of the policy. So it was entirely focused around the farm. That continued basically through the late 1960s. In 1973 we had a significant change, we still had the programs for farmers, they were converted into income support payments rather than price supports in 1973, but the 73 farm bill was the first farm bill that included the food stamp program on a national basis, which again, is the forerunner of today's SNAP program and it's an income supplement essentially for lower income persons. So, in 73 we combined farm programs and nutrition programs. Then in the 80s we added several environmental and conservation programs aimed at a variety of environmental problems associated with agricultural production. Then in the 90s we added even more programs ranging from, you'll see amendments in the 1996 farm bill dealing with a variety of animal welfare issues. Crop insurance then in the 2000s began to replace or exist alongside price supports for farmers. And so, over time, this thing evolved basically in the same direction as society evolved. We added policy targets because society added policy targets. The first policy target back in 33 was a simple one, increase farm income. By the 2000s it had become increase farm income, but don't have too much effect on consumer prices, support incomes and food consumption for lower income persons, deal with a limited set of animal welfare issues. In economists’ lingo, we added an increasing number of policy targets. Now there's an old rule in economics called the Tinbergen rule, and the Tinbergen rule says that you have to have at least as many policy tools as you have policy targets. That no one, that if you have more than two policy targets you cannot hit both targets any more than you can hit two birds with one stone. And if you get to the 2000s where we have 5, 6, 10 or more policy targets, you're going to have a larger number of policy tools and it becomes a much more complex piece of legislation. So over time this has been a matter of legislation that has gotten larger in its scope because the problems that society cares about have gotten larger.
[6:57] Brady: Alright, and so normally these bills are passed every five years, but we're not in normal times now. What's going on right now?
David: Well out last farm bill was in 2008 and it was a 4 year bill, and as you noted, we usually write these bills for four or five years. So it's a four year bill, and so we were supposed to rewrite it in 2012. In 2012, the Senate agriculture committee passed a farm bill, and the entire Senate then took that bill up and passed it largely unchanged from what the Senate ag committee had passed. So the Senate got their job done in 2012. The House agriculture committee passed a bill in the middle of 2012 and the leadership of the House, the Republican leadership of the House never brought that bill to the floor. Why that was, we can go into a bit later, but they never even brought that bill to the floor for votes. So as we reached December of 2012, Congress passed a one-year extension as part of a larger budget package. We called it the fiscal cliff back in December of 2012. So there's a one-year extension. That brought us into 2013. In 2013, the Senate once again passed a bill. The House voted on what was essentially the 2012 House bill and it was defeated when a large number of Republican members voted against the bill because they considered the cuts in nutrition programs, especially cuts in the SNAP program to be too small. After that defeat on the House floor, the House leadership brought back to the House floor a bill which includes only farm programs, did not include any nutrition component. That bill passed on a very narrow vote, vote of about; I believe it was 216 to 208. Virtually no Democrat, very few Democrats voted for that bill, a handful of them did. So it's basically along party lines. So where we stand now is the Senate has passed a Farm Bill that includes both farm programs and nutrition programs. The House has passed a bill that includes only farm programs, does not include any nutrition programs. Now normally when both Houses have passed a bill, they then go to a conference committee that works out the differences between the two Houses, and they produce a final bill that is sent back to both Houses for final vote. That conference committee formation has not occurred and Congress is on vacation until after Labour Day. Speaker Boehner is saying that the House will take up a nutrition bill immediately after Labour Day. I have my doubts that that will happen, but we can talk about that later.
[10:47] Brady: I want to get into some dimensions of this gridlock we talked about when we were recently together in Washington, D.C., about your thinking about a way of characterizing this gridlock. But before I do, just give me an idea of what we're talking about in terms of size of the farm bill. Do you know roughly about, you know, how much money are we talking about here?
David: Well over, they score farm bill over a ten year period even though it only, legislatively, exists for a five year period. And, the House version, the version passed by the House ag committee and the Senate version both cost in the range, of say, 950 billion dollars over ten years [Brady: Okay]. So, we're talking about, Department of Agriculture budget then that would be somewhere in the range of 100 billion a year.
[11:51] Brady: Alright, and let's compare that to maybe the budget, the defense budget. I imagine it's much smaller than the defense budget. But how does it, so I'm just in order to kind of put it in some perspective, it's smaller than the defense budget, but it's bigger than or comparable to, what budget might it be comparable to?
David: Right. Well, if you look at the U.S. budget it's actually pretty simple. Defense, social security and entitlement programs such as Medicare take up about 75% of the U.S. budget. Everything else the government does is about 25%. If you look at farm programs, commodity programs plus crop insurance, that equals maybe 20 billion a year. Now that 20 billion a year, in addition to that 20 billion a year, then you'll have about 80 billion dollars mostly for the food stamp program. That's roughly the way the budget breaks down. If we look at that 20 billion we spend on farm programs, that is significantly larger than the entire budget of an agency like the EPA, the environmental protection agency. It's significantly larger than the budget of the Federal Bureau of Investigation, the FBI. So we're talking about a significant amount of money here in comparison to a lot of other agencies in the government. We're talking, it is small relative to defense or social security or Medicare, but it's large in relation to a lot of other things the government does. Like I said, that, you take away the big three of defense, social security and Medicare, and you've got about 25 percent of the budget left for everything else the government does, and agriculture is still a large chunk of that 25 percent.
[13:59] Brady: Alright, that really helps me put that into perspective. So the stakes, you know, are relatively high, especially when you compare it to spending on other departments. So, what's your theory about, well I guess two things. One, I imagine this is kind of unchartered territory with respect to not being able to pass the farm bill? And two, why is, why is this happening now?
David: Well, let's first begin, in terms of what's so different about this year. Farm bill politics in the United States has traditionally been geographic politics. And by geographic politics, that geographic politics was driven by commodity interest. A Democrat from a cotton growing region often had the same basic policy views on cotton policy as a Democrat, or excuse me, as a Republican from a cotton growing district. A Democrat from a corn growing district often had the same basic policy views as a Democrat from a corn growing district. Why? Because it was commodity interest that mattered. Alongside that commodity and geographic politics, you had beginning in 1973 this politics of an urban-rural coalition. And that urban rural coalition was built around a recognition by the agriculture committees at that time, that in an urbanizing society, which the U.S. was in 1973, the mass movement of people from agriculture into urban areas was pretty much complete. In this urbanizing society, you could no longer pass a farm bill that had nothing except price supports and other income supports for farmers. In an urban society, you began to get an increasing number of urban and suburban legislators who began to ask "What's in this for me? What's in this for my constituents? If it's all about subsidies for farmers, I'm not interested." And the agriculture committee at that time made the decision; we've got to have some coalition between urban and rural interests. And the agriculture committee at that time was the one that led the drive to build that urban-rural coalition, and that urban-rural coalition was around farm programs for rural areas and nutrition programs for urban areas. And so farm politics, under 2008, and especially since 1973 was driven by a) geographic interest and b) urban-rural coalition. What has happened with this farm bill in 2012 and 2013 is that that coalition appears to be under dramatic political pressure that is breaking down that geographic politics and that urban-rural interest. In other words, many rural legislators have decided that they are prepared to take on the nutrition programs on an ideological basis. Basically, and it's an issue of whether people who receive SNAP benefits deserve to receive those benefits. And if that part of the coalition decides that it is no longer willing to make that compromise, it's difficult to see where a farm bill comes from in this atmosphere. So what we've seen is a dramatic shift from the old geographic politics of agriculture to a new perhaps ideologically driven politics of agriculture. And that's a very dramatic shift for the United States.
[18:43] Brady: And then of course, how does that play itself out then, in this gridlock? Because the Senate is controlled by a different party than the House is controlled?
David: Yes. But the fact that the House could not pass a farm bill that included a nutrition program and now is talking about, well we're going to go back and pass a nutrition bill program, which I'm very skeptical that they're going to be able to do it, means that you have a House that has passed a bill that only provides for farm programs and a Senate that's sitting there saying "We want a farm bill that has both the farm programs and the nutrition programs." Now think about that way the House and the Senate are structured. By definition, the Senate tends to take a broader societal view on issues. Trade bills for example, often are treated much friendlier in the Senate than in the House because in the Senate, when you have a trade issue, a Senator hears from both winners and losers in that issue. If you look at a trade issue in the House, the members, because they represent smaller districts, tend to only hear from winners or only hear from losers. And that makes the politics of trade very different in the House. What we're seeing is the Senate is sitting there, basically saying "We expect to have a nutrition program in this farm bill. We can talk about the sides of the cuts that are needed in nutrition, but we expect there to be a nutrition." And the House is saying "We're not so such that we really want a nutrition," or a significant number of members of the House are saying "We're not sure we want a nutrition program in the House and we're hearing from our constituents that they want larger cuts in nutrition and we're listening to those voices." And so you tend to have a very different political structure in the House and the Senate because of the different geographic sizes of the two.
[21:09] Brady: Now if they can't work out a farm bill, what happens?
David: Well, now there's something called permanent legislation which was the 1948 farm bill, which stays on the books. Every farm bill since 48 is an amendment to the 48 legislation. If we don't pass a farm bill, then technically, if we don't pass a farm bill before this one expires, which is sometime in September, then technically we would revert back to the 48 legislation. The 48 legislation has dramatically different programs than what we have today. Today's programs are much more market oriented than they were in 1948. In 1948 they consisted of what would be very high price supports for commodities today, price supports that would be well above prices that we have today, and if that really came into effect you would expect that those price supports to establish a dramatically higher price floor, under the world price, under the world market price and the government would end up having to buy large stocks of those commodities. Now, that's a very troublesome scenario for a lot of members of Congress and one of the reasons that some people have speculated that Congress has kept the 48 farm bill as permanent legislation is that that scenario is so scary that it's a hammer that the ag committees can use every four years to write a new farm bill and get it passed. If you don't vote for this new farm bill the 48 bill comes in and boy is that going to be scary. Perhaps that's true, perhaps not. I don't think Congress, I think if we get into later in the year and we've not passed the farm bill, I think Congress will find ways to delay that 48 bill from coming back into existence because it would be disruptive.
[23:32] Brady: Okay, so that's if, if they don't make something happen then you imagine they will pass some kind of legislation that allows them to delay having to move back to that 1948 farm bill. Is that right?
David: That's what the normal process would be. If you don't pass a new farm bill you would go back to the 48 bill. I guess what I'm saying is I think Congress will find ways to stall the return of that 48 bill. It's a possibility we had in 2012, we had a one year extension of this farm bill. There's a possibility I suppose that there might be another 1 year extension. Now Senator Stabenow now, from here in Michigan, who is the chair of the Senate Agriculture Committee has made it very clear an extension is unacceptable to her. I think it would be unacceptable to a large number of Senators. They've passed this bill two years in a row, they've done their job and I don't think they're going to let the House off of the hook this year with an extension. Now, how did we get that 2012 extension? Well it got rolled into the fiscal cliff deal at the end of 2012, a large budget deal that had nothing to do with agriculture. It's possible we are going to have another one of these large budget debates and government debt limit debates before the year, this year is over. It's possible I suppose that another extension could be rolled into whatever that deal becomes this year but I don't think it's as likely as it was in 2012. Let me also say this, without going into the details, I think America, U.S. farmers are going to begin to work their pencils a little bit, and when they do, they're going to figure out that the provisions of the Senate and House bills are going to be much better for them than another extension. We're seeing commodity prices significantly lower than they have been the last couple of years. The 2013 bills, if they pass, will provide much more downside protection for U.S. farmers than an extension bill.
[26:12] Brady: Okay, let's talk a little bit about that if you will. So, the proposed programs have this shallow loss type of [David: Mhmm] coverage in it. What does that mean?
David: Well the basic principles of the House, both the House and the Senate bills that have passed are basically very similar. They move agriculture, U.S. farm programs from what used to be a price based payment system, that if prices fell, farmers received a payment, if prices rose they did not, or they received a smaller payment. That is being replaced by a revenue based system in which farmers would have a benchmark revenue guarantee, based on, say, the last two years average price and on the last five years average yield. And whenever a pay- whenever a revenue because of a decline in price or a decline in yield, whenever revenue fell, farmers would be below the benchmark, farmers would be eligible to receive a payment. I think farmers are going to begin to look at that and say that that looks a lot better to me than the old fashioned price based system that we used to have and I guess from a Canadian perspective, we've had these relatively high world prices the last two or three years with good weather, in the U.S. at least, corn stocks are likely to be rebuilding a little bit this year, not hugely, but a little bit, and we're seeing prices come down somewhat. Don't be surprised if within a year or two, if we continue to have good weather and good yield, don't be surprised if we are soon hearing Canadian farmers and other country farmers saying "U.S. farm program payments are too generous given these low market prices that the rest of us are getting."
[28:31] Brady: Why would, why would that, would that affect Canadian competitive ability in the market? Why would that be a concern?
David: Well if you look at the rules of the World Trade Organization, payments are supposed to be non-trade distorting. That means that they cannot encourage production in a way that then decreases the world price because it increased the world supply. In other words, if I provide payments because you're a corn producer and you plant more corn than you otherwise would have, then that tends to depress the world price. This has been controversial in U.S. programs dating at least back to the 1990s and we're having about a 10 year long dispute with Brazil on cotton payments. And so, the essence of the issue for other countries, including Canada, would be if U.S. payments encouraged U.S. producers to plant more corn, for example, then they otherwise would, is that depressing the price of corn producers in other countries, including, say Canada? And that's when often times the WTO dispute arises. What I'm saying is, we're coming off a period of about two or three years of especially high prices. We're seeing yields and weather return to a bit more normal stage. We've absorbed the increase of production of ethanol. Corn yields are higher than they were ten years ago. Agriculture always out produces the market level, the market price that exists and I'm just saying, if the U.S. passes a farm bill along the lines of what the House and Senate have passed, we could be in a situation where the U.S. is making some significantly larger payments here within a couple, three years, assuming normal market conditions, and that's going to be something that rubs producers in Brazil and Canada and Australia, usually, rubs them the wrong way.
[31:02] Brady: Alright, let me see if I can recap, and you tell me where I'm kind of missing the mark, or if I've basically got the essence of the issue between the Senate and the House. The Senate and the House are basically in agreement on this program to support farmers’ income.
David: Correct.
Brady: They are not in agreement in this case, the House does not want to have a program that provides supplemental nutrition or food stamps to low income households and the Senate does.
David: Correct. Or, you might say that the House wants to cut more [Brady: Okay] out of nutrition programs. But that's the essence of it, you're correct.
Brady: Alright, and this is in a stalemate. You're prediction is that if they can't figure it out through this conference committee soon, it's probably going to get kicked down the road. If they do come to an agreement than in an era of potentially low commodity prices other countries or other places in the world might look to this program and argue that it is, it allows the United States farmers to continue production in an era of low commodity prices and actually contributes to driving those down.
David: Correct, except the one thing I would add is [Brady: Yep] you made a statement there about the conference committee can't work it out [Brady: Right]. And I want to be clear we do not yet have a conference committee [Brady: Oh]. The House, after each House passes a bill, they then have to pass a motion to have a conference committee. The House has not yet passed a motion to have a conference committee because they say they want to consider a separate nutrition bill, with larger cuts than what were in the earlier version of the farm bill. So other than that, I would say that's a pretty good summary of what I'm arguing.
[33:05] Brady: I just want to maybe tackle an additional issue. Now one of the program targets is to improve farmer income [David: Right]. But, my understanding is that, pretty much in recent times since the mid-1990s, certainly since the 2000s, is that both median and average farmer household income is on par, or I think above non-farm household income. Is that [David: Yes], do you understand me?
David: If you look at the U.S. data, farm household income right now, average farm household income from all sources, both farm and non-farm sources, in other words you might have one spouse who farms and one spouse who works off the farm. Average farm household income right now and for the past 5 years or so has been greater than average nonfarm household income. In other words, to the extent the tax payer money is being used to pay for farm programs in the U.S. we are to some degree taxing persons of lower farm, of lower income levels to provide payments for persons of higher income levels. Now, having said that, part of what happened in this farm bill that can be applauded I think, we did ask some fundamental questions about farm programs. What's the purpose of a farm program? Is it simply an income transfer? Back when the farm programs started in 1933 there was no question that is was about an income transfer. A large portion of the U.S. population lived on farms. They had significantly lower incomes than the non-farm population, and there was no question that farm programs were about income transfer. As we move to today, the question rises, should farm programs still be about things like income transfer? Or should they be about things like risk management? This is also applicable in Canada, where you've had a movement towards things like revenue insurance, for several years before the U.S. What the 2013 farm bill that both the Senate and House have passed, both represent I think, a significant move in the U.S. to make farm, U.S. farm programs more connected to the objective of risk management as a policy objective, and moving them somewhat away from their old historical role as an income transfer mechanism. And that's partly a recognition of this equity issue. If there's a public interest in farm programs, it can probably be justified on the risk management issue. It probably is less justifiable as an income transfer, simply because farm incomes are comparable to, or higher than non-farm incomes.
[36:40] Brady: Okay so David, what is going on here? Is this symptomatic of a larger U.S. political program or is this particular to the U.S. farm bill?
David: Well I would argue that this is symptomatic of what's happening in U.S. politics. And here I would refer your listeners to an excellent, short but excellent book by Thomas Mann and Norman Ornstein, two political scientists, and their book is titled It's Even Worse Than It Looks. And they trace recent U.S. political history, and they argue that there is a fundamental mismatch in U.S. politics right now. And that mismatch right now is U.S. political institutions, which are based on a theory of separation of powers, you have an executive office and you have a legislature, each of whom run as individuals and, they argue that a system of power structure is basically designed to protect the interests on political minorities. In other words, the only way that the majority can make a political decision is by compromising with the minority that has the power to block that political decision. They say we have a separation of power structure, but we have increasing, political parties that are increasingly acting like parliamentary parties. Now Canadians are very familiar with parliamentary parties and Ornstein and Mann say look, "In a parliamentary system, the majority party has basically entire control of the legislative and the executive functions, and they are judged on their success of failure as a party. They do not have to listen to much of what the minority party has to say or compromise with them. The majority party adopts its policies. Their policies fail or succeed, and the majority party is rewarded or punished at the ballot box." They argue that what we now have are parliamentary parties in a separation of power system. And what this has done has given the minority power incredible power to block what the majority party wants to do, but refuses to compromise with the majority party on what needs to be done. And they argue this is a recipe for disaster. This is a recipe for complete and total gridlock because of this mismatch of parties and governing structures, and I think this is very relevant if you're a country like Canada that is looking at U.S. political behaviour and trying to deal with U.S. political behaviour. Mann and Ornstein argue that U.S. political behaviour becomes very unstable in the situation that we have right now. And it's very difficult for an outside country then to understand and predict how the U.S. is going to behave on a particular issue.
[40:33] Brady: That uncertainty I imagine is a much bigger issue than the farm bill, but perhaps it captures the challenge that the uncertainty is U.S. politics has for all countries in the world. I mean, when Standard and Poor’s downgraded the long term sovereign of the United States from triple A to double A, one of the issues they raised are the problem of gridlock, basically pushing through important legislation. And I suppose bigger than the farm bill, this particular farm bill passing, Canadian farmers interests are served by a stable functioning U.S. political process.
David: I think that's true for virtually any country dealing with the U.S. and you're exactly right. If you go back and read the Standard and Poor’s report in which they downgraded the U.S. debt, they said and I'm quoting virtually word for word here "We have not changed our economic assumptions on the economic outlook for the United States in any way. But recent political events have convinced us that the political system in the United States is so unstable, and that policy outcomes are so random that we can no longer assume that the U.S. will deal with its debt issues through the political system [Brady: Hmm]. So it has nothing to do with the U.S. debt level, it had nothing to do with U.S. ability to tax itself to pay itself to pay its debts. It had nothing to do with the state of the U.S. economy. It's tragic that so few people have gone back and read that Standard and Poor’s report, and it's been so misinterpreted as to why Standard and Poor’s did what they did. But essentially they said "United States, if you want to behave like a Banana Republic, we'll rate you like one," [Brady: Mhmm, mhmm]. So this is, the farm bill is merely a small piece in this much broader picture that Man and Ornstein talk about, that Standard and Pores talk about. And Man and Ornstein talk about several ways in which it has arisen, and it has arising right now on things like immigration and the immigration bill that Congress is considering. We're still having, we're about to have another showdown on a debt limit issue, which is what triggered the S and P downgrade in 2011 and we're about to go through it again. So, this is a much bigger picture than simply the farm bill.
[43:34] Brady: Alright. When you look in your crystal ball, do you have any predictions about what's going to happen, or are there any kinds of ideas that you want to hit on that we haven't, discussed so far?
David: Well let me sort of draw I think a couple of scenarios about what might happen the rest of the year. One scenario would be that the House does pass it's, a nutrition bill and then sends their two bills to the Senate for conference. Presumably, that nutrition bill in the House would have much larger cuts than the Senate bill. That means that a final bill would come back with a probably smaller cuts than what the House now would pass. It would be very interesting to see whether Republicans might vote against a final farm bill that had larger cuts, or had smaller cuts, than what they had passed in their nutrition bill. So that's one scenario. The second scenario would be that the House decides not to pass a nutrition bill. It sends the farm only bill to the Senate for conference. If that Senate, if that conference bill comes back with a Senate nutrition bill that's much closer to what the Senate has passed, now I think you would see almost a total rebellion among the Republicans against a farm bill that had something like the Senate nutrition program in it. However, you would see, I think, a significant number of Democrats who would enthusiastically vote for a farm bill that had something like the Senate nutrition programs in it. So you can see a total switch on a final vote, where you would have a large number of Republicans breaking away and voting against the final bill, a large number of Democrats supporting a final bill, and you might actually be able to put together a coalition of a large number of Democrats and a few Republicans and pass that final bill. The third scenario of course would be the extension scenario that we've already talked about. I think that's somewhat unlikely. And the fourth scenario I suppose would be that nothing at all would get passed and we would fall back to the 48 bill. I still think that's probably the least likely scenario.
[46:19] Brady: Okay. Thank you very much, David.
David: Thank you.
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[46:35] Brady: Thanks for joining us on FARE Talk. We hope you will continue to check our website for updates and the latest podcast.
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