Administration breaks down farm bill ills

By Carol Ryan Dumas, Ag Weekly editor
Friday, August 3, 2007 1:44 PM CDT

Washington — With the threat of a presidential veto in his pocket, U.S Secretary of Agriculture Mike Johanns targeted five areas of serious concern the administration has in the House farm bill, passed on July 27.

Heading the list is payment limits, specifically the House version of the adjusted gross income cap on eligibility for farm payments.

“While we do appreciate the House adopting the AGI approach to payment limits, the House bill does not go far enough to set real limits,” he said. “Current law contains an AGI cap of $2.5 million. Fewer than one-tenth of one percent of American tax-filers fall within this AGI, so this provision of current law really has virtually no impact.”

The House bill decreases the AGI cap but only to $1 million annually, he said. It also affects those with AGI between $500,000 and $1 million, but only if less than 67 percent of their income is derived from farming. The House bill also eliminates the limit on loan deficiency payments and marketing loan gains.

“We estimate, based on IRS data, that approximately 3,000 farm operators and landlords would be potentially affected by the $1 million AGI cap, 3,000,” he said. “Another estimated 4,000 have AGI between $500,000 and $1 million, so just over 7,000 people would be impacted across the entire United States.”

That compares with the administration’s proposal to set an AGI cap of $200,000, averaged over three years. Based on IRS data, 38,000 farmers could be affected by the proposal, Johanns said.

“That’s more than five times the number of operators who are doing very well by any definition, who would no longer receive government subsidies under our proposal as compared to the House bill,” he added.

The House AGI approach saves $473 million over the 10-year score period, he said. The administration’s AGI approach saves three times that amount, $1.5 billion.

“Here’s the bottom line, the administration’s proposal would affect only those who are among the wealthiest 2 percent of Americans,” he said.

“Now we celebrate their success, but we also believe strongly that there is a point at which people graduate from receiving government cash subsidies,” Johanns said. “We don’t take these savings away from the Farm Bill; instead, we propose directing these dollars to beginning farmers, rural communities, and other very important farm bill priorities.”

The second area of concern are the unintended consequence of the 2002 Farm Bill, which stayed in place in the House bill.

“I call it the pick-your-price phenomena, and the reality of this phenomena is that it actually happens annually to some degree,” Johanns said. “In farm bill lingo, it’s referred to as ‘beneficial interest.’”

Farmers who get a loan deficiency payment can lock it in anytime after harvest, even if prices are temporarily low. Because they still own the crop and, therefore, retain beneficial interest, they can sell the crop later when the prices have rebounded.

This resulted in $3 billion in payments for the 2005 crop year, where grain prices dropped when shipping on the Mississippi River backed up due to Hurricane Katrina. Corn and soybean farmers locked in at the low price but sold when prices recovered.

“So a payment was received from the government to make up for low market prices, and yet the crop was sold at the higher price at a later date,” Johanns said. “Under the 2002 Farm Bill, this was absolutely legal, yet it did cost taxpayers $3 billion for the 2005 crop year, when in fact no loss was suffered.”

The administration’s proposal would require producers to lock in loan deficiency payment rates when they sell their crops.

Johanns’ third area of concern relates to the increased loan rates and target prices in the House bill. It raises loan rates on 14 of 25 eligible crops and raises target prices for 12 of 17 eligible crops.

“Now I just strongly suggest that these provisions clearly represent a step backward in farm policy,” he said. “Planting decisions should be based on a free-market demand, but loan rates that exceed market prices create an incentive to plant one crop over another, regardless of market demand.”

He added the marketing loan program is categorized as a trade-distorting program under the World Trade Organization obligations, making it subject to intense scrutiny.

“That’s that bull’s eye that I talk about being on the farmer’s back,” he said. “No one can convince me that there’s wisdom in painting an even larger bull’s eye. We should be protecting our programs from challenge and thereby protecting our farmers, not the opposite.”

The administration wants to set loan rates at 85 percent of the market price averaged over the previous five years, which makes planting decisions more market oriented, he said.

Fourth on the list of concerns are the budget issues Johanns referred to as “gimmicks” that change the timing of payments.

“They don’t actually change the amount of the payments or the obligation. In other words, the same amount of tax dollars will be spent, but because of the way they are timed they are not counted under the 10-year score,” he said.

The House bill claims $4.7 billion in nonexistent savings, but the bill contains more than $4 billion in these gimmicks that produce no real savings, he added.

“I think we can ask the question; is that real reform? And I think the obvious answer is: It is not,” Johanns said.

The last point is the administration’s disregarded recommendation that 11 conservation programs be consolidated into three to reduce administrative costs and make the programs easier for farmers to understand and utilize.

The administration also wants more focus on beginning farmers, resources for rural communities and cellulosic ethanol.

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