Farm Debt, Dairy and Cotton Programs Key Topics During House Farm Bill

February 16, 2017 08:19 AM

Big debate over how to alter dairy program

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A panel of economists painted a dark picture of the U.S. farm sector during a House Agriculture Committee hearing, although they said indicators are not as dire as in the 1980s, when high interest rates, low commodity prices and a strong dollar combined to drive a wave of farm foreclosures.

Low commodity prices have driven farm income to a fourth straight annual decline, increasing financial stress among farmers who are increasingly turning to financing to cover operating costs. That is going to influence aid provisions in the next farm bill, the economists testified.

“Producers are going to need every bit of the safety net that you can provide them,” Dr. Joe Outlaw, co-director of the Agricultural and Food Policy Center at Texas A&M University, said. Outlaw said crop subsidy payments totaled $13.2 billion during 2015 and 2016, while cash receipts from crops fell by $23.7 billion. “In no way are commodity payments making producers whole,” said Outlaw. “There is a growing need to provide additional funding as adverse economic conditions are expected to continue.”

Farmland values have not yet plummeted and high crop yields are helping to prop up cash flow, Nathan Kauffman, assistant vice president at the Federal Reserve Bank of Kansas City, said. “Agricultural credit conditions have decreased somewhat over the past year, and financial stress in the US farm sector appears to have increased modestly as commodity prices and farm income remain low, but a farm crisis on the scale of the 1980s still does not appear imminent,” he said.

USDA currently forecasts a drop in net farm income by 8.7 percent to $62.3 billion in 2017. Accounting for inflation, the 2017 net farm income would be the lowest since 2002.

Farm debt-to-asset ratios, a key measure of the financial health of farm borrowers, have increased modestly over the past four years. The higher ratio is driven by increased borrowing to cover operating costs and a small but steady decline in farmland values, which make up more than 80 percent of total farm assets and are important loan collateral. USDA recently forecast a debt-to-asset ratio of 13.9, a slight uptick from the 13.1 in the previous year but far from the 20-plus levels seen in the mid-1980s.

Meanwhile, debt-to-asset ratios remain low, and the decline in farmland values has been “modest,” Kauffman said. That has helped keep the farm economy from a crisis like that of 30 years ago, he said. But if farm incomes remain low and farmland values decline while debt continues to pile up, it is possible that key indicators could return to 1980s levels, he said.

"With interest rates still low and farmland values declining relatively slowly, farm debt presents a lower risk to the sector than in the 1980s," USDA Chief Economist Robert Johansson said. "Current data suggests interest payments on current debt relative to net farm income is about 20 percent; whereas in 1985 it exceeded 60 percent."

The chairman speaks. “In the upcoming farm bill, we will measure our requirements first and then determine what kind of a budget we will need to meet those needs,” said House Agriculture Chairman Mike Conaway (R-Texas), who cited low commodity prices and “predatory trade practices of foreign countries.” As an example, he pointed to the U.S. complaints that Chinese wheat, corn and rice subsidies in 2015 were a cumulative $100 billion higher than allowed by WTO rules.

Conaway said Congress should "take to heart" the advice of former committee chairman Frank Lucas (R-Okla.), who said during the last farm bill debate "that a safety net is supposed to be there to help farmers in bad times - not in good times." Conway added, "Every hole in the current safety net that now requires mending is the result of our not fully heeding that wisdom. Had we followed his counsel more closely, I doubt that there would be anywhere near the current urgency in writing a new farm bill." Lucas said, "We don't do farm bills for the good times but we do farm bills to address the bad times.” He predicted that his colleagues would find out how difficult their task is over the next two years.

The U.S. dairy program was a key focus of the hearing. Committee members discussed possible changes to price and profit margin supports in the next farm bill and talks a lot about dairy Margin Protection Program (MPP). The program, created as part of the 2014 Farm Bill, provides financial assistance to enrolled dairy farmers if profit margins fall below a threshold. Farmers pay an annual fee based on the level of coverage they want. The program has come under criticism from some dairy producers who say the method used to calculate profit margins does not reflect actual costs to the farmer, meaning farmers may not get a payout when the believe they should. Dairy farmer participation has declined each year since it began.

Committee ranking member Collin Peterson (D-Minn.) said the lack of participation meant that when prices do plummet, many dairy farmers would not be enrolled in the program, leaving them financially vulnerable. “I can tell you, talking to my producers and producers around the country, I think it's going to be a tough sell, because they look at this thing as, ‘If I'm not going to get any money out of this, then I'm not going to do it,’ ” Peterson said.

Part of the issue is that the program uses the national average cost of feed to calculate profit margins, which some noted fails to consider higher transportation costs in some sections of the country. Rep. Vicky Hartzler (R-Mo.) suggested monthly feed price calculations rather than bimonthly adjustments. She also proposed allowing dairy producers to package participation in the dairy MPP with the livestock gross dairy margin protection program that covers animal feed costs with the dairy program.

Change to the dairy program is needed to attract more farmers, said Scott Brown, assistant professor of agricultural and applied sciences at the University of Missouri. “I think if we make no changes and continue with the current program we are certainly going to see less and less participation, unless we have a serious event similar to 2009, which was very low prices, or 2012, which was very high feed costs,” Brown said. Changes could include increasing the threshold for the lowest tier of coverage, which Brown said is inadequate. “Four dollars is about as good a safety net as a concrete floor,” Brown said. “It does not provide much protection.”

Peterson suggested another possible change: Make the dairy program a five-year enrollment instead of an annual one, adding that it is unlikely the program can be greatly expanded because of cost concerns. Brown said a five-year enrollment could help boost enrollment numbers. “If you have them in for a longer period of time, perhaps they would rethink that strategy and would pick a higher level of coverage,” Brown said. Peterson said another possibility might be to fine-tune the catastrophic insurance portion to make it more effective financial protection in tough market conditions.

Peterson has called addressing regional feed prices a "bad idea" and that "if you want to blow up the program, that's the way to do it."

Peterson said the panel would also look closely at the program for cotton farmers, who say income support designed for them in the current farm bill is inadequate.

Outlaw said the 2014 farm bill "has worked as intended for all crops except for cotton," noting that the Stacked Income Protection Plan (STAX) "has not provided the protection producers were hoping for." He added that, "Not having Title 1 programs to protect from the sustained drop in cotton prices has caused severe financial difficulties only overcome by the occasional record yields," he told the committee. "There has to be some sort of price protection afforded to cotton producers," Outlaw said. Johansson noted that only 29 percent of cotton acres insured in 2015 and 27 percent of cotton acres insured in 2017 carried STAX policies.

Peterson said the farm bill should be “based on what’s needed,” rather than a budget target set elsewhere in Congress. The 2018 Farm Bill should offer better protection to cotton and dairy producers, he said, and the Conservation Reserve Program (CRP), which pays landowners to idle fragile cropland for ten years or more, should be expanded to 35 million or 40 million from its current limit of 24 million acres.

On the trade policy front, Rep. Rick Crawford (R-Ark.) raised concerns about the effects of possible retaliation against U.S. agricultural goods as the Trump administration pushes a harder line on trading partners. He said Mexican lawmakers are threatening to file legislation that would require their country to stop buying U.S. corn and increase purchases from Brazil and Argentina, amid rising tensions between Mexico and the U.S. over President Donald Trump’s push for Mexican concessions in renegotiating the North American Free Trade Agreement (NAFTA).

Crawford said corn is the target now, but he could easily see Arkansas rice becoming another target. "Mexico is our number one [rice] market," he said.

It would be a blow to U.S. agriculture if Mexico acted on the threat against corn, said Pat Westhoff, director of the University of Columbia's Food and Agricultural Research Institute. However, he said US corn growers could probably recoup some losses by selling into markets left short of corn as Brazil stepped up sales to Mexico.

Comments: This is the first of many hearings in Washington and upcoming field hearings on the new farm bill. Conaway said a series of farm bill hearings will begin on Feb. 28, starting with the conservation subcommittee.

In watching such debates over 40 years plus, there is not much new that has surfaced regarding farm policy. What is new is the lack of analysis of various safety net proposals before they are proposed and voted on. The problems with the current dairy and cotton programs could have been alleviated had any significant analysis been done on current programs — of if analysis presented to lawmakers would have been followed.

To read testimony from five agricultural economists and Conaway’s opening statement or to watch a video of the hearing, click here.

NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.