2007 farm bill : theme papers

2006·18.4 MB·English

Historic, Archive Document
Do not assume content reflects current
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USDA 2007 Farm Bill
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Theme Papers
United States
Department of
Agriculture
Office of Lats
Chief Economist
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www.usda.gov/farmbi«l l Listening to Rural America
2007 Farm Bill Theme Papers
“Lhe first step is to ensure that we
have all the facts on the table and
that is the goal .... My hope is that
this analysis will help to focus our
national conversation as we work
with Congress to develop future
farm policy.”
— Secretary of Agriculture Mike Johanns
United States
Department of
Agriculture
NATIONAL
AGRICULTURAL
Bead
Advancing Access to
Global Information for
Agriculture
Bey
Table of Contents
CHAPTER 1 1-23
Risk Management THEME Paper
CHAPTER 2 25-54
Conservation and the Environment THEME PAPER
CHAPTER 3 55-83
Rural Development THEME Paper
CHAPTER 4 85-107
Energy and Agriculture THEME PAPER
CHAPTER 5 109-139
Strengthening the Foundation for Future
Prosperity in U.S. Agriculture THEME Paper
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Foreword
hese five Farm Bill theme papers were initiated incentives to put environmentally sensitive land into long-
by USDA Secretary Mike Johanns to present and term conservation use. Succeeding farm bills expanded the
assess general views and issues advanced during scope and funding for conservation programs.
the 2007 Farm Bill Forums convened by Secretary Funding for conservation on land in commodity
Johanns at 52 locations around the country in 2005. production increased sharply in the 2002 Farm Bill, which
Each paper also includes views and policy ideas that have authorized greater spending for several programs created
emerged since then, reviews the operation and performance under prior farm bills and established new programs.
of current USDA programs, and presents an overview of Conclusions related to current program spending are
program expenditures. Each paper also discusses alternative reviewed, WTO implications are described, and alternative
approaches to current policies and programs to help inform approaches to conservation programs are presented.
the 2007 Farm Bill debate. The alternatives are not recom-
mendations but presented for further public discussion of The Rural Development paper focuses on what drives
the 2007 Farm Bill. the improvement in overall rural community conditions,
including economic and other quality ofl ife considerations
Risk Management describes five types of risks agricul- such as the environment, health, infrastructure, and hous-
tural producers face: price risk; production risk; income risk; ing. Since rural areas are no longer dominated by agricul-
financial risk; and institutional risk. The paper discusses ture, the rural economy has become highly diverse. Rural
instances where government may have ar ole to play in mit- America is home to about 50 million people, covering 75
igating these risks, reviews the benefits of current programs percent of the total land area of the Nation, and extremely
and outlays by the Commodity Credit Corporation, and varied in geography, population density, and economic and
discusses implications of U.S. proposals in the World Trade social assets.
Organization (WTO) Doha Development Agenda. USDA is the lead Federal agency for rural develop-
The paper evaluates current USDA risk management ment as designated by the Rural Development Policy Act
programs in terms of how well they mitigate risks, their of 1980. To foster rural development, USDA provides
level of comprehensiveness of support, their resource and grants, direct loans, loan guarantees, financial and technical
structural effects, their costs, and WTO implications. assistance, and research, mainly in the Rural Development
Three alternative general approaches to agricultural risk mission area. Other USDA mission areas also contribute
management are discussed. to rural development. A review of current program per-
formance and cost-benefits precedes a discussion of three
The Conservation and Environment paper details broad alternative approaches to addressing U.S. rural
USDA's conservation programs administered by the Farm development.
Service Agency and the Natural Resources Conservation
Service. It reviews the historical purpose for USDA of Energy and Agriculture describes the role of U.S. agri-
conservation programs, which initially focused largely on culture in energy production and efforts to conserve energy
maintaining the productivity of cropland. The current era use in agriculture. The paper discusses and evaluates cur-
of programs emerged with the 1985 Farm Bill that estab- rent USDA energy programs and how policy can address
lished the Conservation Reserve Program (CRP), providing issues associated with energy and agriculture. Government
incentives have been necessary to help ethanol and biodie-
sel compete with petroleum-based fuels. Recently, the surge
By
in oil prices has made biofuels more cost competitive, and These papers, prepared by a team led by the Office of the USDA Chief
these industries are attracting substantial new investment. Economist with representatives from the Economic Research Service,
Environmental benefits, energy security, and geopolitical the Natural Resources Conservation Service, the Farm Service Agency,
risks provide a strong economic rationale for increased gov- and the Risk Management Agency, contain factual, useful information
ernment support for the development of domestic alterna- for examining future farm policy directions. The papers are meant to be
tive energy. Iwo alternative approaches for government general in scope and stimulate discussion of policy issues relevant for
support of renewable energy are presented. the 2007 Farm Bill.
Strengthening the Foundation for Future
Prosperity in U.S. Agriculture provides an overview of
major trends in the food marketplace, strategies that farm-
ers have employed to remain competitive, and key driv-
ing forces shaping agricultural markets. These key forces
include issues related to international trade, the research
and development that lead to creating new technologies,
and protection of agriculture from pests and diseases. The
paper discusses challenges and issues in preparing farmers
and ranchers for this competitive marketplace, especially
the next generation of farmers and ranchers.
BY,
Risk Management
Production risk. Production risk is usually associated
ee Introduction
with inability to plant or harvest acreage or changes in
crop yields or animal production due to environmental
variables such as weather, pests, or disease.
This paper is the first ina series of briefing papers that as- “Income risk. Income risk can be caused by unexpected
sess general themes advanced at the 2007 Farm Bill Forums changes in production or prices received by producers
held during 2005 by Secretary Mike Johanns as well as as well as by swings in prices producers pay for inputs
additional related policy ideas that have emerged in recent such as fuel, fertilizer, or electricity.
months. This paper describes the risks agricultural produc- ~ Financial risk. Farm financial cash flows and net
ers face, describes and evaluates current key risk manage- worth can be seriously affected by access to and the
ment programs and tools available to producers through cost of debt and by the value of capital, which all
the private sector and government, and concludes with a can be affected by changes in interest rates and other
discussion of general policy alternatives. The alternatives factors, thus creating financial risk.
represent generalized approaches to addressing some of the " Institutional risk. Federal and State governments
key concerns that have been raised with regard to current can change laws or regulations producers count on,
programs. such as environmental and tax laws or changes in farm
commodity programs, creating institutional risks.
| Background: Risks and U.S. Options for Managing Risks. Agricultural producers
_ Agriculture Today have a variety of options available to help them manage
risks. Ideally, risk management would involve utilizing
tools or approaches that: (1) avoid or limit potential risks,
U.S. agriculture today continues to face a series of forces (2) mitigate the effects of unavoidable risks, and (3) enable
that transformed the general economy during the 20th recovery from the effects of risk events to ensure the continued
century. These forces include globalization of markets, sustainability of the farming operation.
rapid technological change, global population growth, While individual producers may be able to do little
expansion of regulations, and environmental pressures. to change institutional risks, they can manage price,
These forces and other factors create a variety of risks for production, income, and financial risks by: diversifying
farmers and ranchers in the operation of their farm and production; adopting better crop varieties; adopting other
ranch businesses. technologies, including precision agriculture and informa-
tion technology; conserving resources; altering the financial
Risks Facing Agriculture. Key agricultural risks are gen- structure of the farm; using insurance, forward pricing,
erally organized into five categories. and other hedging tools; and using off-farm earnings to
™ Price risk. Because agricultural prices are mainly stabilize farm earnings. However, not all of these options
determined in global markets, unanticipated changes are available to all producers. For example, climate in some
in global demand or supply of a commodity can lead parts of the country may limit what some producers grow,
to unexpected changes in the prices received by farmers off-farm employment may not be an option for some
for their products.
Bey
producers or their family members, and some risk manage- contracts, joining cooperatives, hedging in futures mar-
ment tools may not be available for all commodities or kets and futures options contracts, maintaining financial
regions. reserves, and working off the farm. Federal programs that
In addition to differing environmental characteristics help producers manage risks can sometimes complement
and opportunities, it is also important to understand that, these private sector approaches, but they may also discour-
financially, agriculture is a very diverse sector. There are age their use, or even displace them.
a small number of farms that account for much of U.S.
farm production. There are a large number of small farms Deciding what and how to produce can help produc-
that account for a small share of production, and farming ers avoid or limit risk. For example, diversification means
is not the principal occupation of these operators. Due to producing a mix of commodities so that low prices or
the wide diversity in producers’ individual situations, there yields for one commodity may be offset by higher prices
is not a single risk management strategy that will be best or yields for a different commodity in that year. Over 50
suited for everyone. Producers face different risks and need percent of all farms in the United States produce more
different risk management tools at their disposal. than one commodity in a year, with over 20 percent of
farms producing three or more commodities. Smaller and
Appropriate Level of Risk Reduction for Federal nonfamily farms tend to have the least diversified agricul-
Programs. An issue in program design is the proper role tural enterprises. Choosing crops resilient to drought in dry
of the Federal Government in helping agricultural produc- years, managing irrigation water, reducing energy use, and
ers manage risk. In a market-oriented economy, business employing new technology are additional ways producers
owners face risks associated with their sector and manage may be able to reduce exposure to risk.
those risks using tools provided by the private sector. That
is, the Federal Government does not try to eliminate risks Vertical integration can be an effective risk manage-
for most types of businesses, because doing so would result ment tool. Combining two or more successive produc-
in overinvestment in risky behavior and cause decisions on tion stages may provide better overall management of the
resource use that would be inconsistent with market incen- production process, reduce overhead, improve efficiency,
tives. Attempts to create a risk-free environment could also and result in outputs better tailored to meet the specific
thwart innovation and investment that would foster greater characteristics desired by consumers. Vertical integration,
global competitiveness. common in poultry and pork production, has not been
However, risk management tools may be inadequately common in grains and oilseeds, although farmer coopera-
provided by the private sector, and in such cases, Federal tives have helped spur an increase in biofuels production
action may be appropriate. In addition, Federal interven- and have been a mainstay in the collection and processing
tion has been based on special risks, such as weather in of milk.
agriculture which can cause widespread losses affecting
a large number of producers, and on the desire to offset Production and marketing contracts enable producers
undesirable market outcomes, such as low income for some to mitigate risk. Contracts are agreements between produc-
groups, despite the economic inefficiencies that may result. ers and buyers before the harvest of a crop or the comple-
tion of a livestock production stage. Under a production
contract, the producer’s payment is based on the costs of
Private Sector Approaches producer-provided inputs, the quantity of production, or
to Agricultural Risk both, and may include a fee paid for the specific services
provided. Under a marketing contract, the focus is on the
Management
commodity as it is delivered to the contractor, rather than
on the services provided, and usually specifies a price and
There are many private sector approaches to managing risk an amount to be delivered, but not how to produce the
in agriculture, including diversifying the enterprise, inte- product. Producers usually bear all yield risk and frequently
grati& ng vertically, engagic ng in préo duction and marketing all input price risk.