1996 Farm Legislation

A Synopsis of a Pre-conference at the 1996 Annual Meeting

of theAmerican Agricultural Economics Association

San Antonio, Texas

July 27, 1996

Edited by:Otto C. Doering, III

Lyle Schertz

A Pre-conference Report of theAmerican Agricultural Economics Association

Ames, IowaNovember 1996

This document is also available on the World Wide Web athttp://www.agecon.purdue.edu/geninfo/aaeapapr.htm

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Table of Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

CBO's Role in Farm Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1David Hull, Agricultural Analyst, Congressional Budget Office

The Making of the 1996 Farm Act as Seen From the Senate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Andy Morton, Chief Economist, Majority Staff, Committee on Agriculture, Nutrition,and Forestry, U.S. Senate

The Making of Farm Legislation in the House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Chip Conley, Economist, Democrat Staff, Committee on Agriculture,U.S. House of Representatives

How the Farm Bill, in the End, Included a Conservation Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Pat Westhoff, Economist, Democrat Staff, Committee on Agriculture, Nutrition,and Forestry, U.S. Senate

The Administration's Approach to the Farm Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Larry Salathe, Senior Economist, Office of the Chief Economist, USDA

Agribusiness and the 1996 Farm Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18David Lyons, Vice President, Louis Dreyfus Corporation

The National Corn Growers Approach to Farm Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19William Northey, President, National Corn Growers

The Cotton Council's Approach to Farm Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Mark Lange, U.S. Cotton Council

The 1995-96 Debate Over Dairy Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Charles Shaw, Senior Economist, International Dairy Foods Association

Environmental Interests in Farm Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Maureen Hinkle, Director of Agricultural Policy, National Audubon Society

Priority Farm Issues Will Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Tim Price, Economist, Illinois Farm Bureau

The Budget and the 1996 Farm Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Bill Hoagland, Staff Director, Committee on the Budget, U.S. Senate

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Page

Outline of 1996 Farm Bill Decisions, Their Drivers, and Resulting Issues . . . . . . . . . . . . . . . . . . . . 30Consensus of Attendees at the Preconference

Implications of the 1996 Farm Act for the Work of Agricultural Economists . . . . . . . . . . . . . . . . . 31Consensus of Attendees at the AAEA Session on the 1966 U.S. Farm Legislation

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Introduction

Farm policy has had major implications for the work of agricultural economists for many decades. Infact, it has been a major field of investigation by agricultural economists since the 1920s. Theimplementation of farm policy required the analysis of agricultural economists to enable the U.S. Secretaryof Agriculture to perform many of the responsibilities given to him by law. In addition, agriculturaleconomists have provided key inputs to legislators as changes in farm policy have been considered. As withprevious Farm Bills, the enactment of the 1996 Farm Act is of major interest to the profession—all themore so because of the important institutional changes it contains that ended most previous programs andresponsibilities of the Secretary with respect to commodity programs.

The new Act was selected as the topic of an all-day conference preceding the 1996 annual meeting ofthe American Agricultural Economics Association. The focus of the pre-conference was how the new Actcame into being and what were the most important issues associated with its provisions. The speakers at thepre-conference were active participants in the many activities associated with the deliberations thatpreceded the passage of the legislation by the Congress. They included staff members of the Congress,USDA, and organizations that lobbied the Congress. A session at the annual meeting took the issuesflowing from the Act and identified the likely impact on the work of agricultural economists.

This report includes:

• Summaries of the presentations on the farm legislation,

• A summary of the presentation on the budget, and how this was and is a critical driver oflegislation,

• A list (developed by the participants in the conference) of major points made by thespeakers—important decisions, their drivers, and resulting issues, and

• A summary of implications of this legislation for the profession. This summary was developed inthe follow-up symposium that was part of the regular annual meeting of the Association.

The presentations about the development of the legislation and its passage illustrate the difficultiesassociated with enacting legislation and how various interest groups participate in the legislative processes.The list of major points made by the speakers and the summary of major implications suggest challengesconfronting agricultural economists in the coming years.

We are particularly appreciative of the speakers and the participants in the conference and thesymposium. All of their contributions were critical. We are appreciative to the Board of the Association.Their willingness to support the conference and the symposium made this report possible.

Otto C. Doering, IIILyle SchertzEditors

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CBO's Role in Farm Legislation

David HullAgricultural Analyst, Congressional Budget Office

David Hull reminded the audience that budget considerations had a dominant role in the legislativeprocess leading to the 1996 Farm Act. The agriculture committees of the Congress were instructed to save$12 to $14 billion over seven years relative to what the outlays were expected to be with a continuation ofcurrent policy.

The approach to budget savings encouraged those with agricultural interest to foster baseline estimatesthat were high. Such baselines would be less constraining on the formation of the prospective farm bill. Forexample, Hull recalled that the USDA and others took the attitude that counter to standard assumptions ofCBO and USDA baselines since 1991, which all assumed no extensions at all, the baseline should be basedon the expectation that the number of acres in the Conservation Reserve Program (CRP) would be near themaximum allowed by law for an extended number of years into the future. In contrast, the CongressionalBudget Office (CBO) baseline anticipated a smaller CRP, a larger number of cropped acres and lowerdemand than did USDA. These expectations translated into CBO-expected lower prices, lower commodityprices, and larger ARPs. CBO's resultant CRP baseline had lower spending while their CCC baseline (forprice supports and income payments) had higher spending. This set of CBO expectations meant that itwould be costly to: i) extend the CRP, and ii) eliminate ARPs. Both results ran counter to the politicaldesires of USDA and farm interests.

However, the give and take of the legislative process, including the baseline estimates, was influencedby the bullish farm commodity markets. In response to the higher market prices, the CBO in December1995 adjusted downward its estimates of 1996 outlays but did not make changes for the out years. Incontrast, others, including the USDA, expected the stronger market conditions to be sustained for a longerperiod.

The higher commodity market prices created an incentive to devise legislation that would generatetransfers to producers at least equal to the baseline amounts even if higher price levels were sustained. Hullreminded the group that the change in federal spending generated by adopting the Freedom to Farmproposal would have looked much different if measured by USDA expectations than if measured, as it was,by the CBO baseline. USDA, in fact, estimated the Freedom to Farm proposal to increase federal spendingversus their baseline.

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Table 1. CCC Outlays: USDA vs. CBO, Early and Later Baselines.

Fiscal Year History Early 1995 Dec. 1995 Early 1995 Early 1996

CCC TotalExpenditure CBO CBO USDA USDA

- - - - - - - - - - - - - - - - - - - - - - - $ Billions - - - - - - - - - - - - - - - - - - - - - - -

1988 12.461 12.461

1989 10.523 10.523

1990 6.471 6.471

1991 10.11 10.11

1992 9.738 9.738

1993 16.047 16.047

1994 10.336 10.336 10.336 10.336 10.336

1995 8.732 6.030 10.623 6.030

1996 8.616 3.790 9.073 3.199

1997 8.521 5.631 8.774 3.633

1998 8.372 7.973 6.984 5.093

1999 8.157 8.200 6.977 5.027

2000 7.928 7.820 6.414 4.446

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Table 2. CRP Acre Assumptions: USDA vs. CBO, Early and Later Baselines.

Crop Year and History Early 1995 Early 1996 Early 1995 Latest 1996

36 mil. AcreNo Extension CBO CBO USDA USDA

- - - - - - - - - - - - - - - - - - - - - - Million Acres - - - - - - - - - - - - - - - - - - - - - -

1986 2.00

1987 15.70

1988 24.40

1989 29.80

1990 33.90

1991 34.40

1992 35.40

1993 36.40

1994 36.40

1995 36.40 36.40 36.40 36.40 36.40

1996 36.00 38.00 35.70 37.40 35.00

1997 22.30 29.68 34.60 35.60 29.50

1998 13.60 24.63 30.30 34.40 25.20

1999 8.20 21.40 28.20 33.50 26.20

2000 4.10 19.08 26.70 32.80 28.30

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Table 3. Change in Outlays Under Different CBO Baselines, Contract Payments in Lieu of DeficiencyPayments.a

Costs (+) or Savings (-) Versus:

Fiscal Year Baseline BaselineCBO 12/95 CBO 3/95

- - - - - - - - - - - $ Billions - - - - - - - - - - -

1996 3.149 -0.595

1997 1.907 -0.848

1998 -0.165 -0.851

1999 -0.779 -0.984

2000 -1.098 -1.241

2001 -1.955 -2.045

2002 -2.072 -2.036

Budgetary effects of H.R. 2854, as amended, 02/02/96.a

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The Making of the 1996 Farm Act as Seen From the Senate

Andy MortonChief Economist, Majority Staff, Committee on Agriculture, Nutrition, and Forestry,

U.S. Senate

Morton pointed out that several restrictions on the use of land associated with the 1990 Farm Act wereeliminated by the 1996 Farm Act except restrictions related to fruits and vegetables.

Support for planting flexibility and the elimination of ARPs became increasingly evident in early1995. Agribusiness had supported this type of change for many years. But the support this time was muchbroader, including farmers. The environmental community also supported this type of change. TheFarmland Trust and World Resources Institute lent support to these changes. A consensus was beingdeveloped also among agricultural economists that withholding land from production was having anadverse effect on U.S. competitiveness. Also it was clear in early 1995 after the Republicans had gainedcontrol of the Congress that this basic policy reform was a key demand by the Republican leadership on theag committees.

Opponents included southern cotton interests who feared potential competition from other regions. Therice millers feared large drops in rice acreage if a decoupled payment structure was initiated.

The National Cattlemen's Association took the position that it was not appropriate for producers toreceive payments and be free to hay and graze the land. Despite the reservations of these groups, there wasserious overwhelming support for the proposed reforms. However, the budget got in the way.

The Ag Committees were asked to cut $13.4 billion from the March 1995 CBO baseline applicable tomandatory spending which assumed a continuation of the 1990 farm bill. The baseline included nearly $57billion in Commodity Credit Corporation (CCC) spending (Table 1). The bulk of this was deficiencypayments. Also included are EEP, the peanut program, and the commodity loan program. The cropinsurance and the Conservation Reserve Program (CRP) each accounted for another $10 billion over theseven year period, 1996-2002. The Wetlands Reserve Program was another $600 million.

There was uncertainty in both ag committees as to how to come up with the $13 billion. There seemedto be agreement that it was not appropriate to take much away from federal crop insurance. With respect tothe CRP, the House Ag Committee made an early decision not to legislate on it, but try to get its baselineincreased later. The Senate Ag Committee wanted to reauthorize the CRP with reforms, but clearly it wasnot thinking about cuts of the CRP; thus the $13 billion had to come from CCC programs. The challengewas how to deliver these basic reforms and still obtain $13 billion in savings. A large budget price tag wasassociated with the elimination of ARPs and planting flexibility. One answer was not to do the reforms. Itis illustrated by the "Abandon Basic Policy Reform" supported by several members of the Senate AgCommittee—increase the nonpaying acres from 15 to 30 percent for a savings of approximately $9 billion(Table 2), and then accumulate the remaining savings with changes in the Farmer Owned Reserve, thepeanut program, and EEP to get about 4.5 billion from these programs, but there would be no basic policyreform.

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Table 1. March 1995 CBO Baseline (Mandatory spending in billions of dollars).

Cumulative SpendingFY 1996-2002

Farm Programs (CCC)Deficiency Payments 44.2Other, marketing loans, EEP, dairy, peanuts, etc. 12.4

Subtotal, CCC 56.6

Federal Crop Insurance 10.1

Conservation Reserve Program 10.2

Wetlands Reserve Program 0.6

Total Mandatory Spending for Agriculture 77.5

Source: Majority Staff Senate Agriculture Committee, July 25, 1996.

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Table 2. Basic Approaches to the Farm Bill Budget Dilemma (Cumulative budget savings in billions ofdollars relative to the March 1995 CBO baseline).

Abandon Basic Policy ReformIncrease Nonpaid Flex Acres to 30% 8.9Other 4.5

Total Savings 13.4

Adopt Basic Policy Reform but Keep Current StructureEliminate ARPs/Full Planting Flexibility -7.6Reduce Target Prices 2.4% Annually for 5 Years 16.5a

Subtotal, Savings Deficiency/Loan Outlays 8.9Other 4.5

Total Savings 13.4

Adopt Basic Policy Reform with Modified Current Structure - Senate BillEliminate ARPs/Near Full Planting Flexibility -7.6Increase Nonpaid Flex Acres to 30% 8.9Cap Deficiency Payment Rates at CBO Baseline 7.5

Subtotal, Savings Deficiency/Loan Outlays 8.8Other 4.3Environmental Quality Incentives Program -0.6

Total 12.5

Adopt Basic Policy Reform with Decoupled/Fixed Payment Structure - RobertsEliminate ARPs/Full Planting Flexibility No CostMarket Transition Payments 5.5Loan Rates Reduced to 70% of Past Market Prices 2.9Payment Limitation Based on Direct Attribution 0.5

Subtotal, Savings Deficiency/Loan Outlays 8.9Other 4.4

Total 13.3

Comparable savings with 40% to 45% nonpaid flex acres beginning in CY 1996.a

Source: Majority Staff Senate Agriculture Committee, July 25, 1996.

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But to deliver both savings and basic policy reform, you had to do something dramatic to thedeficiency payment or the loan program. For example, if you let the commodity loan program alone, youhad to get $16.4 billion out of the deficiency program. Target prices would have to be cut 2.4% per yearfor five years.

If you wanted to do this by increasing nonpaying flex acres, the percentage would have to be 45% in1996 when current law was 15%. Senator Lugar proposed a package that included elimination of ARFS,planting flexibility, a reauthorized CRP, cost share assistance for livestock producers to reduce waterquality problems, and mandatory funding for agricultural research. Lugar paid for these reforms andachieved necessary savings by elimination of EEP and a five-year phasedown of target prices. One otherSenator (Santorum) on the Committee may have supported this proposal, but not likely others.

This dilemma on how to deliver on basic reform drove the FTF approach in the summer of 1995. Youcan do it if you change the structure. Of the programs eliminate ARPs and full planting flexibility, had noprice tag if you go to a decoupled payment system. Then the initial FTF approach did away with $5.5billion from what was the projected stream of deficiency payments.

Chairman Roberts did not want to get the entire $9 billion plus from deficiency and loans. He got theother 3 (2.9) by cutting loan rates. 85% was in the old law. He also went to the direct attribution—applying the $50,000 pay limitation social security number rather than the three entity approach.

An important element of the process was CBO moving to probability scoring. Instead of the agprovisions being scored against the baseline projection, instead of prices as a 100% certainty, they wereviewed in a probability context. If you raised loan rates there was a cost, even if raised to levels belowprojected prices.

The Republican position in the Senate shifted to modify the current structure, deliver basic reforms,eliminate ARPs, and permit nearly full planting flexibility. With probability scoring, savings wereassociated with the capping deficiency payments at no higher than the projected level.

In the summer of 1995, Congressman Roberts and his staff director, Gary Mitchell, did not have amore accurate forecast of where markets were headed than did others. Commodity groups were notenthralled with FTF.

Chairman Roberts was unable to win sufficient support for FTF within the House AgricultureCommittee, but FTF was nonetheless included in the House-passed budget reconciliation bill with thesupport of the House Republican leadership. As market prices rose in the fall of 1995, it became clear thatthe House FTF approach would provide farmers with large upfront benefits, particularly in comparisonwith farm provisions of the Senate bill that retained a modified version of traditional deficiency payments.As a result, the Roberts' FTF program prevailed in conference although funding was modestly reduced toallow commodity loan rates to be capped at their 1995 crop year level. In addition, Senators Lugar andLeahy were able to retain conservation provisions which reauthorized the CRP and created the new costshare assistance program for livestock producers.

The 1996 Act makes farm program payments more transparent and vulnerable. The way you then tryto protect them is to lock the payments up in seven-year contracts. A major policy question is whether theCongress will leave the new payment structure unchanged in the coming years.

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The Making of Farm Legislation in the House

Chip ConleyEconomist, Democratic Staff, Committee on Agriculture

U.S. House of Representatives

Conley’s presentation described the policy development process of the 1996 farm bill as the practicalintrusions of the budget and legislative process, as well as political concerns, into espoused policyobjectives. The provision of transition payments to offset the elimination of income support payments andgovernment planting restrictions may appear to be a straightforward policy choice to the outside observer.Yet, various policy objectives, arising without necessary relation to one another, from different policycenters in Congress conspired to shape the final policy outcome of the 1996 farm bill. The outcomes couldnot have been predicted from the outset of the 104th Congress.

CBO outlay scoring represented the greatest defining constraint to Republican objectives of fewerrestrictions on farmer planting decisions, including the elimination of annual acreage reduction programs. Ifmeasured int he context of the 1990 Farm Act provisions, the proposed increased planting flexibility andelimination of ARPs would increase outlays by nearly $8 billion. To generate savings of this amount andmeet the Budget Committees’ spending reduction target, the percentage of unpaid acreage would have to beincreased to over 40 percent. Producers would then receive deficiency payments on less than 60 percent ofthe base production.

Senate Agriculture Committee Chairman Lugar suggested farm spending should not exceed currentprojected levels less the required deficit reduction. This argued that farm spending should be a “capped”entitlement.

House Agriculture Committee Republicans, concerned over declining CBO baseline commodityprogram outlays projections, spoke of “capturing the baseline” of federal spending for agriculture, so that itcould not be further reduced.

At the same time, Republican House leadership were pressing for policy changes that could bedescribed as policy reform, rather than marginal changes. Majority Leader Armey (R-TX), for instance,had proposed earlier in the decade to eliminate the programs and give producers a fixed welfare payment.

Conley also pointed out that several House Agriculture Committee members from areas where cropshad failed were searching for a vehicle whereby producers who had received advanced deficiency paymentswould not have to repay them.

The combination of these forces and considerations, and rising market prices, led House ChairmanRoberts and then others to propose and adopt the policy of fixing the payments to each producer or landowner for seven years regardless of production or commodity prices. The beneficial result to farmers basedon CBO December 1995 baseline was to increase income transfers $4.8 billion over fiscal years 1996through 1998 rather than reduce them $2.5 billion.

The separation of the farm legislation from budget reconciliation legislation, subsequent to the failureof the Congressional-White House budget negotiation, was required by the onset of spring planting and the

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potential reversion to the supply control policies of the 1949 Act. The timeliness of enactment forced dairyinterests to resolve their differences and gave others the opportunity to include conservation and ruraldevelopment programs, adding a net increase of $3 billion to spending, in order to expedite congressionalaction.

In the end, the enacted law reduced the estimate of outlays over seven years by about $10 billion,relative to the budge resolution, and by $2.1 billion, relative to the updated December 1995 CBO baselineprojection of outlays over seven years with the same policies.

Conley observed that the 1996 farm bill represents an economist’s solution to interventionistgovernment policies: eliminate the distorting mechanisms, compensate the affected parties for their losses,and there will be a net efficiency gain for society. He suggested that several questions arise regarding thelong-term political support for such a policy.

Does the absence of the usual Congressional debate, complete with unrestricted amendments, and thecontentious welfare reform debate, which was not permitted to intrude on farm policy discussions, portendthe law will be changed before 2002?

Is policy stability, which would be interrupted by such changes, important for investment planning andcredit availability in a capital-intense industry like agriculture?

Would the bill’s elimination of government intervention in field crop agriculture be just as acceptableto economists without the transition payments? What about farmers? Would it still have their politicalsupport?

If there turns out not to be long-run political support for the bill’s transition payments, and there is notpolitical support for the elimination of government intervention without uninterrupted payments, then whatis the policy solution that economists can offer that will receive political support for its duration? Are wesearching for a second, third, or fourth best solution if one that might be considered optimal by economistsis not politically viable?

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How the Farm Bill, in the End, Included a Conservation Title

Pat WesthoffEconomist, Democrat Staff, Committee on Agriculture, Nutrition, and Forestry, U.S. Senate

Westhoff described developments in 1995 and pointed out that it was not until January 1996 that itbecame clear that there was not going to be a big agreement between the Republicans in Congress and theWhite House on the federal budget. In turn, farm legislation was separated from the budget debate and therules of the game for considering farm legislation changed. So long as the farm legislation was part of thebudget reconciliation bill only 51 votes were needed for the legislation to pass the Senate. However once thefarm legislation was separate the rules allow indefinite debate unless 60 Senators agree to limit the debate.

With Senator Daschle (D-SD), the Senate Democratic Leader, unalterably opposed to the FTFapproach, it was not possible for the Republicans to marshall the necessary 60 votes unless there was somesupport of Democrat Senators. Westhoff reported that negotiations among Senators Lugar, Dole, andDaschle, and other Midwestern Democrats resulted in a stalemate.

Once it became clear that there would not be an agreement among the Midwestern Senators, SenatorLeahy (D-VT) offered Senators Lugar and Dole a deal. He was willing to accept the Republicancommodity program provisions, provided his amendments were accepted to include:

1) Re-authorization of the food stamp program and other nutrition programs.

2) Congressional consent to the Northeast Dairy Compact.

3) A number of conservation provisions.

Senator Leahy was a champion of nutrition, dairy, and conservation programs when he was Chairmanof the Senate Committee on Agriculture, Nutrition, and Forestry. On the other hand, he had no parochialinterest in commodity programs like those for wheat and cotton. He was willing to accept the RepublicanFTF approach to commodity programs if the legislation included his amendments.

Senator Leahy was concerned that Republicans might try to blackmail the President into accepting abad welfare reform bill with an adverse effect on the nutrition programs. The compact is extremely popularin New England. And, Senator has a long history of support for the environment. He was very displeasedwith provisions of the Republican proposal to eliminate easements in the Wetland Reserve Program.

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Specific conservation provisions required by Senator Leahy included:

1) Reauthorization of the CRP with authority for new enrollments of environmentally sensitiveacres.

2) An Environmental Quality Incentive Program that provided technical and cost share assistance toboth crop and livestock producers.

3) A number of smaller environmental programs, including funding to clean up the Everglades, and

4) An amendment to the CCC's Charter Act that explicitly cited conservation as a legitimatepurpose of the CCC with funding of the major conservation programs from CCC funds. Thus,annual appropriations for these programs would not be necessary.

Senators Lugar and Dole agreed to include all the new provisions in the Senate bill. With additionaldeals on rice, soybeans, and permanent farm law support exceeded the needed 60.

The House Agriculture Committee was reluctant to accept all of the conservation measures supportedby Leahy. However, the most important ones were approved on the floor.

In conference most of the Senate conservation measures were retained, but with some modification andsome rules were made more "farmer friendly."

Westhoff concluded by observing that it is amazing that a budget-conscious Republican Congresspassed this farm bill. The net deficit reduction in the bill was minimal or nonexistent and the Congressvoted to increase spending on conservation programs substantially. Senator Leahy probably achieved moreof his objectives than he could have if he had still been Chairman of the Committee.

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The Administration's Approach to the Farm Bill

Larry SalatheSenior Economist, Office of the Chief Economist, USDA

Salathe indicated that activities associated with the formation of the farm bill provided opportunitiesfor the Administration to demonstrate to farmers and to agribusiness that the Administration had a visionfor agriculture. This demonstration was important for the upcoming election.

In 1994 the Administration initiated work on the prospective farm legislation with the formation ofseveral task forces. At first the USDA was solely involved. However, later in the year the activitiesexpanded to include several other agencies and the White House.

In April 1995 the position of the Administration was made public with the release of the Blue Book.The Administration embraced continuation of evolutionary change in existing farm policies and programsand not major reversals. The intention was to build on the changes of the past decade of less governmentintervention, current conservation programs, and greater planting flexibility. Major cuts in outlays were notenvisioned. Cuts had been made in 1985 and 1990 and outlays were expected to decline over time anywaywith current policies.

Salathe reported that some Congressional Democrats did not support the Administration's position.They felt that the Administration should propose policies involving greater intervention rather than follow apath that they considered to be a continuation of past Republican policies.

The Clinton Administration wanted to continue the CRP. The CBO baseline assumed no newenrollment or extension of current contracts and that therefore the acreage in the program would graduallydecline and would go to zero. Alternatively, given budget scoring a continuation of the CRP would requirecutting other programs.

An attempt to protect a CRP baseline was made by announcing in late 1994 a policy permitting theextension of current contracts. In response CBO allowed a $10 billion baseline.

In 1995 President Clinton indicated that he would not sign a bill that included Freedom toFarm—decoupled payments. The Administration argued that fixed payments paid too much support whenprices are high and too little when prices are low.

In 1996 it became clear that the Administration could not oppose FTF on the basis of the size of thecuts in outlays. Because of higher market prices and CBO response to these changed market conditions,Freedom to Farm meant a cut of only $1.3 billion over seven years, a number much less than the $15associated with Lugar's proposal to cut target prices and the early estimates of the cuts associated withFTF. In the meantime the Department projected that the 1996 Farm Bill would increase payments by $25billion over seven years compared to a continuation of existing programs. In addition, advance paymentsfor the 1995 crop would be forgiven. Thus, there was no basis to claim that the proposed cuts were toolarge.

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Salathe concluded that the final bill included much that Secretary Glickman had outlined in his letterto the farm bill conference committee including extension of the CRP, a fund for rural America, refinementof export programs and re-authorization of food programs. The final bill, however, did not address thesafety net concerns of the Secretary.

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Agribusiness and the 1996 Farm Act

David LyonsVice President, Louis Dreyfus Corporation

In discussing activities of agribusiness related to the debate over the farm bill, David Lyons pointedout that in the past agribusiness has generally avoided active and public roles in farm bill legislativeactivities. In contrast, in connection with the legislative activities preceding the passage of the 1996 FarmAct, U.S. agribusiness took significant and important steps that influenced the formation of the legislation.

The origins of the activities, Lyons indicated, began with a luncheon of only a small number of peoplelocated in Washington, DC. The participants concluded that current policies, particularly those which heldland out of production were making the United States uncompetitive in international markets and having anegative effect on the export volume of U.S. farm products. In addition, the participants concluded that itwas appropriate to form a coalition to engage in activities that would focus on the prospective farm bill.

At first there were six members of the coalition, which later grew to over 125. Drawing upon a varietyof information about the economic benefits of ending U.S. land retirement programs, the coalitiondeveloped specific policy goals for farm legislation, prepared a series of position papers and aggressivelylobbied Congressional staff and members of the Congress.

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The National Corn Growers Approach to Farm Legislation

William NortheyPresident, National Corn Growers

Northey observed that the dependence on baselines has a great effect on the approach to newlegislation. The baseline estimates of prospective outlays under continuation of current policies establishesan amount of money to which estimates of outlays of other proposed policies are measured. He pointed outthat with continuation of current policies the outlays are lower if bullish commodity markets are anticipatedthan if bearish commodity markets are expected.

Northey reminded the audience that outcomes of the political process are difficult to anticipate. Earlyin the legislative effort to craft farm legislation the cotton interests were concerned about prospective lowercommodity prices. This expectation affected their attitude toward Roberts' FTF proposal. However, in theend they accepted Freedom to Farm.

In the Senate during the latter stages of the legislative attention to farm policy a "hard core' group ofRepublicans concluded that if they moved very far away from the House approved legislation in order toattract more Democrats to support the bill they would lose Republican support. This situation providedLeahy (D-VT) an opportunity to advance his compromise. If the Republican group had come to a differentconclusion and if Daschle (D-SD) had been somewhat less demanding, the entire outcome might have beendifferent.

Northey observed that there is great dynamism in the industry. The legislation may or may not bechanged before the end of seven years. Some will depend on market conditions. But, in addition,opportunities and associated risks will be affected by farm and off farm technological developments, tradeopportunities, and contractual arrangements.

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The Cotton Council's Approach to Farm Legislation

Mark LangeU.S. Cotton Council

Lange pointed out that the manner in which the U.S. Cotton Council is organized enhances thelegislative effectiveness of the council. The organization's structure can delay the finalization of policypositions, however. For example, any one member category of the organization can veto any proposedpolicy of the council so long as 50 percent of their segment of the industry are members of the council. Atthe same time, once the council has an approved policy it is supported by the entire industry.

Lange observed that in connection with the 1995-96 farm bill legislative debate the council spent alarge part of its political effort on marketing loans, import quotas, and the advisability of decouplingpayments.

The Cotton Council has had a position on marketing loans that differs somewhat from the approach ofother commodity organizations. The council strongly prefers to focus on the international price not thedomestic price. Thus, the preference is that the "discovered" international price become the redemptionprice without consideration of domestic prices.

U.S. import restrictions are of great importance to members of the Cotton Council. U.S. domesticmills compete in international markets. Over time legislation has permitted the import of cotton undercertain international market price situations. The issuance of import licenses are of significant concern ofour members. However, these quotas are a necessary part of the programs.

The Cotton Council did not support the decoupling of payments during the first part of the legislativedebate over the farm bill. This position accounted for the inability of Chairman Roberts (R-KS) to reportout his bill from the House Committee on Agriculture. However, the votes in the committee against his billby four Republican members should not have been a surprise to the Republican leadership, nor toChairman Roberts.

As optimism over prospective cotton prices strengthened, producers were more willing to accept thedecoupling of payments advanced by Chairman Roberts.

21

The 1995-96 Debate Over Dairy Policy

Charles ShawSenior Economist, International Dairy Foods Association

Shaw observed that the setting for the 1995-96 discussion of dairy policy included:

• An industry that had become market oriented pursuant to the 1990 Farm Act. This legislation hadcontinued lower support prices and had reduced commodity accumulation by the government.

• Continued conflicts among regions over dairy policy,

• Only a limited number of people in Congress that understood the dairy industry and policiesimportant to it, and

• Relatively low levels of federal budget outlays associated with the dairy programs.

Dairy was not included in the Budget Reconciliation bill passed by the Congress but vetoed by thePresident. The drive by the Republican leadership for a straight party line approach to voting on budgetreconciliation enabled individual Republican members to withhold their vote if the dairy part of thelegislation did not meet the desires of their constituents. Shaw indicated that the net effect of this situationwas the omission of the dairy title in the Budget Reconciliation bill.

The Republican leadership depended heavily on Congressman Gunderson (R-WI) to find a consensuson dairy policy. His efforts were complicated by Senator Lugar's willingness to consider and finally acceptthe proposed Northeast dairy compact, the desire by some to constrain outlays associated with dairypolicies, the desire of the National Milk Producer's Federation to increase the outlays of the programs sothat more money could be given to Midwest producers without taking money from southeast producers, andby increasing the cost of milk to consumers and government food programs by changing the standards forfluid milk.

In the end, The International Dairy Foods Association supported the Solomon (R-NY) Dooley (D-CA)bill which called for the phase-out of price support and the Secretary of Agriculture consolidating thecurrent marketing orders into 10 to 14 orders. This reduction will likely lead to significant conflicts. Butunless these conflicts are resolved, the eventual effect could be the phase out of federal milk marketingorders.

22

Environmental Interests in Farm Legislation

Maureen HinkleDirector of Agricultural Policy, National Audubon Society

In her presentation Maureen Hinkle reported that the objectives of her organization during theformation of the 1996 Farm Act included:

• The survival of conservation funding,

• Preventing a direct onslaught on wetlands policy, and

• A fund for rural America.

A key effort to accomplish these objectives was the work of a coalition of approximately 12organizations interested in sustainable agriculture, environmental amenities, and wildlife, and ruraldevelopment. Their work with Congressman Boehlert (R-NY), particularly in the later phases of theCongressional deliberation over the Farm Bill, were of major importance according to Hinkle.

The interaction with Congressman Boehlert facilitated efforts to include features related toconservation and environmental amenities for the 1996 Act. The Congressman pressed for the conservationfeatures in spite of Congressman Roberts' (R-KS and Chairman of the House Committee on Agriculture)preference to defer the consideration of these matters until another time. The Senate passed bill by that timedid include conservation and the Fund for Rural America.

The interest of the House Republican leadership in finding legislation which would improve heirpositions in environmental quality facilitated Congressman's Boehlert's efforts.

The President had indicated he would veto any farm bill that only addressed the commodity programs.Roberts' FTF was by no means sufficiently tenable to obtain the necessary two-thirds vote to override aveto. Therefore, the broker effort by Rep. Boehlert, in the House, and Senator Leahy, in the Senate, madepossible the package that included FTF, conservation, and the Fund. Wetlands, however, suffered a setbackin conference, with the weakening of swampbuster.

23

Priority Farm Issues Will Change

Tim PriceEconomist, Illinois Farm Bureau

Price concluded that the need for commodity policy scenario analysis, as embraced by the agriculturaleconomics profession in the past, will decline and that the need for analyses of emerging issues willincrease. Prospective issues requiring analytical attention include:

• Changing domestic and international consumer demands,

• Structures and institutions that facilitate the competitiveness of U.S. farm products includingtransportation and research,

• Environmental quality,

• Management of risk,

• Devolution of policy and programs from the federal government to state governments,

• Regulations as promulgated by government policy and contractual arrangements,

• Enforcement of environmental laws, and

• Concentration of farm production.

As the farm bill debate transpired, the Farm Bureau pressed for greater planting flexibility. At thesame time it concentrated on maximizing the financial support that the legislation would provide itsmembers,

24

The Budget and the 1996 Farm Legislation

Bill HoaglandStaff Director, Committee on the Budget, U.S. Senate

Hoagland observed that the pre-election commitment embodied in the "Contract With America" andthe election of a Republican-controlled 104th Congress set the stage for evolutionary, if not revolutionary,change in government policies and programs. Agriculture was not mentioned in the Contract, nor was thetelecommunications industry. However, agriculture and telecommunications are the two industries that haveexperienced the most reform. (Subsequent to the San Antonio conference, welfare reform was enacted,mentioned in the Contract.)

The one consensus from last year's debate was the President and the Congress agreeing on theimportance of balancing the budget by a date certain. The math related to balancing the budget is not thatdifficult. However, the politics and the policies to accomplish such has proven very difficult.

Senator Dominici's presentation to the Senate Committee on Agriculture, Nutrition, and Forestry inearly March 1995 concluded that all federal entitlement programs (excluding social security) would have tobe reduced (from their anticipated outlays) by between 14 and 20 percent over a five-year period. Applyingthese percentages to the programs over which the Ag Committee has jurisdiction would mean a savings of$35 to 50 billion which would have meant $7 to $10 billion for traditional commodity programs and $28 to$40 billion from food and nutrition programs. In the following 1995 budget deliberations the SenateAgriculture Committee developed plans that would save $8.7 billion in the farm programs.

In the House in early 1995, Mr. Kasich (R-OH), Chairman of the House Committee on the Budget,and Mr. Roberts (R-KS), Chairman of the House Committee on Agriculture, finally agreed on $9 billion ofsavings in the farm programs. The savings associated with the farm commodity programs included in theHouse-passed budget reconciliation bill was $8.3 billion. The final House-Senate conferencedreconciliation bill (the Balanced Budget Act of 1995) passed by the Congress and vetoed by the Presidenton December 7, 1995 involved an estimated $7.5 billion of savings associated with farm commodity andother agriculture programs over a five-year period ($12.3 billion over seven years).

A comparison of budget savings associated with various proposals and three different baselinesillustrates the dimensions of the challenge to balance the federal budget (Table 1). The first column ofTable 1 depicts the estimated outlay savings associated with the Balanced Budget Act of 1995 (HR 2491passed by the Congress and vetoed by the President) when measured against an April 1995 CBO baselineestimate of the prospective outlays if current polices were unchanged. The sum of the reductions specifiedin that column is $952 billion, the estimated amount, at that time, required to achieve a balanced budget in2002. The farm commodity provisions were estimated to save $12 billion.

With the release of the December 1995 CBO baseline the estimate of budget savings associated withHR 2491 changed somewhat. For example, the farm savings dropped to $5 billion. The far right column ofTable 1 depicts where we stand today. The column does not include a number for "farm" since legislationhas been passed and signed by the President. It is estimated to have a savings of $2.0

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27

billion when measured to the March 1996 CBO baseline. Unfortunately, there were no savings related tothe 1996 Farm Act for FY96 and FY97 (Figure 1). Savings are anticipated in the out years.

The revolution that so many in the House and some in the Senate thought would happen did not totallysucceed. Nonetheless, there have been significant achievements. Legislation related to unfunded mandatesand the line item veto are notable. Further, welfare reform will generate savings, particularly for the foodstamp program but more specifically from reduced welfare benefits to immigrants.

Importantly, two areas in which there will be long term savings—commodity and food stamps—areassociated with the agriculture committee. The agriculture committees were very responsive to thebudgetary discipline required to move to a balanced federal budget.

But as we look to the future it is also important to recognize that the budget challenge rests primarilyin areas that have resisted change this year. The seriousness of the prospective budget deficits withunchanged policies is illustrated by the anticipated increase in the deficit in the late 1990s and the relatedsteep increase in the prospective Debt-to-GNP ratio in the first half of the 21st century (Figures 2 and 3).The debt-to-GNP ratio explodes about 2017. Two-thirds of 750 simulations using alternative assumptionsgave estimates that fell between lines "I" and "II." These increases in the ratio imply lower real GNP andlower standards of living (Figure 4). Hoagland concluded that agriculture programs— commodity and foodstamps—that contributed in 1996, should not expect additional budgetary pressure in the near future.

28

Figure 1.

Figure 2.

Sources: Historical data and Congressional Budget Office staff estimates.

a/ Total unified Federal Budget Deficit with discretionary inflation after 1998 includes off-budget Federal entities deficits orsurpluses.b/ The level of the Federal government budget deficit that would occur under current law if the economy were operating atpotential GDP. It produces measures of underlying fiscal policy by removing the influence of cyclical factors from the budgetdeficit.

29

Figure 3.

Figure 4.

30

Outline of 1996 Farm Bill Decisions, Their Drivers, and Resulting IssuesConsensus of the Attendees at the Pre-conference

Major Decisions:Less government policy, more free market

Planting flexibility and abandonment of Acreage Reduction Programs (ARPs)

Continuation of large transfers to farmland/asset owners

Continuation of some government role in land use decisionsConservation Reserve Program (CRP), swampbuster, wetlands, sodbuster, conservationcompliance

Retention of price supports (the loan rate)

Commodity Credit Corporation (CCC) entitlement funding for many conservation/environmentalprograms

Drivers of Decisions:The Federal budget and the role of the baseline in budget accounting

Increasing optimism for bull markets for commodities

Congressman Roberts' shrewdness and his opposition's ineffectiveness

The overall political drive for less government intrusion in peoples' lives

Resulting Issues:Increased levels of risk for producers and consumers of commodities

Greater price and quantity variabilityFactor of industrialization

Concentration, intellectual property rights, and changes in market institutionsIncome and investment impacts

Market behavior—effects of market behavior onStructure Resource useEfficiency/competitiveness Distribution

Competitiveness in domestic and international marketsProductivity even more criticalKnowledge of foreign competition, markets, and rules of the game

Spillover effects onResearch and technology Rural employment TransportationRural social infrastructure Communication Land use

Distribution effects; among and between producers, suppliers, processors, and consumers

31

Implications of the 1996 Farm Bill for the Work of Agricultural EconomistsConsensus of Attendees at the AAEA Session on the 1966 U.S. Farm Legislation

Some 25 symposium participants suggested that the focus of the profession would move fromWashington to the private sector—to producers, processors, and input suppliers. Agricultural Economistswill be shifting their portfolios towards marketing, management, and finance. Risk analysis will involve therole of coops, portfolio and enterprise diversification, and risk reduction programs like income insurance.Greater importance will be given to questions of economies of size and scale, resource reorganization,structural change, and the analysis of societal risk in areas like food costs and supply.

With the abandonment of government supply control, the profession will be challenged to answersupply response questions. Regional crop shifts, especially in fringe production areas, will be important torural economies and off-farm economic opportunities will gain new importance and must be understoodbetter by agricultural economists. The new act also allows many more opportunities for consultants, andacademic agricultural economists to do more training of these professionals rather than dealing directlywith producers and others directly engaged in the sector.

Critical questions arise about the prospective roles for public sector information and public sectoreconomists. Will the importance of their roles increase? Will public sector information continue as abenchmark for private sector information? Perhaps. However, as the industry becomes more concentratedand the management of the larger units more sophisticated and specialized, the distribution effects ofpublicly financed information and related analyses will be challenged. Questions will increasingly focus onwhether the information programs accelerate concentration and therefore help the more prosperous becomeeven more prosperous or whether the information programs are conducted in ways that provide increasedopportunities for the disadvantaged.