Renewable Fuel Standard

Joe GlauberChief Economist, USDA5 April 2012ISSUES SURROUNDING THE 2012 FARM BILL DEBATEOutline2012 Farm Bill in historical contextBudgetDirect paymentsChairs proposalWTO implications

Reforms in farm policy, 1985-96Lower support pricesMoves towards greater planting flexibilityMoves towards decoupling payments from plantingsConservation programs1996 farm billFreeze loan ratesEliminate set asides; [almost] full planting flexibilityReplace deficiency payments with fixed transition paymentsEliminate honey and wool; phase out dairy support

The counter-reformationCollapse in prices in late 1990s => ad hoc legislationsDairy program is extended2002 Farm BillRaised loan rates; extended to pulsesReintroduced counter-cyclical paymentsUpdated payment bases2008 Farm BillACRESUREProjected OutlaysSelected programsSource: CBO BaselineMarch 2012Mil $$8.6 b avg$4.9 b$0.6 b$6.3 bBudget proposalsAdministration FY 2013 budget: $32 billion cut over 10 years Ag Committees: $23 billion cut over 10 years with $15 bil coming from commodity programsHouse Budget FY 2013: $33.2 cut over 10 years

Where to cut?Little savings in cutting in price/revenue-based programsCrop insurance program popular for most farmersSome savings from reduced CRP/CSPBulk of savings from elimination of direct payments ($49 billion over 10 years).Dissatisfaction with Direct PaymentsNeed for payments questioned in times of high pricesCriticized as not providing adequate protection when prices are low (eg, late 1990s)Benefits accrue largely to landowners (and capitalized into rents)Wide differences between planted and base acresButFor many producers, DPs are the only payments received over past several years Minimally trade distorting; notified as green boxTie to conservation compliance

Direct paymentswho benefits?

Source: EWGDirect paymentswho benefits?

Source: Nickerson et al. 2012Base versus Planted AcreageMil AcresPlanted acres compared to base acresMil acresSource: Farm Service AgencyPlanted vs Base Acres--2010(mil acres)Growth of the crop insurance programMil $Chairs Proposal to Super CommitteeEliminate direct and countercyclical paymentsAgricultural Risk CoveragePrice loss coverageRevenue loss coverageSTAX for cottonDairyEliminate product price supports/MILCDairy Producer Margin Protection ProgramDairy Market Stabilization Program

Agricultural Risk CoverageProducers would make a one time, irreversible decision between Price Loss and Revenue Loss Coverage

Price Loss CoverageSimilar to CCP except payable on planted acresHigher target prices

Revenue Loss CoverageSimilar to ACRE except on individual farm basisPayments tied to moving average of prices and yieldsRange of losses covered (75-87%)Reference prices would limit downward moves of benchmark revenue

STAX (cotton only)Supplemental insurance program for cotton growersCounty-level revenue guarantee (similar to GRIP)Pay on losses between 90% and primary crop insurance coverage level, but no less than 70%Yields based on GRIP yield or 5-year Olympic, whichever higherPrice based on GRIP price or 65 cents/lb reference price, whichever higher (compared with 71.25 cents/lb under current CCP)Producer pays 20% of premium costsObservationsNew programs pay on planted area not fixed base acresNew reference prices are substantially above current target prices (except for cotton)Complicated signup decisions: possible for producer to sign up corn under revenue loss and soybeans under price lossPossible for two corn producers in same county to sign up for different programsIn short run, both programs would pay out with drop in pricesProlonged low prices, outlays under revenue loss program moderate as revenue guarantee fallsProlonged low prices. exposure under price loss program could be very largeReference prices would increase support above current target pricesCurrent target priceProposed reference priceWheat $/bu)4.175.50Corn ($/bu)2.633.64Grain sorghum ($/bu)2.633.87Barley ($/bu)2.633.64Rice ($/cwt)10.5013.98Soybeans ($/bu)6.008.31Peanuts ($/ton)495.00534.00Classification of Domestic Support Programs for WTO NotificationProgramUnder URAAUnder Doha agreement

Direct paymentsGreenGreenMarketing loan benefitsProduct-specific amberProduct-specific amberCounter-cyclical paymentsNon-product specific amberBlueCrop insurance premium subsidiesNon-product specific amberPolicies > 70%: non-product specific amberPolicies 70%: green Crop insurance delivery costs (A&O + underwriting gains)GreenGreenACRE paymentsProduct-specific amberProduct-specific amberSupplemental disaster (SURE)Non-product specific amberNon-product specific amberLivestock disaster paymentsProduct-specific amberProduct-specific amberDairy price supportProduct-specific amberProduct-specific amberMilk Income Loss ContractProduct-specific amberProduct-specific amberSugarProduct-specific amberProduct-specific amberConservation Reserve ProgramGreenGreenEnvironmental Quality Incentive ProgramGreenGreenConservation Stewardship ProgramGreenGreenNutrition Programs

GreenGreenUS amber box support

URAA limitsComposition of U.S. AMS

Non-product specific support

ConclusionsFrom 1985-1996, farm policy moved towards lower support levels, more planting flexibility, and decoupled payments.Since mid-1990s, US farm policy has moved back towards recoupling payments to prices and productionHigh prices have kept outlays (and AMS levels) low, but potential for breaching limits remains non-trivial if prices fallBudget pressures present opportunity to make significant changes in farm policy, but likely outcome will favor policies that are tied to prices and actual plantingsChairs proposal would shift green box spending (direct payments, CRP) into amber box (revenue loss, price loss).Proposal would decrease dairy AMS on average but with potential for large outlays if margins fall (eg, 2009). Overall, AMS will increase compared to current law.