As we go to press, both the Senate and House are acting on proposals to put the federal budget on a path to be balanced by 2002

Meyers, William H.

Smith, Darnell B.

English

As we go to press, both the Senate and House are acting on proposals to put the federal budget on a path to be balanced by 2002.</p

Meyers, William

Smith, Darnell

Digital Repository @ Iowa State University (ISU)

were currently involved in the specialty soybean market, if they were interested in becoming involved, and where they thought the industry would be by the year 2000. We received an enthusiastic response, in part because all the respondents expected continued strong gains in the share of soybeans sent into specialty markets. (The average participant predicted that 20 percent of all soybean sales would be identity preserved by the year 2000.) We then sent out a much more detailed survey asking those companies already in the specialty business to document their involvement in each of the specialty markets we had identified. This information has been published in a 128-page specialty soybean directory. Call Dermot Hayes, CARD, at 515/294-6185, or Greg Ehm, lSPB, at 5151223-1423, to inquire about receiving a free copy. Whe.re Do We Go [rom Here? While creating the specialty soybean directory we discovered that the specially soybean business is already important and is grov.Ting rapidly. As the marketing system undergoes the transformation from a commodity-based system lO a system that competes on characteristics, the Iowa soybean sector will be able to offer new customers exactly those characteristics they want. Our sense is that Iowa is at the forefront of the transition, and that Iowans will receive much of the reward. Many of the new customers for lowa's specialty soybeans and com will locate near the source of production. These companies will employ geneticists, molecular biologists, and engineers to create products that we cannot begin to describe today. With some luck and continued managerial attention, the state could become home to an industry that will create as many uses for corn and soybeans as the computer industry h as for the silicone chip. Emerging Issues Hard Choices (William H. Meyers, 5151294-1184) (Dantell B. Smith, 5151294-1184) As we go to press, both the Senate and House are acting on proposals to put the federal budget on a patl1 to be balanced by 2002. The budget cuts proposed by both bodies are substantial but those proposed by the Iowa Ag Review House are larger, s ince the Senate has rejected t1le tax cuts adopted by the House. Although the budget debates in the House and Senate and between the House and Senate are far from over, the expectation is that the Agriculture Commiuees will be asked to reduce farm program spending by $1.5 billion to $2 billion per year over the next seven years. Spending caps are also being considered. Although it is not clear whether creclit would be granted for years in which acwal expenditures are below projections, Congressional focus is now on constraining actual expenditures in any given year as well as on changes in total expenditures over the budget period. As the budget amounts and rules are being resolved, debate will focus on altemative ways of changing programs to reduce farm program spending and possibly to reduce the year-to-year variability of spending. These will be hard choices, as cuts of this magnitude are difficult to achieve without reducing farm income. Moreover, the different ways to achieve the proposed reductions involve a broad range of distributional impacts by commodity, region, and type of farm. Budget Cut Options As of this writing, FAPRl has not yet analyzed specific options to achieve a particular budget target. However, studies that have been done can be used to gain some insight into likely impacts. The cost and net fann income impacts of several options are summarized and compared below: 1. 25 percent Flex. Increasing flex acres reduces payment acres and reduces participant rewrns and participation rates, while giving fanners more flexibil-ity in using base acres for other crops. An analysis of increasing flex acres from the current 15 percent to 25 percent estimates a budget savings of $1.28 billion per year and a net farm income loss of $1.1 billion per year (FAPRl Report 3-95). This implies that net farm income declines $85 for each $100 or budget savings. It also indicates that an increase to 25 percent flex is not sufficient to meet current budget targets, so this approach would require higher flex rates and/or other program cULs. 2. Elimination of 0-50/85 Program. The 0-50/85 Program pays farmers 85 percent of deficiency pay-ments on base area where less than 85 percent of permitted plantings are actually planted. For rice, 50 percent of base acres must be planted to qualify. June 1995 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT Page 11 Iowa Ag Review Elimination of this program is estimated to save $280 million pe1· year and reduce net farm income by $150 million per year (FAPRI Report 4-95). This makes a very small contribution to budget savings, but net farm income declines only $54 for each $100 of budget savings. 3. Major program reform. FAPRI recently evaluated three major alternatives to current programs, aU of which, at a minimum, eliminated current target prices, ARPs, and 0-50/85 (see "Three Corners" article in this issue) . ln other respects these options are quite differelll from each other, but two of them have estimated budget savings that are greater than those currently being proposed by Congress. These two are the No Program scenario and the Revenue Assurance scenario. tn these two scenarios, we can roughly approximate the impacts or smaller budget cuts by giving the "excess budget savings'' back to farmers in the form of decoupled cash payments. (Of course, Congress could also use some of the "excess budget savings'' to restore some of the planned cuts in market development, conservation, or research.) Budget Cut Impacts The followtng assumptions are made ro find these approximate impacts. We use a target budget reduc-tion of $1.6 billion per year and subtract this from the estimated budget savings in each of the two scenarios. This dillerence constillltes the "excess budget savings" that is assumed to be distributed to farmers in the same way that transition payments are made in the Revenue Assurance scenario. That is , they are paid in proportion to the average target and marketing loan deficiency payments over the last five years. These payments arc assumed to have no impact on produc-tion decisions, so they change net fann income but do not alter the market results of the previous analysis. The payments are set in advance, so they lnvolve no budget exposure beyond these certain payments. A fi ve-year period is used for these approximations, though a seven-year ana'lysis would not differ greatly. The results are presented in the rable below. The No Program scenario is estimated to save $7.54 billion per year, so $5.94 b illion is available for annual decoupled payments. As a result, the adjusted net farm income drops by less than $1 billion per year compared with current program levels. This implies that net farm income would drop about $60 for each $100 of budget savings. • Estimated Impact of $8 Billion Cuts on No-Program and Revenue Assurance Five-Year Annual Total Average (billion S) (billion $) Assumed Cut i.n Agricult-ure 8.0 1.60 No-Program Estimates FA PRJ estimate of No Program Savings 37.7 7.54 Surplus for dccoupled payments J9-- .I 5.94 FAPRI estimate of No-Program NFl 182.9 36.58 Added decoupled payments 29.7 5.94 Adjusted No Program NFI 212.6 4 ') - ') -·'-Change from Baseline -4.8 -0.96 Revenue Assurance Estimates FAPRl estimate of Revenue Assurance savings 15.0 3.00 Surplus for decoupled payments 7.0 1.40 FAPRl estimate of Revenue Assurance Nfl 203.1 40.61 Added decoupled payments 7.0 1.40 Ad justed Revenue • Assurance NFI 210.1 42.01 Increase in government-financed indemnities 2.3 0.47 Estimated value of increased insurance* 4.7 0.93 Adjusted NFI plus increased insurance value 214.7 42.94 Change from Baseline -2.7 -0.54 Baseline Estimate FAPRl estimate of current program NFI 217.4 43.48 *Tom! amounts derived from "Risky J3usiness" averages, pg. 8. Page l2 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT june 1995 The Revenue Assurance scenario is estimated LO save $3 billion per year, after accounting for tl1e increased government contribution of $0.47 billion per year to replace the current crop insurance with revenue assurance. This leaves $1.4 billion available for annual decoupled payments, in addition to transition pay-ments alread)' included in the program design. The adjus ted net farm income drops by $1.4 7 biUion. However, this scenario differs from the others in that an average arumal increase of nearly $.5 billion in government financed insurance indemnities also can be expected. This difference in cash flow by itself would reduce the farm income decline to about $1 billion or $60 for each $100 of budget savings. The "Risky Business" article in this issue indicates that the value of government financed insurance in terms of reducing cash flow risk has been estimated at two times the indemnities payments. Using this factor, net farm income plus the value of insurance drops by $.54 billion per year compared with currenL program levels. This measure of farm sector well-being, therefore, [ails by about $34 fo r each $100 of budget savings. The main reason that the adjusted No Program and adjusted Revenue Assurance scenalios indicate a smaller income loss per dollar of budget savings compared with increasing llex acres is thatt·hese scenarios remove more of the currenL prograni con-straints , and farming efficiency increases. We have assumed that the decoupled payments are disuibuted exactly like recent deficiency payments, so as to retain: the benefit distribution of currenL p rograms. However, Congress could decide to target these payments in another way. As long as they would remain decoupled from production decisions, the principal impact would be on the distribution of income rather than on the level of income in agriculture. The few options presented here are limited because we have not yet done analyses for specific levels of budget savings. However, these scenarios provide some indication of how the impacts can differ under differ-em methods of achieving budget savings. Weather Uncertainty and Financial Risk (Darnell B. Smit/1, 5151294-1184) lt could well be that for many agricultural producers in the United States, the fin ancial risk due to unusual weather conditions is greater today than at any lime in the recent pasL The LWO primary reasons are: (1) increasing budgetary pressure in Washington, imply-ing that less support for ag!iculture will b e forthcom-ing in future years, and (2) Last year's federal crop Iowa Ag Review insurance reform, replacing agricultural disaster assistance with low-cost catastrophic (CAT) coverage, offers only minimal risk reduction, at best. Od1er articles in this issue have highlighted the expectation of reduced payments lO producers as, even without budget cuts, baseline projections already incorporate future payment decl ines. It, therefore, taxes the imagination to envision that over the me-dium term, future support to agriculture will, on average, be anything but less than current levels. Effects of CAT Although CAT replaced disaster assistance, the coverage level is, at most, 30 percent of expected revenue (50 percent of yield times 60 percent of price) and even then, half the crop mtiSl be lost before any indemnities are paid at all. This means that for midrange losses, the losses most likely to occur, producers who did not choose to buy increased coverage will receive no indemnities whatsoever from CAT. For example, suppose an Iowa corn producer ex1)ects 150 bushels per acre a t a price of $2.40 per bushel. This producer could lose up to 75 bushels per ac; re and not be eligible. for any indemnities at all. With the 50 percent yield deductible, the yield must drop below 75 bushels before coverage kicks in. For each bushel lost past the 50 percent deductible, however, the producer receives payment a t 60 percent of expected price ($2.40 x .6 = $1.44 per bushel). So, in this example, if the producer harvests 70 busl1els per acre, the covered losses are $7.20 per acre (5 bushels at a rate of $1.44). For every 100 acres, this producer receives $720 ln insurance and $16,800 in markeueceipts for a total of $17,520. The $720 payment covers only 3.75 percent o.f the $19,200 in lost market revenue .. A comparison with the proposed Revenue Assurance program may p rove useful in illustrating differences in risk exposure. lf we assume that realized market price is equal to the expected price, $2.40, then the per acre assured revenue for the above example equals . 70 times 150 rimes $2.40, or $252 per acre. In our example, actual market revenue is $168 per acre, with the covered indemnities equaling $84 per acre with total receipts of $25,200 for each 100 acres planted. Thus, this coverage provides producers with an assmed cash flow large enough to cover variable cost and some proportion of other costs and expenditures. And in si tuatiolls of midrange losses, the kind most likely to occur, Revenue Assurance offers a much greater degree of cash llow Iisk reduction than the CAT. June 1995 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT Page 13 

Hard Choices

https://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1341&amp;context=iowaagreview

Hard Choices

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