2014 Farm Bill: A Primer Title: Agricultural Act of 2014 Number of pages: 959 pages Estimated cost: $956 billion over ten years - $756 billion for nutrition assistance; $200 billion for agriculture. Specifics: Crop insurance outlays of $90 billion; $58 billion for conservation; $44 billion farm commodity programs. Estimated savings: $16.6 billion over ten years; $23 billion including sequester (across-the-board) cuts. Final savings could be significantly different if commodity price assumptions are not realized. The $16.6 billion savings is $5.4 billion through FY 2018; $11.2 billion for FY 2019-23. Savings - Commodity title: $14 billion Nutrition programs: $8 billion Conservation programs: $4 billion Crop insurance shows an increase in spending of $5.7 billion. The Supplemental Coverage Option (SCO) and moving the cotton safety net program from Title I to crop insurance are major reasons for funding increase. Crop/years covered: 2014-2018, and through Dec. 31, 2018 for dairy. Direct payments: Eliminated, except for reduced transition payments for cotton for the 2014 crop and an even smaller payment for 2015 crops for counties where cotton safety net program called STAX is not available. Payments based on a formula that estimates the marketing year average price and a yield of 597 pounds per acre, with payments capped according to rates in place under the 2008 Farm Bill. CBO estimates transition payments would total $556 million in FY 2015 and $2 million in FY 2016. Commodity loan program: 2008 Farm Bill's nonrecourse marketing loan and loan deficiency payment program, and associated loan rates, are extended, except for modifications to the cotton loan rate, which now can range between 45 and 52 cents per pound. Signup: Dates to be announced by USDA, but due to time needed for regulations, software development and other decisions, signup expected to begin no earlier than April and end well into summer months. Safety net options: Farmers will have a one-time, irrevocable opportunity to elect between a revenue program (ARC) or target/reference price (PLC) program (details on each program below). (1) Price Loss Coverage (PLC), similar to target price programs of the past. (2) Ag Risk Coverage (ARC) – County. (3) ARC - Individual. Safety net selection is on a crop by crop basis, but the ARC individual choice is on the entire farm. If no choice made, farmers don't qualify for any 2014 safety net payments, and default to PLC for 2015-2018. PLC payments: Occur if US average market price for the crop year is less than the crop's reference (target) price. Payment range is reference/target price minus the greater of the US average market price or the loan rate – PLC payments are made even if prices drop below the loan rate, but they are maximized at the loan rate. Reference prices are:

Crop

Target/Reference Price

Loan Rate

Corn

$3.70/bu.

$1.95

Sorghum

$3.95/bu.

$1.95

Wheat

$5.50/bu.

$2.94

Barley

$4.95/bu.

$1.95

Oats

$2.40/bu.

$1.33

Soybeans

$8.40/bu.

$5.00

$20.15/cwt

$10.09/cwt

$14/cwt.

$6.50

$16.01/cwt.

$6.50

Peanuts

$535/ton

$355.00

Dry peas

$11.00/cwt

$5.40/cwt. $6.22 in 2008

Lentils

$19.97/cwt

$11.28/cwt $11.72 in 2008

Small chickpeas

$19.04/cwt

$7.43/cwt

Large chickpeas

$21.54/cwt

$11.28

Other oilseeds Long, medium grain rice Japonica (Calif.) rice

County ARC payments: Occur when actual crop revenue is below the ARC revenue guarantee for a crop year. County ARC guarantee is 86 percent of county ARC benchmark revenue. Coverage is capped at 10 percent – coverage is between 76 percent and 86 percent of the county ARC benchmark revenue. County ARC benchmark is based on the Olympic average (removing high and low values) of county yields and US crop year average prices for the five preceding years. Actual county revenue is calculated by multiplying the average county yield for the commodity in the current crop year by the higher of the Marketing Year Average (MYA) for the commodity or the commodity's loan rate. The revenue guarantee is calculated as follows: First, the county-level yield history for the commodity from the most recent five crop years is averaged, dropping the highest and lowest county yields – this is known as the 5-year Olympic average. Also, if the crop's county yield during any of the five most recent crop years is less than 70 percent of the transitional yield for crop insurance (T-yield), then the county yield for the crop year is replaced with 70 percent of the T-yield. This is called a plug yield. Second, the five-year Olympic average of national MYA prices for the commodity is calculated. If any of those five crop years has a national average prices below the PLC reference price for the commodity, that year's price is replaced by the reference price so that no price in the five-year Olympic moving average can be below the reference price for the commodity. Thus,the price component of the County ARC guarantee will never be less than the commodity's reference price. Third, the five-year Olympic average of county yields is multiplied by the five-year average of prices to determine the benchmark revenue. The County ARC revenue guarantee equals 85 percent of that benchmark revenue. If actual revenue falls below the guarantee, County ARC triggers a payment rate equal to the difference or revenue shortfall. The payment rate is capped at 10 percent of the benchmark, setting coverage from 86 percent to 76 percent of the bench mark county revenue. County ARC payments are made on 85 percent of the commodity's base acres. Individual farm ARC: A whole farm, not individual crop program. Thus, payments are made when actual revenue is less than all farm ARC revenue guarantee. The revenue guarantee is 86 percent of whole program crop farm revenue benchmark (equals sum of revenue benchmark for each program crop on all FSA farms of operator weighted by crop's share of total program acres). Coverage is capped at 10 percent of whole program

crop farm revenue benchmark. If Individual ARC is selected, it applies to all covered commodities and they would all be ineligible for PLC and SCO. Payments are made on 65 percent of the farm's total base acres for all covered commodities planted on the farm. Actual revenue for individual ARC is calculated as a weighted average of the actual revenues for each covered commodity. The weights used in computing the average reflect the amount of acreage planted to each crop in the given crop year. Actual revenue for each individual commodity equals the yield for that commodity multiplied by the price (higher of the MYA price and the commodity's loan rate). For the benchmark revenue, the revenue for each commodity for the five most recent crop years is calculated by multiplying the yield and national average price for each year. Low yields in individual years are replaced by 70 percent of the T-yield and the reference price will replace any actual prices falling below that level. When the revenue for each year is calculated, the five-year Olympic average of that commodity's revenue is calculated. The Individual Benchmark Revenue then uses the crop-specific Olympic averages to compute a weighted average whole-farm revenue, where the weights are based on planted acreage for each commodity. The Individual ARC Revenue Guarantee is set at 86 percent of that benchmark revenue. The payment rate is the difference between the revenue guarantee and the actual revenue, but capped at 10 percent of the benchmark revenue, resulting in coverage between 86 percent and 76 percent of the benchmark. Payment calculation: For both PLC and county ARC, payment acres are 85 percent of the farm's base acres for the crop plus any generic base acres (formerly cotton base acres) planted to the crop. Individual ARC payment acres are 65 percent of the farm's total base acres and any generic base acres planted to covered crops on the farm. Base acres: Total base acres are the same as current base acres, as of Sept. 30, 2013, but farmers can elect to reallocate base acres among the farm's covered crops according to each covered crop's share of the farm's total acres planted to covered crops over the 2009-2012 crop years. Thus, if farmers choose reallocation, the farm's base acres will be in proportion to the four-year average of acres planted to each covered commodity in those crop years, including any acreage that was prevented from being planted to a covered commodity in a crop year. Other base acre provisions, such as adjustments for acres that exit the Conservation Reserve Program (CRP), are similar to the 2008 Farm Bill except the program decisions must be made for CRP acres when they exit. An election to reallocate base acres cannot result in an overall increase in the farm's base acres. The Secretary of Agriculture is to develop procedures for identifying and eliminating base acres on land that has been subdivided and developed for multiple residential units or non-farming uses and is unlikely to return to agriculture uses. No price loss coverage or agriculture risk coverage payments to a producer on a farm if base acres are 10 acres or less, except in the case of socially disadvantaged or limited resource farmers and ranchers. Base acres must be reduced in any crop year when fruits, vegetables (other than mung beans and pulse crops), or wild rice are planted on base acres. Payment yields: For PLC, it is the FSA counter-cyclical yield, or yields can be updated to 90 percent of the farm's average planted yield over the 2008-2012 crop years. Under county ARC, if the crop's county yield during any of the five most recent crop years is less than 70 percent of the transitional yield for crop insurance (the Tyield), then the county yield for that crop year is replaced with 70 percent of the T-yield. This is known as a plug yield. Payment schedule: Any 2014 crop ARC or PLC payment made no sooner than Oct. 1, 2015. Payment caps: Payments received by a person or legal entity under Title I are limited to $125,000; $250,000 for husband and spouse. A separate payment limit for peanuts is retained. Only Title I crop program not included in single payment cap is benefit from forfeiting nonrecourse loans. Pay cap is for combined program payouts. Actively engaged: USDA to write new regulations defining “active engagement in farming” for producers using a significant contribution of active personal management to qualify for farm program payments. Most notably, individuals and entities comprised solely of family members are exempt from the new rule making. AGI limit: The two prior (farm and nonfarm income) adjusted gross income (AGI) limitation tests are replaced with a single $900,000 AGI (three-year average) limitation for certain commodity and conservation programs.

Crop Insurance Provisions Conservation compliance: Linked with crop insurance. Forward looking – no penalties for prior. Farmers purchasing crop insurance will have to be in compliance with conservation provisions for highly erodible land and wetlands beginning in 2015. Conservation compliance previously was a requirement of receiving federal commodity title payments, such as direct payments, so no major repercussions are anticipated. Supplemental Coverage Option (SCO): Available beginning with 2015 crops via PLC choice. Not available if enrolled in ARC. Allows farmers the option to purchase county level insurance that covers part of the deductible under their individual yield and revenue loss policy. Coverage is in addition to an individual policy and cannot exceed the difference between 86 percent and coverage level in individual policy. Subsidy rate is 65 percent, which exceeds the subsidy rate for the commodity-chosen enterprise insurance only at the 85 percent coverage level (53 percent subsidy). When combined, some observers say this suggests the use of SCO could be limited to the 80 percent to 86 percent range of insurance coverage. But others note that comparing enterprise and SCO is not just a matter of comparing percentage subsidy rates, as SCO is county-based and thus will tend to have a lower dollar cost per acre than the same percentage individual enterprise coverage. SCO also has all the negatives of area coverage. There may be producers who take SCO to cover more than just the 80-86 percentage band, but the basic point is correct that there are likely to be better options than SCO for many producers. Producers will have to pay 35 percent of the premium cost, which has yet to be determined. STAX: A Stacked Income Protection Plan (STAX) is offered for cotton, beginning with 2015 crop. No payment cap. Operated by Risk Management Agency. Available as supplemental insurance or as a stand-alone policy — although maximum coverage for an area already covered under other insurance could not exceed the deductible for that underlying crop insurance. Provides coverage for revenue loss of at least 10 percent, and up to 30 percent for a stand-alone policy, insuring cotton for a minimum price based on the expected price established under existing Group Risk Income Protection or areawide policy for the applicable county (or area) and crop year – 80 percent of premium paid by the government. CBO estimates cost at $3.3 billion through FY 2023. Other crop insurance provisions include:  Enterprise Units — Makes permanent a current pilot project under which an increased subsidy is available for enterprise and whole farm units being insured under the same policy. CBO estimates that this would cost $533 million through FY 2023.  New revenue-minus-cost margin crop insurance contract is authorized. Initial target is rice for the 2015 crop year.  Data sharing provisions included, with a focus on USDA agencies. One objective is to increase availability of county-based insurance products.  Insurance yields: A producer may exclude a yield for a crop year in which the county planted acre yield was at least 50 percent below the average county yield over the previous 10 consecutive crop years.  Budget limitations are placed on renegotiations of the Standard Reinsurance Agreement, including budget neutrality with regard to the crop insurance programs.  Insurance benefits are reduced if a farm tills native sod for production of an annual crop.  Irrigated and Non-Irrigated Crops — Allows the same crop produced on dry or irrigated land to be insured for different levels, depending on whether the land is dry or irrigated, and allows for separate enterprise units for irrigated and non-irrigated crops (costing $168 million through FY 2023, according to CBO).  Level of insurance subsidies for high income individuals is not impacted.  Disclose Premium Adjustment Violations — Requires the Federal Crop Insurance Corp. to publish information regarding each violation of the prohibition on rebates or premium adjustments, including sanctions imposed. The information is to serve as guidance for insurance agents and producers.  Beginning Farmers and Ranchers — Provides a 10-percentage-point increase in the federal subsidy for crop insurance for beginning farmers and ranchers, as well as the ability to use the temporary yields or the APH of previous producers if natural disasters have depressed current APH yields (costing $261 million, according to CBO).  Organic Crops — Requires the issuance of crop insurance for organic crops, beginning no later than the 2015 reinsurance year (costing $8 million, according to CBO).  Submission and Review of Policies — Establishes a process for the submission and review of potential insurance policies.  Crop Insurance Fraud — Authorizes the use of up to $9 million from the crop insurance fund to pay for

 

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maintaining program integrity and compliance activities (costing $81 million, according to CBO). Index-Based Weather Insurance Pilot Programs — Authorizes a pilot program to provide assistance in the purchase of an index-based weather insurance product from a private insurance company (costing $50 million, according to CBO). Insurance Research and Development Priorities — Authorizes research and development of insurance policies for different commodities. The measure designates underserved commodities, making these a priority for the development of new insurance products. Immediate priorities are revenue insurance for peanuts, margin insurance for rice, and a specialized irrigated policy for grain sorghum. Underserved commodities include sweet sorghum, biomass sorghum, rice, peanuts, sugar cane, alfalfa, pennycress and specialty crops. The Farm Bill also promotes development of insurance policies for margin coverage for catfish, whole farm diversified risk management, swine catastrophic disease, poultry catastrophic disease and food safety. Studies are authorized of poultry business interruption; and food safety. Insurance for organic crops is to offer price elections that reflect the retail or wholesale price, as appropriate. CBO estimates that these provisions would cost $36 million through FY 2023. Does not include language from the House bill that would have mandated the disclosure of the amount of crop insurance assistance received by members of Congress, Cabinet secretaries and members of their immediate families.

Farmer Safety Net Option Examples Price Loss Coverage (PLC): Payment Example, Corn Payment rate = Reference price – higher of Marketing Year Average (MYA) price or loan rate, when MYA price is less than reference price Payment = Payment rate x payment yield x base crop acres x .85 Example for corn:  MYA price = $3.55  Payment yield = 150 bu. (payment yield is farm specific)  Base Acres = 100 Payment rate = $.15 = $3.70 reference price - $3.55 MYA price PLC payment = $1,913 = $.15 payment rate x 150 payment yield x 100 acres x .85 On a per acre basis, PLC payment = $19.13 ARC County Payment Example Payments when actual county revenue is below county guarantee. Benchmark revenue = five-year Olympic average of county yields x five-year Olympic average of MYA prices (price cannot be below reference prices) Guarantee = .86 x benchmark revenue Actual revenue = county yield x MYA price Payment rate = Guarantee – Actual Revenue, when actual revenue less than guarantee, max payment rate = .10 x benchmark revenue Payment = Payment rate x base acres in crop x .85 ARC Individual Payment Example       

ARC is whole-farm insurance, as payments are calculated based on whole-farm revenue Rates are calculated across all FSA farms enrolled in ARC – Individual Planted acres in year of payment determine weights in benchmark revenue Payments are made on base acres x .65 ARC-Individual will make payments when actual revenue falls below .86 times benchmark revenue Actual revenue equals sum of each crops’ revenue (National Market Year Average price x farm yield) weighted based on planted acres Benchmark revenue equals sum of each crops’ benchmark weighted based on planted acres

Key Farm Program Choice Factors   

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If farmers choose ARC, they cannot get SCO. ARC has payment cap, SCO does not. PLC and ARC tie payments to base acreage, while the SCO program covers planted acreage. Farmer safety net payments for the 2014 crop will be made no sooner than Oct. 1, 2015. Any SCO payouts for 2015 crops would likely be made by the end of March 2016. The dearth of government payments until late 2015 will likely boost the amount of commodities going under USDA's nonrecourse loan program. A key may be interaction of safety net program choice with insurance policies. Price outlook: ARC may provide more money in the short run, but payment potential would diminish over time if farm prices remain lower, thus boosting the allure of the PLC to deal with multi-year price declines – if market prices decline notably in 2014 and 2015, ARC's implied price will decline notably by 2017 and 2018. Expectation that market prices will stay above the PLC reference price in most years will likely lead to an initial look at ARC. But expectation that market prices will be below the PLC reference price in most years will likely lead to an initial look at PLC – due to the adjustment in the ARC revenue guarantee to lower prices and the 10 percent cap on ARC payments. Futures markets currently suggest that County ARC will make larger payments. Based on estimates announced Feb. 20 at USDA's Ag Outlook Forum, USDA's projected corn price for the 2014 marketing year is $3.90 and the projected soybean price is $9.65. Both are above the reference prices of $3.70 (corn) and $8.40 (soybeans). 2014 farm program signup will likely end well into summer. Thus, farmers will have price, acreage and supply/demand information to help determine their program choice – at least impacting 2014 crops. But the choice selected will be in place for five crop years. Farmers may choose different programs for different crops, a feature allowed in PLC and county ARC but not in individual ARC. Thus, operators will likely consider diversification of program choice. Individual ARC may be most attractive for relatively small farms with contiguous acres in an area not representative of the county and in areas with variable yields. The term producer includes everyone sharing in the risk of producing a crop and entitled to share in the crop available for marketing from the farm. It includes owners, operators, landlords, tenants and sharecroppers. Thus, farmers will still need to involve landlords in this decision and everyone involved must agree. Getting such agreement was one of the factors behind low participation in the prior ACRE program via the 2008 Farm Bill – it remains to be seen whether or not this will be a hindrance for enrolling in the new ARC, as the PLC program is a more traditional farmer safety net program. Early proponents of the revenue-based ARC program wanted any benefits based on planted acres. But the final decision set any payments on base acres. Decoupling revenue policy from production is a new direction not yet tested. It is unclear how well revenue payments on base acres will function on the farm. Regarding PLC, reference/target prices fixed for the life of the farm bill may not reflect actual market conditions. Thus, if reference prices are set too low, then the program may not help with actual price risk; if set too high, they may provide assistance in times when farm incomes are relatively strong. Cotton has no safety net against multiple year low returns. However, the farm bill allows the annual planting of other crops on generic (cotton) base acres, with any such crop qualifying for any safety net provisions for the crop planted other than cotton.

Conservation Programs  

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Conservation Reserve Program maximum declines to 27.5 million in FY 2014; 26 mil. in FY 2015; 25 mil. in FY 2016; 24 mil. in FY 2017 and 24 mil. in FY 2018. CRP acres currently total 25.6 million. Reauthorizes through FY 2018 most conservation activities but consolidates the 23 current programs into 13. It also generally reduces the number of acres of land that may be enrolled in the programs but requires farmers to comply with conservation practices in order to receive premium subsidies on crop insurance and to participate in the measure's new risk-management programs. Reauthorized programs include the Conservation Reserve Program, the Farmable Wetlands Programs, the Conservation Stewardship Program and the Environmental Quality Incentives Program (EQIP). EQIP would be expanded to include functions now administered under the Wildlife Habitat Incentives Program. Establishes a new Agricultural Conservation Easement Program by consolidating the Wetland Reserve Program, the Grassland Reserve Program and the Farmland Protection Program. Similarly, a Regional Conservation Partnership Program is established by combining the Agricultural Water Enhancement Program, the Chesapeake Bay Watershed Program, the Cooperative Conservation Partnership Initiatives Program and the Great Lakes Basin Program.

Food Stamps / SNAP  

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Reauthorizes through FY 2018 spending for federal nutrition programs, including food stamps (formally known as the Supplemental Nutrition Assistance Program, or SNAP). Modifies SNAP to reduce the ability of states to artificially boost an individual's food stamp benefits by providing a minimal level of assistance through the Low Income Home Energy Assistance Program (LIHEAP), requiring that an individual receive at least $20 or more in LIHEAP aid from the state before that individual's SNAP benefits may be automatically increased. CBO estimates that this provision would reduce spending by $8.6 billion over 10 years. Does not include House provisions that would have restricted "categorical eligibility" for SNAP or restricted the ability of states to waive SNAP work requirements for certain able-bodied adults, but it does create a pilot program to help get more SNAP recipients working by allowing states to require work and job training as part of receiving SNAP benefits. Prohibits undocumented immigrants, major lottery winners, traditional college students, and convicted murderers and violent sex offenders from receiving SNAP benefits, and it requires stores authorized to accept SNAP benefits to purchase point-of-sale equipment that will allow electronic tracking of where SNAP benefits are used. It also includes provisions to prevent SNAP fraud, including by requiring USDA to establish pilot projects to improve federal-state cooperation in reducing retailer fraud. Modifies the Commodity Supplemental Food Program to eliminate program eligibility for low-income pregnant and breast-feeding women, other new mothers up to one year postpartum, infants and children up to their 6th birthday. CBO estimates that the measure's nutrition provisions would reduce direct spending by $8 billion through FY 2023.

Other Farm Bill Provisions 

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Reauthorizes energy programs through FY 2018 and increases direct spending by $879 million through FY 2023 — including for the Biorefinery Assistance Program, the Rural Energy for America Program and the Biomass Crop Assistance Program. It includes language that prohibits subsidies for ethanol blending pumps. No changes on the country of origin labeling regulations and the proposed regulations required by the 2008 Farm Bill regarding livestock and poultry marketing practices. Extends for one year, through FY 2014, the payment in lieu of taxes (PILT) program, which would result in $410 million in spending this year. Permanent laws of 1938 and 1949 are not repealed. Reauthorizes the federal sugar program, without any changes, through FY 2018. The sugar program provides a price guarantee to the processors and producers of sugar cane and sugar beets. USDA manages the price of sugar by providing price support loans that work as a guarantee of price, limiting the amount of sugar that each processor is allowed to sell, imposing import quotas to restrict sugar from entering the United States and employing a sugar-to-ethanol backstop in case marketing allotments and import quotas fail to prevent a sugar surplus from developing.

Dairy Title         

Creates a Margin Protection Program (MPP) Creates a Dairy Production Donation Program (DPDP) Temporarily Continues then Repeals MILC Program - MILC payments continue through June 30, 2014, at a 45 percent payment rate, with the repeal to be effective July 1, 2014. Repeals the Dairy Product Price Support Program (DPPSP) Repeals Dairy Export Incentive Program (DEIP) Repeals Federal Order Review Commission Extends Dairy Forward Pricing Program Extends Dairy Indemnity Program Extends Dairy Promotion and Research Program

Dairy Program: Margin Protection Program (MPP) Voluntary risk management program. USDA must establish program by Sept. 1, 2014; sunset on Dec. 31, 2018. Enables producers to insure their Margin (Milk price - feed cost) Actual Dairy Production Margin (ADPM) = USDA/NASS National Average All-Milk Price - National Average Feed Cost National Average Feed Cost =  1.0728 X USDA/NASS corn price / bushel  0.00735 X USDA/AMS central Illinois soybean meal price / ton  0.0137 X USDA/NASS alfalfa hay price / ton Participating dairy producers:  Establish individual production history = max. annual production in 2011, 2012, or 2013, adjusted annually by the national average milk production (new entrants use either extrapolated actual production or national average production per cow times herd size)  Choose coverage threshold level: $4.00 / cwt. - $8.00 / cwt., in $0.50 / cwt intervals  Choose coverage percentage of production history: 25% - 90%, in 5% intervals  Pay administrative fee = $100 / year and annual premium Margin Coverage Level

First 4 million pounds **

Over 4 million pounds

$4.00

Free

Free

$4.50

$0.010

$0.020

$5.00

$0.025

$0.040

$5.50

$0.040

$0.100

$6.00

$0.055

$0.155

$6.50

$0.090

$0.290

$7.00

$0.217

$0.830

$7.50

$0.300

$1.060

$8.00

$0.475

$1.360

** Premium reduced 25% from above levels in 2014 and 2015 except for $8.00 level

Participating producers receive payment when: actual average margin < producer-selected margin coverage threshold during any of: Jan-Feb March-April May-June July-Aug Sept-Oct Nov-Dec Payment equals: (Coverage percentage threshold – actual margin) X producer production history X 1/6 X coverage percentage