Secretary of Agriculture Mike Johanns, at a public meeting on January 31, 2007, described the Administration's 65 recommendations for a new farm bill. These recommendations were published by the U.S. Department of Agriculture (USDA) in a report subsequently transmitted to Congress titled 2007 Farm Bill Proposals . The report and related USDA materials are available on the Department's website at http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?navid=FARM_BILL_FORUMS . In the following pages, Congressional Research Service analysts summarize current policy and programs, describe the USDA recommendations, and pose questions related to the policy, program, and/or budgetary impact of the recommendations. The organization of this report parallels that of the USDA report. The USDA report presumes a new five-year farm bill covering the 2008-2012 time frame. However, consistent with U.S. government annual baseline budgeting, the spending authority and spending outlay estimates of the Administration's farm bill are projected for 10 years. The 2002 farm bill mandated support for a group of commodities (grains, oilseeds, cotton, sugar, and milk) that long have received support, and it added six more commodities (dry peas, lentils, small chick peas, wool, mohair, and honey) to the list. The Commodity Credit Corporation (CCC) pays the costs of commodity support under a $30 billion line of credit from the U.S. Treasury. Congress annually appropriates funds to the CCC that are used to pay down its loans from the Treasury. Commodity support expenditures are estimated to have averaged about $12.6 billion per year over the six-year life of the current farm bill (FY2002-FY2007). The Congressional Budget Office (CBO) forecasts that future spending for commodity support under current law would amount to about $7 billion per year over the next five years (FY2008-FY2012). The decline from past spending levels is due to current and anticipated high market prices for supported crops well into the future. USDA ' s proposed 2007 farm bill outlines modifications to the commodity programs that are claimed to save $4.494 billion from the Office of Management and Budget (OMB) 10-year current services baseline of $74.566 billion for commodity support. In addition to the financial savings, the modifications to current law, according to the Secretary of Agriculture, are designed to make the programs "more market-oriented, more predictable, less market distorting and better able to withstand challenge" in the World Trade Organization. Current law specifies support prices for 25 commodities, including corn and other feed grains, wheat, cotton, rice, soybeans and other oilseeds, peanuts, dry peas, lentils, small chickpeas, wool, mohair, honey, and milk. The Secretary asserts that crop loan rates (one of the support price mechanisms) are set at such high levels that they encourage overproduction and cause lower market prices. In contrast, according to the Secretary, the USDA proposal would minimize market distortions and encourage farmers to plant crops based on market prices instead of subsidy prices. Loan rates for each commodity would be set at the lesser of (a) 85% of the five-year Olympic average of market prices (i.e., the average of the last five years excluding the high and low year), or (b) the loan rates specified in the House-passed version of the 2002 farm bill (which are lower than current law for feed grains, wheat, cotton, oilseeds, and peanuts). This proposal is claimed by the Administration to save $4.5 billion over 10 years ($450 million per year) compared to baseline spending of $8.807 billion ($880.7 million per year) on marketing assistance loan program operations. 1. How much higher or lower would federal outlays have been if the proposal had been in place over the past five crop years? 2. Over the past five years, which commodities have experienced season average market prices below the levels proposed for the new loan rate formula? 3. How much of a decrease in savings would result if the loan rates specified in current law were used in the new formula instead of loan rates in the 2002 House-passed farm bill? 4. Has the idea of replacing nonrecourse loans with recourse loans been considered as a mechanism to eliminate commodity certificate gains or the forfeiture of commodities to the government? How much has been paid to farmers in the form of commodity certificate gains over the past five years? Are certificates used in order to circumvent payment limits? Under current law, farmers are allowed to sign up for loan deficiency payments (LDPs) to secure the benefits of the marketing assistance loan program instead of taking out nonrecourse loans. Farmers can capture LDP gains when posted county prices (PCPs), which serve as proxies for county market prices, are lower than loan rates. This opportunity is available daily. The Secretary asserts that there are substantial difficulties and inequities in calculating daily PCPs. Additionally, short-term market price declines create windfall opportunities for farmers that are costly and inconsistent with the fundamental income support objectives of the marketing loan program. The proposed change would replace daily PCPs with monthly PCPs. Additionally, farmers would receive LDPs based on the monthly PCPs in effect on the days producers lose beneficial interest in the commodities. Currently, farmers can collect LDPs and hold onto commodities and market them at a later time when market prices are higher than the loan rates. The USDA proposal is claimed to save $250 million over 10 years ($25 million per year) compared to an unspecified OMB baseline spending level. 1. Over the six-year life of the current farm bill, LDPs are estimated by USDA to cost an annual average of about $2.547 billion. How much would the new proposal have saved had it been in place in the current farm bill? Direct payments were enacted in the 2002 farm bill as a replacement for production flexibility contract payments, which were first enacted in the 1996 farm bill. Direct payments are made on land with a history of production (called base acres) of feed grains (largely corn), wheat, upland cotton, rice, oilseeds (largely soybeans), and peanuts. The payment rate for each commodity is specified in the law. The annual payment to a farm is its commodity base acres times program yield times the payment rate. The direct payment program is designed to cost about $5 billion per year. The payment is made for each eligible farm based on historic production and yield, and not on actual production or market prices. Hence, it was envisioned as not trade-distorting and not subject to WTO spending limits on subsidies. The Secretary has proposed to continue the direct payments and, except for upland cotton, to keep the current payment rates in place from 2008 through 2009, and then increase them by about 7% in 2010 for the three-year period through 2012. Uniquely, the upland cotton direct payment rate would immediately increase about 7% and remain at the higher level. 1. Is the increase in direct payments for program commodities a mechanism to maintain payments to farmers that otherwise would decline under conditions of high market prices and reduced marketing loan program payments? If market prices do remain high, what would be the economic justification for higher direct payments? Would these higher payments be capitalized into higher land prices and rents? 2. A high proportion of the increase in direct payments would be for one commodity, upland cotton. USDA's recommendations report states that "[t]he combination of increases in upland cotton yields per acre and declining U.S. upland cotton textile production is expected to limit price gains and result in substantial cotton program expenditures, compared to other commodities." Why would a declining domestic textile industry have a depressing impact on prices given that in the past, increased exports have offset any decline in domestic use? Are the loan rate and target price for cotton substantially out of line with markets, and the cost of production? Are marketing loan and counter-cyclical program costs likely to be high in the future compared to other commodities? 3. Over the past five years, crop disaster payments amounted to about $1.3 billion per year, and no payments yet have been made on disaster losses for 2005 and 2006. Would farmers be better served if the $5.5 billion proposed increase in direct payments were instead used for crop disaster assistance (or possibly through crop insurance) over the coming 10 years? When it comes to eligibility and payment rates for direct payments, current law makes no distinction among farmers with regard to age, longevity as farm operators, or ownership status. The eligibility requirement is that a person must be actively engaged in farming on an operation that has program commodity base acres. The sharing of direct payments between tenants and landlords is a matter agreed to among the parties in a manner consistent with local custom. The Secretary ' s farm bill proposal would give beginning farmers direct payments at a rate that is 20% higher than for other farmers for the first five years. The expected cost is $250 million over 10 years. 1. How does the USDA intend to define a beginning farmer? 2. How many beginning farmers are expected to benefit from this program? 3. Is it likely that sellers of farmland will raise the asking price or the beginning farmers will raise the offer price to acquire cropland by the amount of the increased direct payment? In other words, could the higher direct payment be bid into higher cropland prices and higher rental rates, as has been the case with regular direct payments? Counter-cyclical payments were adopted in the 2002 farm bill as a way of providing certainty and stability to ad hoc emergency market loss payments enacted in years following low market prices. The five-year (FY2003-FY2007) average annual cost of counter-cyclical payments is estimated at about $2.5 billion.