Category: Policy

The Congressional Budget Office (CBO) is every political budget analyst’s favorite punching bag.  Truth be told, they have an impossible job.  At its core, CBO is responsible for forecasting spending by the Federal government.^[1]  In some cases, this involves forecasting macroeconomic variables and the resulting Federal spending.  For example, CBO forecasts marketing year average prices for commodities covered by the farm bill and the resulting Price Loss Coverage (PLC) payments.  In other cases, CBO looks into its crystal ball to estimate spending that Executive Branch agencies will undertake using discretionary authority granted to them by Congress.  For example, Section 5 of the CCC Charter Act vests USDA with eight categories of specific powers ranging from supporting the prices of agricultural commodities to increasing the domestic consumption of agricultural commodities.  While some of these authorities are used to carry out programs explicitly authorized by Congress (e.g., carrying out conservation or environmental programs authorized by law), the authority has been used to deliver a number of new programs at the discretion of the Secretary. CBO’s efforts to forecast spending under the latter is the focus of this article.

From fiscal years 2012 to 2017, Congress restricted the Secretary’s discretionary use of the CCC Charter Act.^[2] Since the restriction was dropped in fiscal year 2018, both the Trump and Biden Administrations have used Section 5 of the Charter Act in a number of creative ways.  For example, in the midst of the trade war with China, the Trump Administration authorized a combined $28 billion in assistance to producers via the Market Facilitation Program (MFP).^[3]  More recently, the Biden Administration has used Section 5 to fund over $3 billion in Partnerships for Climate-Smart Commodities^[4] along with $1.2 billion for the new Regional Agricultural Promotion Program to “enable exporters to diversify into new markets and increase market share in growth markets.”^[5]

While CBO tries to reflect such spending in their regular baseline updates (for example, the January 2019 baseline explicitly listed $9.799 billion in spending for fiscal year 2019 under MFP), the baseline historically has not included an explicit (i.e., separate line item) forecast of additional spending.  That changed with the January 2020 baseline which – beyond merely reflecting significant additional spending under MFP – included a long-term forecast of $100 million per year in “Other CCC Spending” under the CCC Charter Act Authority. To CBO’s credit, it presumably was attempting to account for the likelihood that spending at the discretion of the Secretary would continue into the future – and continue it did, as noted in Figure 1.  As a result, in its May 2022 baseline, CBO increased the long-term estimate to $1 billion per year.  At this point, the main question is whether $1 billion per year is a reasonable/sufficient estimate of future spending.

Figure 1. Actual versus Projected Spending under USDA’s Discretionary Use of CCC

As noted in Figure 1, spending under Section 5 has averaged $10.7 billion over the last 6 years since Congress restored the Secretary’s full authority under the CCC Charter Act.  That is significantly higher than the $1 billion per year currently being forecasted by CBO.  Even if you consider the most recent 3 years under a different administration – while treating MFP as an outlier – spending still averages almost $4 billion per year, 4 times higher than CBO’s forecast.

While an estimate of $1 billion per year would indicate CBO is projecting a return to “normal,” reality seems to paint a different picture. By our estimates, use of Section 5 authorities of the CCC has resulted in spending in excess of $64 billion over the last 6 years. If the current administration were re-elected, it’s hard to imagine a reduction in spending for the priorities noted above, indicating that recent spending levels could become the status quo.  Further, a second Trump Administration could result in an expansion of tariffs and elevated spending under Section 5 in response. Regardless of the election outcome, recent hearings before the Select Committee on the Chinese Communist Party have indicated a significant interest in a resumption of tariffs on Chinese products.

All of this leads us to question the direction CBO will take in its Spring baseline update.  In light of recent spending and ongoing priorities, if the CBO baseline is intended to be realistic, we would anticipate a significant increase in forecasted spending under CCC Charter Act Authority.

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^[1] It likely goes without saying that this understates the scope of CBO’s duties.  For example, on a recurring basis, CBO projects Federal spending as a “baseline” against which authorizing committees consider changes (e.g., farm bill).  CBO must also estimate the budget impact of those proposed changes, a process colloquially known as “scoring.”  All of this involves CBO predicting into the future.

^[2] https://crsreports.congress.gov/product/pdf/R/R44606/4

^[3] https://crsreports.congress.gov/product/pdf/IF/IF11289

^[4] https://www.usda.gov/climate-solutions/climate-smart-commodities/faqs

^[5] https://fas.usda.gov/programs/regional-agricultural-promotion-program

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Fischer, Bart L., and Joe Outlaw. “Forecasting Discretionary Spending by the Commodity Credit Corporation (CCC).“ Southern Ag Today 3(49.4). December 7, 2023. Permalink

In the lead up to the 2018 Farm Bill expiration, U.S. Representatives Blumenauer (D-OR) and Kuster (D-NH) requested that the U.S. Government Accountability Office (GAO) study the effects of the U.S. sugar program. In this latest GAO report, rather than providing an objective and comprehensive overview of the effects of the program, it seems GAO was most interested in doubling down on its previous work. Importantly, despite decades of criticism from GAO, both Congress and the USDA have repeatedly rejected calls for wholesale changes to the U.S. sugar program. Sugar is the most highly supported agricultural good worldwide and the global sugar market is the most distorted commodity market, a point acknowledged by GAO. That factor and others, which we outline below, help explain why Congress has, with only a few brief exceptions, maintained a strong sugar program since 1789 regardless of which party has been in power. Had GAO considered some of those points, it would have resulted in a considerably more objective and well-balanced report.

GAO devoted a considerable amount of its report to examining the extent to which food companies are harmed by the sugar program. While it is not surprising the GAO report repeats the complaints of sugar-using groups regarding prices paid for sugar, it is surprising that GAO would not note (much less attempt to quantify) any benefits that those users receive from the sugar program. For one, research has shown that U.S. consumers prefer domestically sourced sugar rather than foreign sugar (Lewis et al., 2016). The U.S. sugar program establishes and maintains a strong domestic sugar supply chain, which accrues benefits to sugar-using companies and consumers, as well as promotes a reliable domestic supply of beet and cane sugar. Because of the U.S. sugar program, sugar-users can count on a reliable supply of sugar whenever and wherever they desire it and in the form that meets their specific needs. Such just-in-time delivery of an essential input to their production lines without having to invest in costly sugar storage facilities is extremely valuable to those companies. GAO does not provide any comparison to alternative scenarios in which those companies have to pay to invest in their own sugar supply chain logistics and where those companies are reliant on their main sugar supply being shipped to them from countries such as Brazil or India.  

The GAO report also neglected to include several recent articles that indicate the success of sugar-using firms that operate within the contours of the U.S. sugar program (i.e., Trejo-Pech et al., 2020; DeLong and Trejo-Pech, 2022; Trejo-Pech et al., 2023). For example, Trejo-Pech et al. (2023) demonstrates that food companies that are large sugar purchasers financially outperform other agribusinesses as well as other publicly traded companies in the United States. 

The GAO report briefly discussed how the effects of the U.S. sugar program are passed from food manufacturers to end-consumers. However, they referenced a GAO report from 2000 rather than using more recent studies. For example, DeLong and Trejo-Pech (2022) found that sugar-using companies in the United States do not pass on savings from changes in sugar prices to consumers, raising questions about GAO’s statements regarding which groups bear the costs of the sugar program. History unequivocally shows that food manufacturers and retailers pass no savings along to consumers when the price they pay producers for their sugar drops. DeLong and Trejo-Pech (2022) found no correlation between the price of sugar in the United States and the retail product prices charged to American households by sugar-using companies. In other words, any benefit in a decrease in U.S. sugar prices is likely captured by food manufacturers as increased profits and are not passed along to their customers (DeLong and Trejo-Pech (2022)). 

While GAO did not repeat its earlier recommendation from twenty years ago for Congress to lower the loan rate for sugar, it has missed an opportunity to compare the sugar loan levels in the farm bill – which have remained virtually unchanged over the past several farm bills – to the actual costs of producing sugar. Had GAO done so, the report would have added to the current farm bill discussion by showing how much costs of production have increased relative to the loan rates established in the 2018 Farm Bill. While that topic will be addressed more thoroughly in a subsequent Southern Ag Todayarticle, current costs of sugarbeet and sugarcane production are roughly 30% higher than they were in 2018 when the last farm bill was enacted.

GAO spent most of their report simply summarizing results from selected welfare economic studies (similar to their previous reports) that ultimately provides only a one-sided view of the sugar market in the United States and other countries. Indeed, many of their selected studies do not include more recent developments in the U.S. sugar market, such as the current Suspension Agreements with Mexico for sugar trade. Moreover, welfare economic studies do not capture the real-world benefits of ensuring a strong domestic supply chain, and they will continue to inadequately quantify the threat posed to U.S. producers by foreign governments in response to changes in U.S. sugar policy. For example, in just the past decade, there have been disputes involving the aforementioned dumping of subsidized sugar from Mexico into the United States and a WTO violation in the case of Indian subsidies to its sugar industry (USDA Economic Research Service, 2023; USDA Foreign Agricultural Service, 2023).

Notably absent from GAO’s report are the many studies that document the importance of the economic activity generated by sugar production to many rural and urban communities around the United States. For example, a recent study by researchers at Texas A&M University found that the sugar industry contributes an estimated $23.3 billion annually to the U.S. economy, supporting more than 150,000 jobs across two dozen states.

What is perhaps most interesting in the GAO report is their recommendation to USDA and the U.S. Trade Representative (USTR) to analyze alternative mechanisms for administering preferential-quota access to our trade partners. Improving the efficiency of government administration is always laudable. With that said, that is virtually the same recommendation GAO made nearly 25 years ago. After decades of observing how this has worked in practice, actually analyzing the potential gains from changing how USDA and the USTR administer sugar quotas would have been an interesting contribution by GAO to the discourse surrounding the new farm bill. GAO’s report did not add anything new to the discussion of the U.S. sugar program, and it missed an opportunity to finally provide a balanced report which includes the benefits provided by the U.S. sugar program.

References:

DeLong, K.L. and C. Trejo-Pech. 2022. “Factors Affecting Sugar-Containing-Product Prices.” Journal of Agricultural and Applied Economics, 54(2): 334-356. https://doi.org/10.1017/aae.2022.12

Lewis, K.E., C. Grebitus, and R. Nayga, Jr. 2016. “U.S. Consumer Preferences for Imported and Genetically Modified Sugar: Examining Policy Consequentiality in a Choice Experiment.” Journal of Behavioral and Experimental Economics, 65:1-8. https://doi.org/10.1016/j.socec.2016.10.001

Trejo-Pech, C.J.O., K.L. DeLong, D.M. Lambert, and V. Siokos. 2020. “The Impact of US Sugar Prices on the Financial Performance of US Sugar-Using Firms.” Agricultural and Food Economics, 8(6): 1-17. https://doi.org/10.1186/s40100-020-00161-5

Trejo-Pech, C.J.O., K.L. DeLong, and R. Johansson. 2023. “How Does the Financial Performance of Sugar-Using Firms Compare to other Agribusinesses? An Accounting and Economic Profit Rates Analysis.” Agricultural Finance Review, 83(3): 453:477. https://doi.org/10.1108/AFR-08-2022-0103

USDA Economic Research Service. 2023. Mexico Remains Significant Supplier of U.S. Sugar Despite Limits Imposed on Mexican Sugar Imports. Retrieved from: https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=103093#:~:text=In%202014%2C%20after%20the%20U.S.,been%20applied%20to%20Mexican%20sugar. USDA Foreign Agricultural Service. 2023. India: WTP Rules Against India’s Sugar Export Subsidies and Domestic Price Support. Retrieved from: https://fas.usda.gov/data/india-wto-rules-against-indias-sugar-export-subsidies-and-domestic-price-support#:~:text=On%20December%2014%2C%202021%2C%20the,obligations%20under%20the%20multilateral%20agreement

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DeLong, Karen L., Michael Deliberto, and Bart L. Fischer. “Evaluation of the Recent Government Accountability Office Sugar Program Report.” Southern Ag Today 3(48.4). November 30, 2023. Permalink

Title II of the Agricultural Adjustment Act of 1948 (herein referred to as “the act”), allowed the Secretary of Agriculture to, “Support the prices of whole milk, butterfat, and the products of such commodity… at a level not in excess of 90 per centum not less than 75 per centum of the parity prices.” To achieve this, the act gave the secretary the legal authority to support dairy prices, “Through loans on, or purchases of, the products of milk and butterfat.” To conduct the purchases or loans of dairy commodities, the Secretary of Agriculture was legally authorized to make the purchases of butter or cheese through the Commodity Credit Corporation (CCC). Under the legal framework in the Agricultural Adjustment Act of 1948, the dairy provisions are permanent law, although they have been regularly suspended by subsequent farm bills. 

Parity prices are prices received by farmers for agricultural commodities that ensure a level of farm income to cover the costs of production and provide a living wage (7 U.S.C. §§ 608c-659, 1933). The idea behind parity prices originated in the Agricultural Adjustment Act of 1933 in response to the low commodity prices farmers experienced during the Great Depression.  To calculate parity prices, the U.S. Department of Agriculture (USDA) used agricultural prices from 1910 to 1914, the Golden Age of Agriculture, since the industry generally regarded these prices as fair during this time. One of the commodities designed to receive a parity price was milk, which was spurred by the Wisconsin milk strike and subsequent cheese plant bombings. Parity prices reflect the purchasing power from 1909-1914 but in today’s prices. 

Although the dairy parity price is no longer used in the current dairy pricing scheme in the U.S., it is still reported monthly in the USDA price report due to federal mandates in existing legislation (USDA-NASS, 2011). In September 2023, the USDA Agricultural Prices Report indicated an all-milk (across all classes) parity price of $67.40 per hundredweight (USDA-NASS, 2023).  The actual price received by producers in September 2023 ($21.00 per cwt) was approximately 30% of parity. Milk prices by percent parity are shown in Table 1. Under the act, the secretary has the legal authority to set the parity price, which becomes the new price floor. The new price in turn is supported through dairy foods commodity purchases by the CCC.   

Table 1. Parity milk price.
Pricing factor	Price ($)
Parity Price1	67.40
90%	60.66
30%2	21.00
Income above market price	39.66
1Reported by NASS 2Current market price

Policy Implication Discussion 

If Congress fails to extend the farm bill between now and the end of the year, concerns will grow about a potential return to permanent law after the first of the year.  Although many dairy farmers would be thrilled to receive an all-milk price of $60.66 cwt, there are a few long-term implications that need to be considered before celebrating a high milk price. 

• Undoubtedly, the price of milk paid by consumers would increase significantly. Historically, milk was considered an inelastic food product; therefore, even as the price of milk increased, there was little effect on the quantity consumers demanded (Schröck, 2012). However, some economists have observed that milk is no longer as inelastic as once believed. This begs the question: even if the lowest-priced milk in the grocery store went above $4.00 per gallon, how would consumers respond? 

• If milk consumption were to decline, there would subsequently be a ripple effect that would decrease the amount of milk processed into fluid milk and other dairy foods. Therefore, in a market where there is already an oversupply of milk, this could potentially increase this issue even further. 

References 

Schröck, R. (2012). The organic milk market in Germany is maturing: A demand system analysis of organic and conventional fresh milk segmented by consumer groups. Agribusiness, 28(3), 274-292.

USDA-National Agricultural Statistics Service. (2023, September 29). Agricultural Prices. Economics, Statistics, and Market Information Center. https://downloads.usda.library.cornell.edu/usda-esmis/files/c821gj76b/p5549b47m/6108ww46v/agpr0923.pdf

USDA-National Agricultural Statistics Service. (2011). Price Program. USDA-National Agricultural Statistics Service. https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Prices/Price_Program_Methodology_v11_03092015.pdf

Myers, Jack, and Hunter Biram. “Implications of Reverting to Dairy Policy in the 1948 Farm Bill.” Southern Ag Today 3(46.4). November 16, 2023. Permalink

Over the last year we have spoken at more than 100 farm policy meetings across the United States.  This week a simple but thought-provoking question was posed during Q & A after a farm bill presentation at the Council for Agricultural Science and Technology (CAST) Annual Meeting.  The question was simply: if you had a clean slate to create a strong producer safety net, what would it look like? 

In general, the role of a policy economist is typically not to suggest what Congress should do, but rather to help evaluate the impacts of policy proposals on producers and other stakeholders, estimate costs, and try to discern any unintended consequences of the proposal.  It is the job of Congress to consider all the relevant information and make informed decisions.  Think about all of the meetings with producer groups, hearings, and listening sessions that members of the House and Senate agricultural committees and their staffs have held to determine what should be in the next farm bill.  It is their job to determine what they believe is best for their constituents and producers in general.

With that said, combined we have more than 50 years of experience working in agricultural policy; surely we have some thoughts on the matter.  Upon some reflection, the three-legged stool of price loss coverage (PLC), marketing assistance loans (MAL), and crop insurance constitutes an effective safety net.  Together they provide a counter-cyclical, low-cost, and adaptable safety net for U.S. crop producers.  Let’s look at why each of these characteristics are important.

• Counter-cyclical.  These programs step in and help when conditions warrant because of low prices (PLC and MAL) or low yields/revenue (crop insurance), and payments go away when conditions are good.  The U.S. fiscal situation demands that the limited resources made available to agriculture are used wisely and efficiently.  This is why our clean-slate safety net would not continue ARC, which essentially covers the same losses as the Supplemental Coverage Option (SCO), an area-wide insurance policy.

• Low-cost.  The safety net is not designed to make producers whole from an expected gross receipts standpoint.  Reference Prices that trigger PLC payments due to low prices have been established well below the full cost of production, and MAL Loan Rates are less than one-half the full cost of production for the 23 covered commodities.  While Congress is anticipating increases for both Reference Prices and Loan Rates, the levels under discussion are still well below average costs of production. Payment yields are well below budgeted yields for most producers, and the 85% payment factor further reduces producer payments.  Crop insurance utilizes a substantial deductible that producers have to lose before insurance begins to pay.  And more importantly, with respect to crop insurance, producers pay premiums that are higher or lower depending upon the level of risk in their area/crop and the coverage level chosen.

• Adaptable.  The components of the safety net need to be adaptable.  While more could be done to ensure that Reference Prices keep up with inflation going forward, Reference Prices have the ability to increase along with market prices due to the Effective Reference Price changes made in the 2018 Farm Bill.  As for crop insurance, coverage is based on prevailing prices in the futures markets and policies can be established/adjusted to keep pace with the changes in cropping practices and risks faced by producers.

There are a number of other elements or considerations that we could discuss, but it is worth noting that the clean-slate safety net that would ensure producers can weather the tough times is very similar in structure to what we have now.

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Outlaw, Joe, and Bart L. Fischer. “What Would Our Clean-Slate Safety Net Look Like?” Southern Ag Today 3(45.4). November 9, 2023. Permalink

Some of the most considerable negative impacts on agricultural production are from extreme weather events. Extreme weather events include prolonged drought, record-breaking floods, and extreme temperatures. Scientists predict that extreme weather events will occur more frequently and more intensely. Drought is particularly concerning because water is already a limited resource in many regions of the United States, and the cost of accessing water can prohibit irrigation. The immediate impacts of drought can include water restrictions, brush fires, loss of recreation days due to low lake levels, and economic losses in the crop and livestock sectors. Drought does not just impact agricultural producers. It impacts the entire local community to different degrees. 

From 2011 to 2013, the Southern United States, including parts of Texas, Louisiana, Arkansas, Mississippi, Alabama, Georgia, South Carolina, North Carolina, Florida, and Oklahoma, experienced severe to exceptional drought conditions. Severe drought (D3) is defined as dryland crops being severely reduced, stressed pasture, stressed cattle, and burn bans. As conditions worsen, drought is categorized as extreme (D4) or exceptional (D5). Exceptional drought is characterized by cracking ground, failed and abandoned crops, high costs of hay and water, scarce input supplies, herd liquidation, and increased burn restrictions. 

Producers feel drought losses first in crop and forage losses, livestock stress, and income loss. These losses affect businesses that provide agriculture with inputs or use agricultural production to make food for animals and people. When the drought outlook is unfavorable, crop and livestock producers may not spend as much on inputs to their operation, such as seed, water, machinery, and custom harvesting. During drought, producers may not need workers. Agribusinesses like local grain elevators or cotton gins may not run as many hours. Consequently, employment and income in supporting sectors will be negatively affected. Drought effects are also felt by downstream businesses, like feedyards and wheat mills. These outcomes eventually result in higher consumer prices at the grocery store. When these effects are combined, there are substantial losses to the value of agricultural sales, employment, and profits for businesses in the economy. However, disaster relief payments or crop insurance payments can mitigate some of these effects. These payments allow producers to pay off operating lines, purchase inputs for the next season, and patronize local businesses.

Crop insurance use is higher today than ever, going back to the establishment of federal crop insurance programs in the 1930s and even immediately following crop insurance reform in the 1980s and 1990s. In recent years, the share of eligible US crop acreage enrolled in federal insurance has been 80% or higher for most crops. Federally authorized multi-peril crop insurance (MPCI) covers the loss of crop revenues or yields resulting from drought, damaging wind or rain, deep freezes, and other natural causes is common in more drought-prone areas. MPCI also helps offset the losses for agricultural producers. But how effective are these crop insurance payments at reducing producer losses and, more generally, local economic losses due to drought or other extreme weather events?

This case study estimates drought impacts for Tillman County, Harmon County, and Jackson County, Oklahoma. These three rural, farming-dependent counties experienced exceptional drought (D5) from 2011 to 2013 and 2022. Over the 2011 to 2013 drought period, there was a total loss of $209 million in agricultural revenue or output value. The economic loss includes reduced crop acres harvested, reduced crop yields on acres that were harvested, and reduced value of livestock herds, reflecting significant culling. After accounting for the loss to sectors that provide inputs to and purchase outputs from the impacted agricultural sectors, the total revenue loss increases to $343 million. These three counties alone experienced a loss of 3,699 full-time equivalent jobs due to drought over this period. The job losses could have occurred in several ways. For someone who works a second job seasonally in the cotton gin, that seasonal job may not be available to supplement their annual income. This translates into a loss of economic activity in the local community of 172 million dollars of value added to the economy. 

What impact does crop insurance have on the 3-county area? These indemnity payments moderated drought impacts by 65% in agricultural output value, 62% in employment, and 58% in value-added over the entire period. Crop insurance significantly reduced economic damages for the farmers in the area, reducing the drought agricultural output value loss to 121 million dollars. For the local economy, the job loss was also reduced by more than half to 1,400 jobs. While the cotton gin may not run the additional shift, the local supply store may still be able to keep their employees at full employment. Participation in crop insurance also reduced the losses to the local economy overall, moderating losses to 71.5 million dollars for that same period. Even with insurance, these rural, agriculture-dependent areas still experienced reduced profits, jobs, and local economic activity due to drought. However, insurance policies protect against the worst drought outcomes as it is designed to do. 

What else can a producer do to protect themselves? Other management strategies beyond crop insurance can reduce drought loss severity. Producers who diversified their production activities garnered more protection against loss in addition to protection provided by crop insurance. For example, in 2012, Oklahoma experienced a bumper wheat crop. Higher crop yields on harvested acres helped offset other crop and livestock losses. For livestock producers, 2013 brought record-high cattle prices due to the smallest national cattle herd since 1951. Of course, we broke those cattle price and inventory records again in 2023 after another drought. The ability to counter losses in one farm business activity with higher revenue in another activity highlights the potential value of whole farm risk management plans that include but are not limited to crop insurance. Consider the bars shown in Figure 1, where the relatively lower drought impacts are shown in 2012 and 2013 when other sources of income offset drought production losses compared to 2011. However, the largest driver of loss reduction was from the indemnities paid out by crop insurance. Graphically, this is the decrease from the dark orange (potential loss without insurance) to the light orange (total loss with insurance indemnities). While this was a case study for only three counties and policy effectiveness likely varies over the southern region, crop insurance is shown to be vital to American producers in cases of drought.

Figure 1. Drought Related Revenue Loss, Profit Loss (Value Added), and Employment Loss by Year and Insurance Assumption

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Welch, Katherine, Amy Hagerman, Dayton Lambert, and Lixia H. Lambert. “Do Crop Insurance Payments Help with Economic Impacts of Drought Beyond the Farm Gate?” Southern Ag Today 3(43.4). October 26, 2023. Permalink