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The Devil is in the Details:

Base Updating and the Cost of New Farm Bill Programs
Vincent H. Smith and Barry K. Goodwin

Hopes for a 2012 farm bill are now ancient history. Instead, there will likely be a new farm bill in January 2014. One thing is more certain: in Congress, there is extensive agreement that a major program embedded in successive farm bills since 1996, the $5 billion-a-year Direct Payments Program, will be discontinued in any new farm legislation. This program provides substantial subsidy payments, mainly to wealthy farmers and landowners, based largely on what was produced on the land in the early and mid-1980s.

However, one feature of that program—the base acres and base acre yields for each crop that are used to determine the subsidies a farm receives—is likely to be retained in some form and linked to two new subsidy program proposals included in the Senate and House bills. One is the price-support program called Price Loss Coverage (PLC), which links price supports more closely to the record and near-record agricultural commodity prices for major crops that farmers have enjoyed over the past four years. The other is a revenue support program called Agricultural Risk Coverage (ARC) that, especially over the next three or four years, would guarantee farmers minimum levels of gross farm incomes that are also close to the near-record levels they have enjoyed over the past five years. It is likely that farmers will be given the opportunity to choose which of these two new programs will best serve their perceived needs. Most are likely to pick the program that provides them with the largest subsidies.

Regardless of any implementation details and rules built into the two programs, both are likely to be more expensive for the taxpayer and provide larger subsidies to mainly wealthy farm households than the current Direct Payments Program. The new programs would pay out more in subsidies as crop prices (and farm revenues) fall. Because recent and current prices for major feed and food-grain crops (for example, corn and wheat) have recently been historically high but are likely to trend downward in the coming years, the programs are likely to impose a substantial burden on taxpayers.

However, program implementation details and rules could substantially affect the size of those payments. With farm subsidy programs, as with many other government programs, it is often necessary to delve through the legislative and implementation details to understand how costly they may become. This analysis examines the impact of the definitions of base acres, base yields, and base levels of production on the potential costs of the proposed ARC and PLC programs.

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