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Ag Policy Outlook

By Chris Clayton on January 19, 2012
© RFD-TV

OMAHA (DTN) -- The potential sunset of direct payments could bring a new dawn in farm programs this year.

At the same time, lawmakers and the Obama administration are going to have to overcome the politics of a presidential election year to re-examine or renew the Bush-era tax cuts now scheduled to sunset at the end of the year.

Farmers and agri-policy wonks will spend most of 2012 rewriting commodity programs and coming up with enough budget savings to demonstrate fiscal responsibility without carving too much out of USDA programs. At least one farm-subsidy critic is lauding the willingness of farm groups to do away with the $4.7-billion-a-year direct payment program.

"My sense is, among the farm groups, there was a lot of rethinking, and moving to eliminate direct payments for a more rational revenue insurance," said the Rev. David Beckmann, president of Bread for the World.

"To the extent that, in any case, the story of the farm groups themselves being willing to accept the end of direct payments is a heckuva story," he said. "At least part of it is really encouraging for the country as a whole, because I don't know of anyone else who is going 'Here, cut my program first.'"

CUTS LIKELY DEEPER THAN SHALLOW LOSSES

Yet, farm groups find themselves in a fight over what kind of commodity program and crop-insurance plans they would like to see replace direct and counter-cyclical payments. The American Farm Bureau Federation highlighted that discussion last week when the group's delegates voted that commodity programs should protect against catastrophic losses and not guarantee against all but "shallow losses" in revenue.

At AFBF's annual meeting, Agriculture Secretary Tom Vilsack and AFBF President Bob Stallman also both suggested the overall agriculture budget would likely face more cuts than the $23 billion figure pitched last fall by the House and Senate Agriculture Committees. Both men also said they would like to see a farm bill written this year, but acknowledged the difficulty, given the gridlock that exists in Congress.

"Certainly, with the farm bill discussions coming up, until the number is agreed upon you are always at risk," Vilsack said. "Now, if the committee of 12 (the supercommittee) had somehow figured out how to get to the $1.2 trillion they were supposed to get to, then we would have known it was $23 billion and could have operated off of that."

The Grand Forks (N.D.) Herald quoted House Agriculture Committee Chairman Frank Lucas, R-Okla., saying last week in Fargo that "we'll be lucky people" if Congress can pass a farm bill that achieves $23 billion in savings. Lucas said the budget pressure will be "horrendous."

Still, Lucas reiterated in Fargo his desire to send a bill to President Barack Obama by the fall, or if that fails, then move a bill in the lame-duck session after the election.

Despite some pessimism on the ability to get a farm bill done, a successful piece of legislation could demonstrate that both bodies of Congress can get something accomplished.

Republicans can pass a bill showing significant budget cuts in government subsidies yet protecting the safety net for farmers. Democrats can pass a bill largely protecting food aid to lower-income families and the unemployed while touting investments in the environment.

Another motivation for Congress is if lawmakers don't pass a farm bill, then the sequestration cuts likely go into effect. The Obama administration, or a new president, would then dictate where cuts fall, such as crop insurance. That alone could motivate lawmakers to get a bill done.

2012'S TAXING PROPOSITION

Yet, tax policy is again the real fight in 2012. By the end of the year, lawmakers also will have to revisit the Bush-era tax cuts. Each year the tax cuts are extended saves taxpayers roughly $380 billion annually. But extending the tax cuts also increases the annual budget deficit by $380 billion as well.

Certain tax provisions also cause more ire than others in agriculture. The National Cattlemen's Beef Association described in an editorial this week that the beef industry could face an apocalyptic event Dec. 31 if estate-tax overhaul doesn't occur.

Through the end of the year, the estate-tax exemption is $5 million for an individual, or $10 million per couple. The maximum tax rate is also 35% and an heir also gets the benefit of basis value stepped up to the current market value at the time of the asset transfer.

All of that goes away without an extension or permanent fix of the estate tax. Without a proper fix, the exemption drops to $1 million for an individual, or $2 million per couple. The maximum tax rate moves to 55% and the stepped-up basis also goes away. The problem for now is there is no agenda for compromise on the issue.

"It seems like Congress is going to wait until after the election to address this," said Kevin Bearley, director of tax research for the accounting firm Kennedy and Coe. "The best-case scenario is to get a remedy in December, but there is a real fear, depending on how the election goes, if (President) Obama gets voted out, he will just let it lapse. Then, by law, it goes back to $1 million on Jan. 1."

Land owners, and farmers in general, are in a much different position than 2002, when the exemption first moved to $1 million. At that time, an Iowa farmer could own nearly 480 acres before topping $1 million in asset value. Now, with average Iowa land values at $6,708, fewer than 150 acres tops $1 million in assets.

THE CRP CONUNDRUM

The failed farm-bill blueprint last fall would have squeezed some savings in USDA conservation programs through consolidation. But lawmakers largely proposed reduced conservation spending by more than $6 billion over 10 years with the lion's share -- about $4 billion -- achieved by dropping authorized acreage in the Conservation Reserve Program.

The bill would have lowered CRP acreage from 31 million to 25 million acres. It's likely the new farm bill would keep such language, but USDA officials will have to make a call on the CRP before Congress gets to it.

According to USDA figures, 6.5 million acres of CRP contracts expire this fall. As one conservation advocate framed it "it is a very big deal" whether USDA will announce another CRP enrollment next month, as Vilsack has done at the Pheasant Fest show over the past two years.

It all comes down to budget scoring. If USDA doesn't announce a new enrollment period, then the budget baseline for those 6.5 million acres gets wiped out. Yet, if USDA goes through with a new CRP enrollment, then the budget baseline for CRP stays the same, allowing Congress to go ahead and make the cut, reflect the savings and possibly shift some of the savings to spend elsewhere in the farm bill.

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