Federal Budget Cuts

The Bush Administration is again suggesting some proposed cuts in the level of spending on farm program commodity payments for 2007 and beyond, to address the rapidly rising Federal budget deficit. The expected expenditures on these commodity payments in 2005 were up significantly from the $14.5 billion estimated payments in 2004 and $15.9 billion in 2003. However, the 2003 and 2004 spending levels were actually $7 billion and $8 billion under the USDA budgeted amount due to higher grain prices, which resulted in lower than anticipated levels of counter-cyclical payments (CCPs) and loan deficiency payments (LDPs).

The President’s budget proposals would cut the level of all farm program payments by 5 percent each year, would tighten payment limits, and would restrict the bushels eligible for LDPs or a CCC marketing loan. Currently all bushels produced are eligible for LDPs or a CCC marketing loan. This would result in a reduction in the level of LDPs or marketing loan gains for some producers in years such as this past year, when we have very low grain prices. The Bush administration 2007 budget reduction proposals now go to Congress, where the proposals may face some difficulty in a major election year, and are likely to modified before final approval.

The only significant 2006 Federal budget reduction provision that affected farm program payments was a reduction in the advance direct payment level from 50 percent to 40 percent for 2006, and to 22 percent in 2007 and beyond. Following are some of the farm program spending reductions being proposed by the Bush administration for 2007 and beyond:

  • Continue the reduced advance direct payment rate (22 percent for 2007).
  • Reduce the level of all direct, CCP, and LDPs by 5 percent. This would also include the MILC payments to dairy producers.
  • Set a more stringent payment limit that eliminates the use of “generic commodity certificates” in lieu of LDPs, eliminates the triple-entity rule and tightens requirements for multiple individual payment limits in a farm operation.
  • Establishment of a FSA service fee for LDP and CRP contracts that are written.
  • Reduce the Federal subsidy level for Crop Insurance premiums.

The good news for producers is that all bushels of corn and soybeans produced would still be eligible for either a LDP or a marketing loan gain, similar to the current farm program, up to the payment limit. There was some discussion of limiting LDPs and marketing loans to only 85 percent of the direct payment bushel eligibility. However, the changes in LDP and marketing loan eligibility are not being proposed at this time. In a year such as 2005, with high corn yields and very low commodity prices, this change would have been quite costly to producers of all sizes.

The concept of the current Farm Bill was to have CCPs based off of a target price for each crop and availability of CCC marketing loans or LDP’s that are based off of county loan rates for a commodity, as a safety-net for producers when commodity prices are low. So, when producers had favorable commodity prices for corn, soybeans and wheat, such as for the 2002 and 2003 crops, the levels of CCPs and LDPs were very low, thus reducing the Federal outlay of farm program payments. In years such as with the 2004 and 2005 crop, when producers really need the safety net, the level of CCPs and LDPs increases, along with the total outlay of Federal spending on commodity programs. The safety-net concept of the current commodity farm program seems to be working just as it was designed in the 2002 Farm Bill.

Editors note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.