Changes in farm policy generally occur in relatively small increments. Major watershed changes in policy are few and far between. The new farm bill represents a watershed change. The purpose of this article is to indicate why. While doing this, critical provisions and economic implications will be discussed.

The President signed the bill into law on April 4, 1996 and USDA is currently developing implementation procedures. As these decisions are revealed, the contents of this paper are being modified to more completely reflect the impacts on farmer decisions. That is the reason for the date under the title of the paper. To determine if you have the latest version of the paper, you can continue to check the AFPC home page or call (409) 845-5913.

Figure 1 provides a comparison of the provisions of the 1990 Farm Bill with the 1996 Farm Bill. Since 1973, U.S. farm commodity programs have included:

• A target price for wheat, feed grains, cotton and rice making government deficiency payments a function of the market price, farm program yield and eligible acreage under specific conditions such as conservation compliance and land idling requirements.

• A nonrecourse loan available to producers as an alternative to marketing at harvest.

• Acreage reduction requirements used to tailor production to market needs and to control government expenditures.

• Provisions for storage of commodities owned by the Commodity Credit Corporation (CCC) or in the Farmer-Owned Reserve (FOR) program. CCC stocks have been acquired when farm prices have not risen sufficiently above nonrecourse loan rates to allow repayment of principal and interest, thus commodities covered by the loan have been forfeited to the CCC.

• The target price is replaced by 7-year decoupled "transition" payments.

• The nonrecourse loan remains, but could be effectively replaced by broad-based marketing loan provisions previously used only in cotton and rice.

• The FOR providing farmers a 3-year restricted marketing nonrecourse loan was suspended. Moreover, the marketing loan provisions could effectively curtail or eliminate CCC takeover of commodities, thereby effectively removing government from the storage business.

• Acreage reduction requirements under which farmers have not been allowed to produce on a specified percentage of their acreage in return for receiving farm program payments have been eliminated.

The new farm program has the following main features:

• Transition Payments. In place of the target price/deficiency payment provisions, producers who enroll in the program will receive $35.7 billion in decoupled transition payments over a 7-year period. The term "decoupled" means that the size of the payment does not depend on the amount of crop produced or the level of the market price.

  However, since the total amount of payments is fixed, the per unit rate depends on the number of acres enrolled in the program. The annual limits on total amount of payments are indicated in Table 1 for each crop. In addition, payments are made on only 85 percent of the enrolled acreage. Therefore, the payment rate per unit for each crop is calculated using the following formula:

  total expenditure limit for the crop ---------------------------------------------------------- total crop contracts acreage x 0.85 x farm program yield

  
  A farmer can compute his/her expected total payments on a crop as follows:

  contract acres x 0.85 x farm program yield x payment rate.

  In essence, base acres, as determined in the past, now become contract acres. A farm's 1996 crop acreage base already on file with FSA becomes the farm's contract acres. The contract acres do not change -- farmers cannot build contract acres in the future. Likewise, the farm program yield does not change.

  Since the payment rate depends on the total number of enrolled contract acres, it can only be estimated. Our estimates of the payment rates are given in Table 2. USDA will announce minimum estimates that will be more conservatively estimated assuming every unit of production that is eligible will participate. Thus, the realized payments will likely be higher than the announced minimums. The difference, however, will be only marginal.

• Payment Timing. For the 1996 crop, payments will be bunched up in the last half of the year. The first payment advance (50 percent of the estimated transition payment, subject to the $40,000 payment limit) for 1996 will come 30 days after the contract is approved (essentially sign-up). Subsequent to the 1996 crop year, payments will be made twice annually:

  Final payment is specified as being due no later than September 30.

  After 1996, producers will have the option of receiving the first half of the estimated transition payment on December 15 or January 15, for the next crop year, implying an early decision on lease terms than may be allowed by some state tenancy laws.

• Nonrecourse Marketing Assistance Loans. The bill combines the language of the nonrecourse loan with that of the marketing loan. This may or may not be significant depending on how it is interpreted by USDA. The marketing loan, as it has been applied to cotton and rice, allows the farmer to repay the loan at a calculated world market price. When the world market price is below the loan rate, this results in a direct marketing loan gain to the farmer. The world market price for cotton and rice is interpreted as being discovered outside the United States and will continue to be implemented that way.

  Under the 1990 farm bill, the repayment rate for wheat, feed grains and soybeans has been interpreted as being the FSA-posted county price. Although the new farm bill specifies that wheat, feed grains and soybeans repayment rates are to be determined by the Secretary to minimize nonrecourse loan forfeitures, to minimize government stocks, to minimize storage costs, and to encourage domestic and international marketings, indications are that the USDA will continue to use the posted county price as the repayment rate. If so, then the decision has been made that competitive world prices are discovered at U.S. terminal markets.

  The criteria for setting the loan rate provide explicit instructions to USDA to minimize the potential for forfeiture of commodities to the CCC. With this in mind, most loan rates are set at 85 percent of the preceding 5-year Olympic average farm level season average price (means drop high and low price). Loan maximums of $2.58 per bushel and $1.89, respectively, are specified for wheat and corn. Moreover, should stocks of wheat and corn accumulate, there are provisions for downward adjustments of as much as 10 percent. Table 3 summarizes the loan rate provisions for the other loan eligible commodities. Rye is no longer eligible for the loan.

• Payment Limit and Spending Limits. Payment limits for the transition payment are set at $40,000 per person, down from $50,000. Marketing loan gain and loan deficiency payment limits remain at $75,000 per person. The three entity rule and "person" definition remains as in the past. Marketing loan gains and loan deficiency payments resulting from loan repayment rates being less than the loan rate are not included in the spending limits prescribed for the transition payments as specified in Table 1. In 1996, the transition payments estimated in Table 2 are subject to different payment limit levels. Since the estimated rate is made up of the levels authorized in Table 1, less any deficiency payments earned on the 1994 and 1995 crops, plus any repayment of unearned deficiency payments from the 1995 crops, the transition payment is partitioned for payment limit purposes. The amounts determined from the expenditures in Table 1 are subject to the $40,000 per person limit while the additional payments accrued based on repayments of unearned 1995 advanced deficiency payments are subject to a separate $50,000 per person payment limit.

  For example, the total estimated wheat transition payment rate in 1996 is $0.91/bu. Of that, approximately $0.65/bu. would be subject to the $40,000 payment limit and the remaining $0.26/bu. would be subject to an additional $50,000 payment limit.

• Virtual Flexibility. Enrolled farmers can receive transition payments, with few exceptions, regardless of the combination of crops produced. Prior to the 1990 farm bill, enrolled farmers could receive government payments and nonrecourse loans only if they planted crops within the guidelines determined by the program and acreage base. The 1990 farm bill allowed them to plant/flex up to 15 percent of their base to other approved crops and still get payments. Under the new farm bill, they will be allowed virtual full flexibility on all crops, including haying and grazing. This means that a Delta rice farmer with only a history (base) of producing rice could produce all corn and soybeans in 1996 and still get transition payments based on the farm's historical rice base and farm program yield.

  The loan benefit will be available for all production of loan eligible crops on a farm with a market transition contract, even if they are planted on noncontract acres. In other words, planting beyond the farm's acreage base is completely legal. Essentially, crop bases are no longer a part of the law. Farmland, however, must remain in an agricultural use. Agricultural use does not mean that a crop has to be planted, but the land must be maintained and not physically altered to where a crop could not be planted easily in the future, i.e., if the land was sold for a parking lot, and was paved, it would be difficult to return it to agricultural use. The only prohibited crops are fruits and vegetables, which are only allowed in special cases.

  Planting fruits and vegetables for harvest that are double cropped is permitted in a region (no less than a county) which has a history of double cropping with fruits and vegetables. Check with your FSA office to determine if your county qualifies. The vegetable crop has to be double cropped with a contract commodity to meet this exclusion.

  Planting fruits and vegetables is allowed if the farmer is willing to forego transition payments on an acre-for-acre basis on a farm that has a history of planting fruits and vegetables. Again, check with FSA office for history determination.

  A producer, with a certified history of producing a specific fruit and/or vegetable will be allowed to continue growing this specific crop and acreage on a farm's contract acreage with an acre-for-acre reduction for each acre planted to the specific fruit or vegetable.

• Dairy. Among the most hotly debated commodity sections, dairy provisions underwent major reform with price supports being reduced $0.15 per cwt annually and eliminated in four years, terminating December 31, 1999. Beginning in the year 2000, they will be replaced by a recourse loan program of $9.90 per cwt. While milk marketing orders remained intact, reforms in terms of order consolidation (reduced from 33 to no more than 14 by 2000). The Dairy Export Incentive Program (DEIP) was reauthorized within the limits of GATT and the Secretary was mandated to facilitate increased exports through the establishment of an export board initiative in the private sector or, if not, in the public sector.

• Peanuts. The peanut program survived attack, although the quota price was reduced and frozen at a support price of $610 per ton -- down from $679.25 announced early in the year. In addition, the national quota can now be adjusted downward, below the 1.35 million ton limit established in the past, to reflect domestic consumption levels. Undermarketings can no longer be carried over from one year to the next. Limited county Spring transfers of quotas (up to a cumulative 40 percent of county quota by 2000; 15 percent in 1996; 25 percent in 1997; 30 percent in 1998; 35 percent in 1999; and 40 percent in 2000 and subsequent years) within each of the peanut-producing states is allowed. The mechanics for deciding what farmers will be allowed to sell quota have not yet been decided. A lottery is likely. This ability to transfer, sell, or lease quota outside the county could have significant impacts on where peanuts are produced within a state.

• Sugar. The only program commodity without significant change was sugar with the price support continuing to be frozen at $0.18 per pound for raw cane and $0.229 for beet sugar. Authority for marketing controls/allotments are eliminated.

• Risk Management. Producers are no longer required to obtain catastrophic (CAT) risk protection insurance as a condition of eligibility for market transition payments, marketing assistance loans and other USDA programs. However, if a producer chooses not to obtain this insurance, he must sign a written waiver of eligibility for emergency disaster assistance related to losses for any crop for which he declined insurance coverage.

  The legislation also provided a 4-week extension beginning April 4, of the CAT insurance enrollment period.

  Extension of the pilot options program is authorized and a pilot revenue insurance program is required. The FSA is also required to operate a noninsured crop disaster program to provide the equivalent of CAT coverage to agricultural commodities (except livestock) for which CAT risk protection is not available.

  The USDA is also required, in consultation with the Commodity Futures Trading Commission, to provide appropriate ". . . education in management of the financial risks inherent in the production and marketing of agriculture commodities. . . ." This provision seems to provide a mandate for Extension as well as an opportunity to greatly expand its educational programs in this area.

• Conservation Programs. Conservation compliance and adherence to wetland provisions remain as eligibility requirements for the market transition payments.

  The Conservation Reserve Program authority is extended through the life of the bill but the program is "capped" at the current level of 36.4 million acres. New enrollments are permitted to replace lands coming out of the program, subject to the overall cap, but as currently interpreted, the payment rates for new lands cannot exceed fair market rental rates. Producers with less environmentally-sensitive lands whose contracts are at least 5 years old are permitted to terminate their contracts early with a 60-day written notice to USDA. Decisions on exactly how expiring contracts and new enrollments will be handled have been deferred because of the urgency of completing the commodity transition payment rules. There are indications that all enrollments, including reenrollments, could be treated as new enrollments.

  The Wetlands Reserve Program is continued with a maximum of 975,000 acres, with acreage split as 1/3 permanent easements, 1/3 30-year easements and 1/3 restoration cost-share agreements. Several other conservation programs are created, including the Environmental Quality Incentive Program (EQUIP) with annual funding of $200 million. Half of this is directed to livestock producers for technical and cost-share assistance in addressing environmental improvements on their operations. EQUIP consolidates ACP, Great Plains Conservation Program, Water Quality Incentive Program and the Colorado River Basin Salinity Control Program. The remaining 50 percent of the funds are available for these purposes.

The general verbiage of the farm bill leaves many decisions to USDA's discretion in how the bill will be implemented at the farm level. This section is designed to provide insight into the substance of what is perceived to be some of the more important implementation issues. Producers should be aware of the substance of these issues as they approach their 1996 cropping decisions and when preparing for program sign-up. The Farm Service Agency, of course, is the authoritative source of information on implementation regulations.

Program Enrollment

A one-time sign-up contract for the 7-year program will begin on May 20 and end on July 12, 1996. Except for CRP lands with crop bases, producers/landowners who miss this one-time sign-up will not have another opportunity to enroll their farm. However, land from expiring CRP contracts that have base may be added to existing contract acreage or enrolled as new agreements at the time the CRP contract expires.

The 1996 Farm Bill identifies eligibility to enroll in the program to include:

• An owner of an eligible farm who assumes all or part of the risk of producing a crop.

• A producer (other than an owner) with a share-rent lease of the eligible farmland, regardless of the length of the lease, if the owner enters into the same contract.

• A producer who cash rents the eligible farmland under a lease expiring on or after September 30, 2002, in which case the consent of the owner is not required.

• A producer who cash rents an eligible farm under a lease expiring before September 30, 2002. If the producer elects to enroll less than 100 percent of the farm contract acreage, the consent of the owner is required.

• An owner of eligible farmland who cash rents the eligible farmland and the lease term expires before September 30, 2002, but only if the actual operator of the farm declines to enter into a contract. In the case of an owner covered by this subparagraph, contract payments shall not begin under a contract until after the lease held by the nonparticipating operator expires.

Landlord-Tenant Issue

The new farm bill requires, as has been the case in the past, that USDA protect the interests of tenants and sharecroppers. In the new farm bill, USDA likely will be protecting the interests of both the landlord and the tenant.

While the enrollment involves signing a 7-year contract, farmers will be able to continue to operate under their normal annual lease arrangements. However, because of the potential for disputes under changing economic conditions and the need to know how payments are to be divided, landlords and tenants would be well advised to put the terms of the lease in writing.

One of the more important decisions that USDA will make involves the latitude provided the landlord and tenant for division of the payments. With the contract payment limit reduced to $40,000 per person, either the landlord or the tenant may desire a different distribution of the payment than is implied by crop share or cash rent provisions of current leases. The following general rules have been provided by USDA related to this issue:

• Landlord/tenant relationships in regard to the sharing of contract payments must follow state tenancy laws.

• If the entire farm is cash leased, the owner is not entitled to any Production Flexibility Contract (contract) payments.

• If the farm is share-rented, contract payments must be shared. Each share must be within the normal range of share-rent agreements for the area.

• When a lease expires and the owner finds a new share renter, the division of payments between the owner and new renter can be modified to reflect the new share-rent agreement.

• When a lease expires and the owner either plants the contract acreage, including putting the acreage into conserving uses, or no crops are planted, the owner can receive 100 percent of the contract payments if the owner maintains control of the farm.

• If the farm is sold, the producers on that farm would no longer be eligibnle for contract payments on that farm. The new producers could elect to receive contract payments and decide how payments are divided so long as they comply with the other terms of the contract. They could also elect not to receive payments.

Since 1973, farmers' crop production decisions have been driven by some combination of target prices and base acreage restrictions, including set-aside/ARP. Beginning in 1996, production decisions will be more fully driven by market forces. With greatly increased flexibility, farmers will have the option of producing what they believe to be the most profitable crop combination, based on expected market prices, while getting transition payments on their contract acreage. With current relatively high wheat, feed grains and soybean prices, that presents some interesting choices for cotton and rice farmers.

Fence row-to-fence row production is not an unreasonable expectation over the next year or two, although the 1996 crop year may be affected to some extent by the delay in passage of the farm bill. However, from now on, given normal weather, prices can be expected to reflect our ability to move commodities into export markets.

With marketing loan/loan rate provisions being specified to be set on the basis of minimizing stock accumulations, CCC is likely to hold considerably less stocks. Private stock holdings will be motivated by market conditions.

Without the government (CCC) as an attractive market for commodity forfeitures, there will be increased dependence on export markets. As a result, international market conditions will have an even greater impact on the level and stability of domestic market prices than in the past.

Each of the above economic forces implies greater price instability. As a result, producers' ability to manage risk will be a more important determinant of who survives. Futures markets, contract markets, cooperative pooling, and price insurance will become more important survival tools for farm managers. Those managers who are the most adept at using marketing and production risk management tools are the most likely to survive. This gives a definite advantage to farm units that can afford to allocate resources to specialize in risk management.

Moderate size farms, many of whom, by our representative farm analyses, are already having problems competing, will face even greater challenges under the provisions of the new farm bill. As a result, farm consolidation, which has characterized agriculture since World War II, can be expected to continue, if not accelerate. Having said this, reality and logic indicate that it would be extremely difficult, if not impossible, to design a farm program that saves moderate size farms with or without a reduced role for government. To do so would cost significantly more than current programs and/or reduce the efficiency of the production sector in general.

Does the new farm bill represent a transition of government out of agriculture as is implied by the term "transition payments?" It will not be automatic since reversion to the 1949 permanent legislation was retained by the 1996 Bill. Rather, it depends on the sequence of economic and political events over the next seven years. If we are able to get by without severe rationing of supplies due to adverse weather (including extremely high prices or export restrictions) and without extremely low prices (resulting in many farm bankruptcies and jeopardizing the farm credit system), farm programs designed around direct income supports to the production sector could, indeed, be at an end.

The debate on this farm bill clearly suggests that the willingness of government to subsidize agriculture and to maintain commodity programs is increasingly questioned. It is important that existing institutions, including the research and extension components of our land grant universities, rise to the challenges presented by the 1996 farm bill, particularly in terms of improving the ability of farmers and agribusinesses to manage risk.