4/29/96 Version

Ronald D. Knutson
Edward G. Smith
Joe L. Outlaw
W. Fred Woods

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.

Why a Watershed Year?

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:

Only vestiges of these programs remain in the new farm bill:

New Farm Bill Provisions

The new farm program has the following main features:


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:

Because of the 7-year obligation, it is believed to be in the interest of both the landlord and the tenant to sign up for the program regardless of the current landlord/tenant agreement.

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:

It appears in the case of share leases, if an owner and tenant can agree on how transition payments are divided, then FSA will approve the contract.

Economic Implications

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.

Transition Out?

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.