Grassley Tables Commodity Title

November 9, 2001

Sen. Charles Grassley (R-IA) has issued a "working draft" proposal for the commodity title of the next farm bill, a proposal USDA finds "intriguing." USDA Chief Economist Keith Collins told Grassley, "We will continue to examine it and to work with your staff in evaluating new ideas and possible improvements." The proposal relies on a somewhat complicated "general economic balanced opportunity composite standard" (GE-BOCS).

The GE-BOCS is a "composite index of factors that are important to agriculture (growing-region precipitation, temperature and exchange rates)," according to Grassley. The index is normalized by adopting a value of 100 when the exchange rate is set at its 2001 value and when the weather variable is set at its value of 105 in the index. The percentage of decline below the adopted trigger level determines the size of the payment provided to the respective commodity's producers. The maximum payment available is equal to average per year of the value of production plus marketing loans and market loss assistance payments during the 1996-2001 base period. Payment recipients are not required to produce a crop.

All crops eligible for loan receive a 5% increase in the respective loan. The grain sorghum loan is locked in at 100% of the corn loan.

The proposal maintains fixed payments at 2002 AMTA levels for traditional program crops and includes soybean acres equal to average certified soybean acreage in 1996-2000 as part of a farm payment acreage. In the event soybean acres would result in total payment acres exceeding a farm's crop acreage base, the producer would be required to reduce payment acres for any crops(s). All producers could update their bases but not their yields.

A soybean payment rate of $0.65 per bushel would be established, reflecting a price relationship between soybeans and corn of 2.5 to 1.0 applied to the corn payment of $0.26. Soybean payments would be made on 85% of payment acres for an effective payment rate of $0.5525 per bushel. Soybeans would use the national average yield for 1981-85 (31 bushels per acre). The effective per-acre payment would be $17.13 per acre.

Marketing loan payments could total $75,000, fixed payments $40,000 and $75,000 for the GE-BOCS payment. The "three entity rule" would be supported and commodity certificates would be eliminated.

The proposal also would establish a "farm savings account co-pay opportunity." Producers of non-program commodities could contribute up to $2,500 annually, which would be matched by USDA.

A qualifying producer would be any producer who shares in the risk of producing the commodity and has reported at least $20,000 in estimated income from all agricultural enterprises in each of the preceding five taxable years. Beginning producers with at least $20,000 in estimated income from all agricultural enterprises for the applicable year also would qualify.

In counties where 65% of producers receive an indemnity payment during one calendar year, all producers in the county (whether they received an indemnity payment or not) could receive a low interest loan through USDAS at a 3-4% interest rate equivalent to the size of their deductible on their crop insurance policy.

If a farmer does not have crop insurance coverage, he or she can receive a loan for the size of their crop, but must buy coverage for the next season. That is designed to encourage farmers to protect their own risk and eliminate the political element associated with local or regional disasters.

In a letter to Grassley, Collins said, "[Designing a countercyclical program that is not trade-distorting under World Trade Organization rules] is a particularly difficult proposition, as you well understand. The problem is that tying financial assistance to prices, yields or income clearly makes the support 'trade distorting' and thus in the amber box. The further the financial assistance can be removed from these variables the less likely the program is to be trade distorting but also the less likely it is to be counter cyclical (i.e., to actually provide support to producers in times of clear economic need). "

Grassley's proposal "has a particularly interesting approach in that it uses unusual indicators as the trigger for farm assistance. The fact that the trigger indicators are not prices, yields or income would suggest this to be green box along with the finding that there is not perfect correlation with prices or income."

However, the final determination, if challenged by another World Trade Organization member country, "is difficult to predict because it is impossible to predict how a WTO panel might rule. The critical issue would be how the panel members would view indicators that mimic, even if not perfectly correlated, prices or income."

The American Soybean Association called it a "balanced and equitable approach." "We applaud your effort to develop a green box trigger for income support provided under a new GE-BOCS program which would exempt a significant amount of U.S. domestic support from discipline under the WTO."

The ASA reaction continued, "We understand that the effort to rebalance commodity loan rates entails some reduction in the soybean loan level, and that your proposal addresses this reduction in income support through an increase in the oilseed fixed payment. The ratio between the loan rates for soybeans ($5.15 per bushel) and corn ($1.98 per bushel) is 2.6/1.0, the approximate historical average during the past 20 years. Comparable increases in loan levels for other crops should maintain their competitiveness and reduce any production distortions under the program."