Implications of Budget Reconciliation for Commodity Programs

There appears to be a renewed emphasis in Washington on reducing the federal budget deficit. Although the US economy is improving, it appears that the only way to make real progress in reducing the deficit is to reduce government expenditures. The desire to reduce the deficit, coupled with the President’s agenda that includes several controversial and potentially costly items, has many in Washington discussing the possibility of budget reconciliation for fiscal year 2005/06 after a budget resolution is passed in 2005. The details and intricacies of budget reconciliation are far beyond the scope of this paper. In general, however, if budget reconciliation happens, the budget committees will send instructions to authorizing committees indicating the amount of the required spending reductions relative to baseline spending. It will then be up to the authorizing committees (the agriculture committees in the case of most agricultural programs) to decide what programs are cut and by how much—as long as the required overall reduction is achieved. At this point, there is only speculation about what programs would be cut, but the agriculture committees would have a wide range of programs to choose from, including nutrition, export assistance, conservation, and commodity programs, to name a few. Producers and their groups are having a hard time accepting the prospects of cuts in program benefits. They cite the fact that commodity program spending has been less than projected by the Congressional Budget Office (CBO) over the past few years due to higher actual prices than were projected. In their mind, this results in savings to the federal government, and they shouldn’t be asked to take cuts. Unfortunately for producers, in the world of budget scoring, lower payments due to higher commodity prices do not represent budget savings. The purpose of this paper is to discuss a few of the alternatives available to the agriculture committees for achieving budget reductions from commodity programs. The three primary mechanisms used to provide support to covered crops produced by US farmers are the countercyclical payment program (CCP), the marketing loan/loan deficiency payment program (ML/LDP), and direct payments (DP). The fact that these programs are interrelated has the potential to create additional issues that should be addressed prior to implementing changes to avoid unintended consequences (Table 1). A hypothetical example is provided assuming that a 10% reduction in March 2004 CBO baseline spending levels is required over the 2005–2014 period. To project budget savings, a stochastic simulation model was developed to imitate the CBO budget scoring process and the results of achieving savings by implementing reductions in target prices, loan rates, direct payment rates, and the payment fraction. CCPs and ML/LDPs are received when the market price is less than the program’s respective trigger level. As a result, a deterministic model, which uses mean prices, fails to score reductions in target prices and loan rates as a budget saving. A stochastic model, on the other hand, simulates the full distribution of prices, so any decreases in target prices and loan rates result in budget savings. It should be noted that changes could also be made to payment limits to achieve budget savings (although this paper does not consider payment limits). The example will discuss the consequences of (a) reducing target prices that would reduce CCPs; (b) reduc-