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Conservative showdown and a new dairy bill

Ben Yale Published on 26 August 2011

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In the last weeks of July 2011, the highest levels of government provided Americans a high-stakes political battle over raising the national debt limit. The current debt at $14.5 trillion was not high enough. To cover annual trillion-dollar deficits, the White House wanted another couple of trillion.

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Some in Congress said, “Sure.” Others said, “Not so fast.” And still others simply said, “No!” The White House battled Congress, the House battled the Senate, Republicans battled Democrats, the White House battled Republicans, and Republicans battled Republicans.

The “not-so-fast” and the “no” caucuses prevailed. Feelings over the battle range from disgust to fascination. It was government out of control, spending out of control, Congress and the President out of control, and democracy at work. It would have certainly been no way to milk a cow. In fact, do not even let those politicians in the barn, let alone milk the cows.

The battle highlighted changes in policy and politics. The “sure” camp, long ruling in Congress, sees big government deciding and doing more and more of what individuals used to do – all funded with higher taxes. The other camp, the “no” camp, sees the future of the Republic as one with smaller government funded by lower taxes.

Two and a half years earlier, the “sure” camp passed the stimulus, which added nearly a trillion dollars to the debt. Last year, the “sure” camp created a new health care entitlement with additional cost.

Outraged voters from all walks of life and all corners of the country responded in a wave election, putting the “no” camp in control of the House and weakening the “sure’ camp’s power in the Senate. President Obama, clearly in the “sure” camp, remained in office.

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These opposing camps had to clash sometime. That sometime was the battle over raising the debt limit. True to the American ideal, it happened in the Halls of Congress and not in the streets. But that did not diminish either the force or the intensity of the battle.

This battle was different. In the past the progressives, as those of the “sure” camp call themselves, would ultimately outmaneuver conservatives, now called by many as the Tea Party, by one means or another. As a consequence, regardless of the party controlling Congress or the White House, the budget and deficits grew.

This time the conservatives stopped that. Due to the 2010 election and elected Tea Party representatives, the conservatives possessed a sufficient political mass and focus to pull Congress away from spending.

The bill has not fully played out, calling for a super committee of 12 members of Congress to propose changes. They are empowered to rewrite the tax codes and/or significantly modify entitlement programs. This could, and probably will in some ways, affect agriculture.

For the moment, the committees on agriculture sigh with relief. During the debate the combatants seriously considered slashing or entirely eliminating many agricultural programs. As it stands now, depending on the super committee, the Farm Bill is still viable but with fiscal constraints yet to be defined.

In this environment, the next Farm Bill will decide whether government comes into the milk house, tries to milk the cows or flees down the lane.

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The difference in how to really cut the budget is seen in the rules the different camps used to define “balancing the budget.” The House Democrats, when they were in power, adopted a budget policy called Paygo. It required that funding for new programs come from a combination of offsets from reducing or eliminating any existing programs or creation of new revenue.

The Republicans, now in power, replaced Paygo with Cutgo. Only the savings from replacing an existing program can fund new programs. Cutgo does not consider reductions in other programs or any additional taxes, or income.

The Congressional Budget Office (CBO) estimates program costs using both formulas. This nonpartisan agency of Congress analyzes and models proposed programs to estimate their 10-year cost. This is their official “score,” and the one Congress must use in budgeting and appropriations.

Recent dairy policy proposals illustrate how Paygo and Cutgo work differently. Collin Peterson, ranking member of the House Agriculture Committee, has posted a discussion draft largely modeled after National Milk Producers Federation’s Foundation for the Future.

It takes “savings” from the elimination of MILC and dairy product price support program to fund a new program called the Dairy Producer Margin Protection Program. This program would pay all producers regardless of size for the positive difference between $4 and a national average milk-feed margin.

Producers could also purchase additional coverage to cover as much as an $8 margin with declining government subsidies.

The draft proposal also calls for a market stabilization program. Under this program, when the milk-feed margin reaches a certain point (now proposed at $6 per hundredweight), all producers would be forced to either reduce milk production by a certain amount or, failing to do so, pay the value of that excess production to the USDA. In the proposed discussion draft, half of those producer payments would go to the U.S. Treasury.

This assessment on milk production growth was necessary to make the proposed bill score well under Paygo budget rules. Forcing producers to forgo income from the sale of milk reduces general tax revenue. Remember, the government likes to get its share.

To offset this lost tax revenue, half of this “alternative” tax, or 25 percent of the money collected as a penalty for overbase production, goes to the U.S. Treasury. To bring the margin protection within budget, another 25 percent of the penalty is collected to help fund the margin protection plan.

Under Cutgo, a new program cannot meet budget neutrality by adding new revenue. In this way, the penalties imposed for production over the base that are proposed in the stabilization program cannot be used in scoring a budget for “margin protection.”

It also means that those members of Congress who support margin protection do not have to accept the stabilization program and its new “tax” as the cost for such a program, so each of the policies stand on their own merits.

Firm CBO numbers were not publicly available, but from different reliable sources, it appears that the margin protection program as proposed would score approximately $870 million for 10 years. Elimination of MILC and price support would generate only $560 million.

Supposedly, the assessment in market stabilization going to the U.S. Treasury would make up the $310 million shortfall.

Those are the numbers now. After the super committee reports, every agriculture program will likely be required to reduce even further below existing spending levels.

Also, CBO will revise proposed legislation scores before the Farm Bill is considered. Current high commodity prices can change the way the models look into the future. If that happens, ending MILC and the product price support program will save even less.

Under Cutgo, a margin protection program would require significant modifications to meet budget scoring. Aside from not having a program at all, these changes could include the following: Reduce the unsubsidized payment trigger to a $3.50-per- hundredweight (cwt) margin or some other number; reduce the percentage of subsidized production eligible for payment; or increase premiums for supplemental insurance.

One of the issues with the proposed supplemental insurance is whether the payment base should be on historic production as proposed or use current production as the MILC program uses. This is important, because under a historical base new, growing dairies are shorted in the program.

But this is a policy issue, not a budget issue. The total dollars available are the same.

Cutgo will require covering either higher levels of production at a lower percentage or lower levels of production at a higher percentage. For the vast majority of producers, the impact of either will be similar.

In addition to budget concerns, the stiff conservative mood of Congress, as shown in the budget debate, presents other challenges to the proposed margin protection program. Among conservatives, as well as environmentalists who are generally progressive, farm payment programs should be eliminated altogether or tightened dramatically.

With most commodity prices at all-time highs, it is hard to argue that the government should borrow money to pay producers. Elimination of farm payments were considered in the recently ended debt ceiling debate.

Even if farm programs survive total elimination, the budget demands could limit eligibility to programs for the truly small farms. This presents a fourth way to reduce the cost of the margin protection program.

Earlier this year, the House of Representatives barely defeated an amendment that would reduce the adjusted gross income for eligibility for payments to $250,000 per year. Its narrow victory came in large part by the argument that the current Farm Bill should be left alone and such debates reserved for the next Farm Bill.

The discussion draft and FFTF both call for no caps. As the debt debate shows, this is a very conservative Congress and such limitations are likely.

Clearly government dairy programs come with costs to producers. Is it worth it? Over the next 10 years, U.S. milk production will total almost 2 trillion pounds. Half a billion dollars in government payments divided into that total equates to about 2.5 cents in government assistance per cwt. How will that help most producers?

First, we need to know whether there will be any government payments. If anything survives the super committee, then it is a question of how much and who gets it. The battle over the debt ceiling suggests that the answers are little to nothing and a few.

With so little money at stake, maybe producers should just tell Congress to leave them alone. This conservative Congress might just do that. PD

Recent dairy policy proposals illustrate how Democrats’ Paygo and Republicans’ Cutgo budget programs work differently. Illustration by Mercedes Opheim.

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Ben Yale
Attorney
Yale Law Office

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