Farm bill math updated in new CBO baseline
The Congressional Budget Office (CBO) releases projections on expected spending for farm programs for the 10-year baseline – the current budget year plus 10 years – up to three times a year. CBO’s most recent Baseline for Farm Programs was released on Feb. 15. These projections identify expected outlays for farm program spending, assuming existing programs continue without changes, and indicate program spending available to Congress as crafting of the 2023 farm bill kicks into higher gear.
Farm bill math creates a few possible scenarios. Depending on negotiations between the Budget and Agriculture committees, the next farm bill could be required to be budget neutral, meaning any increase in spending in one part of the bill would require a decrease in spending elsewhere in the bill, it could be required to have an overall net reduction or a decision to increase spending. Given such budget directives, scoring (estimating the additional outlays and potential savings relative to the baseline) would be one of the most critical components of farm bill development. From now through the farm bill’s passage, any change in policy will require an estimate of the budgetary impact.
Nutrition spending rises with inflation
Inflation has been at the top of the hot-topics list for some time and, as expected, will play a role in government spending in the foreseeable future. In CBO’s projections, the Federal Reserve’s tighter monetary policy will slow economic output and increase unemployment in the short run with a long-run goal of 2% inflation from year to year. For now, however, consumers continue to face record prices for everyday expenses including food products.
The government’s nutritional support programs are not exempt from these higher costs. One of the largest outlays for nutrition is for the Supplemental Nutrition Assistance Program (SNAP), which provides benefits to eligible low-income individuals for the purchase of eligible food in authorized retail food stores and is reauthorized within the farm bill. CBO has increased its estimate of outlays for SNAP by $8 billion (6%) for 2023 and by $93 billion (8%) between 2023-2034.
One reason for this expected increase is additional SNAP enrollment resulting from the Federal Reserve’s attempts to fight inflation. Extended periods of higher interest rates often leads to higher unemployment and more people in need of nutrition support. A second reason for these increases is the upward cost projections for the Thrifty Food Plan (TFP). The TFP is one of four food plans USDA develops to estimate the cost of a healthy diet and represents a “nutritious, practical, cost-effective diet prepared at home for a ‘reference’ family, which is defined in law as an adult male and female, ages 20-50, and two children, ages 6-8 and 9-11.”
In addition to record food prices riding the back of inflation, TFP re-evaluations, which per the 2018 Farm Bill will now occur every five years, have resulted in expectations for higher costs of a nutritious diet that would need to be funded under SNAP. This corresponds to increases in estimated program outlays.
Based on the 2024-2033 10-year outlay projection, a 2023 farm bill would cost nearly $1.5 trillion, making it the most expensive on record. Figure 2 breaks down the period by major category. Crop insurance outlays, which include delivery expenses, underwriting gains and premium cost-sharing, are projected at $97.1 billion during the same timeframe. Spending on commodity support programs such as Dairy Margin Coverage (DMC), Price Loss Coverage (PLC), Agriculture Risk Coverage (ARC) and the many authorized disaster support programs are estimated to cost $61.8 billion, 4% of the total score and 1% higher than the May 2022 forecast.
Conservation programs such as the Environmental Quality Incentives Program (EQIP) and the Conservation Reserve Program (CRP) are estimated at $57.5 billion, or 4%, of the total score. This 3% drop from the May 2022 score is primarily linked to a decline in expected CRP spending. The figure also includes $34.7 billion in spending that was passed in the Inflation Reduction Act for agriculture, forestry and rural development. CBO scored the IRA conservation baseline at $18.05 billion for programs traditionally authorized through the farm bill. Questions persist on how this IRA funding could impact farm bill program spending, prompting its tentative inclusion in our analysis below.
Cost of farm programs rise for some commodities
Costs for many of the provisions of current farm programs move in the opposite direction of commodity prices. Recent periods of higher prices have resulted in lower commodity support payments. The distribution of farm program payments follows base acreage in the U.S. Corn, soybeans and wheat represent over 70% of all program payments, while rice, cotton and peanuts represent another 20%. Sorghum, upland cotton, dairy and other smaller field crops represent the remaining 10 or so percent of outlays, as shown in Figure 3. These outlays come in the form of PLC or ARC payments, and the margin protection program for dairy outlays though DMC.
The change in farm bill outlays is due to a variety of factors. First, price expectations for several covered commodities are related to supply and demand conditions. For example, consider that strong global supply uncertainty and high production costs have increased corn prices in recent years (over $6/bu) and led to lower actual ARC-CO payments. CBO’s February projections are for marketing year average corn prices to remain slightly above $4 per bushel over the next decade, slightly lower than projections made in previous scores. These lower corn prices contribute to an additional $8.9 billion in ARC-CO and PLC outlays for corn over the next 10 years compared to CBO’s July 2021 report.
While government costs of the corn program are expected to increase due to weaker prices, other commodities saw their outlays decrease due to higher market prices. For example, CBO raised expectations for milk margins in future years. In July 2021, CBO estimated the five-year average DMC milk margin at $8.78/cwt, and in the most recent baseline, the five-year average price was $10.70/cwt, as shown in Figure 4. In 2021 alone, DMC payments exceeded $1.1 billion. Projected higher milk margins lowered forecasted DMC payments by $4.6 billion over 10 years, compared to the 10-year July 2021 score.
This most recent CBO baseline on farm program outlays is an important indicator of the budget outlook going into the next farm bill debate. Underpinning these budget forecasts are important estimates of commodity supply and use. Lower than forecasted commodity prices would be expected to result in higher outlays by the next baseline estimate. Similarly, improvements in commodity prices would result in lower projected outlays for farm programs.
Record nutrition spending linked to inflation and increased costs leads to questions regarding market-related adjustments within farm-related programs. Like consumers purchasing food at the grocery store, farmers and ranchers face macroeconomic pressures when they purchase inputs and services. Few pieces of legislation are more significant than the farm bill when it comes to safeguarding our domestic food supply. Ensuring that program funding is reflective of market changes is critical to maintaining the farm bill’s role in national security and the health and well-being of rural communities.
Munch is an economist with the American Farm Bureau Federation