On February 7, 2014, a new five-year farm bill, the Agricultural Act of 2014, was signed into law. The 959-page Act affects hundreds of federal programs involving agriculture, dairy, conservation, nutrition and international food aid. The cost of the Act is estimated at $956 billion.

The new farm bill is the product of two years of legislative haggling. It was a political hot potato because the bill includes funding for the Supplemental Nutrition Assistance Program, or SNAP, formerly known as food stamps. This program now provides benefits to one in seven Americans.

The bill cut $8 billion from the SNAP program by changing eligibility rules. The savings come from closing a loophole involving fuel assistance payments used by 16 states to artificially inflate benefits. These changes will not affect SNAP benefits paid in Arizona. The bill also contains new anti-fraud provisions, which will eliminate SNAP benefits for illegal immigrants, lottery winners, college students and deceased persons.

The bill represents a fundamental restructuring of the financial relationship between the federal government and farmers. The law repeals the existing crop subsidy programs, including direct and countercyclical payments, and uses part of the savings to create an expanded crop insurance program.

This change in the law was largely the result of international trade concerns and a decade-long dispute with Brazilian cotton farmers. In 2002, Brazil brought a case before the World Trade Organization (WTO) challenging the payment of subsidies to U.S. cotton farmers. Brazil argued that the subsidies impaired its ability to compete in world markets. The U.S. lost the case and, since 2010, has been paying $147 million per year in compensation to Brazilian cotton farmers. This forced Congress to rethink its method of supporting farm income.

The new law eliminates direct and countercyclical payments to farmers. These programs provided subsidies to farmers for eligible crops, including corn, cotton, wheat, barley, sorghum, oats and soybeans. The direct payment program provided subsidies based upon historical acreage and yields. The countercyclical payment program was designed to provide support to counter the cycle of farm prices; in essence, a safety net to protect against low crop prices.

The crop subsidy payments were not based on the crops planted in a given year, but on historic base acres and yields, meaning that farmers were not required to plant the crops to get the benefits. The rationale for this practice, which was often misunderstood, was to support farm income without distorting farming decisions about what to plant.

The new farm bill has replaced the direct and countercyclical subsidy programs with two new programs and an expansion of federally-subsidized crop insurance. Cotton will not be eligible under the new programs, but will continue to qualify for crop insurance. There will be transition payments in 2014 and 2015 in declining amounts under specific conditions to phase out the cotton subsidies.

For eligible crops, farmers will be required to elect between two new programs, Price Loss Coverage or Agricultural Risk Coverage. There will be an irrevocable election that will apply for the full five years of the new farm bill.

Price Loss Coverage will provide payments if market prices fall below established reference prices. Agricultural Risk Coverage will provide payments if actual crop revenue falls below established revenue guarantee. There will also be an election between Agricultural Risk Coverage based upon county or individual revenue levels.

There are complicated payment formulas, but the critical distinction is that there will no longer be automatic payments. Instead, the programs are designed to provide payments only when market prices or crop revenue fall below threshold amounts.

As with the old law, payments will be a function of base acres; however, there will be a one-time irrevocable election to retain base acres or reallocate base acres among covered crops according to acreage in each covered crop planted over the past four crop years. Notice of the election deadline will be given to farmers by the Department of Agriculture.

The new law modifies the payment limitations applicable under the old law. The most a person or entity can receive is $125,000.00 per year or $250,000.00 for a married couple. A person or entity is not eligible if their three-year average adjusted gross income exceeds $900,000.00.

The Act also provides an expansion of federally-subsidized crop insurance. There are different types of crop insurance coverage. Farmers can buy policies to insure a specific per acre yield or to insure a given level of revenue. The amount of insurance available is dependent upon historic acreages and crop yields. These policies are often required by banks that make crop loans.

The new Act creates a Supplemental Coverage Option. This provides farmers with the option of buying insurance that covers part of the deductible under both yield and revenue loss policies. There will also be a new crop insurance program specifically for cotton, called the Stacked Income Protection Plan, which begins in 2015. The new crop insurance programs will be 65% subsidized by the Credit Commodity Corporation.

The Act repeals the Dairy Product Price Support and Milk Income Loss Contract (MILC) programs. These will be replaced with a new Margin Protection Program for Dairy Producers, which will be managed by the Department of Agriculture and operate like insurance.

The program will make payments to dairy farmers based on the difference between the price of milk and the cost of feed to produce the milk. Dairy farmers will be able to elect different coverage levels between $4 and $8 per hundredweight.

The new law includes premium schedules for purchasing coverage. The insurance premiums go up for milk production in excess of four million pounds. There will also be limitations on coverage based on historic production. These will function like a base plan to provide a disincentive to increase production; however, the Act provides a formula to allow new producers to participate in the program.

The new law affects hundreds of other agricultural and nutrition programs. It authorizes marketing assistance loans to farmers. It provides livestock indemnity payments to eligible producers on farms that have excessive livestock losses due to adverse weather. The Act also extends the conservation reserve program and farmable wetland program, and includes many other conservation and environmental quality incentive programs.

There is some disappointment that the Act did not address the new USDA country of origin rules. These rules, enacted in response to a WTO ruling, require product labeling showing where beef, pork, chicken and fish were born, raised and slaughtered. The rules also ban the co-mingling of meat from different countries.

These rules create problems for livestock moving across the border from Canada and Mexico. They also create problems and expense for processing plants that are required to keep livestock segregated. The new law requires an economic analysis of the country of origin rules, but does not repeal the rules as many had hoped.

The Agribusiness practice at Jennings, Strouss & Salmon, PLC is available to advise farmers of their rights and obligations under the new law, and to guide clients in making the various elections and decisions that the new law requires. The firm serves its clients from offices in Phoenix, Peoria and Yuma, Arizona, and Washington, D.C. 

Jennings, Strouss & Salmon attorney Wayne A. Smith provides farmers and ranchers with a wide variety of transactional legal services, including FSA compliance, business formation, tax advice, estate planning, real estate and commercial transactions.

Brian Imbornoni, a member of the Jennings, Strouss & Salmon commercial litigation department, handles a broad range of litigation matters for farmers and ranchers, including breach of contract claims, property disputes, dairy issues and crop insurance litigation.