SCENARIOS-U.S. election means a pinch on farm funds

Wed Nov 3, 2010 1:08pm EDT

Related Topics

* Big Republican gains mean pressure for big spending cuts

* Anti-spending mood may imperil ethanol tax breaks

* Farm bill debate becomes more complex, delay to 2012

* New chairmen in House and Senate.

By Charles Abbott

WASHINGTON, Nov 3 (Reuters) - U.S. lawmakers will face increasing pressure to constrain spending on farm subsidy programs, possibly as part of government-wide austerity, in the wake of large Republican gains in the mid-term elections.

At its most extreme, the budget-cutting could push millions of acres back into production by slashing long-term reserves that idle 10 percent of U.S. cropland. The deficit-cutting mood also imperils extension of ethanol tax breaks worth $6 billion annually.

Here is how the elections could affect agricultural issues:

NEWCOMERS SEEN DEMANDING SPENDING CUTS

Republicans gained at least 60 seats, and control of the House, partly on their promise to cut spending by $100 billion a year. An ambitious GOP majority could seek the deepest cuts to mandatory programs in 15 years. Republicans gained at least six seats in the Senate but not a majority.

Farm supports are the most vulnerable of Agriculture Department programs, say farm lobbyists. Nutrition programs account for the bulk of spending but have many defenders. Farm groups feud over the $5 billion a year in "direct payments" but the likely new leader of House Agriculture Committee likes it.

Land reserves traditionally have less support than crop subsidies when lawmakers must choose between them. Corn and soybean output could rise 3 percent and wheat 7 percent if land reserves are cut one-third. The 2008 farm law cut Conservation Reserve enrollment by 18 percent.

Senate Budget Committee chairman Kent Conrad, of North Dakota, would be in position to buffer ag cuts somewhat.

TAX BREAKS FOR ETHANOL "AN UPHILL BATTLE"

The "lame duck" session of Congress in late November will be the best chance to extend ethanol tax breaks before they expire and the new anti-spending lawmakers take office in January.

"It remains an uphill battle," said Bob Dinneen of the trade group Renewable Fuels Association. With a long-term extension of the credits out of reach, the industry seeks a one-year renewal at a lower rate as the first step to reform of supports. It also hopes to keep an import tariff.

Expiring on Dec 31 are a 45-cent a gallon tax credit for ethanol blenders, a 54-cent a gallon tariff on imported ethanol and a 10-cent a gallon small-producer tax credit.

Also in question are incentives for cellulosic ethanol, tapped as the new-generation fuel that would replace corn ethanol as the largest biofuel. Output is a trickle nowadays.

If cellulosic ethanol thrives, the grass and woody biomass crops that are its feedstocks would compete with corn, soybeans, wheat and cotton for U.S. farmland.

FARM BILL SEEN GETTING MORE COMPLICATED

House and Senate Agriculture committee leaders either must write one bill that combines budget cuts and farm policy or two separate bills, possibly in separate years.

Frank Lucas, the Oklahoma Republican expected to chair the House Agriculture Committee, would postpone the farm bill until 2012. Some senators also want to wait for 2012.

Congress combined budget cuts and farm bills in 1990 and 1996. The 1996 law ended most federal controls over what farmers grow, a free-market policy still in effect.

The farm program assures a minimum price for grains, cotton and oilseeds, with USDA making up the difference between market prices and the support price. If returns are below targets set by law, it automatically makes additional payments.

Overall, subsidies buffer low market prices and the resulting drop in income, which could constrain purchases of chemicals, seeds and machinery and weaken land prices.

Crop subsidies are forecast for $7 billion this fiscal year. Land stewardship is an additional $2 billion-$3 billion.

NEW LEADERSHIP COMING

New chairmen will be installed in the House and Senate Agriculture Committees. In the House, Lucas will succeed Democrat Collin Peterson of Minnesota as Agriculture chairman. Lucas says the 2012 farm law should be patterned on the current program and says the direct payment is important in regions with harsher climates.

Three Democrats -- Debbie Stabenow of Michigan, Kent Conrad of North Dakota and Ben Nelson of Nebraska -- are in line to chair the Senate Agriculture Committee following defeat of Blanche Lincoln of Arkansas, first woman to lead the panel.

The decision will depend on who argues hardest for the job when senators meet in coming weeks to elect leaders. Stabenow has the clearest path but Conrad has the most seniority.

HARD CHOICES

Most farm-state lawmakers like the crop-subsidy structure now in place but they will face a financial squeeze. Money runs out for three dozen programs, including wetlands protection and for a disaster relief fund.

Crop insurance, crop subsidies and land stewardship are the three major line items. Lawmakers might pare them to free money for other uses, eliminate part or all of some programs, or rewrite the farm support system altogether, the choice in 1996 to marry policy and limited funds.

(Editing by David Gregorio)

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