The automatic spending cuts, called “the sequester,” are getting closer to becoming a reality and members of Congress are sounding the alarm. Senate Minority Leader Mitch McConnell, R-Ky., said this week that the spending cuts will likely go into effect Mar. 1 despite opposition in both parties.

He says it’s now unlikely that Democrats and Republicans will reach a last-minute deal. No one is exactly sure what the sequester cuts will mean for agricultural programs. The sequester would require all government agencies to cut 5.3 percent from their budgets for the remainder of the year, but “some” programs are exempt.

The government is expected to honor legal agreements, such as Conservation Reserve contracts, for example. But it’s not yet clear whether direct payments will be exempt from cuts. Farmers can begin signing up for the direct payment program next week. But don’t spend ‘em before you get ‘em – the USDA has to find places to trim its own budget by 5.3 percent, and direct payments could be on that list.

With or without the sequester, budget cuts are still very likely through the rest of this year. A group of Senate Democrats have been working on plans to replace the sequester, and that plan does include cutting direct payments to farmers.

President Obama has also talked about re-allocating money already approved, and while specifics haven’t been released, other uses for the direct payment money is expected to be part of the Administration plan, too. And if direct payments are eliminated before the new farm bill is developed, that money (which totals about $25 billion over 5 years) would not be a part of the budget baseline and thus not available for other farm programs.

Another big target for budget cutters is crop insurance. With recent developments, the costs of the crop insurance program are now bigger than the cost of direct payments. The new CBO baseline projected that Congress will spend 20 percent more on crop insurance than on other commodity programs over the next decade.

Most farmers and farm groups believe that crop insurance has become the most important part of the farm safety net right now and do not want to see funding for the program reduced. (There is intensive lobbying against that underway.)

Crop insurance payments for the 2012 crops now total more than $14 billion with claims still pending. This is a record payout, exceeding the previous record of $10.84 billion in 2011. Insurance payments are expected to exceed $16 billion by the time all the claims for the 2012 crop are processed. Farmers pay about $4 billion for insurance premiums each year.

About 85 percent of the corn, soybean, and wheat acreage had crop insurance coverage in 2012; for cotton acreage it was close to 90 percent.

USDA updated the forecasts for 2012 and 2013 farm income this week. According to the new data, net cash farm income in 2012 did exceed the record high recorded for 2011 after all, at $135.6 billion despite the drought. Total net farm income fell from $117.9 billion in 2011 to $112.8 billion in 2012, however.

The reason for the decline was a nearly $12 billion decline in the value of inventories. A big rebound in inventories is expected for 2013, up $15.9 billion, pushing total net farm income to a record high of $128.2 billion. However, 2013 income declines on the cash side, with lower crop cash receipts and higher cash expenses.

The next USDA farm income update will be in August.