While Still Largely Profitable…Crop Producers Putting Historic Amount of Capital at Risk in 2022

This morning I testified before the U.S. House Agriculture Committee Subcommittee on General Farm Commodities and Risk Management at a hearing titled “A 2022 Review of the Farm Bill:  Economic Perspectives in Title I Commodities and Title XI Crop Insurance”.

At the Agricultural and Food Policy Center (AFPC) at Texas A&M University, our work with 675 commercial producers located across the United States has provided our group with a unique perspective on agricultural policy.  Currently, we maintain the information to describe and simulate 94 representative crop and livestock operations in 30 states. 

         In order to provide perspective on Titles I and XI, I wanted to briefly summarize a recent AFPC report that looks at farm profitability in 2022 relative to 2021 for our 64 representative crop farms in the face of higher input and output prices^[1].  For this report, we asked our panel members to provide their costs per acre for 2022 versus 2021 for the major input categories.  The average for each category across all respondents is presented in Table 1.  Updated commodity prices for the 2021/22 and 2022/23 marketing years and policy variables were obtained from the FAPRI-MU Bulletin #01-22 entitled U.S. Agricultural Market Snapshot, April 2022 (Table 2).  While some producers were able to benefit by locking in input prices early in 2021 for this year’s crop, most indicated very little ability to lock in these prices even when using their normal tax management strategy of prepaying inputs.  Simply, the input suppliers would not lock in a price until the producers agreed to take delivery.  Almost every respondent stated they were going to do their best to reduce input usage in the face of the highest costs of production they had ever experienced. 

Table 1.  Average Percentage Change in Representative Farm Input Costs/Acre from 2021 to 2022.

         The news is full of stories about inflation that is averaging 8.5 percent so far this year for the average American.  The lowest year-over-year inflation farmers are seeing is twice that on seed with most categories many times higher. Commodity prices, while generally higher in 2022, are up less than 8 percent.  If not for the incredible productivity of the U.S. farmer, there would be a major financial crisis in agriculture.  Following are the key highlights of our report:

• Net cash farm income in 2021 included a significant amount of ad hoc assistance. Absent another infusion of assistance in 2022, we estimate that significant increases in input prices will result in a huge decline in net cash farm income in 2022 (compared to 2021).

• Despite the significant reduction from 2021, higher commodity prices for most crops will likely still result in positive net cash farm income for most of AFPC’s representative crop farms. The noticeable outlier is rice – two-thirds of the rice farms are facing losses in 2022.

• The analysis hinges on producers receiving the higher commodity prices forecasted by FAPRI with average yields. With drought being experienced across a significant portion of the country and many other areas facing excess moisture, this assumption may be overly optimistic. 

• Having worked with farmers located across the U.S over the last 30 years, I want to make sure you understand we are talking about historic amounts of capital that farmers are putting at risk

Throughout my career, I have referred to the programs in Title I and Title XI as the three-legged stool that serves as the safety net for U.S. producers.  The current programs, agriculture risk coverage (ARC) and price loss coverage (PLC) and the nonrecourse commodity loan program, serve as two of the legs while the federal crop insurance program serves as the third leg. The following are what I believe to be the most significant shortcomings of all three legs of the stool.  Most of my suggestions require additional resources that may be difficult to secure but are necessary.

• Price loss coverage (PLC) reference prices worked fine while inflation was fairly low; however, the reference prices set in the 2014 Farm Bill and continued in the 2018 Farm Bill are in dire need of increases to remain relevant.  Producers’ costs have increased substantially, and the current reference prices are not providing a relevant amount of protection.  

Agriculture risk coverage (ARC) was also established in the 2014 Farm Bill as a second attempt at providing producers a revenue-based safety net program to replace the overly complicated and not widely used average crop revenue election (ACRE) program first used in the 2008 Farm Bill.  While good when coming off of relatively high prices, ARC proved worthless when prices declined and remained relatively flat, providing little protection to producers.  This is why that while widely chosen over PLC early in the 2014 Farm Bill, ARC was largely abandoned as a choice of safety net program in recent years.  Since ARC has the reference price embedded in the calculations, raising reference prices will make ARC more attractive as a revenue protection safety net alternative.

Assuming these two alternatives are used going forward, instead of forcing producers to pick the tool (ARC or PLC) they want, I would suggest allowing them to receive the benefits of whichever is higher in a given year.  This would cost nothing more than if the producers have chosen wisely and selected the appropriate tool and would take a major decision away that only serves as a major distraction to their work in trying to grow a crop.  

• The nonrecourse marketing loan program works as it was designed more than four decades ago; however, despite modest increases for some commodities in the 2018 Farm Bill, the rates have largely remained unchanged over the past 30 years, losing ground to inflation.  Providing producers the ability to take out a storage loan or receive a loan deficiency payment on a crop is a very useful marketing tool.  The rates need to be raised to increase the amount of the crop that is being protected which will cost money but is significantly less expensive to do at current price levels.

• Federal crop insurance is an enormously successful public-private partnership that today stands as the primary safety net tool for U.S. producers.  This is due to the program largely using futures prices to annually adjust the amount of protection producers can select.  While crop insurance is popular with producers, the little-known secret in the farming community is that bankers “encourage” producers to purchase buy-up levels of crop insurance as a means of protecting the producer and the operating loan banks make to producers.  As I have said many times in front of Congress… do no harm to crop insurance and stop outside interest groups from tying provisions of their pet projects to crop insurance – for example, linking climate change practice adoption to insurance program subsidy levels.  This runs the risk of creating an unlevel playing field for producers by distorting protection levels and leaving some producers with less protection due to their lack of feasible climate change mitigation alternatives.  

         While this morning’s hearing focused on Title 1 and crop insurance, I believe the upcoming farm bill provides a clear opportunity to help address some of the shortcomings ad hoc assistance was designed to address as well. In the case of WHIP, WHIP+, and ERP, they all essentially are designed to help cover the large deductibles producers face in their crop insurance policies.  While the ad hoc assistance over the last 5 years has been vital, it comes LONG after the disaster has come and gone and has been limited to specific causes of loss.  Perhaps most important, ad hoc assistance is, by definition, not guaranteed.  Farmers already face enough risks and uncertainty – ideally, they wouldn’t have to guess at what the safety net might look like as they struggle to put a crop in the ground.

Link to Full Testimony

^[1] Economic Impact of Higher Crop and Input Prices on AFPC’s Representative Crop Farms, AFPC Briefing Report 22-05.  https://www.afpc.tamu.edu/research/publications/files/716/BP-22-06.pdf

Outlaw, Joe. “While Still Largely Profitable…Crop Producers Putting Historic Amount of Capital at Risk in 2022“. Southern Ag Today 2(24.4). June 9, 2022. Permalink