What Do Producers Want/Need in a Safety Net?

What Do Producers Want/Need in a Safety Net?

During Extension and commodity group meetings this winter, we have been asked over and over what will be in the next farm bill.  After answering with “it depends” – based on money and interest in bi-partisanship on Capitol Hill – we then go on to give our thoughts on what we think will be in the next farm bill.  At that point, the audience is generally happy…and ready to see if they won a door prize…until we ask them the question: what is it that you want or need in the next farm bill?

The expressions on the audiences’ faces generally remind us of the pained looks on the faces of the kids in the Scripts National Spelling Bee competition.  Google it…it’s intense.  After some reflection, below is a summary of what we tend to hear.

There is just so much more risk in farming now than there has been in the past.  Producers need as much help defraying as much of the risk as they can get.  Title I programs like ARC and PLC have not helped much at all during the current run up in most input costs.  Neither are triggering since market prices are too high to generate payments (despite the fact that those market prices are still not high enough to cover costs in some cases).  Overall, there is a lot of interest in raising the reference prices that are used in both the ARC and PLC payment calculations.

On the other hand, producers almost universally acknowledge that crop insurance has provided significant protection as the revenue guarantees have risen along with market prices (since they are based on futures prices for most covered commodities).  Additionally, there are a wide variety of products for producers to choose from to tailor their coverage to their operations such as different coverage types (yield or revenue) across different units (basic, optional or enterprise).  Producers can also purchase supplemental, area-wide coverage such as the Stacked Income Protection Plan (STAX), the Supplemental Coverage Option (SCO), or the Enhanced Coverage Option (ECO).   Some producers will say that the cost of the supplemental policies (and the complicated array of choices) makes them less attractive options.  At the same time, producers are not looking forward to sustained price declines (that everyone knows are coming eventually) that will lower price guarantees and reduce the effectiveness of insurance as a safety net – especially if production costs have not declined. 

A few producers will say that the safety net needs to be bankable – a term that generally refers to lenders allowing prospective safety net payments to be added to loan packages which would aid in showing their operating loan request is viable.  While the ad hoc assistance over the last several years has been vital – particularly against the backdrop of Title 1 providing less support – that assistance arrives long after the disaster has come and gone.  If and when the markets begin to fall, bankability of the safety net will be even more important. 

Overall, producers are quick to point out how much they appreciate the safety net support they receive; however, some are looking for Congress to be innovative in providing programs that are bankable and more aligned with the amount of risk exposure modern farms have today.

Author: Joe Outlaw

Professor and Extension Economist

Co-Director Agricultural & Food Policy Center at Texas A&M University

Author: Bart Fischer

Research Assistant Professor

Co-Director Agricultural & Food Policy Center at Texas A&M University


Outlaw, Joe and Bart Fischer. “What Do Producers Want/Need in a Safety Net?Southern Ag Today 3(5.4). February 2, 2023. Permalink

Support for Rice Producers in the Fiscal Year 2023 Omnibus

Support for Rice Producers in the Fiscal Year 2023 Omnibus

The Consolidated Appropriations Act, 2023 (P.L. 117-328) was signed into law by President Biden on December 29, 2022.  Among other things, the $1.7 trillion bill funds the federal government for fiscal year 2023.  The package also included $250 million in support for rice producers, a key priority of Senator John Boozman (R-AR), Ranking Member of the Senate Committee on Agriculture, Nutrition, and Forestry.

The Agricultural & Food Policy Center at Texas A&M University maintains almost 100 representative farms across 30 different states which serve as a basis on which to conduct policy analysis at the request of Congress.  In a May 2022 report requested by Sen. Boozman, we highlighted that the 15 representative rice farms maintained by AFPC faced the largest drop in net cash farm income in 2022 of all 64 representative crop farms maintained by AFPC – a reduction of $880,000 per farm or $442 per acre.

In the case of rice, AFPC has consistently reported that rice growers have faced the harshest financial outlook over the last several years.  Rice producers, in particular, received very little support from ad hoc aid packages like the Market Facilitation Program (MFP) and the Coronavirus Food Assistance Program (CFAP).  These problems are compounded by trading partners like India whose minimum support prices and input subsidies cause significant harm to U.S. rice producers, contributing to a nearly 40-year low in U.S. rice exports this year.  Relatively flat prices and high input costs further exacerbated an already tenuous situation for U.S. rice producers in 2022.

The $250 million – all of which USDA is required to spend – is for one-time payments for U.S. rice producers for the 2022 crop.  The payment is based on (1) a rate of not less than 2 cents per pound multiplied by (2) the producer’s actual production history (i.e., crop insurance APH) multiplied by (3) all of the producer’s planted (or prevented planted) rice acres in 2022.  A separate payment limit applies, consistent with the limit imposed for WHIP+ (i.e., $250,000 if 75 percent or more of the average adjusted gross income of the person or legal entity is average adjusted gross farm income).

Importantly, nothing is final until USDA announces the official details of the program.  In the meantime, our colleagues at the University of Arkansas have put together a helpful FAQ document that answers several key questions. 

Author: Bart Fischer

Research Assistant Professor Co-Director Agricultural & Food Policy Center at Texas A&M University

Author: Joe Outlaw

Professor and Extension Economist Co-Director Agricultural & Food Policy Center at Texas A&M University


Fischer, Bart and Joe Outlaw. “Support for Rice Producers in the Fiscal Year 2023 Omnibus.Southern Ag Today 3(3.4). January 19, 2023. Permalink

What If We Don’t Get a Farm Bill in 2023?

What If We Don’t Get a Farm Bill in 2023?

One of the questions we have been getting the most as agricultural policy economists is whether we are going to get a 2023 Farm Bill on time.  While there are dedicated teams of ag committee members and staff in the House of Representatives and Senate who are going to do their best to get a farm bill done on time, history is not on their side.  This article isn’t going to focus on the probability or odds of getting a bill in 2023 but rather – how much would it matter if it doesn’t get done? 

Figure 1 contains our estimate of the mandatory spending associated with programs that will expire on September 30, 2023.  It may come as a surprise to many of our readers that only about 5% of the funding is actually facing the threat of expiration.  Why?  The Supplemental Nutrition Assistance Program (SNAP) is what’s known as an appropriated entitlement.  In other words, if the farm bill expires, the appropriators will continue to fund SNAP.  Beyond that, crop insurance is permanently authorized by legislation outside of the farm bill.  In addition, the Inflation Reduction Act (IRA) recently reauthorized spending for the major conservation programs.  Further, annual appropriations bills have provided significant funding for ad hoc disaster programs over the past four years for programs such as WHIP, WHIP+, and ERP.

So – what does this information mean?  It means that the impending expiration of the 2018 Farm Bill means very little for the vast majority (i.e., 95%) of the mandatory spending in the farm bill.  It also means that unless policymakers are able to significantly enhance Title I commodity programs, this is little reason to go through the process that invariably will include damaging amendments to farm policy.  While this still leaves a number of programs in limbo (particularly those without mandatory baseline spending),  a simple extension of the 2018 Farm Bill would maintain the status quo.

Figure 1.  Estimated mandatory spending in the 2018 Farm Bill that will expire on September 30, 2023.

Author: Joe Outlaw

Professor and Extension Economist Co-Director Agricultural & Food Policy Center at Texas A&M University

joutlaw@tamu.edu

Author: Bart Fischer

Research Assistant Professor Co-Director Agricultural & Food Policy Center at Texas A&M University

Bart.Fischer@ag.tamu.edu


Outlaw, Joe, and Bart Fischer. “What If We Don’t Get a Farm Bill in 2023?” Southern Ag Today 3(1.4). January 5, 2023. Permalink


Photograph by Mark Stebnicki

Where are Commodity Prices Headed in the Next CBO Baseline?

Where are Commodity Prices Headed in the Next CBO Baseline?

recent article in Southern Ag Today highlighted that increasing marketing year average prices over the past few years likely will lead to increasing “Effective Reference Prices” for many crops.  The article further noted that if those increased Effective Reference Prices were realized, “then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions.”

The analysis in the earlier article was based on the Congressional Budget Office’s (CBO) May 2022 baseline projections.[1]  The biggest question at this point: where are commodity prices headed in the next CBO baseline?  To help answer this question, we look to the U.S. Department of Agriculture’s (USDA) most recent long-term outlook released on November 7, 2022.[2]

As noted in Table 1, commodity prices in USDA’s latest long-term price outlook have increased significantly relative to CBO’s May 2022 projections.  Significant increases in the near term will bolster Effective Reference Prices, and generally speaking, those increases persist throughout the entire baseline period.  For example, USDA is projecting corn prices to average $4.30/bu in 2032, a $0.50/bu increase over CBO’s $3.80/bu estimate for 2032 in May 2022.  Figure 1 explores the same data as percentage increases.  For example, the marketing year average prices for corn, cotton, and wheat are all expected to be at least 10 percent higher in 2032 than projected by CBO in May 2022.

Bottom line: the upcoming baseline projections will likely reinforce the point made in the earlier Southern Ag Today article, with higher prices continuing to reduce the cost estimates for raising reference prices in the next farm bill.

Table 1.  Dollar Change in Marketing Year Average Price Projections, USDA November 2022 versus CBO May 2022.

Units2023202420252026202720282029203020312032
Corn$/bu1.250.800.550.450.450.350.300.350.400.50
Cotton$/lb0.060.050.040.050.060.070.090.100.120.11
Soybeans$/bu2.501.200.750.450.250.300.300.300.300.30
Wheat$/bu1.651.600.750.450.500.500.500.550.550.60

Figure 1.  Percent Change in Marketing Year Average Price Projections, USDA November 2022 versus CBO May 2022.


[1] https://www.cbo.gov/data/baseline-projections-selected-programs

[2] https://www.usda.gov/oce/commodity-markets/baseline

Author: Bart Fischer

Research Assistant Professor

Co-Director Agricultural & Food Policy Center at Texas A&M University

Bart.Fischer@ag.tamu.edu


Fischer, Bart. “Where are Commodity Prices Headed in the next CBO Baseline?Southern Ag Today 2(52.4). December 22, 2022. Permalink

What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities

What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities

Commodity reference prices are used in both the price loss coverage (PLC) and agriculture risk coverage (ARC) programs to calculate program benefits.  For most commodities, reference prices have not increased since their establishment in the 2014 Farm Bill.  One of the major farm bill changes farm groups would like to see in the next farm bill is an increase in reference prices to catch up with input price inflation.  However, a feature added to the 2018 Farm Bill allows for reference prices to increase along with commodity prices.  Since most commodity prices have increased over the past few years it is interesting to see whether reference prices are likely to increase.

Section 1101 of the 2018 Farm Bill (P.L. 115-334) allows for the “effective reference price” for a commodity to replace the statutory reference price if 85% of the previous five-year Olympic average of the national marketing year average price is greater than the statutory reference price (Schnepf).  The “effective reference price” may increase to as much as 115% of the statutory reference price. 

Table 1 contains the statutory reference prices and calculated commodity “effective reference prices” for 2023 through 2028 determined using historical prices and CBO May 2022 commodity price estimates.  The statutory reference prices are blue.  If the projected “effective reference prices” are green or red that means the commodity prices have risen enough to generate a higher “effective reference price”.  If the calculated reference price is green it means the “effective reference price” is less than 115% of the statutory reference price.  If the calculated reference price is red it means the “effective reference price” is greater than 115% of the statutory reference price and would be set at 115% of the statutory reference price.

Corn, soybeans, oats, grain sorghum, mustard seed, sunflower, safflower and large and small chickpeas could see an increase in “effective reference prices” over the next six years depending upon whether CBO’s price estimates are realized.  While many commodities such as wheat have experienced significant price increases, prices have not increased enough to overcome only being able to use 85% of the Olympic average of the previous 5 years commodity prices.  If the “effective reference prices” in Table 1 are realized then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions. 

Table 1.  Statutory Reference Prices and Calculated “Effective Reference Prices” Based Off of Historical and CBO Estimated Prices for Covered Commodities.

References

Schnepf, R.  “Farm Commodity Provisions in the 2018 Farm Bill (P.L. 115-334), Congressional Research Service Report R45730, May 21, 2019.  The report can be found at: https://www.everycrsreport.com/files/20190521_R45730_24831706457d3ed90c82fa471d93b778b7d33676.pdf

Congressional Budget Office (CBO).  USDA Mandatory Farm Program Baseline, May 2022.  The report can be found at: https://www.cbo.gov/system/files?file=2022-05/51317-2022-05-usda.pdf

Author: Joe Outlaw
Professor and Extension EconomistCo-Director Agricultural & Food Policy Center at Texas A&M University
joutlaw@tamu.edu 


Outlaw, Joe. “What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities.Southern Ag Today 2(50.4). December 8, 2022. Permalink

Correspondence of Rice Planted Acres to Safety Net Prices

Correspondence of Rice Planted Acres to Safety Net Prices

Over the past five years, the federal crop insurance program has become a more important part of the farm safety net – relative to ARC/PLC and the marketing loan.  There are several reasons for this, but the two most important are 1) higher commodity prices have made ARC/PLC and the marketing loan less likely to provide any benefits and 2) the crop insurance program uses the futures market to establish initial and harvest-time prices used in insurance calculations that are based on a monthly average of futures closing prices for a specified contract month.  When commodity prices are trending upward, like they have been over the past few years, crop insurance protection increases along with higher futures market prices.

The correspondence, or lack thereof, of rice planted acres for four Southern rice growing states with the marketing year average price reported by USDA around October 1st of the year prior to planting and the projected insurance prices was evaluated over the 2016 to 2022 period.  The previous year’s marketing year average price was used to evaluate whether it was signaling for more or less acres for the next year.  The projected (initial) insurance price is determined just prior to planting.  The three states (Arkansas, Mississippi and Texas) that use the same futures contract to establish projected and harvest time prices are grouped together in the graphs followed by the graph for Louisiana.

The graphs indicate both marketing year average prices and insurance projected prices are generally trending upward since 2017.  Planted acres for Arkansas and Mississippi and Louisiana do not exhibit an upward trend.  Producers in these states generally have multiple crop alternatives to rice that may be drawing acres away from rice based on the relative profitability of the alternatives to rice.  Texas producers generally have fewer viable alternatives to rice production, which appears to be revealed in the upward trend in planted acres.  Another consideration to keep in mind is that even though rice prices have increased over the past few years, generally speaking, prices still remain below the full cost of production for producers in Southern rice growing states, particularly when accounting for the deductible associated with insurance policies. 

Author: Joe Outlaw

Professor and Extension Economist, Co-Director Agricultural & Food Policy Center at Texas A&M University

joutlaw@tamu.edu

Author: Bart Fischer

Research Assistant Professor, Co-Director Agricultural & Food Policy Center at Texas A&M University

Bart.Fischer@ag.tamu.edu

Outlaw, Joe, and Bart Fischer. “Correspondence of Rice Planted Acres to Safety Net Prices“. Southern Ag Today 2(46.4). November 10, 2022. Permalink