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President’s Budget:  Does it Matter?

President’s Budget: Does it Matter?

It’s around this time of year – with the release of the President’s budget – that we start to get a lot of questions about what’s going to happen with Federal spending for the year.  The questions are quite natural given the amount of attention the release of the President’s budget generates and the enormous volume of pages it fills (i.e. this year the Appendix alone spans 1,400 pages).  It’s somewhat ironic, then, that the Constitution gives no formal role to the President in the federal budget process.  In fact, the Constitution vests the authority to “lay and collect taxes” and to authorize the withdrawal of funds from the Treasury exclusively in the U.S. Congress.

While Congress controls the power of the purse, for the past 100 years – since passage of the Budget and Accounting Act of 1921 – there has been a statutory role for the President in establishing a budget and presenting it to Congress.  For the past 30 years, Federal law has stipulated that the President is to submit the budget to Congress “on or after the first Monday in January but not later than the first Monday in February of each year” (we’ll save the discussion about whether they are submitted on time for another day).

If Congress controls the purse strings, then what’s the point of the President’s budget? 

First, it kicks off the Congressional budget process.  In exercising the power of the purse, Congress establishes a budget resolution, which is a broad revenue/spending framework (which is also the basis for budget enforcement) that also provides spending allocations to the Appropriations Committees.  The budget resolution can also include reconciliation instructions, which featured prominently in last year’s debates on the Build Back Better Act.

Second, the President’s budget is an overview of the President’s policy vision.  Often, that vision includes proposing significant changes to existing Federal programs.  With respect to agriculture, notably, the last two budget cycles broke with recent tradition which had proposed a litany of ways in which farm policy could be slashed to save money.  Last year’s budget was silent on the matter and this year is no different.  With that said, the budget does hint at other significant changes that could have a major impact on agriculture.  For example, the so-called Green Book –the Treasury Department’s explanation of this year’s revenue proposals – contemplates imposing capital gains at death.  The Agricultural & Food Policy Center (AFPC) reported last summer on the enormous impact that the elimination of stepped-up basis (or the imposition of transfer taxes) could have on agricultural producers.  While the President can propose changes, only Congress has the power to actually change the law.

Bottom line:  the President’s budget kicks off the budget process and signals the policy priorities of the Administration, but it’s Congress that ultimately controls the purse strings.

Fischer, Bart. “President’s Budget: Does it Matter?“. Southern Ag Today 2(14.4). March 31, 2022. Permalink

A 2022 Review of the Farm Bill:  The Role of USDA Programs in Addressing Climate Change

A 2022 Review of the Farm Bill: The Role of USDA Programs in Addressing Climate Change

On March 16, I testified before the House Agriculture Committee at a hearing titled

“A 2022 Review of the Farm Bill:  The Role of USDA Programs in Addressing Climate Change”.  Working closely with commercial producers has provided the Agricultural and Food Policy Center with a unique perspective on agricultural policy.  While we normally provide the results of policy analyses at committee hearings, on this occasion I was carrying the message from the nearly 675 producers we work with across the United States.

         In preparation for the testimony we emailed our representative farm members the following points that I planned on making and asked them to let us know if they agreed or disagreed with each of the 5 points.  In two days, we received 105 responses and several more after I had submitted my testimony.

  1. Having a strong safety net from Title I programs (ARC/PLC and the marketing loan) and Title XI (crop insurance) remains critical even with new carbon market opportunities. They unanimously agreed with this statement in spite of the fact they expect very little benefit from Title I programs this year. 
  2. USDA conservation programs (CRP, CSP and EQIP) that have incentivized a broad array of conservation practices have worked well in the past. They have just been under funded.  Producers much prefer this type of program to the current carbon program situation where the significant record keeping requirements, additionality requirements, uncertain soil tests, and very low financial benefits have the majority of our representative farm panel members not interested in participating. 
  3. Congress should strongly consider providing financial incentives to early adopters who are not eligible to participate in current carbon programs due to the additionality requirement. If it is good to sequester carbon it should also be good to keep carbon sequestered.  Many of the producers who responded to my request indicated that they are disgusted with a system that only rewards late adopters
  4. All producers regardless of size, region, or crops planted should have opportunities in any new USDA climate programs. This statement appears fairly benign but let me assure you it is not.  If all producers in the U.S. do not have some USDA NRCS identified practice they can undertake in the name of sequestering carbon then there will be regional winners and losers, and by crop, and by size as carbon programs are created.
  5. Congress should consider providing USDA the authority to safeguard producers from being taken advantage of in current carbon markets dealing with private entities. For example, signing a carbon contract with at least one current company would require a producer to forgo commodity and conservation program benefits on that land.  This is really the only point where many producers disagreed with me.  Several producers would rather not have the government get involved in the carbon market at all and asked me to point out that while they see a problem – it could be made worse.

Link to Full Testimony

Outaw, Joe. “A 2022 Review of the Farm Bill: The Role of USDA Programs in Addressing Climate Change“. Southern Ag Today 2(12.4). March 17, 2022. Permalink

What is a Marketing Year Average Price?

What is a Marketing Year Average Price?

Producers are calling asking about the FSA signup decision they have to make by March 15th.   Even though commodity programs have used marketing year average prices to trigger payments for decades, there still seems to be some uncertainty among producers. 

A quick look at nearby futures would indicate that neither agriculture risk coverage (ARC) nor price loss coverage (PLC) will likely trigger a payment for the 2022 crop.  While it makes some sense to look at nearby (old crop) and harvest time (new crop) futures to help decide what to plant, futures prices may or may not be a very good guide for program signup decisions. 

Why?  Because marketing year average prices start being calculated at harvest of this year’s crop ending prior to the next year’s harvest (Figure 1).  At the end of the marketing year, USDA will multiply each monthly price for the commodity by the percent of the crop marketed that month to arrive at a marketing year average price that weights the monthly prices with higher marketings greater than those months (like right now) with very little marketings occurring. 

While most would agree that the current futures outlook would indicate no ARC or PLC payments, trying to guess at weather, geopolitical and trade conditions around the world 18 months in advance can be daunting.

Figure 1.  Marketing Years and Expected Date Final Price will be Reported by Commodity.

CommodityMarketing YearPublishing Dates for the Final 2022/2023
WheatJun. 1- May 31August 28, 2023
BarleyJun. 1- May 31August 28, 2023
OatsJun. 1- May 31August 28, 2023
PeanutsAug. 1- Jul. 31August 28, 2023
CornSep. 1- Aug. 31September 30, 2023
Grain SorghumSep. 1- Aug. 31September 30, 2023
SoybeansSep. 1- Aug. 31September 30, 2023
Dry PeasJul. 1- Jun. 30September 30, 2023
LentilsJul. 1- Jun. 30September 30, 2023
CanolaJul. 1- Jun. 30September 30, 2023
Large ChickpeasSep. 1- Aug. 31November 30, 2023
Small ChickpeasSep. 1- Aug. 31November 30, 2023
Sunflower SeedSep. 1- Aug. 31November 30, 2023
FlaxseedJul. 1- Jun. 30November 30, 2023
Mustard SeedSep. 1- Aug. 31November 30, 2023
RapeseedJul. 1- Jun. 30November 30, 2023
SafflowerSep. 1- Aug. 31November 30, 2023
CrambeSep. 1- Aug. 31November 30, 2023
Sesame SeedSep. 1- Aug. 31November 30, 2023
Seed CottonAug. 1- Jul. 31October 30, 2023
Rice (Long Grain)Aug. 1- Jul. 31October 30, 2023
Rice (Med/Short Grain)Aug. 1- Jul. 31October 30, 2023
Rice (Temperate Japonica)Oct. 1- Sep. 30January 2024

Should I Buy STAX?

Outlaw, Joe. “What is a Marketing Year Average Price?“. Southern Ag Today 2(10.4). March 3, 2022. Permalink

Should I Buy STAX?

As we’ve traveled throughout the Southern United States over the past two months, one of the questions we’ve most often been asked is whether a producer should purchase a Stacked Income Protection Plan (STAX) insurance policy for the 2022 crop year.  While we would never presume to know what’s best for a producer – because we are neither on the hook for paying the premiums nor do we know a particular producer’s financial situation or appetite for risk – we have been encouraging producers to take a very close look at STAX and to exhaust that option before considering any other alternatives.  Generally speaking, area-wide policies like STAX can serve as an effective complement to an individual crop insurance policy. With prices at their current levels, that option arguably becomes even more important.

            STAX was first authorized under the 2014 Farm Bill.  It was retained in the Bipartisan Budget Act of 2018 and the 2018 Farm Bill, but both bills required producers to choose between (1) Price Loss Coverage (PLC) or Agriculture Risk Coverage (ARC) and (2) STAX.  Any farm (FSA Farm Number) with seed cotton base enrolled in ARC or PLC is ineligible for STAX.  As a result, most producers we talk to are currently trying to choose between ARC (particularly ARC County, or ARC-CO) and STAX.

            While there are a number of factors that must be taken into consideration – for example, how much seed cotton base do you have on your farm and do you plan to plant that farm to cotton – in the example that follows we attempt to draw some comparisons between ARC-CO and STAX.  For those parts of the cotton belt with February 28th sales closing dates (including the Arkansas, Georgia, and Mississippi counties in the example below), the projected price for crop insurance has been set at $1.02/lb with a 0.22 volatility factor (which is used to establish crop insurance premiums).  While the Texas and Oklahoma counties have a March 15th sales closing date and are still undergoing price discovery, the analysis that follows uses the same price assumptions.  The analysis also assumes that the maximum amount of STAX is being purchased, including a 20% coverage level with a 120% protection factor.  If a producer has an underlying crop insurance coverage level above 70%, then the STAX coverage would be reduced.

            Table 1 below illustrates the maximum possible ARC-CO payment rate in the event of sufficient price and/or yield losses.  It illustrates the same for STAX, but it also includes the estimated premiums paid for STAX coverage.  The last column compares maximum possible net indemnities from STAX to the maximum possible ARC-CO payments.  As noted below, in every case, STAX provides more than TWICE the coverage of ARC-CO (even after accounting for premiums).  Naturally, if both prices and yields end up hitting their average levels, then neither ARC-CO nor STAX will pay, and the producer will be left paying the STAX premium.  As a result, there is no clear-cut answer to the question above, but it is abundantly clear that the amount of protection a producer can secure under STAX vastly exceeds that offered by ARC-CO.  Finally, while we provide estimates in this article for purposes of illustrating options for you to consider, nothing can substitute for discussing these options with your crop insurance agent.

Table 1: Comparing ARC-CO and STAX in the Counties with the Largest Number of Planted Acres in the 5 Largest Southern Cotton States

*The maximum possible [net] indemnity can go up if harvest price exceeds the price at planting.  There is no additional premium paid by the producer in that case.

Fischer, Bart L., and Joe Outlaw. “Should I Buy Stax?“. Southern Ag Today 2(8.4). February 17, 2022. Permalink

The ARC-CO/PLC Decision isn’t as Easy as You Think

The ARC-CO/PLC Decision isn’t as Easy as You Think

Producers have until March 15th to select their Title I safety net coverage at their local county FSA office.  Current futures prices for many U.S. covered commodities are well above the reference prices which has most producers thinking there will be no payments for the Price Loss Coverage (PLC) so they should choose the revenue coverage provided by Agriculture Risk Coverage-County Option (ARC-CO).  The combination of price and yield protection provided by ARC-CO should be somewhat more likely to trigger a payment than just the price protection provided by PLC.  On the surface this seems quite reasonable, however, as is the case with most decisions in life, this one is much more complicated than that.

First, with a 2022 yield equal to the 2022 county benchmark yield, ARC-CO would not trigger a payment until market prices fall below $3.18/bu for corn, $7.84/bu for soybeans, $3.40/bu for grain sorghum, and $4.73/bu for wheat (Figure 1).  These trigger prices are considerably lower than the effective reference prices for each crop.  So, what if the yield isn’t average?  Across these 4 commodities, it would take a 14 percent yield decline relative to the 2022 county benchmark yield just to increase each commodity’s ARC-CO trigger price to the effective reference price (i.e., $3.70 for corn, etc).

Second, the supplemental coverage option (SCO) is only available on the crops for which a producer chooses PLC as their Title I safety net program.  Given the extremely high futures prices that currently are in place during price discovery, if a producer is looking for a shallow loss revenue protection option, SCO often provides significantly more revenue protection than ARC-CO which uses marketing year average prices to determine revenue benchmarks.  While SCO has a premium that must be paid, many producers may find the coverage difference well worth the cost.

Finally, the current high futures prices for most commodities are good indicators that market prices will be quite strong this harvest.  However, both ARC-CO and PLC use marketing year average prices to determine whether a payment is triggered.  The 2022-23 marketing year for corn begins September 1, 2022 and continues through August 31, 2023.  While not likely to crash, a lot can happen between now and August 2023.  Purchasing SCO allows a producer to elect PLC for the covered commodity, effectively establishing a free put option at the reference price (at least on those base acres and program yields).

Figure 1.  Example ARC-CO and PLC Parameters for the 2022 Decision.

Crop Name2016 County Yield2017 County Yield2018 County Yield2019 County Yield2020 County Yield2022 Benchmark County Yield2022 Benchmark Price2022 Benchmark Revenue2022 Guarantee RevenuePrice below which ARC-CO is Triggered with an Avg Yield2022 Effective Reference Price (ERP)
Corn129.62144.90168.80137.45157.42146.59$3.70$542.38$466.45$3.18$3.70
Grain Sorghum97.93109.10120.0293.1493.48100.17$3.95$395.67$340.28$3.40$3.95
Soybeans49.4644.5651.9639.0645.1146.38$9.12$422.99$363.77$7.84$8.40
Wheat74.4586.2461.6961.7764.2166.81$5.50$367.46$316.46$4.73$5.50

Outlaw, Joe, and Bart Fischer. “The ARC-CO/PLC Decision isn’t as Easy as You Think“. Southern Ag Today 2(6.4). February 3, 2022. Permalink

ARC-IC Considerations for 2022 Farm Program Elections

ARC-IC Considerations for 2022 Farm Program Elections

The farm program election deadline for 2022 is March 15th, and producers have the option to enroll commodities in Price Loss Coverage (PLC) or Agriculture Risk Coverage (ARC).  PLC protects against declines in prices, and ARC protects against revenue losses at the county level (ARC-CO) or individual farm level (ARC-IC).  Among Southern producers, ARC-IC has not been popular in previous program elections, accounting for less than 1 percent of farm signups.  However, for the 2022 crop year, producers are making their farm program decisions at a time with relatively high commodity prices.  In this situation, it is unlikely that PLC will provide much support, and only alternatives that include yield losses will likely trigger support (ARC-CO and ARC-IC).  This begs the question of whether producers should consider ARC-IC for 2022.  ARC-IC differs from ARC-CO in the following ways: 

  1. The ARC-IC benchmark revenue is determined by a producer’s individual farm yields rather than county average yields. 
  2. ARC-IC election is made by Farm Service Number (FSN) rather than by commodity, i.e., if ARC-IC is selected for a FSN, then all commodities on that FSN are enrolled in ARC-IC.  If multiple FSNs are enrolled in ARC-IC, they will be treated as one “ARC-IC Farm.” 
  3. An ARC-IC payment is made on 65% of base acres rather than 85% for ARC-CO.
  4. Coverage applies to commodities with planted acres rather than base acres, i.e., if a producer has seed cotton base but plants corn in 2022, the ARC-IC benchmark revenue will be determined by corn prices and yields. 

In addition to the ARC-CO/PLC decision tool, Texas A&M University offers a spreadsheet calculator for producers considering ARC-IC available at www.afpc.tamu.edu.  For the ARC-IC calculator, producers will need the information in Table 1.  Producers can utilize the calculator to compare potential ARC-IC payments with different combinations of FSNs and different price and yield expectations. 

Table 1. ARC-IC Calculator Inputs

Graff, Natalie, and Joe Outlaw. “ARC-IC Considerations for 2022 Farm Program Elections“. Southern Ag Today 2(4.4). January 20, 2022. Permalink