11/14/2011. Bradley D. Lubben, Ph.D. Special thanks to: Federal Budget. Economy Farm & General Economy. Politics. Super Committee (more politics)

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1 John Deering Agriculture and Specialist Colorado State University Extension Special thanks to: Bradley D. Lubben, Ph.D. Extension Assistant Professor, Policy Specialist t& Director, North Central Risk Education Center Department of Agricultural Economics University of Nebraska Lincoln Federal Budget Economy Farm & General Economy Politics Super Committee (more politics) 1

2 12.0% $8.00 U.S. Unem mployment Rate 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 MYA Price $/Bu Corn $/Bu Unemployment Year Source: USDA & Bureau of Labor Statistics Producer Groups American Farm Bureau Federation National Farmers Union Commodity Groups National Corn GrowersAssociation National Association of Wheat Growers Conservation Interests National Association of Conservation Districts Pheasants Forever Nutrition Interests Robert Wood Johnson Foundation 2

3 Direct Payments Crop Insurance Subsidies Conservation Programs Nutrition & Food Assistance Source: CBO Source: ERS 12 Member panel charged with finding $1.5 Trillion in debt savings over the next 10 years 3

4 Timeline: October 14 th : House and Senate committees must submit recommendations to the committee November 23 rd : Deadline for the committee to vote on a plan with $1.5 trillion in deficit reduction December 23 rd : Deadline for both houses to vote on the committee bill without amendment A continued evolution toward risk management 1930s 1996 Supply control and price support 1970s present Income support 1980s present Risk management Supply control and price support (1930s 1996) Marketing allotments Production quotas Non recourse commodity loans ( 1985) Acreage reduction ( 1996) Government stocks/farmer owned reserve ( 1996) 4

5 Income support (1970s Present) Target prices/deficiency payments ( ) Counter cyclical l payments (2002 present) Non recourse marketing loans (1985 present) Direct payments (1996 present) $ /Bushel Loan Rate CCP Target Price CCP Trigger Price Market Price /Pound $ Loan Rate CCP Target Price CCP Trigger Price Market Price 5

6 ice/target Price Market Pri Corn Soybeans Sorghum Wheat Cotton Rice Peanuts Source: USDA NASS, USDA-WAOB, and USDA-FSA. Projections as of August 11, Existing three part price safety net Marketing loans and loan deficiency payments Income support tied to national/county price and farm s production Counter cyclical payments Income support tied to national price and farm s historic production base Direct payment Fixed payment tied to legislated rate and farm s historic production base New revenue safety net Average Crop Revenue Election Program Income support tied to state/farm revenue and farm s planted acreage Supplemental Revenue Assistance Program Income support tied to farm revenue and crop insurance coverage ACRE State Guarantee x x 90% = 5-year Olympic 2-year national ACRE state average state yield* average price guarantee Farm Benchmark Revenue x + = 5-year Olympic 2-year national crop insurance farm benchmark average farm yield* average price premium paid revenue * Yields per planted acre 6

7 Actual State Revenue x MAX (, ) = average national loan rate actual state state yield* average price x 70% revenue Actual Farm Revenue x MAX (, ) = average national loan rate actual farm farm yield* average price x 70% revenue * Yields per planted acre If state revenue is less than the ACRE state guarantee and farm revenue is less than the farm benchmark revenue: ACRE Payment MIN ( -, x 25% ) x ACRE state actual state ACRE state guarantee revenue guarantee ( / ) x x 85% (83.3%) = Oly. avg. Oly. avg. planted acres ACRE farm yield state yield payment Year Corn Soybeans Wheat Grain Sorghum 2007 $4.20 $10.10 $6.48 $ Avg. $4.13 $10.04 $6.63 $ Avg Avg Source: USDA NASS, USDA-WAOB, and USDA-FSA. Projections as of August 11,

8 Selected Commodities DCP Farms Corn 1,130,28 5 DCP Acres ACRE Farms ACRE Acres 70,454, ,387 12,995,01 2 Percent ACRE Farms Percent ACRE Acres 8.5% 15.6% Soybeans 885,312 42,263,737 97,216 7,639, % 15.3% Grain 269,240 10,678,713 13, , % 7.3% Sorghum Wheat 809,401 62,966,761 61,875 9,143, % 12.7% Upland 186,417 17,604, , % 0.2% Cotton Rice 45,703 4,270, % 0.01% Peanuts 28,449 1,437, % 0.03% U.S. Total 1,541, ,044, ,620 32,528, % 12.8% Source: USDA Farm Service Agency Available from USDA-FSA at Total spending cuts of ~ $23 billion over 10 years from baseline Area Proposed Cut Baseline % Cut Commodities $15 billion $64 billion 24% Conservation $6 billion $63 billion 10% Nutrition (SNAP) $4 billion $700 billion 0.6% American Farm Bureau: Keep, but reduce DP & ACRE National Farmers Union: Retain Livestock Title & Maintain strong Rural Development Funding NCBA: Eliminate LivestockTitle National Corn Growers: Adjust ACRE with higher coverage % and local reporting districts National Association of Wheat Growers: Slow phase down of direct payments & strong Crop Insurance 8

9 Risk management as the primary safety net component Either revenue safety net or crop insurance Assumed elimination of Direct Payments Attempts to leverage some of Direct Payment savings for safety net revisions Shallow loss coverage vs. safety net coverage Systemic risk vs. idiosyncratic risk Mechanics of revenue guarantee Geography Average guarantee Protection level Payment cap Shallow Loss Coverage Exp Revenue Safety Net Coverage Exp Revenue Avg Revenue Avg Revenue Producer Loss Producer Loss Crop Ins Guarantee Crop Ins Guarantee Shallow Loss Coverage Safety Net Guarantee Crop Ins Indemnity Crop Ins Indemnity Safety Net Coverage Market Price * Yield Market Price * Yield Market Receipts Market Receipts 9

10 Safety Net Risk management safety net No Direct Payments? Timing By Thanksgiving 2011 or 2012 or beyond? Producer Decision Making Program choice? Annual decision? Integrated farm program and crop insurance decision (formal or informal) 10