Looking Out for the 2012 Farm Bill

Looking Out for the 2012 Farm Bill, Ph.D. Extension Assistant Professor, Policy Specialist, and Director, North Central Risk Management Education Center Department of Agricultural Economics UNL Farm Bill information farmbill.unl.edu USDA Farm Bill information www.usda.gov/farmbill Farm Bill Goals A continued evolution toward risk management 1930s 1996 Supply control and price support 1970s present Income support 1980s present Risk management Farm Bill Goals 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) 2011, 1

Farm Bill Goals Income support (1970s Present) Target prices/deficiency payments (1973-1996) Counter-cyclical payments (2002-present) Non-recourse marketing loans (1985-present) Direct payments (1996-present) The 2008 Farm Bill and the Commodity Program A Changing Farm Income Safety Net 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 Commodity Program Rates Existing and New Loan Rates Commodity 2007, 2008 2009 2010-2012 Wheat (bu) $2.75 $2.75 $2.94 Corn (bu) $1.95 $1.95 $1.95 Sorghum (bu) $1.95 $1.95 $1.95 Barley (bu) $1.85 $1.85 $1.95 Oats (bu) $1.33 $1.33 $1.39 Upland cotton (lb) $0.52 $0.52 $0.52 Rice (cwt) $6.50 $6.50 $6.50 Soybeans (bu) $5.00 $5.00 $5.00 Other oilseeds (cwt) $9.30 $9.30 $10.90 Peanuts (ton) $355.00 $355.00 $355.00 Dry peas (cwt) $6.22 $5.40 $5.40 Lentils (cwt) $11.72 $11.28 $11.28 Small chickpeas (cwt) $7.43 $7.43 $7.43 Large chickpeas (cwt) - $11.28 $11.28 2011, 2

Calculating Program Payments Estimated 2010 Loan Deficiency Payments or Marketing Loan Gains* Potential Loan Deficiency Payment or Marketing Loan Gain Rate - = loan rate (county adjusted) PCP (county-specific) LDP or MLG rate Potential Loan Deficiency Payment or Marketing Loan Gain x = LDP or MLG rate bushels LDP or MLG Commodity Loan Rate PCP = LDP or MLG Rate Corn $1.95 $6.70 $0.00 Soybeans 5.00 13.50 0.00 Wheat 2.94 7.30 0.00 Grain Sorghum 1.95 6.50 0.00 * Illustrated with national average loan rates and estimated national prices based on current projected marketing year average prices from USDA-WAOB, August 11, 2011. Commodity Program Rates Existing and New Target Prices Commodity 2007 2008 2009 2010-2012 Wheat (bu) $3.92 $3.92 $3.92 $4.17 Corn (bu) $2.63 $2.63 $2.63 $2.63 Sorghum (bu) $2.57 $2.57 $2.57 $2.63 Barley (bu) $2.24 $2.24 $2.24 $2.63 Oats (bu) $1.44 $1.44 $1.44 $1.79 Upland cotton (lb) $0.7240 $0.7125 $0.7125 $0.7125 Rice (cwt) $10.50 $10.50 $10.50 $10.50 Soybeans (bu) $5.80 $5.80 $5.80 $6.00 Other oilseeds (cwt) $0.1010 $0.1010 $0.1010 $12.68 Peanuts (ton) $495.00 $495.00 $495.00 $495.00 Dry peas (cwt) - - $8.32 $8.32 Lentils (cwt) - - $12.81 $12.81 Small chickpeas (cwt) - - $10.36 $10.36 Large chickpeas (cwt) - - $12.81 $12.81 Calculating Program Payments Estimated 2010 Counter-Cyclical Program Payments* Counter-Cyclical Payment Rate - - MAX (, ) = target price DP rate market price loan rate CCP rate Counter-Cyclical Payment x x x 85% = CCP rate CCP yield base acres CCP Commodity Target Price DP Rate MAX (Market Price, Loan Rate) = CCP Rate Corn $2.63 $0.28 $6.70 $1.95 $0.00 Soybeans 6.00 0.44 13.50 5.00 0.00 Wheat 4.17 0.52 7.30 2.75 0.00 Grain Sorghum 2.63 0.35 6.50 1.95 0.00 * Estimated CCP payment rates based on current projected marketing year average prices from USDA-WAOB, August 11, 2011. 2011, 3

Farm Income Safety Net Comparison Corn Prices and DCP shel $/Bus 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 Loan Rate CCP Target Price CCP Trigger Price Market Price Farm Income Safety Net Comparison Cotton Prices and DCP 1.25 1.00 und $/Pou 0.75 0.50 0.25 0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 Loan Rate CCP Target Price CCP Trigger Price Market Price Farm Income Safety Net Comparison Market Prices vs. Target Prices e/target Price Markt Price 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Corn Soybeans Sorghum Wheat Cotton Rice Peanuts Source: USDA NASS, USDA-WAOB, and USDA-FSA. Projections as of August 11, 2011. 2011, 4

Direct Payment Calculating Program Payments Estimated Direct Program Payments in Nebraska* x x x = DP rate DP yield base acres 83.3% DP Commodity DP Rate x DP Yield (B/A) x Base Acres x 83.3% = DP Corn-Irr $0.28 125.7 1 83.3% $29.32 Corn-Dry 0.28 71.8 1 83.3% 16.75 Soybeans-Irr 0.44 40.7 1 83.3% 14.92 Soybeans-Dry 0.44 29.1 1 83.3% 10.67 Wheat 0.52 36.3 1 83.3% 15.72 Grain Sorghum 0.35 125.7 1 83.3% 20.96 * Estimated DP payments based on estimated statewide average DP yields A Short Review of Direct Payments Decoupled, fixed, transition(?) payments Popular in 1996 because of Flexibility WTO friendly Secured a disappearing baseline Popular target in 2011 because of Paid regardless of price and income Accrue to large farms $5 billion/year Farm Bill Goals Risk Management (1980s Present) Modern crop insurance legislation of 1980, 1994, and 2000 Ad hoc disaster assistance SURE (2008-2011) ACRE (2008-present) 2011, 5

The 2008 Farm Bill and the Commodity Program A Changing Farm Income Safety Net 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 Farm Bill Commodity Program Average Crop Revenue Election Option 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 Actual State Revenue Farm Bill Commodity Program Average Crop Revenue Election Option 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 2011, 6

Farm Bill Commodity Program Average Crop Revenue Election Option 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 State Yields for ACRE Nebraska Yields per Planted Acre (B/A) Corn- Soybeans Soybeans Grain Year Corn Corn-Irr Soybeans Wheat Dry -Irr -Dry Sorghum 2004 166.0 186.0 134.0 45.5 53.5 39.0 36.1 78.0 2005 154.0 185.0 108.0 50.0 58.5 42.5 38.7 87.0 2006 152.0 185.0 101.0 49.5 58.0 41.5 35.7 78.0 2007 160.0 181.0 125.0 50.5 55.5 47.5 42.3 94.0 2008 162.0 184.0 130.0 46.0 55.5 38.5 43.2 91.0 2009 197.0 149.0 60.0 49.0 47.3 93.0 2010 185.0 137.5 59.0 46.0 42.2 90.0 2004-2008 FSA Oly. Avg. 159.0 185.0 121.0 48.5 56.5 41.0 39.0 85.0 2005-2009 FSA Oly. Avg. 185.0 121.0 57.5 44.0 41.4 90.0 2006-2010 FSA Oly. Avg. 185.0 131.0 57.5 45.0 42.6 91.0 Source: USDA Farm Service Agency. Available from USDA-FSA at http://www.fsa.usda.gov/fsa/webapp?area=home&subject=dccp&topic=landing Market Prices for ACRE National Average Market Prices Year Corn Soybeans Wheat Grain Sorghum 2007 $4.20 $10.10 $6.48 $4.08 2008 4.06 9.97 6.78 3.20 2009 3.55 9.59 4.87 3.22 2010 5.25 11.35 5.70 5.20 2007-2008 Avg. $4.13 $10.04 $6.63 $3.64 2008-2009 Avg. 3.81 9.78 5.83 3.21 2009-2010 Avg. 4.40 10.47 5.29 4.21 Source: USDA NASS, USDA-WAOB, and USDA-FSA. Projections as of August 11, 2011. 2011, 7

Farm Income Safety Net Comparison Nebraska Corn Revenue and ACRE re $/Acr 1,400 1,200 1,000 800 600 400 200 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 NE ACRE Guarantee-Irrigated NE ACRE Guarantee-Nonirrigated NE Act/Proj Revenue-Irrigated NE Act/Proj Revenue-Nonirrigated Calculating Program Payments Estimated Direct Program Payments in Nebraska* Direct Payment under ACRE x x x x = DP rate DP yield base acres 83.3% 80% DP Commodity DP Rate x DP Yield (B/A) x Base Acres x 83.3% x 80% = DP Corn-Irr $0.28 125.7 1 83.3% 80% $23.45 Corn-Dry 0.28 71.8 1 83.3% 80% 13.40 Soybeans-Irr 0.44 40.7 1 83.3% 80% 11.93 Soybeans-Dry 0.44 29.1 1 83.3% 80% 8.53 Wheat 0.52 36.3 1 83.3% 80% 12.58 Grain Sorghum 0.35 125.7 1 83.3% 80% 16.77 * Estimated DP payments based on estimated statewide average DP yields ACRE Enrollment in 2009 Selected Commodities DCP Farms DCP Acres ACRE Farms ACRE Acres Percent ACRE Farms Percent ACRE Acres Corn 1,130,285 70,454,400 105,387 12,995,012 8.5% 15.6% Soybeans 885,312 42,263,737 97,216 7,639,025 9.9% 15.3% Grain 269,240 10,678,713 13,736 835,945 4.9% 7.3% Sorghum Wheat 809,401 62,966,761 61,875 9,143,849 7.1% 12.7% Upland Cotton 186,417 17,604,272 966 30,117 0.5% 0.2% Rice 45,703 4,270,846 8 384 0.02% 0.01% Peanuts 28,449 1,437,355 31 387 0.1% 0.03% U.S. Total 1,541,329 222,044,292 128,620 32,528,628 7.7% 12.8% Source: USDA Farm Service Agency Available from USDA-FSA at http://www.fsa.usda.gov/fsa/webapp?area=home&subject=dccp&topic=landing 2011, 8

Managing Risk with the Farm Income Safety Net A Multiplicity of Confused Concepts Scope of Risk Protection Farm Level Area Level National Level Price Hedging ML/LDP CCP Revenue RP/HPE DP AGR GRIP SURE ACRE RP GRIP/H Production YP CAT NAP GRP PRF Farm Bill Wish List An Alphabet Soup of Proposals and Groups Revised Safety Net AFB 1 Administration Revised Revenue Program ARRM Brown, et al. REFRESH Lugar and Stutzman CRGP Conrad RMAF ASA SRRM AFB 2 Enhanced Crop Insurance STAX NCC CROP Neugebauer FFSN Crop Ins. Co. Other Proposals FOR NFU Dairy Peterson, et al. Sources: Shields, D.A. and R. Schnepf, Farm Safety Net Proposals for the 2012 Farm Bill, Congressional Research Service, October 6, 2011 and American Farm Bureau Federation (AFB 2 ) Total spending cuts of $23 billion over 10 years from baseline Recommendations to the Super Committee From the Agriculture Committee Leadership Area Proposed Cut 2012-2021 Baseline % Cut Commodities $15 billion $64 billion 24% Conservation $6 billion $63 billion 10% Nutrition (SNAP) $4 billion $700 billion 0.6% 2011, 9

Fundamental Elements of the Farm Bill Proposals 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 Fundamental Questions Shallow loss coverage vs. safety net coverage Systemic risk vs. idiosyncratic risk Mechanics of revenue guarantee Geography Average guarantee Protection level Payment cap Understanding Shallow Loss Coverage vs. Safety Net Coverage Shallow Loss Coverage Exp Revenue Safety Net Coverage Exp Revenue Avg Revenue Crop Ins Guarantee Producer Loss Shallow Loss Coverage Avg Revenue Crop Ins Guarantee Safety Net Guarantee Producer Loss Crop Ins Indemnity Crop Ins Indemnity Safety Net Coverage Market Price * Yield Market Price * Yield Market Receipts Market Receipts 2011, 10

Estimated Impacts of Changes in the ACRE Guarantee for Selected Nebraska Crops Table 1 Summarized Expected Base* Scenario ACRE Payments and Aggregated Payments Expected Average Payments Per Acre Crop/Trigger State 90% District 90% District 85% District 80% District 75% District 70% Corn Irrigated 0.00 0.00 0.00 0.00 0.00 0.00 Corn Dryland 0.17 3.94 2.74 1.86 1.26 0.84 Soybeans Irrigated 0.00 0.00 0.00 0.00 0.00 0.00 Soybeans Dryland 0.23 0.30 0.12 0.06 0.04 0.03 Winter Wheat 0.29 0.61 0.33 0.17 0.06 0.01 Expected Aggregated Payments Crop/Trigger State 90% District 90% District 85% District 80% District 75% District 70% Corn Irrigated 0 19,885 0 0 0 0 Corn Dryland 590,775 13,798,116 9,592,610 6,502,677 4,425,925 2,949,496 Soybeans Irrigated 0 1,046 0 0 0 0 Soybeans Dryland 593,627 799,067 324,533 152,097 107,729 78,045 Winter Wheat 458,072 966,455 519,602 262,249 99,610 20,270 Total 1,642,473 15,584,567 10,436,745 6,917,024 4,633,264 3,047,811 *Base scenario simulation prices are 2011 spring planting values on a per bushel basis for corn, soybeans, and wheat, of $6.01, $13.49, and $7.15. Source: Lubben, B.D., J.A. Jansen, and M.C. Stockton. Changing Farm Policies for Changing Times. Cornhusker Economics. October 19, 2011. Estimated Impacts of Changes in the ACRE Guarantee for Selected Nebraska Crops Table 2 Summarized Expected Alternative* Scenario ACRE Payments and Aggregated Payments Expected Average Payments Per Acre Crop/Trigger State 90% District 90% District 85% District 80% District 75% District 70% Corn Irrigated 7.44 8.46 3.76 1.36 0.46 0.14 Corn Dryland 3.68 6.18 3.77 2.36 1.52 0.95 Soybeans Irrigated 3.62 3.96 1.77 0.69 0.30 0.16 Soybeans Dryland 4.44 5.08 2.97 1.68 0.93 0.48 Winter Wheat 3.35 3.18 1.91 1.05 0.50 0.21 Expected Aggregated Payments Crop/Trigger State 90% District 90% District 85% District 80% District 75% District 70% Corn Irrigated 39,047,772 44,394,642 19,711,294 7,113,282 2,399,754 721,476 Corn Dryland 12,891,992 21,632,362 13,208,829 8,265,157 5,312,672 3,313,696 Soybeans Irrigated 8,216,922 9,004,065 4,026,440 1,570,953 685,539 372,454 Soybeans Dryland 11,696,707 13,378,759 7,810,186 4,431,505 2,439,384 1,268,054 Winter Wheat 5,308,167 5,043,454 3,029,434 1,670,739 785,781 331,845 Total 77,161,560 93,453,282 47,786,183 23,051,637 11,623,130 6,007,524 *Alternative scenario simulation prices are two year national marketing year average values on a per bushel basis for corn, soybeans, and wheat, of $4.378, $10.294, and $5.621. Source: Lubben, B.D., J.A. Jansen, and M.C. Stockton. Changing Farm Policies for Changing Times. Cornhusker Economics. October 19, 2011. Farm Bill Outlook Safety Net Risk management safety net No Direct Payments? Timing By Thanksgiving 2011 or 2012? Producer Decision-Making Program choice? Annual decision? Integrated farm program and crop insurance decision (formal or informal) 2011, 11