AGEC 429: AGRICULTURAL POLICY LECTURE 19: ANALYSIS OF THE 2014 FARM BILL I

AGEC 429: AGRICULTURAL POLICY LECTURE 19: ANALYSIS OF THE 2014 FARM BILL I

Background AGEC 429 Lecture #19 ANALYSIS OF THE 2014 FARM BILL I The Agricultural Act of 2014 Right after the 2008 Farm Bill passed, prices began to drop! Why? - Rapidly rising prices from 2006-2008 - What always happens when production increases a lot? The lower prices reduced production again in 2010 leading to. As a result, CCP and ML payments were no longer being made. Why? Direct payments (DP) continued to be paid even though prices were increasing. Why? Farm Bill was set to expire on. Presidential election, budget/deficit concerns, and debate on need for farm subsidies delayed decisions on new farm bill. 2002 Farm Bill (5 years + 1 year extension) 2008 Farm Bill (Set to expire in 2012)

The Agricultural Act of 2014 Background (continued) Farm Bill Debate - Commodity programs are a of farm bills:» Proponents wanted a strong safety net for farmers.» Opponents cited costs relative to other policy priorities. - Critics of commodity programs in the Farm Bill argued:» Farm bill dollars are not across the sector. Benefits flow to a limited number of commodities (mainly corn, soybeans, wheat, cotton, rice, dairy, and sugar) but not to fruits, vegetables, or livestock.» Too many get the benefits rather than farmers.» are proportional to production, allowing larger farms to receive more than smaller ones. - The farm economy impacted what was included in the new farm bill.» In recent years, farm sector income has been historically high, though variability has increased.» Critics argued that agriculture does not need as much support as in prior years.» Supporters argued that high volatility in prices and income justified an enhanced safety net.

The Agricultural Act of 2014 Background (continued) 2008 Farm Bill extended but extension expired on September 30, 2013. A through September 30, 2014 was then passed. 2014 Agricultural Act was passed by Congress and signed by President Obama in February 2014 and went into effect on October 1, 2014. USDA immediately began to develop an implementation plan. The 2014 Farm Bill is very complicated and requires a very complicated plan, some parts of which USDA is still working on. Since the 2014 Farm Bill was passed, farm prices have been dropping! 2008 Farm Bill (Set to expire in 2012) 2002 Farm Bill (5 years + 1 year extension) Familiar post- Farm Bill boomerang in prices!! 6 year rather than 4 year Farm Bill (Expires in 2018) 7:30

Main Provisions of the TITLES I. Commodities II. Conservation III. Trade IV. Nutrition V. Credit VI. Rural Development VII. Research, Extension, and Related Matters VIII. Forestry IX. Energy X. Horticulture XI. Crop Insurance XII. Miscellaneous https://www.youtube.com/watch?v=y0lbrdkgmk8 https://www.youtube.com/watch?v=0jm5airtpsy 80.0% 8.4% 4.9% 5.7% 1.0%

Main Provisions of the Agricultural Act of 2014 TITLE I: Commodity Programs Direct payment program: Counter-Cyclical Payment Program: - Replaced by Price Loss Coverage (PLC) Program ACRE Program: - Replaced by Agricultural Risk Coverage (ARC) Program Non-recourse (marketing assistance) loans: Marketing Loan Program (MLGs and LDPs): Crop Insurance Program: and - New Supplemental Coverage Option (SCO) Insurance Payment limits: but

Program Choice - For each covered commodity, producers can choose either: (1) Price Loss Coverage (PLC) program OR (2) Agricultural Risk Coverage - County Option (ARC-County)» One time, irrevocable choice for the life of the Farm Bill. ( )» Covered commodities include wheat, oats, barley, corn, grain sorghum, rice, soybeans, sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe and sesame seed, dry peas, lentils, small chickpeas, large chickpeas and peanuts.» is no longer considered a covered commodity. OR - Producers may choose an ARC - Individual Farm Option (ARC- Individual) but it must apply to» If they choose ARC-Individual, they cannot participate in either PLC or ARC-County for ANY of their crops.» This is a one-time, irrevocable choice for the life of the Farm Bill. (Again, you can t change your mind. You have to stick with it.)

Price Loss Coverage (PLC) Program - Producers can choose to participate in PLC program or the ARC program BUT NOT BOTH! (One-time, irrevocable choice for the life of the Farm Bill.) - PLC payment formula is similar to the calculation of the payment but with Reference Price (P R ) instead of Target Price and no direct payment to subtract: PLC = (P R - Max (P M or P L )) x base acres x program yield x 0.85 - References prices for 2014-2018 are. - Producers choosing PLC for their crops are allowed to purchase additional subsidized insurance protection called Supplemental Coverage Option (SCO) Insurance. (Covers some of the crop insurance deductible. We will talk about this later.)

Calculating Commodity Program Costs - Price Loss Coverage (PLC) Program and Marketing Loan Program (LDP/MLG) operate together. Total Demand Supply Price Loss Coverage Payments: PLC = (P R - Max (P M or P L )) x base acres x farm program yield x 0.85 PR MLG/LDP Payments*: MLG/LDP = (P L P M ) x actual acreage x actual yield Price Loss Coverage Payments (PLC) Total Payments to Farmer (Government Cost): TP = PLC + MLG/LDP PL Loan Deficiency Payments (LDP) [Also Marketing Loan Gains (MLG)] Market Sales Revenue of Farmer: MR = P M x Quantity Sold PM Market Sales Revenue (MR) Total Revenue of Farmer: TR = TP + MR Q

Combined PLC with Marketing Loan Payment Calculation Corn Example Assume: P Reference = $ 3.70/bu Base acreage = 100 acres P loan = $ 1.95/bu Program yield = 150 bu/acre P market = $ 1.69/bu Actual acreage = 100 acres Actual yield = 150 bu/acre Note in this example only we are assuming that: Base Acres = Actual Acres and Program Yield = Actual Yield PLC = (3.70 - Max(1.95 or 1.69) ) x (100 x.85) x 150 = $22,312.50 LDP = ($1.95 - $1.69) x 100 x 150 = $3,900 MR = $1.69 x 100 x 150 = $25,350 TR = PLC + LDP + MR = $22,312.50 + $3,900 + $25,350 = $51,562.50

Agricultural Risk Coverage (ARC) Program - Two types of ARC programs: (1) ARC - County Option (ARC-County) (2) ARC - Individual Farm Option (ARC-Individual) - Two main differences: (1) In ARC-County, payments to a farmer are calculated using average yields. ARC- Individual Option payment calculation uses yield. (2) ARC-County can be chosen for but if ARC-Individual is chosen, it must apply to. - Producers who choose ARC-County for a particular crop cannot also choose for that crop. - Producers who choose ARC-Individual cannot participate in either or for any crop.

Agriculture Risk Coverage (ARC) Payment Calculation ARC payment formula is quite different from ACRE but still intended as a revenue-based revenue payment like the ACRE program rather than the price-based countercyclical PLC program. Makes payment when actual county-wide (or personal farm) revenue drops below 86% of historical revenue. Calculated on a per acre basis. Per Acre Revenue Calculation Benchmark Revenue (BR) = Max( 5-year average price or reference price) x 5-year average yield Guaranteed Revenue (GR) = BR x 0.86 Actual Revenue (AR) = market price x actual yield ARC payment = (GR - AR) x 0.85 but not more than 10% of BR Total Payment (on all acres) Total ARC payment (TAP) = ARC payment x base acres Market Revenue = market price x actual yield x actual acres Total Revenue = TAP + MR Average = (throw out the high and the low)

Agriculture Risk Coverage (ARC) Payment Calculation Corn Example Assume: Olympic average price and yield 5-year average price $6.50/bu 5-year average yield 150 bu./acre Actual market price $1.69/bu Actual yield 75 bu/acre Base acres 100 acres Actual acres 100 acres Per Acre Revenue Calculation Benchmark Revenue (BR) = $6.50 x 150 = $975/acre Guaranteed Revenue (GR) = BR x 0.86 = $838.50/acre Actual Revenue (AR) = $1.69 x 75 = $126.75/acre ARC payment = (838.50-126.75) x 0.85 = $604.99 BUT not more than 10% of BR ($975) = $97.50 Total Payment (on all acres) Total ARC payment = $97.50/acre x 100 acres = $9,750 Market Revenue = $126.75/acre x 100 acres = $12,675 Total Revenue = $9,750 + $12,675 = $22,425

Commodity Program Choice SUMMARY

Commodity Program Choice Dr. Outlaw Explains Commodity Program Choices Co-Director of the Agricultural and Food Policy Center Department of Agricultural Economics Texas A&M University