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Commodity Programs: Small Changes, Big Choices

Commodity Programs: Small Changes, Big Choices. Pat Westhoff ( westhoffp@missouri.edu ) Tri-State Farm Bill Summit Versailles, Ohio April 11, 2019. Agenda. 2018 farm bill provisions Price Loss Coverage (PLC) Agriculture Risk Coverage (ARC) Marketing loans Dairy Margin Coverage

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Commodity Programs: Small Changes, Big Choices

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  1. Commodity Programs: Small Changes, Big Choices Pat Westhoff (westhoffp@missouri.edu) Tri-State Farm Bill Summit Versailles, Ohio April 11, 2019

  2. Agenda • 2018 farm bill provisions • Price Loss Coverage (PLC) • Agriculture Risk Coverage (ARC) • Marketing loans • Dairy Margin Coverage • Other important provisions • ARC-PLC election decision • Some big-picture perspective

  3. Disclaimer • What follows is based on my reading of the 2018 farm bill • USDA has not yet proposed required changes of rules to implement the bill • Experience demonstrates that my reading of the bill will not always prove to be correct; final rules may differ from my expectations

  4. 2018 farm bill: 10-year CBO “score”(change in federal spending vs. baseline that continued 2014 bill) Source: CBO letter to Chairman Conaway, Dec. 11, 2018. Note: The letter estimates total 10-year outlays of $867 billion.

  5. Agriculture Improvement Act of 2018: Commodity program overview • Evolutionary, not revolutionary • But, there are some important changes • Ability for some to update PLC yields • Formula that lets reference prices increase if market prices high enough • Trend adjustment in determining ARC benchmark revenues • Multiple opportunities to make new ARC/PLC elections • Higher loan rates for many crops • Changes in payment limitation rules • Restructuring of dairy margin program

  6. Title I of the farm bill: 10-year CBO “score”(change in federal spending vs. baseline that continued 2014 bill) Source: CBO letter to Chairman Conaway, Dec. 11, 2018. Note: in CBO’s Jan. 2019 baseline, the 10-year total cost of farm commodity programs is $64.3 billion. In other words, the net increase in federal commodity program spending is 0.4% of the total.

  7. PLC payment yields • Producers can update their PLC yields under some circumstances • Will make sense if 2013-2017 average yields are sufficiently above the existing program yield • Adjustment depends on how national yields for a crop changed between the 2008-2012 average and the 2013-2017 average • Formula implies that corn and soybean producers will benefit if 81% of their 2013-2017 average yield is greater than their current PLC yield Source: Calculations by Scott Gerlt based on statute and reported national NASS yields per harvested acre for corn and wheat. Actual percentages may differ, as the statute specifies use of yields per planted acre.

  8. Where the PLC yield update might matter The yield update depends on yields on a particular farm. Counties in blue and red on the map are counties where county-average yields suggest it is likely that many producers will benefit from updating PLC yields for corn. In the counties in white, fewer producers are likely to benefit from the update. Source: Calculations by Scott Gerlt of FAPRI-MU based on NASS data

  9. Where the PLC yield update might matter The yield update depends on yields on a particular farm. Counties in blue and red on the map are counties where county-average yields suggest it is likely that many producers will benefit from updating PLC yields for soybeans. In the counties in white, fewer producers are likely to benefit from the update. Source: Calculations by Scott Gerlt of FAPRI-MU based on NASS data

  10. Reference price adjustment formula • Reference prices for most commodities are kept at current levels under most likely circumstances (Japonica rice is the exception) • Reference price is higher of current reference price or 85% of the 5-year Olympic average marketing-year-average (MYA) price • In other words, it can increase if the Olympic average price exceeds the reference price by 17.6% • This does not occur for any major commodity if prices evolve according to FAPRI-MU’s average price projections • However, in an uncertain world, it could happen if there are at least two years with abnormally high prices in a five-year period • A single high-price year is inadequate, as it is an Olympic average that is used

  11. ARC changes • Trend-adjusted yield (like that in crop insurance) for determining ARC revenue benchmark • Use 80% of transitional yield to replace especially low yield years in calculating benchmark • Both of these changes should increase the probability of an ARC payment in any given year

  12. ARC/PLC elections • Producers can make a new election in 2019 for the 2019 and 2020 crop years • And they can revise those elections in 2021, 2022 and 2023 • As in 2014, FAPRI will work with AFPC colleagues at Texas A&M to provide a tool to help with this choice, once program rules are clear

  13. ARC Olympic average prices(Last 5 years, higher of MYA or reference)

  14. U.S. average corn ARC and PLC payments(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019. 2014-2017 are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)

  15. U.S. average soybean ARC and PLC payments(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019. 2014-2017 are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes). If the final 2018/19 MYA price exceeds $8.40, no PLC payments will be made.

  16. U.S. average wheat ARC and PLC payments(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019. 2014-2017 are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)

  17. Why ARC may look less attractive than it did

  18. Why ARC may look less attractive than it did When MYA price is below 86% of Olympic average price, ARC payments occur with average yields When MYA price is above 86% of Olympic average price, ARC payments do not occur with average yields

  19. Why ARC may look less attractive than it did

  20. Why ARC may look less attractive than it did If reference price is above 86% of the Olympic average price, PLC payments can occur at prices that do not generate ARC payments with average yields

  21. Why ARC may look less attractive than it did

  22. Why ARC may look less attractive than it did

  23. 2019/20 U.S. average corn prices and yields

  24. 2019/20 U.S. average corn prices and yields Average of 500 outcomes: 174 bu./a. and $3.81/bu.

  25. 2019/20 U.S. average corn prices and yields 47% of the 500 outcomes result in a price less than the $3.70 reference price

  26. Implications for program participation • For corn and soybean producers, ARC was very attractive in 2014 • For 2019, comparisons of ARC and PLC may be very different • If actual county yields equal trend-adjusted Olympic average yields, MYA corn prices will have to drop below $3.18/bu. for ARC to pay • PLC will pay any time the MYA price is below the $3.70 reference • We expect higher PLC participation in 2019 than under the 2014 bill

  27. 2014-18 average payment rates FAPRI-MU projections from March 2015 and April 2019 Sources: FAPRI-MU stochastic projections from March 2015 and April 2019. The 2015 projections were discussed in a 2015 Choices article by Westhoff & Glauber, available at http://www.choicesmagazine.org/choices-magazine/submitted-articles/farm-program-elections-budget-costs-and-the-wto

  28. 2014-18 average payment rates FAPRI-MU projections from March 2015 and April 2019 We’re not this good--there was a lot of luck involved Sources: FAPRI-MU stochastic projections from March 2015 and April 2019. The 2015 projections were discussed in a 2015 Choices article by Westhoff & Glauber, available at http://www.choicesmagazine.org/choices-magazine/submitted-articles/farm-program-elections-budget-costs-and-the-wto

  29. 2014-18 average payment rates FAPRI-MU projections from March 2015 and April 2019 Wheat is the one major crop where elections didn’t reflect our expected payments Sources: FAPRI-MU stochastic projections from March 2015 and April 2019. The 2015 projections were discussed in a 2015 Choices article by Westhoff & Glauber, available at http://www.choicesmagazine.org/choices-magazine/submitted-articles/farm-program-elections-budget-costs-and-the-wto

  30. Average payment rates by farm bill 2014-18 and 2019-23 projections by FAPRI-MU, April 2019 Source: FAPRI-MU stochastic projections from April 2019. The projected participation rates assume that expected payment rates have a strong effect on participation decisions.

  31. U.S. average ARC and PLC payments, 2014-18(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019 2014-2017 rates are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)

  32. U.S. average ARC and PLC payments, 2019-23(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019

  33. U.S. average ARC and PLC payments, 2014-18(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019. 2014-2017 rates are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes) *Seed cotton only became eligible in 2018, so no 5-year avg. is reported

  34. U.S. average ARC and PLC payments, 2019-23(Dollars per base acre for participating producers) Source: FAPRI-MU April 2019

  35. PLC participation rates by crop(Share of base acreage) Source: FSA data for 2014-18; FAPRI-MU April 2019 for projections

  36. Page 4 of FAPRI-MU 2019 U.S. Baseline Outlook

  37. 2018 ARC-CO calculation exampleAudrain Co., MO corn

  38. Some things to note about the ARC-PLC choice • The “right” choice will differ by crop, county and producer • The relationship between expected ARC and PLC payments differs across crops—PLC may seem an obvious choice for some crops, while it may be a closer call for others • County yield history matters a lot—ARC will be more likely to pay in some counties than others • PLC program yields and other farm-specific factors can mean different farms within a county could have different optimal choices • What type of risk is of greater concern--long-term depressed prices (PLC), or a short-term drop in revenues caused by lower prices or yields (ARC)?

  39. Loan rates • Loan rates are increased for several commodities • The new rates are still below expected market prices, so loan deficiency payments appear unlikely • But, improves the ability to use the program as a marketing tool, by providing access to more cash at harvest

  40. Some other Title I crop provisions • Changes in payment limitation rules • Nieces, nephews and first cousins more likely to qualify • I’m an economist, not a lawyer: ask Jonathan Coppess if you have questions  • Seed cotton provisions created in pre-farm bill legislation continue • Reference price of 36.7 cents/lb. for seed cotton—weighted average of cotton fiber and cotton seed prices • At FAPRI-projected prices, payments would occur every year under this program • Base acreage for seed cotton typically less than old upland cotton base • No ARC or PLC payments if no crop planted on base acres in last 10 years • However, producers can qualify for an $18/acre CSP payment • Base is retained and theoretically could be restored in a subsequent farm bill

  41. Title I dairy provisions • Dairy Margin Coverage (DMC) program replaces Margin Protection Program • Biggest change: lower premiums to protect higher margins for first 5 million pounds of milk on a farm (Tier I) • 25% discount if commit in 2019 to maintain same coverage for 5 years • Producers can participate in both DMC and Livestock Gross Margin on the same production • Partial refund of MPP premiums • Dairy Product Donation Program replaced with Milk Donation Program ($5 mil./yr.)

  42. Comparing annual average crop program benefits under recent farm bills: Title I Notes: Historical data for crop years 2008-2017 are primarily from FSA. The 2018 crop years estimates are by FAPRI-MU, and the 2019-2023 crop year estimates by CBO and FAPRI-MU.

  43. Comparing annual average crop program benefits: adding crop insurance Notes: Historical data for crop years 2008-2017 are primarily from FSA. The 2018 crop years estimates are by FAPRI-MU, and the 2019-2023 crop year estimates by CBO and FAPRI-MU.

  44. Comparing annual average crop program benefits: adding MFP payments Notes: Historical data for crop years 2008-2017 are primarily from FSA. The 2018 crop years estimates are by FAPRI-MU, and the 2019-2023 crop year estimates by CBO and FAPRI-MU.

  45. Comparing annual average crop program benefits: adding conservation payments Notes: Conservation payments are calendar year figures as reported in ERS farm income estimates. Projections are by the author, and are a function of CBO FY estimates.

  46. Some things to note In aggregate, ARC and PLC payments under 2014 bill were similar to direct payments under the 2008 bill A string of above-average yields resulted in unusually low crop insurance net indemnities under 2014 bill—and higher ARC & PLC MFP payments for 2018 are likely to exceed other program benefits combined CBO projects PLC will account for lion’s share of Title I spending under the 2018 farm bill Crop insurance costs are higher from 2019-2023 because of assumed “normal” weather variability, not because of program changes

  47. U.S. farm payment, income projections(FAPRI-MU April 2019 baseline) Source: FAPRI-MU baseline April 2019; USDA ERS, Mar. 2019.

  48. Farm real estate values and rental rates Source: History from USDA’s National Agricultural Statistics Service. Projections by FAPRI-MU, April 2019.

  49. It’s not the 1980s, but… • During the 1980s farm financial crisis, the farm debt/asset ratio peaked at 22% • It declined to half that level in 2012, but has been increasing since then • Besides lower levels of debts relative to assets, interest rates are far lower now than in the 1980s • But it is concerning that the debt/asset ratio continues to increase, even as interest rates are rising Sources: Debt/asset ratio from USDA and FAPRI-MU, April 2019; Prime rate from FRED and IHS Markit, Jan. 2019

  50. Thanks! • FAPRI-MU website: www.fapri.missouri.edu • Follow us on Twitter: @FAPRI_MU • To contact Pat Westhoff: • 1-573-882-4647 • westhoffp@missouri.edu • @WesthoffPat on Twitter • FAPRI-MU team: • Julian Binfield • Sera Chiuchiarelli • Scott Gerlt • Hoa Hoang • Lauren Jackson • Byung Min Soon • Wyatt Thompson • Jarrett Whistance • Peter Zimmel This material is based upon work supported by the U.S. Department of Agriculture, Office of the Chief Economist, under Agreement #58-0111-18-024, and the USDA National Institute of Food and Agriculture, Hatch project number MO-HASS0024. Any opinion, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the U.S. Department of Agriculture nor the University of Missouri.

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