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Economics and the Farm Bill

Economics and the Farm Bill. Joe L. Outlaw Co-Director Professor and Extension Economist Eighth Annual Texas Commodity Symposium December 3, 2008. Presentation Outline. Introduction and Overview Crop Economics Commodity Outlook Farm Bill Focus on ACRE SURE Summary. The Way

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Economics and the Farm Bill

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  1. Economics and the Farm Bill Joe L. Outlaw Co-Director Professor and Extension Economist Eighth Annual Texas Commodity Symposium December 3, 2008

  2. Presentation Outline • Introduction and Overview • Crop Economics • Commodity Outlook • Farm Bill • Focus on ACRE • SURE • Summary The Way Forward!

  3. Introduction and Overview • Current Financial Mess Will Come to Agriculture • Ag lenders facing shortage of money • Shouldn’t be a Replay of the 1980s for Ag • Shifted from collateral based lending to repayment capacity • Volatility in prices rather than depressed prices • Overall health in farm sector with strong balance sheets • Input costs • Land values • More Worried About Relative Crop Prices • Where Does Ag Fit in Cap and Trade World? • Carbon footprints???

  4. Futures Prices Relative to Contract Highs Earlier in 2008 Source: Agri-Pulse Communications, updated by AFPC, 11-10-08

  5. NYMEX Crude Oil Forward Curve

  6. Prices Go Up and Down All the Time Here is the Problem!

  7. U.S. Corn Cost of Production Source: FAPRI, August 2008 Baseline

  8. U.S. Grain Sorghum Cost of Production

  9. U.S. Cotton Cost of Production Source: FAPRI, August 2008 Baseline

  10. U.S. Wheat Cost of Production Source: FAPRI, August 2008 Baseline

  11. Index of Prices Paid for Seed, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  12. Index of Prices Paid for Fertilizer, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  13. Index of Prices Paid for Chemicals, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  14. Index of Prices Paid for Fuel, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  15. Index of Prices Paid for Repairs, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  16. Index of Prices Paid for Machinery, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  17. Index of Prices Paid for Wages, 2000-2007 with FAPRI Projections, 2008-2013 Source: FAPRI, August 2008 Baseline

  18. Commodity Price Outlook • Who Knows? • Gas prices today vs summer? • Again, Relative Expected Prices Key • Between now and planting will be important • For Texas producers • Stay on your toes • At some point in 2009 there is likely to be a price that you can make money at • Back to strategies from a few years ago • Minimize relative costs with limited price protection from the loan

  19. January and August 2008 Projected Corn Prices Relative to Loan Rate, and Target Price for Corn Source: FAPRI

  20. January and August 2008 Projected Cotton Prices Relative to Loan Rate, and Target Price for Cotton Source: FAPRI

  21. January and August 2008 Projected Wheat Prices Relative to Loan Rate, and Target Price for Wheat Source: FAPRI

  22. 2008 FB Changes • Large comprehensive bill • Boil changes down for the average fan • Four Major Changes Impacting Commodity Programs • ACRE • Payment limits • AGI eligibility criterion • SURE • Conservation Funding Received Boost

  23. 2008 Farm Bill Spending Source: Congressional Budget Office (5/13/2008)

  24. Commodity Program Overview • Commodity provisions very close to previous programs • Continue direct payments • Continue marketing loan gains/LDPs • Maintain counter-cyclical payments (CCPs) or • Provides producer option for Average Crop Revenue Election (ACRE) Payment • Producer has to agree to direct payment and loan rate reductions

  25. Average Crop Revenue Election (ACRE) Payment • Beginning with the 2009 crop year • One-time irrevocable option to choose: • CCP, DP (with full payment rates), and MLG/LDPs (with full loan rates) or • ACRE, DP (with a 20% reduction in payment rates) and MLG/LDPs (with a 30% reduction in loan rates) • Producers will have to determine whether the loss in guaranteed support is more than made up by potential gain from ACRE • This election is for all the crops grown on each FSA farm # • A farmer could choose to select ACRE for certain farms (FSA farm #s) and not others Don’t have to make choice the first year

  26. Average Crop Revenue Election (ACRE) Payment (Cont.) • ACRE defined: • A state level gross revenue protection plan for each covered commodity and peanuts • The Secretary shall make an ACRE payment on a farm for each crop year if: • The actual State revenue for the crop is less than the ACRE program guarantee for the crop, and • The actual farm revenue for the crop is less than the farm ACRE benchmark revenueFor the 2010-2012 crop years, the ACRE state revenue guarantee for a crop shall not decrease or increase more than 10 percent from the guarantee for the preceding crop year

  27. Average Crop Revenue Election (ACRE) Payment (Cont.) • Where: • The actual State revenue for a crop is the State yield per planted acre from NASS multiplied times the national average market price (the higher of the 12-month marketing year price or 70% of marketing assistance loan rate) • The ACRE program guarantee is equal to 90% of the benchmark state yield (5 year Olympic NASS average) multiplied times the ACRE program guarantee price (simple average of 2 previous national average market price) • The actual farm revenue is the actual yield for the crop on the farm multiplied times the national average market price for the crop • The farm ACRE benchmark revenue is [(the most recent 5 year Olympic average crop yields for the farm multiplied times the ACRE program guarantee price for the crop) plus the crop insurance premium per acre]

  28. Average Crop Revenue Election (ACRE) Payment (Cont.) • Where the ACRE payment amount is: • The lesser of: • The difference between the ACRE state program guarantee for the crop and the actual State revenue from the crop or • 25% of the ACRE state program guarantee for the crop • Multiplied by: • The payment fraction (.833 for 2009-11 and .85 for 2012) multiplied by planted or considered planted acres of the crop • Multiplied by: • The quotient obtained by dividing the Olympic average yield per planted acre for the crop on the producers farm for the most recent 5 years by the benchmark State yield for the crop (the Olympic average of the most recent 5 years of State yields)

  29. Average Crop Revenue Election State ACRE Guarantee = 90% *5-Year Olympic State Avg. Yield* 2-year Natl. Average Mkt. Yr. Price Restricted to < 10% change/year Actual State Revenue = Actual State Planted Acre Yield* MAX[ Natl. Average Mkt. Yr. PriceOR 70% Loan Rate] > AND Farm ACRE Benchmark = Farm's 5-Year Olympic Avg. Yield* 2-year Natl. Average Mkt. Yr. Price+ Ins Premium Actual Farm Revenue = Actual Farm’s Planted Acre Yield* MAX[ Natl. Average Mkt. Yr. Price OR 70% Loan Rate] > THEN Farm Payment = 0.833 (0.85 in 2012) * Actual Planted or Considered Planted Acres * [ Farm's 5-Year Olympic Average Yield / State’s 5-year Olympic Average Yield ] * MIN[ (State ACRE Guarantee–Actual State Revenue) ORState ACRE Guarantee* 25%] Note: All Yields are Planted Acre Yields

  30. Comparison of Different 2-Year National Average Prices for ACRE Program (12-2-08)

  31. Loan Rates

  32. 20% of Direct Payment

  33. Average Crop Revenue Election (ACRE) Payment (Cont.) • AFPC risk-based decision aid to evaluate expected benefits from current programs (DP,LDP,CCP) vs (ACRE and reduced DP, LDP) • The decision has a lot of moving parts (farm yields, state yields, marketing year prices and expected future prices) • Correlation of moving parts • Results of Total Gov’t Payments:

  34. Correlation of State and County Yields, Selected Locations Webster County, IA 89%

  35. Summary • Relatively high and sticky on the way down production costs with declining prices tough combination • In my opinion, Texas farmers do not have much of a choice for the 2009 crop • Final or nearly final details aren’t available • Seed has to be purchased • Operating loans secured – based on what? • Crop prices for some commodities low enough that 30% reduction in loan rates and 20% reduction in direct payments overwhelm potential benefits of ACRE

  36. Thank you…Joe Outlawjoutlaw@tamu.eduwww.afpc.tamu.edu979-845-5913

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