Tuesday, October 18, 2011
Would You Like To See A Return To The Farmer-Owned Reserve?
Some of today’s farmers will have to ask Dad or Grandpa about the Farmer-Owned Reserve, but that’s okay. We all need to know how agriculture got to where it is today. Interestingly, in the midst of the debate over where we are headed, a proposal has been submitted that we make a U-turn and go back a few years to the supply-management days of agriculture, before the market orientation that has dominated more recent farm programs. The Farmer-Owned Reserve. Now how would that work in today’s environment?
The Farmer-Owned Reserve (FOR) was a step in agricultural policy that was designed to hold grain from the market to keep prices high, but was beyond the era of government bins where grain was locked in government-owned storage bins until it was slowly released to the market to stabilize prices. The FOR has been suggested by the Farmers Union as the keystone to the 2012 Farm Bill, and University of Tennessee ag policy specialist Daryll Ray was hired to put the economics behind the concept. Writing in the Iowa State University Ag Decision Maker newsletter, Ray says a renewed version of the FOR would achieve the financial savings that is currently being sought by the White House and the Deficit Reduction Committee in Congress.
Looking at the period from 1998 to 2010, Ray says USDA commodity programs paid out over $152 billion, or nearly $12 billion per year on average. And he says that does not include subsidies for crop and revenue insurance programs. He says under the current policy climate costs must be cut and he suggests the FOR would fit the bill, based on lower costs for farm programs during the 13 crop years he examined, in which cash corn prices ranged from $1.50 to $7 per bushel.
The FOR and other supply management programs were shelved by the 1996 Farm Bill with its Freedom to Farm program that pushed a more market-oriented philosophy to let farmers produce as much of any crop as desired pursuant to signals from the market. Daryll Ray says computer modeling was used to see how it would have performed in recent years, “where the initial loan rate was set by the 3-year running average of the difference between the variable and full cost of production for corn. For subsequent years, the rate was modified by the change in a farmer purchased production-input price index. For corn the loan rate went from $2.27 in 1998 to $2.60 in 2010.”
Ray says the grain would be sealed in on-farm storage and could be released to the market at no less than 160% of the loan rate. “For corn, the release price ranges from $3.63 in 1998 to $4.16 in 2010. The loan rate and release prices for other crops were set in terms of their historic ratio to the price of corn.” To save money, which was the purpose of the proposal, Ray says direct payments, loan deficiency payments, marketing loan gains and the use of generic certificates were eliminated for all crops except rice and cotton.
The University of Tennessee ag economist says over the 13 crop years, corn prices would have averaged 26 cents higher under the FOR than they did historically. Wheat prices averaged 48 cents more than historical prices, and soybeans were $1.09 higher than historical prices if they had been locked into an FOR.
Further, he says such a plan is less costly because it only pays a loan rate on a portion of the crop, and does not pay a loan deficiency payment on every bushel. By doing that, he says the FOR only would have cost $56 billion over the 13 years, instead of the $152 billion, which he says was spent trying to keep grain out of a reserve program.
Responding to critics about the FOR setting a price floor and reducing exports; Ray says such a system will reduce exports, but with higher prices the value of the exports had an overall higher value.
There was no indication in Daryll Ray’s proposal about levels of farm income, and profitability margins above costs of production.
Summary:
In addition to many other proposals for a new farm program, is a reprise of an old farm program, the Farmer Owned Reserve, in which farmers would store grain on farm with grain not released for sale until it reached 160% of the loan rate. Supporters say it will allow grain to average higher prices than in recent years and will only cost taxpayers about one-third of what has been paid out in commodity programs over the past 13 crop years.
Posted by Stu Ellis on 10/18 at 12:00 AM | Permalink