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Tuesday, December 25, 2012

Are you ready for production quotas and parity prices in agriculture?



 

Most of agriculture, and particularly dairy and livestock producers, consider the Congress to be the Christmas “Grinch” for its failure to approve a successor to the expired 2008 Farm Bill.  It ceased to exist on October 1, and three months later the Congress may be no closer than February 27 in addressing itself to a renewal of farm policy.  While cash and futures markets are continuing to operate without problems, while wheat remains dormant, and while USDA employees continue to report for work, what could be the problem, if there is any problem?  If the US farmer and consumer can survive three months without a Farm Bill, why can’t they survive three more months, or three more years?  There are reasons.

 

The lack of a 2012 Farm Bill, which soon will be re-labeled a 2013 Farm Bill, may not have an impact at the grocery store today, or in the feedlot today, or in the machine shed today, but overtime a finely-tuned food machine will begin to show wear and tear without the daily maintenance that is necessary.  One of the first assessments about the lack of a federal farm policy came from Secretary of Agriculture Tom Vilsack on October 8, after the Congress recessed for the election without addressing farm policy that expired September 30:

 

"Many programs and policies of the U.S. Department of Agriculture were authorized under the Food, Conservation and Energy Act of 2008 ("2008 Farm Bill") through September 30, 2012. These include a great number of critical programs impacting millions of Americans, including programs for farm commodity and price support, conservation, research, nutrition, food safety, and agricultural trade. As of today, USDA's authority or funding to deliver many of these programs has expired, leaving USDA with far fewer tools to help strengthen American agriculture and grow a rural economy that supports 1 in 12 American jobs. Authority and funding for additional programs is set to expire in the coming months. Without action by the House of Representatives on a multi-year Food, Farm and Jobs bill, rural communities are today being asked to shoulder additional burdens and additional uncertainty in a tough time. As we continue to urge Congress to give USDA more tools to grow the rural economy, USDA will work hard to keep producers and farm families informed regarding those programs which are no longer available to them."

 

Where we are now

When Congress recessed for the election, the Senate had passed its Farm Bill proposal that cut $23 billion from the 10-year baseline for agricultural appropriations.  The proposal included a stronger crop insurance program and nearly full funding of USDA’s nutrition programs.  In the House, only the Agriculture Committee has approved a proposal, which cuts $35 billion from the 10-year baseline spending, half of that in nutrition programs.  House leadership has not called the bill for a vote, contending there are insufficient votes to pass anything.  Since the election recess and the lame duck session, there has been no overt effort to approve farm legislation and the Chairman and ranking Democratic member of the House Agriculture Committee both say they cannot see the opportunity to address the issue before the end of February.  Earlier in the fall, there had been talk of a one year extension of the 2008 legislation.  In a Reuters article, Kansas State University economist Barry Flinchbaugh said, "In 1995 and 1996 they didn't" extend the earlier legislation.   He believes it will not be as easy to pass an extension as it may look now based on how farm bills are funded.  "If they try a one-year extension, I don't know where they are going to get the money," he said. "They might do a 30-day extension or 60-day extension until they get the new one.”  And he added, "My prediction is that we will get a farm bill by April 2013. It will look very close to the Senate version."

 

What is the impact of the delay?

But how does that delay impact agriculture, consumers, and the food merchandising system in the US? 

  1. While they never had their hands on it, livestock producers were promised they would get financial benefits from several USDA programs designed to indemnify producers from the drought of the past summer, but they were paused in the committees.  They include:

1. Livestock Indemnity Program (LIP), which would compensate ranchers for a portion of market value for livestock mortality caused by a disaster (65% in

Senate bill, 75% in H.R. 6083);

2. Livestock Forage Disaster Program (LFP), which would compensate for grazing losses due to qualifying drought conditions or fire on rangeland managed by a federal agency (the Senate bill increases the payment amount from the 2008 farm bill in some cases);

3. Emergency Assistance for Livestock, Honeybees, and Farm-Raised Catfish

(ELAP), which would provide annual funding of $5 million (Senate bill) and $20 million (House committee bill) to compensate producers for disaster losses not covered under other disaster programs.
 

  1. Any government support programs, such as direct payments, marketing loans, ACRE are in effect for a commodity until the end of the current marketing year.  For example, that will be June 30, 2013 for wheat and August 31 for corn and soybeans.  However, the dairy support program ended September 30, 2012 without any replacement.  Under 1949 Permanent Law, parity prices become effective January 1, 2013 for any commodity for which the Permanent Law has not been suspended.  (Typically, each new Farm Bill suspends the 1949 legislation, but that has not happened.)  Subsequently, at the expiration of the current marketing year for a commodity, familiar commodities will have some unfamiliar prices that the USDA says producers shall be paid.  USDA economists calculated those prices at the end of November to be:

    Corn                $12.00 per bushel
    Soybeans         $28.90 per bushel
    wheat              $18.30 per bushel
    Beef cattle       $292.00 per cwt
    Hogs                $160.00 per cwt
    Milk                 $52.10 per cwt

    Parity prices for a multitude of other commodities are calculated monthly by USDA statisticians in the National Agricultural Statistics Service.  The November 2012 report of commodity prices contains parity prices on pages 30 and 31.

 

 

Parity prices are part of an economic base for agriculture using the relationship between market prices and the cost of production between the years of 1910-1914.  While this formula worked 100 years ago, there are few, if any, who believe it would work today.  Nevertheless, that is where we are.  Flinchbaugh’s observation on parity price suggests a doubt that Congress knows what the result of inaction will be.  “What does that mean for 2013?  That is very interesting to contemplate. If we don't amend the permanent legislation, the 2013 crop will be covered by an ancient non-recourse loan program. A floor would be put under prices at between 50 and 90 percent of parity. Parity is based on a 1910-14 purchasing power index. That means we have a 100-year old policy.

“Parity prices for 2013 include wheat at $18, corn at $12, beans at $27, cotton at $2 a pound, milk at $52 a hundredweight. Secretary of Agriculture Tom Vilsack will be required to hold producer referenda by April on marketing quotas and production controls on wheat and cotton.

“Who loves this? Our competitors. Our Canadian friends think it's great because we'll put a floor price down and they'll beat us on prices and our grain will be in government storage. I don't think agriculture has awoken to this. I don't think they know how inept this is."

 

  1. One of more immediate issues is the impact of the lack of farm policy on the US dairy program.  Beginning January 1, 2013, the lack of a dairy program will force the USDA to begin implementing the 1949 Permanent Law for dairy producers.  In brief that will require the USDA to purchase milk, store it as cheese and powdered milk, and remove enough of it from the market to cause prices to rise from the current $18 per cwt to the parity price of $52 per cwt.  Such a shortage of milk is expected to push consumer prices into the $6 to $8 per gallon range.
     

One of the more outspoken critics of the lack of farm policy inaction is Senator Patrick Leahy (D-VT) who addressed the Senate December 21 .  He said, “The Secretary of Agriculture and his staff have been -- quite literally -- dusting off old paper files and mimeographed notes from the 1940s and 50s to review the Agricultural Act of 1949….This archaic law will force the Federal Government to spend billions of dollars to buy and store dairy products to help raise the price of fluid milk for dairy farmers.  The Secretary will have to keep spending until he is able to raise the price of fluid milk by 60 or 70 percent…..Never before has the Farm Bill expired like this.  And now on January 1 we will implement market-distorting dairy policy so old that 49 current members of the Senate -- including the Chairwoman of the Senate Agriculture Committee -- were not even born when it was signed into law by then-President Harry Truman.”

 

Summary:

The September 30th expiration of the 2008 Farm Bill without a replacement was not a crisis on October 1st.  However, three months later, it is beginning to look like that.  On January 1, the US dairy industry will see prices determined by parity, which is based on a 1949 law that uses economic formulas developed 100 years ago and will push milk prices to the $6-8 per gallon range.  As commodity marketing years expire, the 1949 Permanent Law will take effect and raise prices as the government is forced to impose production quotas to keep enough of the commodity off the market that will allow prices to rise to established levels that are 2-4 times current market prices.

 

 

 

 

 

 

 

 

 

 

Posted by Stu Ellis on 12/25 at 08:30 PM | Permalink

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