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Tuesday, April 30, 2013

Political Dealing with Farm Programs


Monty Hall would love it.  And farmers who gamble on the markets and big stakes revenue crops would be in hog heaven.  And for those who were fans of the daytime television show Let’s Make a Deal will appreciate the choices they might be afforded if the Congress approves a new Farm Bill with a trio of optional programs.


Agricultural economists Carl Zulauf of Ohio State University and Gary Schnitkey of the University of Illinois suggest farmers may have three choices of programs for a farm safety net based on what the House and Senate Agricultural Committees may develop.  The Committees are slated to begin marking up their versions of a new Farm Bill in the next few days, reworking their proposals for the 2012 Farm Bill that did not get considered in the House.


Door #1  Revenue Program


While they did not get much attention per se, the Senate’s Agriculture Risk Coverage (ARC) and the House’s Revenue Loss Coverage (RLC) were designed to provide year to year financial support for agriculture, since crop insurance guarantees only provide support for a single crop, and crop values can change significantly from year to year (e.g. 2012 to 2013).  The ARC and RLC programs contained complex formulas involving price averages over multiple years, then multiplied by a coverage level, which was 89% in the Senate and 85% in the House.  When revenue fell below threshold levels, payments were made on a per acre basis taking gross revenue into account along with crop insurance indemnity payments.


The reason a farmer would not want to pick Door #1 is because price trends, as the result of large crops, will decline and financial support will decline in lockstep. Crop revenue insurance makes payments on a price guarantee or yield insurance makes payments on bushels produced. As a result, multiple years could provide minimal insurance indemnity payments and the multiple year season average prices may work their way lower as well.  Rapid declines would be protected, but slow declines would not and farming operations would have to learn to live with less USDA farm supports.


Both ARC and RLC are connected with crop insurance, and provide financial support where farmers may lower their cost by having a higher deductible.  If a 65% or 75% crop insurance coverage is selected the ARC and RLC programs provide a payment that begins where the crop insurance ends, but does not guarantee 100% of expected revenue, only a “shallow loss.”


Door #2  Target Prices


An old program that was phased out with Freedom to Farm was resurrected for southern farmers who wanted to retain the concept of target prices for peanuts and rice, which have enjoyed high price support programs.  And the political weight of the south on the Agriculture Committees nearly assures that any new farm program will include target prices.  The concept of target prices created havoc for the USDA when the World Trade Organization upheld a complaint by Brazil over high support prices for US cotton.  A payment was made to Brazil, but a subsequent payment was negated by the recent sequester action.


Target prices were included in the 2008 Farm Bill, but were so low, Cornbelt farmers may not have known they were there, with $2.63 for corn, $6.00 for soybeans, and $4.17 for wheat.  While the target prices were low, the government did not have any outlays for deficiency payments. However, they would not have provided any substantial economic support if market prices had faded that deep.


Since target prices are set by a Farm Bill, they will remain steady throughout the life of the legislation, but any financial support they offer could be pared by year to year appropriations.  If target prices are high, payments could be made that would draw taxpayer protest, such as the current system of direct payments.  And such financial support, since target prices are based on production, will draw WTO protests because target prices encourage US production at the financial risk of farmers in developing countries.


Door #3  Supplemental Insurance Program


While cotton producers only were eligible for the STAX program proposed in the failed 2012 Farm Bill, the Supplemental Coverage Option (SCO) was included in both the House and Senate proposals.  It was designed to enhance the use of crop insurance by offering the opportunity for farmers to cover their shallow losses, their deductible, with a subsidized mini crop insurance program.  It was generally designed to take farmers up to the 90% coverage level, and was based on either county yield or revenue in the spirit of GRP or GRIP policies.


The SCO plan was a year to year plan with different levels of financial protection from year to year and could fall substantially as 2012 prices fell compared to the 2013 new crop prices. Another downside is the potential for sporadic coverage, if an insufficient number of farmers wanted SCO to create a risk pool in their county.




Contrary to the TV program, farmers may know what is behind each of the doors, but it is now up to the Congressional Ag Committee members to play Let’s Make a Deal.  All three of the programs, Revenue Program, Target Price Program, and Supplemental Insurance Program potentially have a substantial price attached to them and that may spell their demise.  However, Congress will have ways of cutting costs, by reducing subsidies for crop insurance, by reducing target prices, and by reducing the payment levels from the 80% range down to levels that are considerably less.  The Congress is a long way from approving any of these plans for implementation for the 2014 crop; however they form the basis for programs that have been given considerable support within the committees and are familiar to others in Congress.

Posted by Stu Ellis on 04/30 at 09:58 PM | Permalink

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