By Gary Schnitkey, University of Illinois and Carl Zulauf, The Ohio State University
After last year's failed attempt, Congress will again try to pass a Farm Bill this year. Mark up in both the Senate and House Agricultural Committees likely will occur in the near future. Given bills passed last year in the full Senate and by the House Agricultural Committee, along with proposals put forward this year by farm groups, it is possible to gain a feel for the types of programs likely to be included in the Farm Bill. This year, negotiations likely will be around three programs: a revenue program, a target price program, and a supplemental insurance program. A passed Farm Bill likely will include two, if not all three, of these programs, giving farmers choices among the programs. The exact nature of each program will be determined by negotiations.
Both the Senate and House Agricultural Committee bills from last year included revenue programs. The Senate version is called Agriculture Risk Coverage (ARC) and the House's version is called Revenue Loss Coverage (RLC). A discussion of ARC and its farm and county level alternatives is provided here. Discussion of the House Bill is available here.
Both ARC and RLC are designed to make payments when revenue falls below an average of previous revenues. In ARC, the guarantee for each crop equals the previous Olympic average of 5-years of yields times the Olympic average of the previous 5-years of prices times .89. The .89 is a coverage level and varies across bills (the House had a .85 coverage level). When revenue falls below the guarantee, a payment is made. ARC and RLC payments are limited in amount so as to limit expenditures on the farm commodity program, to limit payments to operations with large acreages, and to prevent duplication of payments across the revenue and crop insurance programs.
Because guarantees are based on previous revenues, these revenue programs will tend to make payments in cases when prices decline and then stay low over multiple years. These are cases in which crop insurance will not make payments. Crop insurance resets its guarantee on that year's futures prices, thereby providing protection against price and yield declines within a year. However, crop insurance will not provide protection across years. If, for example, the projected price in 2014 is $4.50 rather than this year's $5.65, crop insurance will not provide protection against the decline from $5.65 to $4.50. Revenue programs are designed to fill this gap in a crop insurance based safety net.
The major advantage of this revenue program is that it will provide protection against multi-year revenue declines. Moreover, payments will decrease over time if prices remain low because the guarantee will decline as lower prices enter into the guarantee. Hence, farmers will be protected against price declines, but eventually farmers will have to adjust to new market conditions.
Criticisms of the revenue programs include that payments will decline over time if prices stay low. These programs also begin paying at relatively high coverage levels and only pay on a narrow band of coverage levels (ARC is from 89% to 79%, RLC is from 75% to 65%), leading critics of these programs to label them as "shallow loss" programs.
Target Price Program
A target price program makes payments when national, market year average (MYA) price falls below a set "target price". The counter-cyclical programs contained in the 2002 and 2008 Farm Bills are examples of target price programs. Last year's bill from the House Ag Committee has a target price program named Price Loss Coverage (PLC), as more fully described here. The Senate did not have a target price program. The recently released Farm Bill proposals by the American Farm Bureau Federation (AFBF) and the American Soybean Association (ASA) contain a target price program.
Target price programs traditionally set target prices in the legislation that are fixed for the length of the Farm Bill. Payments then occur when MYA price falls below the target price. When this occurs, the target price payment equals:
target price rate (target price - MYA price) x payment bushels per acre x base crop acres x payment rate.