Billions of Dollars in Corn Program Payments and 2014 Plantings Impact Could Also Have Farm Bill Implications

December 9, 2013 12:38 AM

via a special arrangement with Informa Economics, Inc.

A look at farm bill safety net and commodity price issues

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Those analysts scoring farm bill and farm program costs in the Congressional Budget Office and the Obama administration (USDA, OMB) have not yet revealed a major issue ahead – the billions of dollars in corn-related payments likely for the 2014 crop. The "baseline" projections must assume current policy – and that policy allows farmers to enter the Average Crop Revenue Election (ACRE) program. While few producers enrolled in that program via the 2008 Farm Bill and its one-year extension for 2013, that would not likely be the case if they are allowed to in 2014, what with low to very low prices expected for corn during the 2014 crop season. That means the budget baseline could or would show around $5 billion or so in ACRE-related payouts, depending on ACRE participation.

But another market-significant development is that this could or would skew more-than-expected plantings of corn in order to be protected under the ACRE program parameters – thus, corn plantings may not decline as much in 2014 as most now project. This would occur even if a new farm bill is passed and Congress starts the new programs (ARC, PLC, etc.) with the 2015 crops in order to give USDA time to implement the new programs. The draw to corn plantings comes at a time when some corn and soybean grower lobbyists have stressed farm programs should be decoupled from actual plantings so they do not impact plantings or the market. But in the above scenario, that would likely be the case.

Some congressional contacts signal that if a new farm bill is passed in early January 2014, the Title I (safety net) programs in the new farm bill would be implemented for 2014 crops, and not delayed. However, sources doubt USDA can implement the new cotton crop insurance/STAX program for 2014 since the reinsurance year has begun. But, even if it can, USDA's past stance has signaled at least a two-year lag in fully implementing STAX, so all cotton producers can access it.

It will be interesting to see how CBO scores the farm bill relative to farm prices and ACRE and to future ARC participation. Some note the CBO and USDA baseline last year included higher prices than current values and thus did not trigger ACRE payments. FAPRI's August baseline did not trigger payments. However, more current private analysts' forecasts would trigger ACRE payments because those forecasts reflect current cash and futures prices. Many private analysts' have a corn price projection for 2014 of under $4. Any unrealistic CBO corn price projection would skew the baseline to look more favorable than it could turn out to be. CBO will officially release their new updated budget baseline in early 2014. It is unknown what the upcoming Obama administration projects for the 2014 corn season, but that will be known in early 2014 when the White House releases its budget proposals. Because commodity prices, notably corn, are considerably lower they were a year ago, they would trigger hefty payments via ACRE program participation.

But a baseline analyst contact said, "A lot of people forget that most baselines were showing lower prices for 2014/15 last year. For example, USDA's February 2013 baseline projected corn prices for 2014/15 is at $4.10 per bushel. Preliminary numbers being discussed by those working on baselines (CBO, FAPRI, USDA) are generally within this range and I expect all will change somewhat before we see the published numbers. That said, these prices will mean revenue guarantees under ARC (Ag Risk Coverage) could be pretty deep in the money. Over time, assuming prices remain in the $4.00-4.25 range, the ARC guarantee based on the 5-year olympic average would be less attractive. The issue is akin (though in an opposite sense) to the 1996 farm bill when Freedom to Farm was scored against the 1995 baseline. Direct (PFC) payments were locked in based on the large expected deficiency payments using the '95 baseline. If the 1996 baseline had been used there would have been lower expected outlays for deficiency payments (because of higher prices)."

Also of note will be pending and updated farm bill reports from FAPRI and Texas A&M University, and the University of Illinois as to what they assume for 2014 crops, notably corn. A joint FAPRI/Texas A&M report was expected to be released weeks ago, but for some reason has been delayed. Some conjecture the delay is to avoid some updated projections playing a big role in new farm bill negotiations, which are at a sensitive and critical stage. Others speculate that some groups will just "cherry pick" items from the report to support whatever position they have regarding farmer safety net issues.

To illustrate the potential ARC program payments, here are the numbers behind expected big corn farm program payments for 2014 relative to the ARC program (note: sequestration-related cuts are not included to better compare announced program details):

  • The estimated 5-year Olympic Average price for corn is around $5.30/bu.

  • 86% of $5.30/bu is $4.56/bu., which would be the ARC guarantee.

  • So, if the 2014 price is $4.00/bu., that is $0.56/bu. below the guarantee.

  • But, the ARC is maxed out at $0.53/bu. because, if you assume average yields, the max ARC payment is 10% of $5.30/bu., or 0.53/bu.

  • While the ARC is obviously based on revenue, you can look at price alone—like the above illustration--if you assume farmers have average corn yields in 2014.

  • The calculated ARC payment is just under two times the current direct payment rate of $0.28/bu. One important thing to remember: the direct payment is paid on the old payment yield, last updated in 2002. ARC is based on a farmer's 5-year Olympic Average yield. Given the trend in corn yields, farm policy analysts see a scenario where the ARC payment could be well over two times the full direct payment when one accounts for the much higher yield used by ARC.

In discussing the ARC-related issued with veteran farm policy analysts, they raised the following questions and issues:

  • If corn grower lobbyists said they did not need need the Direct Payment, why do they need ARC, at more than twice the DP?

  • If corn grower lobbyists complain that the Price Loss (Target Price) Coverage (PLC) would distort plantings, what will ARC do, paying out two times the Direct Payment before PLC even provides a dime of support? Some observers speculate this is perhaps the reason why corn, soybean and canola group lobbyists are calling for the revenue programs to be decoupled too – after a long time talking about how ARC is market-oriented and will not distort plantings and the market.

  • Taking the above into consideration, some analysts are suggesting that ARC needs considerably more restraint. The reduction to the 86% loss threshold was a good move, they note, but the scenario above already assumes the 86% loss threshold. There needs to be more, some conclude. Some suggestions noted by analysts include:

         – Not allowing ARC to exceed the old Direct Payment;

         – Lowering the payment factor below 82% or even 80%;

         – Not allowing the full 5-year Olympic Average price to be used in the benchmark revenue---perhaps use 90%
            of the 5-year Olympic Average price.

Bottom line: Soybeans at $12.10 and wheat at $6.65 imply hitting trigger levels (assuming no change in yield) at $10.65 and $5.85. All three (including corn) could be in the money relative to 2014/15 price expectations. Restricting payments to base acres/production will mitigate against potential area distortion, but the costs could be quite high. And if those costs are indeed high, farm program spending would be a target for future budget cutting exercises. Maybe not in this administration, but something like this ensures agriculture will be on the defensive for the duration of the budget spending offset era.

How Veteran Farm Bill Analyst Views Current Farmer Safety Net, Commodity Price Issues

A farm bill analyst, asked to comment on the various farmer safety net issues relative to the ongoing farm bill debate, said:

"There are a lot of different views about where markets are going. It should be no surprise that updated baseline estimates have weaker prices for many crops than the ones prepared earlier this year and used for farm bill analysis. However, not everyone agrees about just how low baseline prices should be.  December 2014 corn futures are currently at  $4.64 per bushel. So it will be important to hear more from people who are convinced that 2014/15 corn prices will be a lot lower than that to find out just what it is that they know that the market hasn’t figured out yet. 

"As we’ve learned this past year, it’s not just the baseline prices of corn and soybeans that have political significance when evaluating farm bill alternatives. We should have more of a discussion than we normally would about crops like barley, peanuts and rice to make sure we are comfortable with the stories for those commodities as well. Rice is an interesting one right now, for example—US prices are far above Thai and Vietnamese prices and it will be important to hear views on whether those gaps can persist or if they’ll close, either by US prices falling or world prices rising.

"It’s probably important to separate concerns about how baselines will affect the scoring of the farm bill from concerns about how policies will play out given changing market circumstances.  My understanding is that the official Congressional Budget Office (CBO) scoring baseline will continue to be the one from last spring for some time yet. CBO could start providing unofficial scores against the new baseline in January or whenever it’s ready.  That could easily result in a situation like we had back in 1995/96, when the farm bill was scored as saving a bunch of money against the 1995 scoring baseline but not much against an updated baseline.

"I don’t honestly know the net effect of shifting to a new baseline as there are many moving parts.  Lower corn prices will result in larger ACRE expenditures in the baseline, all else equal, so eliminating ACRE (even if it isn’t done until 2015) probably will be scored as saving more money than CBO gave it credit for a year ago. On the other side, of course, an ARC-like program will cost a lot more than earlier anticipated for the 2014 and 2015 crops if baseline prices are indeed lower.  However, if baseline prices remain lower than previously estimated, then the cost of ARC will come down and will eventually be likely to drop below previous estimates, all else equal, given declining levels of benchmark revenue.

"PLC, on the other hand, would get more expensive, potentially a lot more expensive, in every year if a new baseline has lower average prices. FAPRI's 2013 baseline, for example, showed that a PLC-type program for corn would only pay out about 22 percent of the time in any given year between 2014 and 2018 (that is, 5-month prices would drop below $3.70 per bushel about 22 percent of the time given the average 12-month price of $4.78 and FAPRI's estimate of market volatility).  Even a fairly modest drop in the average baseline price would increase the frequency and magnitude of PLC payments.  It would matter a lot if baselines just show a temporary dip in prices or if they show prices at a new, lower plateau.

"Budget scoring concerns aside, it is important to think about how policies will play out in the real world.  As various folks have noted, it’s not hard to come up with scenarios where payments for particular crops are quite large, either under current policies (ACRE) or proposed policies. If large payments are anticipated, they will affect production choices, especially if payments are tied to actual planted acreage but to some extent even if they are not. While prior reports showed small average effects on production because they were looking at averages across a lot of different market circumstances – some with few or no payments, where one crop was favored over another, and some where the favored crops were different. But there were certainly market situations where net impacts were far larger than the averages shown.

"A key unknown is how bases are going to be determined, for example. Choices there could have important impacts, not just on the distribution of benefits, but perhaps on market outcomes as well (it is bound to affect producer decisions if they think bases are forever fixed than if they think or know they will be routinely adjusted)."

PERSPECTIVE: The biggest contention between the two price outlook camps is the interaction between policy and prices. Those that don't see much of a policy impact have higher price outlooks. Those that see policies impacting area have much lower prices, especially given the new Renewable Fuel Standard (RFS) volume requirement for corn-based ethanol that is set at the blend wall.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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