House Lawmakers, Southerners, Others Building Case for Target Price Option in Farm Bill

May 22, 2012 05:45 AM

via a special arrangement with Informa Economics, Inc.

Lawmakers believe ‘shallow’ loss program will provide shallow help if prices decline and stay there

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

As the House Ag panel has now finished subcommittee hearings in preparation for the next farm bill, those sessions revealed what is spurring the push to include a target-price-related option or some price protection component to the farm program mix that will be included in that bill. Similarly, my interviews with southern Senators – and more to come – have identified similar concerns on their part relative to the lack of such an option for peanuts and rice in particular. So the prairie fire is spreading from the south!

Peterson leads the charge for including target prices. Last week’s House Ag subcommittee hearing that focused on the commodity title and crop insurance saw the panel’s ranking member, Rep. Collin Peterson (D-Minn.), spell out his concerns on this front, both in his opening remarks and in questions to panelists.

The shallow-loss concept embodied in the Senate Ag Committee farm bill raises a key concern with Peterson, "If prices were to collapse today, which some people say we’re in a zone here where prices are never going to go down… which is the same thing we heard in 1996 with Freedom to Farm…I just want to remind everybody we spent quite a bit more money than we saved with Freedom to Farm to bail everybody out. And the thing that people need to understand is that if the same thing happens this time, there is no money coming from Washington. Forget about getting bailed out. So if you get this thing wrong, good luck!"

That concern is driving Peterson’s support for a target price component to remain in the farm bill. "It solves some of the problems that we’ve had on regional areas," he said as the May 16 hearing opened.

But he also warned against making changes to the crop insurance program, noting that the program has already be recently re-written, has seen major changes made via the Standard Reinsurance Agreement (SRA) USDA negotiated with crop insurance companies, and other changes. "We don’t know the effects of those changes," Peterson stated. "I don’t think we should do anything until we have hard data on what happened before we go off on doing something with crop insurance."

Noting that many of the growers in his congressional district have shifted to using enterprise units for insuring their crops, Peterson said his problem with jettisoning target prices from the farm bill comes in if prices declined. "The problem is, it will protect you in this year but if these prices go down and we have $3 corn, you’re going to be buying insurance to guarantee that you have a loss at that point," he warned. "I am not sure that revenue coverage is going to be enough to make up for that. That’s why I am interested in target prices and putting some kind of a floor in in case prices do go down."

Peterson has a series of meetings in his district this week in which he’s going hear what farmers have to say about the coming farm bill.

"We need to really work through this commodity title to make sure what we do here is going to stand the test of time that its going to work if we get a collapse in these prices, which seems like we always do at some point," Peterson continued. "Frankly, in order to get this bill done, we need to take care of the concerns of rice and peanuts which don’t have a crop insurance system that works for them at this point. Rice is getting close to getting something put together; I think we’re getting close to a reference price or a price we can rely on for peanuts, but they’re not going to be ready for this year so I think that’s another thing that argues for the target-price concept."

In questions to panelists, Peterson returned to the issue of what would happen if corn prices would decline to $3 per bushel and stay there for three or four years. "The revenue ‘thing’ will protect you against that decline somewhat, but eventually that’s going to go to $3 too," Peterson said. "So you got a situation with crop insurance where you’re not able to protect your price where you need and the revenue gets down to the same level. Am I right about that? What happens at that point?" He said the response he has gotten so far has been that farmers would "plant for the marketplace." But, he pointed out that corn "kind of drives the price for soybeans and wheat and if corn goes down, it’s going to be across the board and I don’t see people necessarily shifting crops from one loss to another, they’re going to plant what’s better for the farm."

University of Illinois Economist Dr. Gary Schnitkey responded that Peterson was "absolutely right. If something like what was passed by the Senate came into being, and we have a $4.50 price now for corn and have a series of years of $3, the benchmark revenue and the benchmark price would go down to $3 and ARC (Ag Risk Coverage) would make less payments as we move through time. The point of that though is that – and you’re also right that other crops are correlated and soybeans and wheat and others would be going down at the same time."

Schnitkey said that under Peterson’s scenario, "the purpose of ARC in that case would be to give producers the opportunity to make decisions on their farm to react to that marketplace. There would likely be leads and lags in cost of production, but they would also likely decline as well as cash rents would also likely come down if we saw that situation. So, it would be a buffer for that period."

But Peterson was not satisfied, pushing further on the issue of how much of a buffer it really was and asking why wouldn’t farmers opt to purchase unit coverage crop insurance at 80 percent coverage with an 80 percent subsidy on the premium?

Schnitkey again agreed with Peterson that producers would likely do both -- "continue in crop insurance and also be in a revenue-based program." He acknowledged that since ARC did offer free risk coverage for producers, they would potentially buy lower crop insurance coverage levels. "In my personal opinion it would be minimal because of the differences in what’s being protected," he added. "Again, most of the revenue programs I’ve seen protect are a very narrow band."

But Peterson still was not convinced, commenting, " I just don’t see where if these prices collapse this is going to help you a heckuva lot! You’re going to be okay the year it collapses probably, but the next year, I just think you’ve got a big problem. And you’re going to have people camped out out here (gesturing to outside the hearing room) and we’re not going to be able to do anything about it!"

Schnitkey was able to partially respond with "Yes, prices would come down. But in the Senate program it is a five-year Olympic average so the first year of a low price…. " only to be told by Peterson, "Yeah it would buffer you somewhat."

In further questioning, Peterson engaged with Roger Johnson, President of the National Farmers Union (NFU) and former Agriculture Commissioner and farmer from North Dakota, who also indicated that there was not adequate price protection in the Senate bill. While advocating for the NFU proposal as the way to fix the problem, Johnson’s comments reveal a growing concern among growers well beyond peanut and rice producers as they learn more about shallow loss revenue programs contained in the Senate version of the bill.

Turning to former USDA Chief Economist Keith Collins, who now is a consultant to the crop insurance industry, Peterson delved further into the issue of enterprise units, something that came about due to a provision in the 2008 Farm Bill. USDA implemented that provision by increasing the premium subsidy for producers to shift to enterprise units instead of buying crop insurance field by field. "That appears to be working as we have a lot of people shifting to things like that," Peterson said. "Am I right about that?"

"That has worked big time," Collins responded. "The enterprise unit subsidy is 80 percent I think for 75 percent coverage; at 85 percent coverage it’s only 53 percent. But that’s a lot higher than basic or optional units. On basic and optional units I think it is 38 percent. So it jumps from 38 percent to 53 percent at the highest levels of coverage. So you get a higher subsidy and you also get a second effect because the producer is taking on more risk because they have a bigger area that is being insured; there’s an opportunity for some diversification because the premium rate is lower, so you get a double effect when you go to enterprise units."

Two years after the 2008 Farm Bill provision was put in place, Collins detailed things went from virtually no enterprise units for corn to "something like 400,000 enterprise units in the United States" two years later. "So there has been a big shift to enterprise units and it has helped coverage levels," he commented.

"This whole question about supplemental programs filling the gap that crop insurance might not be covering….in most of our discussions with agents, they have told us that people who have shifted to enterprise units have increased their coverage levels by about 5 percent," Collins detailed. "So you see that coverage level increasing as well, so crop insurance is doing a better job than what it had been, which is part of this shallow loss issue."


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






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