Key Question for New Farm Bill: What's the Objective?

October 4, 2012 03:23 AM
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Equity and good farm policy mean different things to farm bill stakeholders

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

The key to analyzing any new farm bill is to ask the question: What's the objective? In the current farm bill debate, one hears different responses, as some groups, analysts, lawmakers and others are pushing one approach over another.

Answer this about the farm bill objective: Is it to replace as much of the eliminated direct payments as possible? Or is it to develop an effective safety net for as many producers as possible within a given and fiscally prudent budget baseline?

The Senate-passed farm bill focuses on a revenue assurance program called Ag Risk Coverage (ARC). It includes an optional program called Supplemental Coverage Option (SCO).

The House Ag Committee-passed bill allows a producer to make a choice between a revenue assurance program called Revenue Loss Coverage (RLC) or a target/reference price program called Price Loss Coverage (PLC). An optional SCO is offered under the House plan, but not if the RLC option is chosen.

The SCO program is an area-based crop insurance product that can cover a portion of the deductible in individual crop insurance coverage. SCO provisions differ between the House Committee and Senate bills. (For program details and differences, see the box at the end of this article.)

Some farm bill observers conveniently use certain assumptions and have cherry-picked some farm bill analysis reports to push their favored programs.

Some farm bill stakeholders isolate the commodity title, leaving out crop insurance benefits, the result of which is clearly that a revenue program will pay out when price protection will not. But if one adds in SCO benefits and observes which crops are best served by crop insurance, it is a far different story. So beware of what is included and what is not and a possible sleight of hand to prove one's biased choice.

To repeat: Crop insurance needs to be figured into the mix and the need for payments needs to be in the mix.

Talking with some corn farmers impacted by a farm bill, one hears this refrain: they want the Renewable Fuels Standard (RFS, another factor to consider when trying to look at overall policy support), crop insurance, and basic price protection. They do not want a revenue program shooting out regular, little payments.

Farm bill equity is in the eye of the beholder. In essence, it is easy to come up with metrics that make each bill look more equitable across crops than the other.

In the Senate bill, for example, projected ARC payments are roughly proportional to the market value of each crop – there are some differences, but they would be much smaller than the differences in the corresponding ratios for PLC/RLC payments relative to market values for each crop under the House Committee bill, so that would be a talking point for the Senate bill being "more balanced." One analyst said, “The only people who define 'equity' in proportion to the market value of a crop are those pushing for the revenue program in major corn and soybean country. That is because, when compared to huge revenues of late, the payments look small. By contrast, peanut growers with lower revenue will appear as they they are being well supported because the ratio of payments to market receipts (government payments/market receipts) is large (by mathematical necessity). I don't think I need to point out the error in this argument if the point is to respond to need.”

On the other hand, the changes from current law support levels are generally (not universally) more proportional in the House bill, so by that metric the House bill is "more balanced."

A recent Food and Agricultural Policy Institute (FAPRI) report (link - figures 1 and 2 on page 21) showed two ways of looking at equity issues, and analysts say it wouldn't be hard to come up with many others that would favor one bill over the other. In Figure 2, which accounts for all commodity spending and crop insurance, the House and Senate bill both provide very similar levels of support for corn and soybeans (within a half of a percent). All of the other commodities are treated relatively the same in the House bill, but not so in the Senate.

From page one of the FAPRI report: “The House Committee bill provides substantially more support than the Senate bill to producers of some commodities, including wheat, rice, barley and peanuts.” What FAPRI says is that corn and beans do better under the commodity title of the Senate bill compared to the commodity title of the House bill. But, when adding in crop insurance, says FAPRI: “For all major commodities, the optimal decision appears to be for farmers to choose the combination of PLC and the maximum permitted level of SCO coverage.”

Again, if one removes crop insurance from the equation and a comparison is only made of commodity title spending, then the Senate bill would probably look “better”, at least for corn and soybeans. But why? If “better” is purely a function of paying out money, it stands to reason that the Senate will look better because it is locking in high guarantees based on high prices and high yields, while the House is offering a low level of price protection that would not generate a payment unless prices dropped substantially.

What is the objective? It should be, What is the most effective safety net? For example, the Senate's revenue program triggers on an 11% revenue loss (i.e. at 89%). A 3.5% yield loss and 3.5% price dip combine for a greater-than-11% drop in revenue. One farm policy analyst said, “How could any objective observer consider this good policy unless the policy is to remove the risk from the grower and institute a quasi-direct payment? Doesn't this look most like a direct payment – except much larger for some major corn and soybean growers than the current direct payment?”

As for "better policy," that obviously can be defined many ways as well.

In terms of "efficiency," both bills distort production decisions. To oversimplify a bit, said one analyst, the Senate bill would probably distort decisions more when prices are high while the House bill would distort decisions more when prices are low. But on average, neither bill shifts acreage all that much for most crops.

For all their other problems, direct payments probably have less-distortive effects, at least on a per-dollar-of-subsidy basis, than the programs established under either the Senate bill or the House bill, according to a veteran farm policy analyst. In WTO parlance, both bills replace programs that the US currently declares to be “green box” support with new programs that will almost certainly be classified as “amber”, but overall levels of support offered under either bill are projected to remain well below WTO commitments.

Of course, the "best policy" is about a lot more than just efficiency, and different people would have different ideas of what good policy would mean. That's why many analysts should attempt to stick to providing estimates of what might happen under alternatives and let other folks figure out what is or is not good policy.

States can differ in some cases from national group suggestions. As for good policy, an individual state group can and oftentimes could/should have a different farm bill position from a national farm group or even a national commodity group, due to different soil types, weather patterns, and other state-varying factors. This is why it makes most sense to let the farmer decide the risk management option that works best.

But when looking at farm bills from a national perspective, one should be careful not to have a bill get too tilted toward any one region or regions of a country.

Enter the Congressional Budget Office (CBO), Congress' accountant. (Link to CBO reports on the farm bill.) The CBO's farm bill comparison does not include SCO, nor does CBO include it in its cost breakout. SCO is not an option in the House bill if a producer chooses revenue. But choosing Price Loss Coverage with SCO yields better than the Senate plan in many (not all) cases, particularly for larger farmers. This is what Dr. Joe Outlaw, Co-Director of the Agricultural and Food Policy Center (AFPC) at Texas A&M University, concluded in a report (link).

So do some analysis on your own. 2012 will provide an interesting example. Which proposed farm bill safety net would have worked better in real dollars: ARC county? Or PLC/SCO?

Look at the whole picture. If you look only at commodity programs and not in conjunction with what is being done on Crop Insurance (CI) (which heavily benefits corn and soybean country), then you are not looking at the whole picture. Think of a situation where a person can choose between two jobs: One job offers $100,000 per year while the other job offers $75,000 per year plus $75,000 in stock options. Which is the better deal? Apart from a few select areas of the country, much of the wheat producing regions show much lower levels of participation and much lower coverage levels relative to their corn and soybean brethren.

On SCO, the Senate bill says that SCO cannot exceed 79 percent if a farmer participates in ARC. A farmer would not likely buy a GRP/GRIP policy up to 79 percent. It would rarely pay (2012 might be such an exception year in the Midwest). Moreover, this kind of coverage cannot duplicate individual coverage. So, if the farmer has 80 or 85 percent coverage, this is not an option anyway. If the farmer has 65, 70, 75 percent coverage, it is an option but again probably not the best option. This is why the House reportedly did not offer “free” shallow loss via the revenue program and “paid” SCO.

Some observers say the real “choice” under the Senate bill may be to simply duck out of the farm program ARC and into SCO provided the farmer feels prices will stay strong.

The House farm bill instead says a farmer can have revenue or price but if he cares about both revenue and price risk, he can take the latter and then buy SCO. A farmer can still opt out of farm programs and just take SCO, which is the effective choice the Senate offers.

Some initial conclusions: A farm bill should never be an exercise in who gets the most payments the most often. Why would a farmer with corn or soybean prices where they are feel like he needs a payment? This pertains to the fiscal responsibility issue.

If wheat, cotton, rice and other prices are forecast to be relatively low and/or production more variable, then, yes, it stands to reason that they should receive more payments relative to crops with strong prices and production. In this situation, corn and soybean producers would not likely want to change positions with those other crops. Would you?

And a word about SCO. If the farm bill drags into next year, an important question is whether CBO will change its scoring of SCO. Their current score assumes only a minority of producers choose to purchase SCO. Given experience with crop insurance (where many producers buy less coverage than would maximize their return over time), that’s at least plausible. This is why some reports analyzing the farm bills assumed only moderate (half of those in PLC) rates of participation in SCO under the House bill. So if CBO changed its scoring of SCO, either the House bill would end up costing a lot more or the House would have to make its provisions less attractive to fit in a given budget window. In other words, one of the reasons the House package looks attractive to a lot of people is because they see the advantage of doing something CBO assumes they are not going to do. But analysts point out that one should look to GRIP adoption rates for insight. At the end of the day, the observers note, SCO triggers on a county-wide loss of revenue. Unlike the shallow-loss FSA-administered programs like ARC, which are free (i.e., not cost of entry), the producer has to pay for SCO. Given that a producer has to pay for an insurance product that only pays if the entire country has a loss, some observers discount those who think the CBO is considerably low on its SCO participation rates.

Also, if growers would opt out of the Senate ARC and into SCO, then CBO would have to reflect this dynamic and increase the cost of SCO in the Senate package. At a minimum, it would marginalize the Senate's Title I program and reflect much more spending in the crop insurance title.

The real corn policy fight ahead. Lastly, some corn and soybean farmers recognize that the Renewable Fuels Standard (RFS) is going to come under increasing attack and they know that is where their bread is buttered, and they say they should be making friends with others to help them fight that fight rather than flicking the ears of a 2 million acre rice industry or the cotton industry or whomever.

Bottom line: What's the objective? That has and will be the key debate point on farm policy. In the past this argument has been framed in terms of farm/operation size. That debate point is still there, but may well be overshadowed by the issues raised via an examination of the current two farm bill versions relative to one crop versus another.

The new farm bill process started with one objective that will be met – the elimination of direct payments. But while lawmaker after lawmaker insisted that crop insurance be the template for risk management for producers, lawmakers themselves are unwilling to forgo having some type of true government involvement in US farm programs. Maintaining some type of government involvement beyond crop insurance makes sense when recognizing that the value of crop insurance rises and falls over time with the market.

Yes, the government is involved in the federal crop insurance program, but it is delivered to the farmer by the private sector. There are those – namely some in government – who that think government workers could do a better job of delivering even crop insurance to farmers.

But think about the complexity of some prior farm programs, like the Average Crop Revenue Election (ACRE) program or the Supplemental Revenue Assistance Payments (SURE) program. Both reflected lawmaker desires and when those were meshed with actual delivery to farmers, both are viewed as complex or in the case of SURE viewed as providing benefits far too long after the fact. So, one can only imagine how cumbersome crop insurance could become if pushed totally to the government.

Then there is the matter that under farm programs, government employees are directed in no uncertain terms to not offer the producer guidance on which option may be the best for them. There are likely more than a few crop insurance agents who work through scenarios with their farmer customers to develop the best plan.

But this trails far away from the basic premise here: What is the objective? Answer that and it makes the current Byzantine-like farm bill debate a lot easier to understand – at least for typical farm bill stakeholders, many who appear more stuck in the weeds debating things that would get experts bogged down. Keep it simple because the farm bill is not.

Major Farm Programs in Senate and House Farm Bills

Source: FAPRI

The proposed Senate ARC program would also make payments when per-acre revenues for a particular crop fall below a trigger level. While the program has some features in common with the current ACRE, the program also has many distinct provisions:

– The program is available to grain and oilseed producers, but not to producers of upland cotton.

– Producers must choose between two options. One would make payments based on calculations that use county-level yields and the other would use farm-level yields. Those who choose the county-based option can receive payments on 80 percent of planted acres, while those who choose the farm-based option can receive payments on 65 percent of planted acres. Under either option, 45 percent of prevented planted acres are eligible for payment.

– Total planted acres on a farm used to calculate ARC benefits generally cannot exceed actual average plantings and acres considered planted between 2009 and 2012.

– A benchmark level of revenue is determined by multiplying a 5-year Olympic average of U.S. season-average market prices (the average after excluding the year with the highest price and the year with the lowest price) by a 5-year Olympic average of yields per planted acre. For rice and peanuts only, there is a floor beneath the annual prices that can be used in calculating the Olympic average price. Unlike ACRE, there is no restriction on the magnitude of annual movements in the benchmark.

– Payments are made when actual revenues (yields per planted acre multiplied by the U.S. average market price for the first five months of the marketing year) fall at least 11 percent below the benchmark.

– The maximum payment is equal to 10 percent of the benchmark. Thus, the program covers losses of between 11 percent and 21 percent of the benchmark. Producers would be expected to continue to use crop insurance to protect against losses not covered by ARC.

– Payments under the program can be made once the five-month price is known. For corn and soybeans, for example, payments could be made early in the calendar year after the crop is harvested.

– There is a $50,000 limit on ARC payments to a producer, except a peanut producer can receive up to $50,000 in ARC payments for peanuts and up to $50,000 in ARC payments for other crops. ARC benefits are not available to producers with an adjusted gross income (AGI) of more than $750,000.

In the House Committee bill, producers can choose to enroll particular crops in the RLC program, which is similar in many respects to the Senate ARC program.

– As with ARC, RLC is available to grain and oilseed producers, but not to producers of upland cotton.

– RLC is similar to the county-based option under ARC, except payments are available on up to 85% percent of planted acres and 30 percent of prevented planted acres, and producers can make participation choices on a crop-by-crop basis. Total payment acres on a farm generally cannot exceed the sum of historical base acreage on the farm.

– Benchmark calculations under RLC are generally the same as under ARC, except all commodities have a floor under the annual prices that are used in calculating the Olympic average price.

– Payments are made when actual revenues fall at least 15 percent below the benchmark.

– The maximum payment is equal to 10 percent of the benchmark. Thus the program covers losses of between 15 percent and 25 percent of the benchmark.

– Payments can only be made after October 1 of the year after the crop is harvested. Thus, payments on the 2013 crop would not be available until October 2014, similar to the timing of CCPs and ACRE payments under current law.

– The payment limitation in the House Committee bill is $125,000, again with a separate limitation for peanuts. The AGI limit is $950,000.

In the House Committee bill, PLC is the default option for grain and oilseed producers. The program has some features in common with the current CCP program, but differs in important respects.

– Like CCPs, PLC payments occur when market prices fall below a trigger level, and payments depend on fixed program yields instead of actual harvested yields in a given year.

– Unlike CCPs, PLC payments are made on 85 percent of planted acreage and 30 percent of prevented planted area rather than on fixed base acreage. As with RLCs, total payment acreage is limited to historical base acreage on a farm.

– PLC reference price are higher than the target prices used in calculating CCPs, and PLC calculations use the five-month market price, which is normally less than the season-average price used in CCP calculations.

– Producers are given the option of updating payment yields to 90 percent of the 2008-2012 average yield per planted acre.

– Like RLC payments, PLC payments can only be made after October 1 of the year after the crop is harvested. Payment limitation and AGI rules are also the same as for RLC.

The SCO program is an area-based crop insurance product that can cover a portion of the deductible in individual crop insurance coverage. SCO provisions differ between the House Committee and Senate bills.

– In the Senate bill, SCO is available to producers not enrolled in STAX. In the House bill, SCO is not available for acreage enrolled in STAX or RLC.

– In the Senate bill, SCO can cover all but 21 percent of a producer’s deductible if the producer is enrolled in ARC, and all but 10 percent in the case of a producer not enrolled in ARC.

– In the House Committee bill, SCO can cover all but 10 percent of the deductible for a producer enrolled in PLC.

– Federal subsidies cover 70% of the SCO premium.

For cotton, the Stacked Income Protection Plan (STAX) has some features in common with ARC and RLC, but also has distinct provisions.

– The program is available only to producers of upland cotton.

– STAX is offered as a crop insurance product. Producers pay a premium and receive indemnities when a calculation of county revenues falls below a trigger level determined by historical yields and futures market prices. Federal subsidies cover 80 percent of the STAX premium.

– STAX can be used to cover revenue losses between 10 percent and 30 percent of expected county revenue. Producers would be expected to continue to use conventional crop insurance policies to protect against other losses.

– The STAX payment rate multiplier of between 80 and 120 percent is selected by the producer.

– The House Committee and Senate versions of STAX are similar, except the House version specifies that the price used to calculate the level of guaranteed revenue cannot fall below 68.61 cents per pound.

– As a crop insurance program, there are no payment limitations under STAX.

Both the House and Senate bills continue the current Marketing Loan Program, with loan rates and other provisions that generally follow current law. One important exception is upland cotton, where the loan rate under both bills is set at the two-year average of the Adjusted World Price (AWP), but in no case above 52 cents per pound or less than 47 cents per pound.

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






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