FarmPolicy

August 21, 2019

Farm Bill Risk Management Programs (Price Issues), Payment Limits, EU Issues (Trade), and Senator Johanns

Farm Bill Risk Management Programs (Price Issues)

Robert Dismukes and Edwin Young, writing in the November edition of USDA’s Amber Waves magazine, noted in an article entitled, “New Market Realities Affect Crop Program Choices,” that, “Higher world market prices for major food commodities such as grains and vegetable oils have increased prices received by producers of several major field crops to historic highs—more than 75 percent above levels just 2 years ago (see, ‘Fluctuating Food Commodity Prices—A Complex Issue With No Easy Answers’). While price increases have boosted crop revenues and farm incomes, producers still face financial risks. For one, higher production costs—for fuel, seed, fertilizer, and land, in particular—have offset some of the gains in product prices and increased producers’ exposure to revenue losses. Higher prices have generally been accompanied by greater price volatility, increasing the costs of managing crop price risks. Prices might, as they generally have in the past after dramatic upswings, drop back to pre-spike levels. Finally, weather variability, as always, makes yields uncertain.

“Farmers and ranchers employ a variety of tools and strategies—including forward contracting, diversification, savings/borrowing, and off-farm income—to mitigate and manage their risks. Field crop producers are also aided under government programs such as Federal crop insurance, disaster assistance, and commodity programs. The Food, Conservation, and Energy Act of 2008 (known as the Farm Act), which covers 2008-12, modifies these programs and adds new ones.”

The authors indicated that, “Federally subsidized crop insurance, which includes a variety of crop yield and revenue insurance options, protects participating producers against risks over the growing season. Crop yield insurance protects against yield shortfalls; crop revenue insurance protects against revenue (yield multiplied by price) shortfalls. Both yield and revenue insurance adjust from year to year, depending on crop market price expectations. Since potential insurance payouts, as well as premium costs, increase with rising commodity prices, these insurance plans have assumed greater significance in the current price environment.”

With respect to disaster assistance, Dismukes and Young explained that, “While subsidized crop insurance is the primary form of assistance provided by the Federal Government against bad weather, plant diseases, and other natural hazards, ad hoc disaster assistance payments have also been frequently provided. Between 2000 and 2007, four disaster programs were authorized, at a total cost of about $10 billion. The 2008 Farm Act established a permanent Supplemental Agricultural Disaster Assistance program, which includes programs for livestock as well as crop producers.

“The program for crop producers, called Supplemental Revenue Assistance (SURE), is linked to crop insurance. To be eligible for SURE payments, a producer, with some exceptions, is required to obtain crop insurance or, if crop insurance is not available, to participate in the Non-Insured Acreage Program (NAP). The SURE guarantee level is based on the producer’s insurance coverage: the higher the insurance level, the greater the SURE guarantee, up to 90 percent of the expected revenue.

“Eligible producers in counties declared disaster counties by the Secretary of Agriculture, or in contiguous counties, or those who show proof of an individual loss of at least 50 percent are eligible to receive SURE payments for crop production or crop quality losses. Losses are measured considering whole-farm revenue, which includes crop insurance indemnities and commodity program payments, so that producers are not paid more than once for the same loss.”

While discussing the more traditional farm commodity programs, the Amber Waves article stated that, “The commodity programs—direct payment, nonrecourse loan, and countercyclical payment (see box, ‘Traditional Commodity Programs and the 2008 Farm Act’)—provide benefits to field crop producers through income and product price supports. While each of these programs provides different benefits, all use payment triggers or rates that are set by legislation and do not adjust when market prices rise. Thus, these programs become less relevant as risk management tools when high prices prevail, and none provide protection against yield risks.”

Dismukes and Young also discussed the new ACRE program in detail, noting in part that, “The 2008 Farm Act introduced an alternative to traditional commodity programs. The Average Crop Revenue Election Program (ACRE) is novel in that it protects against revenue (national price multiplied by State yield), rather than price, shortfalls and that it uses moving averages of market prices, instead of legislated target prices, to set levels of protection. By incorporating yield risk and by using recent market prices, ACRE could be an attractive alternative for producers in areas of high yield risk and for crops with market prices well above the trigger levels of traditional commodity programs. The choice, however, will not be simple.”

And near the conclusion of the Amber Waves article, the authors pointed out that, “But what if current high prices drop? How will benefits provided by the various programs change? A sharp drop in crop price over a single crop year could trigger revenue payments from crop revenue insurance and ACRE, depending on production levels. A more gradual downward trend in price would reduce the potential dollar amount of payments, though not necessarily the degree of risk protection, from these programs as they adjust to the market conditions. Moreover, if prices drop to pre-spike levels, then the traditional commodity programs that provide benefits when prices are below legislated targets would be more likely to provide price and income support to producers. In short, while prices for several field crops are at high levels, U.S. producers will face management decisions that are complex because of the variability of crop prices and the variety of farm program options.”

On the topic of direct payments, one of the pillars of traditional farm commodity programs, the “Washington Insider” section of DTN noted yesterday (link requires subscription) that, “With a significant economic downturn in play, Washington will keep spending money that will increase the budget deficit, at least during the first half of 2009. But when the focus turns to Fiscal Year 2010 matters around March or April, the attention will begin shifting to ways to deal with the bulging budget deficit. A budget resolution and eventual budget reconciliation action will likely lead to some farm program payment cuts. Democratic leaders have indicated they do not like across-the-board budget cuts and instead want to focus on targeted cuts. Some observers say direct payments may be at the top of the list.”

For more on crop insurance issues, Pat Hill reported yesterday at DTN (link requires subscription) that, “Producers whose patience has been tried by this year’s extra-innings harvest game may find a little comfort from USDA’s Risk Management Agency [RMA] in the form of crop insurance payouts.”

Ms. Hill explained that, “RMA has set harvest prices for revenue-based crop insurance policies for soybeans and two kinds of policies for corn, and it has begun collecting the final numbers needed to determine prices for a third type of corn policy.

“Already set in stone are the rates for Revenue Assurance (RA), Crop Revenue Coverage (CRC) and GRIP (Group Risk Income Protection) for soybeans.

“The approved base price for all soybean revenue insurance this year is $13.36 (the average of the Feb. closes of Nov. 2008 futures). RA policies have an approved harvest price of $9.22 (the average of the Oct. closes of Nov. 2008 futures), while CRC and GRIP policies are set at $10.36 ($3 below the base price).”

The DTN article added that, “For corn, the approved base price for all policies is $5.40 (average of the Feb. closes of Dec. corn futures). CRC and GRIP approved harvest rates are set at $4.13 (average of Oct. closes for Dec. corn futures).

“The RA harvest price will be based on the average of the Nov. closes of the Dec. corn futures contract, beginning with $4.03 posted Nov. 3.”

Meanwhile, in a look at current commodity price levels, the Associated Press reported yesterday that, “Wheat for December delivery rose 10.5 cents to $5.725 a bushel; December corn rose 10 cents to $4.13 a bushel; and November soybeans jumped 21.25 cents to $9.495 a bushel.”

A recent Reuters news article pointed out that, “The next USDA report, [which will be released on November 10], could provide fresh direction for the market, traders said, noting the possibility of upward yield revisions, especially for corn.”

The Reuters article added that, “Back in the U.S., traders said corn prices are likely to fall to below $3.80 per bushel in the days ahead on weakening ethanol demand which has been hit by lower oil prices and financial trouble in the U.S. ethanol industry.

“‘Ethanol demand is decreasing, the corn market will continue to be in a bearish trend in November,’ said Kazuhiko Saito, strategist at Interes Capital Management Co. in Tokyo.

“More U.S. ethanol distillers may be forced to seek bankruptcy protection if they fail to keep costs down as the industry gets squeezed by oil refiners and gyrating corn costs alike.”

On the issue of potential crop size and yield estimates, John Perkins reported yesterday at Brownfield that, “Ahead of the November 10 USDA update, Informa Economics sees the USDA lowering their corn production estimate while raising beans.

“Informa has corn at 12.028 billion bushels, down 5 million bushels from the USDA’s October update. Informa expects the USDA to leave yield unchanged at 153.9 bushels per acre. Informa pegs soybeans at 2.987 billion bushels, with an average yield of 40.2 bushels per acre. Those are both up modestly from the USDA’s most recent estimates of 2.938 billion bushels for production and 39.5 bushels per acre for average yield.”

For more on the economics of ethanol production, Kate Galbraith reported in today’s New York Times that, “As producers of ethanol navigate a triple whammy of falling prices for their product, credit woes and volatile costs for the corn from which ethanol is made, an economic version of ‘Survivor’ is playing out in the industry.”

The Times article indicated that, “While producers pin their hopes on rising government mandates for the use of ethanol, analysts who follow the industry voice concerns that more companies could go under. They expect a wave of consolidation to sweep the ethanol business once the credit crisis eases.”

Ms. Galbraith stated that, “Archer Daniels Midland, the agribusiness giant that is one of the largest ethanol producers, reported higher overall profits on Tuesday — but recorded a sharp drop in operating profit for its corn processing unit, which includes ethanol production. The company, which also announced a new $370 million investment in Brazilian ethanol made from sugar cane [see related article here], is far more diversified than its smaller competitors who are focused on ethanol.

“Nowadays, gasoline sold at many stations nationwide includes about 10 percent ethanol, with a few stations in the Midwest selling an 85 percent ethanol blend. Many politicians have embraced ethanol as a way to court farmers and because it is produced domestically. Most research suggests that corn ethanol offers modest benefits in lowering emissions of climate-altering greenhouse gases, though production of ethanol has contributed to rising food prices.”

The Times article noted that, “Falling ethanol prices have compounded the squeeze on producers. These roughly track gasoline prices, and are down by nearly 40 percent since June, despite a recent uptick [for related articles on oil prices, click here and here].

“On top of all that came the credit freeze, which hurt companies that needed operating loans. With companies’ share prices falling, it became difficult to raise investment capital, too. VeraSun, for example, sought to issue 20 million shares to raise money, but that failed and it was forced to file for bankruptcy protection.”

Payment Limits

Chris Clayton reported yesterday at the DTN Ag Policy Blog that, “An advocate for tougher payment limits, Iowa Sen. Charles Grassley, R-Iowa, looked at the glass half-full when he was asked about what he would expect to happen next year in Congress, particularly given that Democrats are expected in the elections to expand their majorities in the House and Senate. More Democrats in Congress could likely increase the likelihood that farm payment caps could be tighter. McCain and Obama backed efforts by Grassley and Sen. Byron Dorgan, D-N.D., to lower payment limits to $250,000. Grassley said hopes that the payment cap would come up in the budget discussions, as it has in the last three years.

“‘If it does come up, I would think it would have a good chance of passage, considering how bad the budget situation is,’ Grassley said in a weekly conference call with reporters Tuesday. ‘They are going to look for every way they can to save money, and particularly Obama during the debates said he was going to go through a line-by-line approach. Well, this is one very obvious line where over the course of 10 years, somewhere between $600 million and $1.3 billion can be saved. I would think he would be looking at it and of course he would have bi-partisan support for it.’

“Grassley noted that if Obama wins, the National Farmers Union could become more influential and the NFU has favored tighter payment caps.”

EU Issues (Trade)

Dow Jones writer Carolyn Henson reported yesterday that, “The European Union has started talks with Switzerland aimed at freeing up trade in farm produce, the E.U.’s executive commission said Tuesday.

“The negotiations will aim to end tariffs on all agricultural produce sold between the two regions, as well as increase cooperation on food and feed safety.”

In other trade news, Frances Williams reported yesterday at the Financial Times Online that, “Pascal Lamy, head of the World Trade Organisation, announced on Tuesday he would seek reappointment for a second four-year term when his current tenure ends in August 2009.

“In a letter to the chairman of the WTO’s ruling general council, Mr Lamy said there was still much work to be done to conclude the seven-year-old Doha round of global trade talks and strengthen the multilateral trading system.”

Senator Johanns

The Associated Press reported yesterday that, “[Mike] Johanns — who rose from mayor to governor to U.S. agriculture secretary — staged a triumphant return to politics Tuesday, defeating newcomer Scott Kleeb to keep the U.S. Senate seat vacated by Chuck Hagel in Republican hands.”

The AP article stated that, “Johanns, the son of an Iowa dairy farmer, said his parents didn’t travel outside the state more than once or twice in their lives. Their son has been to dozens of foreign countries, negotiating trade deals and promoting American agriculture.”

“And I don’t have to ask where the front door of the USDA building is,” the article quoted Johanns as saying.

Keith Good

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