Farm Bill Issues
University of Illinois Agricultural Economist Nick Paulson indicated yesterday at the farmdoc daily blog (“Graphical Illustrations of Proposed Farm Revenue Programs and Crop Insurance”) that, “It is likely the Commodity Title of the next Farm Bill will include a program designed to provide protection against declines in farm revenues from some sort of guarantee based on historical averages. While the specific parameters of such a program will continue to be debated, two distinct program design themes have emerged and been coined ‘deep loss’ and ‘shallow loss’ programs.
“Previous farmdoc daily posts have estimated payments levels and timing associated with these types of programs (here, here, and here) and discussed the differences between the multi-year price protection offered by these revenue programs and the within-year price risk protection offered through crop revenue insurance (here, here, and here). However, based on some recent comments and questions received regarding the outlook for changes to Commodity Title programs, it is apparent that there exists confusion over the basic concepts behind the deep and shallow loss design alternatives. Today’s post provides a simple graphical illustration of how both types of programs address revenue risk, and how they may work with the existing crop insurance program.”
Dr. Paulson added that, “Three different revenue program designs are examined:
“ 1) A ‘deep loss’ program with a 70% revenue guarantee (similar to the SRRP program proposal). A deep loss program could significantly reduce the cost of the crop insurance program and potentially have reinsurance implications. However, a deep loss program would not add any significant new protection beyond what is offered by the current crop insurance program.
“ 2) An area ‘shallow loss’ program covering losses between 75% and 90% of the revenue guarantee (similar to the ARRM program proposal). A shallow loss design would provide capped coverage for losses at the top end of the revenue profile, and enhance risk protection under conditions of multi-year price declines. Such a program could impact farmers’ crop insurance decisions, but the insurance program would continue to provide the primary component of risk protection.
“ 3) A farm-level ‘shallow loss’ program covering losses between 75% and 87% of the revenue guarantee (similar to the ARC program proposal). Because it would be based on farm-level yields, this program would better tailor protection to the farm operation but also be more complex and costly to administer.”
Yesterday’s farmdoc daily update continued and contained five graphic illustrations, with brief explanations, that provide additional background on the functionality of different program scenarios.
Meanwhile, Reuters writer David Lawder reported yesterday that, “Republicans in six House of Representatives committees next week will dust off their past proposals for reducing the deficit as they try to replace some of the automatic spending cuts set to take place in January.
“Under a directive in the House-passed budget plan from Congressman Paul Ryan, the panels have just two weeks to come up with $18.45 billion in savings for fiscal 2013 and a net $261 billion over 10 years.
“Expected targets for cuts include food stamps, farm subsidies and crop insurance, federal employee pensions and health care.”
Mr. Lawder noted that, “The House Agriculture Committee has been told to make the biggest contribution – $8.2 billion for fiscal 2013 and $33.2 billion over 10 years. The Ryan budget documents suggested that $30 billion of this could come from farm subsidies and federal crop insurance programs – steps that would be deeply unpopular in farm states.
“House Agriculture Committee chairman Frank Lucas said the panel will meet its specified targets but is still determining sources of the savings.
“‘I think the key phrase is, they are suggestions,’ said Lucas, an Oklahoma Republican during a radio interview early this month. ‘The positive thing is we have flexibility in how to make recommendations.’”
The Reuters article explained that, “Democrats say the cuts are far larger than advertised – $180 billion over 10 years when the math includes a proposal to convert food stamps to a block grant and to limit its spending.
“The deadline to identify budget-cut targets ‘will only muddy the waters and is a waste of time,’ said Collin Peterson of Minnesota, the committee’s Democratic leader.
“The House and Senate Agriculture committee plan to begin work on a five-year, $480 billion farm bill in the next couple of weeks. Peterson said the job will be tougher because of the dissension created by having to vote on budget cuts before writing farm and food policy for coming years.”
A news release earlier this week from the National Corn Growers Association (NCGA) stated that, “U.S. Senator Roy Blunt [R., Mo.] shared his thoughts on today’s political environment with St. Louis Agribusiness Club members and guests at a lunch this week, co-sponsored by the [NCGA].”
The update indicated that, “When asked if he thought a farm bill could be completed this year, Sen. Blunt said he thought some extension of the current bill was more likely. ‘Although something could be accomplished in the Senate that we could live with, that won’t happen in the House,’ Blunt said.”
A news release Wednesday from Sen. John Hoeven (R., N.D.) stated that, “[Sen. Hoeven] today gathered agricultural producers from Western North Dakota for a forum to brief them on the current status of the farm bill in the U.S. Senate and to gather additional input from them as work continues to reauthorize farm programs…Hoeven discussed the Revenue Loss Assistance and Crop Insurance Enhancement Act of 2012, bipartisan legislation that he and Senators Conrad and Max Baucus recently introduced to help maintain a critical safety net for North Dakota farmers and serve as a major component of a new Farm Bill.”
Farm Bill: GAO Report and Crop Insurance
DTN Ag Policy Editor Chris Clayton reported yesterday that, “The Government Accountability Office says the federal government would save money by shifting more of the cost for crop-insurance premiums over to farmers.
“Farmers have steadfastly supported crop insurance this year as the core of the safety net, but the report released Thursday states there are savings to be had for taxpayers by cutting government support that approached $8.7 billion in 2011.
“The GAO, Congress’ investigative arm for examining government spending, stated a $40,000 cap on premium subsidies would have saved taxpayers $1 billion last year and as much as $358 million in 2010. By the same token, those taxpayer savings would have cost farmers comparable amounts, assuming they would have paid to keep the same level of insurance protection.”
The DTN article stated that, “The GAO report comes as the Senate Agriculture Committee pushes to draft a new farm bill with formal meetings expected to begin as early as the week of April 23. The Agriculture Committee has several proposals to reduce commodity spending by $15-$16 billion through the elimination of direct payments and likely creating a shallow-loss program that would supplement crop insurance.
“Such a shift in the safety net demands a strong crop insurance program, which has been the mantra of almost every farmer who has testified before the House and Senate Agriculture Committees over the past year. Farm groups have been willing to accept cuts to commodity programs for the sake of avoiding further cuts to crop insurance.”
“The GAO report also was requested by Sen. Tom Coburn, R-Okla., one of the Senate’s leading fiscal conservatives. Coburn said in a statement emailed to DTN that he expects the Senate Agriculture Committee to take the GAO recommendations seriously when drafting a farm bill in the coming weeks,” the article said.
Mr. Clayton added that, “[Coburn’s] position is at odds with a fellow Oklahoma Republican, House Agriculture Committee Chairman Frank Lucas. In a news release, Lucas defended crop insurance by citing farmer testimony before his committee.
“‘Over and over again we have heard from our farmers about the importance of crop insurance because it forms the backbone of the safety net,’ Lucas said. ‘I do not support the repeated attacks on an actuarial sound risk management program that serves as a good example of a public-private partnership where producers pay for coverage. This proposal would discourage participation in the crop insurance program and as a result endanger its integrity.’
“In responding to the report, Michael Scuse, acting undersecretary for Farm and Foreign Agricultural Services, stated that in recommending a $40,000 cap, the GAO ‘does not fully account for all potentially negative impacts and costs resulting in such a change … The federal crop insurance program treats all producers equally, regardless of farm operation size. Small, medium and large operations pay the same premium rate for the same risks and receive the same subsidy percentage, but the total premium amount changes depending on the quantity of the commodity to be insured. This allows each producer to tailor coverage to their individual operation and within financial parameters imposed by lending institutions.’”
National Crop Insurance Services stated in a release yesterday that, “Any proposal to limit insurance protection or discourage farmer participation only shifts risk back to taxpayers and consumers and makes it more likely that farms would be unable to pick up the pieces in the aftermath of an unpredictable weather event or market collapse.
“The plan recently outlined by the Government Accountability Office would adversely affect many of America’s full-time farmers. In addition, we fear it could prove particularly punishing to beginning and young farmers and other operators who are less likely to secure essential loans without adequate insurance coverage.
“The fact that farmers are in the fields planting this year’s crop and there were no calls for disaster assistance following the 2011 growing season—arguably one of the worst on record from a weather standpoint—shows how well the current system is working for farmers and taxpayers. And the fact that maintaining a strong crop insurance system is most farmers’ top policy priority must not be overlooked.”
In other news, the “Washington Insider” section of DTN reported yesterday (link requires subscription) that, “As long as there have been farm programs, there have been advocates for linkage — that is, limits on support program eligibility based on compliance with other objectives, including conservation practices, payment limits and many others. Once again, linkage is gaining at least a little momentum as major changes to the structure of the safety net are considered and ‘compliance’ is seen as a way to better protect soil and water.
“As long ago as the 1985 farm bill, provisions were designed to conserve soil and water resources as conservation became a major focus of that bill. Several of these are still around including two compliance provisions — highly erodible land conservation (sodbuster) and wetland conservation (swampbuster). These require that eligibility for ‘certain’ USDA program benefits requires agreement by producers to maintain a minimum level of conservation on highly erodible land and not to convert wetlands to crop production.
“These rules apply to most programs administered by USDA’s Farm Service Agency and Natural Resources Conservation Service, and can affect commodity support payments, disaster payments, farm loans, and conservation program payments, among others. Producers found to be in violation of ‘compliance rules’ face a number of potential penalties, ranging from temporary exemptions that allow the time to correct the violation to a ruling that the violator is ineligible for any USDA farm payment and, possibly, that the violator be required to return current and prior years’ benefits.”
Yesterday’s DTN update noted that, “Several proposals are being discussed and a possible fight is brewing over whether crop insurance subsidies should be added to the list of benefits at risk for producers who do not comply.”
The analysis indicated that, “Farm organizations and the crop insurance industry generally oppose any such linkage, and the ag committees seem unlikely to generate much enthusiasm for anything that would reduce the appeal of crop insurance as a main safety net programs. And, that argument may well carry the debate.
“Whether it will be as persuasive in the broader floor debates remains to be seen, but its intensity could well be an important indicator of the strength and determination of conservation groups who claim to worry about the intensity of modern agricultural production and its impacts on natural resources, Washington Insider believes.”
Sarah Gonzalez reported yesterday at Agri-Pulse Online that, “The consistent increase in U.S. farmland values is likely to level out in the coming years, but not through a market ‘bust,’ said a panel of farm credit experts Wednesday at the Farm Foundation Forum.
“U.S. crop producing regions, particularly in the Corn Belt, have seen values rising 25 to 40 percent in recent years, said Federal Reserve Bank of Kansas City Vice President Jason Henderson. According to the USDA, U.S. cropland values have soared more than 40 percent since 2004.
“High farm incomes are spilling over into rural spending, Henderson explained, helping rural communities respond better to the economic recession. He said rural manufacturing is up 14 percent since 2009.”
The Agri-Pulse article stated that, “Purdue University Center for Commercial Agriculture Director Brent Gloy said policy plays a major role in the current farmland value environment. Crop demand for biofuel production and increasing demand from international emerging markets are helping to set the stage for an environment with tight stocks and growing demand, he said. For example, increases in soybean exports to China and corn acres dedicated to ethanol contributed substantially to rising farm incomes.
“These favorable conditions, including consistently low interest rates, lead to high farmland value, but Gloy cautioned that these conditions are likely to change.
“Although ‘this prolonged era of low interest rates lasted longer than we thought,’ conservative and cautionary lending makes the current farmland value bubble unlikely to suddenly burst, said Farm Credit Services Chief Risk Officer Ken Keagan.”
Bloomberg writers Whitney McFerron and Luzi Ann Javier reported yesterday that, “Corn climbed for the first time this week and wheat gained as freezing weather threatened crops in the U.S., the world’s largest shipper of both grains. Soybeans also rose.
“Temperatures dropped as low as 26 degrees Fahrenheit (minus 3.3 degrees Celsius) in eastern parts of the Midwest overnight, Telvent DTN said. About 17 percent of the corn crop in Illinois, the largest U.S. grower after Iowa, had been planted as of April 8, ahead of the previous five-year average of 1 percent, Department of Agriculture data show.
“‘Freezing temperatures across the U.S. Midwest may have damaged emerging corn crops, according to U.S. weather forecasters,’ Luke Mathews, a commodity strategist at Commonwealth Bank of Australia (CBA), said in a report e-mailed today. ‘Supporting values were concerns that cold temperatures may have damaged U.S. wheat crops.’”
Marcia Zarley Taylor reported earlier this week at the Minding Ag’s Business Blog that, “Pork producers are learning how to weather the era of high-priced corn, but their near-death experiences the past decade could hold some lessons for U.S. grain producers as they enter more extreme boom-bust cycles. For starters, keep a lot of cash on hand.
“During the depths of the 2008 and 2009 debacle, one producer who grows some of his own feed told DTN he lost $3.4 million on a 100,000-head farrow-to-finish business. Smaller operators without much real estate besides their buildings quickly burnt through their net worths.
“Southwest Minnesota’s Farm Business Management Association records also document pork’s erratic cycles. The average pork operation’s losses plunged to a 15-year low of negative $371,000 in 2009, then bounced to profits of $794,000 in 2010 and $823,500 in 2011.”
The DTN Blog update noted that, “One painful lesson was how much producers and lenders underestimated the working capital needed to weather agriculture’s new storms. Even pork industry standards — 35% of working capital per annual revenue — weren’t enough to sustain operators through multi-year losses. In the grains sector, 20% working capital levels have been the minimal ‘safe’ standard.”
A World Trade Organization news release from yesterday stated that, “World trade expanded in 2011 by 5.0%, a sharp deceleration from the 2010 rebound of 13.8%, and growth will slow further still to 3.7% in 2012, WTO economists project. They attributed the slowdown to the global economy losing momentum due to a number of shocks, including the European sovereign debt crisis.”
Ben Protess reported yesterday at The New York Times Online that, “The trustee overseeing the liquidation of MF Global is considering whether to sue the brokerage firm’s executives and directors for their role in its collapse last year and the misuse of customer money.
“The potential for civil lawsuits is the latest twist in the high-profile investigation.
“When MF Global filed for bankruptcy on Oct. 31, regulators found that large amounts of client money vanished from the firm. The trustee, James W. Giddens, who is tasked with returning money to MF Global customers, has since pegged the customer account shortfall at $1.6 billion.”
Joseph Checkler and Aaron Lucchetti reported yesterday at The Wall Street Journal Online that, “The trustee, James W. Giddens, said in a statement that he may assert claims for, ‘among other things, breach of fiduciary duties’ owed to both the MF Global brokerage unit and its customers, ‘and violations of the segregation requirements of the Commodity Exchange Act.’”
The Journal article added that, “The announcement from the trustee followed a court hearing in which a judge declined to approve Mr. Giddens’s plan to approve the distribution of more money to MF Global customers. The judge said he would consider it and asked for more details about a particular part of the plan in which MF Global customers would relinquish to Mr. Giddens some of their rights to sue for damages.
“The trustee’s announcement also represented the first time in the 5½ months since MF Global filed for bankruptcy protection that a major investigator in the case has said he might bring claims against individuals that worked at the company. Various civil and criminal investigators are probing the circumstances around the firm’s demise, but no one has been accused of wrongdoing.”