Author: Bart Fischer

Yesterday, the Congressional Budget Office (CBO) released its February 2023 budget projections for a number of Federal programs, including farm-related programs and the Supplemental Nutrition Assistance Program (SNAP).  All eyes are on the farm bill, which expires on September 30, 2023, and this latest update gives us an initial glimpse of the budget baseline that will be available to the farm bill authors this year.  

CBO typically updates their budget projections early in the year, and yesterday’s release follows that pattern.  Following the release of the President’s budget in February, CBO will often release a revised outlook in March.  If the President’s budget is delayed, the updated outlook from CBO can stretch into late Spring or early summer – for example, in 2021, the update was released in July.  Why does this matter?  It is generally the update following the release of the President’s budget that is the baseline against which the cost of legislative proposals is “scored” throughout the year.  In other words, while the current release will get a lot of attention, CBO may choose to update their projections again this spring; if they do, that baseline likely will be used for writing the farm bill.  CBO will also typically release – at least to policymakers – their baseline projections by farm bill title.

In the meantime, there is much to glean from the information made publicly available in yesterday’s release.  As we noted in a Southern Ag Today article last summer, if we look back to the April 2018 baseline (the scoring baseline for the 2018 Farm Bill), the spending projections for CCC Price Support and Related Activities, Conservation, SNAP, and Crop Insurance accounted for $865.9 billion (Table 1), or 99.85% of the $867.2 billion in projected total baseline outlays for the farm bill.  Applying the same methodology to CBO’s most recent February 2023 baseline update, those four categories are projected to spend approximately $1.45 trillion over the next 10 years (Table 1).  The significant increase is due to an 81.6% increase in projected spending on SNAP, with SNAP now projected to account for $1.2 trillion, or 83.3% of the total farm bill baseline.  By contrast, the income support provisions for agricultural producers that make up the largest component of Title 1 – the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs – are projected to spend $48.6 billion over the next 10 years, or just 3.4% of the total farm bill baseline. Following are a few initial observations from Table 1:

• While some may look to the $71.8 billion in CCC Price Support & Related Activities (a $7.5 billion increase) as additional resources with which to write the farm bill, it’s not that simple.  In January 2020, CBO began including $100 million per year in the baseline as an estimate of the amount they project the Secretary of Agriculture to spend using discretionary authority available under the CCC.  In May 2022, CBO increased that amount to $1 billion per year (or $10 billion over 10 years).  In other words, absent the amount that CBO includes in the baseline as a guess of what they expect the Secretary to spend using discretionary CCC authority, the baseline for CCC Price Support & Related Activities would be going down.  

• These estimates would also likely be considerably lower if one were using USDA’s latest market projections which were also released yesterday.  For example, USDA projects cotton prices in the long run that are 16% higher than CBO.  If USDA’s projections were to materialize, ARC and PLC spending would be considerably less and the safety net would still be doing nothing to address the high cost of inputs.

• The increase in conservation spending is almost entirely due to the infusion provided in the Inflation Reduction Act (IRA) of 2022, although CBO has revised downward the amount they expect USDA to spend on these efforts (by roughly $1.5 billion).

• On crop insurance, the increase in projected spending is generally attributable to expanded product availability over the last 5 years along with projected increases in liability coverage due to higher market prices.

Table 1. Congressional Budget Office (CBO) 10-Year Outlays in Million$

	April 2018	February 2023	Change ($)	Change (%)
CCC Price Support & Related Activities 1/	64,305	71,806	+7,501	+11.7%
Conservation 2/	59,689	72,610	+12,921	+21.6%
SNAP 3/	663,828	1,205,440	+541,612	+81.6%
Crop Insurance	78,037	96,974	+18,937	+24.3%
Total	865,859	1,446,830	+580,971	+67.1%

Bottom line: the already relatively small 10-year baseline for writing Title 1 may ultimately be an overestimate, especially when comparing with USDA’s economic outlook.  Even now, it pales in comparison to the almost $88 billion in unbudgeted ad hoc assistance that was provided to agricultural producers over the past 5 years alone.  If Congress plans to move away from ad hoc assistance to a more sustainable risk management framework for producers, additional resources will be needed for the farm safety net.

Author: Bart L. Fischer

Research Assistant Professor and Co-Director Agricultural & Food Policy Center at Texas A&M University

Author: Joe Outlaw

Professor and Extension Economist

Co-Director Agricultural & Food Policy Center at Texas A&M University

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Fischer, Bart, and Joe Outlaw. “CBO’s February 2023 Baseline Update.” Southern Ag Today 3(7.4). February 16, 2023. Permalink

Photo by Karolina Grabowska: https://www.pexels.com/photo/image-of-old-building-on-american-banknote-4386157/

The Consolidated Appropriations Act, 2023 (P.L. 117-328) was signed into law by President Biden on December 29, 2022.  Among other things, the $1.7 trillion bill funds the federal government for fiscal year 2023.  The package also included $250 million in support for rice producers, a key priority of Senator John Boozman (R-AR), Ranking Member of the Senate Committee on Agriculture, Nutrition, and Forestry.

The Agricultural & Food Policy Center at Texas A&M University maintains almost 100 representative farms across 30 different states which serve as a basis on which to conduct policy analysis at the request of Congress.  In a May 2022 report requested by Sen. Boozman, we highlighted that the 15 representative rice farms maintained by AFPC faced the largest drop in net cash farm income in 2022 of all 64 representative crop farms maintained by AFPC – a reduction of $880,000 per farm or $442 per acre.

In the case of rice, AFPC has consistently reported that rice growers have faced the harshest financial outlook over the last several years.  Rice producers, in particular, received very little support from ad hoc aid packages like the Market Facilitation Program (MFP) and the Coronavirus Food Assistance Program (CFAP).  These problems are compounded by trading partners like India whose minimum support prices and input subsidies cause significant harm to U.S. rice producers, contributing to a nearly 40-year low in U.S. rice exports this year.  Relatively flat prices and high input costs further exacerbated an already tenuous situation for U.S. rice producers in 2022.

The $250 million – all of which USDA is required to spend – is for one-time payments for U.S. rice producers for the 2022 crop.  The payment is based on (1) a rate of not less than 2 cents per pound multiplied by (2) the producer’s actual production history (i.e., crop insurance APH) multiplied by (3) all of the producer’s planted (or prevented planted) rice acres in 2022.  A separate payment limit applies, consistent with the limit imposed for WHIP+ (i.e., $250,000 if 75 percent or more of the average adjusted gross income of the person or legal entity is average adjusted gross farm income).

Importantly, nothing is final until USDA announces the official details of the program.  In the meantime, our colleagues at the University of Arkansas have put together a helpful FAQ document that answers several key questions. 

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Fischer, Bart, and Joe Outlaw. “Support for Rice Producers in the Fiscal Year 2023 Omnibus.” Southern Ag Today 3(3.4). January 19, 2023. Permalink

A recent article in Southern Ag Today highlighted that increasing marketing year average prices over the past few years likely will lead to increasing “Effective Reference Prices” for many crops.  The article further noted that if those increased Effective Reference Prices were realized, “then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions.”

The analysis in the earlier article was based on the Congressional Budget Office’s (CBO) May 2022 baseline projections.^[1]  The biggest question at this point: where are commodity prices headed in the next CBO baseline?  To help answer this question, we look to the U.S. Department of Agriculture’s (USDA) most recent long-term outlook released on November 7, 2022.^[2]

As noted in Table 1, commodity prices in USDA’s latest long-term price outlook have increased significantly relative to CBO’s May 2022 projections.  Significant increases in the near term will bolster Effective Reference Prices, and generally speaking, those increases persist throughout the entire baseline period.  For example, USDA is projecting corn prices to average $4.30/bu in 2032, a $0.50/bu increase over CBO’s $3.80/bu estimate for 2032 in May 2022.  Figure 1 explores the same data as percentage increases.  For example, the marketing year average prices for corn, cotton, and wheat are all expected to be at least 10 percent higher in 2032 than projected by CBO in May 2022.

Bottom line: the upcoming baseline projections will likely reinforce the point made in the earlier Southern Ag Today article, with higher prices continuing to reduce the cost estimates for raising reference prices in the next farm bill.

Table 1.  Dollar Change in Marketing Year Average Price Projections, USDA November 2022 versus CBO May 2022.

	Units	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Corn	$/bu	1.25	0.80	0.55	0.45	0.45	0.35	0.30	0.35	0.40	0.50
Cotton	$/lb	0.06	0.05	0.04	0.05	0.06	0.07	0.09	0.10	0.12	0.11
Soybeans	$/bu	2.50	1.20	0.75	0.45	0.25	0.30	0.30	0.30	0.30	0.30
Wheat	$/bu	1.65	1.60	0.75	0.45	0.50	0.50	0.50	0.55	0.55	0.60

Figure 1.  Percent Change in Marketing Year Average Price Projections, USDA November 2022 versus CBO May 2022.

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^[1] https://www.cbo.gov/data/baseline-projections-selected-programs

^[2] https://www.usda.gov/oce/commodity-markets/baseline

Author: Bart Fischer

Research Assistant Professor

Co-Director Agricultural & Food Policy Center at Texas A&M University

Bart.Fischer@ag.tamu.edu

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Fischer, Bart. “Where are Commodity Prices Headed in the next CBO Baseline?” Southern Ag Today 2(52.4). December 22, 2022. Permalink

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From wild swings in commodity prices to an explosion in input costs that would make the Consumer Price Index (CPI) blush, agricultural producers have been riding a rollercoaster over the past year.  The purpose of the farm safety net – the combination of Federal crop insurance and the traditional farm bill programs like Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) – is to help producers manage these risks. However, unprecedented pressure from the COVID-19 pandemic and natural disasters, along with the inflated input costs, have exposed gaps in the current farm safety net.  One of the concerns on the minds of most producers at this point is how the farm safety net will perform in 2023 if commodity prices fall and input costs remain at elevated levels.  In this article, we look at this question in the context of cotton.

This summer, USDA’s Economic Research Service (ERS) forecasted a U.S. average total cost of production for cotton in 2023 of $794/ac.^[1]  Assuming an average yield of 847 lbs/ac (based on the 5-year harvested-acre average for upland cotton from 2017-21), the total average cost of production for cotton in 2023 would be an estimated $0.9374/lb.  The question:  how much of the cost incurred by producers will be protected by the farm safety net?

Federal crop insurance is the cornerstone of the farm safety net.  The insured price for cotton in the spring will be based on the Cotton #2 Dec ’23 futures contract (CTZ23).  While the price is based on a month-long average (with the discovery period depending on your location), this example simply uses yesterday’s closing price ($0.731/lb) as a proxy for how the safety would perform if the insured price were established at yesterday’s levels (Figure 1).  For a grower with Revenue Protection (RP) at a 75% coverage level, they are effectively protecting $0.5483/lb (= $0.731/lb x 75%).  Even in the case where a grower purchases STAX at a 90% coverage level (in addition to RP), they still are only able to protect $0.6579/lb (= $0.731/lb x 90%).  In other words, a producer would only be able to insure, on average, 70% of their total cost of production (= $0.6579/$0.9374).  

But, won’t PLC help fill in the gap given it is designed to help in low-price scenarios?  With cottonseed prices at $343/ton (NASS August 2022^[2]), a lint value of roughly $0.637/lb equates with a seed cotton equivalent of $0.367/lb (the PLC seed cotton reference price).  In other words, if cottonseed prices for the marketing year averaged $343/ton, lint prices would have to fall below $0.637/lb before PLC would trigger support.  If the marketing year average price were to hover around the insurance price in our example ($0.731/lb), PLC would end up paying nothing.

Naturally, any number of different scenarios could transpire.  For example, prices could rebound before planting.  Input costs could fall between now and the spring.  And, above-average yields could blunt the impact of lower prices.  In the case of yields and given the example above, if prices averaged $0.731/lb, yields would need to be more than 28% above average to break even.  While that is possible (especially in isolated areas), neither producers (nor their lenders) can bank on yields that are 28% above average.

This scenario clearly highlights just one example of the gaps that exist in the current farm safety net.  It also highlights the importance of the upcoming debate on the 2023 Farm Bill.  While pundits are prognosticating over whether there will be a simple extension of the current farm bill next year, agricultural producers may not be able to wait.  Even if the markets end up breaking their way, they currently are exposed to a considerable amount of risk and the prospect of significant losses.

Figure 1.  Cotton #2 December 2023 ICE Futures Contract (CTZ23)

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^[1] https://www.ers.usda.gov/webdocs/DataFiles/47913/cop_forecast.xlsx?v=4738.9

^[2] https://downloads.usda.library.cornell.edu/usda-esmis/files/c821gj76b/69700872f/k643c9334/agpr0922.pdf

Fischer, Bart L., and Joe Outlaw. “An Early Look at the Farm Safety Net for Cotton in 2023.” Southern Ag Today 2(44.4). October 27, 2022. Permalink

In a recent report by the Agricultural & Food Policy Center (AFPC), we provided an overview of the agricultural provisions included in the recently-passed Inflation Reduction Act (IRA) of 2022.  The IRA was a Senate-led compromise that broke the months-long logjam over the Build Back Better (BBB) Act that had been stalled in the Senate.  As noted in Figure 1, the funding for agriculture in the IRA was less than half of what had been proposed in the BBB.

As noted in Figure 1, roughly half of the funding for agriculture goes to conservation.  Specifically, the IRA provides an additional $8.45 billion for the Environmental Quality Incentives Program (EQIP), $3.25 billion for the Conservation Stewardship Program (CSP), $1.4 billion for the Agricultural Conservation Easement Program (ACEP), $4.95 billion for the Regional Conservation Partnership Program (RCPP), $1 billion for Conservation Technical Assistance, and $300 million for USDA to collect “field-based data” to quantify carbon sequestration and greenhouse gas emissions.  Importantly, beyond the temporary funding increases, the authorizations for all of these programs – including the Conservation Reserve Program (CRP) – were extended through fiscal year 2031.

The IRA also provided $3.1 billion for loan relief to borrowers with “at-risk agricultural operations” and almost $3 billion in assistance and support for “underserved farmers, ranchers, and foresters,” of which $2.2 billion is for financial assistance – including the cost of any financial assistance – to producers determined to have experienced discrimination prior to January 1, 2021, in any USDA farm lending programs.  As noted in a recent Southern Ag Today article, initial versions of the IRA had left out debt relief, but the version that was signed into law ultimately addressed the issue.  

Finally, the IRA provided over $13 billion for rural development programs – most of which is for rural electric cooperative loans – and almost $5 billion for forestry-related provisions.

We are frequently asked about the impact that this will have on the next farm bill.  While one can argue that an additional infusion for farm bill conservation programs is helpful, it is important to note that the additional funding dries up in fiscal year 2026, which will likely coincide with the mid-point of the next farm bill.  This undoubtedly will complicate what are already guaranteed to be complicated farm bill deliberations next year.

Figure 1. Comparing Estimated Outlays for Agriculture under the Build Back Better (BBB) Act and the Inflation Reduction Act (IRA), FY2022-31.

Fischer, Bart L., and Joe Outlaw. “Agricultural Provisions in the Inflation Reduction Act of 2022.” Southern Ag Today 2(36.4). September 1, 2022. Permalink