Author: Joe Outlaw

Over the past three years, we have written a lot of articles for Southern Ag Today about the need for a new farm bill that increases the support provided by the farm safety net.  While it was important three years ago, it is much more important now.  The steady decline in market prices has continued, with current price projections from USDA below the average cost of production for some crops (Table 1).  Why?  While costs for some inputs have decreased from their 2022 highs… commodity prices have fallen more.  While Marketing Year Average (MYA) prices in Table 1 don’t look very good, current futures prices at harvest look even worse.

Some producers still have their 2023 crop in storage, holding on and not wanting to sell below their cost of production.  The 2024 harvest is not far away.  Using corn as an example, the USDA projected marketing year average price is $4.40/bu for the 2024/25 marketing year which is right around the U.S. average cost of production.  That would mean producers still holding their 2023 crop would be looking at two crops in a row not making any money.  Reports from Federal Reserve banks around farm country indicate loan delinquencies are on the rise.  What does all this mean?

Either we see a farm bill this year or there will be loud calls for financial assistance for farmers.  Recall, in the last presidential election year (2020), record amounts of assistance were provided to agricultural producers due to short-term price declines when the pandemic almost broke the supply chain.  A strong farm bill would be much better than ad hoc assistance, but if Congress can’t come to an agreement… there will be pressure to help producers endure the current financial downturn. And, even if a new farm bill is put in place this Fall, the fact that it is not slated to kick in until the 2025 crop year – with support not arriving until Fall 2026 – will undoubtedly put tremendous pressure on Congress to help bridge the gap. 

Table 1. Historical and Projected Marketing Year Average Prices for Major Commodities.

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Outlaw, Joe, Bart L. Fischer, and Natalie Graff. “If It’s Not Time to Hit the Panic Button… We Are Getting Close.” Southern Ag Today 4(33.4). August 15, 2024. Permalink

There was a time when agricultural economists who focus on farm policy didn’t take a position on a farm bill proposal.  At least the authors of this article were taught by our mentors…just describe what’s in a policy proposal and don’t take a position…that’s not your job.  Good and bad was for others to decide…primarily elected officials since it is, in fact, their job.  Those days are over.  In the last two weeks since the House Agriculture Committee majority released details of their bill, there has been a steady stream of articles talking about the proposal’s reference price increases as being tilted to the South and Southern crops. 

 We thought we would instead try to provide facts and information that you can use to help decide whether any proposed bill—House or Senate—is providing a safety net for all U.S. farmers.

Fact #1 

During the development of every farm bill, there are people who say unequivocally that one or more commodities are advantaged relative to others.  In the current environment – with ARC and PLC as the Title I safety net programs – since they are both countercyclical, producing a map that shows payments are higher in one area really means very little.  It very likely means that prices for those crops are lower and triggering payments, not that the farm bill was titled toward producers of those crops.

Fact #2 

While farm bills encompass a broad range of topics, producers rely on the programs in Title I and Title XI to provide a minimal safety net so they can endure economic downturns like we are currently in.  Without meaningfully bolstering the safety net provided in Title I and Title XI, the producers we encounter all over the country see little benefit in passing a new farm bill.    

Fact #3

Statutory reference prices were established in the 2014 Farm Bill and have not kept up with increases in the cost of production.  Using USDA cost of production data, the average increase in costs from 2014 to 2023 (the most current) for corn, cotton, grain sorghum, peanuts, rice, soybeans, and wheat was 31 percent.

Fact #4 

The effective reference price (ERP) provisions included in the 2018 Farm Bill allow individual crop reference prices to increase based on the 5-year Olympic average of market prices (lagged one year) multiplied by 85%.  ERPs are capped at 115% of statutory reference prices.  Of the 23 covered commodities with reference prices, only 10 (corn, oats, soybeans, grain sorghum, large chickpeas, small chickpeas, mustard seed, crambe, sesame seed and temperate japonica rice) had market prices increase enough to result in a 2024 ERP greater than the statutory reference prices in the 2018 Farm Bill.   Of these 10, only corn, soybeans and grain sorghum represent significant base acreages.  Based on realized market prices and CBO projections, corn and soybean ERPs are expected to increase each year and hit the 115% cap in each year through 2027.  Based on hearing testimony in both the House and Senate, commodities not in that position were seeking reference price increases in the next farm bill.

Fact #5

Statutory reference prices are set by Congress.  In past farm bills, at least since the 1970s, reference prices and their predecessor (i.e., target prices) have been established with the commodity’s cost of production in mind.  Looking at major crop cost of production for 2023 indicates that current reference prices are not covering much of major commodity costs (Table 1).   This happens for two reasons: (1) costs are higher than reference prices and (2) the payment calculations use an 85% payment factor to reduce payments.  Based on USDA data, wheat and grain sorghum appear to have the strongest case for significant reference price increases, but USDA data is just one resource the Committees use in establishing support levels.

Table 1.  Major Crop Cost of Production, Effective Reference Prices and Percent of Costs Covered by the Effective Reference Price.

Outlaw, Joe, Nathan Smith, and Bart L. Fischer. “If You are Following the Conversation about Reference Prices… Here are a Few Facts.” Southern Ag Today 4(21.4). May 23, 2024. Permalink

In a recent Southern Ag Today article we highlighted the overwhelming need to increase commodity reference prices in the next farm bill based on hearing testimony from the commodity groups.  While we continue to believe that this is the first and most important step in making meaningful changes to our country’s farm safety net, a very close second would be to increase the payment limit to account for the impact of inflation.  Actually, we would argue that payment limits should be eliminated completely because they are implemented for social engineering not economic reasons…but that is a discussion for another day.

Why do we think payment limits should be increased?  Using data from the Agricultural and Food Policy Center’s (AFPC) database of representative farms—and illustrated for crop year 2025—the 3,400-acre Iowa corn/soybean farm is projected to be facing much lower commodity prices.  In 2025, market receipts are projected to be $2.5 million with corn and soybean prices at $4.30 and $10.46/bu.  Costs in 2025 are projected to be lower at $2.7 million, resulting in a $200,000 loss without government assistance (of course, the loss could also be much larger if prices fall more than expected).  Assuming ARC and/or PLC are improved to the point that they would trigger assistance in 2025, the support would be limited to $125,000, leaving the farm with a loss of $75,000.  Even though Congress will have spent hundreds of hours conducting hearings and debating how to help farmers stay in business… payment limits will reduce the effectiveness of the improved safety net.  Said another way, the producer puts $2.7 million at risk through borrowing or self-financing, and if there is a price or production problem, the Federal government will help with up to $125,000, or 4.6% of what the producer has at risk in this example. 

How much payment limits should be raised tends to be almost as contentious as whether we should have them.  As a frame of reference, modern-day payment limits trace their roots to the 1970 Farm Bill with a $55,000 payment limit for each of the annual programs for wheat, feed grains, and cotton in crop years 1971, 1972, and 1973.  The figure below illustrates the magnitude of that payment limit ($55,000 for a single program/crop) were it in place today and indexed for inflation. That $55,000 payment limit would have been $413,247 in 2023, more than three times larger than the current combined payment limit of $125,000 applying to all covered commodities eligible for ARC and PLC.  If the limits from the 1970 Farm Bill were combined for a producer growing all three crops (i.e., $165,000), the payment limit today would be just over $1.2 million. Again, this doesn’t mean a producer is entitled to a payment of $1.2 million; it simply means that any losses up to $1.2 million could be covered. Instead, under current law, any losses beyond $125,000 are borne entirely by the producer.

Figure 1. Initial 1970 Farm Bill Limit ($55,000) Indexed for Inflation.

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Outlaw, Joe, and Bart L. Fischer. “Higher Reference Prices Are Critical… But So Is Increasing Payment Limits.” Southern Ag Today 4(13.4). March 28, 2024. Permalink

Recently we were emailed a publication regarding the lack of progress on the farm bill that really gave us pause.  As is normally the case, we agree with much of the article; however, one specific sentence (below) in the conclusions cannot go unaddressed.   

“Farm Bill reauthorization has failed to launch; it is the hidden demand for increasing reference prices, not matched by any actual proposals and shielded from public scrutiny, that blocks any potential for progress.”

There are two problems with this sentence.  First, the demand for higher reference prices isn’t really “hidden.”  Last year the House and Senate Agriculture Committees held multiple hearings and listening sessions regarding what producers want in the next farm bill.  The hearings that focused on Title I of the farm bill were on April 26^th in the House of Representatives and May 2^nd in the Senate.  

In the House hearing, of the nine witnesses representing covered commodities that receive safety net protection from ARC (Agriculture Risk Coverage) and PLC (Price Loss Coverage) for their crops, only three didn’t explicitly ask for higher statutory reference prices in the next farm bill (USA Dry Pea and Lentil Council, U.S. Canola Association and National Corn Growers Association (NCGA)).  However, the NCGA witness asked to “strengthen the Price Loss Coverage (PLC) effective reference price ‘escalator’” which would cost money and result in higher reference prices for corn.  Thus 7 out of 9 wanted higher reference prices.

In the Senate hearing, there were seven witnesses representing covered commodities that receive safety net protection from ARC and PLC.  Six of the seven explicitly asked for higher reference prices with the NCGA witness again asking to strengthen the PLC effective reference price escalator. In other words, seven out of seven witnesses from national groups asked to increase the reference price for their commodity.

The second problem with the statement is this notion that the demand for higher reference prices is “not matched by any proposals and shielded from public scrutiny.”  At this point, the agricultural committees are at the mercy of House and Senate leadership who have provided little to no additional funds for developing the next farm bill.  Committee leadership and staff have been left to “find” savings from other areas of the farm bill to fund higher reference prices.  Thus far, it appears none of the sources of funds found to fund reference price increases have been acceptable to their counterparts across the aisle.  If anything is responsible for the failure of farm bill reauthorization to launch, it is that impasse. As for higher reference prices, the demand is abundantly apparent. Once the impasse is broken, only then will the stage be set for fulsome discussions on the extent to which the reference prices can be raised.

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Outlaw, Joe, Bart L. Fischer, and Katelyn Klawinsky. “Demand for Raising Reference Prices Not Hidden Very Well.” Southern Ag Today 4(9.4). February 29, 2024. Permalink