Author: Joe Outlaw

During Extension and commodity group meetings this winter, we have been asked over and over what will be in the next farm bill.  After answering with “it depends” – based on money and interest in bi-partisanship on Capitol Hill – we then go on to give our thoughts on what we think will be in the next farm bill.  At that point, the audience is generally happy…and ready to see if they won a door prize…until we ask them the question: what is it that you want or need in the next farm bill?

The expressions on the audiences’ faces generally remind us of the pained looks on the faces of the kids in the Scripts National Spelling Bee competition.  Google it…it’s intense.  After some reflection, below is a summary of what we tend to hear.

There is just so much more risk in farming now than there has been in the past.  Producers need as much help defraying as much of the risk as they can get.  Title I programs like ARC and PLC have not helped much at all during the current run up in most input costs.  Neither are triggering since market prices are too high to generate payments (despite the fact that those market prices are still not high enough to cover costs in some cases).  Overall, there is a lot of interest in raising the reference prices that are used in both the ARC and PLC payment calculations.

On the other hand, producers almost universally acknowledge that crop insurance has provided significant protection as the revenue guarantees have risen along with market prices (since they are based on futures prices for most covered commodities).  Additionally, there are a wide variety of products for producers to choose from to tailor their coverage to their operations such as different coverage types (yield or revenue) across different units (basic, optional or enterprise).  Producers can also purchase supplemental, area-wide coverage such as the Stacked Income Protection Plan (STAX), the Supplemental Coverage Option (SCO), or the Enhanced Coverage Option (ECO).   Some producers will say that the cost of the supplemental policies (and the complicated array of choices) makes them less attractive options.  At the same time, producers are not looking forward to sustained price declines (that everyone knows are coming eventually) that will lower price guarantees and reduce the effectiveness of insurance as a safety net – especially if production costs have not declined. 

A few producers will say that the safety net needs to be bankable – a term that generally refers to lenders allowing prospective safety net payments to be added to loan packages which would aid in showing their operating loan request is viable.  While the ad hoc assistance over the last several years has been vital – particularly against the backdrop of Title 1 providing less support – that assistance arrives long after the disaster has come and gone.  If and when the markets begin to fall, bankability of the safety net will be even more important. 

Overall, producers are quick to point out how much they appreciate the safety net support they receive; however, some are looking for Congress to be innovative in providing programs that are bankable and more aligned with the amount of risk exposure modern farms have today.

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Outlaw, Joe and Bart Fischer. “What Do Producers Want/Need in a Safety Net?” Southern Ag Today 3(5.4). February 2, 2023. Permalink

One of the questions we have been getting the most as agricultural policy economists is whether we are going to get a 2023 Farm Bill on time.  While there are dedicated teams of ag committee members and staff in the House of Representatives and Senate who are going to do their best to get a farm bill done on time, history is not on their side.  This article isn’t going to focus on the probability or odds of getting a bill in 2023 but rather – how much would it matter if it doesn’t get done? 

Figure 1 contains our estimate of the mandatory spending associated with programs that will expire on September 30, 2023.  It may come as a surprise to many of our readers that only about 5% of the funding is actually facing the threat of expiration.  Why?  The Supplemental Nutrition Assistance Program (SNAP) is what’s known as an appropriated entitlement.  In other words, if the farm bill expires, the appropriators will continue to fund SNAP.  Beyond that, crop insurance is permanently authorized by legislation outside of the farm bill.  In addition, the Inflation Reduction Act (IRA) recently reauthorized spending for the major conservation programs.  Further, annual appropriations bills have provided significant funding for ad hoc disaster programs over the past four years for programs such as WHIP, WHIP+, and ERP.

So – what does this information mean?  It means that the impending expiration of the 2018 Farm Bill means very little for the vast majority (i.e., 95%) of the mandatory spending in the farm bill.  It also means that unless policymakers are able to significantly enhance Title I commodity programs, this is little reason to go through the process that invariably will include damaging amendments to farm policy.  While this still leaves a number of programs in limbo (particularly those without mandatory baseline spending),  a simple extension of the 2018 Farm Bill would maintain the status quo.

Figure 1.  Estimated mandatory spending in the 2018 Farm Bill that will expire on September 30, 2023.

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Outlaw, Joe, and Bart Fischer. “What If We Don’t Get a Farm Bill in 2023?” Southern Ag Today 3(1.4). January 5, 2023. Permalink

Photograph by Mark Stebnicki

Commodity reference prices are used in both the price loss coverage (PLC) and agriculture risk coverage (ARC) programs to calculate program benefits.  For most commodities, reference prices have not increased since their establishment in the 2014 Farm Bill.  One of the major farm bill changes farm groups would like to see in the next farm bill is an increase in reference prices to catch up with input price inflation.  However, a feature added to the 2018 Farm Bill allows for reference prices to increase along with commodity prices.  Since most commodity prices have increased over the past few years it is interesting to see whether reference prices are likely to increase.

Section 1101 of the 2018 Farm Bill (P.L. 115-334) allows for the “effective reference price” for a commodity to replace the statutory reference price if 85% of the previous five-year Olympic average of the national marketing year average price is greater than the statutory reference price (Schnepf).  The “effective reference price” may increase to as much as 115% of the statutory reference price. 

Table 1 contains the statutory reference prices and calculated commodity “effective reference prices” for 2023 through 2028 determined using historical prices and CBO May 2022 commodity price estimates.  The statutory reference prices are blue.  If the projected “effective reference prices” are green or red that means the commodity prices have risen enough to generate a higher “effective reference price”.  If the calculated reference price is green it means the “effective reference price” is less than 115% of the statutory reference price.  If the calculated reference price is red it means the “effective reference price” is greater than 115% of the statutory reference price and would be set at 115% of the statutory reference price.

Corn, soybeans, oats, grain sorghum, mustard seed, sunflower, safflower and large and small chickpeas could see an increase in “effective reference prices” over the next six years depending upon whether CBO’s price estimates are realized.  While many commodities such as wheat have experienced significant price increases, prices have not increased enough to overcome only being able to use 85% of the Olympic average of the previous 5 years commodity prices.  If the “effective reference prices” in Table 1 are realized then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions. 

Table 1.  Statutory Reference Prices and Calculated “Effective Reference Prices” Based Off of Historical and CBO Estimated Prices for Covered Commodities.

References

Schnepf, R.  “Farm Commodity Provisions in the 2018 Farm Bill (P.L. 115-334), Congressional Research Service Report R45730, May 21, 2019.  The report can be found at: https://www.everycrsreport.com/files/20190521_R45730_24831706457d3ed90c82fa471d93b778b7d33676.pdf

Congressional Budget Office (CBO).  USDA Mandatory Farm Program Baseline, May 2022.  The report can be found at: https://www.cbo.gov/system/files?file=2022-05/51317-2022-05-usda.pdf

Author: Joe Outlaw
Professor and Extension EconomistCo-Director Agricultural & Food Policy Center at Texas A&M University
joutlaw@tamu.edu 

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Outlaw, Joe. “What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities.” Southern Ag Today 2(50.4). December 8, 2022. Permalink

Over the past five years, the federal crop insurance program has become a more important part of the farm safety net – relative to ARC/PLC and the marketing loan.  There are several reasons for this, but the two most important are 1) higher commodity prices have made ARC/PLC and the marketing loan less likely to provide any benefits and 2) the crop insurance program uses the futures market to establish initial and harvest-time prices used in insurance calculations that are based on a monthly average of futures closing prices for a specified contract month.  When commodity prices are trending upward, like they have been over the past few years, crop insurance protection increases along with higher futures market prices.

The correspondence, or lack thereof, of rice planted acres for four Southern rice growing states with the marketing year average price reported by USDA around October 1^st of the year prior to planting and the projected insurance prices was evaluated over the 2016 to 2022 period.  The previous year’s marketing year average price was used to evaluate whether it was signaling for more or less acres for the next year.  The projected (initial) insurance price is determined just prior to planting.  The three states (Arkansas, Mississippi and Texas) that use the same futures contract to establish projected and harvest time prices are grouped together in the graphs followed by the graph for Louisiana.

The graphs indicate both marketing year average prices and insurance projected prices are generally trending upward since 2017.  Planted acres for Arkansas and Mississippi and Louisiana do not exhibit an upward trend.  Producers in these states generally have multiple crop alternatives to rice that may be drawing acres away from rice based on the relative profitability of the alternatives to rice.  Texas producers generally have fewer viable alternatives to rice production, which appears to be revealed in the upward trend in planted acres.  Another consideration to keep in mind is that even though rice prices have increased over the past few years, generally speaking, prices still remain below the full cost of production for producers in Southern rice growing states, particularly when accounting for the deductible associated with insurance policies. 

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Outlaw, Joe, and Bart Fischer. “Correspondence of Rice Planted Acres to Safety Net Prices.” Southern Ag Today 2(46.4). November 10, 2022. Permalink

One of the most asked questions we get is whether the next farm bill will contain a reference price increase for covered commodities to offset higher input prices.   Both the price loss coverage (PLC) and agriculture risk coverage (ARC) safety net programs use reference prices in their respective calculations.  Focusing on PLC, with relatively high market prices, it would seem that now is the time to increase reference prices as market prices for many covered commodities are above their respective reference prices.  This would mean reference prices could be raised modestly without triggering much, if any, payment.  This analysis sets aside the question of whether the agricultural committees will have any more money to write the next farm bill.

Table 1 provides the ratio of marketing year average prices to reference prices for seven covered commodities from 2023 to 2032.  The results in Table 1 that are green indicate the market price is above the reference price for the commodity for that year.  And conversely, ratios that are red indicate market prices that are below reference prices.  One of the first things that jumps out in the table is that the 2023 marketing year has all but peanut prices higher than their respective reference prices.  CBO projects prices to decline below reference prices for all but corn and soybeans over their projection period.  Generally, this wouldn’t bode well for the agricultural committees being able to increase reference prices; however, the last column in the table contains base acres for each of the covered commodities.  Two of the biggest crops in terms of base acres (corn and soybeans) that account for more than 146 million base acres are projected to experience prices above their respective reference prices.  The remaining commodities with relatively lower marketing year average prices account for less than 100 million acres, with wheat accounting for more than one-half of the total.

Time will tell whether reference prices can be increased, which will largely depend on an infusion of new money into the farm bill process.  Proponents should feel cautiously optimistic that a reference price increase could be feasible.

Table 1.  Ratio of Marketing Year Average Prices to Reference Prices and Base Acres.

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Outlaw, Joe, and Bart Fischer. “Does the May 2022 CBO Baseline Provide Any Information About the Ability to Increase Commodity Reference Prices?” Southern Ag Today 2(42.4). October 13, 2022. Permalink