Author: Joe Outlaw

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

In a previous Southern Ag Today article, I discussed the concept of unintended consequences which is a topic we talk a lot about in agricultural policy.^[1]  Generally speaking, unintended consequences result from a lack of knowledge and/or lack of analysis of the potential consequences of a policy change.  The previous article focused on the unintended consequences associated with government policies that created the U.S. ethanol industry.  This article looks at the Securities and Exchange Commission (SEC) proposed rule changes that would require climate-related disclosures of publicly traded firms.^[2]

On March 21, 2022, the SEC proposed rule changes that would require certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. 

According to the SEC, the proposed rule “would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.”  Required disclosures for each of the three scopes would be phased in over a period of time.

This proposal generally requires publicly traded companies to provide investors more information about GHG emissions coming from business activities.  However, as reported by the American Farm Bureau Federation (AFBF), “While farmers and ranchers are not public companies and therefore not ‘registrants’ that are required to report directly to the SEC, their obligations through their regulated customers could be enormous….requirements for Scope 3 greenhouse gas emissions not only directly affects farmers’ and ranchers’ operations, but could create several substantial costs and liabilities, such as reporting obligations, technical challenges, significant financial and operational disruption and the risk of financially crippling legal liabilities.”^[3]

While the proposed rule’s focus is to provide investors more information about the GHG emissions of publicly traded companies, depending upon 1) if the rule is adopted and 2) how it is implemented, it could have implications for U.S. farmers and ranchers because as AFBF points out, “for agriculture, food, and forestry manufacturing alone, there are nearly 2,400 companies registered with the SEC that would be subject to reporting Scope 3 emissions from its farm suppliers.”

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^[1] https://southernagtoday.org/2022/04/the-u-s-ethanol-industry-and-unintended-consequences/

^[2] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

^[3] https://www.fb.org/market-intel/overreach-of-sec-proposed-climate-rule-could-hurt-agriculture

Outlaw, Joe. “The Securities and Exchange Commission Proposed Climate Related Disclosures and Unintended Consequences?“. Southern Ag Today 2(40.4). September 29, 2022. Permalink

One of the questions policy economists get the most from farmers is how likely is it that they will get to update their base acres in the hopes of finally converting their non-base acres into base.  For example, there is a significant amount of cotton produced in the Texas Panhandle that does not have seed cotton base and therefore is not eligible for ARC or PLC protection.  In previous base update opportunities provided in the 2002, 2014 and 2018 (for cotton only) Farm Bills, producers always had the choice to stay with the crop bases that were established in the 1985 Farm Bill or update to align their crop bases more closely to current plantings.  Given the choice, producers rarely would choose to have less total base acres even if it meant more closely aligning their bases to current plantings.  This type of update has generally been scored by the Congressional Budget Office (CBO) as having a positive cost so Congress has had to find the money to update crop bases.

One of the suggestions currently making the rounds in Washington D.C. is a forced base update where producers who were planting less than their farm’s base acres during some specified time period would lose base and similarly, those that were planting more than their current base acres would gain base.  Proponents see this as costing less to implement, as some farmers will most certainly gain base acres while others would lose base.  While the devil is very much in the implementation details that would be determined by USDA, a quick evaluation of USDA-NASS planted acre data relative to USDA-FSA base acre data for the 13 Southern States indicates the South would lose a considerable amount of base in a forced base update situation where keeping old crop bases would not be an option.

Table 1 compares the planted acres of nine primary covered commodities (corn, grain sorghum, soybeans, rice, wheat, cotton, peanuts, barley and oats) in the South and indicates that an average of 53.6 million acres were planted in 2021 and 2022.  This compares to 2021 total base acres of 62.1 million acres.  Producers planted roughly 8.5 million acres less than their crop bases during that time period.  Of the 13 Southern States, only Kentucky, North Carolina, Tennessee, and Virginia planted more acres than they have crop base.

While this quick analysis only looked at planted acres over two years, it still provides a good indication of what the direction of the overall impact would be on the Southern States.   A forced base update is still just one of many proposals that are floating around Washington as farm bill discussions are just getting started.  Individual farmers may benefit drastically; however, it is important to understand that a forced base update will have significant negative repercussions on the South as a whole.

Table 1.  Planted Acres of Nine Primary Covered Commodities for 2021 and 2022 and 2021 Base Acres.

Outlaw, Joe. “An Initial Look at Forced Base Update on the South“. Southern Ag Today 2(30.4). July 21, 2022. Permalink