Author: Joe Outlaw

This morning I testified before the U.S. House Agriculture Committee Subcommittee on General Farm Commodities and Risk Management at a hearing titled “A 2022 Review of the Farm Bill:  Economic Perspectives in Title I Commodities and Title XI Crop Insurance”.

At the Agricultural and Food Policy Center (AFPC) at Texas A&M University, our work with 675 commercial producers located across the United States has provided our group with a unique perspective on agricultural policy.  Currently, we maintain the information to describe and simulate 94 representative crop and livestock operations in 30 states. 

         In order to provide perspective on Titles I and XI, I wanted to briefly summarize a recent AFPC report that looks at farm profitability in 2022 relative to 2021 for our 64 representative crop farms in the face of higher input and output prices^[1].  For this report, we asked our panel members to provide their costs per acre for 2022 versus 2021 for the major input categories.  The average for each category across all respondents is presented in Table 1.  Updated commodity prices for the 2021/22 and 2022/23 marketing years and policy variables were obtained from the FAPRI-MU Bulletin #01-22 entitled U.S. Agricultural Market Snapshot, April 2022 (Table 2).  While some producers were able to benefit by locking in input prices early in 2021 for this year’s crop, most indicated very little ability to lock in these prices even when using their normal tax management strategy of prepaying inputs.  Simply, the input suppliers would not lock in a price until the producers agreed to take delivery.  Almost every respondent stated they were going to do their best to reduce input usage in the face of the highest costs of production they had ever experienced. 

Table 1.  Average Percentage Change in Representative Farm Input Costs/Acre from 2021 to 2022.

         The news is full of stories about inflation that is averaging 8.5 percent so far this year for the average American.  The lowest year-over-year inflation farmers are seeing is twice that on seed with most categories many times higher. Commodity prices, while generally higher in 2022, are up less than 8 percent.  If not for the incredible productivity of the U.S. farmer, there would be a major financial crisis in agriculture.  Following are the key highlights of our report:

• Net cash farm income in 2021 included a significant amount of ad hoc assistance. Absent another infusion of assistance in 2022, we estimate that significant increases in input prices will result in a huge decline in net cash farm income in 2022 (compared to 2021).

• Despite the significant reduction from 2021, higher commodity prices for most crops will likely still result in positive net cash farm income for most of AFPC’s representative crop farms. The noticeable outlier is rice – two-thirds of the rice farms are facing losses in 2022.

• The analysis hinges on producers receiving the higher commodity prices forecasted by FAPRI with average yields. With drought being experienced across a significant portion of the country and many other areas facing excess moisture, this assumption may be overly optimistic. 

• Having worked with farmers located across the U.S over the last 30 years, I want to make sure you understand we are talking about historic amounts of capital that farmers are putting at risk

Throughout my career, I have referred to the programs in Title I and Title XI as the three-legged stool that serves as the safety net for U.S. producers.  The current programs, agriculture risk coverage (ARC) and price loss coverage (PLC) and the nonrecourse commodity loan program, serve as two of the legs while the federal crop insurance program serves as the third leg. The following are what I believe to be the most significant shortcomings of all three legs of the stool.  Most of my suggestions require additional resources that may be difficult to secure but are necessary.

• Price loss coverage (PLC) reference prices worked fine while inflation was fairly low; however, the reference prices set in the 2014 Farm Bill and continued in the 2018 Farm Bill are in dire need of increases to remain relevant.  Producers’ costs have increased substantially, and the current reference prices are not providing a relevant amount of protection.  

Agriculture risk coverage (ARC) was also established in the 2014 Farm Bill as a second attempt at providing producers a revenue-based safety net program to replace the overly complicated and not widely used average crop revenue election (ACRE) program first used in the 2008 Farm Bill.  While good when coming off of relatively high prices, ARC proved worthless when prices declined and remained relatively flat, providing little protection to producers.  This is why that while widely chosen over PLC early in the 2014 Farm Bill, ARC was largely abandoned as a choice of safety net program in recent years.  Since ARC has the reference price embedded in the calculations, raising reference prices will make ARC more attractive as a revenue protection safety net alternative.

Assuming these two alternatives are used going forward, instead of forcing producers to pick the tool (ARC or PLC) they want, I would suggest allowing them to receive the benefits of whichever is higher in a given year.  This would cost nothing more than if the producers have chosen wisely and selected the appropriate tool and would take a major decision away that only serves as a major distraction to their work in trying to grow a crop.  

• The nonrecourse marketing loan program works as it was designed more than four decades ago; however, despite modest increases for some commodities in the 2018 Farm Bill, the rates have largely remained unchanged over the past 30 years, losing ground to inflation.  Providing producers the ability to take out a storage loan or receive a loan deficiency payment on a crop is a very useful marketing tool.  The rates need to be raised to increase the amount of the crop that is being protected which will cost money but is significantly less expensive to do at current price levels.

• Federal crop insurance is an enormously successful public-private partnership that today stands as the primary safety net tool for U.S. producers.  This is due to the program largely using futures prices to annually adjust the amount of protection producers can select.  While crop insurance is popular with producers, the little-known secret in the farming community is that bankers “encourage” producers to purchase buy-up levels of crop insurance as a means of protecting the producer and the operating loan banks make to producers.  As I have said many times in front of Congress… do no harm to crop insurance and stop outside interest groups from tying provisions of their pet projects to crop insurance – for example, linking climate change practice adoption to insurance program subsidy levels.  This runs the risk of creating an unlevel playing field for producers by distorting protection levels and leaving some producers with less protection due to their lack of feasible climate change mitigation alternatives.  

         While this morning’s hearing focused on Title 1 and crop insurance, I believe the upcoming farm bill provides a clear opportunity to help address some of the shortcomings ad hoc assistance was designed to address as well. In the case of WHIP, WHIP+, and ERP, they all essentially are designed to help cover the large deductibles producers face in their crop insurance policies.  While the ad hoc assistance over the last 5 years has been vital, it comes LONG after the disaster has come and gone and has been limited to specific causes of loss.  Perhaps most important, ad hoc assistance is, by definition, not guaranteed.  Farmers already face enough risks and uncertainty – ideally, they wouldn’t have to guess at what the safety net might look like as they struggle to put a crop in the ground.

Link to Full Testimony

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^[1] Economic Impact of Higher Crop and Input Prices on AFPC’s Representative Crop Farms, AFPC Briefing Report 22-05.  https://www.afpc.tamu.edu/research/publications/files/716/BP-22-06.pdf

Outlaw, Joe. “While Still Largely Profitable…Crop Producers Putting Historic Amount of Capital at Risk in 2022“. Southern Ag Today 2(24.4). June 9, 2022. Permalink

In 2017 Extension Economists from across the South worked on a major producer education effort that resulted in a book titled Surviving the Farm Economy Downturn^[1].  The 1980s is second only to the Great Depression in terms of really bad financial outcomes for agricultural producers in the United States.  In the 1980s, the sustained decline in farm incomes and corresponding drop in land values triggered a large number of loan defaults leading to a significant number of farm bankruptcies.  The chapter I worked on was titled “Are We Headed Toward Another Farm Financial Crisis as Severe as the 1980s?”  The chapter evaluated six of the variables often cited as contributing in some way to the 1980s downturn such as high interest and exchange rates, collapsing land values, and rising debt to asset ratios.  At that time the conclusion was that while the late 2016-2017 period had a few caution signs, only the strong exchange rate was similar to the 1980s and that U.S. agriculture was not going into another major downturn.

The Federal Reserve recently increased interest rates by one-half point with strong signals that more increases are on the way.  This triggered my thinking about what happens when our current near record crop prices decline to their new normal along with inputs prices that are sticky on the way down.  According to USDA survey data, U.S. agricultural producers, on average, have relatively low debt and many are in quite strong cash flow positions.  Low debt makes farmers much less vulnerable to a collapse in land values.  But, I think the biggest reason the U.S. won’t see a crisis like the 1980s again is the federal crop insurance program.  Crop insurance had very low participation during the 1980s with less than 50 million acres covered generally at low levels of buy-up on yield policies (Figure 1).  Over time, a lot of innovation has occurred in crop insurance policies.  Now, around 225 million acres are covered generally by revenue insurance policies bought up to at least the 70 percent coverage level.  With virtually all cropland covered by some type of policy, significant within year price declines will be covered by revenue insurance.  Due to this, there wouldn’t be the tremendous pressure on farm incomes contributing to lower land values and increased loan defaults.  What about a sustained price decline scenario?  That is where crop insurance coupled with price loss coverage provides significant protection.

Figure 1.  Planted Acres for Major Crops in Crop Insurance, 1981-2021.

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^[1] https://www.afpc.tamu.edu/extension/resources/downturn-book/Surviving-the-Farm-Economy-Downturn.pdf

Outlaw, Joe. “Crop Insurance the Key to Avoiding Another Farm Economy Downturn“. Southern Ag Today 2(20.4). May 12, 2022. Permalink

Often in agricultural policy we find that well intentioned policies designed to solve a problem often have unintended consequences.  A good example of this is the U.S. ethanol industry.

Since the 1970s the U.S. government has implemented a variety of policies aimed at increasing the use of gasohol that later became known as ethanol.  There were a variety of tax credits offered to blenders in an attempt to increase the use of ethanol in motor fuels.  One of the major boosts to biofuels came in 1996 when California announced it was banning Methyl tertiary-butyl ether (MTBE) as an oxygenate in motor fuels by 2003.  This change brought to light the need for a replacement oxygenate that ethanol was touted as being able to fill.  However the most significant boost for the ethanol industry came from the Energy Policy Act of 2005 (EPA of 2005) and the Energy Independence and Security Act of 2007 (EISA of 2007) both aiming to increase U.S. energy independence.  The EPA of 2005 mandated increasing levels of biofuels (ethanol and biodiesel) that had to be blended into the nation’s fuel supply each year from 4 billion gallons in 2006 up to 7.5 billion gallons by 2012. Overnight this effectively created a demand for biofuels and therefore corn leading to a significant price increase (Figure 1).  The EISA of 2007 increased the mandate each year to 36 billion gallons by 2022 (15 billion gallons of corn ethanol and 21 billion gallons of other renewable fuels).  Corn prices continued an upward trend spiking during the midwest drought of 2012.  

At the same time all of this was happening in the U.S., the rising corn prices were seen not just by producers in the U.S. but by producers around the world.  Spurred on by prices that were now profitable, producers increased their corn production.  This created an unintended consequence of incentivizing corn production and exports by several countries who had previously not been significant competitors – namely Brazil and Ukraine (Figure 2).  Prior to the 1990s, the U.S. was the unrivaled corn exporter in the world with only Argentina with significant corn exports.  Now, Argentina, Brazil and Ukraine (prior to being attacked by Russia) are all major exporters of corn who compete with U.S. producers.

Figure 1.  U.S. Marketing Year Average Corn Price, 1980 to 2021

Source: USDA-NASS.

Figure 2. Corn Exports by Major Exporting Countries, 1980 to 2021

Source: USDA.  Found at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Outlaw, Joe, and David Anderson. “The U.S. Ethanol Industry and Unintended Consequences.” Southern Ag Today 2(16.4). April 14, 2022. Permalink

On March 16, I testified before the House Agriculture Committee at a hearing titled

“A 2022 Review of the Farm Bill:  The Role of USDA Programs in Addressing Climate Change”.  Working closely with commercial producers has provided the Agricultural and Food Policy Center with a unique perspective on agricultural policy.  While we normally provide the results of policy analyses at committee hearings, on this occasion I was carrying the message from the nearly 675 producers we work with across the United States.

         In preparation for the testimony we emailed our representative farm members the following points that I planned on making and asked them to let us know if they agreed or disagreed with each of the 5 points.  In two days, we received 105 responses and several more after I had submitted my testimony.

1. Having a strong safety net from Title I programs (ARC/PLC and the marketing loan) and Title XI (crop insurance) remains critical even with new carbon market opportunities. They unanimously agreed with this statement in spite of the fact they expect very little benefit from Title I programs this year. 
2. USDA conservation programs (CRP, CSP and EQIP) that have incentivized a broad array of conservation practices have worked well in the past. They have just been under funded.  Producers much prefer this type of program to the current carbon program situation where the significant record keeping requirements, additionality requirements, uncertain soil tests, and very low financial benefits have the majority of our representative farm panel members not interested in participating. 
3. Congress should strongly consider providing financial incentives to early adopters who are not eligible to participate in current carbon programs due to the additionality requirement. If it is good to sequester carbon it should also be good to keep carbon sequestered.  Many of the producers who responded to my request indicated that they are disgusted with a system that only rewards late adopters
4. All producers regardless of size, region, or crops planted should have opportunities in any new USDA climate programs. This statement appears fairly benign but let me assure you it is not.  If all producers in the U.S. do not have some USDA NRCS identified practice they can undertake in the name of sequestering carbon then there will be regional winners and losers, and by crop, and by size as carbon programs are created.
5. Congress should consider providing USDA the authority to safeguard producers from being taken advantage of in current carbon markets dealing with private entities. For example, signing a carbon contract with at least one current company would require a producer to forgo commodity and conservation program benefits on that land.  This is really the only point where many producers disagreed with me.  Several producers would rather not have the government get involved in the carbon market at all and asked me to point out that while they see a problem – it could be made worse.

Link to Full Testimony

Outaw, Joe. “A 2022 Review of the Farm Bill: The Role of USDA Programs in Addressing Climate Change“. Southern Ag Today 2(12.4). March 17, 2022. Permalink

Producers are calling asking about the FSA signup decision they have to make by March 15^th.   Even though commodity programs have used marketing year average prices to trigger payments for decades, there still seems to be some uncertainty among producers. 

A quick look at nearby futures would indicate that neither agriculture risk coverage (ARC) nor price loss coverage (PLC) will likely trigger a payment for the 2022 crop.  While it makes some sense to look at nearby (old crop) and harvest time (new crop) futures to help decide what to plant, futures prices may or may not be a very good guide for program signup decisions. 

Why?  Because marketing year average prices start being calculated at harvest of this year’s crop ending prior to the next year’s harvest (Figure 1).  At the end of the marketing year, USDA will multiply each monthly price for the commodity by the percent of the crop marketed that month to arrive at a marketing year average price that weights the monthly prices with higher marketings greater than those months (like right now) with very little marketings occurring. 

While most would agree that the current futures outlook would indicate no ARC or PLC payments, trying to guess at weather, geopolitical and trade conditions around the world 18 months in advance can be daunting.

Figure 1.  Marketing Years and Expected Date Final Price will be Reported by Commodity.

Commodity	Marketing Year	Publishing Dates for the Final 2022/2023
Wheat	Jun. 1- May 31	August 28, 2023
Barley	Jun. 1- May 31	August 28, 2023
Oats	Jun. 1- May 31	August 28, 2023
Peanuts	Aug. 1- Jul. 31	August 28, 2023
Corn	Sep. 1- Aug. 31	September 30, 2023
Grain Sorghum	Sep. 1- Aug. 31	September 30, 2023
Soybeans	Sep. 1- Aug. 31	September 30, 2023
Dry Peas	Jul. 1- Jun. 30	September 30, 2023
Lentils	Jul. 1- Jun. 30	September 30, 2023
Canola	Jul. 1- Jun. 30	September 30, 2023
Large Chickpeas	Sep. 1- Aug. 31	November 30, 2023
Small Chickpeas	Sep. 1- Aug. 31	November 30, 2023
Sunflower Seed	Sep. 1- Aug. 31	November 30, 2023
Flaxseed	Jul. 1- Jun. 30	November 30, 2023
Mustard Seed	Sep. 1- Aug. 31	November 30, 2023
Rapeseed	Jul. 1- Jun. 30	November 30, 2023
Safflower	Sep. 1- Aug. 31	November 30, 2023
Crambe	Sep. 1- Aug. 31	November 30, 2023
Sesame Seed	Sep. 1- Aug. 31	November 30, 2023
Seed Cotton	Aug. 1- Jul. 31	October 30, 2023
Rice (Long Grain)	Aug. 1- Jul. 31	October 30, 2023
Rice (Med/Short Grain)	Aug. 1- Jul. 31	October 30, 2023
Rice (Temperate Japonica)	Oct. 1- Sep. 30	January 2024

Should I Buy STAX?

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Outlaw, Joe. “What is a Marketing Year Average Price?” Southern Ag Today 2(10.4). March 3, 2022. Permalink