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.
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.”
Source: SEC data compiled by American Farm Bureau Federation (AFBF)
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.
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.
Seed
Nitrogen Fertilizer
Phosphorus & Potassium Fertilizer
Herbicide
Insecticide
Fungicide
Fuel & Lube
Percentage Change 2021 to 2022
16.58%
133.62%
92.75%
64.23%
40.25%
36.02%
86.63%
Table 2. Projected Commodity Prices Reported in FAPRI April 2022 Update, Marketing Years 2021/22 and 2022/23.
2021/22
2022/23
Percentage Change
Corn ($/bu)
$5.78
$6.06
4.84%
Wheat ($/bu)
$7.60
$8.08
6.32%
Soybean ($/bu)
$13.27
$14.22
7.16%
Grain Sorghum ($/bu)
$5.87
$6.14
4.60%
Barley ($/bu)
$5.27
$5.60
6.26%
Oats ($/bu)
$4.30
$4.00
-6.98%
Upland Cotton ($/lb)
$0.910
$0.871
-4.29%
Seed Cotton ($/lb)
$0.464
$0.443
-4.53%
Peanuts ($/lb)
$0.238
$0.240
0.84%
Sunflower Seed ($/lb)
$0.318
$0.324
1.89%
Canola ($/lb)
$0.318
$0.295
-7.23%
All Rice ($/cwt)
$15.80
$15.84
0.25%
Long Grain Rice ($/cwt)
$13.75
$14.03
2.04%
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.
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.
