Category: Policy

Over the last year we have spoken at more than 100 farm policy meetings across the United States.  This week a simple but thought-provoking question was posed during Q & A after a farm bill presentation at the Council for Agricultural Science and Technology (CAST) Annual Meeting.  The question was simply: if you had a clean slate to create a strong producer safety net, what would it look like? 

In general, the role of a policy economist is typically not to suggest what Congress should do, but rather to help evaluate the impacts of policy proposals on producers and other stakeholders, estimate costs, and try to discern any unintended consequences of the proposal.  It is the job of Congress to consider all the relevant information and make informed decisions.  Think about all of the meetings with producer groups, hearings, and listening sessions that members of the House and Senate agricultural committees and their staffs have held to determine what should be in the next farm bill.  It is their job to determine what they believe is best for their constituents and producers in general.

With that said, combined we have more than 50 years of experience working in agricultural policy; surely we have some thoughts on the matter.  Upon some reflection, the three-legged stool of price loss coverage (PLC), marketing assistance loans (MAL), and crop insurance constitutes an effective safety net.  Together they provide a counter-cyclical, low-cost, and adaptable safety net for U.S. crop producers.  Let’s look at why each of these characteristics are important.

• Counter-cyclical.  These programs step in and help when conditions warrant because of low prices (PLC and MAL) or low yields/revenue (crop insurance), and payments go away when conditions are good.  The U.S. fiscal situation demands that the limited resources made available to agriculture are used wisely and efficiently.  This is why our clean-slate safety net would not continue ARC, which essentially covers the same losses as the Supplemental Coverage Option (SCO), an area-wide insurance policy.

• Low-cost.  The safety net is not designed to make producers whole from an expected gross receipts standpoint.  Reference Prices that trigger PLC payments due to low prices have been established well below the full cost of production, and MAL Loan Rates are less than one-half the full cost of production for the 23 covered commodities.  While Congress is anticipating increases for both Reference Prices and Loan Rates, the levels under discussion are still well below average costs of production. Payment yields are well below budgeted yields for most producers, and the 85% payment factor further reduces producer payments.  Crop insurance utilizes a substantial deductible that producers have to lose before insurance begins to pay.  And more importantly, with respect to crop insurance, producers pay premiums that are higher or lower depending upon the level of risk in their area/crop and the coverage level chosen.

• Adaptable.  The components of the safety net need to be adaptable.  While more could be done to ensure that Reference Prices keep up with inflation going forward, Reference Prices have the ability to increase along with market prices due to the Effective Reference Price changes made in the 2018 Farm Bill.  As for crop insurance, coverage is based on prevailing prices in the futures markets and policies can be established/adjusted to keep pace with the changes in cropping practices and risks faced by producers.

There are a number of other elements or considerations that we could discuss, but it is worth noting that the clean-slate safety net that would ensure producers can weather the tough times is very similar in structure to what we have now.

Outlaw, Joe, and Bart L. Fischer. “What Would Our Clean-Slate Safety Net Look Like?” Southern Ag Today 3(45.4). November 9, 2023. Permalink

Some of the most considerable negative impacts on agricultural production are from extreme weather events. Extreme weather events include prolonged drought, record-breaking floods, and extreme temperatures. Scientists predict that extreme weather events will occur more frequently and more intensely. Drought is particularly concerning because water is already a limited resource in many regions of the United States, and the cost of accessing water can prohibit irrigation. The immediate impacts of drought can include water restrictions, brush fires, loss of recreation days due to low lake levels, and economic losses in the crop and livestock sectors. Drought does not just impact agricultural producers. It impacts the entire local community to different degrees. 

From 2011 to 2013, the Southern United States, including parts of Texas, Louisiana, Arkansas, Mississippi, Alabama, Georgia, South Carolina, North Carolina, Florida, and Oklahoma, experienced severe to exceptional drought conditions. Severe drought (D3) is defined as dryland crops being severely reduced, stressed pasture, stressed cattle, and burn bans. As conditions worsen, drought is categorized as extreme (D4) or exceptional (D5). Exceptional drought is characterized by cracking ground, failed and abandoned crops, high costs of hay and water, scarce input supplies, herd liquidation, and increased burn restrictions. 

Producers feel drought losses first in crop and forage losses, livestock stress, and income loss. These losses affect businesses that provide agriculture with inputs or use agricultural production to make food for animals and people. When the drought outlook is unfavorable, crop and livestock producers may not spend as much on inputs to their operation, such as seed, water, machinery, and custom harvesting. During drought, producers may not need workers. Agribusinesses like local grain elevators or cotton gins may not run as many hours. Consequently, employment and income in supporting sectors will be negatively affected. Drought effects are also felt by downstream businesses, like feedyards and wheat mills. These outcomes eventually result in higher consumer prices at the grocery store. When these effects are combined, there are substantial losses to the value of agricultural sales, employment, and profits for businesses in the economy. However, disaster relief payments or crop insurance payments can mitigate some of these effects. These payments allow producers to pay off operating lines, purchase inputs for the next season, and patronize local businesses.

Crop insurance use is higher today than ever, going back to the establishment of federal crop insurance programs in the 1930s and even immediately following crop insurance reform in the 1980s and 1990s. In recent years, the share of eligible US crop acreage enrolled in federal insurance has been 80% or higher for most crops. Federally authorized multi-peril crop insurance (MPCI) covers the loss of crop revenues or yields resulting from drought, damaging wind or rain, deep freezes, and other natural causes is common in more drought-prone areas. MPCI also helps offset the losses for agricultural producers. But how effective are these crop insurance payments at reducing producer losses and, more generally, local economic losses due to drought or other extreme weather events?

This case study estimates drought impacts for Tillman County, Harmon County, and Jackson County, Oklahoma. These three rural, farming-dependent counties experienced exceptional drought (D5) from 2011 to 2013 and 2022. Over the 2011 to 2013 drought period, there was a total loss of $209 million in agricultural revenue or output value. The economic loss includes reduced crop acres harvested, reduced crop yields on acres that were harvested, and reduced value of livestock herds, reflecting significant culling. After accounting for the loss to sectors that provide inputs to and purchase outputs from the impacted agricultural sectors, the total revenue loss increases to $343 million. These three counties alone experienced a loss of 3,699 full-time equivalent jobs due to drought over this period. The job losses could have occurred in several ways. For someone who works a second job seasonally in the cotton gin, that seasonal job may not be available to supplement their annual income. This translates into a loss of economic activity in the local community of 172 million dollars of value added to the economy. 

What impact does crop insurance have on the 3-county area? These indemnity payments moderated drought impacts by 65% in agricultural output value, 62% in employment, and 58% in value-added over the entire period. Crop insurance significantly reduced economic damages for the farmers in the area, reducing the drought agricultural output value loss to 121 million dollars. For the local economy, the job loss was also reduced by more than half to 1,400 jobs. While the cotton gin may not run the additional shift, the local supply store may still be able to keep their employees at full employment. Participation in crop insurance also reduced the losses to the local economy overall, moderating losses to 71.5 million dollars for that same period. Even with insurance, these rural, agriculture-dependent areas still experienced reduced profits, jobs, and local economic activity due to drought. However, insurance policies protect against the worst drought outcomes as it is designed to do. 

What else can a producer do to protect themselves? Other management strategies beyond crop insurance can reduce drought loss severity. Producers who diversified their production activities garnered more protection against loss in addition to protection provided by crop insurance. For example, in 2012, Oklahoma experienced a bumper wheat crop. Higher crop yields on harvested acres helped offset other crop and livestock losses. For livestock producers, 2013 brought record-high cattle prices due to the smallest national cattle herd since 1951. Of course, we broke those cattle price and inventory records again in 2023 after another drought. The ability to counter losses in one farm business activity with higher revenue in another activity highlights the potential value of whole farm risk management plans that include but are not limited to crop insurance. Consider the bars shown in Figure 1, where the relatively lower drought impacts are shown in 2012 and 2013 when other sources of income offset drought production losses compared to 2011. However, the largest driver of loss reduction was from the indemnities paid out by crop insurance. Graphically, this is the decrease from the dark orange (potential loss without insurance) to the light orange (total loss with insurance indemnities). While this was a case study for only three counties and policy effectiveness likely varies over the southern region, crop insurance is shown to be vital to American producers in cases of drought.

Figure 1. Drought Related Revenue Loss, Profit Loss (Value Added), and Employment Loss by Year and Insurance Assumption

Welch, Katherine, Amy Hagerman, Dayton Lambert, and Lixia H. Lambert. “Do Crop Insurance Payments Help with Economic Impacts of Drought Beyond the Farm Gate?” Southern Ag Today 3(43.4). October 26, 2023. Permalink

With cotton added back to the farm safety net via the Bipartisan Budget Act of 2018, the 2018 Farm Bill largely maintained the statutory reference prices (SRPs) established in the 2014 Farm Bill. One noticeable exception was the addition of Effective Reference Prices (ERPs) in the 2018 Farm Bill at the insistence of House Republican negotiators.  As we noted in a December 2022 Southern Ag Today article, Section 1101 of the 2018 Farm Bill (P.L. 115-334) allows for the ERP for a commodity to replace the SRP if 85% of the previous five-year Olympic average of the national marketing year average price is greater than the SRP. The ERP may increase to as much as 115% of the SRP.

A recent article noted that the Congressional Budget Office (CBO) is projecting that “9 of the 19 program crops will have an ERP higher than the SRP in at least some of the years of the baseline” with those crops representing “over 90% of all base acres in the United States.”  They argue that this will result in an increase in Reference Prices “without Congress needing to do anything more than extend those [ERP] provisions.” While the article expressed surprise at “how little attention the ERP has received,” we have been reporting on it since the inception of Southern Ag Today as noted above. It seems the real purpose of this new article was to call into question the need for higher SRPs in the next farm bill, a key request of many state and national commodity organizations across the country. We believe this latest article seriously misses the mark in two key respects:

• First, while there is no question that the ERP provision is projected to result in higher Reference Prices for certain crops, it is projected to have zero impact on several other major commodities, including cotton, rice, and peanuts. While the author acknowledged this point, he simply used the absence of an increase in market prices for these other crops as a nonsensical justification for not adjusting the SRPs for these crops. As we’ve noted elsewhere (including in recent Southern Ag Today articles), sticky production costs and the prospect of lower prices are the primary justifications for increased SRPs (frankly, for all covered commodities).

• Second, while ERPs are certainly projected to provide higher levels of protection for some crops, those levels will also drop if marketing year average prices fall going forward. As a result, while CBO’s relatively flat price projections are an important factor in the debate, the much more important consideration for policymakers is how the farm safety net will fare if those projections are wrong.  To that end, we analyzed the impact of an unforeseen price drop on all 64 crop farms maintained by the Agricultural & Food Policy Center (AFPC) at Texas A&M University.  Specifically, we examined the impact of a price decrease over the next 5 years assuming that crop prices followed the same path experienced during the last downturn from 2013 to 2017. Under this scenario, 33 of the 64 crop farms maintained by AFPC would face a greater than 50% likelihood of an ending cash shortfall at the end of the baseline outlook (2028). In other words, under that scenario, 52% of the farms would have a greater than 50% chance of exhausting all cash on hand over the next 5 years and would have to debt-finance the day-to-day operations of the farm.  Bottom line: if there are any unforeseen hiccups in the market, the current farm safety net is simply NOT up to the task of mitigating losses for many farms across the country.

As we’ve noted time and again, the farm bill debate is fertile ground for those who like to sow regional discord.  Serious observers know that the farm bill must work for growers throughout the United States and not just one region of the country. If the goal is to ensure that the farm safety net can provide meaningful levels of support for producers in the event of a downturn in the farm economy, simply relying on existing Effective Reference Prices – or even modest 5-10% increases in the Statutory Reference Prices for many covered commodities – will simply prove insufficient.  Producers are operating in a higher cost environment, the Federal farm safety net needs to reflect that fact.  We are all for the swift completion of the farm bill, but given the extraordinary amount of capital that American producers are putting at risk, we continue to believe that the substance of the farm bill is far more important than the timeline.

Fischer, Bart L., and Joe Outlaw. “Reference Prices: Setting the Record Straight.“ Southern Ag Today 3(41.4). October 12, 2023. Permalink

As discussed in a May 25, 2023, SAT article “The Silly Season Has Begun… Must Be Farm Bill Time,” every farm bill cycle, we run across a report or research geared toward “informing” farm bill discussions that, while not technically wrong, boy does it leave out something kind of important…hence the term “Silly Season.”  This time the article was written by Scott Faber and Jared Hayes of the Environmental Working Group.  Their September 5, 2023, article entitled “Calls to Increase Crop Reference Prices Would Help Fewer Than 6,000 Farmers” caught our attention.

The authors analyzed individual producer payment data from their database of FSA payment data obtained through Freedom of Information Act requests to arrive at the following conclusions:

For the most part, we have few technical issues with what they said based on what they did. However, there are a number of factors – not discussed – that make their results meaningless.  First, they picked 2021, a year where most commodities in PLC did not trigger a payment.  The black line in Figure 1 intersects the marketing year average price for 2021 for the top 5 commodities in terms of base acreage.  All commodity prices are above their respective reference prices, so…no safety net payments would have been made.  If they had picked a year or two prior to 2021, there would easily have been more than 6,000 producers receiving payments.  Second, rather than try to use payment data to draw a conclusion, it would have been more meaningful to use FSA enrolled base acre data.  Figure 2 provides the FSA enrolled base acres for PLC and ARC county and individual for all 23 covered commodities.  While acreage data doesn’t allow one to say definitively how many farmers would be affected, it is pretty clear that in 2021 there were over 140 million acres of base in the PLC program that, depending upon prices, could have benefitted from higher reference prices. That applies to every single farmer with base acres in the United States.  In fact, every farmer would receive assistance in direct proportion to the amount of acres they have at risk, except for mid-to-large-sized operations that are payment limited. However, that is not likely the headline the authors were looking for…

Figure 1.  Historical and Projected Prices for Five Major Commodities, 2009 – 2023.

Figure 2.  Enrolled Base Acres in PLC and ARC, 2015 to 2023.

Outlaw, Joe, and Bart L. Fischer. “EWG Takes the Spotlight in the Silly Season.” Southern Ag Today 3(39.4). September 28, 2023. Permalink