Category: Policy

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

The Stacked Income Protection Plan (STAX) was first offered to cotton producers in 2015.  Along with the Supplemental Coverage Option (SCO), STAX is one of the area-wide plans of insurance that are designed to help a grower cover a portion of their underlying crop insurance deductible.  Unlike the underlying Multi-Peril Crop Insurance (MPCI) policies, both STAX and SCO trigger indemnities based solely on area-wide losses (i.e., only if the entire county triggers a loss). Both STAX and SCO are taking on newfound importance in the 2023 Farm Bill debate, as improvements to both could serve to reduce the need for ad hoc disaster assistance.  Currently STAX is still only available to cotton producers whereas SCO is widely available across the country.

In our travels around the country over the last several months, we’ve often been asked about the future of policies like STAX and SCO, and we’ve repeatedly been told that they are simply too expensive. That wasn’t too surprising to us in the case of SCO, because the premium support is just 65%. On the other hand, we were considerably more surprised in the case of STAX because the premium support is 80% – growers must pay just 20% of the premium. Consequently, in this article, we take a closer look at STAX premiums across the country for the 2023 crop year.

In the maps that follow, we present STAX premium rates (dollars of premium per dollar of liability) for the 2023 crop year assuming a coverage band ranging from 70% to 90% with a 120% protection factor (resulting in the maximum level of coverage of 24%). STAX was also assumed to include the harvest price (i.e., the guarantee can increase at harvest if prices increase during the growing season). Figure 1 illustrates dryland STAX premiums and Figure 2 illustrates irrigated STAX premiums.  

As noted in the maps, there is significant variability in premium rates both within and across states, ranging from 28.83% to 81.87% for dryland and 26.7% to 75.82% for irrigated. The highest rate (81.7%) is for dryland cotton production in Bee County, TX. In other words, if the maximum indemnity possible is $1,000 per acre, RMA is charging $817 per acre to insure the crop!  If premiums are actuarily fair, this implies that RMA expects the average indemnity over time to be $817. In reality, indemnities have been zero in Bee County seven of the eight years since STAX was first introduced.  Even with an 80% premium subsidy, the coverage is cost prohibitive.   Neighboring San Patricio County has had a very similar indemnity experience (one indemnity in eight years), and they faced a 72.69% premium rate in 2023. On close examination of the maps, it’s clear that almost every state faces situations where there is considerable variability in rates between neighboring counties.

Congress may very well choose to provide additional premium support for area-wide policies in the 2023 Farm Bill. Arguably, buying additional area-wide coverage would make considerably more sense than giving away free deductible coverage via ad hoc assistance after disaster strikes. But, the additional premium support is only effective if the underlying premiums being charged by RMA are reasonable and rational and not otherwise pricing producers out of the market for area-wide insurance, a point Congress may wish to explore as they continue their work on the next farm bill.

Figure 1:  2023 Dryland STAX Premium Rates by County

Figure 2:  2023 Irrigated STAX Premium Rates by County

Fischer, Bart L., Joe Outlaw, and Henry L. Bryant. “Crop Insurance Rating: the Curious Case of STAX.” Southern Ag Today 3(37.4). September 14, 2023. Permalink

Fall is right around the corner, and for many of us that means baking goodies with pecans. Pecans are native to the Southern region of the US, particularly along the Mississippi River flood plain. In 2022, Georgia was the top producer of improved varieties of pecans, contributing almost 43% of the US value of production^[1].  Native pecans are a much smaller portion of total US pecan production. Oklahoma was the top producer of native varieties of pecans, contributing 72% of the US value of production¹. 

Pecan producers, like other agricultural sectors, have been faced with rising input costs in the last 3 years. Pests, diseases, and predation are big challenges in pecan production, and the costs of managing those challenges are forcing producers to make hard management decisions.  Native pecan grove owners have been particularly hard hit since their groves also have lower yields as compared to improved pecan varieties. This, along with higher maintenance costs for existing trees, leads to issues for those hoping to draw a profit from their pecan harvest. Higher input costs open producers to greater risks when it comes to price and yield declines. Insurance exists to help cover essential costs should a disaster event happen.

Whether a producer is involved in managing a native pecan grove or an improved pecan orchard, the risks for each can be equally damaging to profitability. Insurance can be combined with disaster programs in many cases in extreme events. There are many risks that affect the health and yield of a pecan operation; however, some of the main factors are listed below:

• Freeze – An early fall freeze prior to shuck split can reduce yields. Shucks may be frozen and incapable of opening to release the pecans.
• Drought – Oklahoma has been in a drought for several years. This can stunt the growth of trees, trigger nut drop, and cause yield reductions for 3-5 years. 
• Insects – The pecan weevil and other pests can be controlled with approved pesticides and maintenance practices. View additional fact sheets for more information here.  
• Disease – Make sure to spray fungicides at the proper rate and time for maximum effectiveness.
• Predation – Utilize various methods including sound deterrents, trapping, or hunting for multiple species, and make sure to pick up harvested nuts as quickly as possible to reduce loss.

Pecans are considered to be a specialty crop which means they are not eligible for commodity safety net programs like Agricultural Risk Coverage and Price Loss Coverage. Pecan producers are primarily dependent on crop insurance, disaster programs like the Tree Assistance Program (TAP), and more traditional risk management like operation diversification. USDA RMA offers a variety of insurance coverage plans for specialty crop producers. How much insurance a farm will need is determined, in part, by the level of costs that are “essential” in any given year. This will vary widely from farm to farm. An improved pecan farm that does its own processing and sells directly to retail will have quite different risks and costs of production than a native pecan farm selling primarily wholesale.  

In Oklahoma, pecans can be insured if the grove or orchard is at least one acre and the insured trees have produced a minimum production, which is: 600 pounds in one of the last 4 years for improved variety pecans in irrigated orchards, and 300 pounds in one of the last 4 years for native pecans or improved variety pecans without irrigation. The Pecan Revenue Insurance product covers unfavorable weather, declines in market prices, irrigation failure, fire, insects, disease, and other acts of God. If you are interested in Pecan Revenue Insurance, ask your neighbors about nearby crop insurance agents that offer that coverage. 

Pecan Revenue Insurance can provide a needed safety net in the event of a significant weather event. As shown in the figure, the 2018 drought which was severe for Southwestern pecan producers, in particular, resulted in insurance payouts to help cover production costs. Similarly, Pecan Revenue Insurance meant the difference in paying the bills for producers in Oklahoma that were impacted by drought in 2022. As an example of how the insurance product might work, consider an improved variety pecan operation based in Northeast Oklahoma. Starting with an estimated production cost for 2023 of $1,546 per acre for a producer that has irrigated, improved pecan groves and sells in the premium market. In a year where the weather cooperates and prices are reasonable (not the best but not the worst), the producer might make a net profit of $506/acre. However, what about a drought year that reduces yield by 26% and prices remain around the same level? That producer could experience a 163% reduction in net returns or a net loss of $800 per acre. What if they purchase Pecan Revenue Insurance? In this particular scenario, the producer has a cost of insurance that reduces the net return per acre in a typical year to $369/acre; however, in a drought year, the producer experiences a shallower financial loss (132% reduction in net returns).

Risk management for specialty crop producers has come up in several of the 2023 farm bill listening sessions. Supply chain disruptions and restaurant closures hit the pecan sector in 2020, followed by severe weather events that impacted regional production. It takes years for pecan groves to recover from tree damage or to establish replacement trees. Risk management is individual to a farm, and insurance may play a role in that overall risk management plan. For more information on Pecan Revenue Insurance in your local area, contact your local crop insurance agent. 

^[1] USDA NASS Pecan Production Report https://downloads.usda.library.cornell.edu/usda-esmis/files/5425kg32f/n5840623x/ww72cn927/pecnpr23.pdf

Hagerman, Amy. “Pecan Risk Management.” Southern Ag Today 3(35.4). August 31, 2023. Permalink