Category: Policy

When the Agriculture Committees and their staff begin working on a farm bill, like clockwork, experts from around the country, including us, put out information intended to help inform the process.  Every farm bill cycle, we run across a report or research geared toward the next farm bill that, while what the authors did and said isn’t technically wrong, boy does it leave out something kind of important…hence the term “Silly Season.”

The article that caught our eye this time is titled “State Shares of US Commodity Program Payments: 2002–2021” by Zulauf, et al., written for farmdoc.^[1]  The authors summarize their paper with the following:

“Payments are compared to the value of all field crop production. One would expect payments to be proportional to value of production. In general, commodity payments follow farm production, but exceptions exist. States whose share of commodity payments are higher (lower) than their share of field crop production tend to be in the South (Midwest).”

When looking at the share of commodity payments relative to the share of the value of crop production, the South does receive proportionally more payments than the Midwest.  The implication is that Southern farmers are provided significantly more benefits than the value of their crops would imply is needed.  The problem is the report leaves out one word that we think should have been included: ethanol.

The biofuels blending mandates contained in the Energy Policy Act of 2005 (EPA of 2005) and the Energy Independence and Security Act of 2007 (EISA of 2007) dramatically changed the value of corn production in the United States.  See the SAT article from April 14, 2022, for more information on these two acts.  Overnight, this effectively created a new demand for biofuels – and therefore corn – leading to a significant increase in price and the quantity of corn diverted to ethanol production (Figure 1).  The blue line indicates the share of total corn supply going to industrial uses…namely ethanol.  The red line indicates what happened to corn prices when the ethanol mandate took effect.

All corn producers have benefitted greatly from the ethanol mandate.  While there are definitely spillover effects on some other crops resulting from ethanol policy, leaving out the effect of ethanol when discussing proportional shares of farm program payments is misleading.  As Paul Harvey was fond of saying: “now you know…the rest of the story.”  

Figure 1.  Share of Total Corn Supply Utilized in Food, Alcohol and Industrial Use and Marketing Year Average Corn Prices, 1973 to 2022.

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^[1]

 Permalink: https://farmdocdaily.illinois.edu/2023/05/state-shares-of-us-commodity-program-payments-2002-2021.html

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Outlaw, Joe, and David Anderson. “The Silly Season Has Begun… Must Be Farm Bill Time.” Southern Ag Today 3(21.4). May 25, 2023. Permalink

Two of the primary risks faced by any producer at any point in time are production and price risk. In agricultural crop production, farmers must deal with the risk of crop yield losses due to several causes of loss such as excess rainfall, drought, and pest pressure via parasitic insects or weed populations. While all crops grown in the U.S. are exposed to these risks, the effect that these risks have on crop yield is not the same for all crops. Understanding the differences in the production of each crop and the risks faced by each crop is important for risk management as this information informs which tools a producer will need to select to minimize losses and stabilize their farm income year-to-year. In this article, we evaluate the relative riskiness of rice to other principal crops grown in the midsouth region to better inform a producer’s risk management strategy and provide implications for policymakers evaluating risk protection programs in the upcoming farm bill.

We compare the relative yield risk of rice production to corn, soybean, and cotton production by considering the state-specific coefficient of variation (CV) for the yield of each crop as a measure of relative yield risk. Put simply, the CV is a measure of how much yield across a given state varies relative to the average yield of that state. The CV allows us to make comparisons between different crops and counties to assess if one crop is more or less risky to grow than another crop in a specific state. We used state-level data^[1] from 2007-2022 (USDA-NASS, 2023) and removed a linear time trend from each crop yield in each state to account for changes in technology and production practices in each state over time.

Figure 1 gives the state-specific ratio of the CV for corn relative to the CV for rice. This ratio of two CVs tells us how much more, or less, risky corn yield is relative to rice yield. For example, in Arkansas the ratio of 1.62 implies that it is about twice as risky to grow corn relative to rice in that state.  Figure 2 gives the state-specific ratio of the CV for soybeans relative to the CV for rice. Using Mississippi as an example, the ratio of 4.92 implies it is nearly 5 times riskier to grow soybeans than rice in that state. Finally, Figure 3 gives the ratio comparing CVs for upland cotton to CVs for rice with ratios ranging from nearly 2 to a little over 5 indicating it is nearly 2-5 times more risky to grow cotton than it is rice in the states considered.  

There are several other levels of relative riskiness across rice-producing counties in the midsouth, but the same message generally holds: rice yield risk is relatively lower than the yield risk of its competing crops in the midsouth. This becomes important when deciding between risk management strategies that focus on production risk or price risk. Due to the lower rice yield risk, programs such as the Price Loss Coverage (PLC) may be more advantageous to rice producers than programs like the Agriculture Risk Coverage (ARC) program, which also helps explain why rice producers have overwhelmingly favored PLC. 

Figure 1. Ratio^[1] of the CV for Corn Yield to the CV for Rice Yield (2007-2022)

Figure 2. Ratio of the CV for Soybean Yield to the CV for Rice Yield (2007-2022)

Figure 3. Ratio of the CV for Upland Cotton Yield to the CV for Rice Yield (2007-2022)

^[1] We note that while we are unable to distinguish between irrigated and nonirrigated yields across time, USDA-NASS provides a breakdown of the shares of irrigated and nonirrgated acres in Table 34 of the 2017 Agricultural Census. The portions of acres irrigated in Arkansas for corn, soybeans, and cotton is 93%, 85%, and 93%, respectively. The same irrigated portions in Mississippi are 81%, 74%, 74%. The irrigated portions for Louisiana are 78%, 68%, 60%. The irrigated portions for Texas are 84%, 83%, and 52%.

References

USDA-NASS. (2023, May 10). USDA-NASS 2017 Agricultural Census. Retrieved from https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_State_Level/

USDA-NASS. (2023, April 20). USDA-NASS QuickStats. Retrieved from https://quickstats.nass.usda.gov/

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Biram, Hunter, and Brian E. Mills. “Analyzing the Relative Riskiness of Rice Yields.” Southern Ag Today 3(19.4). May 11, 2023. Permalink

Photo by Polina Tankilevitch: https://www.pexels.com/photo/close-up-photo-of-assorted-rice-4110255/

As reported this week by Jim Wiesemeyer with Pro Farmer, there is renewed interest by some in Washington, D.C., in tying commodity program payments to planted acres rather than base acres.  Since the mid-1980s, commodity programs in the U.S. have used base acres of each program crop on a farm to determine a producers’ payment for each crop, with two notable exceptions: (1) the period covered by the 1996 Farm Bill (1996 to 2001) and (2) the Average Crop Revenue Election (ACRE) program in the 2008 Farm Bill which paid on planted acres (not to exceed total base acres on the farm).  

The primary argument for using base acres rather than planted acres centers around the desire to not have potential commodity program benefits unduly influence program commodity plantings.  On the other hand, using planted acres as the basis for payments would allow producers to more effectively manage their risk, as potential payments would be based on the crop they are actually planting. 

So, why is paying on planted acres a topic of discussion in Washington, D.C.?  There are producers that plant more acres than they have base all over the United States.  These producers and their associations are lobbying Congress to allow them to add base either through a forced base update or alternatively, by basing payments on planted acres, which effectively is the same thing.  Either way you look at it, there will be a cost as additional acres are added.  Looking at 2022 FSA enrolled base acres and 2022 planted and prevented planted acres reported to FSA shows a difference of about 9 million acres (Table 1).  Most of the commodities in the table would have lower bases in the future while soybeans and seed cotton would add acres.

The House version of the 2014 Farm Bill included what some would call a compromise option (similar to payment acres in ACRE in the 2008 Farm Bill) where commodity payments would have been paid on planted acres not to exceed their current base acres.  While it was not included in the final bill, this would seem to solve some of the risk management concerns but would still leave producers with more planted acres than base wanting more.

Table 1. FSA Total Enrolled Base Acres and Planted and Prevented Planted Acres Reported to FSA in 2022.

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Outlaw, Joe, and Bart Fischer. “Revisiting Planted Versus Base Acres.” Southern Ag Today 3(17.4). April 27, 2023. Permalink

Those who like to sow discord during farm bill discussions will often argue that crop insurance is regionally inequitable – that one region (typically the Midwest) subsidizes crop insurance in other regions of the country.  The argument often takes this form: loss ratios – the ratio of indemnities received to premiums paid – are highest in areas like the Great Plains and the South. Regional battles in farm bill deliberations are seldom constructive.  In the case of crop insurance, those battles endanger the entire crop insurance system and threaten to reduce the risk pool which is essential in spreading risk across multiple crops and states.

For serious participants in the policy process, it’s important to make informed/balanced decisions based on the facts.  While loss ratios are certainly one metric, focusing on loss ratios alone can leave the impression that growers in certain parts of the country are not pulling their weight (i.e., not paying enough for coverage).  In this article, we delve into this topic using corn production to illustrate.  In particular, we explore average premiums paid by county for the highest coverage level (85%) for the most popular crop insurance product (Revenue Protection) in 2022 to examine regional equity throughout the country.  In carrying out the analysis, we utilize average yields in the county (specifically, the county reference yield utilized by RMA in rating crop insurance policies).  We further assume the crop is being produced for grain, and we focus exclusively on non-irrigated crop production.  Finally, we illustrate the case of enterprise units, but the relative results are largely the same for optional units as well.

As noted in Figure 1, the lowest average premiums paid for 85% coverage are in the heart of the Midwest.  For example, the lowest premium rate in the country is in Marshall Co., IA, where producers are paying just 2.13% (or 2.13 cents for every dollar of liability insured) for 85% coverage.  In contrast, corn producers in Wilbarger Co., TX, would have to pay 32.5% (or 32.5 cents for every dollar of liability insured) for the same percentage coverage level.  No producer can afford to spend that kind of money on crop insurance, so their only option is to reduce their coverage level – and increase their risk exposure – as a result.  While we illustrate the two extremes, this highlights one reason why coverage levels outside of the Midwest tend to be considerably lower than 85% – producers simply cannot afford the coverage.    

It is also important to note that rates are significantly variable within states as well.  For example, while the median county rate in Minnesota is just 3.9%, as noted in Figure 2, the average ranges from just 2.14% in Watonwan Co., MN, to 17.8% in St. Louis Co., MN.  No surprise…producers reduce their coverage as a result.  For example, in Marshall Co., MN, where the average premium for 85% coverage in 2022 was 13%, the average coverage level actually purchased by producers has averaged just 73% over the past 5 years, far below the maximum 85% coverage available.

Bottom line: outside of the Midwest, much of the country is (1) paying considerably higher rates for crop insurance which is (2) resulting in producers having to significantly reduce coverage while shouldering considerably more risk.  Any effort in the farm bill to further raise premiums on these producers would simply drive coverage levels even lower and risk exposure even higher.

Figure 1.  2022 Average Premium Rates for 85% Revenue Protection for Corn, by County

Figure 2.  Range of County Average Premium Rates for 85% Revenue Protection for Corn, by State (median county premium rate denoted by black dots).

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Fischer, Bart, Henry L. Bryant, and Joe Outlaw. “Regional Equity in Crop Insurance.” Southern Ag Today 3(15.4). April 13, 2023. Permalink

As the process to develop the 2023 Farm Bill is underway, it is interesting to look at the make-up of the House and Senate from the South.  The South typically includes Alabama, Arkansas, Georgia, Florida, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virginia.  Southern Ag Today also includes Maryland in our grouping of Southern states.  

Currently, 161 (or 37 percent) of the members of the House of Representatives are from the South (Table 1).   In terms of agriculture committee make-up, 17 of the 54 members (31 percent) of the House Agriculture Committee are from the South.  Mr. David Scott, the ranking member of the committee is also from the South (Georgia). In the 118^th Congress, 29 of the 75 freshmen members (39 percent) are from the South.

In the Senate, obviously each state has two senators, so the South would have 28 of the 100.  Five of the 23 members of the Senate Committee on Agriculture, Nutrition and Forestry are from the South (Table 2), with Mr. John Boozman of Arkansas serving as ranking member.

While the South has a significant amount of representation in Congress – and especially on the agricultural committees – there is a considerable amount of work to do in educating new members who have never taken a vote on a farm bill.

Table 1.  States with Members on the House Agriculture Committee.

Table 2.  States with Senators on the Senate Committee on Agriculture, Nutrition, and Forestry.

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Outlaw, Joe, and Bart L. Fischer. “Congressional Representation from the South.” Southern Ag Today 3(13.4). March 30, 2023. Permalink