Category: Policy

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

It’s around this time of year – with the release of the President’s budget – that we start to get a lot of questions about what’s going to happen with Federal spending for the year.  The questions are quite natural given the amount of attention the release of the President’s budget generates and the enormous volume of pages it fills (i.e. this year the Appendix alone spans 1,400 pages).  It’s somewhat ironic, then, that the Constitution gives no formal role to the President in the federal budget process.  In fact, the Constitution vests the authority to “lay and collect taxes” and to authorize the withdrawal of funds from the Treasury exclusively in the U.S. Congress.

While Congress controls the power of the purse, for the past 100 years – since passage of the Budget and Accounting Act of 1921 – there has been a statutory role for the President in establishing a budget and presenting it to Congress.  For the past 30 years, Federal law has stipulated that the President is to submit the budget to Congress “on or after the first Monday in January but not later than the first Monday in February of each year” (we’ll save the discussion about whether they are submitted on time for another day).

If Congress controls the purse strings, then what’s the point of the President’s budget? 

First, it kicks off the Congressional budget process.  In exercising the power of the purse, Congress establishes a budget resolution, which is a broad revenue/spending framework (which is also the basis for budget enforcement) that also provides spending allocations to the Appropriations Committees.  The budget resolution can also include reconciliation instructions, which featured prominently in last year’s debates on the Build Back Better Act.

Second, the President’s budget is an overview of the President’s policy vision.  Often, that vision includes proposing significant changes to existing Federal programs.  With respect to agriculture, notably, the last two budget cycles broke with recent tradition which had proposed a litany of ways in which farm policy could be slashed to save money.  Last year’s budget was silent on the matter and this year is no different.  With that said, the budget does hint at other significant changes that could have a major impact on agriculture.  For example, the so-called Green Book –the Treasury Department’s explanation of this year’s revenue proposals – contemplates imposing capital gains at death.  The Agricultural & Food Policy Center (AFPC) reported last summer on the enormous impact that the elimination of stepped-up basis (or the imposition of transfer taxes) could have on agricultural producers.  While the President can propose changes, only Congress has the power to actually change the law.

Bottom line:  the President’s budget kicks off the budget process and signals the policy priorities of the Administration, but it’s Congress that ultimately controls the purse strings.

Fischer, Bart. “President’s Budget: Does it Matter?“. Southern Ag Today 2(14.4). March 31, 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

As we’ve traveled throughout the Southern United States over the past two months, one of the questions we’ve most often been asked is whether a producer should purchase a Stacked Income Protection Plan (STAX) insurance policy for the 2022 crop year.  While we would never presume to know what’s best for a producer – because we are neither on the hook for paying the premiums nor do we know a particular producer’s financial situation or appetite for risk – we have been encouraging producers to take a very close look at STAX and to exhaust that option before considering any other alternatives.  Generally speaking, area-wide policies like STAX can serve as an effective complement to an individual crop insurance policy. With prices at their current levels, that option arguably becomes even more important.

            STAX was first authorized under the 2014 Farm Bill.  It was retained in the Bipartisan Budget Act of 2018 and the 2018 Farm Bill, but both bills required producers to choose between (1) Price Loss Coverage (PLC) or Agriculture Risk Coverage (ARC) and (2) STAX.  Any farm (FSA Farm Number) with seed cotton base enrolled in ARC or PLC is ineligible for STAX.  As a result, most producers we talk to are currently trying to choose between ARC (particularly ARC County, or ARC-CO) and STAX.

            While there are a number of factors that must be taken into consideration – for example, how much seed cotton base do you have on your farm and do you plan to plant that farm to cotton – in the example that follows we attempt to draw some comparisons between ARC-CO and STAX.  For those parts of the cotton belt with February 28^th sales closing dates (including the Arkansas, Georgia, and Mississippi counties in the example below), the projected price for crop insurance has been set at $1.02/lb with a 0.22 volatility factor (which is used to establish crop insurance premiums).  While the Texas and Oklahoma counties have a March 15th sales closing date and are still undergoing price discovery, the analysis that follows uses the same price assumptions.  The analysis also assumes that the maximum amount of STAX is being purchased, including a 20% coverage level with a 120% protection factor.  If a producer has an underlying crop insurance coverage level above 70%, then the STAX coverage would be reduced.

            Table 1 below illustrates the maximum possible ARC-CO payment rate in the event of sufficient price and/or yield losses.  It illustrates the same for STAX, but it also includes the estimated premiums paid for STAX coverage.  The last column compares maximum possible net indemnities from STAX to the maximum possible ARC-CO payments.  As noted below, in every case, STAX provides more than TWICE the coverage of ARC-CO (even after accounting for premiums).  Naturally, if both prices and yields end up hitting their average levels, then neither ARC-CO nor STAX will pay, and the producer will be left paying the STAX premium.  As a result, there is no clear-cut answer to the question above, but it is abundantly clear that the amount of protection a producer can secure under STAX vastly exceeds that offered by ARC-CO.  Finally, while we provide estimates in this article for purposes of illustrating options for you to consider, nothing can substitute for discussing these options with your crop insurance agent.

Table 1: Comparing ARC-CO and STAX in the Counties with the Largest Number of Planted Acres in the 5 Largest Southern Cotton States

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Fischer, Bart L., and Joe Outlaw. “Should I Buy Stax?” Southern Ag Today 2(8.4). February 17, 2022. Permalink