One of the questions we have been getting the most as agricultural policy economists is whether we are going to get a 2023 Farm Bill on time. While there are dedicated teams of ag committee members and staff in the House of Representatives and Senate who are going to do their best to get a farm bill done on time, history is not on their side. This article isn’t going to focus on the probability or odds of getting a bill in 2023 but rather – how much would it matter if it doesn’t get done?
Figure 1 contains our estimate of the mandatory spending associated with programs that will expire on September 30, 2023. It may come as a surprise to many of our readers that only about 5% of the funding is actually facing the threat of expiration. Why? The Supplemental Nutrition Assistance Program (SNAP) is what’s known as an appropriated entitlement. In other words, if the farm bill expires, the appropriators will continue to fund SNAP. Beyond that, crop insurance is permanently authorized by legislation outside of the farm bill. In addition, the Inflation Reduction Act (IRA) recently reauthorized spending for the major conservation programs. Further, annual appropriations bills have provided significant funding for ad hoc disaster programs over the past four years for programs such as WHIP, WHIP+, and ERP.
So – what does this information mean? It means that the impending expiration of the 2018 Farm Bill means very little for the vast majority (i.e., 95%) of the mandatory spending in the farm bill. It also means that unless policymakers are able to significantly enhance Title I commodity programs, this is little reason to go through the process that invariably will include damaging amendments to farm policy. While this still leaves a number of programs in limbo (particularly those without mandatory baseline spending), a simple extension of the 2018 Farm Bill would maintain the status quo.
Figure 1. Estimated mandatory spending in the 2018 Farm Bill that will expire on September 30, 2023.
A recent article in Southern Ag Today highlighted that increasing marketing year average prices over the past few years likely will lead to increasing “Effective Reference Prices” for many crops. The article further noted that if those increased Effective Reference Prices were realized, “then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions.”
The analysis in the earlier article was based on the Congressional Budget Office’s (CBO) May 2022 baseline projections.[1] The biggest question at this point: where are commodity prices headed in the next CBO baseline? To help answer this question, we look to the U.S. Department of Agriculture’s (USDA) most recent long-term outlook released on November 7, 2022.[2]
As noted in Table 1, commodity prices in USDA’s latest long-term price outlook have increased significantly relative to CBO’s May 2022 projections. Significant increases in the near term will bolster Effective Reference Prices, and generally speaking, those increases persist throughout the entire baseline period. For example, USDA is projecting corn prices to average $4.30/bu in 2032, a $0.50/bu increase over CBO’s $3.80/bu estimate for 2032 in May 2022. Figure 1 explores the same data as percentage increases. For example, the marketing year average prices for corn, cotton, and wheat are all expected to be at least 10 percent higher in 2032 than projected by CBO in May 2022.
Bottom line: the upcoming baseline projections will likely reinforce the point made in the earlier Southern Ag Today article, with higher prices continuing to reduce the cost estimates for raising reference prices in the next farm bill.
Table 1. Dollar Change in Marketing Year Average Price Projections, USDA November 2022 versus CBO May 2022.
Units
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
Corn
$/bu
1.25
0.80
0.55
0.45
0.45
0.35
0.30
0.35
0.40
0.50
Cotton
$/lb
0.06
0.05
0.04
0.05
0.06
0.07
0.09
0.10
0.12
0.11
Soybeans
$/bu
2.50
1.20
0.75
0.45
0.25
0.30
0.30
0.30
0.30
0.30
Wheat
$/bu
1.65
1.60
0.75
0.45
0.50
0.50
0.50
0.55
0.55
0.60
Figure 1. Percent Change in Marketing Year Average Price Projections, USDA November 2022 versus CBO May 2022.
Commodity reference prices are used in both the price loss coverage (PLC) and agriculture risk coverage (ARC) programs to calculate program benefits. For most commodities, reference prices have not increased since their establishment in the 2014 Farm Bill. One of the major farm bill changes farm groups would like to see in the next farm bill is an increase in reference prices to catch up with input price inflation. However, a feature added to the 2018 Farm Bill allows for reference prices to increase along with commodity prices. Since most commodity prices have increased over the past few years it is interesting to see whether reference prices are likely to increase.
Section 1101 of the 2018 Farm Bill (P.L. 115-334) allows for the “effective reference price” for a commodity to replace the statutory reference price if 85% of the previous five-year Olympic average of the national marketing year average price is greater than the statutory reference price (Schnepf). The “effective reference price” may increase to as much as 115% of the statutory reference price.
Table 1 contains the statutory reference prices and calculated commodity “effective reference prices” for 2023 through 2028 determined using historical prices and CBO May 2022 commodity price estimates. The statutory reference prices are blue. If the projected “effective reference prices” are green or red that means the commodity prices have risen enough to generate a higher “effective reference price”. If the calculated reference price is green it means the “effective reference price” is less than 115% of the statutory reference price. If the calculated reference price is red it means the “effective reference price” is greater than 115% of the statutory reference price and would be set at 115% of the statutory reference price.
Corn, soybeans, oats, grain sorghum, mustard seed, sunflower, safflower and large and small chickpeas could see an increase in “effective reference prices” over the next six years depending upon whether CBO’s price estimates are realized. While many commodities such as wheat have experienced significant price increases, prices have not increased enough to overcome only being able to use 85% of the Olympic average of the previous 5 years commodity prices. If the “effective reference prices” in Table 1 are realized then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions.
Table 1. Statutory Reference Prices and Calculated “Effective Reference Prices” Based Off of Historical and CBO Estimated Prices for Covered Commodities.
Over the past five years, the federal crop insurance program has become a more important part of the farm safety net – relative to ARC/PLC and the marketing loan. There are several reasons for this, but the two most important are 1) higher commodity prices have made ARC/PLC and the marketing loan less likely to provide any benefits and 2) the crop insurance program uses the futures market to establish initial and harvest-time prices used in insurance calculations that are based on a monthly average of futures closing prices for a specified contract month. When commodity prices are trending upward, like they have been over the past few years, crop insurance protection increases along with higher futures market prices.
The correspondence, or lack thereof, of rice planted acres for four Southern rice growing states with the marketing year average price reported by USDA around October 1st of the year prior to planting and the projected insurance prices was evaluated over the 2016 to 2022 period. The previous year’s marketing year average price was used to evaluate whether it was signaling for more or less acres for the next year. The projected (initial) insurance price is determined just prior to planting. The three states (Arkansas, Mississippi and Texas) that use the same futures contract to establish projected and harvest time prices are grouped together in the graphs followed by the graph for Louisiana.
The graphs indicate both marketing year average prices and insurance projected prices are generally trending upward since 2017. Planted acres for Arkansas and Mississippi and Louisiana do not exhibit an upward trend. Producers in these states generally have multiple crop alternatives to rice that may be drawing acres away from rice based on the relative profitability of the alternatives to rice. Texas producers generally have fewer viable alternatives to rice production, which appears to be revealed in the upward trend in planted acres. Another consideration to keep in mind is that even though rice prices have increased over the past few years, generally speaking, prices still remain below the full cost of production for producers in Southern rice growing states, particularly when accounting for the deductible associated with insurance policies.
From wild swings in commodity prices to an explosion in input costs that would make the Consumer Price Index (CPI) blush, agricultural producers have been riding a rollercoaster over the past year. The purpose of the farm safety net – the combination of Federal crop insurance and the traditional farm bill programs like Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) – is to help producers manage these risks. However, unprecedented pressure from the COVID-19 pandemic and natural disasters, along with the inflated input costs, have exposed gaps in the current farm safety net. One of the concerns on the minds of most producers at this point is how the farm safety net will perform in 2023 if commodity prices fall and input costs remain at elevated levels. In this article, we look at this question in the context of cotton.
This summer, USDA’s Economic Research Service (ERS) forecasted a U.S. average total cost of production for cotton in 2023 of $794/ac.[1] Assuming an average yield of 847 lbs/ac (based on the 5-year harvested-acre average for upland cotton from 2017-21), the total average cost of production for cotton in 2023 would be an estimated $0.9374/lb. The question: how much of the cost incurred by producers will be protected by the farm safety net?
Federal crop insurance is the cornerstone of the farm safety net. The insured price for cotton in the spring will be based on the Cotton #2 Dec ’23 futures contract (CTZ23). While the price is based on a month-long average (with the discovery period depending on your location), this example simply uses yesterday’s closing price ($0.731/lb) as a proxy for how the safety would perform if the insured price were established at yesterday’s levels (Figure 1). For a grower with Revenue Protection (RP) at a 75% coverage level, they are effectively protecting $0.5483/lb (= $0.731/lb x 75%). Even in the case where a grower purchases STAX at a 90% coverage level (in addition to RP), they still are only able to protect $0.6579/lb (= $0.731/lb x 90%). In other words, a producer would only be able to insure, on average, 70% of their total cost of production (= $0.6579/$0.9374).
But, won’t PLC help fill in the gap given it is designed to help in low-price scenarios? With cottonseed prices at $343/ton (NASS August 2022[2]), a lint value of roughly $0.637/lb equates with a seed cotton equivalent of $0.367/lb (the PLC seed cotton reference price). In other words, if cottonseed prices for the marketing year averaged $343/ton, lint prices would have to fall below $0.637/lb before PLC would trigger support. If the marketing year average price were to hover around the insurance price in our example ($0.731/lb), PLC would end up paying nothing.
Naturally, any number of different scenarios could transpire. For example, prices could rebound before planting. Input costs could fall between now and the spring. And, above-average yields could blunt the impact of lower prices. In the case of yields and given the example above, if prices averaged $0.731/lb, yields would need to be more than 28% above average to break even. While that is possible (especially in isolated areas), neither producers (nor their lenders) can bank on yields that are 28% above average.
This scenario clearly highlights just one example of the gaps that exist in the current farm safety net. It also highlights the importance of the upcoming debate on the 2023 Farm Bill. While pundits are prognosticating over whether there will be a simple extension of the current farm bill next year, agricultural producers may not be able to wait. Even if the markets end up breaking their way, they currently are exposed to a considerable amount of risk and the prospect of significant losses.
Figure 1. Cotton #2 December 2023 ICE Futures Contract (CTZ23)
