Category: Policy

One of the most asked questions we get is whether the next farm bill will contain a reference price increase for covered commodities to offset higher input prices.   Both the price loss coverage (PLC) and agriculture risk coverage (ARC) safety net programs use reference prices in their respective calculations.  Focusing on PLC, with relatively high market prices, it would seem that now is the time to increase reference prices as market prices for many covered commodities are above their respective reference prices.  This would mean reference prices could be raised modestly without triggering much, if any, payment.  This analysis sets aside the question of whether the agricultural committees will have any more money to write the next farm bill.

Table 1 provides the ratio of marketing year average prices to reference prices for seven covered commodities from 2023 to 2032.  The results in Table 1 that are green indicate the market price is above the reference price for the commodity for that year.  And conversely, ratios that are red indicate market prices that are below reference prices.  One of the first things that jumps out in the table is that the 2023 marketing year has all but peanut prices higher than their respective reference prices.  CBO projects prices to decline below reference prices for all but corn and soybeans over their projection period.  Generally, this wouldn’t bode well for the agricultural committees being able to increase reference prices; however, the last column in the table contains base acres for each of the covered commodities.  Two of the biggest crops in terms of base acres (corn and soybeans) that account for more than 146 million base acres are projected to experience prices above their respective reference prices.  The remaining commodities with relatively lower marketing year average prices account for less than 100 million acres, with wheat accounting for more than one-half of the total.

Time will tell whether reference prices can be increased, which will largely depend on an infusion of new money into the farm bill process.  Proponents should feel cautiously optimistic that a reference price increase could be feasible.

Table 1.  Ratio of Marketing Year Average Prices to Reference Prices and Base Acres.

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Outlaw, Joe, and Bart Fischer. “Does the May 2022 CBO Baseline Provide Any Information About the Ability to Increase Commodity Reference Prices?” Southern Ag Today 2(42.4). October 13, 2022. Permalink

In a previous Southern Ag Today article, I discussed the concept of unintended consequences which is a topic we talk a lot about in agricultural policy.^[1]  Generally speaking, unintended consequences result from a lack of knowledge and/or lack of analysis of the potential consequences of a policy change.  The previous article focused on the unintended consequences associated with government policies that created the U.S. ethanol industry.  This article looks at the Securities and Exchange Commission (SEC) proposed rule changes that would require climate-related disclosures of publicly traded firms.^[2]

On March 21, 2022, the SEC proposed rule changes that would require certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. 

According to the SEC, the proposed rule “would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.”  Required disclosures for each of the three scopes would be phased in over a period of time.

This proposal generally requires publicly traded companies to provide investors more information about GHG emissions coming from business activities.  However, as reported by the American Farm Bureau Federation (AFBF), “While farmers and ranchers are not public companies and therefore not ‘registrants’ that are required to report directly to the SEC, their obligations through their regulated customers could be enormous….requirements for Scope 3 greenhouse gas emissions not only directly affects farmers’ and ranchers’ operations, but could create several substantial costs and liabilities, such as reporting obligations, technical challenges, significant financial and operational disruption and the risk of financially crippling legal liabilities.”^[3]

While the proposed rule’s focus is to provide investors more information about the GHG emissions of publicly traded companies, depending upon 1) if the rule is adopted and 2) how it is implemented, it could have implications for U.S. farmers and ranchers because as AFBF points out, “for agriculture, food, and forestry manufacturing alone, there are nearly 2,400 companies registered with the SEC that would be subject to reporting Scope 3 emissions from its farm suppliers.”

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^[1] https://southernagtoday.org/2022/04/the-u-s-ethanol-industry-and-unintended-consequences/

^[2] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

^[3] https://www.fb.org/market-intel/overreach-of-sec-proposed-climate-rule-could-hurt-agriculture

Outlaw, Joe. “The Securities and Exchange Commission Proposed Climate Related Disclosures and Unintended Consequences?“. Southern Ag Today 2(40.4). September 29, 2022. Permalink

Livestock producers are making hard decisions this summer and fall as widespread drought conditions limit pasture, hay, and, in some places, water availability across the southern and western states. Drought losses can result in additional costs for purchased hay (for those who can find a hay source), selling calves early, retaining fewer replacement heifers, or culling cows to reduce pressure on pasture and rangeland. Drought disaster programs are available to help offset some of the additional costs. For example, the Emergency Assistance for Livestock, Honey Bees and Farm-Raised Fish (ELAP) program can help offset the added cost of transporting hay from greater distances this year. Forage management and supplementation can also stretch available grazing to reduce the need for winter hay feeding in some areas. However, in many cases, producers will be reducing herd sizes through additional cattle sales. 

Drought related costs and losses will be reflected on 2022 tax returns for many producers across the country. Understanding how those losses must be reported come tax season and what documentation to retain will aid in properly reporting expenses and program payments. Drought related farm expenses and payments from drought disaster programs are fairly straightforward. For example, if a producer purchases hay in 2022 sourced from farms in states at a greater distance than previous years, they may be eligible for the ELAP transportation cost offset mentioned previously. The producer would report the cost of hay and hauling as farm expenses. The ELAP disaster payment for excess transportation cost would be reported as income. For more information on USDA disaster program documentation requirements, see factsheet: https://extension.okstate.edu/fact-sheets/usda-program-recordkeeping-requirements.html

Cattle sales will also be reported on tax returns, but these decisions are a little more complicated. Gains from breeding, dairy or draft cattle sales in excess of normal due to drought may be deferred for up to two years, as long as the dollar value of the cattle are replaced within those two years. Record keeping is critical. The producer can only defer cattle sales that are above what would typically be sold under normal production conditions. Two tax provisions exist to avoid the adverse tax consequences of selling more animals than normal due to weather related conditions. One applies only to breeding, dairy and draft animals that will be replaced. The second applies to market animals where the income from the additional animals sold are reported in the year that they would have normally been marketed.

Consider an example for breeding animals: Over the past 3 years, my cattle operation sold 30 calves weighing 650 pounds and 4 cull cows as an annual average. Due to drought in 2022, I sell 5 replacement heifers I would ordinarily have retained and 10 cows (6 more than the average) for $10,000. I can defer reporting the $10,000 of income from the excess animal sales (the 5 replacement heifers and the 6 cows) by electing to replace those sold by buying at least $10,000 of replacement breeding animals by December 31, 2024. If I do not spend at least $10,000 on replacement animals, I must amend the 2022 return and report the difference as income in that year. Should my county or a contiguous county be declared a federal disaster area, the replacement period is extended to 4 years and the animals will not have to be replaced until the end of 2026. The replacement animals must also be of the same type and purpose of the animals sold (dairy animals for dairy animals or breeding for breeding). This tax provision is under Internal Revenue Code Section 1033(e).

Now consider an example for the sale of any livestock (other than poultry) due to weather related conditions, and this time the county I raise cattle in is declared a federal disaster area (which is a requirement for this provision). Using the same facts as the prior example, I sold 6 more cows and 5 replacement heifers plus 15 head of calves (that would have normally been sold in 2023) for $20,000. Combined, this is more livestock than what would have normally been sold had the drought conditions not existed. This tax law provision allows me to elect to report the $20,000 of income in 2023 instead bunching this excess income in 2022. This tax provision is under Internal Revenue Code Section 453(g). 

Documentation is critical for all drought related losses. Specifically for your taxes keep the following in your tax records: 

• Evidence of the weather-related conditions that forced the sale or exchange of animals.
• Number and kind of livestock sold or exchanged.
• Number of livestock of each kind that would have been sold or exchanged under normal business circumstances (generally, the average number of animals sold over the three preceding years).
• The amount of gain realized on the sale or exchange.
• The amount of income to be postponed

It will be important to discuss the application of these tax provisions with your income tax advisor. Sources of drought information include the Drought Monitor Maps which indicate drought intensity by state and region. In addition, USDA reports which counties are currently considered drought disaster areas and are eligible to receive federal disaster programs, and disaster declarations generally are available from State and Federal government websites and stakeholder announcements. Tax season seems like it is far off on the horizon still, but better understanding how drought related losses will be reported may aid in documentation of losses today. 

For more information see the Rural Tax Center factsheet http://ruraltax.org/files-ou/RTE_2021-05_Weather_Related_Sales_of_Livestock.pdf

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Hagerman, Amy, and JC Hobbs. “Drought Related Livestock Sales and Tax Reporting Options.” Southern Ag Today 2(38.4). September 15, 2022. Permalink

In a recent report by the Agricultural & Food Policy Center (AFPC), we provided an overview of the agricultural provisions included in the recently-passed Inflation Reduction Act (IRA) of 2022.  The IRA was a Senate-led compromise that broke the months-long logjam over the Build Back Better (BBB) Act that had been stalled in the Senate.  As noted in Figure 1, the funding for agriculture in the IRA was less than half of what had been proposed in the BBB.

As noted in Figure 1, roughly half of the funding for agriculture goes to conservation.  Specifically, the IRA provides an additional $8.45 billion for the Environmental Quality Incentives Program (EQIP), $3.25 billion for the Conservation Stewardship Program (CSP), $1.4 billion for the Agricultural Conservation Easement Program (ACEP), $4.95 billion for the Regional Conservation Partnership Program (RCPP), $1 billion for Conservation Technical Assistance, and $300 million for USDA to collect “field-based data” to quantify carbon sequestration and greenhouse gas emissions.  Importantly, beyond the temporary funding increases, the authorizations for all of these programs – including the Conservation Reserve Program (CRP) – were extended through fiscal year 2031.

The IRA also provided $3.1 billion for loan relief to borrowers with “at-risk agricultural operations” and almost $3 billion in assistance and support for “underserved farmers, ranchers, and foresters,” of which $2.2 billion is for financial assistance – including the cost of any financial assistance – to producers determined to have experienced discrimination prior to January 1, 2021, in any USDA farm lending programs.  As noted in a recent Southern Ag Today article, initial versions of the IRA had left out debt relief, but the version that was signed into law ultimately addressed the issue.  

Finally, the IRA provided over $13 billion for rural development programs – most of which is for rural electric cooperative loans – and almost $5 billion for forestry-related provisions.

We are frequently asked about the impact that this will have on the next farm bill.  While one can argue that an additional infusion for farm bill conservation programs is helpful, it is important to note that the additional funding dries up in fiscal year 2026, which will likely coincide with the mid-point of the next farm bill.  This undoubtedly will complicate what are already guaranteed to be complicated farm bill deliberations next year.

Figure 1. Comparing Estimated Outlays for Agriculture under the Build Back Better (BBB) Act and the Inflation Reduction Act (IRA), FY2022-31.

Fischer, Bart L., and Joe Outlaw. “Agricultural Provisions in the Inflation Reduction Act of 2022.” Southern Ag Today 2(36.4). September 1, 2022. Permalink

The Risk Management Agency (RMA) is responsible for rating crop insurance in an actuarially sound way. Unlike private insurance companies, RMA is not driven by profit when determining rates. Premium rates do not include the cost of sales, underwriting, loss adjustments, or the operating costs of RMA. Legislative language instructs that “the amount of the premium shall be sufficient to cover anticipated losses and a reasonable reserve^[1].” RMA considers actual production history in the rating process, and rates are established independently of crop and geographic region. The loss experience of rice is not a factor when developing a premium rate for corn. Likewise, the loss experience of corn in Mississippi is not a factor when developing a premium rate for corn in Illinois. 

The politics of crop insurance comes into play with the premium subsidy percentage amounts set by policy. Subsidy percentages are equitable across all crops, though, with each crop receiving the same subsidy percentage dependent on coverage level and unit choice. Total acres insured, coverage level, and premium rates all factor into the total amount of subsidies received by a crop. As seen in Figure 1., corn has received a total of $24.6 billion of crop insurance subsidies in the past decade, followed by soybeans at $14.9 billion. Rice and peanuts have total subsidy amounts of $617 million and $424 million, respectively, over the past decade.  

Crop insurance performance is often judged by loss ratios. A loss ratio is simply calculated as indemnity payments divided by total premium. A loss ratio of 1.0 means that indemnity payments equaled total premiums. A loss ratio greater than 1.0 means indemnity payments exceed premiums, and a loss ratio less than 1.0 means total premiums exceed indemnity payments. The Risk Management Agency (RMA) is statutorily mandated to achieve a target loss ratio of 1.0. While loss ratios can fluctuate year-to-year, the national and crop-specific ratios have been trending down since 1989, as seen in Figure 2. Interestingly, many crops have trended down at similar rates. Rice, cotton, wheat, soybeans, and the national total have similar sloping trend lines. Corn has trended down but at a slower rate than the previously mentioned crops. Peanuts have seen the most dramatic decrease in the trend of any crop.    

Figure 1. Total 10 Year Subsidy Amount by Crop, 2013-2022

Figure 2. U.S. Crop Insurance Loss Ratio Trends Over Time by Selected Crops, 1989-2021

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^[1] Coble, K. H., Knight, T. O., Goodwin, B. K., Miller, M. F., Rejesus, R. M., & Duffield, G. (2010). A comprehensive review of the rma aph and combo rating methodology: Final report. Prepared by Sumaria systems for the risk Management agency.

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Maples, William E., and Keith H. Coble. “Crop Insurance Loss Ratio Trends Over Time.” Southern Ag Today 2(34.4). August 18, 2022. Permalink