Category: Policy

The weather outlook for the Southern Great Plains and Southeast regions in 2024 and beyond signals a heightened risk of intense downburst events and extended periods without rainfall^[1]. This shift poses a big challenge for rainfed farms, especially with the transition from La Nina to El Nino ENSO patterns, which could mean too much rain in certain southern areas.

The timing of these weather events is crucial for farming success. Farmers recognize this and use various strategies like crop insurance, safety net programs like Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC), and disaster programs. Combining these tools strategically, following program guidelines, helps strengthen individual farms’ resilience against unpredictable weather.

Recent events, especially those resulting in financial support, strongly influence farmers’ decisions—this is known as ‘recency effects.’ A study in the Southern Great Plains^[2] found that when a weather disaster triggered a government program payment in the previous year, farmers were more likely to buy crop insurance the next year. This effect was even stronger for farmers already using crop insurance who had received both indemnity and a government program payment. Interestingly, as D2 drought weeks increased, policy sales also rose by a factor of 1.017, underlining the impact of recent experiences on risk management choices.

Farmers also stack safety net programs based on expected weather challenges. A recently published analysis^[3] showed that combining a safety net program with crop insurance led to better financial outcomes under a wide range of potential yields compared to relying on any one program alone. For rainfed wheat farmers, the best strategy involved combining PLC and revenue protection multi-peril crop insurance, along with planting a double crop of summer soybeans or grain sorghum alongside winter wheat. This not only maximized net returns but also reduced return variability.

PLC wasn’t triggered for the 2022 crop year, and commodities triggering a PLC payment rate were limited in 2020 and 2021 due to high commodity prices. ARC payments depended on county-level yields, reflecting weather-related damages to crops. As a result, many farmers have widely chosen ARC County (ARC-CO) coverage for 2023. Combining ARC-CO election with crop insurance has proven to yield higher net returns than relying solely on crop insurance, although payment limits can result in lower payments than PLC when the price program triggers.

With deadlines for 2023 disaster programs approaching in January, followed by ARC/PLC election and crop insurance deadlines later in the spring, the importance of whole-farm risk management is clear. Navigating these challenges requires farmers to carefully combine available tools, adapt to evolving climate projections, and strengthen their operations against future uncertainties.

Days with Excess Precipitation (Greater than 3 inches) in the Southeast over time. (Figure 19.3 from the IPCC 2018) 

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^[1] Intergovernmental Panel on Climate Change (IPCC), 5^th Assessment. https://www.ipcc.ch/report/ar5/wg2/north-america/

^[2] Unpublished study by Hagerman, A.D., L.H. Lambert, and M. Fan “Recency effects of drought and government disaster payments on crop insurance decisions in the Southern Great Plains.” Presented at the Agricultural and Applied Economics Association Annual Meeting, Austin, TX: August, 2021.

^[3] Westbrook, L., D.M. Lambert, A.D. Hagerman, L.H. Lambert, E.A. DeVuyst, and C.A. Maples. 2023. “Should Producers of Rainfed Wheat Enroll in Agricultural Risk Coverage or Price Loss Coverage?” Choices Magazine. Vol 38(Q4). Available online at: https://www.choicesmagazine.org/choices-magazine/submitted-articles/should-producers-of-rainfed-wheat-enroll-in-agricultural-risk-coverage-or-price-loss-coverage

If you were following farm bill developments over the past year, chances are you’ve heard a lot of chatter about the Inflation Reduction Act (IRA).  The IRA—signed into law in August 2022—provided approximately $18 billion in new, additional funding for climate-smart agriculture delivered via the existing conservation programs authorized in Title 2 of the farm bill. But, what does that have to do with the farm bill reauthorization?  As it turns out, quite a lot.

While the IRA infused $18 billion into the conservation programs, it was one-time funding. The IRA passed through Congress under a budget process known as reconciliation. While that process lowers the vote threshold in the Senate—allowing bills that might not otherwise pass to find their way through the process, typically in partisan fashion—it also requires that no spending extend beyond the 10-year budget window in the reconciliation agreement. For the IRA, that window closes in 2031. Contrast that with the farm bill, where the budget for conservation programs is assumed to continue in perpetuity.  

While the debate over the IRA has largely involved (1) quibbling over CBO’s projections of IRA spending and (2) speculating if USDA will be able to obligate the entire $18 billion by 2031, both of these arguments miss the bigger point. Absent creative thinking, the IRA funding will be a one-time flash in the pan—gone by 2031—as noted in Figure 1.  

Figure 1. Historic Conservation Spending with Estimated Spending under Current Law

Sadly, like most debates in Washington, D.C., creativity often takes a backseat. The same is true of this debate.  Much of the conversation has focused on the fringe options: (1) doing absolutely nothing, despite the caution above and (2) clawing back all of the IRA funding and using it to fund deficit reduction. We don’t see either of these as viable—or likely—options. In the remainder of this article, we explore the middle ground: options that deviate from the status quo but that could result in permanent increases to conservation funding.

As noted above, the farm bill differs from the IRA in that the budget for conservation programs in Title II of the farm bill is assumed to continue in perpetuity. The options that follow all involve reallocating the IRA funding within the context of the farm bill. It is complicated to be sure—and would require navigating arcane budget rules—but it is possible and would ensure that elevated funding levels for conservation extend beyond the life of the IRA. To illustrate the point, the gray area from Figure 1 is simply reallocated (in a nearly linear fashion) in Figure 2. A few key observations from this hypothetical reallocation: 

• This option results in additional conservation funding beyond 2031, which is not an option under status quo;

• By CBO’s estimates, the IRA will result in Title II outlays reaching a maximum of $9 billion in FY2027 (Figure 1), while the hypothetical reallocation option presented in Figure 2 would reach $9 billion by 2033; and

• Perhaps most importantly when compared to status quo, this option would result in these elevated levels in perpetuity.  In other words, rather than reaching $9 billion for a single year, it’s possible to build a Title II baseline at $9 billion per year in perpetuity.

Importantly, this example is hypothetical.  The faster USDA obligates the IRA funding, the less there is available to build long-term baseline in a farm bill. In other words, the longer this drags on, the less opportunity there is to have a long-term impact.  Regardless, while this option would trim IRA spending in the near term, it would result in permanent additional baseline to Title II of the farm bill going forward.

Figure 2. Historical Conservation Spending and Hypothetical Reallocation of IRA Dollars

Of course, Congress is under no obligation to follow the hypothetical allocation presented in Figure 2. The IRA was a one-time agreement strictly limited to $18 billion.  If policymakers agree to a solution that allows for a permanent increase in Title II spending—particularly those who were opposed to the IRA in the first place—then it stands to reason that compromise may be required.  For example, some of the gray area in Figure 2 could be allocated to fund other priorities in the farm bill.  While some may be naturally opposed to this option, it could still result in long-term investments to Title II that dwarf the IRA funding. 

Where does that leave us? Supporters of status quo (i.e., those demanding that the IRA not be brought into farm bill discussions) are guaranteeing that no more than $18 billion will be added to Title II programs for carrying out climate-smart agriculture (at least not in the near term, given the political environment that appears against more spending).  While it would require some very difficult conversations about priorities and funding levels, to us this seems to present a win-win opportunity…but only if cooler heads can prevail.

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Bart L. Fischer, and Joe Outlaw. “What’s all the Fuss about the Inflation Reduction Act?” Southern Ag Today 3(50.4). December 14, 2023. Permalink

The Congressional Budget Office (CBO) is every political budget analyst’s favorite punching bag.  Truth be told, they have an impossible job.  At its core, CBO is responsible for forecasting spending by the Federal government.^[1]  In some cases, this involves forecasting macroeconomic variables and the resulting Federal spending.  For example, CBO forecasts marketing year average prices for commodities covered by the farm bill and the resulting Price Loss Coverage (PLC) payments.  In other cases, CBO looks into its crystal ball to estimate spending that Executive Branch agencies will undertake using discretionary authority granted to them by Congress.  For example, Section 5 of the CCC Charter Act vests USDA with eight categories of specific powers ranging from supporting the prices of agricultural commodities to increasing the domestic consumption of agricultural commodities.  While some of these authorities are used to carry out programs explicitly authorized by Congress (e.g., carrying out conservation or environmental programs authorized by law), the authority has been used to deliver a number of new programs at the discretion of the Secretary. CBO’s efforts to forecast spending under the latter is the focus of this article.

From fiscal years 2012 to 2017, Congress restricted the Secretary’s discretionary use of the CCC Charter Act.^[2] Since the restriction was dropped in fiscal year 2018, both the Trump and Biden Administrations have used Section 5 of the Charter Act in a number of creative ways.  For example, in the midst of the trade war with China, the Trump Administration authorized a combined $28 billion in assistance to producers via the Market Facilitation Program (MFP).^[3]  More recently, the Biden Administration has used Section 5 to fund over $3 billion in Partnerships for Climate-Smart Commodities^[4] along with $1.2 billion for the new Regional Agricultural Promotion Program to “enable exporters to diversify into new markets and increase market share in growth markets.”^[5]

While CBO tries to reflect such spending in their regular baseline updates (for example, the January 2019 baseline explicitly listed $9.799 billion in spending for fiscal year 2019 under MFP), the baseline historically has not included an explicit (i.e., separate line item) forecast of additional spending.  That changed with the January 2020 baseline which – beyond merely reflecting significant additional spending under MFP – included a long-term forecast of $100 million per year in “Other CCC Spending” under the CCC Charter Act Authority. To CBO’s credit, it presumably was attempting to account for the likelihood that spending at the discretion of the Secretary would continue into the future – and continue it did, as noted in Figure 1.  As a result, in its May 2022 baseline, CBO increased the long-term estimate to $1 billion per year.  At this point, the main question is whether $1 billion per year is a reasonable/sufficient estimate of future spending.

Figure 1. Actual versus Projected Spending under USDA’s Discretionary Use of CCC

As noted in Figure 1, spending under Section 5 has averaged $10.7 billion over the last 6 years since Congress restored the Secretary’s full authority under the CCC Charter Act.  That is significantly higher than the $1 billion per year currently being forecasted by CBO.  Even if you consider the most recent 3 years under a different administration – while treating MFP as an outlier – spending still averages almost $4 billion per year, 4 times higher than CBO’s forecast.

While an estimate of $1 billion per year would indicate CBO is projecting a return to “normal,” reality seems to paint a different picture. By our estimates, use of Section 5 authorities of the CCC has resulted in spending in excess of $64 billion over the last 6 years. If the current administration were re-elected, it’s hard to imagine a reduction in spending for the priorities noted above, indicating that recent spending levels could become the status quo.  Further, a second Trump Administration could result in an expansion of tariffs and elevated spending under Section 5 in response. Regardless of the election outcome, recent hearings before the Select Committee on the Chinese Communist Party have indicated a significant interest in a resumption of tariffs on Chinese products.

All of this leads us to question the direction CBO will take in its Spring baseline update.  In light of recent spending and ongoing priorities, if the CBO baseline is intended to be realistic, we would anticipate a significant increase in forecasted spending under CCC Charter Act Authority.

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^[1] It likely goes without saying that this understates the scope of CBO’s duties.  For example, on a recurring basis, CBO projects Federal spending as a “baseline” against which authorizing committees consider changes (e.g., farm bill).  CBO must also estimate the budget impact of those proposed changes, a process colloquially known as “scoring.”  All of this involves CBO predicting into the future.

^[2] https://crsreports.congress.gov/product/pdf/R/R44606/4

^[3] https://crsreports.congress.gov/product/pdf/IF/IF11289

^[4] https://www.usda.gov/climate-solutions/climate-smart-commodities/faqs

^[5] https://fas.usda.gov/programs/regional-agricultural-promotion-program

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Fischer, Bart L., and Joe Outlaw. “Forecasting Discretionary Spending by the Commodity Credit Corporation (CCC).“ Southern Ag Today 3(49.4). December 7, 2023. Permalink

In the lead up to the 2018 Farm Bill expiration, U.S. Representatives Blumenauer (D-OR) and Kuster (D-NH) requested that the U.S. Government Accountability Office (GAO) study the effects of the U.S. sugar program. In this latest GAO report, rather than providing an objective and comprehensive overview of the effects of the program, it seems GAO was most interested in doubling down on its previous work. Importantly, despite decades of criticism from GAO, both Congress and the USDA have repeatedly rejected calls for wholesale changes to the U.S. sugar program. Sugar is the most highly supported agricultural good worldwide and the global sugar market is the most distorted commodity market, a point acknowledged by GAO. That factor and others, which we outline below, help explain why Congress has, with only a few brief exceptions, maintained a strong sugar program since 1789 regardless of which party has been in power. Had GAO considered some of those points, it would have resulted in a considerably more objective and well-balanced report.

GAO devoted a considerable amount of its report to examining the extent to which food companies are harmed by the sugar program. While it is not surprising the GAO report repeats the complaints of sugar-using groups regarding prices paid for sugar, it is surprising that GAO would not note (much less attempt to quantify) any benefits that those users receive from the sugar program. For one, research has shown that U.S. consumers prefer domestically sourced sugar rather than foreign sugar (Lewis et al., 2016). The U.S. sugar program establishes and maintains a strong domestic sugar supply chain, which accrues benefits to sugar-using companies and consumers, as well as promotes a reliable domestic supply of beet and cane sugar. Because of the U.S. sugar program, sugar-users can count on a reliable supply of sugar whenever and wherever they desire it and in the form that meets their specific needs. Such just-in-time delivery of an essential input to their production lines without having to invest in costly sugar storage facilities is extremely valuable to those companies. GAO does not provide any comparison to alternative scenarios in which those companies have to pay to invest in their own sugar supply chain logistics and where those companies are reliant on their main sugar supply being shipped to them from countries such as Brazil or India.  

The GAO report also neglected to include several recent articles that indicate the success of sugar-using firms that operate within the contours of the U.S. sugar program (i.e., Trejo-Pech et al., 2020; DeLong and Trejo-Pech, 2022; Trejo-Pech et al., 2023). For example, Trejo-Pech et al. (2023) demonstrates that food companies that are large sugar purchasers financially outperform other agribusinesses as well as other publicly traded companies in the United States. 

The GAO report briefly discussed how the effects of the U.S. sugar program are passed from food manufacturers to end-consumers. However, they referenced a GAO report from 2000 rather than using more recent studies. For example, DeLong and Trejo-Pech (2022) found that sugar-using companies in the United States do not pass on savings from changes in sugar prices to consumers, raising questions about GAO’s statements regarding which groups bear the costs of the sugar program. History unequivocally shows that food manufacturers and retailers pass no savings along to consumers when the price they pay producers for their sugar drops. DeLong and Trejo-Pech (2022) found no correlation between the price of sugar in the United States and the retail product prices charged to American households by sugar-using companies. In other words, any benefit in a decrease in U.S. sugar prices is likely captured by food manufacturers as increased profits and are not passed along to their customers (DeLong and Trejo-Pech (2022)). 

While GAO did not repeat its earlier recommendation from twenty years ago for Congress to lower the loan rate for sugar, it has missed an opportunity to compare the sugar loan levels in the farm bill – which have remained virtually unchanged over the past several farm bills – to the actual costs of producing sugar. Had GAO done so, the report would have added to the current farm bill discussion by showing how much costs of production have increased relative to the loan rates established in the 2018 Farm Bill. While that topic will be addressed more thoroughly in a subsequent Southern Ag Todayarticle, current costs of sugarbeet and sugarcane production are roughly 30% higher than they were in 2018 when the last farm bill was enacted.

GAO spent most of their report simply summarizing results from selected welfare economic studies (similar to their previous reports) that ultimately provides only a one-sided view of the sugar market in the United States and other countries. Indeed, many of their selected studies do not include more recent developments in the U.S. sugar market, such as the current Suspension Agreements with Mexico for sugar trade. Moreover, welfare economic studies do not capture the real-world benefits of ensuring a strong domestic supply chain, and they will continue to inadequately quantify the threat posed to U.S. producers by foreign governments in response to changes in U.S. sugar policy. For example, in just the past decade, there have been disputes involving the aforementioned dumping of subsidized sugar from Mexico into the United States and a WTO violation in the case of Indian subsidies to its sugar industry (USDA Economic Research Service, 2023; USDA Foreign Agricultural Service, 2023).

Notably absent from GAO’s report are the many studies that document the importance of the economic activity generated by sugar production to many rural and urban communities around the United States. For example, a recent study by researchers at Texas A&M University found that the sugar industry contributes an estimated $23.3 billion annually to the U.S. economy, supporting more than 150,000 jobs across two dozen states.

What is perhaps most interesting in the GAO report is their recommendation to USDA and the U.S. Trade Representative (USTR) to analyze alternative mechanisms for administering preferential-quota access to our trade partners. Improving the efficiency of government administration is always laudable. With that said, that is virtually the same recommendation GAO made nearly 25 years ago. After decades of observing how this has worked in practice, actually analyzing the potential gains from changing how USDA and the USTR administer sugar quotas would have been an interesting contribution by GAO to the discourse surrounding the new farm bill. GAO’s report did not add anything new to the discussion of the U.S. sugar program, and it missed an opportunity to finally provide a balanced report which includes the benefits provided by the U.S. sugar program.

References:

DeLong, K.L. and C. Trejo-Pech. 2022. “Factors Affecting Sugar-Containing-Product Prices.” Journal of Agricultural and Applied Economics, 54(2): 334-356. https://doi.org/10.1017/aae.2022.12

Lewis, K.E., C. Grebitus, and R. Nayga, Jr. 2016. “U.S. Consumer Preferences for Imported and Genetically Modified Sugar: Examining Policy Consequentiality in a Choice Experiment.” Journal of Behavioral and Experimental Economics, 65:1-8. https://doi.org/10.1016/j.socec.2016.10.001

Trejo-Pech, C.J.O., K.L. DeLong, D.M. Lambert, and V. Siokos. 2020. “The Impact of US Sugar Prices on the Financial Performance of US Sugar-Using Firms.” Agricultural and Food Economics, 8(6): 1-17. https://doi.org/10.1186/s40100-020-00161-5

Trejo-Pech, C.J.O., K.L. DeLong, and R. Johansson. 2023. “How Does the Financial Performance of Sugar-Using Firms Compare to other Agribusinesses? An Accounting and Economic Profit Rates Analysis.” Agricultural Finance Review, 83(3): 453:477. https://doi.org/10.1108/AFR-08-2022-0103

USDA Economic Research Service. 2023. Mexico Remains Significant Supplier of U.S. Sugar Despite Limits Imposed on Mexican Sugar Imports. Retrieved from: https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=103093#:~:text=In%202014%2C%20after%20the%20U.S.,been%20applied%20to%20Mexican%20sugar. USDA Foreign Agricultural Service. 2023. India: WTP Rules Against India’s Sugar Export Subsidies and Domestic Price Support. Retrieved from: https://fas.usda.gov/data/india-wto-rules-against-indias-sugar-export-subsidies-and-domestic-price-support#:~:text=On%20December%2014%2C%202021%2C%20the,obligations%20under%20the%20multilateral%20agreement

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DeLong, Karen L., Michael Deliberto, and Bart L. Fischer. “Evaluation of the Recent Government Accountability Office Sugar Program Report.” Southern Ag Today 3(48.4). November 30, 2023. Permalink

Title II of the Agricultural Adjustment Act of 1948 (herein referred to as “the act”), allowed the Secretary of Agriculture to, “Support the prices of whole milk, butterfat, and the products of such commodity… at a level not in excess of 90 per centum not less than 75 per centum of the parity prices.” To achieve this, the act gave the secretary the legal authority to support dairy prices, “Through loans on, or purchases of, the products of milk and butterfat.” To conduct the purchases or loans of dairy commodities, the Secretary of Agriculture was legally authorized to make the purchases of butter or cheese through the Commodity Credit Corporation (CCC). Under the legal framework in the Agricultural Adjustment Act of 1948, the dairy provisions are permanent law, although they have been regularly suspended by subsequent farm bills. 

Parity prices are prices received by farmers for agricultural commodities that ensure a level of farm income to cover the costs of production and provide a living wage (7 U.S.C. §§ 608c-659, 1933). The idea behind parity prices originated in the Agricultural Adjustment Act of 1933 in response to the low commodity prices farmers experienced during the Great Depression.  To calculate parity prices, the U.S. Department of Agriculture (USDA) used agricultural prices from 1910 to 1914, the Golden Age of Agriculture, since the industry generally regarded these prices as fair during this time. One of the commodities designed to receive a parity price was milk, which was spurred by the Wisconsin milk strike and subsequent cheese plant bombings. Parity prices reflect the purchasing power from 1909-1914 but in today’s prices. 

Although the dairy parity price is no longer used in the current dairy pricing scheme in the U.S., it is still reported monthly in the USDA price report due to federal mandates in existing legislation (USDA-NASS, 2011). In September 2023, the USDA Agricultural Prices Report indicated an all-milk (across all classes) parity price of $67.40 per hundredweight (USDA-NASS, 2023).  The actual price received by producers in September 2023 ($21.00 per cwt) was approximately 30% of parity. Milk prices by percent parity are shown in Table 1. Under the act, the secretary has the legal authority to set the parity price, which becomes the new price floor. The new price in turn is supported through dairy foods commodity purchases by the CCC.   

Table 1. Parity milk price.
Pricing factor	Price ($)
Parity Price1	67.40
90%	60.66
30%2	21.00
Income above market price	39.66
1Reported by NASS 2Current market price

Policy Implication Discussion 

If Congress fails to extend the farm bill between now and the end of the year, concerns will grow about a potential return to permanent law after the first of the year.  Although many dairy farmers would be thrilled to receive an all-milk price of $60.66 cwt, there are a few long-term implications that need to be considered before celebrating a high milk price. 

• Undoubtedly, the price of milk paid by consumers would increase significantly. Historically, milk was considered an inelastic food product; therefore, even as the price of milk increased, there was little effect on the quantity consumers demanded (Schröck, 2012). However, some economists have observed that milk is no longer as inelastic as once believed. This begs the question: even if the lowest-priced milk in the grocery store went above $4.00 per gallon, how would consumers respond? 

• If milk consumption were to decline, there would subsequently be a ripple effect that would decrease the amount of milk processed into fluid milk and other dairy foods. Therefore, in a market where there is already an oversupply of milk, this could potentially increase this issue even further. 

References 

Schröck, R. (2012). The organic milk market in Germany is maturing: A demand system analysis of organic and conventional fresh milk segmented by consumer groups. Agribusiness, 28(3), 274-292.

USDA-National Agricultural Statistics Service. (2023, September 29). Agricultural Prices. Economics, Statistics, and Market Information Center. https://downloads.usda.library.cornell.edu/usda-esmis/files/c821gj76b/p5549b47m/6108ww46v/agpr0923.pdf

USDA-National Agricultural Statistics Service. (2011). Price Program. USDA-National Agricultural Statistics Service. https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Prices/Price_Program_Methodology_v11_03092015.pdf

Myers, Jack, and Hunter Biram. “Implications of Reverting to Dairy Policy in the 1948 Farm Bill.” Southern Ag Today 3(46.4). November 16, 2023. Permalink