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  • The Trillion Dollar “Farm” Bill

    The Trillion Dollar “Farm” Bill

    In May 2022, the Congressional Budget Office (CBO) released its latest 10-year budget projections for a number of Federal programs, including farm-related programs and the Supplemental Nutrition Assistance Program (SNAP).  While CBO typically updates its budget projections up to three times per year, the spring update following the release of the President’s budget is most closely watched as it typically is the baseline against which the cost of legislative proposals is “scored” throughout the year.

    During farm bill reauthorization years, CBO typically also releases their baseline projections by farm bill title.  That summary gives policymakers a clear picture of the budget for mandatory spending they have to work with in each title of the farm bill.  That estimate also gives a clear picture of what CBO expects the entire farm bill to spend if existing policies were simply maintained going forward.

    While we are still a year out from CBO releasing baseline projections by title, there is still plenty to be gleaned from the May 2022 baseline update.  For example, if we look back to the April 2018 baseline (the scoring baseline for the 2018 Farm Bill), the spending projections for CCC Price Support and Related Activities, Conservation, SNAP, and Crop Insurance accounted for $865.9 billion (Table 1), or 99.85% of the $867.2 billion in projected total baseline outlays for the farm bill.  

     Applying the same methodology to the most recent May 2022 baseline update, those four categories are projected to spend approximately $1.3 trillion over the next 10 years (Table 1).  The significant increase is due to a 66.4% increase in projected spending on SNAP, with SNAP now projected to account for $1.1 trillion, or 84% of the total farm bill baseline.  By contrast, the income support provisions for agricultural producers that make up the largest component of Title 1 – the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs – are projected to spend $43.3 billion over the next 10 years, or just 3.3% of the total farm bill baseline.

    Table 1.  Congressional Budget Office (CBO) 10-Year Outlays in Million$

     April 2018May 2022Change($)Change (%)
    CCC Price Support & Related 1/64,30571,092+6,787+10.6%
    Conservation59,68959,216-473-0.8%
    SNAP 2/663,8281,104,384+440,556+66.4%
    Crop Insurance78,03779,761+1,724+2.2%
    Total865,8591,314,453+448,594+51.8%

    1/ CBO included $10 billion in “Other Administrative CCC Spending” in the May 2022 baseline update.
    2/ Revised economic assumptions and administrative changes to the Thrifty Food Plan (TFP) resulted in the Office of Management and Budget (OMB) projecting an additional $254 billion in SNAP outlays from FY2022-31 (https://www.whitehouse.gov/wp-content/uploads/2021/08/msr_fy22.pdf).

    Fischer, Bart. “The Trillion Dollar “Farm” Bill“. Southern Ag Today 2(28.4). July 7, 2022. Permalink

  • Influential Expectations

    Influential Expectations

    When referencing prices, nominal simply means the actual quoted price of a good at a given time.  Real is a concept used to remove the inflation effect on prices and compare the true value of a good in different time periods.  For example, the US average price of gasoline recently hit $5/gallon.  To truly understand how expensive today’s prices are, we would have to account for inflation and adjust past gas prices to be quoted in 2022 dollars.  The inflation adjustment makes it a “real” value comparison.

    Real and Nominal also have a unique meaning when it comes to interest rates, and again inflation is a key component.  Nominal interest rates are the value you see quoted for a loan, a certificate of deposit, or yield on a bond.  The total nominal interest rate is made up of several components: the real interest rate, a risk premium, and expected inflation.  The real interest rate is the underlying cost of using someone else’s capital for a period of time.  The risk premium accounts for the uncertainty of the loan due to the credit worthiness of the borrower and/or how the loan is to be used.  Finally, expected inflation is added to account for the change in purchasing power between original loan proceeds and the loan repayment at a later date.  If, for example, a lender was expecting 5% inflation over the next year, the real interest rate was around 1.5%, and the risk premium was another 1% (the lender thinks the borrower is a trustworthy fellow), he would quote a nominal interest rate of 7.5%. 

    Expected inflation is an important part of the greater economic picture today.  Peoples’ feelings and expectations about future inflation influence how they buy, sell, borrow, lend, and negotiate prices in the market place.  In no small part, expected inflation can create a self-fulfilling prophesy.  All of this brings us to an interesting bit of economic data that gives us a hint at today’s market expectations for inflation.  Nominal interest rate quotes are readily available, but the components as described above are not transpartent in those quotes; at best, they can be estimated.  One such estimate is known as the TIPS spread or the 5-Year Breakeven Inflation Rate.  TIPS refers to Treasury Inflation-Protected Securites which are adjusted to offset inflation.  The nominal yield for regular Treasury notes includes real interest rates, virtually no risk, and market expectations for inflation.  The yield on TIPS has the same components but excludes expected inflation, therefore the market’s expectation of inflation is revealed in the spread, or yield difference, between the two types of notes.  Figure 1 shows the TIPS spread on five-year Treasury notes over the past twenty years.  The TIPS spread quickly rose from near zero at the onset of the pandemic to a high of 3.5% in mid to late March.  The spread has since fallen back to around 2.75% as of last week.  The decline over the last three months coincides with the Fed’s more aggressive action to fight inflation.  It’s too early to tell if the Fed’s higher interest rates are slowing down inflation, but this early indication in the TIPS spread suggests market expectations are improving with regard to inflation.  If your glass if half full, it’s an encouraging step it the right direction.  If your glass is half empty, a decline in inflation expections also reflects a growing concern about a future recession.  In reality, both interpretations are relevant regardless of how much water is in your glass.    

    Figure 1. Daily Yield Difference between Regular and Inflation-Protected 5-Year Treasury Notes

    Data Source: St. Louis Federal Reserve Bank

    Klose, Steven, and John D. Anderson. “Influential Expectations.” Southern Ag Today 2(28.3). July 6, 2022. Permalink

  • Net Farm Income Varies Widely in Commercial Broiler Production

    Commercial broiler chicken production is a staple of the farming community in the southeastern states, so much so that the area is often referred to as the “broiler belt.” Contract broiler growers have benefitted from the business arrangements between large poultry integrators, lending institutions and themselves for many decades. However, over the last decade or so, the investment cost of housing and the cost of utilities supplied by the growers has risen greatly, resulting in rapidly decreasing grower net incomes. Given the nature of most poultry contracts, growers only have a limited opportunity to positively affect revenues. Most profit improvement opportunities lie in lowering input costs, either by improving efficiency or simply by cutting back on inputs like heating fuel or electricity. However, choosing the latter has the potential to negatively affect the revenue side through bird performance losses, as well as negatively affect the competitive contract pay rate. As houses age, they typically become less efficient, requiring major house maintenance and equipment replacement or upgrade, adding to the cost of operation. The variable cost for a poultry farm is made up mostly of utility costs. On new farms, variable cost can be as low as 20% of revenue, while older farms can see as high as 40% or more. Therefore, a contract grower could be faced with shortages on the revenue side caused by lowered bird performance possibly linked to housing deficiencies, coupled with increased input costs stemming from the same deficiencies – all resulting in a fast drop in net farm income.

    By surveying southeastern poultry financing institutions for averages across farms, we see what seems like a tight range of revenue per square foot of broiler grow out space per year. However, when you apply these numbers to the thousands of square feet on a typical broiler farm, then apply known ranges for variable costs, the resulting spread in net incomes can be significant.

    Estimated Broiler Farm Income, 4-40’x500’ Houses

    Broiler Farm income Estimate 4-40’x500Square Feet “Old/Less Efficient”“New/More Efficient”
    80,000
    Gross Revenue per SF Range$2.75$3.25
    Gross Revenue$220,000.00$260,000.00
    Variable Expenses (High 35%, Low 25%)$(77,000.00)$(65,000.00)
    Income Before Debt Service$143,000.00$195,000.00
    Debt Service Assignement (50%)$(110,000.00)$(130,000.00)
    Net Farm Income$33,000.00$65,000.00
    Net Income per SF$0.79$1.55

    Sometimes growers face unforeseen risks from market changes and other outside forces, like the recent HPAI outbreaks, and COVID19 before that. Instances where fewer birds are placed or when out times increase between flocks negatively affect revenue. Some contracts have provisions that help mitigate these risks for the grower; however, some contracts have no such provisions and growers can suffer greatly. Poultry companies absorb much of the normal risks from changing markets and volatile feed prices. However, for the individual grower, a small change in bird density or placement schedule, for example, can have great impact on their individual farm operation which typically operates on a much tighter margin with little working capital to buffer the impact. Current proposed changes to the GIPSA (Grain Inspection, Packers and Stockyards Administration) regulations may offer some mitigation of these and other areas of risk, as well as provide for greater financial disclosures related to the tournament system. Growers should carefully read the proposal and offer comments at:  

    https://www.federalregister.gov/documents/2022/06/08/2022-11997/transparency-in-poultry-grower-contracting-and-tournaments

    Brothers, Dennis, and Paul Georinger. “Net Farm Income Varies Widely in Commercial Broiler Production.” Southern Ag Today 2(28.2). July 5, 2022. Permalink

  • Wheat Production of Major Exporters in the Southern Hemisphere

    Wheat Production of Major Exporters in the Southern Hemisphere

    In the latest WASDE report, USDA projected lower world wheat production than last season. This lower projection was primarily a result of lower expected wheat production in Ukraine, although partially offset by higher spring wheat production in Canada. 

    The southern hemisphere represents 6-10% of annual global wheat production, 45-72 MMT over the past 10-years (USDA-PSD). The two dominant producers in the southern hemisphere are Australia and Argentina, contributing 75-82% of total southern hemisphere production. An increase in winter wheat acreage for the two main exporters from the southern hemisphere, Argentina and Australia, would have been expected given soaring prices. On the contrary, USDA projects lower wheat production for the upcoming 2022-23 season in Argentina and Australia (Graph 1) which are both coming from record high production levels in their previous seasons. The effect of La Niña and high production costs have reduced 2022-23 wheat projections, compared to last year’s records. 

    The lack of moisture in the soil has decreased planting progress in much of the Pampas region of Argentina. Total acreage projections have also decreased below USDA estimates (20 MT) during the last month (Rosario Stock Exchange). High production costs, high breakeven prices, high breakeven yields, and uncertainty in government policies discourage wheat planting in areas with a lack of moisture and higher production risk. According to the Rosario Stock Exchange, 2022-23 winter wheat planting projections decreased to 15.32 million acres (10% less than last season). Wheat estimated production in Argentina could reach 18.5 MT if assuming an average yield of 46 bu/acre. 

    The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) projects winter wheat production below last year in Australia. Weather conditions were reported favorable for wheat planting in most of the country. ABARES production projections are similar to the USDA’s (30 MT) and 16.5% lower than last season. High fertilizer prices have decreased yield projections for the next campaign, especially considering last season’s record high production of 36 MT. 

    High costs and non-favorable weather have primarily offset the influence of high prices to increase wheat production in the southern hemisphere this season, reduce the chances of increasing worldwide ending stocks, and support prices in the short term.

    Abello , Francisco Pancho . “Wheat Production of Major Exporters in the Southern Hemisphere“. Southern Ag Today 2(28.1). July 4, 2022. Permalink

  • On a Need-to-Know Basis: TXFED Online Training for Market Farmers

    On a Need-to-Know Basis: TXFED Online Training for Market Farmers

    We all want the information we need when we need it. We want it to be easy to find and easy to understand. And we want to know we can trust it. That’s not too much to ask for.

    The Texas Food Education & Discovery network (TXFED) aims to help local food producers and farmers markets to increase customers and sales and develop new market opportunities through online, on-demand training. Online courses provide content created by and for farmers & farmers market organizers, along with trusted organizations. 

    TXFED’s first 9 courses, available with closed captioning and Spanish subtitles, cover topics ranging from whether selling at a farmers market is right for your business and how to make money at a farmers market to using social media to promote your farm. Multi-course series provides opportunities for more in-depth learning. Several additional courses are in development. For a limited time, these courses are free.

    Thirteen collaborating organizations provide consistency in creating course outlines and content with input and additional videos and other content provided by more than 50 knowledgeable new farmers and farmers market organizers with different types of businesses and experiences relevant to each course. Courses are relatively short but include assessments, worksheets, and outside resources to help farmers put lessons to work. 

    TXFED is funded in part by a grant from the USDA Agricultural Marketing Service, Farmers Market Promotion Program. The program is led by the Texas Center for Local Food. Other educational collaborators include the Texas A&M AgriLife Extension Service, The University of Texas – Rio Grande Valley Texas Rural Cooperative Center, the National Center for Appropriate Technology, the Small Producers Initiative at Texas State University. Business and association collaborators include Farmshare Austin, the Farmers Market Coalition, the Farm & Ranch Freedom Alliance, Grow North Texas, Terra Preta Farm, Texas Farmers Market, Texas Organic Farmers & Gardeners Association, and Texas Small Farmer & Ranchers Community-Based Organization.

    Visit https://www.txfed.org/ to explore courses.

    Dudensing, Rebekka. “On a Need-to-Know Basis: TXFED Online Training for Market Farmers“. Southern Ag Today 2(27.5). July 1, 2022. Permalink