Farm Programs

Farm Programs - Commodity Programs: A Farmer's Perspective...

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Unformatted text preview: Commodity Programs: A Farmer's Perspective AAE 320 Paul D. Mitchell Goals Overview federal farm programs, focusing primarily on commodity crops How these programs operate at the individual farm level Price support Crop insurance Farm Bill Every 56 years, Congress and President pass a Farm Bill that sets ag policy over several years Currently trying to pass 2008 Farm Bill Farm Security and Rural Investment Act of 2002 Federal Agriculture Improvement and Reform Act of 1996 ("Freedom to Farm") Food Agricultural Conservation and Trade Act of 1990 Farm Bill Huge document, with lots of "titles" that define federal ag programs in that area 2002 had ten titles I. Commodity Programs, II. Conservation, III. Trade, IV. Nutrition, V. Credit, VI. Rural Development, VII. Research and Related Matters, VIII. Forestry, IX. Energy, and X. Miscellaneous See class web page 2008 Farm Bill Both added new titles: Title X House: Horticulture and Organic Agriculture Senate: Livestock Marketing, Regulatory and Related Programs Conference committee has compromised to a final version, currently negotiating with administration to avoid veto Administration asked for budget balance Not releasing details of compromise, just veto threats regarding various issues The Commodity Title Current Commodity Support Programs Review each quickly, then look at House and Senate proposed changes Farmers must establish Base Acres and Program Yields: register with USDAFarm Service Agency (FSA) office in each county Direct Payments & CounterCyclical Payments Marketing Assistance Loans and Loan Deficiency Payments Base Acres Main idea: acres of each crop you grow Option 1: Base aces established under older farm bills or update Option 2: 4yr average acres (19982001) Payment Acres = 85% of Base Acres Number of acres a farmer eligible to receive support payments Program Yield Main idea: typical yield for crops you grow Differ for Direct vs. CountyCyclical Direct Payments Counter Cyclical: same as Direct, or update As established under previous farm bill rules Oilseeds (soybeans): Farm Average19982002 x (National Avg19811985/National Avg19982002) 93.5% of Farm Average19982002 Other options too DP = PymtRateDP x 85% x BaseAc x PymtYld Direct Payment Rates (PymtRateDP) Direct Payments Example: Base acres = 100, Payment acres = 85 and program yield = 100 bu/ac, then Direct Payment = $0.28/bu x 85% x 100 bu/ ac x 100 ac = $2040, or $20.40 per acre Direct Payment Rate is like "price" & rest is yield and acres: You get 85% of this price Corn $0.28/bu, Soybeans $0.44/bu, Wheat $0.52/bu When crop prices are low, triggers payments that larger when prices lower CCP paid if Effective Price < Target Price Effective Price = PymtRateDP + max{MYAPriceUS, Loan Rate} MYAPriceUS = US marketing year avg price Loan Rates: Corn $1.95, Soybeans $5.00, Wheat $2.75 Target Prices: Corn $2.63, Soybeans CounterCyclical Payments CounterCyclical Payments CCP = PymtRateCCP x 85% x BaseAc x PymtYld PymtRateCCP = TargetPrice PymtRateDP max{MYAPriceUS, Loan Rate} CCP triggered if market price (MYAPriceUS) is below Target Price DP Rate (PymtRateDP) CCP Pymt Rate (PymtRateCCP) increases 1 for each 1 market price below TP PymtRateDP CounterCyclical Payments Crop Corn Soybean s Wheat Target Price $2.63 $5.80 $3.92 DP Pymt Rate $0.28 $0.44 $0.52 CCP Trigger $2.35 $5.36 $3.40 Max CCP Loan Pymt Rate Rate $0.40 $0.36 $0.65 $1.95 $5.00 $2.75 CounterCyclical Payments Graphics for Corn CCP Payment Rate 0.40 Market Price 1.95 Loan Rate 2.35 Target Price DP Payment Rate 2.63 Target Price Marketing Assistance Loans and Loan Deficiency Payments (LDP's) Main idea: Program works to give farmers a price floor equal to the Loan Rate Picks up price support for prices below the Loan Rate, where CCP stop Based on local prices and actual farmer harvested yield, not base acres and program yields as used for DP and CCP Marketing Assistance Loans and Loan Deficiency Payments (LDP's) Farmers receive marketing loans from the Commodity Credit Corporation (CCC), with their harvested grain used as collateral When sell, if local price is below the Loan Rate, farmers pay back less than the full loan Marketing Loan Repayment Rate based on daily Posted County Price (PCP) Simplification: not get loan and pay it back, but receive LDP = Loan Rate PCP, if PCP < Loan Rate LDP Loan Deficiency Payments Graphics for Corn 0.15 Market Price 1.80 1.95 2.35 Target Price DP Payment Rate 2.63 Target Price Posted Loan County Price Rate Implication of Programs Conceptually, these 3 price support programs work together to give farmers a price equal to the Target Price or better DP and CCP only for 85% of base acres at program yield, triggered by nation price LDP for actual yields and local prices Combined DP, CCP, and LDP Assume $1.80 "market price" Farmer receipts Never works exactly this way: $1.80 Farmer Price (= Posted County Price) + $0.28 Direct Payment + $0.40 CountyCyclical Payment + $0.15 Loan Deficiency Payment $2.63 Target Price 85% Base Acres actual acres Program Yield actual yield Posted County Price actual price Summary Farm Bill passed every 56 years, includes price support programs Direct Payments, CounterCyclical Payments, and Loan Deficiency Payments Goal: to ensure farmers receive Target Price or better for their crops What's going on with the 2008 Farm Bill? New Directions Both House and Senate create alternatives for price support programs as a new "safety net" House: RevenueBased Counter Cyclical Payments Senate: Average Crop Revenue Payments In lieu of CCP's, keeps LDP's and Direct Payments In lieu of CCP's, LDP's and Direct Payments House: onetime signup Senate: annual signup (but irrevocable) Both are voluntary but irrevocable choices House's RevenueBased Counter Cyclical Payments National target revenue specified for each program crop If actual national revenue for a crop is less than this target revenue, farmer peracre support payments equal the difference Example: National Target revenue for Corn is $344.12/ac. If actual national revenue is $300, farmers receive $44.12/ac Creates a revenue floor at the national level House's RevenueBased Counter Cyclical Payments National Target Revenues Actual National Revenue Corn = $344.12 Wheat = $149.92 Soybeans = $231.87 Oats = $92.10 National average yield Maximum of (a) national average market price received by producers during the 12month marketing year and (b) the loan rate Historical Yields, Prices and Revenues and RevenueBased CounterCyclical Payments for CORN Year Yield Price 2002 129. 3 2003 142. 2 2004 160. 4 2005 148. 2.32 2.42 2.06 2.00 Actual Revenue 299.98 344.12 330.42 296.00 Target Revenu Payment e 344.12 44.14 344.12 344.12 344.12 0.00 13.70 48.12 Historical Yields, Prices and Revenues and RevenueBased CounterCyclical Payments for SOYBEANS Year Yield Price 2002 38.0 2003 33.9 2004 42.2 2005 43.0 2006 42.7 2007 41.3 5.53 7.34 5.74 5.66 6.43 ??? Actual Revenue 210.14 248.83 242.23 243.38 274.56 > 231.87 Target Revenu e 231.87 231.87 231.87 231.87 231.87 231.87 Payment 21.73 0.00 0.00 0.00 0.00 0.00 Summary Corn: Low yield in 2002, low prices in 2004 and 2005 would have triggered payments Soybeans: Low yield and low prices in 2002 would have triggered payments Given current futures prices, only low national yields would triggered payments, which would drive prices higher, making payments unlikely Payments based on national prices and yields No formal process for updating target revenues Structured similar to GRIP crop insurance Senate's Average Crop Revenue Payments If actual state revenue is less than state revenue guarantee, farmer payment equals the difference Creates a revenue floor at the state level, with the guarantee updated each year GRIP: if county revenue less than the chosen revenue guarantee, farmer receives indemnity Guarantee = 90% of expected state yield per planted acre x preplanting crop price Expected state yield: linear trend of yield per planted acre for NASS data 19802006 Preplanting crop price: average of pre planting prices for crop revenue insurance policies for current and past two years Senate's Average Crop Revenue Payments Guarantee updated annually based on technology trends and market conditions Basically 3year moving average of APH price Actual Yield: USDANASS state yield per planted acre Harvest Price: Same as used for crop revenue insurance policies Senate's Average Crop Revenue Payments Actual state revenues: multiply these two Average CBOT settle prices for month previous to harvest month futures contract November average of December corn October average of November soybeans Historical Yields, Prices and Revenues and Average Crop Revenue Payments for CORN Year 2002 2003 2004 2005 2006 2007 Expecte d Yield 103.6 104.9 106.2 107.5 108.7 110.0 Pre Plant Price 2.43 2.40 2.52 2.52 2.58 2.99 Revenue Actual Actual Actual Guarantee Yield Price Revenue Paymen t 226.59 226.56 240.80 243.71 252.49 296.07 107.3 98.0 98.2 112.9 109.7 144.1 2.52 2.26 2.05 2.02 3.03 3.58 270.30 221.57 201.36 228.15 332.39 408.39 0.00 4.99 39.44 15.56 0.00 0.00 Historical Yields, Prices and Revenues and Average Crop Revenue Payments for SOYBEANS Year 2002 2003 2004 2005 2006 2007 Expecte d Yield 39.7 40.1 40.5 40.9 41.3 41.7 Pre Plant Price 4.83 4.81 5.49 5.84 6.14 6.60 Revenue Actual Actual Actual Guarantee Yield Price Revenue Paymen t 172.56 173.58 200.11 214.97 228.23 247.71 43.4 27.2 33.4 43.2 43.7 38.7 5.45 7.32 5.26 5.75 5.93 9.75 236.69 199.00 175.80 248.29 259.34 275.24 0.00 0.00 24.31 0.00 0.00 0.00 Summary Corn: Unexpected low harvest prices with average or below trend yields in 20032005 would have triggered payments Soybeans: only in 2004 did below trend yields occur with unexpected low harvest prices, which would have triggered payments Comparing the Two Programs Three major differences between them 1) House and Senate's Safety Nets provide different types of protection 2) Basis Risk for House's program 3) Momentum Effect for Senate's program 4) House: Only replaces CCP, not DP or LDP Comparing Safety Nets House program: Absolute Revenue Floor unaffected by markets and tech. trends Senate program: Relative Revenue Floor responding to markets and tech. trends When revenue is low, receive payments Protects vs. low revenue as govt. defines it When revenue lower than expected by tech. trends and futures prices, receive payments Protects vs. unexpectedly low revenue Comparing Safety Nets Senate: Farmers plant knowing payments will come only if revenues lower than expected If expected revenue high at planting If expected revenue low at planting House: Farmers plant knowing payments are unlikely Senate: Payments more likely to come House: Farmers plant, knowing payments will come if low revenues occur as expected Senate: Payments less likely, since low revenue already expected Basis Risk Differences House uses National Revenue Senate uses State Revenue Farm revenue tracks state revenue closer than national revenue More "basis risk" with House program More likely receive payments when needed with Senate program Momentum Effect Senate uses threeyear moving average of expected preplanting prices, so slow to respond to rapidly changing markets High preplant futures prices for 23 years and then a sharp drop Low preplant futures prices for 23 years and then a sharp increase Senate revenue guarantee will remain high, though expected revenue at planting is low Senate revenue guarantee will remain low, though expected revenue at planting is high Summary House: "RevenueBased Counter Cyclical Payments" and Senate: "Average Crop Revenue Payments" Historical Analysis of 20022007 Absolute vs. Relative revenue floor Basis Risk and Momentum Effects House still keeps LDP and DP Both averaged about same (House higher) ...
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