Making Decisions for the 2014 Farm Bill

Transcription

1 Making Decisions for the 2014 Farm Bill

2 Making Decisions for the 2014 Farm Bill February 2015 Archie Flanders Department of Agricultural Economics and Agribusiness Northeast Research and Extension Center University of Arkansas Keiser, AR For questions and comments related to this report contact ext. 108 or University of Arkansas, United States Department of Agriculture and County Governments Cooperating. The Division of Agriculture offers its programs to all eligible persons regardless of race, color, national origin, religion, gender, age, disability, marital or veteran status, or any other legally protected status, and is an Affirmative Action/Equal Opportunity Employer.

3 Table of Contents Section Page I. Introduction 1 II. Payment Yield Updating and Base Acreage Reallocation 1 III. PLC and ARC Program Selection 2 IV. PLC 2 V. ARC-County 3 VI. PLC and ARC in Risk Management 3 VII. ARC Price Characteristics 3 VIII. PLC Price Characteristics 6 IX. ARC Characteristics with Declining Prices 8 X. Summary of Risk Reduction 9 References 9

4 Making Decisions for the 2014 Farm Bill Producers and land owners have upcoming decisions to select among alternative risk management programs contained in the 2014 Farm Bill. Decisions made in 2015 have impacts for crops already planted in the 2014 production year, as well as production until at least Given recent history, provisions of the 2014 Farm Bill could be in effect beyond the legislated expiration date. Thus, decisions made now should have a long-term perspective for relative risk management potential in years when commodity prices may greatly differ from current prices. Land owners have until February 27 to schedule an appointment with the county Farm Service Agency (FSA) office for reallocating base acreage and updating payment yields. Deadline for program enrollment with FSA in Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) is March 31. Although program enrollment is a decision independent of the base acreage decision, considerations for base acreage reallocation are correlated with risk management perspectives of PLC and ARC. Upcoming decisions for program enrollment are dependent upon perspectives for future crop prices and how PLC and ARC could meet risk management objectives. Future prices are characterized by uncertainty, and enrollment decisions will be based on probabilistic considerations. In general, there are three broad possibilities for prices: 1) trending at levels higher than current levels, 2) stable at approximately current levels, or 3) persistently lower than current levels. Program selection is on a crop-by-crop basis. An understanding of the fundamentals of PLC and ARC is necessary to determine which program best meets risk management objectives for each crop. Preferred program selection will be determined by crop price expectations for each crop in relation to the fundamental characteristics of each program. II. Payment Yield Updating and Base Acreage Reallocation Payment yields are only used for crops enrolled in the PLC program. There are two choices of PLC payment yields for each crop: 1) Retain existing yields for counter-cyclical payments under the 2008 Farm Bill, or 2) Update to 90% of average yields for Land owners should select the highest possible payment yield for each crop. The decision does not entail any commitment or impose any limits for program selection. Even for crops enrolled in ARC, consideration should be given for potential benefits in future farm bills in which yield updating may not be allowed or only allowed with limitations. There are two available choices for reallocating base acreage: 1) Retain 2013 counter-cyclical base acreage for each crop, or 2) Reallocate 2013 counter-cyclical base acres according to planted/prevented planted acreage. Base acreage reallocation and payment yield updating are two separate choices. Land owners can choose to update yields on a crop-by-crop basis without regard to which of the two base acreage reallocation choices are selected. 1

5 III. PLC and ARC Program Selection PLC covers losses in actual revenue due to a commodity price decline below an established reference price. Reference prices can be regarded as another name for target prices contained in the previous farm bill. ARC covers losses in actual crop revenue for a covered commodity relative to a revenue guarantee. Revenue is composed of prices and yields and can be thought of as a type of revenue insurance. Thus, the two available programs are similar to concepts that are already familiar: 1) target prices and 2) revenue insurance. ARC has two alternatives in which revenue is determined by either county yield (ARC-County) or farm yield (ARC-Farm). In the ARC-Farm alternative, prices and yields from all crops on a farm are applied simultaneously to determine revenue. Thus, decreased revenue from one crop could be offset by stable or increased revenue in another crop. ARC-County payments are determined by 85% of base acres, and ARC-Farm payments are determined by 65% of base acres. Analysis comparing the two ARC alternatives indicates that Arkansas farms most likely to benefit from ARC-Farm would be limited to monoculture non-irrigated soybean production having yields that are often significantly less than the county average yield. Farms not characterized by these special circumstances would likely receive greater risk management protection from ARC-County. IV. PLC PLC payments are made for any crop year if the effective price is less than the reference price. The effective price is the higher of the 1) national average market price received during the marketing year and the 2) national average loan rate for the crop. Reference prices are established in the Farm Bill for each covered commodity and are presented in Table 1. Payments are paid on 85% of base acres. Table 1. PLC Reference Prices Corn $3.70 /bu. LG Rice $6.30/bu. MG Rice (Delta) $6.30/bu. Soybeans $8.40/bu. Wheat $5.50/bu. Sorghum $3.95/bu. Peanuts $535/ton The following example for rice demonstrates the determination of PLC payments. The national average market price at the end of the 2014 production year is $6.14/bu. This becomes the effective price. The legislated reference price is $6.30/bu. The payment rate is calculated as $ $6.14 = $0.16/bu. The payment yield on record with USDA is bu./acre Base rice acres on record with USDA are 100 acres. The payment amount is $0.16 x x (100 x 0.85) = $1,

6 V. ARC-County ARC is based on revenue which is yield multiplied by price. ARC-County applies county yields to determine revenue. County yields and national prices are applied to determine the benchmark revenue and the actual county revenue. The applied price is the higher of the 1) national average market price received during the marketing year and the 2) national average loan rate for the crop. The revenue guarantee is 86% of the benchmark revenue. Payment rates are the amount by which actual county revenue is less than the revenue guarantee. Payments are paid on 85% of base acres. Applied yields and prices are Olympic averages. Olympic averages are over five years after omitting the high and low numbers and computing an average of the three remaining numbers. FSA will calculate the revenue guarantee and actual revenue each year, and it will be identical for every farm in the county. The following example for soybeans demonstrates the determination of ARC payments. Olympic average county yield for is bu./acre Olympic average national price for is $11.77/bu. Benchmark revenue is x $11.77 = $545.19/acre Revenue guarantee is $468.86/acre ($ x 0.86) As an example situation, actual county revenue for 2014 is $450.00/acre (45 bu./acre county yield, $10.00/bu. national price) Base soybean acres on record with USDA are 100 acres Actual crop revenue is less than the revenue guarantee Payment rate is $ $ = $18.86 Payment amount is $18.86 x 100 x 0.85 = $1, VI. PLC and ARC in Risk Management Differences in fundamental characteristics will determine which program meets risk management objectives. In evaluating PLC, the primary question is How likely is the national price to be less than the reference price? In evaluating ARC there are two questions How likely is the national price to be less than 86% of the moving Olympic average national price? How likely is the county yield to be less than 86% of the moving Olympic average county yield? In Arkansas, with the prevalence of irrigation, the primary risk management concern is commodity prices. Thus, ARC can be compared to PLC by focusing on the ARC price component of revenue. VII. ARC Price Characteristics Figure 1 presents the average national marketing year soybean price and the lagged Olympic average for (USDA, NASS 2014; USDA, WASDE 2015). These variables represent the price component of ARC calculations for county revenue. Red lines designate years in which the annual price is less than 86% of the Olympic average. Under assumed conditions in which the annual county yield is equal to or less than the Olympic average yield, years indicated by red lines are years that correspond to an ARC payment. There are a total of 10 years out of 63 3

7 years, or 16% probability of occurrence, in which annual yields are less than 86% of the Olympic average. For years with annual price less than 86% of the Olympic average, the average level is 80% of the Olympic average price. Thus, the price component of the average payment rate is 6% of expected county revenue (86% - 80%). For 2014, the expected soybean price is $10.20/bu. which is 83% of the $12.27/bu. Olympic average. Table 2 indicates similar statistical results as soybeans for corn, sorghum, wheat, long-grain rice, and medium-grain rice (USDA, NASS 2014; USDA, WASDE 2015). Historical probabilities of occurrence are similar for all crops. Expected prices for corn and sorghum are consistent with an ARC payment in Expected corn price is 69% of the Olympic average and expected sorghum price is 75% of the Olympic average. Expected 2014 prices for wheat, long-grain rice, and medium-grain rice are greater than 86% of the Olympic average. Figure 2 presents soybean ARC price characteristics under assumed conditions of prices declining during from current levels (USDA, NASS 2014; USDA, WASDE 2015). The red line indicates that all years have annual prices less than 86% of the Olympic average. Annual price of $9.00/bu. in 2016 at 76% of the moving Olympic average represents the greatest payment rate (86% - 76% = 12%). Figure 3 presents soybean ARC price characteristics under assumed conditions of prices increasing from current levels (USDA, NASS 2014; USDA, WASDE 2015). The red line indicates that only the 2014 annual price is less than 86% of the Olympic average. Consider 2017 when increasing annual prices cause the Olympic average to reach $11.50/bu. Annual prices less than 86% of $11.50/bu., or $9.89/bu., are consistent with the price component triggering an ARC payment in Thus, ARC provides moving risk management protection during periods of increasing prices. In contrast, PLC reference prices are fixed, and increasing prices above reference prices provide no risk management protection. $/bu Red line: Price < 86% of Olympic Average Annual Price Olympic Average Price Figure 1. Soybean, Market Average Price and Lagged Olympic Average, U.S.,

8 Table 2. Probability of Annual Price less than 86% of Olympic Average, Average Level for s of Occurrence, 2014 Expectations Crop Probability of Price < 86% of Olympic Average Average % of Olympic Average, if Triggered Triggered in 2014?, % of Olympic Average Soybean 10/63=16% 80% Yes, 83% Corn 12/63=19% 77% Yes, 69% Sorghum 11/63=17% 76% Yes, 75% Wheat 11/63=17% 76% No, 92% LG Rice 7/31=23% 61% No, 90% MG Rice 6/31=19% 68% No, 102% $/bu Red line: Price < 86% of Olympic Average Annual Price Olympic Average Price 2018 Figure 2. Soybean, Market Average Price and Lagged Olympic Average, U.S., Example with Declining Annual Prices $/bu Red line: Price < 86% of Olympic Average Annual Price Olympic Average Price Figure 3. Soybean, Market Average Price and Lagged Olympic Average, U.S., Example with Increasing Annual Prices 5

9 VIII. PLC Price Characteristics Historical price deviations and trends support comparing PLC reference prices to annual prices for s with annual prices less than reference prices indicate occurrences corresponding to PLC payments. Historical durations of periodic price deviations and trends imply similar relationships for the duration of the 2014 Farm Bill. The methodology is applicable for evaluating price risk reduction in relation to PLC, but it is not applicable for predicting annual prices. Figure 4 through Figure 10 present annual prices in comparison to PLC reference prices for peanuts, long-grain rice, sorghum, corn, wheat, soybeans, and Delta medium-grain rice (USDA, NASS 2014; USDA, WASDE 2015). Peanut price in Figure 4 is less than the reference price in 6 of the 8 years during Long-grain rice price in Figure 5 is less than the reference price in 5 years. Sorghum price in Figure 6 is less than the reference price in 3 years, corn price in Figure 7 is less than the reference price in 2 years, and wheat price in Figure 8 is less than the reference price in one year. Prices for soybeans in Figure 9 and medium-grain rice in Figure 10 are not less than the reference price during the period of analysis. Medium-grain rice price for 2007 is not available for Delta production. Table 3 presents equilibrium commodity price outlooks for comparison to reference prices (USDA, NASS 2014; USDA, WASDE 2015). Equilibrium outlook prices are estimated using statistical indicators for price trends, historical price deviations, and U.S. costs of production. Equilibrium prices should not be regarded as price predictions for any single marketing year. The perspective for equilibrium price is a point to which prices are estimated to converge. Annual prices that are lower than equilibrium prices lead to market adjustments that increase prices. Likewise, annual prices that are greater than equilibrium prices lead to market adjustments that decrease prices. Reference prices for peanuts and long-grain rice are greater than equilibrium outlook prices. This is an indicator of the likelihood of annual prices occurring that are less than the reference price. Enrollment in PLC for these crops enhances risk management protection in the event of actual prices less than reference prices. Results for peanuts and long-grain rice in Table 3 are consistent with Figure 4 (peanuts) and Figure 5 (long-grain rice) having greater frequencies of annual prices less than reference prices when compared to frequencies of other crop prices. Ratios of reference price to equilibrium outlook price for soybeans and medium-grain rice in Table 3 are indicators for the likelihood of annual prices greater than reference prices. Ratio results in Table 3 are consistent with Figure 9 (soybean) and Figure 10 (medium-grain rice) having no occurrences of annual prices less than reference prices. As annual prices converge to equilibrium outlook prices, annual prices are greater than reference prices and there will be no PLC payment. However, these identical annual prices could correspond to levels less than 86% of moving Olympic average prices, and ARC could provide risk management protection during periods of declining prices. 6

10 $/Ton Figure 4. Peanut, Annual Price & Reference Price 6.50 $/Bu Figure 5. LG Rice, Annual Price & Reference Price $/Bu Figure 6. Sorghum, Annual Price & Reference Price $/Bu Figure 7. Corn, Annual Price & Reference Price $/Bu Figure 8. Wheat, Annual Price & Reference Price $/Bu Figure 9. Soybean, Annual Price & Reference Price $/Bu Figure 10. Delta MG Rice, Annual Price & Reference Price 7

11 Table 3. Expected 2014 Price, Equilibrium Outlook Price, Reference Price, and Ratio Crop Expected 2014 Price Equilibrium Outlook Price Reference Price Reference/ Equilibrium Peanut % LG Rice % Sorghum % Corn % Wheat % Soybean % MG Rice % The 2014 production year represents a period of decreased commodity prices after a period of favorable prices. Program payments for the current year are indicative of the relative long-term risk management potential for PLC and ARC. Table 3 indicates that expected 2014 peanut and long-grain rice prices are significantly less than the reference prices. In contrast, expected 2014 soybean and medium grain prices are significantly greater than the references prices. Table 2 indicates that the ARC soybean price component is consistent with a 2014 ARC payment for soybeans. Table 3 indicates that expected 2014 corn and sorghum prices are slightly less than the reference prices. Table 2 shows that the ARC corn and sorghum price components are consistent with ARC payment rates for corn (86% - 69% = 17%) and sorghum (86% - 75% = 11%). Expected 2014 wheat price is greater than the reference price in Table 3, and the ARC wheat price component in Table 2 is greater than 86% of the Olympic average, consistent with no ARC payment for wheat. IX. ARC Characteristics with Declining Prices As discussed above, Figure 2 presents soybean ARC price characteristics under assumed conditions of prices declining during from current levels. The red line indicates that all years have annual prices less than 86% of the Olympic average. Annual price of $9.00/bu. in 2016 at 76% of the moving Olympic average represents the greatest payment rate (86% - 76% = 12%). Similarly, Figures present corn, sorghum, and wheat ARC price characteristics under assumed conditions of prices declining during from current levels (USDA, NASS 2014; USDA, WASDE 2015). Red lines indicate years that have annual prices less than 86% of the Olympic average. Continuously declining corn prices in Figure 11 indicate that each year during has an annual price less than 86% of the Olympic average. The payment rate, 86% - 64% = 22%, reaches a maximum in Continued price decreases cause the Olympic average to decrease. Payment rates decline in 2016 and 2017, and in 2018 the Olympic average has decreased so that the annual price is 90% of the Olympic average. Figure 12 indicates a similar ARC concept for sorghum. 8

12 Figure 13 presents wheat ARC price characteristics under assumed conditions of prices declining during from current levels. Annual price declines to 84% of the Olympic average in Continued price declines decrease the moving Olympic average so that annual price is greater than the moving Olympic average in 2017 and X. Summary of Risk Reduction with PLC and ARC Program selection in PLC and ARC involves decisions based on uncertain commodity prices. The preceding discussion of comparative program fundamentals can be applied for broad categories of decisions based on comparative price situations. Based on historical prices and reference prices, PLC has the most risk management potential for long-grain rice and peanuts. PLC selection for these crops has the least uncertainty when compared to program selection of other crops. Thus, it follows that base acreage reallocation should be to select the base acreage allocation that has the most acres in long-grain rice and peanuts. Farms without long-grain rice and peanut base acreage could: 1) Select base acreage to correspond to likely future plantings in order to have a risk management program that corresponds to annual production, or 2) Diversify crop base acreage across FSA farm numbers. PLC has the least risk management potential for soybeans and medium-grain rice. Soybean and medium-grain rice prices above the references prices could potentially correspond to ARC payments due to significant declines in prices to levels less than 86% of the Olympic average. ARC revenue guarantees are moving averages that provide continued risk management protection as prices increase, as well as a degree of risk management protection for short periods of decreasing prices. PLC risk management potential relative to ARC is indeterminate for corn, sorghum, and wheat. A consideration for program selection is that only ARC includes yield risk. Expectations of increasing crop prices from current levels favor ARC over PLC. Expectations for an extended period of decreasing crop prices from current levels favor PLC over ARC. In general, ARC is an effective risk management program for a range of annual price levels. Selection of PLC provides price protection at known price levels. PLC will likely give greater risk management protection than ARC: 1) For specific crops (long-grain rice and peanuts), and 2) Under specific price conditions (persistently low prices at levels below reference prices). References U.S.D.A National Agricultural Statistics Service. Data and Statistics, Washington, D.C. Available at: U.S.D.A World Agricultural Supply and Demand Estimates, WASDE-538, Washington, D.C., February 10,

13 Red line: Price < 86% of Olympic Average $/bu Annaul Price Olympic Average Price Figure 11. Corn, Market Average Price and Lagged Olympic Average, U.S., Example with Declining Annual Prices Red line: Price < 86% of Olympic Average $/bu Annual Price Olympic Average Price Figure 12. Sorghum, Market Average Price and Lagged Olympic Average, U.S., Example with Declining Annual Prices 7.50 Red line: Price < 86% of Olympic Average $/bu Annual Price Olympic Average Price Figure 13. Wheat, Market Average Price and Lagged Olympic Average, U.S., Example with Declining Annual Prices 10