2008 FARM BILL: WITH FOCUS ON ACRE AND SURE

Transcription

1 2008 FARM BILL: WITH FOCUS ON ACRE AND SURE Carl Zulauf Ag. Economist, Ohio State University Updated: 1

2 2008 Farm Bill: Big Picture Themes Continued Expansion in Scope of the Bill First livestock title First title for horticultural and organic crops Rebalances Spending to Non-Title I Programs Continued Increasing Role of Conservation Programs Redesigns CSP program (now Conservation Stewardship Program) Must meet stewardship threshold for at least 1 priority resource concern Expands CSP by 12.8 million acres per year Creates Cooperative Conservation Partnership Initiative Encourage producers to cooperate to meet conservation priorities 6% of all conservation spending (excludes CRP, WRP, GRP, FPP) Food as More than Energy Attention to Beginning, Socially Disadvantaged, and Economically Disadvantage Farmers 2

3 2008 Farm Bill: Big Picture Themes Continued Expansion in Commodities Receiving Support Horticultural Crops More Restrictive Means Testing of Farm Payments Farm program payments denied if average adjusted gross nonfarm income for previous 3 tax years exceeds $500,000 Direct payments denied if average adjusted gross farm income for previous 3 tax years exceeds $750,000 Individuals can no longer double payment limit, but spouse qualifies Risk Management Emphasized Over Increased Payments Agricultural Disaster Relief Trust Fund Funds: (1) Supplemental Revenue Assistance (SURE), (2) Livestock Indemnity Payment, (3) Livestock Forage Disaster, (4) Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish, and (5) Tree Assistance ACRE (AVERAGE CROP REVENUE PROGRAM) 3

4 Policy Objectives: Crop Insurance and SURE Crop Insurance: assist with managing farm specific crop production risk (called idiosyncratic risk) that occurs between planting and harvest SURE (Supplemental Revenue Assistance): assist with managing whole farm losses due to adverse weather and associated with the deductible part of crop insurance 4

5 SURE (Supplemental Revenue Assistance): Thumbnail Sketch SURE is whole farm (all crops/counties) production disaster assistance program To receive a SURE payment, 2 triggers must be met: (1) Crop insurance and NAP (Noninsured Crop Assistance Program) must be purchased for all the crops raised on the farm, AND (2) Farm is in a declared disaster (or contiguous) county, OR adverse weather reduced farm s total production by 50% or more SURE payment = [60% of (farm s SURE guarantee minus farm s total crop revenue)] For insured crops, guarantee per planted (and prevented planted) acre is essentially 115% of selected per acre insurance coverage level (not technically correct). For NAP crops, guarantee per planted (and prevented planted) acre is essentially 120% of NAP coverage level (not technically correct). Value is summed for all insured crops. Guarantee is capped at 90% of farm s expected revenue. Farm s total crop revenue is the sum for all crops of (A) insurance indemnities, (B) prevented planting payments, (C) other Federal disaster aid for same loss, (D) 15% of direct payments, (E) all counter-cyclical, ACRE, and market loan payments, and (F) crop value based on harvested acres, actual yields, and U.S. market year cash price adjusted for local/regional quality losses and excess moisture from adverse weather For a more detailed presentation on SURE see Carl Zulauf, Supplemental Agricultural Disaster Assistance in Food, Conservation, & Energy Act of 2008., AEDE-RP , May 2008, available at 5

6 SURE: Some Initial Thoughts on Implications 1. SURE is an incentive to buy at least 75% individual crop insurance (115% of 75% is 86%, or just below 90% cap on SURE guarantee). 2. SURE most benefits areas with higher yield variability (ceteris paribus). Yield variability increases the chance of a county disaster designation (or a 50% or more decline in a farm s production). 3. SURE raises questions about crop insurance and NAP. If a farmer wants to qualify for SURE, insurance and NAP must be bought for all crops grown on operational farm (all acres in all counties in all states). 4. SURE raises questions about crop rotation. SURE most benefits single-crop farms because multiple crops reduce revenue variability. For a single crop producer, at no extra cost, SURE increases insurance coverage for the farm by 15% if there is a natural disaster. Will farmers adopt an all-crop alternative year rotation, (100% corn one year; 100% soybeans next year)? Will farmers eliminate small acre crops, such as wheat in Midwest? 6

7 ACRE (Average Crop Revenue Election Program) Orientation Thoughts 1. ACRE is a new and different program and thus requires patience and an investment of time to learn. 2. Comparison of Program Objectives: Marketing Loan/Counter-Cyclical Program: assist with managing systemic risk of chronic low market prices over extended years ACRE: assist with managing systemic risk of a decline in revenue (price times yield) of a crop over a short period of years 3. Acre is a risk management program so both expected return and risk of change in expected return need to be considered. Furthermore, risk has several measurement dimensions (minimum revenue, chance of bankruptcy, variation in return) and the level of risk a person is comfortable varies by person. 4. A central question frames the ACRE decision: Over the period of participation, does ACRE improve the management of systemic revenue risk relative to the Counter-Cyclical price program enough to compensate for the 20% reduction in direct payments? 7

8 Prices for U.S. Crop Production Inputs and Crops are Increasing. Just as 1970s 105% 65% 54% 47% Ratio: 8/74 to Ratio: 7/08 to Crop Prices Input Prices Notes: (1) Crop prices include all crops. (2) Crop production inputs include interest, taxes, and wages. (3) Source: U.S. Department of Agriculture, National Agricultural Statistics Service 8

9 Beginning with 2009 Crop Year, Choice of (1) ACRE Suite of Farm Programs (2) Traditional Suite of Farm Programs Traditional Suite of Farm Programs ACRE Suite of Farm Programs Marketing Loan Marketing Loan at 70% Direct Payment Direct Payment at 80% Price Counter-Cyclical ACRE State Revenue Program 9

10 ACRE Program Decision A farmer can elect to enter ACRE with the 2009, 2010, 2011, or 2012 crop. Once a farmer elects ACRE, he/she is in ACRE through the 2012 crop. Thus, a farmer can elect to participate in ACRE for the crops, crops, crops, or 2012 crop. As long as a farmer is not in ACRE, he/she makes an annual decision. ACRE must be selected ---- current suite of farm programs is default selection if no choice is made. ACRE payments are crop specific (for example, corn but not wheat can receive a payment), but a farmer must elect ACRE for all covered program crops and peanuts grown on the farm (for example, if the farm grows corn, soybeans, and wheat, ACRE must be elected for all three crops). For a more detailed presentation of ACRE see Carl Zulauf, ACRE (Average Crop Revenue Election) Provisions in Food, Conservation, & Energy Act of 2008, AEDE-RP , May 2008, available at 10

11 ACRE and SURE Have Important Differences SURE Unit is Farm Operation (all acres in all counties/all states) Disaster Assistance Program Payment triggered by natural disaster that results in county in which farm operates declared disaster (plus contiguous) county or farm s production declines 50% ACRE Unit is FSA Farm Number State Revenue Risk Management Program Payment triggered by decline in revenue calculated using state yield and U.S. price (state yield and/or U.S. price declines) If disaster declared, payment is based on the shortfall in revenue for the farm operation (all acres/all counties/all states) Must purchase insurance and NAP for all crops grown on farm operation and for which these two products are available Payment is based on the shortfall in state revenue for crop Must elect ACRE for all program crops on FSA farm; direct payments reduced 20%; marketing loan rates reduced 30% 11

12 ACRE State Revenue Protection Program VS. National Price Counter-Cyclical Program ACRE State Revenue Protection Program Targets State Revenue U.S. Price Counter-Cyclical Program Targets U.S. Season Average Price State Target Revenue (referred to as Revenue Guarantee) Changes Each Year with U.S. Prices and State Yield (i.e., Follows the Market) U.S. Target Price is Fixed by the Farm Bill and Does Not Change with the Market Farmer Must Experience a Revenue Loss for the Crop Relative to his/her Farm s ACRE Revenue Guarantee for the Crop Counter-Cyclical Payment Made or Not Made Regardless of Whether the Farm Experiences a Sizeable Loss or Has Record Income 12

13 ACRE Mechanics: Thumbnail Sketch ACRE is a crop specific, state revenue risk management program. To receive an ACRE payment, 2 triggers must be met: (1) State s realized revenue (state yield times U.S. market year cash price for crop year) is less than state s revenue guarantee for crop. ACRE s per acre state revenue guarantee for a crop is: [(90%) times (moving average of U.S. crop year cash price for 2 most recent years) times (Olympic moving average of state s yields for 5 most recent years)]. Revenue guarantee cannot change more than 10% from prior year s guarantee ACRE s payment is capped at 25% of state revenue guarantee State revenue payment is adjusted to individual farm by yield ratio (2) Individual farm s revenue for crop less than its ACRE benchmark revenue. Farm s actual revenue for crop is: farm s actual yield times U.S crop year price Farm s ACRE benchmark revenue for crop is: [(Olympic average of farm s yields for 5 most recent years) times (moving average of U.S. crop year cash price for 2 most recent years)] plus (per acre insurance premium paid by farmer for crop) Payment based on acres planted to crop, but ACRE payments cannot be received on more than farm s total base acres. For a more detailed presentation of ACRE see Carl Zulauf, ACRE (Average Crop Revenue Election) Provisions in Food, Conservation, & Energy Act of 2008, AEDE-RP , May 2008, available at 13

14 Soybean 5-Year 2-Year ACRE ACRE Ohio Historical Historical Revenue Revenue ACRE ACRE Olympic U.S. Simple Guarantee Guarantee Realized Revenue Plant Average Season Average No Cup/Cap Cup/Cap Revenue Payment Yield Yield Average Price (90%) (90%) Year bu. bu. Cash $ acre acre acre acre $ $ $ $ $ $6.29 $6.27 $185 $185 $222 $ $7.60 $6.48 $195 $195 $271 $ $6.07 $6.95 $214 $214 $171 $ $5.71 $6.84 $211 $211 $203 $ $7.83 $5.89 $183 $190 $249 $ $5.84 $6.77 $208 $208 $211 $ $5.05 $6.84 $211 $211 $208 $ $4.78 $5.45 $169 $190 $192 $ $5.88 $4.92 $165 $171 $215 $ $7.42 $5.33 $181 $181 $190 $ $5.69 $6.65 $225 $199 $178 $ $5.74 $6.56 $212 $212 $223 $ $5.58 $5.72 $183 $191 $199 $ $5.56 $5.66 $176 $176 $218 $ $6.40 $5.57 $177 $177 $241 $ $5.48 $5.98 $201 $195 $238 $ $6.72 $5.94 $206 $206 $254 $ $7.35 $6.10 $210 $210 $257 $ $6.47 $7.04 $242 $231 $284 $ $4.93 $6.91 $246 $246 $216 $ $4.63 $5.70 $214 $222 $163 $ $4.54 $4.78 $168 $200 $190 $ $4.38 $4.59 $166 $180 $179 $ $5.53 $4.46 $169 $169 $176 $ $7.34 $4.96 $175 $175 $281 $ $5.74 $6.44 $221 $193 $268 $ $5.66 $6.54 $237 $212 $254 $ $6.43 $5.70 $212 $212 $300 $0 ACRE Revenue Guarantee: no cup/cap -- Historical yield X Historical Price ACRE Revenue Guarantee: cup/cap Guarantee cannot increase or decrease by more than 10% from prior year. Examples see 1983 for 10% cup and 1989 for 10% cap (purple boxes, if you have color) ACRE Revenue Payment -- Limit of 25% of revenue guarantee -- Example: 1999 ($222-$163 = $59) 1999 ($222 X 0.25 = $55) (blue box, if you have color) ACRE Strike Revenue -- Changes each year as immediate past year price and yield replace earliest yield and price -- continual yield update 14

15 20% of Average U.S. Direct Payment Per Acre 20% of Average U.S. Direct Payment Per Acre Oats Barley Soybeans Wheat Sorghum Corn Cotton Peanuts Rice $0.20 $1.95 $2.30 $3.05 $3.36 $4.87 $6.85 $9.15 $19.24 Direct payment reduction can be considered an ACRE risk management fee. Calculation is made using data from the U.S. Department of Agriculture. 15

16 Breakeven Price Between ACRE and Traditional Suites of Farm Programs, Average for 26 States Includes direct, marketing loan, price counter-cyclical, and ACRE revenue payments $/bushel $2.87 $6.35 $4.39 Corn Soybeans Wheat If U.S. cash price is expected to average above breakeven price through 2012 crop, expected payments from ACRE are higher despite its lower direct payments. Actual payments from ACRE revenue program may be zero even if market price is above the breakeven price. For details on this analysis see Carl Zulauf, Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, (AEDE-RP ), June 2008, available at 16

17 Share of Years with ACRE Revenue Payment, Average for 26 States 36% 37% 33% Corn Soybeans Wheat Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, (AEDE-RP ), June 2008, available at 17

18 ACRE Revenue Payments Tend to Occur in Consecutive Years Share of Years with ACRE Revenue Payment Consecutive with Another Year with ACRE Revenue Payment, 26 State Average 74% 79% 77% Corn Soybeans Wheat ACRE provided payments during multiple-year, large declines in state revenue Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, (AEDE-RP ), June 2008, available at 18

19 A Reason for Consecutive Year ACRE Payments is 10% Limit on Year-to-Year Change in Revenue Guarantee Share of Years ACRE Cup/Cap Effective, 26 State Average 48% 49% 58% Corn Soybeans Wheat Cup is the name for a 10% limit on declines in ACRE revenue guarantee from the prior year s guarantee. Cap is the name for a 10% limit on increases in ACRE revenue guarantee from the prior year s guarantee. Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, (AEDE-RP ), June 2008, available at 19

20 State Yield Declines Were an Important Trigger for ACRE Payments Share of Years with ACRE Revenue Payment That Also had a State Yield Decline of 10% or More, Average for 26 States 49% 50% 61% Corn Soybeans Wheat An ACRE payment was made in approximately two-thirds of the years in which state yield declined by 10%. Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, (AEDE-RP ), June 2008, available at 20

21 Average Payment by Year, 26 States $90 $75 $60 $45 $30 $15 $0 Average Payment by Year, 26 States Corn Soybeans Wheat Because ACRE is based on historical moving averages of price and yields, it increases as yields and price increase and decreases as they decrease. Payments will tend to zero over a short period (4 to 5 years). Thus, ACRE does not prevent the need for farmers to adjust to lower market revenues, but it does give them additional time to adjust. Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, (AEDE-RP ), June 2008, available at 21

22 Indicator of Overlap of ACRE Double Triggers Share of Years in which Individual Illinois Farm Yield Declined and in which Illinois Average Yield Declined by 10%, % 88% Corn Soybeans ACRE has a double trigger that must be met before a payment is made: (1) State realized revenue for crop is less than 90% of state s ACRE revenue guarantee (2) Farm realized revenue for crop is less than farm s ACRE expected revenue Source for farm data is Illinois Farm Business Farm Management project. Data set is 552 farms with corn and soybean acres each year from 1996 through Year-to-year change is measured as (ln change). 22

23 Change in State Yield Explained a Small Share of Change in Yield on Individual Illinois Farms Average Share of Year-to-Year Change in Farm Yield Explained by Year-to-Year Change in State Yield, Illinois, % 44% Corn Soybeans Because ACRE is a market-oriented, revenue-based program, its payment yields are continually updated (Olympic moving average over past 5 years). This feature stands in contrast to current farm programs which freeze payment yields at some historical period. Source for farm data is Illinois Farm Business Farm Management project. Data set is 552 farms with corn and soybean acres each year from 1996 through Year-to-year change is measured as (ln change). 23

24 ACRE: Some Initial Thoughts on Implications 1. ACRE provides risk protection against revenue declines that extend beyond crop insurance s planting-harvest period. Should encourage short-term, multiple year investments, such as potassium and phosphorus application. 2. ACRE is a poor substitute for crop insurance. A farmer who elects ACRE should carefully consider purchasing crop insurance to help manage the production risks associated with his/her farm. 3. ACRE most benefits areas with high yield variability (ceteris paribus). 4. ACRE s expected payment (not maximum or actual payments) should be capitalized into the value of land. 5. Because ACRE does not provide a floor, farmers will have to adjust to lower market revenues although their adjustment time is lengthened. 6. While ACRE likely will be classified as amber box under World Trade Organization guidelines, its distortion of trade is limited by the fact that its payments approaches zero within a few years. 24

25 Concluding Thoughts - I 1. ACRE and SURE are potentially important new programs to help farmers manage risk, especially with high and volatile prices and costs. 2. Yet-to-be written regulations will impact ACRE and SURE decision. 3. Given SURE, an hypothesis that will be tested by farmer decisions: Is the optimal individual crop insurance coverage now 75%? 4. ACRE provides risk protection against systemic state revenue declines, due to declines in yield and/or price, that extend beyond crop insurance s planting-harvest period will not provide payments if revenue (prices and yields) continue to increase, stabilize at current levels, or decline slowly higher are expected production cost, price and yield volatility, and price relative to breakeven price; greater is the potential for ACRE s revenue program to help manage risk relative to Counter-Cyclical program 25

26 Concluding Thoughts - II 4. Central ACRE question every farmer will need to ask is: Over the period of participation, does ACRE improve the management of systemic revenue risk relative to the Counter-Cyclical price program enough to compensate for the 20% reduction in direct payments? To rephrase this question for corn and soybean farmers, if they think protection against systemic state revenue declines, given expected market environment, is worth more than $3-$5/acre, participate in ACRE; if not, stay with traditional program At current corn, soybean, and wheat prices, marketing loan and counter-cyclical programs offer little help managing risk. 5. Unexpected impacts are to be expected. 6. Experience with ACRE will inform future policy decisions. 26

27 Carl Zulauf (614)

28 Appendix: Brief Outline of Analytical Parameters of the Breakeven Price Analysis (1) Breakeven price is an average of the weighted average breakeven price derived from two analyses, both involving 26 states and using data for crop years. One analysis used (a) percent deviation for a state s yield for a year from its trend-line yield estimated using linear regression and (b) percent deviation of U.S. price for a year from the average price for The second analysis used (a) percent ratio of a state s yield for a year relative to the state s average yield for and (b) percent deviation of U.S. price for a year from the average price for A weighted average breakeven price was calculated for both analyses. The weight was the state s share of acres planted to the crop in the 26 states in The 26 states accounted for 94%, 96%, and 83% of U.S. acres planted to corn, soybeans, and wheat, respectively, in The yield distribution was centered on the average yield used by the Congressional Budget Office for (2) The data for historical prices, yields, and acres are from the U.S. Department of Agriculture. (3) Program parameters are from 2008 Farm Bill. Marketing loan and price counter-cyclical prices are for The 83.3% payment factor is used. Planted acres are assumed to sum to base acres. (4) The calculation for ACRE does not include separate programs for irrigated and dryland acres when at least 25% of a state s acres are irrigated and at least 25% are in dryland production. (5) No adjustment was made for the change in calculating loan deficiency payments: a 30-day moving average of cash prices replaces a single day s cash price. SOURCE: Carl Zulauf., Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat, AEDE-RP , June 2008, available at 28