Why not embrace the commodity title written in November?

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, February 15, 2012 -With all of the effort that went into producing a Farm Bill with $23 billion in hard-fought savings last fall, why not just rubber stamp what was already done? In essence, staff members admit there will likely be a lot of the same concepts in whatever final product may emerge this year.

“We are not starting over from scratch,” pointed out Jonathan Coppess, chief counsel with the Senate Agriculture Committee, in his remarks to the Crop Insurance Industry annual convention this week. But the commodity title is still the primary section yet to be finalized. Several critics warn that it must be changed because of what they percieve as “unintended consequences” on planted acres and crop rotations.

However, defenders of the November package say that critics just don't understand how the commodity title came together and what it offers as a safety net for all parts of the country.

Basically, that proposal would eliminate direct payments, counter-cyclical payments, the Average Crop Revenue Election (ACRE) program and the Supplemental Revenue Assistance Program (SURE), creating $15 billion in savings. Crop insurance would be expanded for underserved crops, including fruit and vegetable producers. To help fix problems with the declining Actual Production History (APH) on crop insurance, the plan increased the county transitional yield. A stand alone revenue protection program for cotton growers would be created, as well as expanded supplemental area-wide revenue coverage for other producers.

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Growers would have the option of the Ag Risk Coverage (ARC) program to protect against both price and yield losses. Under ARC, producers could elect Revenue Loss Coverage (RLC) which provides coverage, in addition to crop insurance, starting at 87% of a producer's 5-year Olympic average revenue, with a maximum payment of 12% to prevent overlap with crop insurance.”

As an alternative to RLC, producers can elect Price Loss Coverage (PLC) which provides support on 85% of planted acres (not to exceed total base on the farm) whenever prices in the first 5 months of the marketing year fall below the reference price.

Those reference or “target prices” were set at the following levels: Wheat, $5.50 per bushel; Corn, $3.64 per bushel; Sorghum, $3.87 per bushel; Barley, $3.64 per bushel; Oats, $2.40 per bushel; Rice (medium and long grain), $13.98/cwt.; Soybeans, $8.31 per bushel; Peanuts, $534 per ton; Lentils, $16.90 per hundredweight; Large Chickpeas, $17.40 per hundredweight; Small Chickpeas: $13.66 per hundredweight.

Sources close to the commodity title writing process told Agri-Pulse that when “we talk about addressing potential risks farmers face, and filling the gaps relative to what is available to them today, a support price of some sort stands out as the simplest way to address the key systemic risk that farmers are most concerned about and which crop insurance is not built to cover - that is deep and sustained price declines of the type we saw from 1998-2003. We would hope we never see such a thing again, but history would say we probably will. Indeed, USDA's new long-term price projections predict that net farm income will drop over the next few years. (See our Feb. 13 report.)

“Shallow losses can be a problem, but as long as prices are at or near where they are today, this is a problem that farmers are prepared to handle,” explained our source. “It will not put them out of business, or really eat into their equity. Moreover, there are tools that could be made available rather easily and inexpensively, like an area-based policy which would allow farmers to cover their crop insurance deductible (including shallow losses).

“The fact that this would be insurance, and the farmer would pay for it, makes this a defendable risk management tool, as opposed to the government guaranteeing 90% of a farmer's expected income. If we strengthen crop insurance to deal with production losses and keep a strong Title I to deal with price collapses, we don't need an FSA -administered shallow loss revenue program.”

The following example ‑ for a producer in Greeley County, Kansas ‑ demonstrates how ARC works depending on whether the producer elects Revenue Loss Coverage (RLC) or Price Loss Coverage (PLC).  It also shows the direct payment that the producer currently receives.

Our sources said that RLC (and other revenue programs) work well where you have historically high revenue guarantees.  “Moreover, for crops that experience high levels of insurance buy-up, revenue type programs tend to work better; but for crops that have either limited buy-up or no viable crop insurance program, revenue programs leave a sizeable gap.”

For example, a Kossuth County, Iowa corn farmer with an Olympic average revenue of $700 per acre could receive up to $50 per acre from RLC under a maximum loss scenario.  That's well above the current direct payment of $30 per acre.  However, compare that with the Greeley County, KS example.  The western Kansas wheat producer ‑ in a maximum loss scenario ‑ could at most expect $13.80 per acre from RLC; that's very close to what he currently receives in guaranteed direct payments at $12.86 per acre ‑ and that's using reference prices and yield plugs to calculate the revenue guarantee.  “In other words, if this producer elects RLC and experiences a disaster, they could expect a payment slightly over what they currently get every year.  To compound matters, if prices start declining, then the value of revenue insurance starts to decline and the revenue guarantee starts declining as well (apart from offsetting increases in yield).”

What kind of support would target prices provide for this wheat producer? “They are designed to provide support when a producer experiences deep price declines. If the market is near the 2007 or 2008 levels, target prices would not pay anything. If, however, the market falls to levels experienced from 2001 to 2006, then the producer would be protected against those deeper losses (to a much greater degree than RLC would provide). Some would argue that these payments would lead to planting distortions.  That simply underscores the importance of setting reference prices appropriately and ignores the fact that payment limits are binding as well.”

As a result, the commodity title gave producers the choice between RLC and PLC by crop. They could choose the program that best meets their risk management needs given the crops they grow and the regions in which they grow them. Our sources also made the following points in defense of the commodity title produced in November:


·         The need for price loss coverage isn't just a rice and peanut issue, but for anyone who hasn't experienced record high yields. It's an issue for any producer that is concerned about deep price losses more than protecting against shallow revenue losses.

·         Some argue that target prices don't pay when yields are low. However, if yields are low and prices are high, then individual crop revenue insurance works quite well and the target price is not effective. In other words, it is designed to turn off when prices are high. If yields are low and prices are low, then the value of crop insurance indemnities would fall as well. However, the target price would kick in and provide support and pay at the counter-cyclical yield. For wheat, the counter-cyclical yield and expected yield are much closer than for other crops because wheat has not experienced the same technological increases in yield.

·         Some argue that reference prices are too high and that they will drive planting decisions. Reference prices were established in recognition that cost of production has drastically outpaced the target prices established in 2002 and again in 2008. The proposed reference prices maintain the average relationship between target prices over the past 20 years and were adjusted to account for USDA and AFPC cost of production estimates.

·         Critics of reference prices fail to recognize the constraints built in. Reference prices are paid on counter-cyclical payment yields (which are often much lower than current planted acre yields) and are paid on 85% of payment acres. As a result, the “effective” reference price is much lower than what would be established in law.

·         The WTO argument and planting distortions argument always comes up. There is a simple answer ‑ decouple the price support from current plantings. Bases could be updated to reflect more current plantings (while not adding new payment acres to the program during a time of deficit reduction), but payments could remain decoupled.



Original story printed in February 15, 2012 Agri-Pulse Newsletter.

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