Agricultural Policy

1
Agricultural Policy

• George Haynes, Ph.D.
• Professor and Extension Specialist
• Montana State University

2
Agricultural Policy Why?

• Current Farm Bill debate . . .
• Stabilize grain prices (and net farm income)
• Make products more competitive abroad
• Provide a plentiful food supply (food security)

3
2002 Farm Bill Primer - Funding

• Farm Commodity Programs 12.0 b/yr
• Conservation Programs 3.0
• Exports 0.3
• Subtotal Farm Support 15.0 33.3
• Food Stamps 29.7 67.7
• Total 45.0

4
Montana Net Farm Income1949 2007 (estimate)
5
Global Wheat Market Shares
6
International Trade - Wheat

• Wheat exports are expected to rise.
• Weak dollar
• Less foreign competition (weather related)
• Exports/Imports
• Imports of wheat have declined (26 percent)
• 0.09 billion bushels in 2007 (0.12 billion
  bushels in 2006)
• Exports of wheat have increased (27 percent)
• 1.2 billion bushels 2007 (0.91 billion bushels in
  2006)

7
Global US Wheat Market(current situation)

• World
• 2007 Wheat Production ? 1.5 Higher than 2006
• Strong prices
• Global Ending Wheat Stocks lowest in 30 years
• 110 million metric tons (4.0 billion bushels)
• US
• 2007 Wheat Production 14 Higher than 2006
• US Ending Wheat Stocks lowest in 60 years
• 7.94 million metric tons (291 million bushels)

8
All Wheat Production - US1949-2007
9
Wheat WTO

• Green Box
• Do not distort trade or at most cause minimal
  distortion
• Domestic programs not targeted at particular
  products and include direct income supports for
  farmers that are not related to current
  production levels or prices
• Blue Box (amber box with conditions)
• Any support normally in amber box if the support
  requires farmers to limit production
• No U.S. programs currently in Blue Box
• Amber Box
• Domestic support measures considered to distort
  production and trade.
• Includes measures to support prices or subsidies
  directly related to production quantities (19
  billion magic number)

10
U.S. Farm Programs

• Commodity
• Direct payment
• Counter cyclical payment
• Loan rate and loan deficiency payments
• Average crop revenue (new)
• Conservation
• Land Retirement Programs
• Working Lands Programs
• Crop insurance and disaster relief (new)
• Energy

11
Direct Payments

• Program applies to specific crops
• Producers must have payment acres for each
  eligible crop
• Producers must have payment yields for each
  eligible crop
• Producers must meet cross compliance or
  conservation requirements
• Producers do not have to produce the crop to
  receive the direct payment, but the land must be
  placed into an appropriate agricultural use
• Some large producer may face maximum restrictions
  on the their receipt of government payments

12
Direct Payments2002 Farm Bill
13
Direct Payment (an example)

• Suppose the farm has . . .
• 40 bushels per acre payment yield
• 0.52 per bushel direct payment rate
• 85 of the farms approved payment yield
• 2002 Farm Bill provision
• Direct payment per acre yield x rate x 0.85
• 40 bu/a. x 0.52 / bu. x 0.85 17.68 / acre

14
Direct Payments

• WTO (Where do direct payments fit?)
• Green
• Blue
• Amber

15
Direct Payments

• Green
• Direct payments are related to historical (not
  current) production
• Blue
• Amber

16
Counter Cyclical Payments

• Purpose
• Provides farmers with additional income when
  market prices for direct payment program crops
  are low.
• Provisions
• Producer must have a beneficial interest in the
  crop
• Producer must comply with the same provisions as
  those required for receipt of direct payments

17
Counter Cyclical Payments

• Computing counter cyclical payments
• Concepts
• Target price
• 3.92 per bushel for wheat
• Effective price
• Price against which the target price is compared
• Loan rate
• 2.75 per bushel for wheat
• National Average Market Price
• Average market price for the crop nationally as
  reported by the USDA
• 85 of the farms approved counter cyclical
  payment

18
CCP (an example)

• Suppose the farm has . . .
• 40 bushels per acre payment yield
• Effective price depends on . . .
• 2.90 per bushel National Wheat Price (USDA)
• 0.52 per bushel wheat direct payment rate
• 2.75 per bushel wheat loan rate
• 3.92 per bushel wheat target price
• 85 of the farms approved payment yield
• 2002 Farm Bill provision

19
CCP (an example)

• CCP 0
• If Effective Price Target Price
• CCP 0
• If Effective Price
• If National Wheat Price Loan Rate then . . .
• Effective Price National Wheat Price direct
  payment
• If National Wheat Price
• Effective Price Loan Rate direct payment

20
CCP (an example)

• Suppose the farm has . . .
• 40 bushels per acre payment yield
• Effective price is computed as follows
• Effective price National Wheat Price direct
  payment
• Effective price 2.90 0.52 3.42 / bushel
• 85 of the farms approved payment yield
• CCP/acre yield (target price effective price)
  x 0.85
• CCP/acre 100 x 40 x (3.92 - 3.42) x 0.85
  17.00

21
CCP (today)

• Effective Price (all wheat)
• National Wheat Price (March, 2008) 4.75
• Target Price 3.92
• What is the CCP today?

22
CCP

• WTO (Where do CCPs fit?)
• Green
• Blue
• Amber

23
CCP

• WTO (Where do CCPs fit?)
• Green
• Blue
• Amber
• Not linked to current production, but linked to
  current prices.

24
Loan Rate Program

• Loan Rate
• Loan rate is essentially a minimum guaranteed
  price
• Producer can put a crop under loan to the USDAs
  Commodity Credit Corporation at the loan rate
• Within 9 month period, producer can repay the
  loan (with adjustments for interest charges and
  storage costs) or forfeit the crop to the
  government.

25
Loan Deficiency Payment (LDP) Program

• The LDP program is an alternative to placing the
  crop under the Loan Program
• USDA publishes a county price for each crop. The
  posted county price (PCP) is established by
  adjusting the national price for transportation
  and other costs affecting the basis for the
  county
• If an LDP is taken, the farmer cannot place the
  crop under the loan program.

26
LDP (an example)

• Suppose the farm has . . .
• 40 bushels per acre payment yield
• 2.25 per bushel posted county price (PCP) for
  wheat
• 2.75 per bushel wheat loan rate
• LDP/acre (loan rate county price) x yield
• LDP/acre (2.75 - 2.25) x 40 20.00

27
LDP (today)

• Gallatin County
• Posted County Price (hard winter wheat)
  10.52
• Loan Rate 2.82
• (actual hard winter wheat loan rate 2.82)
• What is the LDP today?

28
Loan Rate and LDP

• WTO (Where do the loan rate and LDPs fit?)
• Green
• Blue
• Amber

29
Loan Rate and LDP

• WTO (Where do the loan rate and LDPs fit?)
• Green
• Blue
• Amber
• Minimum price support (current price) and
  subsidized loan on the crop

30
Average Crop Revenue (new)

• Fixed per acre payment of 15 per acre on farms
  base acres
• The per acre payment is equal to 90of the
  difference between the per acre estimated long
  run annual average state revenue guarantee and
  actual average state revenue for each crop. This
  amount is then multiplied by the ratio of the
  farms proven crop insurance yield (APH yield) to
  the average state yield
• If a farm chooses this program, the farm cannot
  receive direct and countercyclical payments, and
  cannot participate in the loan rate program
• A farmer receiving crop insurance indemnities
  will not be able to double dip Farms
  insurance indemnity payments will be reduced by
  the amount of the ACR payment.

31
Average Crop Revenue

• Average statewide revenue winter wheat
• 30 bushels/acre x 5.00/bushel 150
• Actual statewide revenue winter wheat
• 20 bushels/acre x 4.00/bushel 80
• ACR Payment (farm yield 30 bu./a.)
• 0.90 x (150 - 80) 63 / acre
• Fixed payment 15
• Total payment/acre 78

32
ACR (today)

• Average statewide revenue winter wheat
• 30 bushels/acre x 5.00/bushel 150
• Actual statewide revenue winter wheat
• 30 bushels/acre x 6.25/bushel 188
• ACR Payment (farm yield 30 bu./a.)
• 0.90 x (150 - 188) 0 / acre
• Fixed payment 15
• Total payment/acre 15

33
Average Crop Revenue

• WTO (Where do average crop revenue programs fit?)
• Green
• Blue
• Amber

34
Average Crop Revenue

• WTO (Where do average crop revenue programs fit?)
• Green
• Blue
• Amber
• Based on current production and prices

35
Conservation Programs

• Land Retirement Programs
• Conservation Reserve Program Both the House and
  Senate Bills renew and expand eligible lands for
  this program.
• Wetlands Reserve Program Both the House and
  Senate Bills renew and expand the program, with
  average annual funding of about 480 million
• Grassland Reserve Program Senate Bill expands
  this program (which funds conservation easement
  to maintain grassland) with annual average
  funding of 60 million for the program over a
  four year period.

36
Conservation Programs

• Working Lands Programs
• Conservation Security Program Both the House and
  Senate renew the program, which provides
  incentives for farms and ranches to adopt
  conservation practices.
• Environmental Quality Incentives Program Both
  the House and Senate Bills renew and expand the
  program, which provides cost share funds for
  farm/ranch investments that improve environmental
  quality. The Senate Bill expands scope to
  provide fund for farmers transitioning to organic
  production.

37
Conservation Programs

• WTO (Where do conservation programs fit?)
• Green
• Blue
• Amber

38
Conservation Programs

• WTO (Where do conservation programs fit?)
• Green
• Improve the environment
• Blue
• Amber

39
Crop InsuranceFederal Crop Insurance Corporation

• Insured crop
• Actual production history (APH)
• Year Production
• 2006 30 bushels/acre
• 2005 40
• 2004 25
• 2003 17
• Yield election
• Portion of APH to insure (50 - 75)
• Price election
• Usually choose 100 of FCIC Price - 4.90

40
Premium Paid

• Premium maximum indemnity x 7
• Maximum indemnity
• (APH yield x yield election) 21 bushels/acre
• (Market price x price election) 4.90 /bushel
• Maximum indemnity 102.90 / acre
• Rate 7
• Premium 7.20 / acre

41
Crop Insurance

• WTO (Where does crop insurance fit?)
• Green
• Blue
• Amber

42
Crop Insurance

• WTO (Where does crop insurance fit?)
• Green
• Blue
• Amber
• Current production and insurance subsidy
  (production distorting)

43
Catastrophic Risk Protection (CAT)

• If an Risk Management Agency (RMA) product exists
  for a crop in a county
• Producer may choose to purchase a CAT endorsement
• Costs 100 for each crop in each county
• Must Establish An APH
• Given A 50 Yield Election
• Given A 55 Price Election
• Baucus Disaster Assistance (4.2 b.)

44
CAT Insurance

• WTO (Where does CAT insurance fit?)
• Green
• Blue
• Amber

45
CAT Insurance

• WTO (Where does CAT insurance fit?)
• Green
• Blue
• Amber
• Current production and insurance subsidy
  (production distorting)

46
Other Insurance

• Group Risk Plan Range Insurance
• Crop Revenue Coverage
• Income Protection
• Revenue Assurance
• Adjusted Gross Revenue Lite
• Group Risk Insurance Policy

47
Energy

• Energy-related Provisions
• Feed stock subsidy program
• CCC Bio-energy program
• Bio-refinery development program
• Loan guarantee (cellulosic ethanol focus)
• Rural Energy for America
• Grants to farmers to become more energy efficient
  using renewable energy technology
• Loan guarantees/grants for agricultural operators
  and small rural business to purchase/install
  renewable energy systems

48
Energy

• WTO (Where do energy programs fit?)
• Green
• Blue
• Amber

49
Energy

• WTO (Where do energy programs fit?)
• Green
• Improve the environment
• Blue
• Amber

50
Summary

• Commodity
• Direct payment G
• Counter cyclical payment A
• Loan rate and loan deficiency payments A
• Average crop revenue (new) A
• Conservation
• Land Retirement Programs G
• Working Lands Programs G
• Crop insurance and disaster relief (new) A
• Energy G