The 1-2-3 Scenarios:

1

• The 1-2-3 Scenarios
• An Analysis of Safety Net Alternatives

December 4, 2000 Presentation to the U.S. Rice
Federation Las Vegas, Nevada
2

• Why We Do It?
• Because of National Policy Objectives

1. Income Maintain adequate net farm income for
   livestock and crop farmers.
2. Food Maintain an adequate food supply at
   reasonable prices.
3. Exports Maintain a competitive trade position.
4. Conservation Environment Enhance
   environmental and conservation quality.
5. Inputs Maintain a viable input industry.
6. Reserves Adequate reserves in the event of crop
   production problems.
7. Rural Areas Development of rural areas.
8. Government Cost Achieve objectives at the least
   cost.

3

• Direct Government Payments

25
23.3
20.6
20
16.7
14.5
15
13.4
12.4
12.2
Billion Dollars
11.8
9.5
10
5
0
1979
1983
1987
1991
1995
1999
Direct Payments
1979-98 Average 8.5 Billion
4

• Direct Government Payments

25
23.3
20.6
20
16.7
14.5
15
13.4
12.4
12.2
Billion Dollars
11.8
9.5
10
5
0
1979
1983
1987
1991
1995
1999
Direct Payments
1983-2000 Average 11.4 Billion
Standard Deviation 4.6 Billion
5

• Direct Government Payments

25
23.3
20.6
20
16.7
14.5
15
13.4
12.4
12.2
Billion Dollars
11.8
9.5
10
5
0
1979
1983
1987
1991
1995
1999
Direct Payments
1986-2000 Average 12.0 Billion
Standard Deviation 4.8 Billion
6

• US Rice Prices

• Projected prices are similar to those observed in
  the early 1990s
• Much below the levels of the mid-90s.
• For rice, LDPs remain a significant factor
  throughout the baseline.

7

• US Farm Income

• In the absence of additional assistance packages,
  farm income remains around 40 billion through
  2006.
• Modest recovery in the later years as the cattle
  cycle turns.

8

• US Crop Prices

• In general, baseline crop prices are weak in the
  near term before showing recovery in later
  years.
• For soybeans and cotton, loan rates continue to
  play a large role through 2005.

9

• US Livestock Prices

10

• Scenario Assumptions

• For the scenarios, all baseline policies remain
  in place, i.e. AMTA payments remain.
• In addition, assume authority exists for
  additional spending above baseline levels for the
  2001-05 crops.
• Average 1 Billion/Crop Year (5 Billion Total)
• Average 2 Billion/Crop Year (10 Billion Total)
• Average 3 Billion/Crop Year (15 Billion Total)

11

• More Assumptions

• Spend the additional money in three ways
• Modified Supplemental Income Payments (MSIP) -
  Payments based on 1995-99 reference period.
• Higher Marketing Loan Rates (LR) - Increase all
  loan rates by the same percentage in order to
  achieve the additional spending.
• Market Loss Assistance (MLA) Payments -
  Distributed in the same fashion as the previous
  MLA payments. Some money included for oilseeds.
• Precise levels for loan rates and SIP triggers
  set so as to spend on average the same amount as
  the increase in MLA payments.

12

• Modified SIP
• Where the Baseline Is Important

• Relative to the FAPRI baseline, MSIP will play a
  larger role in the early years as the value per
  acre falls well below the 1995-99 average.
• Over time, stronger prices and increasing yields
  reduce the gap between the value and the
  reference period.

13

• Loan Rate Formulas
• Where the Baseline Is Important

• In the FAPRI baseline, loan rates are held fixed
  through the 2001 crop and then allowed to adjust
  to minimum levels based on the formulas.
• Rice loan rate remains at 6.50 in the baseline.
• The scenarios maintain this convention with loan
  rates for all crops increased by the same
  percentage above baseline levels.

14

• Market Loss Assistance

• Market Loss Assistance payments are allocated
  based on percentages from the previous assistance
  packages.
• Feed grains receive 50 of the money under these
  rules.
• Rice receives 8 of the money.

15
Policies Analyzed in this Study

• 3 ways to spend an additional money above
  baseline spending over the 2001-05 crops.

Avg Annual Additional Spending
1 Billion
2 Billion
3 Billion

MSIP (Trigger )
89.80
93.86
96.75
LR Increase Above Base
3.50
6.67
9.60
MLA Payments
1 bil/crop yr
2 bil/crop yr
3 bil/crop yr
16

• Methodology

• The FAPRI baseline represents a deterministic
  view of the future conditioned on specific
  assumptions such as
• trend yields
• stable growth in macroeconomic indicators.
• However, this view does not provide an indication
  of the range of outcomes and the potential
  variability.
• To capture this range, shocks were introduced
  into the FAPRI US modeling system for the major
  sources of variability.

17

• Determining Sources of Variability

• Shocks include the following
• US crop yields
• Harvested/planted ratios
• US crop exports
• Costs of production
• Animal slaughter weights
• Adjustment factors on selected crop demand
  equations, livestock per-capita demand
  equations, and selected animal inventory
  equations.
• Shocks are applied with correlations determined
  from historical observations
• a good corn yield most often is accompanied with
  a good soybean yield

18

• Multiple Draws Must Be Done

• Looking at one possible path doesn't provide
  enough information.
• Program must be evaluated over a number of runs.
  We have done 500 simulations.
• Graph shows 10 of the 500 rice yield paths used
  in this analysis.
• Remember - all other shocks are being introduced
  at the same time.

19

• Generating Results,
• Developing Probability Ranges

• The results of the 500 draws will give
  variability around production, consumption and
  prices.
• We can develop probabilities ranges or the
  likelihood that price will be in a certain range.

20

• Change in Per-Acre Returns,
• 2 Billion Scenario

• Of the 3 optionsRice payments are highest under
  MLACorn receives largest payment under
  MLASoybeans receive the most under LRWheat
  payments are highest under MLACotton receives
  the most under SIP
• Rankings the same under alternative spending
  levels.

21

• Assessing Variability

• Thus far, we have focused on the average outcome
  based on the 500 simulations.
• However, to get some idea of the variability, we
  can look at
• The range of outcomes and probabilities
  associated with those outcomes.
• Does the policy reduce the chance of an
  undesirable outcome? or increase the chance of a
  desirable one?
• The "counter-cyclical" nature of the policies?

22
Distribution of Gov't Outlays, 2 Billion Scenario

• Average spending levels are similar under all 3
  programs (12.6 Bil)
• With fixed payments, there is a higher minimum
  under MLA.
• In all cases, much more upside spending potential
  than downside.

Average
23

• Likelihood That Net CCC Outlays Exceed 10 Bil,
  2 Billion Scenario

• Rising prices and declining AMTA payments reduce
  chance that net outlays exceed 10B.
• Fixed payments under MLA2 give greatest chance of
  net outlays exceeding 10 billion.
• From 1986-99, net outlays surpassed 10 billion
  in 10 of 14 years.

24

• Likelihood That Net CCC Outlays Exceed 15 Bil,
  2 Billion Scenario

• The infusion of additional money under all 3
  scenarios greatly increase the likelihood that
  outlays exceed 15Bil.
• In general, MSIP2 and LR2 have greater chances of
  exceeding 15 Bil, when compared to MLA2.
• Upside spending potential when linked to prices
  and production.

25
Distribution of Rice Returns, 2 Billion Scenario

• Returns average 242 under MSIP2 and 258 under
  MLA2. Average is 228 under LR2.
• SIP reduces more of the downside risk in returns,
  especially relative to LR2.

Distribution of Rice Per-Acre Net returns, 2003
2 Billion Scenario
Averages
Frequency
50
100
150
200
250
300
350
400
450
Dollars per Acre
MSIP2
LR2
MLA2
26
Distribution of Cotton Returns, 2 Billion
Scenario

• Average returns under LR2 and MLA2 are 165/ac.
  Average under MSIP2 is 169.
• Note the different shape relative to corn returns
• Skewed in the opposite direction.

Distribution of Cotton Per-Acre Net returns, 2004
2 Billion Scenario
Averages
Average
Frequency
25
50
75
100
125
150
175
200
225
250
275
Net Returns (Dollars per Acre)
MSIP2
LR2
MLA2
27
Distribution of Corn Returns, 2 Billion Scenario

• Returns average 155 under MSIP2 and MLA2.
  Average is 151 under LR2.
• SIP reduces more of the downside risk in returns.

Distribution of Corn Per-Acre Net Returns, 2002
2 Billion Scenario
Averages
Frequency
75
100
125
150
175
200
225
250
275
300
Net Returns (Dollars per Acre)
LR2
MSIP2
MLA2
28
Distribution of Soybean Returns, 2 Billion
Scenario

• Returns average 132 under MSIP2 and 135 under
  LR2. Average is 128 under MLA2.
• SIP reduces more of the downside risk in returns.

Distribution of Soybean Per-Acre Net returns, 2002
2 Billion Scenario
Averages
Frequency
75
100
125
150
175
200
Dollars per Acre
LR2
29
Distribution of Wheat Returns, 2 Billion Scenario

• Returns average 72 under MSIP2 and 67 under
  LR2. Average is 73 under MLA2.
• SIP reduces more of the downside risk in returns.

Distribution of Wheat Per-Acre Net returns, 2002
2 Billion Scenario
Averages
Frequency
25
50
75
100
125
Dollars per Acre
MLA2
30

• Summary Points

• The results of the analysis are not "universal"
• They are influenced by baseline characteristics
  such as
• Loan rates adjusting after 2001
• Relative price/loan rate relationships for
  different crops
• With that in mind, the results of the 2 billion
  scenario generally hold for the other two as
  well, just at different magnitudes.
• Acreage Impacts
• Small in the aggregate.
• MSIP shifts acreage from soybeans into other
  crops.
• Soybeans, cotton, rice gain acreage under LR.

31

• Summary Points

• Relative to MLA and LR, MSIP reduces the
  variability per-acre crop returns.
• LR and MSIP increase the variability and upside
  spending potential of government outlays
• Under LR and MSIP, there are higher probabilities
  that outlays exceed 15 bil. However, MLA gives a
  better chance of producing outlays above 10
  billion.
• At the national level, "countercyclical" nature
  of MSIP provides greater downside protection on
  net returns.
• This may not hold for farm level results. A
  number of local factors come into play.

32

• MSIP Points

• PROS
• Based on high income period of time
• Most downside protection
• CONS
• Local yields vs. national yields
• Regional weather

33

• Loan Rate Summary

• PROS
• Favors areas with high yields and low yield
  variability
• CONS
• No crop, no payment

34

• Market Loss Assistance Summary

• PROS
• Best for grain, wheat, and rice
• Greatest pass through of dollars from government
  to the farm sector
• CONS
• Least protection in bad years

35

• Consideration for Future Analysis

• Objectives
• Many different groups sitting at the Farm Bill
  table
• For the given objectives, what should the farm
  program costs?
• Look at history
• Need to reach 14-16 billion in bad years
• In extreme cases, need to reach 18-20 billion

36

• Consideration for Future Analysis

• What is the projected average cost over time?
• Need a new baseline March 2001
• Current estimates have spending declining from
  13 billion to 7 billion with an average of 8
  billion per year
• Which income enhancement is likely to work best?

37

• Consideration for Future Analysis

• Of the 3 counter-cyclical options, which worked
  best for
• Rice?
• Cotton?
• Wheat?
• Feed Grains?
• Soybeans?
• Total Farm?

38

• Consideration for Future Analysis

• PROS and CONS of each option
• Has to be examined regionally
• Large yield differences
• Regional analysis will require risk assessment
• With crop insurance
• Are the options WTO compatible?

39

• Texas Net Farm Income, 1970-1999

5
4
3
Billion Dollars
2
1
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Direct Government Payments
Market Net Income
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Cash Receipts 99 (1,000)
Farm Name
Acres
Crops
IAG2400 598.2 Corn 1200
Soybeans 1200
TXNP6700 1606.1 Corn 3350
Sorghum 335
Wheat 1675
KSSW3180 331.1 Wheat 2258
Sorghum 652
Corn 56
Soybeans 87
NDW4850 678.8 Wheat 2585
Barley 470
Soybeans 705
Sunflowers 940
TXSP3697 1066.9 Cotton 2665
Peanuts 285
TX3750 1311.9 Long Grain Rice 1500
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