Forecast Sends Corn Prices to Near Taxpayer Subsidy Level

Source: By Alan Bjerga, Bloomberg News • Posted: Tuesday, July 15, 2014

Washington — The U.S. government Friday increased its forecast for a surplus of corn, raising the prospect prices will tumble to levels that would trigger subsidy payments to farmers.

Corn supplies in 2015 will reach 1.801 billion bushels, 4.3 percent larger than forecast last month, the U.S. Department of Agriculture said, even as it cut the estimate for the size of this year’s crop.

Futures sold in Chicago briefly fell under $3.83 a bushel, nearing the $3.70 support price contained in legislation known as the farm bill that Congress passed this year.

Payouts are based on a longer-term average, so a dip will not immediately add to taxpayer costs. Still, as U.S. grains such as corn and rice head toward bigger surpluses, an era of low crop-subsidies may be ending.

“This could wipe out any savings we had in the farm bill,” said Scott Faber, government affairs vice president for Environmental Working Group, which opposes most payments to growers. “The current prices are certainly a reminder that this bill could become a budget-buster.”

Farm-bill supports shield growers from market declines, with federal subsidies closing the gap between actual prices and a target. Corn reached a record $8.49 a bushel in 2012 as drought withered crops. Futures have since declined 54 percent through Thursday, as better weather and stagnant demand for ethanol made from the grain has rebuilt inventories.

The $956.4 billion farm bill was touted as changing the subsidies that watchdog groups called excessive government support for farmers who last year had record profits. A $5 billion annual program to pay farmers regardless of crop price was eliminated, replaced by aid for insurance programs and a so- called Price Loss Coverage program, a vestige of the old subsidies approach that would still be an option for producers.

Booming prices for corn, soybeans, wheat and other commodities has led to less spending on traditional forms of payouts in recent years. Corn growers received $2.7 billion in 2012, down from a peak of $10.1 billion in 2005, according to Environmental Working Group, which tracks farm payments.

Assuming continued high prices, the farm bill was estimated to save $23 billion over 10 years, according to congressional estimates. That isn’t happening.

As surpluses push down prices, annual farm profits are forecast to drop 27 percent to $95.8 billion this year from last year’s record, the government said in February. Revenues from major crops will be $189.4 billion, down 12 percent.

Wheat, corn and soybeans prices have dropped at least 9.4 percent this year through Thursday. Wheat traded in Chicago dipped below the $5.50 government target on July 9, and rice has fallen under the support levels, as have peanuts, which aren’t publicly traded. Soybeans, the second-biggest U.S. crop, aren’t near the price trigger.

Rice and peanut farmers probably will get payments this year, while corn, wheat and other crops should remain higher than price set for triggering payouts, said Pat Westhoff, an agricultural economist at the University of Missouri.

Export demand and requirements to add ethanol in some fuels may be enough to keep corn above target prices, assuming crops don’t become too large, Westhoff said.

Farmers planted 3.9 percent fewer acres of corn this year, the USDA said June 30, even as higher yields on what’s now growing may produce a record crop. Future bumper crops will only drive prices down further, Westhoff said.

A study by the University of Missouri in March estimated price-support payments of about $2 billion for crops harvested this year and exceeding $3 billion annually in following years.

“Weather matters,” Westhoff said. “We have relatively decent demand. The larger question is, how large are these crops going to be? Supply is going to affect the outcome much more than demand will.”

The USDA last month projected corn will average $4.55 a bushel for the year that ends Aug. 31 and $4.20 for the next year. Prices would have to remain low for some time before the government would need to pay producers, said Paul Bertels, a vice president for the National Corn Growers Association and a corn and soybean farmer near Alton, Illinois, about 15 miles north of St. Louis.

Because the farm-policy bill hasn’t been fully implemented, it’s not known how many farmers — who can choose traditional supports or additional insurance aid — will decide to seek price-based aid. Should prices for some crops stay low, growers should switch to more-profitable options, reducing supply gluts.

“Southern acres won’t stay in corn at these prices,” instead switching to cotton, he said. Still, in the event of a global crop surplus, profitable options may be limited, he said. “We’re going to have some interesting times ahead.”

The cost of subsidies in any one year isn’t a concern, said Representative Michael Conaway, the Texas Republican who heads the House Agriculture Committee’s panel on commodities.

“Some years it will cost more than we projected, some years it will cost less,” he said in an interview. “They’re set up to protect farmers when they need it. We’ll see at the end of the farm bill where we’ll round out.”

That’s what Faber says worries him. With boom prices turning to bust, taxpayers may be left with the tab in the end.

“The reference prices set for crops may be a good idea to the farm bill writers because it gives farmers more money,” he said. “They will end up offsetting the loss of other payments in the farm bill.

”The bad stretch we’re in right now isn’t enough to render final judgment,” he said. “But the evidence is mounting that price-loss coverage will be much more costly than we imagined.”