Senate advances farm bill

Source: By DAVID ROGERS, Politico • Posted: Tuesday, February 4, 2014

A new five-year farm bill advanced toward final passage Tuesday, after a strong bipartisan Senate vote Monday night to limit further debate and expedite action.

The 72-22 vote caps two years of struggle that badly split the old farm and food coalition. The final product represents a landmark rewrite of commodity programs, but even now, all eyes are returning to corn prices and three sets of numbers that will tell a lot about the topsy-turvy world facing the new law before spring plantings.

Indeed, never before has there been a farm bill with such a robust crop insurance program combined with a price-sensitive commodity title, all in a period of changing prices.

The first data dump could come as early as Tuesday morning when the Congressional Budget Office will release its updated budget forecast, which many expect will show an increase in costs under the old policies of the 2008 farm bill.

The second will follow quickly in early March, when crop insurance premiums will be set for Midwest corn states for the coming 2014 crop year. And third, CBO will come back weeks later with an updated baseline that will project the costs of the new farm bill once it has been signed into law by President Barack Obama.

How much CBO will make public Tuesday is still unclear — coming just hours before the Senate’s scheduled afternoon vote on passage. But its numbers are expected to show a spike in commodity program costs because of the drop in corn prices over the past year.

At one level, this is an academic exercise since much of the increase is attributed to higher participation in the ACRE revenue protection program which is now expiring. But because ACRE is a forerunner of the corn-backed Agriculture Risk Coverage or ARC program in the farm bill, the numbers are a harbinger of troubles that could lie ahead.

At the same time the crop insurance premium for corn — which represents close to 40 percent of the total premium for all crops — will almost certainly go down this year with the lower price for corn. That will in turn reduce the cost of taxpayer subsidies in that title of the farm bill.

For the Midwest Corn Belt, these annual premium calculations are based on the February average of prices on the Chicago Mercantile Exchange for futures contracts for corn delivered in December at the end of the year.

In 2013, that average was $5.65 per bushel and the premium $4.7 billion. But futures contracts for December 2014 are now running close to $4.50 per bushel for corn, a 20 percent drop that should produce a reduced premium since the insured assets will be that much less.

All this makes the March CBO forecast more challenging, but it also illustrates an important new dynamic in the farm bill

The new commodity title reflects a landmark rewrite, making the bill much more an engine of countercyclical aid to farmers. The nearly 18-year-old system of direct cash payments — tied to the land not markets — is ending. Instead, producers must choose between two replacement options that will trigger only when prices decline.

At the same time, the crop insurance title is shielded from major changes and only grows in size with the addition of new products tailored to cotton and farmers looking for a lower cost supplement based on countywide losses. Even organic crops have a small piece of the action.

The end result is a decided shift. Just a few years ago, when CBO projected spending for the next five years, 2014-2018, the commodity title was still an equal match for crop insurance. The picture now is one in which the crop insurance title is almost double the level of spending for commodity programs.

This creates two levers that can counterbalance one another to some degree. Crop insurance premiums go up with rising prices and down when prices fall. The new commodity title is the opposite, costing less when markets are good but much more when prices fall.

“Farm program taxpayer costs go up when prices go down, but crop insurance costs go down when prices go down,” said Keith Collins, former chief economist for the Agriculture Department and now an adviser to the crop insurance industry. “The new safety net means these offsetting effects may result in more stability for the taxpayer on safety net costs.”

This is not a small change. For sure, target prices and countercyclical programs were standard fare for many farm bills before the current system of direct cash payments began in 1996. But nothing like today’s crop insurance existed then, and in many cases, it wasn’t even a separate title in the farm bill.

In 1997, for example, the total premium for corn was $461 million compared with $4.7 billion in 2013. Even when adjusted for inflation, that’s a sevenfold increase.

After subtracting what the farmer pays on the same premium, the net indemnities distributed on crop insurance policies are now a big part of the farm safety net.

This can be seen by breaking down the traditional government commodity and conservation subsidies versus net crop insurance indemnities as a percentage of net cash income for farmers.

The old-style subsidies have fallen as a rule and are dramatically less than past years like 2000 and 2001. But in 2012 and 2013, the net indemnities paid on crop insurance were almost as big as the traditional commodity and conservation payments.

For example, data collected by the Agriculture Department show that $10.6 billion was paid out directly by the government in 2012 but an additional $9.2 billion came in net indemnities on crop insurance policies. In 2013, the government paid $11.4 billion, while the net indemnities on crop insurance were $11 billion.

Adverse weather and drought conditions are part of this picture. But the numbers underscore the magnitude of crop insurance now as part of the farm safety net. And to the extent premiums are tied to crop prices, this can be some counterweight to the new countercyclical programs in the commodity title.

Instead of direct cash payments, producers will have two options linked to real market losses. But they will lock themselves into one path for each crop in their base production for five years, a big decision that will most likely mean consultation with bankers whose operating loans are needed each spring.

ARC is the first option and promises a temporary cushion for growers once prices fall at least 14 percent below the rolling average for the prior five years. In this regard, its design is like ACRE and is a formula that’s very advantageous to corn given the fat years growers have enjoyed amid the ethanol boom.

These high prices mean the threshold now at which ARC payments will be triggered for corn in 2014 is near $4.55 per bushel. Cash sales are already running 40 cents per bushel below that marker, and it seems almost certain that some subsidies will flow in 2014.

If prices fall to about $4.35 per bushel, the farmer would get something close to the current direct payments. But if corn were to drop to $4 per bushel, ARC subsidies could be twice what corn receives now per acre in direct cash payments.

The catch is that if corn prices were to stay at $4 per bushel, the ARC payments could run out in the space of three years. The idea is that this window buys time for the farmer to make adjustments. But it could also lead nervous growers to take a look at the second option known as price loss coverage or PLC.

This approach fits the more classic countercyclical model of fixed, government-set target prices — not a rolling market average. In the case of corn, prices would have to drop to $3.70 per bushel before any assistance is provided. But unlike ARC, PLC promises a more permanent floor to try to cover a farmer’s production costs.

The corn lobby and its soybean allies actively promoted the ARC approach, suggesting most of their growers will go in that direction. But wheat farmers are sure to be more divided, and rice growers lean toward price loss coverage.

For example, the PLC target price for wheat is $5.50 per bushel, about 22 cents below the ARC threshold but a much smaller gap than seen in the case of corn and soybeans.

For growers of medium-grain rice in California, the numbers break more in favor of PLC but will still mean that farmers must absorb a much larger price drop than corn.

Because of higher production costs, California growers get an extra 15 percent adjustment, which gives them a target price of $16.10 per hundredweight. And for a farmer to recoup what he is now getting in direct payments, the California Rice Commission estimates that prices would have to drop to $14.24.

That means a roughly $5 per hundredweight loss compared with current market prices. For a 750-acre farm that would mean a revenue loss of more than $310,000 to get a PLC payment of $115,000.