U.S. Farm Policy and Its Effect on Global Agriculture

7th Annual Soy & Grain Trade Summit

September 18, 2012

By James Callan

CEO/Founder of James Callan Associates

& Partner, NorthStar Policy Navigation

Farm Bill Status and Why It Matters

Farm Bill Process To Date: Summary -- The Agriculture Reform, Food and Jobs Act of 2012 – passed full Senate, June 21, 2012; House Ag Committee passed its bill, the Federal Agriculture and Risk Management Act (FARRM), on July 12: • Senate Bill saves $23 billion in farm programs over 10 years; House bill - $35 billion • Total farm program spending over 10 years @ $153 billion • Crops covered: wheat, corn, sorghum, barley, oats, long grain and medium grain

rice, pulse crops, soybeans, other oilseeds, peanuts • Both bills would interact with crop insurance with new revenue programs and

would make it the focal point of a revised safety net for American’s farmers • Both would “plus up” crop insurance funding over next 10 years - $5 billion in he

Senate bill and - $9.5 billion in the House bill - Source: Congressional Budget Office

The Farm Bill Process

Farm Bill Reauthorized Every Five Years – Major Drivers of Reform: • Desire to change farm programs, maintain/improve safety net

• Budget realties – much tighter Federal budget situation; make programs compliant

with WTO rules, i.e. cotton; provide certainty to U.S. farmers in global context • New revenue programs would “cover shallow losses,” those not covered by crop

insurance deductible. Farmers of major crops, also have an enhanced insurance option that would add further coverage on top of individual policies.

The Farm Bill Process

Farm Bill Was Last Reauthorized in 2007: • From a dollar standpoint, the Farm Bill is mostly made up of nutrition programs,

such as the old food stamps program, now called SNAP; however, “Farm Programs” receive most of the attention because of farm lobby

• It addresses conservation programs in agriculture, energy incentives, trade access programs, research, and other areas – DOES NOT reauthorize crop insurance, which contains “such sums as may be necessary” (Federal Crop Insurance Act)

• Will it pass this year or next?

Farm Bill In Budget Context

Total budget authority for all mandatory farm bill programs under current law is $995 billion during FY2013-FY2022 – Source: Congressional Budget Office Nutrition programs make up 80 percent of the $995 billion Of this amount, budget authority for farm safety net programs is $153 billion over the 10-year period, including $63 billion for Title I (including commodity programs) and $90 billion for Title XII (crop insurance). Disaster programs do not have budget baseline funding .

Key Safety Net: U.S. Federal Crop Insurance Program

In context - insurance for 128 crops, a range of coverage levels: • Coverage -- 438 combinations of crops and plan types available (Yield, Revenue,

Area/individual farm, Whole farm, Asset); 80% of top 10 crops planted acreage Administered by the Risk Management Agency (RMA) of U.S. Department of Agriculture (USDA); Federal Crop Insurance Corp. Board reviews/approves policies • Standard Reinsurance Agreement (SRA) between USDA and 15 Private Insurers and more than 10,000 Insurance Agents – RMA renegotiated SRA in 2005 and 2011 U.S. program is largest, most wide ranging of its kind in the world; Spain, Canada, and Japan have well established programs; China’s has grown; India, Europe want more.

Sources: Risk Management Agency - USDA, James Callan Associates

The Drought and Federal Crop Insurance

Revenue Protection Insurance: • Provides protection based on projected harvest price determined by daily

settlement prices in one-month price discovery period of corn (CBOT) in late winter

• With harvest price component, also provides upside protection – higher insurance guarantee – against expected increases in prices based on one month average of corn in the Summer or Fall; price discovery for soybeans mostly in the Fall

• Combination of yield and price protection in the event of reduced production and higher prices, as expected in 2012

• Largest area of policy growth in Federal crop insurance program

The Drought and Crop Production

Corn crop condition comparison – 52 percent is in poor or very poor condition in

the 18 states that planted 92 percent of the U.S. corn crop

In context, in the last big loss year of 2002, the poor and very poor category was 29 percent; while it was 25 percent for soybeans at that time; soybeans are at 36 percent poor or very poor in latest report

In 2011, 20 percent (of corn) and 17 percent (of soybeans) were in the very poor to poor category, a comparatively good year for both crops in this same time period.

Source: National Agricultural Statistics Service (NASS) – USDA , Crop Progress Report, Sept. 10, 2012

The Drought and Crop Production Corn Production Down 13 Percent from 2011

Despite planting the largest number of acres (99.6 million) to corn in the past 75 years, growers are forecast to produce 10.7 billion bushels in 2012, down 13 percent (1.679 billion bushels) from 2011, and the smallest since 2006. Based on conditions of Sept. 1, corn yields to average 122.8 bushels per acre, down 24.4 bushels from last year.

Soybean Production Down 12 Percent from 2011 Soybean production forecast at 2.63 billion bushels, down 14 percent from 2011. Based on Sept. 1 conditions, yields to average 35.3 bushels per acre, down 6.2 bushels. If realized, the average yield will be the lowest since 2003. Area for harvest is forecast at 74.6 million acres, down 1 percent from June but up 1 percent from 2011

Source: NASS, Crop Production Report, September 12, 2012

The Drought and Crop Production, Supply/Exports U.S. Corn - Increases in corn stocks and imports offset lower production this month. Ending stocks for 2011/12 are projected 108 million bushels higher with lower expected exports, reduced corn use for ethanol, and a small increase in imports. Soybean supplies for 2012/13 are projected 12 percent below last month to a 9-year low from lower production and reduced beginning stocks Soybean exports are reduced 55 million bushels to 1.055 billion bushels U.S. Cotton and Wheat: Cotton Production up 10 percent from 2011. Total Wheat Production up by 13 percent from 2011. Both will be above export levels in 2011.

Sources: World Agricultural Supply and Demand Estimates, USDA - Sept. 12, 2012; NASS – Sept. 10 Crop Progress Report

Who are the Key Congressional Players? Farm Bill Reauthorization and Federal Crop Insurance

• Senate Ag Chairwoman Debbie Stabenow (D-MI) – focuses on specialty crops • Senate Ag Committee Member and former Chairman Saxby Chambliss (R-GA) –

represents southern contingent concerned about rice and peanuts • Ranking Senate Ag Member Pat Roberts (R-KS) – focused on preserving and

strengthening crop insurance – he likely would become chairman if Republicans take control of the Senate in November

• House Agriculture Committee Chairman Frank Lucas (R-OK) – trying to pull all commodities up – will not sell out southern farmers; favors stronger crop insurance

• House Ag Committee Ranking Member Collin Peterson (D-MN) – Minnesota has one of highest participation rates in Federal crop insurance and he historically opposes disruptions to the program; wants Farm Bill this year

Crop Year 2010 2011 2012

Value of Insurance $78 Billion $114.11 Billion $116 Billion

Acres Insured 256 Million Acres 265 Million Acres 279 Million Acres

Total Premium $7.6 Billion $11.96 Billion $11 Billion

Claims Paid So Far for 2012 $4.2 Billion $10.83 Billion $1.45 Billion

Loss Ratio .55 .91 .13

Above equals stability, certainty that funds are available providing support in intensive production environment with worldwide implications for market certainty, investment, and output

*Combined figures for crop and livestock insurance, where applicable **These are real-time estimates

Data Source: Risk Management Agency –USDA

National Summary of Business – U.S. Federal Crop Insurance Program* – 9-10-12**

Questions? Thank you!

For further information, contact:

James Callan

jamescallan@msn.com ~ (703) 577-1978