new rules of the road: implementing the 2008 farm bill patrick westhoff...
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New Rules of the Road:Implementing the 2008 Farm Bill
Patrick Westhoff ([email protected])Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri–Columbiawww.fapri.missouri.eduNational Farm Business Management ConferenceSt. Louis, June 15, 2009
Agenda
2008 Farm Bill provisions Modifications of previous law New programs
Implementation issues ACRE and other new programs Payment limitations
Other policies affecting farm sector Biofuel and climate change legislation Budgetary issues
Official title: Food, Conservation, and Energy Act of 2008
14 of 15 titles became law on May 22, 2008 over President’s veto
Override votes (two-thirds required) 316-108 in the House 82-13 in the Senate
Final title became law on June 18, 2008
A few facts about the farm bill
Farm bill spending, 2008-17
Pre-farm bill laws 2008 farm bill
Changes in farm bill spending (FY 2008-17, billion dollars, CBO estimates, relative to continuation of 2002 farm bill provisions)
2008 farm bill changes in 2002 farm bill programs Target prices and loan rates for some crops Base eligible for direct payments Marketing loan program rules Timing of payments Payment limitations Dairy program changes
Loan rates(used in calculating marketing loan benefits)
2002 farm bill 2008 farm bill for 2008/09-2009/10
2008 farm bill for 2010/11-2012/13
Corn/bu. $1.95 $1.95 $1.95
Soybeans/bu. $5.00 $5.00 $5.00
Wheat/bu. $2.75 $2.75 $2.94
Upland cotton/lb. 52.0¢ 52.0¢ 52.0¢
Rice/cwt. $6.50 $6.50 $6.50
Producers may take out a government loan at these rates, or they may earn marketing loan benefits if an indicator price (posted county price or adjusted world price) falls below the loan rate. Benefits are available on all production.
The 2008 farm bill says that prices for the last 30 days should be used to compute benefits. Previously, a daily price was used for some crops.
Direct payment rates(used in calculating direct payments)
2002 farm bill 2008 farm bill for 2008/09-2009/10
2008 farm bill for 2010/11-2012/13
Corn/bu. $0.28 $0.28 $0.28
Soybeans/bu. $0.44 $0.44 $0.44
Wheat/bu. $0.52 $0.52 $0.52
Upland cotton/lb. 6.67¢ 6.67¢ 6.67¢
Rice/cwt. $2.35 $2.35 $2.35
Direct payments = Payment rate * base area * DP yield * proportion of base eligible for DPs.
The 2008 farm bill reduces the proportion of base eligible for DPs from the current 85% to 83.3% for the 2009/10, 2010/11, and 2011/12 crops. The proportion is restored to 85% in 2012/13. Base acreage and DP yields remain fixed at 2002 farm bill levels.
Target prices(used in calculating countercyclical payments)
2002 farm bill 2008 farm bill for 2008/09-2009/10
2008 farm bill for 2010/11-2012/13
Corn/bu. $2.63 $2.63 $2.63
Soybeans/bu. $5.80 $5.80 $6.00
Wheat/bu. $3.92 $3.92 $4.17
Upland cotton/lb. 72.40¢ 71.25¢ 71.25¢
Rice/cwt. $10.50 $10.50 $10.50
Countercyclical payment rate = Greater of zero or Target price – direct payment rate – higher of (loan rate or season average farm price)Payments = Payment rate * base acreage * CCP yield * 0.85
2008 farm bill does not change these payment formulas, and base acreages and CCP yields are fixed at 2002 farm bill levels.
Implications of changes in target prices and loan rates If commodity prices are low enough, the farm bill
changes would result in Increased marketing loan benefits for wheat, barley,
oats and minor oilseeds Increased countercyclical payments for soybeans,
wheat, barley, oats and minor oilseeds Reduced countercyclical payments for cotton
But if commodity prices are high enough, countercyclical payments and marketing loan benefits will be zero, even with the changes
Soybean prices & program provisions History and June 11, 2009 futures
Future farm prices based on Nov. contracts minus assumed $0.30/bu. basis
Corn prices and program provisions History and June 11, 2009 futures
Future farm prices based on Dec. contracts minus assumed $0.30/bu. basis
Cotton prices and program provisions History and June 11, 2009 futures
Future farm prices based on Dec. contracts minus assumed $0.02/lb. basis
Implications of changes in target prices and loan rates revisited At projected prices, appears CCPs and loan
benefits for most crops are unlikely Thus, higher target prices, loan rates may have little
impact on CCPs and loan program benefits
Likely exception: cotton, where the lower target price may reduce payments Reduction in cotton payments could exceed increase
in payments for other crops
Corn program provisions and variable production expenses
Source: Farm bill and FAPRI-MU estimates, January 2009
Note: Variable expenses do NOT include land and other fixed costs.
Timing of payments
Farm bills specify when payments can be made
2008 farm bill delays some payments
These delays are intended to shift government spending from one fiscal year to another to achieve budgetary targets
Timing of payments
2008/09-2010/11 2011/12 2012/13
Direct payment advance 22% 22% 0%
(available Dec. of yr. before harvest)
Final direct payment 78% 78% 100%
(available Oct. of harvest year)
Countercyclical payment advance 40% 0% 0%
(available 180 days into market year)
Final countercyclical payment 60% 100% 100%
(available Oct. of harvest year)
Payment limitations & AGI test
Farm bill tightens payment limitation rules
Eliminates 3 entity rule—payments directly attributed to a human being
Adjusted Gross Income test $500,000 of nonfarm adjusted gross income
disqualifies for many payments $750,000 of adjusted gross farm income disqualifies
for direct payments
Dairy provisions: price supports
2002 farm bill set milk price support ($9.90 per cwt for manufacturing grade milk)
2008 farm bill has no milk price support, but does set price supports for products $1.13 per pound for block cheddar cheese $1.05 per pound for butter $0.80 per pound for nonfat dry milk
No effective change in support levels
Dairy provisions: MILC
Farm bill revises rules for Milk Income Loss Contract (MILC) program Trigger price $16.94/cwt, adjusted if feed costs exceed
$7.35/cwt of milk (April 2009 trigger: $17.14/cwt) Subtract Boston Class I price (April: $13.61/cwt) Multiply difference by 45% for 2008-2012 (April
payment rate: $1.59/cwt) Available on 2,985,000 pounds per fiscal year Various provisions revert to 2002 farm bill levels on
Sep. 1, 2012 (34% of production, 2.4 mil. lbs.)
Average Crop Revenue Election (ACRE) program Short version: make payment if state per-acre
revenues fall below a trigger level Trigger (“benchmark” revenue)
2-year average national price, multiplied by 5-year Olympic average (throw out high and low) of
state yields per planted acre, multiplied by 0.9 Cannot adjust more than 10%/year
Payments made on 83.3% of planted acreage from 2009-2011 (85% in 2012)
ACRE program provisions, continued
Farm must have a loss to get a payment (double hurdle—state and farm loss) Farm level benchmark = Farm 5-year Olympic yield times 2-
year average US price plus crop insurance premiums paid In contrast, state benchmark multiplies by 0.9 and does not
add crop insurance premiums Payments don’t depend on size of farm level loss—but must
have some loss to qualify for payments if state benefits triggered
Farm level payment is adjusted for average yields State level payment rate * ratio of farm to state Olympic
yields
ACRE program provisions, continued
Trade-off: to enter program, farmers must give up 20% of direct payments All countercyclical payments And must accept 30% lower loan rate
Farmers must choose whether or not to enroll First available in 2009: August 14 deadline Once enroll, must stay in program through 2012 If enroll, must enroll all crops on farm
SURE
Supplemental Revenue Assistance (SURE)
Intended to replace ad hoc disaster aid
Payments if various conditions met Disaster county or one contiguous, or farm-level production
down 50% from normal Whole farm revenue less than trigger amount Must have crop insurance or NAP where available
Trigger tied to crop insurance coverage level
Implementation issues
Most programs now available for sign-up
ACRE an example of program requiring many implementation decisions at USDA Which two years’ prices are used in establishing
benchmark revenue? What is a planted acre? What happens if base acres limit acres eligible for ACRE
payments? What if a farmer did not plant a crop in a particular year
—how do you calculate an Olympic yield?
How implementation choices can matter—a lot
2006/07 2007/08 2008/09
Corn farm price $3.04 $4.20 $4.10-$4.30
Some at USDA proposed to read the farm bill to say that the 2009/10 benchmark should depend on prices in 2006/07 and 2007/08. The average of those two years’ prices was $3.67/bu.
Others argued that the farm bill requires that the 2009/10 benchmark should depend on prices from 2007/08 and 2008/09. Although the 2008/09 price still is not known with certainty, the average of the two years is likely to be about $4.20/bu.
The final decision: use 2007/08 and 2008/09.
Implication: the revenue benchmark for 2009/10 is about 14% higher than it would have been otherwise, making ACRE more attractive.
ACRE program: an example
2004 2005 2006 2007 2008 Average
MO corn yield/plant. a. 161 111 138 137 140
w/o high, low 138 137 140 138
US price per bushel $4.20 $4.20 $4.20
Revenue benchmark $522
Farm yield 170 130 100 140 135
w/o high, low 130 140 135 135
Payments would be made to MO corn farmers if the 2009 state yield/acre multiplied by 2009/10 US corn price is less than $523
If 2009 MO yield = 138 and 2009/10 US price = $3.50: revenue = $483State average payment rate: $522 - $483 = $39
Farm payment, if farm has loss: 0.833 times planted acres times $39 times 135/138 = $32 per planted acre
Deciding whether to participate in ACRE Like insurance purchase decision:
Is expected ACRE payment worth the “premium” of payments foregone?
If prices and yields are steady or increase No ACRE payments, But still give up 20% of direct payment
But if US prices or state yields drop Potential payments could be quite large Likely to be larger than foregone payments
US simulation results Annual averages for 2009/10-2012/13
Corn Wheat Soybeans Cotton
Average ACRE payment/acre $10.06 $11.32 $13.00 $11.34
Payments foregone/base acre
$4.81 $3.11 $2.53 $100.21
Net benefit of ACRE/acre $5.25 $8.21 $10.47 -$88.87
Results reflect average of 500 stochastic outcomes. Note that the most likely outcome in any given year for any given commodity in any given state is no ACRE payments. However, when ACRE payments do occur, they can be quite large—much larger than the traditional program payments that producers must give up to participate.
Results are based on FAPRI’s January 2009 baseline. Results are very sensitive to projected prices and yields, and will differ across states and producers. These calculations assume one acre of base for each acre planted. On particular farms, base acreage can be very different than planted acreage.
WA
OR
CA
NV
ID
MT
WY
UT
AZ
ND
SD
NE
KSCO
NM
TX
OK*
MN
IA
MO
AR*
LAMS
AL
GA
WI
IL IN
OHPA
KY
TN NC
SC
FL
VA
ME
NYMI
NH
MA
CTRI
NJ MDDE
WV
VT
DC
Traditional payments greater
ACRE payments greater
ACRE payments vs. traditional paymentsJan. 2009 FAPRI estimates
Chart reflects average results over 2009/10-2012/13
*In Oklahoma and Arkansas, ACRE payments are greater in some years and traditional payments are greater in other years. Over the four years, ACRE payments are greater in Oklahoma and traditional payments were greater in Arkansas.
For more on the ACRE choice
National estimates are interesting, but not sufficient for producers who have to choose
The best choice for a given producer depends on Mix of crops grown on the farm Base acreage and program yields Correlation between farm and state yields Expectations of future prices and yields Much more
FAPRI ACRE tool (at www.fapri.missouri.edu) lets producers use own assumptions
Other farm bill provisions
Conservation program changes Revamped Conservation Security Program Conservation Reserve limited to 32 million acres by 2010
(currently 34.7 mil. acres) More funding for EQIP, other programs
Biofuel policy changes Ethanol tax credit reduced from $0.51 to $0.45/gallon Additional subsidies for cellulosic ethanol
And much, much more
Payment limitations: direct attribution
Payments directly attributed to “warm bodies”
Can get payments from as many entities as desired (no 3 entity rule), but limit is on payments to individuals
For example, individual can only get $40,000 in direct payments regardless of entities
Attributed through 4 levels, and all must be “actively engaged”
Adjusted Gross Income test
$500,000 in nonfarm adjusted gross income: no commodity program benefits
$750,000 in farm adjusted gross income: no direct payments
$1,000,000 in non-farm adjusted gross income: no conservation program payments
Based on 3-year averages
Talk to an expert
Payment limitation rules are complex 2008 farm bill makes major changes Many issues still being resolved by FSA People are still learning how to operate under
the new rules As my wife, the attorney, reminds me, I’m just
an economist and not the right person to go to for legal advice
Other policy issues affecting the farm sector Implementation of 2007 energy bill and other
biofuel issues
Climate change legislation
Health care legislation
Future budget legislation
Implementation of the 2007 energy bill
Energy Independence and Security Act mandates minimum levels of use of 4 classes of biofuels
Major controversies in rulemaking Will ethanol from new corn ethanol plants qualify? How will “grandfathering” of existing corn ethanol plants
work? Will biodiesel from soybean oil qualify? Will imported sugar-based ethanol from Brazil count as
an “advanced biofuel”?
Other biofuel policy issues
Will 12%, 13%, or 15% ethanol blends be allowed?
Will credits and tariffs be extended when they are scheduled to expire at the end of 2010?
Will supportive policies succeed in encouraging rapid growth in cellulosic ethanol production?
Impacts of some biofuel policy options(Average percentage impacts on corn prices, 2011-2018)
Source: FAPRI-MU Report #04-09, “Impacts of Selected US Ethanol Policy Options”
Climate change legislation
Congress is considering cap and trade legislation
Implications for agriculture still unclear Likely to result in higher fuel and fertilizer prices May be possible for farmers to sell credits for reducing
carbon emissions May be important effects on biofuel industry
Process just beginning: a long way from final law
Health care legislation
Under consideration in Congressional committees
More likely to become law in 2009 than climate change legislation
Possible impacts on agriculture Cost of health care services and insurance Taxes or other budgetary offsets
Future budget legislation
FY 2009 now expected to be on the order of $1.8 trillion, and FY 2010 only slightly smaller
For perspective, previous record deficit: $455 billion in FY 2008
Likely to mean future budget cuts across all of government, including farm programs
But when will this occur?
What went up, has come down
Jun 08: $7.08
Dec 08: $3.64
What went up, has come down
Will what’s gone up, come back down?
US corn receipts and variable expenses
Source: FAPRI projections, Jan. 2009.
Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)
Final comments
Farm bill implementation process far along
With a few exceptions, farm bill unlikely to have huge impacts on producer profitability
Other policy debates may be more important to agriculture than the farm bill
Thanks!
Contact me at [email protected] or 573-882-4647
Visit FAPRI-MU web page at www.fapri.missouri.edu