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The U.S. Farm Bill: More than just the farm

The U.S. Farm Bill: More than just the farm. Kent Olson Department of Applied Economics University of Minnesota Minnesota Economic Association October 26, 2012. Current Crop Commodity Policy. Direct payments (DP) 2a. Counter-Cyclical Payments (CCP) Based on target prices OR

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The U.S. Farm Bill: More than just the farm

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  1. The U.S. Farm Bill: More than just the farm Kent Olson Department of Applied Economics University of Minnesota Minnesota Economic Association October 26, 2012

  2. Current Crop Commodity Policy • Direct payments (DP) 2a. Counter-Cyclical Payments (CCP) • Based on target prices OR 2b. Average Crop Revenue Election (ACRE) 3. Loan rates & Loan Deficiency payments (LDP)

  3. Corn example of CounterCyclical Target price per bushel = $2.63 Direct Payment = $0.28 If U.S. market price > $2.35, farmers only receive $0.28 (times 83.3% of base acres * DP yield). Target price – DP = $2.35 Potential CCP = $0.40 Loan rate = $1.95 Potential LDP

  4. The ACRE payment • An ACRE payment on a farm is made if: • (1) ACRE program guarantee for the crop is greater than actual State revenue for the crop • AND • (2) farm ACRE benchmark revenue is greater than actual farm revenue for the crop • Farm payment is based on the loss in revenue at the State level and the farm’s planted acreage—adjusted for relative yields

  5. ACRE: State revenue & guarantee • Actual state revenue for a crop is the State yield per planted acre from NASS times the national average market price • National average market price is the higher of the 12-month marketing year price or 70% of the marketing assistance loan rate • State guarantee is equal to 90% of the benchmark state yield (5 year Olympic NASS average) times the ACRE program guarantee price • ACRE program guarantee price is the simple average of 2 previous national average market prices • For the 2010-2012 crop years, the ACRE state revenue guarantee for a crop shall not decrease or increase more than 10 percent from the guarantee for the preceding crop year.

  6. ACRE: farm revenue & benchmark • Actual farm revenue is the actual yield for the crop on the farm times the national average market price for the crop • Farm ACRE benchmark revenue is: The most recent 5 year Olympic average crop yield average for the farm times the ACRE program guarantee price for the crop Plus The crop insurance premium per acre paid by the farm

  7. ACRE Payment If the two triggers are met, the ACRE payment amount is: • The lesser of: • The difference between the ACRE State program guarantee for the crop and the actual State revenue from the crop • OR • 25% of the ACRE state program guarantee for the crop • Multiplied by the payment fraction (.833 for 2009-2011 and 0.85 for 2012) • Multiplied by the planted or considered planted acres of the crop on that farm • Multiplied by the quotient: obtained by dividing the Olympic average for the crop on the producers farm for the most recent 5 years by the benchmark State yield for the crop (the Olympic average of the most recent 5 years of State yields)

  8. Still with me?

  9. Summary of ACRE payment triggers State ACRE Guarantee Actual State Revenue IF > Farm ACRE Benchmark Actual Farm Revenue AND > THEN, and only then: ACRE Farm Payment

  10. Estimating the impact of CCP vs ACRE • Program rules and formulae • Actual farm data for acreages plus yield trends and error distributions - 11 example farms in southern Minnesota - 6 example farms in northwest Minnesota • Historical prices for distributions • Price projections for expected means • Food and Agricultural Policy Research Institute (FAPRI) • @RISK within Excel

  11. Index of Total Government Payments (TGP), if ACRE guarantee is “high” and market prices drop … 11 corn-SB farms 6 wheat-SB farms Pi3 index = 533 F1

  12. Index of Total Government Payments (TGP), if ACRE guarantee is high and market prices remain high … 11 corn-SB farms 6 wheat-SB farms F3

  13. Commodity programs Conservation Trade Nutrition Credit Rural development Research & related matters Forestry Energy Horticulture and organic agriculture Livestock Crop Insurance and Disaster Assistance Programs Commodity Futures Miscellaneous Trade and tax provisions Food, Conservation and Energy Act of 2008

  14. S.3240: Agriculture Reform, Food and Jobs Act of 2012 • Commodity programs • Conservation • Trade • Nutrition • Farm Credit Programs • Rural development Programs • Research, Extension, & related matters • Forestry • Energy • Horticulture • Crop Insurance • Miscellaneous Which title has the largest budget?

  15. CBO’s Ten-year Baseline, S.3240$995 billion, FY2013-2022 Source: Monke, CRS

  16. CBO’s Ten-year Score of S.3240Net: $969 billion (23.6B less), FY2013-2022 Source: Monke, CRS

  17. CBO’s Score of S.3240$billion change, FY 2013-2022 Source: Monke, CRS

  18. No Farm Bill? • Several programs ended on October 1 • Funding for other programs will end soon • Commodity programs stopped • Crop insurance subsidies cut • No disaster assistance • No MILC payments for small dairies • SNAP is funded for now • On January 1: USDA buys dairy products at very high prices under 1949 law

  19. Futures trading rules - derivatives Rural policy Highways Monetary policy International trade Other country’s policies Environment Energy (incl. ethanol) Immigration Science Zoning … “The Farm Bill” is not the only policy to affect farms

  20. References Monke, J. 2012. Budget Issues shaping a 2012 farm bill. CRS, R42484. Olson, K., and M. DalSanto. 2007. Alternative Farm Bills: Impacts on Minnesota Farms. Staff paper P07-5, St. Paul, MN: University of Minnesota, Department of Applied Economics.

  21. Thank you!Questions, comments Kent Olson Applied Economics 612-625-7723 kdolson@umn.edu

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