Agricultural Policy

1. Agricultural Policy George Haynes, Ph.D. Professor and Extension Specialist Montana State University

2. Agricultural Policy – Why? • Current Farm Bill debate . . . • Stabilize grain prices (and net farm income) • Make products more competitive abroad • Provide a plentiful food supply (food security) Source: Farm Services Agency - Montana - 3/26/08

3. 2002 Farm Bill Primer - Funding • Farm Commodity Programs $ 12.0 b/yr • Conservation Programs 3.0 • Exports 0.3 • Subtotal Farm Support 15.0 33.3% • Food Stamps 29.7 67.7% • Total 45.0 Source: Farm Services Agency - Montana - 3/26/08

4. Montana Net Farm Income1949 – 2007 (estimate) Stabilize Net Farm Income

5. Global Wheat Market Shares Competitive Products Abroad

6. International Trade - Wheat • Wheat exports are expected to rise. • Weak dollar • Less foreign competition (weather related) • Exports/Imports • Imports of wheat have declined (26 percent) • 0.09 billion bushels in 2007 (0.12 billion bushels in 2006) • Exports of wheat have increased (27 percent) • 1.2 billion bushels 2007 (0.91 billion bushels in 2006) Competitive Products Abroad

7. Global & US Wheat Market(current situation) • World • 2007 Wheat Production → 1.5% Higher than 2006 • Strong prices • Global Ending Wheat Stocks – lowest in 30 years • 110 million metric tons (4.0 billion bushels) • US • 2007 Wheat Production – 14% Higher than 2006 • US Ending Wheat Stocks – lowest in 60 years • 7.94 million metric tons (291 million bushels) Competitive Products Abroad

8. All Wheat Production - US1949-2007 Plentiful food supply

9. Wheat & WTO • Green Box • Do not distort trade or at most cause minimal distortion • Domestic programs not targeted at particular products and include direct income supports for farmers that are not related to current production levels or prices • Blue Box (amber box with conditions) • Any support normally in amber box if the support requires farmers to limit production • No U.S. programs currently in Blue Box • Amber Box • Domestic support measures considered to distort production and trade. • Includes measures to support prices or subsidies directly related to production quantities ($19 billion – “magic number”)

10. U.S. Farm Programs • Commodity • Direct payment • Counter cyclical payment • Loan rate and loan deficiency payments • Average crop revenue (new) • Conservation • Land Retirement Programs • Working Lands Programs • Crop insurance and disaster relief (new) • Energy

11. Direct Payments • Program applies to specific crops • Producers must have payment acres for each eligible crop • Producers must have payment yields for each eligible crop • Producers must meet “cross” compliance or conservation requirements • Producers do not have to produce the crop to receive the direct payment, but the land must be placed into an appropriate agricultural use • Some large producer may face maximum restrictions on the their receipt of government payments

12. Direct Payments2002 Farm Bill

13. Direct Payment (an example) • Suppose the farm has . . . • 40 bushels per acre – “payment yield” • $0.52 per bushel – “direct payment rate” • 85% of the farm’s approved payment yield • 2002 Farm Bill provision • Direct payment per acre = yield x rate x 0.85 • 40 bu/a. x $0.52 / bu. x 0.85 = $ 17.68 / acre

14. Direct Payments • WTO (Where do direct payments fit?) • Green • Blue • Amber

15. Direct Payments • Green • Direct payments are related to historical (not current) production • Blue • Amber Source: Farm Services Agency - Montana - 3/26/08

16. Counter Cyclical Payments • Purpose • Provides farmers with additional income when market prices for direct payment program crops are low. • Provisions • Producer must have a beneficial interest in the crop • Producer must comply with the same provisions as those required for receipt of direct payments

17. Counter Cyclical Payments • Computing counter cyclical payments • Concepts • Target price • $3.92 per bushel for wheat • Effective price • Price against which the target price is compared • Loan rate • $2.75 per bushel for wheat • National Average Market Price • Average market price for the crop nationally as reported by the USDA • 85% of the farm’s approved counter cyclical payment

18. CCP (an example) • Suppose the farm has . . . • 40 bushels per acre – “payment yield” • Effective price depends on . . . • $2.90 per bushel – National Wheat Price (USDA) • $0.52 per bushel – wheat direct payment rate • $2.75 per bushel – wheat loan rate • $3.92 per bushel – wheat target price • 85% of the farm’s approved payment yield • 2002 Farm Bill provision

19. CCP (an example) • CCP = 0 • If Effective Price > Target Price • CCP > 0 • If Effective Price < Target Price • If National Wheat Price > Loan Rate then . . . • Effective Price = National Wheat Price + direct payment • If National Wheat Price < Loan Rate then . . . • Effective Price = Loan Rate + direct payment

20. CCP (an example) • Suppose the farm has . . . • 40 bushels per acre – “payment yield” • Effective price is computed as follows: • Effective price = National Wheat Price + direct payment • Effective price = $2.90 + $0.52 = $3.42 / bushel • 85% of the farm’s approved payment yield • CCP/acre = yield (target price – effective price) x 0.85 • CCP/acre = 100 x 40 x ($3.92 - $3.42) x 0.85 = $17.00

21. CCP (today) • Effective Price (all wheat) • National Wheat Price (March, 2008) $4.75 • Target Price $3.92 • What is the CCP today?

22. CCP • WTO (Where do CCPs fit?) • Green • Blue • Amber

23. CCP • WTO (Where do CCPs fit?) • Green • Blue • Amber • Not linked to current production, but linked to current prices.

24. Loan Rate Program • Loan Rate • Loan rate is essentially a minimum guaranteed price • Producer can put a crop under loan to the USDA’s Commodity Credit Corporation at the loan rate • Within 9 month period, producer can repay the loan (with adjustments for interest charges and storage costs) or “forfeit the crop to the government.

25. Loan Deficiency Payment (LDP) Program • The LDP program is an alternative to placing the crop under the Loan Program • USDA publishes a county price for each crop. The posted county price (PCP) is established by adjusting the national price for transportation and other costs affecting the basis for the county • If an LDP is taken, the farmer cannot place the crop under the loan program.

26. LDP (an example) • Suppose the farm has . . . • 40 bushels per acre – “payment yield” • $2.25 per bushel – posted county price (PCP) for wheat • $2.75 per bushel – wheat loan rate • LDP/acre = (loan rate – county price) x yield • LDP/acre = ($2.75 - $2.25) x 40 = $20.00

27. LDP (today) • Gallatin County • Posted County Price (hard winter wheat) $10.52 • Loan Rate 2.82 • (actual hard winter wheat loan rate = $2.82) • What is the LDP today? Source: Farm Services Agency - Montana - 3/26/08

28. Loan Rate and LDP • WTO (Where do the loan rate and LDPs fit?) • Green • Blue • Amber

29. Loan Rate and LDP • WTO (Where do the loan rate and LDPs fit?) • Green • Blue • Amber • Minimum price support (current price) and subsidized loan on the crop

30. Average Crop Revenue (new) • Fixed per acre payment of $15 per acre on farm’s base acres • The per acre payment is equal to 90%of the difference between the per acre estimated “long run” annual average state revenue guarantee and actual average state revenue for each crop. This amount is then multiplied by the ratio of the farm’s proven crop insurance yield (APH yield) to the average state yield • If a farm chooses this program, the farm cannot receive direct and countercyclical payments, and cannot participate in the loan rate program • A farmer receiving crop insurance indemnities will not be able to “double dip”: Farm’s insurance indemnity payments will be reduced by the amount of the ACR payment.

31. Average Crop Revenue • Average statewide revenue winter wheat • 30 bushels/acre x $5.00/bushel $150 • Actual statewide revenue winter wheat • 20 bushels/acre x $4.00/bushel $ 80 • ACR Payment (farm yield = 30 bu./a.) • 0.90 x ($150 - $80) = $63 / acre • Fixed payment $15 • Total payment/acre $78

32. ACR (today) • Average statewide revenue winter wheat • 30 bushels/acre x $5.00/bushel $ 150 • Actual statewide revenue winter wheat • 30 bushels/acre x $6.25/bushel $ 188 • ACR Payment (farm yield = 30 bu./a.) • 0.90 x ($150 - $188) = $ 0 / acre • Fixed payment $ 15 • Total payment/acre $ 15

33. Average Crop Revenue • WTO (Where do average crop revenue programs fit?) • Green • Blue • Amber

34. Average Crop Revenue • WTO (Where do average crop revenue programs fit?) • Green • Blue • Amber • Based on current production and prices

35. Conservation Programs • Land Retirement Programs • Conservation Reserve Program: Both the House and Senate Bills renew and expand eligible lands for this program. • Wetlands Reserve Program: Both the House and Senate Bills renew and expand the program, with average annual funding of about $480 million • Grassland Reserve Program: Senate Bill expands this program (which funds conservation easement to maintain grassland) with annual average funding of $60 million for the program over a four year period.

36. Conservation Programs • Working Lands Programs • Conservation Security Program: Both the House and Senate renew the program, which provides incentives for farms and ranches to adopt conservation practices. • Environmental Quality Incentives Program: Both the House and Senate Bills renew and expand the program, which provides cost share funds for farm/ranch investments that improve environmental quality. The Senate Bill expands scope to provide fund for farmers transitioning to organic production.

37. Conservation Programs • WTO (Where do conservation programs fit?) • Green • Blue • Amber

38. Conservation Programs • WTO (Where do conservation programs fit?) • Green • Improve the environment • Blue • Amber

39. Crop InsuranceFederal Crop Insurance Corporation • Insured crop • Actual production history (APH) • Year Production 2006 30 bushels/acre 2005 40 2004 25 2003 17 • Yield election • Portion of APH to insure (50% - 75%) • Price election • Usually choose 100% of FCIC Price - $4.90

40. Premium Paid • Premium = maximum indemnity x 7% • Maximum indemnity • (APH yield x yield election) 21 bushels/acre • (Market price x price election) $4.90 /bushel • Maximum indemnity $102.90 / acre • Rate 7% • Premium $7.20 / acre

41. Crop Insurance • WTO (Where does crop insurance fit?) • Green • Blue • Amber

42. Crop Insurance • WTO (Where does crop insurance fit?) • Green • Blue • Amber • Current production and insurance subsidy (production distorting)

43. Catastrophic Risk Protection (CAT) • If an Risk Management Agency (RMA) product exists for a crop in a county • Producer may choose to purchase a CAT endorsement • Costs $100 for each crop in each county • Must Establish An APH • Given A 50% Yield Election • Given A 55% Price Election • Baucus Disaster Assistance ($4.2 b.)

44. CAT Insurance • WTO (Where does CAT insurance fit?) • Green • Blue • Amber

45. CAT Insurance • WTO (Where does CAT insurance fit?) • Green • Blue • Amber • Current production and insurance subsidy (production distorting)

46. Other Insurance • Group Risk Plan Range Insurance • Crop Revenue Coverage • Income Protection • Revenue Assurance • Adjusted Gross Revenue Lite • Group Risk Insurance Policy

47. Energy • Energy-related Provisions • Feed stock subsidy program • CCC Bio-energy program • Bio-refinery development program • Loan guarantee (cellulosic ethanol focus) • Rural Energy for America • Grants to farmers to become more energy efficient using renewable energy technology • Loan guarantees/grants for agricultural operators and small rural business to purchase/install renewable energy systems

48. Energy • WTO (Where do energy programs fit?) • Green • Blue • Amber

49. Energy • WTO (Where do energy programs fit?) • Green • Improve the environment • Blue • Amber

50. Summary • Commodity • Direct payment G • Counter cyclical payment A • Loan rate and loan deficiency payments A • Average crop revenue (new) A • Conservation • Land Retirement Programs G • Working Lands Programs G • Crop insurance and disaster relief (new) A • Energy G