The Agricultural Act of 2014

1. The Agricultural Act of 2014 Note: -Information is based upon on the bill as passed by Congress. FSA has not issued final rules and regulations yet. Material is subject to change. -Information source: Dr. Kent D. Olson, U of M Extension Economist. Dr. Marin Bozic, U of M Economist, Dept. of Applied Economics. FarmDocDaily, University of Illinois, Urbana-Champaign -Materials edited by Gary A. Hachfeld, U of M Extension Educator. March 14, 2014; v. 1.0

2. Agricultural Act of 2014 • Commodities • Conservation • Trade • Nutrition • Credit • Rural Development • Research, Extension, and Related Matters • Forestry • Energy • Horticulture • Crop Insurance • Miscellaneous

3. Today’s outline: • What’s new, what’s gone, what continues • Decisions to be made • Update payment yields? • Reallocate base acres? • Price Loss Coverage (PLC) • Agricultural Risk Coverage (ARC) • Dairy Program • Conservation Programs • Crop Insurance

4. Overview for crops Title I. Commodities

5. What’s new: • Price Loss Coverage (PLC) • Agricultural Risk Coverage (ARC) • Supplemental Coverage Option (SCO) • $125,000 payment limit per person: • For Title I programs: PLC, ARC, marketing loan gains, LDPs. • $900,000 AGI limit to receive any payments: • Based on 3-year rolling average AGI. • No separate measure for an agriculture AGI.

6. What’s GonE: • Direct payments: • Except for a declining amount for cotton. • Counter-Cyclical Payments: • Replaced by Price Loss Coverage (PLC). • ACRE Payments: • Replaced by Agricultural Risk Coverage (ARC).

7. What continues: • Marketing Assistance Loans • Marketing Loan Gains • Loan Deficiency Payments (LDPs) Note: Same rules as in 2008 farm bill Same loan rates (except cotton)

9. Irrevocable Decisions in 2014: • Update payment yields • Reallocate current base acres • Commodity program election: • Price Loss Coverage (PLC) • Agricultural Revenue Coverage • ARC-county option • ARC-individual option FSA has not issued final rules and regulations yet. Sign-up deadlines are likely late summer, fall, winter, into 2015.

10. Who Decides? • Land owner(s): • Update payment yields • Reallocate base acres • Owner(s) and Producer(s): • PLC, ARC-county, or ARC-individual? • If a unanimous decision is not made: • FSA will deem PLC to have been elected. • NO payments for the 2014 crop year.

11. Update payment yields? • Update payments yields to 90% of average yields per planted acre from 2008 to 2012. • Keep current payment yields at those used in 2008 farm bill. • Decision can be made crop by crop. • Which yield is higher? • Can update yields & not reallocate base acres. • Payment yields are used only for PLC.

12. Update payment yields? • If owner decides to update: • A year is excluded from calculation if no acres were planted to a cover crop. • A “substitute yield” is used when FSA farm yield is less than 75% of its 2008-2012 average county yield. • Current yields could be yields from as far back as 1981-1985 or 1998-2001. • Since there is no penalty or harm for updating payment yields, makes sense to do so IF calculation works out to be a higher yield.

13. Example Calculation of Updated Payment Yield for Corn Question is: Will new yields be higher than current yield being used?

14. Reallocate base acres? • Retain current base acre allocation across program crops. • Reallocate base acres across program crops based on average proportion of planted & prevented planted in 2009 to 2012 crop years. • NOTE: Total base acres cannot be increased, only reallocated.

15. Example Calculation of Reallocated Base Acre Option Question is: Which crops will have highest projected payments?

16. Reallocate base acres? • Is an important decision because both PLC & ARC programs make payments on base acres. • Decision rests with the owner of the FSA farm. • Decision applies to all covered crops on the FSA farm and takes effect with the 2014 crop year. • Crop must have been planted for harvest, grazing, haying, silage or other similar purposes. • Prevented planted acres count. Must be due to conditions beyond producer’s control – drought, flood, other natural disasters.

17. Reallocate base acres? • All years are included whether or not a cover crop was planted. • Base acres can included double cropping if deemed by Secretary of Ag as an established practice in the area. • Base acre decision is independent of the payment yield update decision. Base acres can be reallocated without updating yields and vice versa. • If no decision is made, owner retains current base acres.

18. Reallocate base acres? • If you have base acres no longer planted to that crop (oats, wheat, etc.) may make sense to reallocate those acres to corn or soybeans. • Crop rotation, inclusion of zero acres planted to covered crop when calculating the reallocated acres and the changing mix of crops (more corn and soybeans) means base acres can differ notably from current base acres. • Question remains: Are the crops in the current base more likely to have higher future payments than those same crops in 2009-12?

19. Reallocate base acres? • Appears decision may rest on two issues: • To minimize financial risk and bring future base acre allocations more in line with what is actually being planted. • To maximize government payments which is based upon what the owner feels future yields and prices will be. Since both PLC & ARC payments are based upon base acres, reallocating more toward what is actually planted may help maximize government payments.

20. Title I Program Choice Producers and farm owners must choose: • For each covered commodity, elect either: • Price Loss Coverage (PLC). • Agricultural Risk Coverage – county based (ARC-County). Or • For all covered commodities on the farm, elect: • Agricultural Risk Coverage – individual farm based (ARC-Individual). Note: Only PLC crops are eligible for SCO. Choice of either ARC means no SCO.

21. Program choice, continued • A farm could elect PLC for some crops and ARC-County for other crops. • ARC-county for corn and PLC for soybean, for example. • If ARC-Individual is elected, ALL covered commodities are enrolled in ARC-individual. • No PLC or ARC-county for any crop. • Default: if no election is made for 2014, FSA assumes the PLC election for 2015-2018 and the farm forfeits any potential 2014 payments.

22. Price Loss Coverage (PLC)

23. Price loss coverage (PLC) • PLC payments are triggered: • when the Market Year Average (MYA) price is below the Reference Price (as set in the bill). • MYA is the 12-month marketing year: • Sept-Aug for corn, soybean, grain sorghum, sunflower seed, large and small chickpeas. • June-May for wheat, feed barley, oats. • July-June for canola, flaxseed, dry peas, lentils.

25. MYA prices, Usda & fapri Projections, versus farm bill reference prices 2013 est. WASDE ‘14-’18 proj. USDA & ‘14-’18 proj. FAPRI

26. PLC calculations: • Payment Rate = Reference price – {higher of MYA price or loan rate} • Payment = payment rate x payment yield x 85% of crop’s base acres • Example: MYA price for corn falls to $3.50 and a farm had a payment yield of 160 bu. and a corn base of 350 acres: Payment Rate = 3.70 – 3.50 = 0.20 per bu. Payment = 0.20 x 160 x 0.85 x 350 = $9,520 for corn

27. ARC-county Agricultural Risk Coverage - County

28. ARC-county: • Payments are made when the Actual Revenue for a crop falls below the Guarantee. • Guarantee is base on a rolling 5-year average. • Uses average county yields, not individual farm yields. • Payment made on 85% of crop’s base acres.

29. ARC-county calculations: • Benchmark Revenue = 5-year Olympic average county yields x 5-year Olympic average MYA prices. • Guarantee = 86% of Benchmark Revenue: • This will be a rolling benchmark and guarantee. • Actual Revenue = county average yield x MYA price. • Payment Rate = Guarantee – Actual Revenue: • Not to exceed 10% of Benchmark Revenue. • Payment = Payment Rate x 85% of crop’s base acres.

30. ARC-County: Corn example, p. 1 *2009 MYA price of $3.55 is replaced by Reference Price of $3.70 per rules in 2014 farm bill. **Prices and yields in red are used to calculate 5-year Olympic average.

31. ARC-County: Corn example, p. 2

32. ARC-County: Soybean example, p. 1 *Prices and yields in red are used to calculate 5-year Olympic average.

33. ARC-County: Soybean example, p. 2

34. ARC-Individual Agricultural Risk Coverage - Individual

35. ARC-Individual • Based on revenue sum over all covered commodities. • Calculations based on producer’s share of production on all farms in the state. • Planted acres in each crop year are used to determine weights for calculating Actual and Benchmark Revenue. • Base acres are used to calculate payments: • 65% of base acres.

36. ARC-Individual:Benchmark Revenue • Revenues are calculated for each covered commodity in each crop year = yield x MYA price: • Reference Price replaces lower MYA price. • 70% of T-yield replaces lower yields. • Olympic Average Revenues are calculated for each covered commodity for each of the 5 most recent crop years. • Benchmark Revenue is weighted sum of the Olympic Average Revenues for each commodity. • Weights are the current crop year’s planted acreage for each commodity.

37. ARC-Individual: Benchmark Example -With 100 Base acres planted 60 corn and 40 soybeans in 2014: Benchmark Revenue = (957 x 0.6) + (570 x 0.4) = $802 Guarantee = 86% of Benchmark = $802 x 0.86 = $690

38. ARC-Individual:Actual Revenue • Revenues are calculated for each commodity = individual farm yield x MYA price. • Actual Revenue for farm is weighted sum of each commodity’s actual revenue. • Planted Acres for each commodity in current crop year are used as weights.

39. ARC-Individual:Actual Example

40. ARC-Individual:Payment • Payment Rate = Guarantee – Actual Revenue: • When actual revenue is below the guarantee. • Not to exceed 10% of Benchmark Revenue. • Payment = Payment Rate x 65% of Base acres for all covered commodities on the farm.

41. ARC-Individual:Payment Example

42. Dairy Program: • Gone: • Dairy Product Price Support Program – repealed. • Dairy Export Incentive Program – repealed. • Past Milk Income Loss Contract (MILC) is replaced with Margin Protection Program (MPP). • Remaining: • Dairy Forward Pricing Program – applies to milk buyers subject to Federal Milk Marketing Order rules. • Dairy Indemnity Program – payment for milk removed from market if contaminated.

43. Dairy Program: • New: • MPP program replacing MILC program. MPP is a voluntary target-index safety net program that provides dairy producers with income-over-feed-cost (IOFC) margin protection at farmer selected margin levels & coverage percentages. • Dairy Product Donation Program (DPDP) – requires Sec. of Ag to procure and distribute (not store) certain dairy products when Actual Dairy Production Margin (ADPM) falls below lowest margin level specified by MPP.

44. MPP Dairy Program: • Program elements: • Actual Dairy Production Margin (ADPM) = national estimate of dairy farm income from milk sales less an estimate average cost of feed for a hypothetical but nationally representative dairy farm. • Actual Dairy Production History (ADPH) of participant. • Coverage Percentage – a percentage of ADPH producer selects determining how much of eligible milk they want covered. Quantity selected determines total premium and indemnity payment. • Coverage Level – is $/cwt amount defining the degree of margin protection desired.

45. MPP Dairy Program: • Margin Calculation: • Uses national prices and is not customizable • ADPM = U.S. All-Milk Price minus the sum of 1.0728 x NASS Corn Price ($/bu.) 0.00735 x AMS Soybean Meal (Central IL - $/ton) 0.0137 x NASS Alfalfa Hay ($/ton) • Payment: • Based upon ADPM, based on a 2 month average for consecutive months (Jan/Feb, Mar/Apr, etc.). Note: NASS is National Ag Statistical Service AMS is Agricultural Marketing Service

46. MPP Dairy Program: • Indemnity Payment: • An indemnity is paid when the average difference between the Actual Dairy Production margin (ADPM) falls below a producer user selected coverage level.

47. MPP Dairy Program: • Other details: • Sign up is on an annual basis – rules to be released by September 1. • Producers who sign up for MPP are ineligible to sign up for Livestock Gross Margin – Dairy Cattle Program. • Producers can skip a year without being penalized the following year. • Production history is based upon annual marketing’s from three preceding years (2011, 2012, 2013).

48. MPP Dairy Program: • Other details: • Each year production history can increase. • Can insure up to 90% of ADPH. • Each year can pick coverage levels between 25% - 90% in 5% increments. Premiums $4 to $8/cwt in $0.50 increments. • Does not impose production or gross income eligibility caps. • No supply management or any direct disincentives for growth in low-margin periods.

49. Title II. Conservation

50. Conservation provisions: • Net reduction in conservation spending over life of farm bill. • Conservation compliance required for federal crop insurance subsidy. • Merges 12 existing programs into new programs: • Agricultural Conservation Easement Program (ACEP). • Regional Conservation Partnership Program (RCPP). • Maximum allowable CRP acres reduced. • EQIP & CSP program reauthorized.