Commodity prices will be key ingredient in farm bill projections

Farmers are beginning to try out different scenarios involving their participation in the Agriculture Act of 2014 on one of the two Decision Aid tools USDA funded to help growers understand their farm bill options.

Ostensibly, USDA selected the Agriculture and Food Policy Center at Texas A&M University and the Food and Agricultural Policy Research Institute at the University of Missouri to design software to help growers in the South and Southwest with their decision-making and the University of Illinois to assist producers in the Midwest.

Of course, nothing is ever as simple as that, and it’s very possible that agricultural economists at Texas A&M and Missouri – who have been advising Congress on the impact of farm bill scenarios for decades – may have the better tool for more farmers, especially when it comes to more realistic scenarios.

One of the reasons for that is because FAPRI, which provides a 10-year “baseline” projection of commodity prices for USDA’s use in formulating ag policy, is also providing monthly price data for the Texas A&M-Missouri designed Decision Aid.

“The other side of the coin is this – and Pat’s going to get into it,” said Joe Outlaw, co-director of the Agricultural and Food Policy Center during a presentation for a group of farm policy analysts. “If you looked at the FAPRI prices for January about the time the farm bill was signed, and you looked at the FAPRI price projections he put out this last month, you would have made different decisions.”

Pat Westhoff, the director of FAPRI, discussed some of the ramifications of the changes in prices that have occurred for every major commodity since the farm bill was written and signed by the president after dozens of congressmen and farm policy “experts” claimed that price protection was no longer needed given the high commodity prices of recent years.

Instead, farmers are now faced with some difficult farm program decisions at a time when farmgate prices may actually be below the cost of production for all but the highest-yielding producers, according to Dr. Westhoff.

“The ARC (Agricultural Risk Coverage program), for example, has a cap where it can never be more than 10 percent of the benchmark,” he says. “So no matter how low prices get, your cap is your payment limit. So at the beginning that is very important.

“Likewise, the price that would trigger one payment may not be sufficient to trigger the other payment (ARC or PLC or Price Loss Coverage program),” he noted.

Westhoff described a situation in which corn prices never fell below the reference price of $3.70 per bushel over the next five years, there never would be a PLC payment in any of those years. If prices dropped below that level each year, payments would be made each year of the farm bill.

“If the prices turned out exactly the way we projected last March (at $3.70), would there be PLC payments in any of the years?” Westhoff asked. “If it happened to be $3.70 each year, no PLC payments would occur. If it happened to be below $3.70, there would be payments every year. I hope you can see this information matters.”

Westhoff said the team that built the Farm Bill Decision Aid are encouraging farmers to put in their own price projections. “I’m not saying we know what’s going to happen. We’re doing the best we can with the price projections, but they are projections. We’re encouraging everyone to put in their own price projections, and see what it does. That’s because it is going to matter.”

FAPRI has run more than 500 simulations of what could happen with prices over the next five years. In one of those, No. 5 of 500, the prices spike and go back into the $7 to $8 per bushel range.

“In that particular outcome, we put a drought similar to what happened in 2012 in the outlook for 2019,” he said. “In that case, we get prices similar to what happened in 2012.”

For more information on the implementation of the new farm bill, visit http://deltafarmpress.com/government/vilsack-touts-work-done-new-farm-bill-implementation

And http://www.usda.gov/wps/portal/usda/usdahome?contentidonly=true&contentid=progress-2014-farm-bill.html

TAGS: Management
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