Before deciding on new farm programs to sign up for, sharpen some pencils and get ready to crunch numbers. While the farm bill provides expanded options for producers it also means there is much more to suss out.
That was the underlying message from economist Abner Womack at the Southern Cotton Ginners Association (SCGA) summer meeting on July 22.
In approaching his work, Womack, professor emeritus with the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri, “generally looks for momentum and what I’ve seen in the last two outlooks is a momentum change. What’s occurring with all these uncertainties on the supply side -- which you’re familiar with -- is that world stocks have built up faster than we imagined.”
Part of that is the demand for ethanol topping out. “The crop supply side is simply overrunning the demand side. That’s led to a level of prices we’ve not seen in quite a while.”
Womack cautioned that the baseline projections he provided were seasoned with a wide range of uncertainties. The projections were based on market conditions in January of 2014. “It’s very important that we tie down what’s going on with the farm bill. … There will be differences in our interpretation and the final rules and regulations.”
For representative feed grain farms the net return from 2010 to 2013 averaged $171 per acre. Expectations for those same farms from 2014 to 2017 show a significant drop with a net return of $26.
“That’s not quite so bad if you’ve got most of your debt paid off. But in averaging these farms, half own land with debt on it. … You can imagine, with such pressure in front of us, it will put pressure on rent and leases and land prices.”
Expected per acre numbers for representative cotton farms also showed a drop: an $86 net return from 2010 to 2013 moves to $16 from 2014 to 2017. “That’s certainly sobering and means there will be pressure. But it doesn’t mean that you’ll only get $16 an acre back with what’s in the farm bill and the momentum of price movements.”
With the drop in grain prices, livestock producers will benefit. Womack and colleagues expect cattle farms’ net return per cow to jump from $118 (2010 to 2013) to $200 (2014 through 2017).
As for the new farm bill, Womack listed the biggest changes:
- No more direct payments.
- No more countercyclical payments.
- No more ACRE payments.
- Producers must choose between price loss coverage (PLC) payments and agriculture risk coverage (ARC) payments (either county or individual).
The PLC program makes a payment if annual average farm price is less than the reference price. “It’s kind of like countercyclical payments.”
The 2014 farm bill reference prices -- “a gain for farmers compared to the 2008 farm bill target prices” -- are $5.50 for wheat, $3.70 for corn, $8.40 for soybeans, $3.95 for grain sorghum, $14 for long-grain rice, and $16.10 for Japonica rice. Cotton, which has a dedicated crop insurance program all its own (STAX) isn’t eligible for either PLC or ARC coverage.
For marketing purposes, the FAPRI projections from early 2014 showed average corn prices of about $4 through 2019/2020. “That’s valuable information. The projections also showed prices will remain volatile, as corn prices in any given year could exceed $5 per bushel or fall to $3.
“We’re seeing the same thing with soybeans. … There’s an average around $10 with a plus/minus of $3. Wheat is at about $5.50 with a plus/minus of about $1.50. Long-grain rice is at about $13 with about $2 up or down. Cotton is expected to average around 67 cents with a dime up or down.”
What about ARC? Womack says the program makes payments when per-acre revenues fall below a trigger. That trigger depends on moving average of market prices and yields.
“The benchmark is price times yield. There are two directions you can go: county or farm. If you go with the county, you’ll use the national price of a commodity (five-year Olympic average) but you’ll use the average yield of the county. If you feel that route is out of line with what your own farm is doing, you may want to consider the second option. That’s based on a five-year Olympic average based on your yield and the national price multiplied together and you’ll then drop out the high and low revenue to provide a target. That way if revenue goes below that target you’ll get a payment.”
The county option provides “payments on 85 percent of base acres while the farm yield option only pays on 65 percent. These options should be carefully considered to best match the program to an individual’s farm.”
ARC vs. PLC
So, how does ARC versus PLC in various crops shake out?
“When we ran corn numbers, we couldn’t believe it. The numbers (from 2014/15 through 2018/19) were a wash, given all the assumptions of our baseline.”
For wheat, sorghum, rice and peanuts PLC was a clear winner. Soybean producers, meanwhile, would do better with ARC.
As for cotton and STAX, “it’s all or nothing. It’s got good insurance coverage with an 80 percent premium subsidy. It won’t be available until 2015.
“A Supplemental cover option (SCO) will be available in 2015 to those not signed up for STAX or ARC. That provides an opportunity to buy more coverage. It has a 65 percent premium subsidy.”
This fall, producers will have to make many decisions to make, said Womack. “The first thing you’re going to do when you walk into the FSA office is figure out if you want to reallocate your base acres and update program yields. Then you’ll need to make a choice among the new farm programs. For each FSA farm, you can decide between PLC or the county version of ARC on a crop-by-crop basis, or you can choose to be in the individual version of ARC for all the crops on a farm.”
FAPRI is partnering with the Agriculture and Food Policy Center (AFPC) at Texas A&M University to develop a web-based tool that farmers can use to make these complicated choices.
“The good news is that farmers do not have to make a choice today, and we hope to help them make more informed choices when the time comes to decide how to participate in the new program options,” Womack said.