ARC and the Mid-South

ARC and the Mid-South

How would Mid-South farms really do under the farm bill recently passed out of the Senate Agriculture Committee? Agriculture economists at the University of Arkansas are considering how programs in the proposed legislation would impact the state’s crops.

How would Mid-South farms really do under the farm bill recently passed out of the Senate Agriculture Committee?

To answer that question, agriculture economists at the University of Arkansas are considering how programs in the proposed legislation would impact the state’s crops.

It turns out a focus of the latest study, rice, wouldn’t do well. This is not a major revelation as Southern lawmakers and farm advocates have long warned that the Senate farm bill would leave rice farmers in a precarious position.

For more, see here, here and here.

While leaving loan deficiency payments intact, the Senate farm bill  removes direct payments, the Average Crop Revenue Election (ACRE) program and counter-cyclical payments.

In their place, the bill would introduce two new programs for rice, corn, wheat, soybeans, grain sorghum and peanuts: Agriculture Risk Coverage (ARC) and the Supplemental Coverage Option. Cotton would be under the Stacked Income Protection Plan (STAX) program, which the economists are now studying in preparation for a future analytical report.

For the particulars on ARC, see here.

Shortly after the rice report’s release, Farm Press spoke with Eric Wailes – who co-authored the study with fellow University of Arkansas economists Vuko Karov, and Bradley Watkins – about ARC’s inability to address rice properly, how rice-dependent farms would be affected, and the possibility of Cuba as an offset. Among his comments:

On the study’s three “goals and objectives”…

  • What is the average annual probability of receiving an ARC payment on a by farm/crop/coverage type basis?

“For the first objective, we wanted to observe under the individual and county coverage option how often an ARC payment would be triggered over 500 simulations for each year of 2013 through 2017. Historical prices and yields are used to establish a statistical distribution from which the farm or county price and yields are drawn for each of the 500 simulations. The ARC payment is triggered based on uncertain actual crop revenue relative to a risk coverage guarantee."

Note: The ARC study -- including charts and graphs that Wailes references in his comments -- can be viewed here.

“To account for this uncertainty for every year of analysis, we do 500 simulations based on random draws of yields and prices -- to determine the probability that a farm would receive an ARC payment (see study's Table 1.1 on page 7 for all eligible crops and Figure 1 on page 11 for long-grain rice for the Stuttgart farm). For the Stuttgart farm, the probability of receiving an ARC payment on long-grain rice ranges from 27 percent to 45 percent over 2013-2017.”

  • What is the average annual ARC payment amount (in dollars per acre) received on a by farm/crop/coverage type basis?

 “The second objective after determining the probability of a payment is to estimate again for the individual or county coverage the annual average ARC payment on a per-acre basis?”

Note: See study's Table 2.1 on page 9 for all eligible crops and Figure 2 on page 11 for the Stuttgart farm for long-grain rice.

  • What farms and crops are most likely to benefit from ARC participation during the next farm bill by evaluating weighted (farm and crop) and total (farm) ARC payments received?

“The third objective was to estimate the average ARC payment per acre for each farm across the multiple crops produced on the farm. Aggregating across the eligible crops allows us to determine the probability that these farms would be payment limited. We also estimate the average ARC payment for each crop across the four representative farms in our analysis to obtain an idea of the extent of revenue loss available for the state by crop.”

On running the numbers…

“As the Senate farm bill eliminates counter-cyclical and direct payments, the ARC program is an attempt to design a program that, in addition to crop insurance, will provide a one-size-fits-all revenue loss program that is affordable under the $23 billion budget reduction target. They’ve chosen a path that will be used for all program crops except cotton.

“The ARC program as a replacement for budget baseline support for Arkansas crops represents significant losses.

“If you examine the McGehee farm (see Table 2.1 on study's page 9), it was getting direct payments on its rice acreage of $91 per acre. As a substitute, the expected payment under ARC if they choose the county option is $16.63 per acre. That average payment would only be expected 32 percent of the time, though.

“This shows particularly for rice that there is a significant decline in the level of support. The loss of the certain $91 per rice base acre even if it is decoupled will affect this farms ability to obtain operating loans and stay afloat financially.

“On the other hand, that same farm had no direct payment base in corn or wheat. To the extent they’ll now shift to corn, the (proposed) program could possibly be a plus for them. They had no history of corn production but now there’s some incentive to switch to corn.

“If the McGehee farm gets an ARC payment for corn -- again, about a one in three chance (see Table 1.1 on study's page 7), 31 percent -- it would be an expected annual average of $18.42. Before, they were getting no direct payments because no corn base acres had been established.

“Two things are going on for this farm with the Senate bill. One, there is less support for rice and the farm in general from the commodity title. Second, this farm will have a much greater incentive to produce corn.”

Rice, STAX, Cuba

More on rice-dependent farms and STAX…

“Obviously, any farm that has been producing rice -- and has a historical production base in the crop -- will lose significantly.

“Look at the Hoxie farm (see Table 2.1 on study's page 9) where they were getting direct payments of $10 on soybeans. Now, they’ll get an ARC payment (if they choose ‘individual’) of $7.44. That isn’t such a large loss -- except the Hoxie farm would only receive that ARC payment 27 percent of the time.

“As we continue to evaluate the effect of the Senate bill on Arkansas crop farms we’ll be looking at the STAX program for cotton. We have a Leachville farm that is fully planted in cotton and the McGehee farm with about 2,400 acres of cotton.”

On the analysis being used by Southern farm advocates to bolster their case for a stronger safety net…

“We’ve made all our analyses available to the Arkansas delegation. They’re aware and understand the implications of this significant change in the commodity policy landscape for Arkansas crops. Attention has shifted to the development of the House bill where there are indications of a much more regional approach than the one-size-fits-all Senate bill.

“The rice sector’s baseline over the next 10 years, to the extent they’re losing the flow of funds coming from direct payments, will see a loss of around $100 million per year.

“And looking at the individual farms --removing the $90-range direct payment and replacing it with a program that has a one-in-three chance to provide $15 or $17 -- depicts a huge change in the commodity policy landscape.”

It would seem like the rice industry might say “well, you’re taking away direct payments, give us something else. Open Cuba for trade.”

“Yes, there are many things they could say. … Opening up trade to Cuba could be an important offset. … Unfortunately, Cuba trade isn’t (driven by) the farm bill. That policy is in other legislation.

“My concern about Cuba, though, is that we also need to also keep the focus on improving U.S. rice sector productivity. The South American rice industry -- Uruguay, Brazil, Argentina, Paraguay -- are all competing strongly with us in the western hemisphere.

“That Cuban market should be an important one for U.S. rice. It’s a large market and our proximity makes us competitive. It would be easy in terms of timing of deliveries and the ability to get the rice to them.”

Feedback from farmers and advocacy groups…

“The farmers and groups understand the Senate farm bill is absolutely no good for Arkansas. It will be a challenge if the Senate bill dominates in conference.

“The cornerstone, however, for either the Senate or House bill will be crop insurance. Well, Arkansas farmers recognize this and are signed up for crop insurance. But the product available -- the combo products in particular, yield and revenue protection -- really don’t get at the important systemic risk the Arkansas farmers are facing. That is particularly true for rice and all the irrigated crops in this state. Pumping costs and all the other energy-priced and weather-related inputs are far more important for these irrigated crops than the Midwest crop systems.

“There are margin insurance products in development. But we may not see these insurance products earlier than 2014, if then. That means we may have rice farmers hanging on in 2013 and 2014 with inadequate crop insurance.

“And we’ve seen what has happened to rice price volatility lately. India has come into the market and knocked prices down by $100 per metric ton milled rice. There’s a lot of uncertainty. India’s in-and-out approach to rice trade has been destabilizing for the world rice market -- and the United States exports about half our rice.

“The need for developing solid risk management tools for the rice sector has never been more important. There is a need to address the convergence problem with the rice futures market, not only for hedging purposes but also because this futures market is used to generate an expected price for the revenue crop insurance product. The bottom line is that crop production in Arkansas is facing a challenging future.”

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