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November 4, 2009
What Is The Health Of The Crop Insurance Industry?
With all of the crop production problems that have beset the Cornbelt this year, you may have a close relationship with your crop insurance agent. Not that you will be picking out curtains or anything like that, but this has certainly been a year for frequent communication and it has not come to an end. You may even be wondering about all of the claims that will have to be paid, and if crop insurance companies can weather the current storm. That’s a good question, too!
The crop insurance industry continues to diminish in size annually with companies buying each other. But are they making money and are the companies that you expect to send you an indemnity check in good financial health? Iowa State University economist Bruce Babcock conducted a health check up on the crop insurance industry after the USDA reported high profitability and the industry disagreed. USDA’s Risk Management Agency said the average annual rate of return on equity within the industry since 2000 has been 19%, which was 72% more than what might have been expected. In response, the insurance industry said the crop insurance industry is not as profitable as the property and casualty industry and there is more risk in crop insurance. This tit-for-tat is not new and causes Congressional inquiries into crop insurance that are frequently not clearly answered.
Economist Babcock says a simple and reasonable measure of profitability indicates, “that industry subsidies could be reduced by more than a billion dollars without adverse impacts on program effectiveness.” He says the big difference between crop insurance and unsubsidized insurance is that about 80% of the premium revenue is paid by taxpayers in return for the requirement to sell crop insurance to all farmers who want to buy it. And Babcock says that makes good reason to question the fact about a 72% rate of return above what might be otherwise expected.
While crop insurance products and premiums are the same from one company to another, because of federal equality requirements, there is some competition among the various crop insurance carriers. And Babcock says, “Those companies that are best at using the government-provided reinsurance make more money than others. In addition, companies compete with each other for market share by competing for crop insurance agents' books of business.” He says those companies that pay higher commissions to independent agents will tend to increase their market share. Thus, Babcock says, if all else is equal, examine the commission structure to find out which companies are doing well and which are trying to cut losses.
His examination of crop insurance agent commissions found that in the past 8 years, commissions have held between 15.5% and 17% as a percentage of total premiums paid. But in the same time, he says the dollar amount of commission paid per policy sold has increased fourfold. Adjusting commissions to general wage inflation, Babcock says, “the amount by which agents were able to increase their compensation because of increased profits of the crop insurance companies in 2008 was $1,015 per policy.” He multiplied that amount by the 1.148 million policies sold in 2008 to arrive at $1.165 billion, which he contends is overcompensation of crop insurance agents. And Babcock feels that’s an excessive support of the crop insurance industry.
If Babcock’s $1.165 billion is cut from industry revenue, there would be about $2 billion left from underwriting gains and expense reimbursement. He suggests that underwriting gains could be returned to the Risk Management Agency, or RMA could cut expense reimbursement to $426 per policy, and save $500 million per year in commissions. But he doubts that Congress would cut such a program that has pumped money into the pockets of crop insurance agents who live in rural areas. Nevertheless, he believes the same level of service can be provided to farmers at a much lower cost.
Summary:
Crop insurance companies and their agents will have a lot of work this fall, but they will be compensated for it. With an average commission exceeding $1,000 per policy, crop insurance agents could serve as an indicator of the health of the industry. While the industry says it is in challenging financial times, USDA disagrees, however there are difficulties in determining which side is correct. If agent commissions are the only inequitable factor, the financial health of the industry could be determined by those commssions.
Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink
October 8, 2009
Cap And Trade: How Likely Will You Get Compensated For Sequestering Carbon?
The climate change legislation is now in the hands of the US Senate. Earlier this year the House approved legislation that aims to reduce carbon emissions, and offered farmland owners the opportunity to dedicate their land to reduced tillage and in return receive small payments from industries that emit carbon dioxide and other greenhouse gases. The Senate did not make any substantial changes that would be more beneficial to farmers, thus the so-called “cap and trade” program will have to be evaluated by land owners and operators to determine if there will be any benefits for their property. Your farm may or may not benefit from “cap and trade,” depending on several issues.
Instead of allowing carbon-containing gasses to flow into the atmosphere, the climate change legislation would have carbon retained and/or returned to the soil. The crop production process is a major key to achieving that goal, but farm owners and operators have to determine if their change in production practices is worth the payment to retain carbon in the soil, called sequestration. USDA economists have issued a recent brochure that helps in the understanding of the pros and cons of the issue.
One of the initial issues is the requirement to sequester carbon for 5-10 years, and farmers with a year to year cash or crop share lease may express some reluctance. Owners may be quite willing to make a long term commitment, but operators who are short tenure will have to evaluate the merits. The economists say sequestration of carbon on a given farm can complicate lease negotiations and rental rates.
The economists also believe it is too early to tell how large any payments will be and how farmers will respond to those payments given the changes that will be required. They think farmland with a tenure rate above 80%, meaning ownership or long term renter, will make land use or production practice changes at a rate of 45% likelihood. However land with a tenure rate under 20% will only see 20 to 25% of it enter such a program.
To some extent the carbon sequestration program may be compared to the Conservation Reserve Program because 2/3 of the carbon sequestration potential comes from conversion of cropland into grassland or timberland. USDA’s statistics indicate that a large volume of high tenure farm and ranchland have large amounts of pasture, hay production, or trees, and many of those high tenure farms have CRP land on them. Conversely, low tenure land, which many see more rental operators will have more acreage in crop production and less in CRP, thus would be less likely to be interested in a carbon sequestration program. Over 70% of US cultivated cropland falls in the categories of lower tenure rental operators.
So what happens if you make a change in production practices? How much carbon will you save? Within the Cornbelt, a change from conventional tillage to reduced tillage will sequester 0.09 tons of carbon per acre per year, which would increase to 0.17 tons if the switch were made to no-till. By retiring cropland into a CRP program, 0.25 tons of carbon would be sequestered per acre per year, and if cropland were converted to pasture or hay, that would rise to 0.50 tons per acre per year.
While your 2,000 acre corn and soybean farm may not be an immediate candidate for a carbon sequestration program, there are some land owners who may already be counting the cash. USDA says half of the potential carbon sequestration potential is concentrated on just 7% of farms in the Northern Plains and Mountain regions which operate 38% of all farmland. They have a high tenure rate and already contain 52% of US hay and pastureland and 58% of the CRP enrollment.
The USDA economists contend farms that are likely participants in a carbon sequestration program will be larger operations, potentially with livestock and willing to convert marginal cropland to grazing lands. They add that price signals from a national cap and trade system would encourage changes in agricultural practices but would not encourage non-operating landowners to make radical changes in their leasing arrangements.
Summary:
If you are counting on reducing the farm mortgage with payments from a carbon sequestration or cap and trade program, your farm may not be a typical one in the Cornbelt. The most likely farms that would participate in the program to reduce carbon emissions are going to be large operations which with long term owner or rental arrangements, potentially with livestock on grazing lands, and willing to convert any marginal cropland into more pasture or hay production. While payments from such a program are unknown, and the legislation has not even been passed by Congress, the benefits to agriculture seem to be limited to compensation for eliminating any tillage and converting cropland into a long term setaside similar to the CRP.
Posted by Stu Ellis at 12:07 AM | Comments (1) | Permalink
August 25, 2009
Small Farms? Who Said They Were Going Out Of Business?
The 2008 Farm Bill created the ACRE program to target farm support at the combination of yield and price risk, giving farmers a chance to protect their revenue, without encouraging additional production, which had been an international complaint about US farm programs. Critics of farm programs want support pulled from large farms and targeted toward small farms. Others who weigh into the debate promote specific commodity supports, since they are staples of the US diet, such as corn, wheat, and soybeans. But the folks who have to do the work to figure out just who should be supported and those who should be ineligible do not have an easy job. That is quite evident in USDA’s report on “small farms.”
Everyone in agriculture has their own definition of a small farm, a large farm, a family farm, a corporate farm, and every definition is different, since it is compared to one’s own farm. But USDA agricultural economists who are forced to set parameters and specific financial boundaries have provided a glimpse into the foggy world of definitions when they reported to an international economics conference on whether small farms in the US were declining or persisting. (And they report that a fair share of them is doing quite well, financially, thank you!)
There have been quite a few dynamic forces in US agriculture in the past 25 years, and the so-called “small farm” has been one of those. As critics of US farm policy became louder for various reasons, they have continued their support for small farmers, which are usually seen as those with a few hardscrabble acres, a milk cow, some chickens, and a poor family trying to eke out a living with 50 year old two row machinery. Despite that Norman Rockwell version of US agriculture, USDA uses a definition of small farms based on sales from $10,000 top $250,000. The 2007 Ag Census found 676,160 of them in the US, but that was a 40% decline in the past 25 years. Some observers may say that is a function of the financial parameters, and commodity values increasing over time. But USDA also reports the number of farms with less than $1,000 in sales increased by 171% and make up one-third of all farms.
Between 1982 and 2007 the number of farms with sales exceeding $1,000,000 grew by 239%, which means that larger farms are producing more foods. For those large farms in that 25 year period, average corn acreage grew from 200 to 600, soybean acres grew from 243 to 490, and wheat acres grew from 404 to 910. In that same category, the average number of broilers grew from 300,000 to 681,000, the average number of hogs grew from 1,200 to 30,000, and fat cattle grew from 17,532 to 35,000 head.
But the nearly 700,000 small farms still contributed substantially to US production, with total sales of $42.6 billion in 2007, equal to that of IL, IA, and IN. Small farms generally focus on beef cattle, poultry, grains and oilseed production and together produce 70% of the production in each of the three classes in that category. Small farms account for over 55% of poultry production and 40% of hay production, along with 20% of cash grains, but handle only small percentages of cotton, high value crops, and dairy. When it comes to receiving farm program payments, the USDA economists report, “Large farms ($250,000-$999,999) account for nearly half of program crop production and they received over 40% of all payments. Small commercial farms received 27.4% of commodity-related payments.”
Small farm operators tend to be older, say the USDA economists, with 37% over the age of 65 years, compared to 15% of farmers older than 65 who operate farms in the largest classes. And when USDA looks at the operator, he is winding down. “When we add in occupational choice, we see that most operators in the smallest classes report that they are retired or that their principal occupation is off the farm. Many small farms are in transition; while some may be aiming to transition to a larger operation, others are run by older farmers who are cutting back their activity and transitioning to retirement.”
Are small farms barely scraping by, or doing well financially? Their financial performance in 2007 shows a growing operating profit margin that increases with gross cash farm income. Those with the least income generally have negative operating profit margins and return on equity, but that turns around once gross income reaches $100,000. However, those small farmers who are operating in the red, are not necessarily in poverty. USDA say substantial amounts of off farm income are reported in households where farm earnings would not be sustainable. USDA adds, “Many of these households with the smallest farm operations may farm as a consumption activity—farming is how they spend their money.”
The analysis indicates that favorable returns and off-farm income have helped small farms to survive and persist, despite being small, and being family operated businesses. They still dominate US agriculture, but the major bulk of production continues its shift to larger sizes of family farms.
Summary:
Small farms were one of the fastest growing segments of agriculture in the last five-year Ag Census, but over the past 25 years, small farms have declined in numbers, but not totally in productive capacity. Small farms focus on beef, poultry, and grain and oilseed production and contribute 70% of the production in those categories. However with changing dynamics in agriculture, the production will shift to larger farms, although still those that are family operated.
Posted by Stu Ellis at 12:20 AM | Comments (2) | Permalink
August 24, 2009
Perspectives On The Future Of Ethanol.
Since the farm gate blog was initiated in the late fall of 2005, ethanol has been one of the most powerful dynamics driving farm policy, economics, and marketing in the Cornbelt. On this 1,000th installment of the farm gate blog it is appropriate to take a closer look at how well ethanol is driving this bus and check the roadmap to see what hazards lie ahead.
About this time two years ago the grain market took off with the help of the oil market, which pushed rapidly higher and took both ethanol values and corn prices with it. That spurred bids for acres by other commodities, higher land prices, and more expensive farm inputs. After the oil and economic bubble burst 13 months ago, the ethanol link between the Cornbelt and the economy remains strong. Within this context, ag economist Paul Westcott visits the future of ethanol in the August Issue of Amber Waves electronic magazine published by USDA. He attributes 2007 federal policy to promote biofuels as fostering the demand for more corn, which was easily attained. But he says any future shift of that magnitude will depend on other technologies, both in ethanol production and the capacity of the auto industry to respond to changes in fuel formulation.
In 8 short years, ethanol grew from 1% of the fuel supply to 7% with the help of numerous policy decisions by Congress and state governments. While that was happening, the amount of corn used for ethanol production climbed from 6% to 24% and will level off in the next decade at 30-35%. While most row crop farmers say they are willing to meet that demand, the technical goal is to reach 36 billion gallons of ethanol available for the motor fuel supply by 2022. That includes both corn-based ethanol and biomass-based or cellulosic ethanol. Westcott says the mandate “would require significant expansion of biofuel production and use from current U.S. levels. However, major challenges in both supply and demand may limit future growth in the industry.”
First among the challenges is achieving the technology needed to manufacture cellulosic ethanol, including production, storage, transportation, and refining. Profitability is the key word for farmers, and that will be based on yields, market prices, and production costs. Next among the challenges is the need to change government and automaker policies that limit basic reformulated gasoline to a maximum 10% blend with ethanol, other than variable blends for flexible fueled vehicles. The urgency to change policy stems from the so-called “blend wall,” which will soon be reached. Ten percent ethanol, or E10, will likely reach the saturation point in the market soon, since the motoring public is burning about 140 billion gallons of gasoline per year, and the current US ethanol production will soon be 14 billion gallons, or 10%. Interestingly, economist Westcott says the movement toward improve fuel efficiency “will mean that the volumes of biofuels set forth in the (latest renewable fuels standard) will account for even greater shares of fuel use, necessitating a larger market penetration by biofuels.” However, the mandated production of 36 billion gallons of ethanol by 2022 will be more than enough to achieve a 10% blend of the anticipated 160 billion gallons of motor fuel used by that date.
While E-10 is the dominant ethanol blend, E-85 has the potential to consume much more ethanol, but the number of flex-fuel cars available to use it is quite limited, and E-85 is only about 1% of US fuel consumption. Among the challenges to E-85 is its sparse availability in most US gas stations, metropolitan gas stations do not have room for additional pumps and tanks, and dispensing equipment has been slow to be licensed. Because of those issues, Westcott says there is more opportunity for mid-level blends, such as E-15 or 15% ethanol, and that would generate a demand for as much as 24 million gallons of ethanol annually. The economist says it would have to overcome the challenge of consumer acceptance, and difficulties with small motors and off road engines. While these are negatives, there are activities underway to address the challenges, including research by the USDA and Department of Energy, and federal policies to promote biofuels.
Lurking on the horizon is the federal policy that allows states to be flexible in their requirements for motor fuel, and California’s Air Resources Board has taken a dim view of ethanol, by alleging it causes the loss of soil carbon in South America. In brief, ethanol critics say is pushes corn production up, soybean production down, and the result is more tillage for Brazilian soybean fields. The California standards are even being considered for implementation by other states including Illinois, which would diminish ethanol use—particularly that made from corn.
Summary:
Ethanol provided high levels of octane to the grain markets in 2007 and 2008, but the recession and the softer oil market depressed ethanol values and corn prices. Nevertheless, federal policy and research support for biofuels will keep ethanol as the prime alternative to hydrocarbon fuels as ethanol begins to shift its feedstock from corn to biomass products. In the meantime, the 10% ethanol blend is reaching a ceiling or “blend wall” causing proponents to push for the maximum to be raised to 15% ethanol in reformulated motor fuel. Some environmental challenges remain in the future of ethanol, however its current path retains its dynamic nature in the corn market.
Posted by Stu Ellis at 12:43 AM | Comments (1) | Permalink
August 19, 2009
What Does The Brazilian Rain Forest Have To Do With US Ethanol Policy?
There is no one whose name causes a Cornbelt ethanol advocate to spit and cuss more than that of David Pimentel of Cornell University. Even Bruce Babcock at Iowa State University, who has written some economic analyses of ethanol that make a corn grower grimace, acknowledges that Pimentel’s credibility is up for debate. The Cornell Ecologist contends that ethanol consumes more energy than it returns, which Babcock says is based on suspect data. But the Pimentel contentions continue to show up in public debates, most recently within the Environmental Protection Agency and the California Air Resources Board, which believes ethanol does not qualify as a low carbon fuel. The future of ethanol is on the line here, and it could have a major impact on corn market dynamics.
The latest challenges to ethanol involve conversion of forest and grasslands around the world to produce crops and feed livestock, which ethanol critics decry. In the Summer edition of the Iowa Ag Review, Bruce Babcock says the ethanol critics at EPA say the loss of carbon stocks on the converted land would more than offset any benefits of ethanol in the way of greenhouse gas emissions. This has generated considerable rural debate over whether US ethanol policy should even be driven by what might happen in another country, and how would such changes ever be accurately measured.
The EPA has employed help from Purdue, Iowa State, and Texas A&M Universities to analyze the measurement process, which looks at corn demand from US ethanol refineries. Such demand results in higher prices, more corn acres, fewer acres for beans and wheat, and conversion of Brazilian forests into cropland for soybean production. At least that is the theory in a nutshell that is being evaluated. Babcock says each step has to be analyzed, such as:
• Which crops will U.S. farmers decrease in response to higher corn prices?
• How much U.S. pasture and forest land will be converted to crops?
• How much will farmers increase yields in response to price?
• How much will prices, demand, and production change in each important producing or consuming country in response to a change in U.S. production and exports?
Babcock says the economists have a good idea about US farmer responses to such change, but not such a clear idea of how a Brazilian rancher would respond to changes in the US beef market. He says it is easy to say more Brazilian beef would be produced if US beef prices rise, but then Brazilian and international trade policies cloud the equation.
Babcock says if the theory is correct that more US ethanol production would cause more conversion of rain forest to cropland, then US soybean acreage should decline along with fewer exports of corn and beans. But that has not been the case. Since 2005, ethanol production has increased by 6 billion gallons, corn acres are up 6%, soybean acres are up 7%, corn exports are flat, but soybean exports are up over 25%.
Babcock engages in a lengthy evaluation of creating economic models to make predictions that the EPA and the California Air Resources Board could use, but says the models never work out to equal the real world. However, he says “expansion of U.S. biofuels will result in more land being devoted to crop production on an aggregate worldwide basis. However, given all the forces that affect agricultural production decisions, it is impossible to attribute any given agricultural development project to U.S. biofuels expansion, which is why CARB and EPA have to rely on models that attempt to isolate the effects of U.S. biofuels.” And he adds that the need for using economic models will increase as land use policy is created, particularly for offsetting carbon use.
Summary:
US biofuels policy, at both the federal and state levels, has created concerns among ethanol supporters that policy assumptions are being made based on erroneous data. However, where data cannot be collected, economic models are created, but can themselves differ from the eventual outcome. Recently, environmental regulations have been proposed that are rooted in the assumption that greater US ethanol production will result in the loss of carbon from Brazilian rain forests and grasslands. While those assumptions are difficult to measure, policymakers may have to rely on economic models in lieu of data.
Posted by Stu Ellis at 12:34 AM | Comments (0) | Permalink
August 17, 2009
How Should Congress Respond To The Cost-Price Squeeze In Agriculture?
Every farmer has felt the impact of the cost-price squeeze, and likewise has had a difficult time explaining it to his city cousins who ask challenging questions about tax-supported farm programs, the farm economy, and why farmers have so much trouble making money. They look at 2007 and 2008 commodity prices, assume every farmer is wealthy, and wonder why the dairy industry is in financial collapse. Congress, which is being asked for financial support for the livestock industry, has been given a new report from the Congressional Research Service which sets out a clear perspective of that cost-price squeeze.
Economist Dennis Shields of the Congressional Research Service (CRS) says the cost-price squeeze concept began in the early part of the last century, when farmers began purchasing commercial feeds, fertilizers, and other crop inputs, rather than using homegrown inputs. And he says livestock producers are currently facing low or negative returns based in part on feed prices, which have not fallen as fast as output prices. At the same time crop producers have had to deal with volatile costs of energy and fertilizer which affect their returns. He says crop inputs climbed after the commodity price boom of 2007 and 2008, and have not returned to prior levels, although grain prices have.
Shields has told Congress that after periods of higher commodity prices, production typically expands, followed by higher input prices. Once profitability is lost, production declines or farmers go out of business, if they cannot make up the income shortfall with part time employment. Other farmers try to reduce input costs by increasing the size of their operation and spreading out fixed costs, which creates many other issues.
One of the dynamics influencing the trend is rising productivity, which Shields says allows more output from less input. And that, says the CRS economist, puts economic pressure on smaller operators unable to take advantage of those inputs. He says the end result is declining farm prices resulting in the loss of some farmers. Shields suggests the need for a yardstick that will measure the cost-price squeeze, which could be the comparison of prices paid versus prices received, and for now, put the issue of technological developments on the back burner. Shields proceeds to compare milk prices to feed prices on a per pound basis and that the ratio is 2, which means the value of two pounds of milk is equivalent to two pounds of feed. Within the dairy industry two would be negative profitability and the likelihood of herd liquidation. Shields also says the cost-price squeeze could also be measured with an index of current prices received, divided by an index of prices paid, and if the ratio declines it indicates financial difficulty.
The CRS economist notes that using data collected by the National Agricultural Statistics Service would be a good source, but they will end up being industry averages, and some producers may be better off and others worse off than what the statistics suggest.
Using current data, Shields points to the dairy industry and says 2007 saw record high milk prices stemming from export demand, which increased the milk-feed price ratio. But once feed costs climbed higher in 2008, the ratio fell from 3.0 to 2.0 and weakened further. His charts all indicate that livestock to corn ratios are at the lowest levels of the decade, many of them below the point at which herds are liquidated. The crops ratio has been climbing, and after a peak, current prices are equivalent to 2007 prices.
When farm prices do not keep pace with production costs, Shields tells Congress that farmers have a variety of tools:
1) Marketing tools allow price risk to be managed, and management decisions can reduce input costs.
2) Low prices for certain commodities will result in fewer acres or head of that commodity will be produced. However, production cycles are so long that such responses take time to implement.
3) Farmers may be able to take advantage of some federal programs, but those are limited to a few program crops. Other programs include crop insurance and dairy price supports. However, the economist says farm programs distort production incentives that originate from consumers, and keep inefficient farms in business. Shields says, “The counterpoint to limited or no government intervention is that markets are, at times, too volatile and can unnecessarily destroy farms that otherwise benefit society.” And he notes that smaller farms which have higher production costs are better suited to carry out conservation and other environmental programs that benefit the long term productivity of the land.
4) Off farm income is one of the keys to survival seen by Shields, since for the past 20 years, off farm income as a share of total household income has been at least 80%, and some years over 90%.
Shields says the farm policy created in the Great Depression has helped farms weather financial difficulties, but technology has resulted in a transition from many high cost producers to a few low cost producers. Public opinion supports continuation of farm subsidies, but with payment targeted to smaller producers instead of larger ones. However, that is an incentive for some farmers to either grow to the point of not needing any farm program payments, or contracting in size and depending on farm program payments and off farm income. He says the US is not going to have a food shortage because land, labor, and capital will all continue to be available. But he rhetorically asks if federal farm policy should address the trend of large farms producing an increasing share of agricultural output; and should Congress let family farmers financially fail or help them toward a more economically efficient transition? Shields says farm policy used to be rural policy, but the growth of rural industries has reduced the importance of farming, so he says Congress must decide how does farm policy complement its goals for rural communities and rural life in important agricultural areas? He says some policy critics have suggested that current farm policy is reinforcing or accelerating trends in farm structure and making worse the cost-price squeeze.
Summary:
Much of agriculture, and particularly the livestock industry, is in the midst of a financial squeeze caused by rising costs and declining commodity prices. Farmers have several ways of relieving the pressure, including receiving farm program payments. However, Congress is challenged on how to structure those supports, both on amount and to whom they are paid. But in the end, are those payments keeping inefficient farms in business and exacerbating the cost-price squeeze.
Posted by Stu Ellis at 12:47 AM | Comments (1) | Permalink
August 6, 2009
Crop Insurance and CRP. Distant Cousins That Have An Intriguing Relationship.
Although land retirement programs have long been an instrument of US farm policy, most involved supply management to ensure sufficient grain existed, but not too much to drown the market. The 1985 Farm Bill brought the advent of the Conservation Reserve Program (CRP) which allowed up to 35 million acres to be converted to grass or trees, in return for USDA rental payments. The CRP contracts soon included an Environmental Benefits Index (EBI) to prioritize land that had the most vulnerability to wind or water erosion, for owners wanting to park land in the CRP. But while the environmental benefits were all ranked for importance, one factor was left out of the formula, and that is how much savings to the taxpayer there would be if that land no longer required subsidized crop insurance. Now, there’s a twist!
Just think for a moment. The land that is most environmentally vulnerable and which should qualify for inclusion in the CRP, is probably the land that is most likely to have crop failures and require heavy subsidization of crop insurance. That is the contention of Iowa State University ag economist David Hennessy. He wants you to consider how land retirement programs integrate with crop insurance, since the CRP will pay out $5 billion per year through 2017 and crop insurance subsidies have cost $11 billion from 2000 to 2007. He says the EBI includes many factors which push up the amount of CRP rent a producer could collect. But he says omitted from the formula is a reduction in crop insurance subsidies “that would occur were the land to be removed from production.”
Hennessy points to the concentration of CRP acres in the southern Cornbelt, eastern Dakotas, Montana, the Great Plains, and parts of the Palouse, and he says CRP enrollment costs are low while environmental benefits may be high. Those erosion prone regions are more vulnerable to nutrient losses and water pollution, and Hennessy says the factors that make them more likely for CRP enrollment also make them more likely for owners to regularly collect indemnity payments from crop insurance due to crop failures. The Iowa State economist says farmers in most of those geographical areas receive twice as much in crop insurance indemnity payments as they pay into the system in premiums, while in states such as Iowa, Illinois, and Indiana the reverse is true.
There are two concerns Hennessy has about omitting crop insurance subsidies from the financial formula for tallying CRP rental rates. He says federal tax dollars spent or saved have equal weight in the budget deficit calculation, and if the CRP rent formula included savings on crop insurance subsidies there would be better choices made for enrolling highly erodible land into the CRP. Hennessy seems to suggest—using economic terminology—that a change in USDA practice would be unpopular and could create some political issues. He says USDA has long histories of crop performance down to the farm and field level, used for rate setting for crop insurance, and is even planning to include carbon sequestration in the EBI, although that data is more foggy.
Hennessy raises the issue of restricting application of nitrogen and pesticides on such land, which may make yields more variable, and therefore more prone to receiving crop insurance subsidies. He observes, “On balance, we conclude that restrictions on the use of inputs that are protective in function would likely increase the cost of an insurance subsidy policy. It may be that, rather than restrict input use when producing on land that is marginal as cropland, is environmentally sensitive, and has high yield variability given output level, it would be better to remove the land from production entirely.” He adds that the reason CRP contract formulas do not intersect with crop insurance is political in nature, and being administered in different parts of USDA, they would have priorities that do not correlate well with each other over time.
Summary:
Highly erodible land scores high on environmental scales when it comes to enrollment in the Conservation Reserve, but such land is also highly variable in its productivity and subsequently becomes more costly for crop insurance subsidization. However, the formulas used by USDA to determine CRP rental agreements do not consider such savings, possibly for political reasons.
Posted by Stu Ellis at 12:48 AM | Comments (1) | Permalink
August 4, 2009
US Farmers Are Feeding The World, But Why Does Hunger Remain?
Years of supply-management agriculture gave way to the Freedom to Farm and FAIR policies prior to the past decade. US farm policy was in high gear to produce for the market, with the hope that international markets would be open and full of hungry people. The hungry people are there all right, but markets apparently are having some problems, well beyond the current global economic challenges. And those systemic problems have impeded the goals of many US farmers to feed that hungry world.
The thriving economies of India and China, both considered to be in the “developing” world, were major engines that drove grain and commodity prices higher in 2007 and 2008. But while their GDP’s were growing at 8% and 10%, there were problems with many other developing nations where food just wasn’t getting to the population. So what are the answers? USDA economists have completed rather extensive studies that seem to have a connection, although it is not a direct quid pro quo or tit for tat. And that connection seems to draw the issue of hungry folks to a problem with currency exchange.
Food security is today’s formal name for hunger, and USDA’s assessment is that more than 800 million people in 70 developing nations suffer from increased food insecurity. That is up 11% from 2007. Although prices of food have declined, there are growing deficits, higher inflation and other issues that prevent them from getting a minimum of 2,100 calories per day. The recent 33% decline in food prices was seen as positive for this group, many of which is dependent on imported food and imported food ingredients. For example, those nations where per capita income averaged less than $750 per year, the dependence on commercial grain imports nearly tripled between 1990 and 2007.
The current economic crisis is deepening the problems for those nations. One thought is their reduction export earnings and the cut in import capacity will result in a decline in food consumption. A second thought is that food security decline further when there is a cut in capital inflows along with the reduced growth in export earnings. Even in the long term, when the developed world climbs out of the current economic morass, the hungry population in the developing nations will remain flat through the next decade. USDA economists say these nations have few safety nets in place for the population, and international programs are inadequate.
As the USDA was projecting continued hunger problems for developing nations, other USDA economists were looking at the problems of price food in the markets of the developing countries because of exchange rate volatility. Most Cornbelt farmers watching the 2008 rise in grain prices knew one of the contributing factors was the lower value of the dollar that made it easier for foreign nations to buy US commodities. But when those commodities are distributed to interior markets in other nations, merchandisers have difficulty putting a price tag on a bushel of corn, beans, or wheat because of the exchange rates. USDA economists describe the problem by saying, “If the exchange rate change were fully transmitted, importers would pay 50 percent less for commodities purchased from the exporter, all other things equal. However, the exchange rate change might not be fully transmitted because the exporters might exercise market power to increase their markups in response to the exchange rate depreciation.”
The USDA study of the exchange rates says about one-fourth of US agricultural production was sold abroad in the past 15 years, one of the goals of 1990’s farm policy changes. But that volume could have been larger, USDA says, were it not for the systemic economic problem with translating exchange rates from international shipments to retail quantities. USDA says many developing countries liberalized their agricultural policies to accept more imported food products following the 1994 Uruguay Round of trade talks, but the process broke down in trying to get food to the actual market place.
Government policies are one of the reasons for the system to break down, such as the variable levies imposed by the European Union which became trade quotas. Another barricade are the state trading agencies, such as the Canadian and Australian Wheat Boards and others around the world. Tariffs are more transparent and add a percentage of the price which flows down to the consumer, without impeding the process.
So what is the impact of the problem posed by the exchange rate issue? Looking at the recent spike in commodity prices, the economists say, “The price surge likely affected developing countries asymmetrically, in that their food consumers were hit hard, with little offsetting advantage of higher prices to farmers.”
Summary:
World agricultural trade policies have improved, but not to the extent that hunger issues are declining. Food security remains a problem in 70 countries, and one possible reason is a systemic problem with adjusting food prices from exporters to retailers when those prices have been subject to exchange rate complexities.
Posted by Stu Ellis at 12:50 AM | Comments (0) | Permalink
August 3, 2009
How Will You Be Impacted If A Carbon Tax Is Imposed To Reduce Greenhouse Gas Emissions?
Climate change legislation was approved in the U.S. House of Representatives last month and the Senate will consider similar legislation when Members return after Labor Day. The contentious debate saw most agricultural organizations in opposition because of higher costs that farmers would have to pay, versus the uncertainty of any real financial benefits from carbon sequestration payments. But until the latter is calculated, what is the real cost?
The sources of agricultural costs and benefits are known, so Iowa State economist Bruce Babcock says those can be calculated, even before the final language for the legislation is approved. In his article in the summer issue of the Iowa Ag Review, Babcock says the effects of higher costs for fuel, electricity, fertilizer, and pesticides will determine the change in net farm income. If farmers are limited on how much greenhouse gases can be emitted from their operation that will have a cost as well. Such a cap on other industries may provide the opportunity for farmers to sell emission credits. An alternative is a carbon tax, which would be paid by companies that cannot reduce their consumption, but would encourage others to reduce their consumption of fuels that emit greenhouse gases.
Agriculture contributes 6.7% of the total greenhouse gases emitted by the US, but the legislation so far does not penalize agriculture. However, higher energy prices would be felt in the form of higher production costs. Babcock looks at an Iowa corn and soybean farm, which produces the following statistics:
• Four gallons of diesel fuel per acre used to cultivate, plant, and harvest crops.
• 60 lbs of N, 50 lbs of P, and 65 lbs of K per acre across two crops.
• Propane is used to dry corn.
One gallon of diesel fuel emits over 10 kilograms of carbon dioxide, and if a $20 per ton tax is applied on carbon dioxide emissions as proposed, that would result in an additional 80¢ per gallon of diesel fuel.
Since natural gas is the primary feedstock for fertilizer, its carbon dioxide emissions must be calculated per pound of fertilizer. Babcock says it totals about 0.14 tons of carbon dioxide per acre across corn and soybeans, and at the $20 per ton tax rate, that would amount to $2.85 per acre in additional fertilizer costs.
To dry corn from 19% moisture to 15%, it requires 0.088 gallons of propane, and with a 180 bushel yield, 15.84 gallons of propane would be required per acre of corn. The propane emits 5.525 kilograms of carbon dioxide per gallon, and at the $20 per ton tax rate, the cost of drying corn would increase by $1.75 per acre. Or $0.87 per acre for both corn and beans, assuming beans do not require drying.
The total would be $4.52 per acre for a corn and soybean farm, and if the combined cost of corn and soybean production averages $300 per acre, the increased costs of a carbon tax would be 3.3%. Babcock’s colleague John Lawrence at Iowa State says livestock farms would be impacted as well, since the cost of fuel, repairs, and utilities add 5% to hog confinement costs. A 20% increase in that cost sector would add 1% to the cost of producing hogs.
On the benefit side of the ledger, Babcock says the adoption of no-till farming allows 0.4 tons of soil carbon to be retained in one acre of soil, and based on the $20 carbon tax, that would increase income potential by $8 per acre. Tree planting sequesters two to nine tons of carbon dioxide per acre per year, which would yield $40 to $180 per acre per year. However Babcock says Cornbelt land would be closer to $80 per acre, and that requires a halt to crop production in favor of tree planting. The benefits to livestock producers would come if there is an investment in manure digesters, which would capture greenhouse gases with an income rate of $100 per cow per year.
Babcock says the negative impact of a cap and trade policy on agriculture will be relatively small, but if production costs around the world rise, then so will commodity prices, which would compensate farmers for higher costs.
Summary:
Under a carbon tax program to reduce carbon dioxide emissions, agriculture’s consumption of fuel and fertilizers will result in higher production costs for corn and soybean production, estimated at $4.52 per acre or a 3.3% increase in average production costs. Livestock costs would be higher by 1% on hog confinement operations. Beef and dairy operations which install digesters, could recapture $100 per cow per year savings because of the various proposals for reducing greenhouse gases.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
July 28, 2009
Climate Change: Profit Or Problem?
The popular agricultural press has taken the USDA to task over its position that the Climate Change legislation (HR 2454) will have little impact on agriculture. USDA’s analysis of the House-passed legislation, which is now in the US Senate for consideration, originated in the Office of the Chief Economist. The study says, “In summary, USDA’s analysis shows that the agricultural sector will have modest costs in the short-term and net benefits – perhaps significant net benefits – over the long-term.” But how did it come to that conclusion?
The USDA analysis is based on energy cost estimates of the Environmental Protection Agency, applied to agricultural supply, demand, prices, and net farm income over the near term (2012-2018), medium term (2027-2033) and long term 2042-2048.) USDA says its estimates are predicated on several assumptions:
• Farmers will receive payments for offsetting the carbon released into the atmosphere by industry.
• Some cropland and pasture will be planted to trees and that will reduce grain supplies causing higher values for grain. While that will help grain farmers, livestock producers will be hurt financially.
• There will be increased demand for biomass to produce renewable electricity, but that addition to farm income has not been calculated.
USDA acknowledges greater production costs because of higher energy costs, and says 50% of the cost of production of wheat and feed grains can be traced to energy costs. Over the past 4 crop years, 55% of corn production costs, 31% of soybean production costs, and 58% of wheat production costs are attributable to energy. USDA quotes EPA as expecting petroleum, electricity and natural gas costs will rise significantly above baseline levels, but while energy prices would be felt by producers, the cost of fertilizer would be unaffected until 2025. EPA has placed the fertilizer industry into a category that would be expected to experience high costs, but since foreign competitors would avoid those costs, they would not be charged against US fertilizer producers. However, that immunity would be phased out in 2025 and fertilizer costs would then catch up to where they would normally float.
The Chief USDA Economist also says a 2006 survey found more than a half million farmers took some action to reduce fuel or fertilizer expense, such as servicing engines, cutting back on trips across the field, or reducing fertilizer use, as well as negotiating price discounts. And USDA says efficiencies have increased in agriculture’s use of energy to the point that it is nearly half of what it was in the early 1950’s. Going forward, rice and sorghum producers are expected to see a more than $3 per acre increase in energy costs in the near term, while soybean producers will only see a $0.45 increase per acre. USDA says energy costs are forecast to be 6.4% more, pushing up total production costs only by 0.3% in the near term. That translates into a small decline in planted acreage, and a subsequent rise in market prices for grain commodities. Those include 0.1% for corn, and wheat, but no change for soybeans or livestock. Net farm income is expected to fade during the 2012-2018 period by $600 million per year. If the immunity were not given to fertilizer, net farm income would fall an estimated $1.3 billion per year.
In the longer term, over the next 40 years, USDA again used EPA-estimated energy costs, which would see higher costs for fertilizer because its immunity from higher natural gas costs would be phased out. Additionally, allowable emissions in the manufacture of fertilizer and chemicals would be reduced and that would have an increased cost for fertilizer. As a result, USDA says corn production costs would increase about 10%, but soybean production costs would go up less than 5%. With an estimated 22% rise in energy costs in the long term, higher commodity prices are not sufficient to offset the hike and farm income will decline over 7% from baseline levels. However, USDA says if farmers adopt production of biomass crops, annual net farm income would actually increase, but less than 3% by 2045.
The USDA analysis of the Climate Change legislation says farmers and ranchers would receive compensation for offsetting the release of carbon by others, not only through reduced tillage, but forest maintenance and conversion of pasture and some cropland to forest. Initially, USDA says those $2 billion in annual payments would rise to $28 billion per year, and in the long run, there would be more income than cost for agriculture resulting from the legislated climate change that will come in the form of higher taxes on fuel and energy.
Summary:
Climate Change legislation pending in Congress would place a tax on energy, and cause higher production costs for agriculture, not only from fuel, but also from higher costs from fertilizers. USDA believes the change will cause some farmers to reduce production to the point that higher commodity prices will result, as well as other farmers changing their production and cropping practices to earn money from industries that emit carbon beyond their limits.
Posted by Stu Ellis at 12:54 AM | Comments (0) | Permalink
July 13, 2009
Climate Change And Carbon Credits: Sorting Out The Confusion.
The US House of Representatives narrowly approved legislation addressing climate change and sent it to the Senate, where supporters hope the fall will bring restrictions or costs for releasing carbon dioxide and other greenhouse gases into the atmosphere. The public is divided on the issue of global warming, responsibility for greenhouse gases, and what should be done and by whom. Agriculture currently is one of the major stakeholders in the debate, and can come out either in good shape or bad.
The definition of good shape or bad shape is offered by Luther Tweeten as either mitigating or adapting. Tweeten is the emeritus Chairman of the Ohio State University Department of Agricultural Economics and in a recent perspective does not tell government what do to, but says whatever the choice of government may be, it will have an impact on agriculture. Tweeten cites the Intergovernmental Committee on Climate Change which reports average temperatures are rising, with food production gradually shifting away from tropical and subtropical regions and more into Canada and Siberia over the next century. Because of high populations in the developing countries in Africa and Latin America, Tweeten says such a shift will create hardships among the world’s food insecure people.
Tweeten readily says the science of global warming is unsettled, and scientists cannot agree among themselves. But he says global warming is an unintended consequence of producing energy with the use of fossil fuels that release carbon dioxide and methane into the atmosphere and that traps heat from the sun. While society may suffer the consequences, the market must send the proper signals for efficient resource allocation and private costs must be paid to match the cost to society. He says governments are in control, but the constituents of policy makers are less than enthusiastic about paying more taxes and energy costs to correct any damage. And he adds that greenhouse gases do not stop at the borders of an individual country.
To mitigate greenhouse gases, Tweeten says one solution is to impose a $26 per ton tax at a coal mine or oil well that is designed to offset the $26 cost per ton of carbon dioxide that society has to pay. While no one wants the cost of energy to rise, Tweeten says a cap and trade policy is becoming a popular alternative which would allow heavy energy users to pay for a permit to emit more than their share of greenhouse gases. Following the issuance of permits by governments, a market would develop for the trading of them. But he says the purpose would be to raise the cost of carbon-based fuels to the point that alternative source of energy would be preferred.
Tweeten says agriculture would have a difficult time slowing the momentum, because food production accounts for only 13% of manmade sources of greenhouse gases, and biofuels contribute only minor positive results in the limitation of greenhouse gases. He says a gallon of ethanol requires nearly a gallon of fossil fuel equivalent in the form of motor fuel, fertilizer, pesticides, transportation, and processing. However, he says agriculture would have a modest role by supplying only 300 million tons of carbon credits, which means one ton of carbon stored in the soil for perpetuity. He calculates a farmer could break even by spending up to $1.30 per acre annually to retain the carbon, but would lose money if he has to sacrifice more than one-half bushel of corn to hold or sequester the carbon. He says that means no-till production can be the most profitable enterprise, but then again, it requires more carbon-based chemicals to control weeds.
Farmers would have the option of selling their carbon capture enterprise to industry, but the result would be minimal compared to the overall cost. Tweeten says authorities project a $50 billion cost to control the climate in the year 2035, but carbon credits sold by farmers for $26 per ton would net agriculture only $390 million. While that is only the US, Tweeten says the world’s nations acting individually would be too small to have any positive impact, and many times they have other priorities, such as poverty, disease, conflict, or food insecurity. He suggests the adoption of wide ranging policies that would include development of crop genetics to resist drought and heat stress, better infrastructure for moving crops from production to consumption areas, and high yield crops that will minimize crop area to allow expansion of forests that do a better job of holding on to carbon dioxide.
Summary:
Although there is considerable controversy about global warming, there is public policy momentum to seek changes that would mitigate any rise in temperature due to the burning of fossil fuels that create carbon dioxide and methane. Agriculture cannot do much to reduce emissions of those gases, and even biofuels require fossil fuels for production, refining, and transportation. Agriculture may be able to lend its capacity to retain carbon in the soil by selling carbon credits from no-till agriculture to industries that emit more than their share of carbon dioxide. Such a program may seem significant, but may also be overshadowed other initiatives, such as improved crop genetics for drought resistance and better movement of food from areas of high production to areas of high consumption.
Posted by Stu Ellis at 1:31 AM | Comments (0) | Permalink
June 1, 2009
If Federal Ethanol Policy Is Threatened, How Serious Would It Be?
If you are playing the game Jeopardy! and the answer is “ethanol,” you might be tempted to respond, “What bio-fuel carries the most controversy?” Regardless of the turn that ethanol supporters make, there is always some roadblock to surmount. As Congress is faced with energy policy, food prices, and many other issues that ethanol touches, what are the economic impacts if any change is made from the status quo? Some are significant.
Several Members of Congress recently asked the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri for help in evaluating nearly a dozen alternatives that have been proposed as a result of oil, ethanol, and corn prices in 2007 and 2008. Along with the high corn prices, there was a considerable pain for the livestock producer, and some ethanol critics began asking why the subsidies and protective tariffs continued while prices were high. The FAPRI report examined a wide range of alternatives suggested by the Members of Congress, as well as from livestock groups. Among the proposals were:
1) Allowing the 45¢ blenders tax credit to expire next year.
2) Vary the credit like a countercyclical payment when corn prices go up and down.
3) Allow the 54¢ tariff on imported ethanol to expire next year.
4) Vary the tariff like a countercyclical payment when corn prices go up and down.
5) Allow the 10% ethanol blend to rise to 15%.
6) Provide a countercyclical payment to ethanol plants when corn prices rise and fall.
7) Slow down the Renewable Fuels Standard’s requirement for ethanol production.
8) Divert distillers’ grains to the energy industry as a feedstock at power plants.
9) Modify the Renewable Fuels Standard to reduce ethanol requirements when corn prices are high.
10) Eliminate the Renewable Fuels Standard for corn ethanol and keep it for cellulosic ethanol.
11) Totally eliminate the Renewable Fuels Standard, ethanol tariffs, and blenders’ credits.
The FAPRI economists developed 500 different scenarios, based on levels of corn production, market prices, oil prices, acreage, and others to determine how farmers would respond, the impact on other commodities, the impact on livestock feed, farm income, and CCC outlays for farm program benefits, as well as the cost to consumers.
Each of the scenarios had their own results, but assembling a trend, the FAPRI economists drew some basic conclusions:
1) If Congress allows either the blenders’ credit or ethanol tariff to expire next year, there will be less ethanol produced and corn prices will decline marginally over the period of 2011 to 2018.
2) Any downward change in the Renewable Fuels Standard curtails ethanol production and reduces corn prices. An elimination of the federal policy would depress corn prices nearly 5%.
3) The removal of one ethanol support policy has marginal impact, but the elimination of all three policies would curtail ethanol production by 5.5 billion gallons and would cause corn prices to fall by more than 13%.
4) When corn prices are high, any moderation or modification of the biofuels policies will reduce ethanol production and slightly reduces corn prices.
5) If the ethanol blend is raised from 10% to 15%, there is only a modest increase in ethanol use and a 1% increase in corn prices.
6) Whatever changes are made to ethanol policies, other market fundamentals such as weather and oil prices will raise or lower their importance.
Summary:
Congressional policies affecting ethanol can be changed at anytime, and any change would probably be reduction in a policy that supports ethanol production and price and is beneficial to the price of corn. Such changes may be the result of higher ethanol prices or a negative impact on livestock feed availability and price. Policy changes that cause a reduction in ethanol production or corn prices may be a temptation to Congressmen should ethanol prices rise to the point that either consumers complain or anti-ethanol forces raise questions about ethanol supports in times of high prices.
Posted by Stu Ellis at 12:24 AM | Comments (0) | Permalink
May 28, 2009
USDA Wrong? Never! (Pause) Oh, Really!
As the administrator of hundreds of different farm programs, the US Department of Agriculture is everyone’s partner, client, business associate, boss, and a myriad of other relationships that might come to mind. As everyone knows who has stepped foot into a Farm Service Agency office, or ASCS offices before that, there are strict rules that need to be followed to participate in those farm programs. And if you don’t follow the rules, you can no longer play the game. And you may even get to sit in the penalty box for those woeful infractions. But what if USDA doesn’t follow its own rules?
USDA is not going to be in a position to penalize itself, but the court certainly can, and that is exactly what happened in an eight year long case that involved wetlands. And any farm operator or land owner with a wetland, and who also participates in farm programs, knows that wetlands and sacred cows both have unprecedented protection. But should that protection extend to something that is not a wetland?
When the 1985 Farm Bill implemented the Conservation Reserve Program, it also prohibited the conversion of wetland into cropland, under terms of the Swampbuster provision of the legislation. And anyone who does, loses farm program benefits, but also can be penalized in several other areas, says Iowa State University ag law specialist Roger McEowen in a review of a case that was a nightmare for a land owner for many years. Swampbuster could not penalize anyone for something done prior to enactment of the law in December 1985, and penalties could only be levied after that date if the property met the definition of a wetland, which required hydric soils, hydrophytic plants, and periodic inundation.
USDA said those requirements were met on land owned by the B & D Land and Livestock Co., and an administrative law judge held in favor of USDA when it claimed B & D removed some woody vegetation that was protected in a wetland. B & D claimed the land had been farmed as early as 1972 and was being farmed when it bought the land in 1999. But the administrative law judge determined that as long as hydrophytic plants were present, it must be a wetland, and the owner should be heavily fined.
The B & D Land and Livestock Co. sought help from the federal court in the Northern District of Iowa in 2008 when the administrative case had finally concluded. The federal judge told USDA that its own Swampbuster rules required the presence of three elements of a wetland, not just one, and its administrative law judge disregarded expert testimony about the issues involved. The USDA decision was reversed and the court found in favor of B & D Land and Livestock Company. Instead of the USDA’s financial penalty against B & D, the federal court began to calculate what financial penalties USDA should have to pay to B & D.
B & D asked for reimbursement of about $75,000 for its attorney fees, and hiring expert witnesses over the eight years the USDA was processing the alleged violation. The federal court agreed with most of that because, the judge said, “At each stage of the proceedings, the government sought to uphold its prior “wetlands” determination, without regard to any evidence or law to the contrary, suggesting an entrenched bureaucracy’s refusal to admit error, not an interest in proper application of the law.”
In his summary of the case, Iowa State’s McEowen says, “So, in essence, USDA harassed the plaintiff with bogus wetland violation claims for many years which placed the plaintiff within the potential peril of bankruptcy and continued to maintain its bogus claims in an attempt to avoid paying the plaintiff’s attorney fees.” He says that is not new, and quotes another case, in which the court said, “…there is no worse statute than one misunderstood by those who interpret it.”
McEowen suggests that USDA should send its staff and attorneys to some wetland education classes, and if courts keep making USDA reimburse land owners for their attorney fees, then USDA may learn what the law is.
Summary:
While farm programs require land owners and operators to meet certain standards, USDA sometimes may not observe its own requirements and definitions, putting farm program participants at financial risk and in jeopardy of court proceedings. Such instances can end in favor of farmland owners and operators, but after expensive costs of litigation, which may or may not be reimbursed, depending upon a judicial decision.
Posted by Stu Ellis at 12:57 AM | Comments (1) | Permalink
May 19, 2009
The Latest Challenge To Biofuels Would Seem To Be Easily Overcome, But It May Not Be!
Every farmer has fought for years to develop new markets and create an additional demand for his crops. Ethanol’s long history finally shifted into road gear in 2006 with the help of federal mandates. Soydiesel does not have quite the history, but has consumed sufficient quantities if soybean oil to help push the market higher. However, both are facing one of the biggest challenges of their life, and the share of biofuels in the farm economy has raised some serious questions.
Suddenly, the ethanol and soydiesel industries have found themselves having to answer charges they are villains in the global warming debate. The US EPA raised the issue with a proposed rule adverse to biofuels. Most folks would stop in their tracks at such an allegation because they thought biofuels were supposed to replace petroleum fuels that were contributing to global warming. How can ethanol and soydiesel be worse than petroleum in that debate?
The issue involves, what is called, “indirect land use.” Those concerned about the issue allege that production of ethanol and soy diesel are forcing more land to be converted to crops both here and abroad and clearing land for row crop production is a contributor to global warming. That is their argument in a nutshell. Coming to the defense of biofuels during a Congressional hearing was Chief USDA economist Joe Glauber. Glauber says biofuel production may increase land under cultivation, but estimates of the magnitude vary. Part of the immediate negative impact on ethanol will be seen by the policies adopted in California which take indirect land use into account as contributing to greenhouse gas emissions, a move that would potentially exclude Cornbelt ethanol from the California market.
Glauber says corn based ethanol will stabilize at the 15 billion gallon level in the near future, then added requirements will come from biomass sources. He says last year 3.7 billion bushels of corn went into ethanol refineries, and by the 2015/16 marketing year, that volume will top out at 4.8 billion bushels. At that time corn planting will require 86 to 90- million acres and the average yield is expected to be 169 bushels per acre. His point is that increased yields, as well as a slight increase in acreage will achieve ethanol’s requirement for corn.
Also, Glauber says cropland has varied widely in the US over the past 30 years, ranging from 297 million in 1981 to less than 245 million in early 1990. Planted acreage for the eight major row crops was 253 million last year, and is estimated to be 246 million this year. So, Glauber is saying acreage for row crop production in the US has been 50 million acres higher than it is now.
Globally, the estimate of biofuel production is more difficult to estimate says the USDA Chief Economist. He says one recently study estimated more than 26 million acres would be used for ethanol production world wide, which was 1.8 million acres per billion gallons of ethanol. On the other side was a study that said a 1% increase in ethanol used would result in a 0.009 percent increase in world crop area. Even the California policy makers did not agree with the initial estimate, saying each one billion gallons of ethanol would require only 726,000 acres.
Glauber says one of the uncertainties in everyone’s calculations is the projected corn yield, particularly on land that is brought into cultivation just to meet the ethanol demand. Lower yields would require more land, and good yields would require less land. Glauber says the latter can be seen in Brazil where new lands opened for soybean production were double the national average. Alternately, switching from one crop to a biofuel crop can be easily done if both are typically cultivated on that farm, but more difficult if forestland is being reclaimed for row crops.
Another uncertainty is the growth of yields over time, since many studies do not take into consideration USDA’s estimate that corn yields increase by 2 bushels per year per acre, and if that is applied to the rest of the world, then corn yields would be 10% higher in 2015 than the California study estimates. And Glauber says higher crop prices will likely result in increased crop yields.
One product that may be misunderstood by critics is DDGS, which can replace as much as 1.271 pounds of corn for animal feed per 1 pound of DDGS. The California policy is based on a one to one ratio for DDGS replacement of corn.
Glauber says there is no question that increased demand for biofuels will have an impact on crop acreage, but the big question is magnitude, and higher crop yields that are expected mean there will be less acreage needed than many critics are projecting.
Summary:
While federal policies current favor biofuel production and use, proposals by the US EPA would curtail some of the impact by saying US biofuel production is causing more land to be cultivated in the US and around the world, and that would contribute to more global warming. Critics may not be looking at the fact that US corn production for ethanol is near the maximum, and that yields here and abroad will climb to the point that increased acreage will not be needed.
Posted by Stu Ellis at 12:31 AM | Comments (1) | Permalink
April 28, 2009
Does The Public Get Its Money's Worth From Crop Insurance Subsidies?
Risk management is an integral part of every family, every farm, and every company or organization. Some risk is managed well and some is not. In agricultural production, the expense of managing weather and production risk traditionally has been borne by USDA to ensure farmers will financially survive to plant another crop and guarantee affordable food for the populace. But that process is complex, costly, and increasingly controversial. How would you answer the question of whether USDA should subsidize agricultural risk management tools?
The question of governmental support for farmers’ risk management will receive either strong support or opposition, and a lesser number of folks who ride the fence. One of those with strong opinions is Iowa State University ag economist Bruce Babcock, whose thoughts are published in the Spring edition of the Iowa Ag Review. Babcock describes the programs as complex in their administration, and adds that crop insurance agents are paid commissions fully funded by taxpayers, most of the RMA (crop insurance) program risk is borne by taxpayers, and all of the FSA program risk is paid for by taxpayers.
Babcock contends price support programs and crop insurance programs are expanding rapidly without being questioned, “Fundamental questions that never seem to be addressed by those who support taxpayer subsidies for risk management are whether the public receives any benefits from these subsidies, and if it does, whether the benefits outweigh the costs.”
The Iowa State economist says risk is a real production cost and will vary by region and crop; and should be treated as any other production input. Subsequently, Babcock says farmers should try to reduce the cost of managing risk, “If farmers fully understand the risks they face and private markets exist to allow them to pay for desired levels of risk reductions, then the efficiency with which agriculture operates cannot be increased through subsidized risk management. The reason we have so many subsidized risk management programs is either that the private sector is incapable of providing the kind of tools that farmers desire or that Congress uses the subsidies to meet some other objective.”
Babcock says the futures market is available to farmers to offset their price risk, and even weather contracts traded on the CME could be used as yield insurance. But he says farmers will not use those tools, “Because taxpayers fund a crop insurance program that offers insurance agents a large commission to get farmers to sign up for an insurance policy that pays out, on average, twice what a farmer is asked to pay as a premium. Private insurance companies are willing to insure a farmer's yield because a large portion of the risk of this insurance is borne by taxpayers. Why should a farmer care about weather contracts when taxpayers provide more reliable coverage against low farm yields at a small fraction of the true cost of insurance?” And he rhetorically asks why farmers would not sign up for the ACRE program and crop insurance to get “double compensation if harvest prices fall dramatically.”
Babcock believes farmers would participate in risk management programs if they were on their own to do so, and he wonders why US producers require risk management subsidies when those programs do not exist in other countries. He contends there are many areas of the US where crop production is a high risk exercise, and if risk management subsidies were eliminated, it would not hurt crop production in low risk areas because the risk cost is small. Babcock says, “a large proportion of the subsidies do not even flow to farmers but rather go to the crop insurance industry. Instead of looking at taxpayer benefits of expanded production in high-risk areas, it is more instructive to look at the political benefits of this expanded production, and at the lobbies that guard against changes in risk management policy.”
Babcock says Congress continues to support the status quo, which is not surprising if it maintains the industry of agriculture. But he says it is not easy to understand the support of the crop insurance industry, since it duplicates FSA programs. He suggests more public awareness will result in change or the need to save money to finance the rest of the federal budget.
Summary:
The cost of agricultural risk management is high, but for the most part has been borne by various government programs funded by taxpayers. Such programs have had Congressional support although they support crop insurance companies and agents, as well as the agricultural production industry. Alternatives exist for farmers to offset their risk through futures exchanges, however, may not have the incentive to do so if the government continues to provide subsidized risk management programs.
Posted by Stu Ellis at 12:27 AM | Comments (3) | Permalink
March 24, 2009
Farm Program Payments, Payment Limits, And Crop Insurance Subsidies? Will They Drop?
In an effort to reduce federal spending the Obama administration has proposed cuts in Direct Payments, lower payment limitations, and a reduction of the level of federal subsidy in crop insurance premiums. The proposals are part of the annual appropriation process, and need Congressional approval before the start of the 2010 Fiscal Year on October 1. The administration says it will save $16 billion over 10 years, and is not an attempt to re-open the Farm Bill. Will such a proposal impact you?
Agricultural organizations have expressed opposition to the plan, which may go to the Congressional budget committees, instead of the agriculture committees. If the budget committees endorse the plan, then the House and Senate Agriculture Committees will have to go along with it, or find savings somewhere else in the USDA budget says the Congressional Research Service (CRS). CRS has issued a briefing paper to Congress on the details of the proposal.
The President’s budget address last month specifically mentioned termination of direct payments, to what he called, “large agribusinesses that don’t need them.” His statements mirrored those of his predecessor who also called for reduced farm program payments and reduction of payment limits. The lightening rod issue of the handful of proposals seems to be the elimination of direct payments to farms with more than $500,000 in sales. CRS analyst Jim Monke says there are some Members of Congress who have spoken out against the proposal in part or in whole. Opponents will indicate that someone with $500,000 in sales may not be guaranteed any profitability in times of high production expenses.
CRS says the FY 2010 budget indicates that most of the $16 billion removed from farm safety net programs be used to offset a nearly $10 billion increase in child nutrition. CRS says the concept faces an uphill fight, since change would have to be sanctioned at some point by the Congressional ag committees, and if they feel it is an attempt to “re-open” the Farm Bill, they are not obligated to do so. But any continued effort to reduce farm spending would be modified before it becomes reality.
The four proposals of the administration to reduce farm spending call for elimination of the cotton storage program, and three others that have consequences in the Cornbelt:
1) The prohibition of direct payments to farmers with over $500,000 in sales would revise the payment limit rules and impact 8,159 farms in Iowa, 6,484 in Illinois, 5,299 in Minnesota, 5,069 in Nebraska, 3,559 in Indiana, 3,409 in North Dakota, 3,356 in Kansas, and 2,905 in Wisconsin. More than 76,000 farms would be affected according to 2007 statistics.
2) The move to tighten payment limits would put a $250,000 cap on total subsidies, which would impact marketing loan benefits, and tighten the amount of direct and counter-cyclical payments that could be received. The current law has a $210,000 limit for direct and counter-cyclical payments, but no limits on marketing loan proceeds.
3) The administration does not indicate how much reduction it proposes in crop insurance premium subsidies, but savings could also come from the compensation to crop insurance companies as well as commissions to crop insurance agents.
The CRS analysis indicates the $500,000 in sales eligibility limit would be on top of the present eligibility limits for FSA program participation. The CRS analyst indicates that farms with gross sales of $500,000 or more may have very little profit or even a loss. However, the recent highs in the grain market pushed more farms over the threshold. In the prior 9 years, only 3-4% of farms would gross more than $500,000 per year, but in the past two years the number has increased to 5.5%. It is expected to fall this year with lower prices, and if a net income threshold is used, it will fall even further because of the cost of production.
CRS says there were 76,500 farms in 2007 receiving government payments and having sales over $500,000. While 116,000 farms had more than $500,000 in gross sales, many of them were large fruit, vegetable, or livestock farms that did not receive subsidy payments. Because farms in the heart of the Cornbelt (IA, IL, MN, NE) are in both categories, CRS estimates that 17%-21% of corn and soybean farms would be impacted by the proposal.
Summary:
The administration proposal to reduce spending on agricultural program supports is focused at farms with more than $500,000 in gross sales, and proposed a total payment limit of $250,000, in addition to lower subsidies for crop insurance premiums. The plan is expected to be met with opposition in Congress and from farm organizations, but Congressional committees may be forced to either adopt parts of the plan or find other savings in USDA appropriations. The impact of the proposal will hit the heart of the Cornbelt and maybe as many as one in five corn and soybean farms.
Posted by Stu Ellis at 12:18 AM | Comments (0) | Permalink
March 17, 2009
ACRE May Be A Farm Program, But It Is Also An Ag Policy Experiment.
A commenter about Monday’s posting on the SURE disaster aid program expressed exasperation about the complexity of SURE as well as the ACRE program that Congress designed to replace conventional direct and counter-cyclical payment programs. Probably many farmers have felt the same way after staring at the formulas and trying to determine whether it would be advantageous to sign up or not. Recently an agricultural policy analyst for the Congressional Research Service also looked at the ACRE program in an effort to explain to Members of Congress what they had done in creating it.
So far in the short life of the ACRE program, and even before sign-up has begun, there have been wide spread opinions on whether it will or will not benefit farmers. Many thoughts have come from farm organization and from agricultural economists who study Cornbelt farm programs. While most have advocated ACRE, a few have urged a wait and see attitude. But what about someone who is looking at ACRE from a totally different perspective, and not having any suggestion about whether farmers should sign-up or whether it will be a beneficial program or not?
Dennis Shields, an agricultural policy analyst for the Congressional Research Service, in his March 4th assessment offered several thoughts about ACRE that have not been heard frequently, and has not yet been posted on CRS websites. The main purpose of Shields is not to criticize the ACRE program or promote it, but to educate the typical Member of Congress about its purpose and impact on the federal budget.
Shields reviews the purpose of ACRE, which he says was designed to provide benefits to producers when farm revenues drop, not just yield or prices, but their combination. He also works through an explanation of state revenue trigger calculation, the farm revenue trigger calculation, and how the two are merged with other calculations. That is where the interests of farmers and the interests of the Members of Congress diverge. While farmers try to determine if ACRE would be of an economic benefit to their farm, the CRS analyst turns his focus on political and fiscal issues.
1) Shields says the World Trade Organization, which determines global trade rules, would not look kindly on ACRE and may penalize the US because it may spend more on farmers than allowed.
2) He notes that ACRE calculations are moving averages, determining benefits to farmers based on the prior year crops and prices, but with a 10% limitation on how much change is allowed.
3) Payment limits from ACRE are outlined in the report, which puts a $65,000 maximum per person, but raises total payment limits to $105,000 when the direct payments are added, and further raises it to $210,000 to allow for couples operating a farm.
4) Shields tells Congress that the key to the ACRE decision is a farmer’s expectation of prices over the next few years, “If prices are expected to remain high enough so that ACRE payments are not triggered, farmers may stay with traditional programs because they would not give up any direct payments.”
5) He says farmers whose plantings and base acres vary substantially may see an appeal to ACRE because he may not get as much money from counter-cyclical prices that are determined by his base acres. He also tells Congress that ACRE will have more appeal to dryland wheat farmers with high yield variability than to Midwestern corn farmers with sufficient rainfall and steady yields.
6) The CRS analyst also says budgetary outlays for ACRE on only estimated at $4.9 billion from Fiscal Year 2010 to Fiscal Year 2014, and that payments will not be made on the 2009 crop until 2011 after the marketing year ends.
7) He says the outlay estimate is based on declining prices of commodities, but that price levels will remain high enough not to trigger any load deficiency payments and marketing loan benefits.
8) Shields says since an ACRE payment must be triggered by both state and farm revenue deficiencies, farmers would probably chose revenue-based crop insurance to protect against the scenario of one being triggered, but not the other.
9) The ag policy analyst says the test of success will come when it is time for farmers to sign up for ACRE, and when 2009 harvest prices are determined which will give a hint about the effectiveness of the program and whether it will be called into question. He suggests that the time of the payments, which would be in early 2011 for the 2009 crop, would create issues.
10) Finally, he suggests that since farmers have to trade in some of the benefits from Direct and counter-cyclical payments and the loan rate, and that process may set a precedent for future years of trading benefits from one program in exchange for another, which may include: farm programs, crop insurance, and disaster programs or with environmental programs that include carbon sequestration and emissions of greenhouse gases.
Summary:
While the ACRE program is a new generation of risk management programs offered by USDA to reduce revenue risk, the outcome of the experiment is far from being determined, and it may prove to be insufficient. However, ACRE may also prove to be a precedent that allows farmers and USDA to trade for various economic and environmental benefits.
(The ACRE Report has yet to be posted on the CRS website.)
Posted by Stu Ellis at 12:31 AM | Comments (0) | Permalink
March 9, 2009
What Should US Obligations Be Toward Global Agriculture?
US food and agriculture priorities should be focused on small farmers, particularly the small farmers who make up 600 million starving people in Sub-Saharan Africa and Southern Asia. That is the opinion of nearly 11 hundred US adults, and nearly 200 Members of Congress, the executive branch, corporations, and both governmental and non-governmental organizations involved with international development projects. And why should the US help fund more than $8 billion over 10 years to do that, you ask?
The Chicago Council on Global Affairs, which has an agricultural leadership group composed of some potent thinkers, pushed Congress toward improvements in its international trade philosophy during Farm Bill debate. Now the group has issued a lengthy report on the challenges that the global food crisis presents to the developed nations of the world. The authors include a former Secretary of Agriculture, former under Secretary of State, several members with Congressional resumes, the head of the UN’s World Food Program, several noted academics, and several heads of global non-governmental organizations. It was chaired by agricultural economist Dr. Robert Thompson of the University of Illinois.
The group’s survey found concern for the hundreds of millions who live on less than $1 per day and depend on subsistence farming for their needs, all in the wake of declining resources for agricultural research and the need for another “Green Revolution.” Such an initiative is defined by the group as stimulating “agricultural productivity through agricultural education and extension, local agricultural research, and rural infrastructure so the rural poor and hungry can feed themselves and help support growing populations under increasingly challenging climate conditions.” And they say if America takes the initiative, then other nations will follow. Beyond empathy and compassion for the suffering, the authors of the study say the US “diplomatic, economic, cultural, and security interests will increasingly be compromised if our government does not begin immediately to change its policy posture toward the rural agricultural crisis.” The roadmap includes five policy recommendations and 21 specific actions, some of which have no cost, and other which have costs associated with them.
The major recommendations include:
1. Increase support for agricultural education and extension at all levels in Sub-Saharan Africa and South Asia.
2. Increase support for agricultural research in Sub-Saharan Africa and South Asia.
3. Increase support for rural and agricultural infrastructure, especially in Sub-Saharan Africa.
4. Improve the national and international institutions that deliver agricultural development assistance.
5. Improve U.S. policies currently seen as harmful to agricultural development abroad.
How is all of this going to be done? The proposal calls for foreign students to come to the US for education that can be taken back to their homes, where extension-style networks can spread the word about improvements in crop cultivation and livestock husbandry. US universities would share their research knowledge with universities in other parts of the world. And an agricultural “Peace Corps” would be established to assist local volunteers with their training. US ag scientists would have larger financial grants to conduct research that would be applicable on the ground in South Asia and Sub-Saharan Africa. The US cost would be $8.6 billion of the global $21.8 billion cost.
Dr. Thompson’s group anticipates a good reception from US political leadership, since the general concepts were part of the platforms of both presidential candidates in the 2008 election. And the report adds, “Among the public, 77 percent agree that “addressing global poverty by helping improve the productivity of poor farmers in developing countries” is an important policy priority and a very important way for the United States to improve its current standing in the world.”
Summary:
The US government is urged to provide leadership to a $22 billion global program that will increase agricultural research, train volunteers, and educate subsistence farmers in South Asia and Sub-Saharan Africa. The US would pay about 40% of the cost in an effort to protect US diplomatic, cultural, economic, and security interests in the world. Additionally, the World Bank and other nations would contribute to the program designed to solve daily hunger problems for nearly one billion people.
Posted by Stu Ellis at 12:37 AM | Comments (3) | Permalink
February 25, 2009
Increased Biofuel Production Will Come With Extra Baggage
Grain originating in the Cornbelt destined for livestock feedlots may be trucked down the road or railed to the Southwest. Grain destined for the export market is loaded on barges on the Illinois and Mississippi Rivers, towed to the Gulf and loaded on Panamax ships for overseas destinations. But grain produced for the biofuels industry has a different future that spills into the region around the farm and the nearby ethanol refinery.
The federal policy initiatives that sparked biofuel production has not only set targets in future years for production of ethanol and biodiesel, but have caused some dominoes to fall in the meantime, say USDA economists Scott Malcolm and Marcel Aillery writing in the current issue of Amber Waves electronic magazine. The 36 billion gallon goal by 2022 and the 15 billion gallon goal for ethanol by 2015 results from the Congressional attempt to make energy resources more secure. By 2016 that means ethanol will consume 35% of US corn production, but also that year the mandate requires 4.25 billion gallons of ethanol made from cellulose-based feed stocks. Subsequently, the growing demand for corn and other biomass will change the agricultural landscape as cropping patterns adjust and production practices change. The USDA economists say that may lead to conversion of land, more intense cultivation practices, and increasing the potential for environmental degradation.
The increased amount of corn shipped to ethanol plants has increased the net cost of feed for livestock producers, but softened the hardship with added supplies of DDGS at lower prices. Other biomass crops, such as forestry waste, municipal solid waste, and algae, would not compete for farmland like corn. As crop prices rise, cultivation expands, and it will do so the most in the Northern Plains and the Cornbelt, which USDA calculates will supply two-thirds of the 90+ million acres of corn anticipated by 2016.
The expansion of corn production anticipated by the USDA will raise nitrogen use by 2% and pesticides by nearly 3% over prior estimates, with additional nitrogen running off into waterways and down the rivers. USDA is not predicting changes in water quality, but is estimating increased nitrogen runoff along with the higher biofuel target. Additionally, 2% more erosion is anticipated with sheet erosion from more corn acreage.
The USDA economists also expect the added corn acres will involve added emissions of greenhouse gases, from a combination of increased tillage, more fertilizer usage, and more reduction of stored carbon in the soil. More corn acres will also increase the demand for water, including for irrigated areas. They also expect idled land converted to corn production will also strain wildlife resources and reduce wildlife habitats.
The economic study predicts 170 bushel average corn yields by 2016, resulting from planting on good soils, higher yielding seed, use of irrigation, and planting less ground that is of average production. Some of the poorer land will also be planted to switchgrass, relieving better land for food grains and providing another income source, as would harvesting of corn stover. Such actions also have an environmental impact with soil erosion, loss of soil nutrients, reduced soil carbon, and reduced soil moisture.
The economists say conservation programs such as EQIP can mitigate some of the environmental impact of producing biomass for ethanol production. Nutrient and soil management programs could offset potential soil loss and leaching of nitrates, and the use of no-till systems will further reduce soil loss. They say CRP could be part of a larger program for biofuel production, as could riparian buffers that could produce forage to replace higher priced livestock feeds. And the economists say USDA must manage conservation compliance rules and the allowance of CRP grazing as part of the change.
Summary:
The demand for biofuels will increase the demand for corn as well as biomass feedstocks for cellulosic ethanol. But along with that change will come application of more nitrogen and pesticides, the potential for more soil loss through erosion, and some changes in water quality as a result. Most of the change will occur in the Cornbelt and Great Plains where the production increases will occur. The additional harvesting of biomass such as corn stover adds new issues for consideration, such as soil loss, loss of soil nutrients, reduced moisture, and reduced soil carbon.
Posted by Stu Ellis at 12:13 AM | Comments (0) | Permalink
February 19, 2009
Can The Ethanol Industry Be Sustained At Current Corn And Oil Prices?
The US ethanol industry is in a financial pinch. Some plants and some multi-plant companies have had some fits, and starts, and burps in the past year. Some are history and others are living on their past financial laurels. Economic factors have changed since the go-go days of 2007 and 2008 when oil prices were rocketing upward, carrying ethanol and corn on its back. With oil prices playing on both sides of the $40 mark, can ethanol remain financially viable?
The future of ethanol is ruled by many masters. Federal mandates require 10.8 billion gallons of production this year, enroute to 15 billion gallons by 2015. EPA rules call for fuels that cannot be blended without ethanol. And the motoring public and friendly farmers would not know what to do if the gas pump did not have an ethanol decal on it.
But ethanol economics are being squeezed in a vice with one jaw that is the oil market and the other jaw that is the corn market. And Nebraska economist Richard Perrin says something has to give, as he writes in the current issue of Cornhusker Economics. He’s not only concerned about the economics, but the parade of academic studies that assail ethanol, blaming it for everyone’s ills. He questions the sustainability of the ethanol industry without mandates and subsidies, pointing to the current cost structure to refine ethanol at a profitable level.
Perrin says a recent survey of 7 ethanol plants in the Cornbelt found a surprising degree of efficiency, as he evaluated operating costs. The costs of making ethanol, which include electricity, natural gas, a denaturant (to remove water) enzymes, labor, maintenance, and miscellaneous costs totaled 45.4¢ per gallon, corn at $1.06 per gallon, and subtracting DDGS sales at 22.9¢ revenue per gallon, combined to total $1.288 in operating costs per gallon of ethanol. Adding the capital cost of 35¢ per gallon requires the product to sell at $1.638 per gallon.
The key is the cost of corn, and Perrin says today’s cost of corn is higher than the example, adding 20¢ to the total cost. He says profitability at that level is even more at risk if the plants have to operate with mandates and subsidies, which can be politically removed.
The current oil price of $40 per barrel puts wholesale gasoline at $1.30 per gallon. Since ethanol has a lesser energy value, pricing it at $0.85 per gallon. Adding the blenders’ credit of 45¢ per gallon makes ethanol $1.30 per gallon, and gives corn a value of $2.50 per bushel. Perrin says corn ethanol cannot compete with $40 oil unless the corn price is below $2.50 per bushel with the blenders’ credit, or $0.85 per bushel without the blenders’ credit. With corn at $3.55 per bushel, Perrin says oil prices have to rise to $55 per barrel for ethanol to be competitive, but as high as $80 per barrel if ethanol did not have the blenders’ credit.
As the federal mandate pushes ethanol production to 15 billion gallons in 2015, Perrin says price premiums for ethanol will rise until the quantity is achieved. While corn will be profitable, Perrin says the mandates and the blenders’ credit could be removed by public outcry. And if that happens, the ethanol industry will only be profitable and continue as a dynamic in the corn market if the price of oil rises to $80 per barrel. At that point the ethanol industry will be able to pay $3.50 to $4.00 for corn.
Summary:
While the demand for corn is dependent upon the ethanol industry, ethanol cannot remain profitable at current corn prices when crude oil is $40 per barrel. Due to ethanol production costs and the lesser energy efficiency of ethanol, $3.50 corn makes ethanol an unprofitable venture unless crude oil is selling for $80 per barrel. The ethanol mandate and blenders’ credit will be required to sustain the ethanol industry.
Do you agree with the economics? Should the mandate and the blenders’ credit be maintained? What other issues are involved, from your point of view?
Posted by Stu Ellis at 12:02 AM | Comments (5) | Permalink
January 28, 2009
Where Does Agriculture Stand In The Economic Stimulus Package?
Investment banks on Wall Street have been bailed out with billions of federal dollars. Funds have also been requested and discussed with various other segments of corporate America, as well as state governments, schools, as well as to indemnify mortgage bankers against falling real estate values. But have any funds been earmarked for agriculture?
Farmers should not expect a check in the mailbox. However, more than $27 billion will be allocated for food and agriculture, out of the $825 billion economic stabilization plan being developed by the government to restart the US economy. The use of the funds are detailed in a new Congressional Research Service report distributed to Members of Congress in preparation for a vote in coming days. As of January 27, the report had not yet appeared on the CRS website.
$27 billion represents 3.3% of the total economic stabilization plan, slightly more than the USDA portion of the federal budget, but more than $21 billion will be used for nutrition assistance and about 92% of those nutrition funds will be for the Supplemental Nutrition Assistance Program, which was formerly the food stamp program. Other nutrition funds will be allocated to after school feeding programs, senior citizens, emergency food assistance and the WIC program for women, infants and children.
While many of those nutrition funds will be distributed in urban areas, more rural areas of the US will see the bulk of the other funds from the $21 billion; specifically, rural development and conservation.
The CRS report indicates the administration is proposing $5.125 billion for rural development and infrastructure improvements over a two year period to fund grants and loans. That is double the annual USDA appropriation, and with local matching funds, raises the local impact to nearly $35 billion.
1. The rural facilities program would receive $200 million for public safety, libraries, education, community centers, day care, and rural medical clinics that will begin $1.2 billion in loan and grant applications already pending.
2. Another $500 million will be distributed to guarantee loans for rural housing, which will benefit low income individuals to purchase modest homes in rural areas or to upgrade similar homes with water and septic systems.
3. Rural water and waste water programs will receive $1.5 billion to provide community drinking water systems and waste water treatment plants, which is double the annual USDA appropriation.
4. $100 million will be appropriated to spur $2 billion in loans and grants to rural businesses which have been hampered with tight credit.
5. The stimulus bill will provide $2.8 billion for loans and grants to expand broadband Internet service to rural areas. This is more than 20 times the annual appropriation. CRS says funding will be limited to areas without existing broadband service and where more than 75% of residents are in rural areas.
6. Funds will also be allocated to upgrade computers and IT equipment in local FSA offices, upgrade scientific equipment at Agriculture Research Service facilities, and make repairs at USDA buildings in Washington, D.C.
Conservation programs would receive $400 million from the economic stimulus bill. CRS says $350 million would fund watershed projects, flood prevention projects, floodplain easement purchases, and for dam rehabilitation.
1. Watershed and flood prevention projects would receive $175 million. Projects must be planned and contracted by September of 2010, but USDA has over 300 unfunded, but approved, projects ready to start.
2. Floodplain easements would also receive $175 million in funding to allow NRCS to obtain full authority to restore and enhance floodplain functions. There is currently an estimated $250 million list of projects in 17 states that already meet the criteria, but the priority will be on those projects that can begin immediately.
3. Watershed rehabilitation would get $50 million to provide technical and financial assistance to rehabilitation aging dams. 775 dams are on the list, which will grow to more than 4,300 by 2015.
Summary:
The economic stimulus bill pending in Congress does not overlook agriculture, but allocates 78% of the funding to nutrition programs, including food stamps. The balance is designated for rural development, such as Internet broadband service, rural water and water treatment systems, and other infrastructure improvements. Funds are also included in the $850 billion package for conservation that includes watershed, dam, and floodplain projects.
Posted by Stu Ellis at 12:22 AM | Comments (2) | Permalink
January 12, 2009
Will The Brazilian Ethanol Machine Challenge US Renewable Fuels Policies?
The corn market, and to an arguable extent, the soybean and wheat markets, have been a function of the demand for ethanol and the US renewable fuels policy. That policy sets annual targets for ethanol production and keeps in place a subsidy for fuel blenders and a tariff that make foreign produced ethanol more expensive when it enters the US market. Next to the US, the world’s biggest ethanol producer is Brazil, which converts sugarcane to fuel, and runs a substantial amount of its motor vehicle traffic on ethanol. But is Brazilian ethanol a real competitive threat to the Midwestern corn grower?
Brazil has nearly doubled its ethanol production since 2003, and will produce over 7 billion gallons in its current marketing year, compared to the 9 billion in the US, according to Don Hofstrand, in the January Iowa State Ag Decision Maker. Hofstrand says Brazil initiated a renewable fuels program in the 1970’s during the high oil price era, and kept building it into today’s robust ethanol program.
Brazil’s sugarcane industry is the primary supplier of the feedstock for ethanol. The canes are chopped and crushed to produce sucrose which is converted into ethanol. The remaining fiber is burned to produce the electrical energy needed to refine the sugar into ethanol. Hofstrand says new laws are designed to reduce the smoke that pollutes the air. Also, the sugarcane has traditionally been cut by hand, but manual labor is being replaced by machinery in the harvesting process. He says excess energy from the co-generating plants is used to feed the Brazilian electrical grid.
In comparison to corn, sugarcane is planted only once in six years, with five annual crops before it requires replanting. Sugarcane produces 35 tons of cane per acre, compared to 8.4 tons of 150 bu. corn. An acre of sugarcane produces 560 gallons of ethanol, compared to 420 gallons of ethanol from an acre of 150 bu. corn. The sugar ethanol is cheaper to produce than corn ethanol, both in the cost of crop production and in the cost of refining it into ethanol. Brazil has 9 million acres of sugarcane converted annually into ethanol, which is only 1% of its arable land base, while the US has 28 million acres of corn converted annually into ethanol, equal to nearly 4% of the land base. Current Brazilian governmental policies do not include either subsidies or tariffs comparable to the US renewable fuels policy, however the policy does call for planted acreage to reach 25 million acres by 2012.
Regarding future expansion, Hofstrand says Brazil can greatly expand sugarcane production without an impact on any other crop, while any US expansion of corn production for ethanol will come at the expense of either soybeans or wheat production. He says Brazil has made substantial governmental investments into research that will improve sugarcane production, focused on drought and pest resistance, as well as yield and overall sugar content. He says yields have tripled in the past 30 years.
Research has also been focused on using the entire sugarcane plant for ethanol production, not just the sugar content, which Hofstrand says will allow ethanol production per acre to double. Ethanol production in Brazil is expected to grow from the current 7 billion gallons per year to 10 billion gallons by 2012.
Summary:
While Brazil is currently second behind the US in world ethanol production, its plans for expansion are in nearly lockstep with the US renewable fuels policies. Brazilian ethanol comes from sugar, which produces more ethanol per acre than corn, and is produced at a lower price per gallon. While the US maintains a tariff on imported ethanol, some Brazilian ethanol does enter the US market at competitive prices. Over time, Brazil will have the opportunity to produce even more ethanol at a lower price than the US, which will challenge current US renewable fuels policies.
Posted by Stu Ellis at 12:05 AM | Comments (2) | Permalink
January 7, 2009
What Is Your Comfort Level With Regulation Of Agricultural Markets?
For months the evening news broadcasts and morning headlines have been detailing the bailout du jour and we have been equating that action with the voters’ demand for change. So far, the bailouts and regulatory controversies have occurred in the financial markets along the East Coast. But would you see positives or negatives in governmental intervention in the grain market, for example, if for some reason their was a failure of the Chicago Board of Trade, the Mercantile Exchange, or the grain trading floors in Kansas City or Minneapolis?
Markets allocate resources, but when there is a failure to do that, to what degree is the government warranted in any intervention? Without a deep exploration of the mind of Eighteenth Century economist Adam Smith, it may be worthwhile to consider government involvement in agricultural markets. According to USDA economists Marc Ribaudo, Fred Kuchler and Lisa Mancino, in the November issue of Amber Waves ag markets are competitive, composed of numerous diverse buyers and sellers, transparent, and should be efficient without direct government intervention. However, the economists contend that on-going government intervention includes: conservation payments, price supports, pesticide exposure limitations, food labeling requirements, and public-funded research.
Justification for government intervention is identified in various ways:
1) When our decisions impact others and no compensation is involved, such as water pollution.
2) Public goods that do not lend themselves to market allocation, such as national defense.
3) Marketable goods with insufficient information about them, such as organic foods.
4) Near-monopoly situations that exclude some market participants.
The issue of water pollution is one example of government intervention where conservation payments have been developed to assist farmers in solving problems that would eventually impact others downstream. The economists call that a substitute for consumer demand. Another intervention, such as the Clean Water Act, uses regulations and imposes requirements and penalties.
Another example of intervention follows the outbreak of foodborne illness, resulting from consumers unwilling to pay higher prices for safer foods, or the lack of information about a food, where a consumer may not believe a seller’s claim. Without some certification of purity, safety may be sacrificed in the absence of government oversight, say the economists.
A third example is market concentration, such as the meat packing industry, where the top four beef packers account for 81% of fed cattle slaughter. The economists contend, “The market system works best when there are many buyers and sellers acting independently and where no single actor or set of actors can influence prices. With only a few buyers, processors may have sufficient market power, individually or cooperatively, to exert downward pressure on the price they pay producers. If that were to happen, the quantity supplied and prices paid to farmers would ultimately be lower than under more competitive conditions.”
Market failure occurs when decisions made in self interest conflict with society’s desire for an efficient allocation of resources. The USDA economists say when that happens, there is a wide variety of remedies such as more stringent regulation, tax incentives, subsidies, and government-set standards.
Summary:
Although most people would identify the US as a free market economy, the agricultural markets alone have a diverse number of government interventions to ensure the market allocates resources. Recent examples in the news have dealt with various bailouts and failures of regulatory oversight in the financial markets. So far, the commodity market has not made the daily headlines, but that may be a result of all of the USDA program involvement before and after a commodity value is established.
Posted by Stu Ellis at 12:23 AM | Comments (0) | Permalink
December 9, 2008
Ethanol: Will It Always Be In Demand Or Will It Ever Be A Surplus Commodity?
Through the hard work of nearly every corn farmer and various commodity and farm organizations, ethanol has become a significant motor fuel and new use of surplus corn. While corn has moved from surplus to a demand commodity in the past several years, more ethanol plants have been produced to meet the demand for ethanol by the motoring public and to satisfy the various governmental mandates for it use. But at some point ethanol will be found in nearly all of the US motor fuel, and what happens at that point of market saturation. Can agriculture afford for ethanol to be a surplus commodity?
The answer to that question is no. Agriculture cannot afford for ethanol to be in surplus and both economists and policy planners should anticipate the day that ethanol has saturated the conventional 10% blend of the motor fuel market. Iowa State economists Bruce Babcock and Michael Boland track the use of ethanol in the fall issue of the Iowa Ag Review.
2008 fuel consumption is estimated at 138 billion gallons of gasoline and 9 billion gallons of ethanol produced in the US and 800 million more imported. The economists say, “The net benefit of replacing a gallon of gasoline with a gallon of ethanol depends on whether gasoline blenders perceive that ethanol is a perfect substitute for gasoline on a volume basis or an energy basis. At a 10 percent blend, it is doubtful whether most consumers perceive a change in gas mileage, so it is likely that gasoline blenders value ethanol on a par with gasoline on a volume basis.” The net benefit equals the price of ethanol, minus the wholesale price of gasoline, plus the 51¢ per gallon blender’s credit.
Ethanol use was substantially promoted by the US Renewable Fuels Standard, along with the EPA mandated phase out of MTBE in 2006, the latter of caused ethanol to be used in nearly all of the gasoline blends used in geographic areas mandated by the Clean Air Act. Those regulations shifted ethanol from being in 20% of the motor fuel to more than 70% today.
By 2015 federal law will require the use of 15 billion gallons of ethanol, and based on a 10% blend that would saturate the market of 135 billion gallons of gasoline. Two scenarios would present themselves; one would be ethanol that was all refined and no where to go, or exporting ethanol to the international market. Surplus ethanol means the price drops, and likely takes the corn market down with it. Exporting ethanol would subject the US to accusations of dumping it on the world market, since subsidies had been involved.
Economists Babcock and Boland point to, what they call, a contradiction in US policies that promote more ethanol use, and call for increased ethanol production, yet define the blend as 10% ethanol. Those familiar with E-85 will point to that blend of 85% ethanol and say that is the answer, and it partially is the solution. Although 85% consumes serious quantities of ethanol, availability is an issue because of the lack of pumps approved for dispensing a fuel that is 85% ethanol.
The alternative is a blend that is slightly higher than 10% ethanol, such as E-12, which would be a temporary relief valve to allow more ethanol into the motor fuel supply without causing massive engine failures. That would allow 15.5 billion gallons of ethanol to be blended with 115 billion gallons of gasoline without impact on the price of ethanol. The remaining issue is what to do with the ethanol that will enter the market, as more cellulosic ethanol is produced as mandated by the final years of the Renewable Fuels Standard.
Summary:
Ethanol has been a success story, thanks to grassroots promotion by farmers helped by beneficial federal policies. But the policies that promote more ethanol use from both corn and cellulosic sources may soon collide with the policy that restricts ethanol to a 10% blend. With the lack of sufficient vehicles to use E-85 ethanol and the lack of sufficient pumps to dispense E-85, there will soon become a time that ethanol will sit in surplus and drive down both the price of it and the price of corn. The solution may be to slightly bump up the conventional 10% blend to 12% or more, and keep a continuing demand for the ethanol that comes to market with increasing volumes.
Posted by Stu Ellis at 5:17 AM | Comments (0) | Permalink
November 27, 2008
What Is The Value Of All Those State Ethanol Mandates And Tax Incentives?
The federal Renewable Fuels Mandate kick-started ethanol production, and in a shorter time than expected, US ethanol refineries were up and running and demanding corn at record-setting volumes. The jolt to the corn market pushed prices higher, but well before the RFS came into being, many state governments adopted laws designed to support the fledgling ethanol industries in their states. Those regulations will be dusted off, to evaluate their impact on the corn market.
When corn farmers began pushing “gasohol” as a potential new market in the late 1970’s and early 1980’s, state governments initiated rudimentary support measures, such as using it in some state fleet vehicles when available, or exempting it from state gas taxes. For the past 30+ years, different measures have been adopted across the Cornbelt, and the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri evaluates those ethanol support initiatives.
FAPRI economists analyzed gas taxes in all states, which ranged from 8¢ per gallon in Alaska to 36¢ in nearby Washington. Six states reduced the tax, anywhere from 1¢ to 5¢ per gallon if it contained E-10 ethanol, but the vast majority did not. However, tax reductions become substantial for E-85 ethanol in many more states.
Six states have mandates that require certain amounts of ethanol to be included in all gasoline sold, including 10% minimums for Iowa, Minnesota, and Missouri. Hawaii has an 8.5% minimum, Oregon has a 2.5% minimum, and 2% for Washington. Of course, ethanol is more widely available, but as a result of the market, not state mandates.
On the other hand are incentives to use ethanol, which FAPRI counts at 22. Those incentive states use about 1/3 of motor fuel. The 19 states with tax incentives account for 28% of the motor fuel use, and there is 9% of US motor fuel used in the 6 states with mandated ethanol use.
The FAPRI economists note that the various tax reductions are passed onto consumers, and not kept by fuel blenders. They say that will occur if the blenders compete with each other, but in non-competitive situations, the blenders will keep the tax incentives designed to spur ethanol use.
As crude oil prices have increased over the summer, ethanol prices were initially holding back gas prices. But as they decreased this fall, ethanol prices were above the cost of gas, say the FAPRI folks, “If the combination of benchmark prices is $2.00 per gallon of ethanol and $70 per barrel of petroleum, then the average retail prices of both E10 and E85 are higher than the average gasoline price, taking into account taxes, margins, and energy content. On the other hand, if the petroleum price were $140 per barrel, then the E10 and E85 prices would be, on average, less than the gasoline price if the ethanol price were still $2.00.”
What would happen if state support of ethanol is reduced? It seems the states that currently apply ethanol promotion policies are not the states that are large users of motor fuels, so their impact would be limited, says the FAPRI team. Such effects would be minimal when ethanol prices are low. But at higher prices, the mandates tend to cause greater consumption than would occur otherwise, they say. If state supports are lifted, there would be less willingness to buy ethanol at lower priced gasoline, but an increased willingness to buy gas when crude oil is at $140 per barrel.
The FAPRI economists eliminated all of the state ethanol support programs—theoretically that is—and used the $140 crude oil high from the summer and the 13 billion gallon target of the Renewable Fuels Standard in a couple years. Their findings indicated that to sell all of that ethanol when crude oil was at $140, then the benchmark price of ethanol could be no higher than $1.78 per gallon, and still have the state ethanol incentives in place. Without any state ethanol supports, the maximum price for ethanol could be no more than 94¢ per gallon and be able to reach the 13 billion ethanol target with $140 crude oil.
Summary:
Various state governments began supporting ethanol use before the federal mandates were implemented, and they all vary in style and amount from state to state. However, they have impact on the ethanol demand when crude oil prices are high, and the lower ethanol taxes allow the ethanol blends to cost less than pure gasoline. But economic analysis of the state promotional initiatives indicate that removing all of the tax incentives and ethanol use mandates would have only a modest impact on the overall use of ethanol. And the impact on the farm would be to lower corn prices by about 1¢ per bushel and raise prices of other crops no more than 8¢ to 11¢ per bushel.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
November 10, 2008
Food Prices: What, Why, and Where
If you have been to the grocery store lately, you will have noticed: bread prices are still high, cereal is being sold at former prices but in smaller boxes, cooking oil prices have not declined; all the while grain prices have come well off their summer highs when food manufacturers blamed high commodity prices for skyrocketing food prices. What is the answer to this? Or is there an answer?
Ron Trostle says Fluctuating Food Commodity Prices are A complex Issue With No Easy Answers. Trostle is a USDA economist and addressed the conundrum between divergent food and commodity prices in the November issue of Amber Waves, a USDA electronic magazine.
He notes that commodity prices have risen sharply over the past two years; developing countries have demanded more food and world stocks have declined; and the whole issue is pushed and shoved by energy prices, exchange rates, weather problems, and trade issues. When all of those come into play, answers are not easy.
Trostle says the International Monetary Fund calculates a 75% increase in market prices for food commodities from early 2006 to July 2008. While food commodity prices have risen, the index for all other commodities, such as metals and crude oil, has “significantly outpaced it.” The food commodity index has risen 130% since January 2002, but other commodities have risen 330% and oil has risen 590%.
USDA economists have suggested that food commodity prices have risen because of long term supply and demand trends, higher energy prices, increased biofuel production, lower values of the dollar, adverse weather, and how other nations respond to inflation with their policies.
1) Within the market environment, Trostle says stockpiles have declined here and abroad, and increased demand causes up-trends in the market. But he says the demand has been building slowly and with two decades of stable food prices there was neither reason to keep stockpiles high nor any reason to fund crop research. Finally, growth in per capita income resulted in increased demand for quantity and quality of food.
2) Also slowly building was the demand for biofuels, until 2003 in the US and 2005 in the EU when production grew rapidly; the former helped by the federal renewable fuels mandates. But global demand for biofuels has created more demand for feedstocks such as sugarcane, soybeans and corn, all of which have multiple uses.
3) Other government policies, here and abroad also contributed, including those that impact currency exchange rates. Although importers with strong currency had more buying power, exporters with weaker currency saw their commodities in high demand. What was good for the grain seller was not good for the oil and fertilizer user. Additionally, traders, who followed the trends, kept bidding up prices and included commodities in their portfolio to push values much higher than fundamentals may have warranted, exacerbating price volatility.
4) Nations which had enjoyed low food prices for their consumers saw commodity prices rise and fearing exports would create shortages, applied export taxes to keep commodities within their borders. But nations with growing wealth, such as China and the OPEC nations, imported food without regard to price and that only served to keep prices high. The downside was the inability of poorer countries to both obtain food and to buy inputs to raise more food. Those countries subsequently were no longer being served by food aid donations because of the high cost of the service.
So what is ahead for food prices and commodity prices if they are so intertwined with complexity? Trostle says weather issues will have the most immediate impact on supply and when 2008 production potential was determined, and then commodity prices weakened. But the demand factors remain, including global economic growth and subsequent food demand, biofuel demand, as well as weather and credit challenges in other nations which are unable to produce sufficient crops. Higher food prices will encourage greater production, research for higher yields, and higher land values.
Summary:
After commodity prices climbed earlier this year, food prices followed, and although food prices have continued at high levels, commodity prices have fallen. The economic relationship is quite complex, and includes exchange rates, trade policy, biofuel demand, and global economic growth. Weather will always impact the supply, but the other factors strengthen or weaken the demand. If food prices continue at high levels, they will encourage higher commodity prices and more production.
Posted by Stu Ellis at 12:17 AM | Comments (2) | Permalink
September 15, 2008
You Need To Watch USDA's Rulemaking Process For The ACRE Program.
The Average Crop Revenue Election program in the 2008 Farm Bill will soon become a dilemma for many farmers, who are undecided whether to sign up for the program or not. Many Land Grant University agricultural economists have analyzed the program, created decisions aids, and considered the alternatives. Most of them say it is difficult to make a recommendation that covers most farmers because of the variables in the program and the direction of prices over the next five years. So what do you do? There is always more to learn if you need help with a decision, and there is where we are going today.
While the general provisions for the ACRE program have been written by Congress and included in the new Farm Bill, there has been little said about the fact that USDA staff members are feverishly working on program details, which can make significant differences in the structure of the program and whether farmers decide to participate. The new rules are far from complete, and some of the Washington, D.C. observers say they will probably not be finalized until the new administration takes office early next year.
In the meantime, ag economist Pat Westhoff of the University of Missouri’s Food and Agricultural Policy Research Institute joined many of his colleagues in delving into the details of the ACRE program, in a recent presentation. The first two-thirds of the presentation lay out the details about ACRE, but beginning on slide 21 Westhoff expresses his thoughts about the seriousness of the rule-making procedure underway at the US Department of Agriculture.
Westhoff says one of the critical questions is which two years of prices will be used to calculate the benchmark for the ACRE price guarantee? Most of his colleagues have previously noted that if 2008-2009 prices are the basis for the ACRE guarantees, then farmers will benefit from the relatively high prices that will guarantee a high ACRE payment for 2009-2010. However, the 2007-2009 average price will not be finalized until after August 31, 2009, and Westhoff says USDA may use the 2006-2008 average price, which is already known, but much lower, as the ACRE guarantee. In Westhoff’s term “MUCH” lower.
On his slide 22 Westhoff shows that ACRE payments will be greater than the alternative of direct and counter-cyclical payments in all states, except the southernmost tier from California to Florida. But that would only be the case if the USDA uses the 2007-2009 average prices. If USDA opts for the 2006-2008 average price for the ACRE guarantee in 2009, then 75% of the US would not benefit from ACRE. The only Cornbelt states that would see ACRE having more financial benefit than the traditional program payments would be the Dakotas, Minnesota, Michigan, and Ohio; and only for the entire span of the Farm Bill. If you look at the 2009 crop year results, Westhoff says ACRE comes in second to direct and counter cyclical payments.
Westhoff says using the 2007-2009 market year prices and using the entire life of the Farm Bill, the average net benefit per acre of the ACRE program would be $6.42 for corn, $12.93 for beans, and $2.68 for wheat. But he warns that because of the variables in the ACRE program, some farms will get nothing and other farms may get very large payments.
Another indicator of the impact of USDA’s choice of years for calculating the ACRE guarantee is the total amount of outlay by USDA. For the 2009-2010 crop year, the use of the lower prices would mean about $200 million in payments, but with the higher price calculation, the total outlay would exceed $1.5 billion. For the 2010-2011 crop year, the use of the lower price alternative would mean a total outlay of $250 million, compare to $2.25 billion if the higher price alternative were used. And there are similar comparisons for the balance of the Farm Bill.
Westhoff says participation in the ACRE will be reduced if the USDA uses the 2006-2008 price average, if farmers expect market prices to rise, if there is more base acreage than is planted, if program yields are high relative to actual harvest yields, and if the state Olympic yield is unusually low.
Summary:
Farmers who are still undecided about signing up for the ACRE program have not lost anything, since many of the details of the program are undecided. Those details are being written by USDA and depending upon the structure of the rules, a significant rise or drop in farm program payments could result. The primary issue circulates around the ACRE payment guarantee, and if it includes 2006 and 2007 prices the ACRE payments will likely be less than traditional direct and counter cyclical payments, but if the ACRE program uses 2007 and 2008 prices, then the ACRE program will be more attractive to Cornbelt farmers.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
August 28, 2008
Conservation Programs Will Be Changing, And New Rules Are Coming.
Conservation was one of the priorities of Iowa Senator Tom Harkin who controlled much of the development of the new Farm Bill, and increased funding for conservation was one of the issues that stretched out the debate. So what was the result? There is more money; program rules have changed; and more farmers will be affected by the new conservation policies.
Conservation even has a primary role in the title of the new Farm Bill, which is the Food, Conservation, and Energy Act of 2008. The Congressional Research Service (CRS) analyzed the new policy and compared it with the 2002 Farm Bill. The CRS report to Congress is a starting point for anyone wanting to identify the latest changes in the general policy. Currently, USDA staff members are writing the regulations that will be implemented at local FSA and NRCS offices, and those may not be completed until late in 2008 or early 2009.
In general, changes include eligibility, payment limits, terms of contracts, and program evaluation. There is special consideration also given to beginning farmers, socially disadvantaged farmers, specialty crop producers, and farmers in transition to organic production. Federal spending on conservation is increased by $2.7 billion over the 2002 Farm Bill and will cost $24.3 billion during the life of the program. CRS says, unlike commodity programs, conservation program participation involves many more small and mid-sized farms. But like commodity programs, there are payment limitations.
Conservation programs in the Farm Bill are divided between land retirement and working lands programs.
Land Retirement Conservation Programs:
Within the Conservation Reserve Program, Congress capped the acreage at 32 million, down from its long term cap of 39.2 million. The official reason is to help land owners who have interest in taking land out of the permanent setaside and putting it back into production through a working lands conservation program. Congress also changed some of the rules that would allow CRP to be used for forage production during times of drought, and those call for rental payments to be reduced during that year. Increased attention is given to whether CRP land is benefiting the environment and whether the land owner lives in the proximity of the CRP acreage. And CRP payments can be excluded from self employment taxes for retired or disabled farmers.
The Wetlands Reserve will be expanded from 2.275 million to 3.014 million acres and allows eligibility for land that is habitat to specific wildlife species. There will also be an enhancement program for the WRP acreage similar to the CREP program of the 2002 Farm Bill and deals with grazing rights.
The Grasslands Reserve is expanded by 1.22 million acres. Permanent easements will get 60% of the available funds, and the balance will go to holders of contracts of varying length. Enrollment priority is given to land coming out of the CRP.
Working Lands Conservation Programs
Environmental Quality Incentives Program will received an additional $3.4 billion over the next five years and it funds cost share assistance with certain priorities given to beginning and socially disadvantaged farmers, and to organic producers. Payment limitations for EQIP drop from $450,000 to $300,000 in any 6 year period per entity. Livestock producers will get 60% of the funding, with priority given to those with a comprehensive nutrient management program.
The Conservation Stewardship Program, formerly known as the Conservation Security Program, establishes 5 and 10 year contracts to promote soil, water, air, animal, and plant life improvements, depending on the priorities of the watershed. Payments will be for conservation structure installation, with priorities to beginning and disadvantaged farmers. Payments are limited to $200,000 for any 5 year period.
Summary:
Conservation programs will remain an integral part of the federal farm program, but with minor changes over the next five years. Fewer acres will be in the CRP, but acreage coming out can be transitioned into other conservation programs in an effort to achieve environmental benefits. Payments will have limitations, but several programs will give priorities to certain farmers. Overall, more money will be allocated to soil and water conservation in the new Farm Bill.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
August 14, 2008
Agriculture Needs To Look Far Enough To See Tomorrow.
Many Cornbelt farmers are looking toward a delayed harvest; others are looking toward 2009 markets, costs, and profitability. Others still are looking at the next generation on their operation. Sometimes agriculture is examined more often with a microscope when we should really use a telescope. This “big picture” edition of the farm gate will take a Hubble space telescope view of agriculture.
Weather forecasters will tell you it is easier to forecast six months out than it is to predict the weather six days out. Marketing plans are the same way, and they are tough to adjust to changing market conditions. Sometimes we miss the forest for the trees, but today we rely upon the vision of Purdue economists Sally Thompson, Allan Gray, and Mike Boehlje as they looked at the “The Long View” for Indiana agriculture. But what they report is really a long view of the entire Cornbelt.
1) The Intersection of Agriculture, Food, and Energy Policy—as they call it—is really impacting commodity prices for corn and soybeans as a result of biofuel demand. The demand will be a strong support for crop farmers. The downside is the impact on the livestock industry and it will continue to consolidate as a result of energy policy, and the higher costs of feed will impact food prices. Future policy questions to answer include assistance to the livestock industry, continuation of current energy policy, help for consumers and food stamp users, and what will develop from second generation biofuel technologies.
2) The Global and Local Influence of Demand and Supply for Agricultural Products—or the export/import market—is focused on the global replacement of vegetable protein with animal protein in diets in developing countries. The US has been a supplier of both, but what will the future hold if the US is focused on biofuels? The Purdue economists say US production is at capacity, but other parts of the world can develop more land and use better technology to supply the global demand, rather than just the local demand. But as organic production and sustainable agriculture grow, the public compares those practices favorably to traditional farming on the carbon footprint scale. The issues of environment, freshness, and local production will also drive agriculture, as will currency exchange values that have recently boosted US exports, but could work in the opposite direction. US farmers have already experienced that with higher costs of fertilizers, many of which have to be imported.
3) The Resurgence of Risk in Agriculture—which impacts the cost structure of agriculture—has caused expenses to climb and profits to fall, all in the face of higher land values and cash rents. Also the livestock industry expresses similar concerns with high feed costs, stronger environmental regulations, and being unwelcome in many rural areas. Producers will have a wide variety of risks and must successfully manage that risk for the future of agriculture.
4) The Increasing Strain on Natural Resources—as exacerbated by domestic and global food demand—has created debate on the use of land and water resources, which spills over into rural community economics and welfare. The debate also includes the location of livestock facilities and alternative uses of the land, and land values. The economists say future policy will have to blend management, technology, and regulation with the use of land, air, and water resources as long as they are acceptable to the public and not a burden on the industry’s long term financial health.
5) The Role of Biotechnology in Redefining Agriculture—in both the use of new technology and creation of new marketable products—will have profound impacts on agriculture. Scientific advances have increased productivity and economic growth, but it can also supply food and fiber with increased quality and quantity. The Purdue crew suggests biotech breakthroughs need to come quickly, provide opportunities beyond the biofuels industry, and should be incubated into many potential opportunities.
Summary:
Agriculture is faced with a myriad of policy decisions in coming years, stretching well beyond today’s debate of food versus fuel. However, those future policy decisions will have to address biotechnology, risk, natural resources, and markets that will be driven by global demands.
Posted by Stu Ellis at 12:25 AM | Comments (0) | Permalink
August 12, 2008
The SURE Program: A Permanent Formula For Calculating Disaster Assistance.(UPDATED)
The ACRE program has received considerable attention as a prime element in the new Farm Bill, but another program—entitled SURE—also merits the attention of farmers. SURE is the permanent disaster program, which Congress had only authorized from year to year in previous legislation. But being part of the permanent legislation, it requires action on the part of farmers and farm owners.
SURE is an acronym for SUpplemental REvenue program and producers who may have suffered a disaster for the 2008 crop need to pay attention to its details, and will have to sign up for the program by September 16. Eligibility for 2008 requires the prior purchase of crop insurance (and the deadline was last March) or the purchase of catastrophic coverage (CAT) insurance on insurable crops and Noninsured Assistance Program (NAP) coverage on non insurable crops. CAT and NAP coverage is $100 per crop per county, with a $300 per county maximum and a $900 per farm maximum, with credit given for crop insurance previously purchased. 2009 eligibility will be the same, however the sign-up period will be more timely. A concise explanation is provided by University of Nebraska public policy specialist Brad Lubben in the latest issue of Cornhusker Economics.
While CAT, NAP, and crop insurance establish eligibility for disaster assistance, the producer has to live in a county that has been declared an agricultural disaster county. That is a USDA designation, but does not always follow typical Presidential disaster declarations. Requests originate from local FSA committees, and need state approval before being forwarded to USDA. The threshold for a request is a 30% loss of a major crop in the county due to weather. Without the county designation, a farm needs to have a 50% loss of production for individual eligibility.
To receive a payment from the SURE program, an extensive calculation is made which includes a wide range of variables and formulas. Some of those include the insurance price and yield election, the actual production history yield, the harvested acreage and yield, crop insurance indemnity payments, and other federal payments. Once farm revenue is calculated, it is subtracted from the SURE guarantee, and the payment is 60% of the product. Lubben provides an extensive explanation of the calculation.
Another perspective is offered by Kansas State ag economist Art Barnaby, whose analysis shows extensive decisions that have yet to be made by USDA staff members.
1) SURE claims are to be settled with the marketing year average price, but Barnaby says that means a SURE payment will have to be delayed until a year after the damaged crop would have been harvested.
2) Barnaby also says one of the variables that enter into the SURE calculation is the “insurance price guarantee,” but for farmers with revenue type crop insurance, there is no certainty that the SURE payment will be based on the spring guarantee or the harvest option price.
3) Another question mark is generated by the variable for “actual production history,” which Barnaby says will jeopardize payments for producers with less than 4 years of crop yield history, and some of those years may have been prior disaster years that would skew any payment.
4) Yet another question arises for purchasers of GRP and GRIP insurance, which are county-wide yield based, because Barnaby says those yields may not be applicable to individual farmers who have to submit their actual production history.
5) And another question arises about the insurance indemnity payment that is subtracted before the SURE payment is made. Barnaby says the way USDA defines whether it is the gross or net payment will make a difference to producers who buy higher coverage levels for crop insurance.
Those and other issues that Barnaby lists as undecided at this point are the so-called “devil in the details” for the SURE program. He says the SURE program will curtail crop diversification, since Cornbelt farms will eliminate wheat from their rotation, and he believes that more Illinois farmers will switch to continuous corn. Additionally, with the $100,000 payment limit on SURE, larger farmers with crop insurance will exceed the payment limitation for SURE eligibility.
Summary:
The SURE permanent disaster program is still a work in progress, but may give financial benefit to farmers with extreme variability in their crop yields. It is designed to provide a constant flow of USDA money to crop producers who have had to wait in the past for Congress to approve an ad hoc disaster program. Payments are based on a complex calculation, but many of the elements are yet undecided.
Iowa State University economists have developed a decision aid calculator to help compute disaster payments under the SURE program. Find it here.
Posted by Stu Ellis at 12:31 AM | Comments (0) | Permalink
July 10, 2008
Are You As Familiar With ACRE As You Are With An Acre?
If you have been to the FSA office to report your 2008 acreage, were you asked if you wanted to sign up for the 2009 ACRE program? The ink is barely dry on the 2008 farm program and FSA is already recruiting farmers to participate in the support program for next year. No, they are probably not working on commission, but are just so efficient they are working ahead. And you need to respond like you know the program as well as they know it. So, what is your answer about ACRE?
The Average Crop Revenue Election has nothing to do with the Presidential candidates and their campaigns, but the choice you have the option to make at the FSA office to determine the type of farm program you want for your operation. There will be the same old, same old, same old, direct and counter-cyclical payments with a marketing loan to protect your interests. But by sacrificing 20-30% of those, you will have the chance to sign up for ACRE, and according to Iowa State University ag economist Bruce Babcock, “Almost all price scenarios favor enrollment in ACRE. ACRE payments will be double the level of traditional programs even if commodity prices drop back to levels last seen in 2005."
Before you make any rush to sign up for ACRE, remember the program does not start until the 2009 crop. Kansas State ag economist Art Barnaby says, “The ACRE program is a “put option” on expected state revenue. The strike price for 2009 ACRE is the two year average of 2008 and 2007 Marketing Year Average price. Because of weather combined with demand, this strike price is likely to be very “high” and there is no limit on the price in the first year.”
While the downside is not being able to switch away from ACRE once you are there, Barnaby says, “In 2010 the ACRE guarantee can not decline by more than 10% from 2009. Therefore, if the current weather market of 2008 sets a very “high” ACRE guarantee for 2009. Barnaby also says it is likely ACRE will be attractive to corn and bean producers, and the later one signs up for the program, the clearer the picture will be on the value of the 2009 Marketing Year Average price that will settle ACRE claims. And he warns, “If farmers only signup for ACRE when it is in the money and increase the odds of a payment, ACRE can still expire worthless, like a Board traded option.”
To assist you in making a decision, whether it is tomorrow or a year from tomorrow, the folks at Iowa State have created several decision aids that offer a picture of your farm program benefits from corn, soybeans, and wheat. Users of the Excel-based spread sheets will enter specific data about their state, expected commodity price for the new market year, the 2008 marketing year price, and the average yield per planted acre. The outputs of the spreadsheets are estimated ACRE payments and ACRE revenue guarantees.
The 10% limit on going up or down from one year to the next, will save many farmers from grief, according to Ohio state ag economist Carl Zulauf, “The 10% cup/cap is important. It limited changes in the revenue guarantee around half of the time in an analysis that calculated the breakeven price at which expected payments were the same from the ACRE programs and traditional farm programs.
As farm programs change over time, farmers initially will grumble about the changes being unfair and not be of any benefit to them. Then they get quiet about the farm program because they have figured it out and how they can benefit from it. It is always evolutionary, and farmers will soon be finding ways to benefit.
Summary:
ACRE will be the farm program du jour beginning next year for many farmers, who have figured out how the Average Crop Revenue Election program will be of greater benefit than staying with the old programs in full force. ACRE utilizes a myriad of calculations, and decision aids are available to assist farmers in making the best decision. While some folks will sign up now, the program will not take effect until after the 2009 crop is harvested, so later participants will be able to see more clearly how they will benefit.
Posted by Stu Ellis at 12:38 AM | Comments (1) | Permalink
June 23, 2008
Can Biofuels Be Blamed For Higher Food Prices?
Corn and soybean producers have taken a beating in recent months because of high commodity prices. Critics, who include consumers, livestock producers, advocates for food stamp recipients, and supports for international food aid have all expressed concern about high food prices, and many have made the link to corn and bean values whether it was legitimate or not. USDA’s new Chief Economist went to Capitol Hill earlier this month and said most of the criticism was not appropriate.
Joe Glauber has been at USDA for many years, but now holds the top economist job, and testified to the Senate Committee on Energy and Natural Resources. He said a couple facts were true, that corn and soybean oil make up 90% of biofuel production, corn and bean prices have risen over 50% in the past year, and global food prices have risen over 45%. But he says to blame the corn and soybean producer, or even the biofuels industry, is not correct.
Glauber said food prices are rising for a number of reasons:
1) Global economic growth is raising family incomes and bolstering demand for processed foods and meats.
2) Adverse weather has created grain shortages in many countries, and buyers are buying ahead, pushing prices higher.
3) Many countries have installed export restrictions to reduce their own domestic food price inflation.
4) Higher costs for food marketing, transportation, and processing are due to higher costs for energy.
Farmers retain an average of 20% of each dollar spent by the consumer on food, but that is less than the value of the processing. Regarding grains and meats, each has a different economic track it is following.
1) Wheat is in the 3rd consecutive year of low global production, with US stocks at record lows and prices at record highs, but global production will rise beyond the point of demand.
2) Corn has strong domestic demand from livestock operators and a 15% increase from export business due to currency relationships; however ethanol demand will rise to 4 billion bushels, further reducing US carryover stocks.
3) US rice prices are high because of tight global supplies and export bans by several producers that have pushed up prices.
4) Soybeans are priced higher because of low stocks and carryover, with strong demand from China, and the prospect for larger US crop production.
5) Fruit and vegetable prices are higher because of drought and freeze damage.
6) Livestock and poultry prices are responding to increased cow slaughter and herd contraction, increased pork production and low market prices, and stable broiler production from higher feed costs.
7) Increased dairy production from higher international demand.
The biofuel industry doubled its demand for corn and soybean oil over the past three years, but while that was responsible for part of the rise in food prices, it was not the only reason. The strength of exports from global economic growth and drought resulted in 15-18% more corn and soybeans being exported. The increased use of corn and soybean for biofuels has raised commodity prices slightly, but has had little to do with higher prices for wheat and rice. Globally, food prices have increased 45% over the past year, with the largest increases in rice and sunflower oil, but lower prices for meats. Corn contributed 5% of the 45% increase and beans contributed 12%, and assuming there was no growth in the biofuels industry, global food prices would have still risen over 40%.
Regarding domestic food price increases, USDA’s Glauber says the Consumer Price Index for all food rose 4% in 2007, pushed up by a 30% increase in egg prices, 7% for dairy, 5% for poultry and 4% for beef. And he says it is very unlikely retail prices were affected by higher corn and soybean prices, since higher feed costs impact producers and there would not have been any time for that event to translate into higher retail prices.
Glauber says the ratio of livestock prices to feed costs tells producers whether to increase or decrease production, and in April the steer-corn price ratio was the lowest since August 1996, the hog-corn ratio was the lowest since December 1998, and the milk-feed ratio was the lowest since 1995.
In the Consumer Price Index, Glauber says biofuel expansion increased food prices in 2007 by .10-.15 percentage point, and in the first four months of 2008 the increase was .20-.25 of a percentage point, while the CPI for all food rose 4.8%. He forecast that in future years, a curtailment of livestock production from higher feed costs would still only raise the food CPI by .6-.7 of a percentage point.
Summary:
Food prices have risen both domestically and international, but USDA says that cannot be attributed to the increase in the biofuels industry. It has contributed less than a quarter of a percentage point to the 4.8% higher food costs this year, and less than 5% of the 45% increase in global food costs. The real reasons are higher demand from income growth areas, increased energy costs to process and transport foods, and global grain shortages due to weather adversities.
While that might be the bottom line economics, should this issue be viewed differently?
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
June 18, 2008
The New Farm Program: No Pain, No Gain
Compared to understanding the new Farm Bill, mastering the markets and the weather will seem as easy as eating a piece of pie. Grandpa and Dad went to the ASCS office to sign up and just flagged off their setaside acres. For the 2002 Farm Bill, you had to make some calculations and some decisions whether to participate. For the 2007 Farm Bill, you might want to volunteer to do all of your neighbors’ taxes if they will take care of your program sign up obligations. When you get to the ACRE and SURE programs, you will be thinking they SURE are ACHERS!
All joking aside, the Farm Bill will be in effect through the 2012 crop, and although commodity prices are well above support levels, most farmers will find that it would be smart to pencil out the alternatives. To get you started toward a rough understanding, University of Nebraska ag economist and farm policy specialist Brad Lubben offers his insight in the latest Cornhusker Economics newsletter.
On the surface the new farm program is similar to the last farm program:
1) A loan deficiency payment can be obtained if the Posted County Price is below the county loan rate.
2) You will get a direct payment, which is a set rate that varies by crop.
3) Counter cyclical payments may be made, depending upon the results of calculations with the target price, direct payment, loan rate and market price.
Direct and counter cyclical payments are made on 85% of the yield in 2008, and 83.3% for 2009-2011. Lubben says the marketing loan benefits and the counter cyclical payments would be safety net provisions in case of a collapse in commodity prices, but direct payments will provide cash annually.
But the complexity begins in 2009, with the implementation of the Average Crop Revenue Election (ACRE) program. Entry into that program is irreversible, but you may find it to be quite beneficial, depending upon your farm. It is designed to provide financial support more closely to prices in your own state compared to a national price and yield.
1) Benchmark state yields are based on Olympic averages.
2) Benchmark prices are two year national averages.
3) State guarantees are 90% of a calculation, but cannot change 10% year to year.
4) Benchmark farm yield is based on Olympic averages.
5) Benchmark farm revenue includes crop insurance and crop revenue
6) Actual state revenue tallies statewide statistics
7) Actual farm revenue uses benchmark prices and annual production.
8) ACRE payment rates utilize all of the above, but is made on 83.3% of crops.
Since ACRE payments are limited to 25% of the guarantee, it may not cover the entire decline in crop prices. And ACRE payments are based on state statistics, not farm statistics. Farmers electing the ACRE program will only be eligible for 80% of their direct payments and 70% of market loan benefits.
Delays in approving the new Farm Bill were due in part to the development of a permanent disaster program, which is called Supplemental Revenue Assistance Program (SURE). Beginning with the current crop year, it covers crop and livestock losses, along with feed losses. Participation requires crop insurance, being in a county with a declared disaster, and having a loss greater than 50%. Calculations are more complex than in the ACRE program, but payments come after crop insurance indemnities are paid, and payments are limited to 90% of the expected revenue.
Lubben readily admits the programs are much more complex than typical farm programs. He says with the need to manage risk with crop insurance and marketing tools, the addition of the safety net programs increased the complexity of decisions that need to be made, but may be critical to the survival of the farm.
Summary:
21st Century agriculture requires a strong discipline in risk management, and the 2007 Farm Bill provides assistance, despite its complexity. Participants can remain with the elements retained from the 2002 legislation, but also offers an alternative that calculates financial assistance based on state level statistics instead of national statistics. A permanent disaster program would also provide assistance, but only to farmers with crop insurance. The complexity of the calculations and program requirements should not divert farmers from a strong look at the program details.
Posted by Stu Ellis at 12:25 AM | Comments (0) | Permalink
June 10, 2008
What If You Woke Up Tomorrow And US Ethanol Policies Had Evaporated?
Farmers and other ethanol supporters are being besieged by critics in the debate over whether food should be converted to fuel, and if farmers should benefit from government farm payments while commodity prices are at record highs. Much of the focus is on the level of goals set by Congress for ethanol production, the tax credit provided to companies that blend ethanol with gasoline, and the tariff that is applied to foreign ethanol. While those elements are part of the ethanol fabric of America, they do come with an economic impact that critics can cite, chapter and verse. Here’s what you should know…
Congress has established a Renewable Fuels Standard that calls for 9 billion gallons of ethanol to be produced by 2008, rising to 10.5 billion in 2009. U.S. trade policy on ethanol includes an ad valorem tariff of 2.5 % as well as an import duty of $0.54 per gallon. Additionally, there is a $0.51 per gallon tax credit given to blenders of domestic ethanol, which will be reduced to $0.45 on Jan. 1, 2009. These three lightning rod issues are frequently focused on agriculture and its supporters by a wide variety of opponents, some of which are related to food marketing, others in petroleum industries, and others which support Brazilian sugar interests. US farmers, trying to make a buck, have promoted ethanol for nearly 30 years, know those economic supports may be on shaky ground.
What would happen if one or more would be lost? That’s what Iowa State University economists Lihong Lu McPhail and Bruce A. Babcock calculated in their recent analysis of federal ethanol policies. Looking at the marketing year for the new crop, the researchers assessed corn acreage, yield, oil prices, domestic and export demand, and the capacity of the ethanol industry.
Some of the assumptions made by the economists included:
• Planted corn acreage of 86 million, with 763 million bu. in ending stocks.
• Continued strong exports because of a weak dollar.
• At least a 9 bil. gal. ethanol production capacity at 2.75 gal. per bu. of corn.
• 800 mil. gal. of Brazilian ethanol would be imported at equal price levels.
• Shipping problems will increase with higher volumes of ethanol produced.
• Ethanol has 67.8% of the energy content of gasoline, and consumers will not pay more than that price relationship with gasoline.
• Wholesale prices are $2.62 for gasoline and $2.36 for ethanol in the current marketing year.
• Crude oil was priced at $130 per barrel based on NYMEX futures prices.
• Corn prices will average $5.86 for the new crop.
1) Elimination of either the Renewable Fuels Mandate or the blenders’ tax credit would reduce the price of corn by 3.9% to $5.63 per bu. Elimination of the mandate would reduce ethanol production by 3%, ethanol prices would drop 3% and gasoline prices would rise 0.3%. Corn growers would lose $2.37 bil. in income and gasoline producers would gain $1.88 bil. in income.
2) Elimination of the blenders’ tax credit would generate $5.1 bil. more tax income, corn prices would drop 3.5%, ethanol prices would drop 10.2%, and ethanol production would drop 2.8%. Gasoline producers would gain $2.75 bil. from less competition from ethanol. Corn growers and ethanol producers would each lose about $2.4 bil.
3) Elimination of the tariff on imported ethanol would triple ethanol imports, reducing domestic ethanol production by 1.9% and corn prices by 2.5%. Ethanol prices would drop 2.5% and fuel prices by 1.2%. Motorists would save $5.08 bil. in fuel costs, with corn growers losing $1.58 bil.
4) If all programs were eliminated, corn prices would drop 14.5% or $9.4 bil. Ethanol prices would drop 18.6%, but gasoline prices would rise 0.2% providing a $5 bil. revenue increase to the oil industry. Government revenue would increase by $4.9 bil.
Summary:
Elimination of the federal ethanol support policies would keep most ethanol plants operating, as long as revenue covers operating costs. Eliminating one of the policies would cut corn prices by no more than 4%, but elimination of all would reduce corn prices by 14.5%. Motorists would benefit $5 bil. worth if tariffs were removed, dropping both gasoline and ethanol prices. While the three policies are in place to foster growth in the bio-fuels industry, they have wide-ranging impacts.
And a question for you: Should they be kept in place?
Posted by Stu Ellis at 5:00 AM | Comments (3) | Permalink
May 27, 2008
Is Everything Copasetic In Your Neck Of The Woods?
What is happening outside your farmgate? Is unemployment growing in your county, or are people coming into your region for work? Is per capita income in your county rising or falling, and by the way, how does it compare to the rest of the Cornbelt? Is the population increasing or decreasing? Many of these trends tell a lot about your county and they will give an indication of the infrastructure upon which you depend, such as availability of education, medical care, banks, and the rural farm to market roads you travel daily. If the politicians have not addressed some of these issues, maybe you need to initiate that conversation. Here’s some ammunition for that discussion.
Your governor should have attended a presentation earlier in May at the National Governors Association, given by the Rural Policy Research Institute (RUPRI), addressing the issues of non-metro America. RUPRI studies the social demographics in rural America, and divides counties into metropolitan (50,000+ population), micropolitan (population of 10-50,000), and non core counties which have less than 10,000 population. The latter two are considered non-metropolitan and there are a considerable number of those across the Cornbelt, particularly where the western Cornbelt meets the High Plains. But to clarify our language, RUPRI does not equate the non-metropolitan area as rural, “In fact, more rural residents live in metropolitan counties than in micropolitan and non-core counties combined.”
Population across the Cornbelt was characterized as “slow growth” or less than 5.4% between the 2000 Census and July of 2005, with only North Dakota registering a population loss. But for the non-metro counties, the picture is different. Population declined in: ND, SD, NE, KS, IA, & IL. Population increased (2.4% or less) in: MN, WI, MI, OH, IN, & MO.
Employment trends across the Cornbelt all indicated positive job growth from 2001 to 2005, except for Michigan with a slight employment decline. But when comparing metro and non-metro counties, IL and IN show declines in employment. The unemployment rate numbers are a bit different. Across the Cornbelt, unemployment rates in MI, OH, IN, IL, KS & MO all exceed the national average of 5.1% for 2005. Other Cornbelt states have unemployment rates below the national average. When the focus turns to non-metropolitan counties, the picture is much the same, except KS has an unemployment rate better than the national average.
Income per capita in 2005 was $34,471, with metro per capita income at $36,140, and non-metro per capita income at $26,161. That has been the trend for many decades, but the separation has narrowed since 1974 and now stands at 70% of metro income. Across the Cornbelt, non-metro per capita income ranged from 69.8% of metro per capita income in Illinois, to 90.9% in North Dakota. Along with ND, SD, NE, KS, IA, WI, MI, OH, & IN all registered non-metro per capita income that was 75% or closer to metro per capita income. IL, MO, and MN reported non metro per capita income that was less than 75%.
Recently released income information for 2006, indicates a slight decline for per capita income in non metropolitan areas. Nationally the per capita income level was $36,714, with metropolitan per capita income at $38, 564 and $27,403 for non-metropolitan areas. The financial divide slipped from 75.1% in 2005 to 74.6% in 2006. Nationally, only 287 counties had average per capita income higher than the national average, and 76% of those were metropolitan counties. Of the counties in the quartile with the least per capita income, 87% were non-metropolitan counties. Of the 2,038 counties that are non-metropolitan nearly 97% had per capita income less than the national average. A very significant change from 2005 to 2006 was the location of the counties where per capita income averages dropped. That occurred in 207 counties throughout the nation, and 95% were non-metropolitan, but 90% of the counties were in the Great Plains. RUPRI says, “Declines in farm subsidy and disaster payments played some role in these income declines in many of these counties.”
Summary:
Recent statistics indicate non-metropolitan counties are suffering from slow population growth or declines, higher unemployment rates, lower per capita income and the trends reflect a growing dichotomy between those counties and metropolitan counties. And the most recent income statistics point to income declines in counties which are most dependent upon various farm support programs.
Posted by Stu Ellis at 12:26 AM | Comments (0) | Permalink
May 14, 2008
Here's A Glimpse Of Your New Farm Bill, In Case You Are Asked About It.
Your Congressman and Senators are scheduled to vote—probably Wednesday, maybe Thursday—on the “Food, Conservation, and Energy Act of 2008” which will guide farm policy thru 2012. If a legislative aid called your cell phone and asked for your recommendation on how to vote, what would you say? Oh, you don’t know what is in the proposed Farm Bill? Well, you will if you read on…..
The Members of the Congress won’t be getting much of a chance to learn the details of the legislation, which is 1,500 to 2,000 pages thick. So, the authors of the legislation have provided a 423 page summary. And if that is a bit weighty, here is a quick version with the highlights of interest to most Cornbelt farmers.
Commodity programs:
• Direct payments will be made at current rates, unless participants sign up for the average crop revenue program, but the option to collect advance direct payments terminates with the start of the 2012 crop year.
• The counter cyclical payment program is continued, and rebalances target prices for wheat, grain sorghum, barley, oats, soybeans and other oilseeds effective for the 2010 crop year; and eliminates partial counter-cyclical payments beginning with the 2011 crop year.
• An optional revenue-based counter-cyclical program (ACRE) begins with the 2009 crop year for participants who forego 20% of direct payments and 30% of loan rates, but have to remain in the program for the balance of the Farm Bill.
• Participants in ACRE will be eligible for state-based coverage with a revenue guarantee equal to 90 percent of the 5-year state average yield per planted acre (excluding the years with the highest and lowest yields) times the 2-year national average price for the covered commodity.
• If the actual State revenue (yield per planted acre times the national price) is less than the revenue guarantee, and if the producers suffer a loss on their farm, then they will receive an ACRE payment equal to the difference between the State revenue guarantee and the actual revenue for the crop year up to 25 percent of the revenue guarantee. ACRE revenue payments are made on 85 percent of the acreage planted or considered planted to the covered commodity. For years 2009 to 2011, payments are limited to 83.3% of planted acreage.
Planting flexibility:
• Base acres are limited to program crops, except for specific acreage in a pilot program that will allow fruits or vegetables for processing. IL: 9,000; IN: 9,000; IA: 1,000; MI: 9,000; MN: 34,000; OH: 4,000; & WI: 9,000.
Marketing loan:
• Marketing loans are available with rules continued from the 2002 program, unless one participates in the average crop revenue program.
• 2008-2009 Loan rates are: Wheat-$2.75, corn-$1.95, soybeans-$5.00
• 2010-2012 Loan rates are: Wheat-$2.94, corn=$1.95, soybeans-$5.00
• Loan deficiency payments will be available under general terms of the current program, but the rate will be determined on the date beneficial interest was lost.
Payment limitations:
• Non farm participants may not collect farm program payments if they have an adjusted gross income exceeding $500,000 from non farm sources.
• Farm participants may not collect farm program payments if they have an adjusted gross income exceeding $750,000 from farm sources.
• Conservation payments may be collected by participants with non farm income up to $1,000,000.
• Direct payments and average crop revenue payments are capped at $40,000 and counter cyclical payments at $65,000.
Conservation:
• The CRP is extended through 2012 with a 32 mil. acre cap, with CRP land subject to special conservation and wildlife initiatives determined by regional priorities.
• CRP land will be allowed to be removed from the program if ownership change involves a beginning, socially disadvantaged, limited resource farmer.
• The Conservation Security Program will remain in effect for existing contracts with a $2.3 bil. fund to promote conservation initiatives on working lands.
Credit:
• FSA farm ownership loans will be capped at $300,000, with encouragement to seek commercial credit.
• The credit and conservation titles are linked with a 75% guarantee by the USDA on loans for conservation improvements.
• The New Farmer Individual Development Accounts Program will match the savings of beginning farmers to hasten their ability to accumulate enough financial resources to buy farmland or other capital items.
Energy:
• Accelerate the commercialization of the production of advanced biofuels, which are produced from biomass products. Provide loan guarantees to refineries to upgrade their technology.
• Programs will be created and funded to promote alternative sources of energy for rural America such as livestock manure.
• Over $1 bil. for biomass energy research.
Organic agriculture:
• $220 million in funding for research for specialty crops working with state departments of agriculture.
Livestock:
• Enhance the Livestock Mandatory Reporting Act to be more readily understood by participants in the market.
• Creates new provisions for the Country of Origin Labeling Act, clarifying some nebulous regulations, and restates the 2002 law for compliance.
• Addresses numerous issues in contract production with regard to arbitration, long term financing, and litigation.
Crop Insurance:
• CAT fees will rise to $300 per crop per county.
• To create new crop insurance products, the USDA will finance the research and development cost incurred by crop insurance companies.
• Prohibits insurance coverage for the first 4 years on crops that are planted for the first time on non-cropland.
Miscellaneous:
• USDA is prohibited from closing an FSA office within 1 year of the implementation of the ACT, and the office must have at least 3 staff members.
Summary:
Farm policy for the next five years will be set within hours, and most farm organizations have signed on to the proposal, saying no one is totally happy with the plant, and that indicates significant compromises over commodity policy, conservation , energy, and many other issues.
Posted by Stu Ellis at 12:42 AM | Comments (1) | Permalink
May 12, 2008
PSSST! Ya Wanna Know The Real Reason Behind High Food Prices?
The rise in grain and oilseed prices has been appreciatively received by owners and operators of cropland, but those rising prices mean someone has to pay more, and livestock producers know how consumers feel about it. Everyone who buys food, whether it is in the US or abroad, is paying more for food. Don’t blame corn growers and soybean producers, because there are a multitude of reasons that food prices have risen. And they go well beyond the farmgate.
US headlines have blistered US agriculture for causing food prices and fuel prices to rise, blaming farmers, ethanol, the unwritten Farm Bill and everything else that mad consumers can point toward. Prices for food commodities have risen around the world, not just in the US, but USDA economist Ronald Trostle says there are a myriad of reasons for the spike. His analysis looks at the reasons, the impact, and prospects for the future.
A 60% rise in world market prices of food has occurred in the past 2 years, which is even more significant than on the surface because since 1980 nominal food prices have generally declined. A slow rise began in 2001 and in 2006 a sharp rise began for the four principle grain commodities of corn, wheat, rice, and soybeans. For the past 38 years, periodic price spikes have occurred so the most recent is nothing new, but in the past the prices have retreated because buyers switch to alternate products. Parallel to the recent spike in prices for those four grains, food commodity prices have risen 98%, the index for all commodities has risen286%, and the index for crude oil has risen 547%. While food grain prices have not risen as much, in the big picture they form the staples for foods around the world, and such a rise has caused hardships in many poor and developing countries.
The recent rise in food prices has come amidst another series of developments that have an impact on the overall perspective:
1) Public funding of agricultural research in the US and abroad has been declining and along with that trend, the increase in average crop yields has declined.
2) A small percentage of farmland around the world is annually diverted to non-farm use.
3) Water resources have been stressed and artificial systems have become expensive.
An even more significant trend has been the combination of rising world population and its increasing economic power, which allows people to buy more food and higher value food. These trends have been quite prominent in China and India, with 40% of the world population. Their additional demand for energy and oil has also grown substantially.
The growth in per capita income in developing countries has allowed poorer populations to feed their hunger with higher quality food, particularly meats that were produced with protein feeds. Growth rates for meat consumption have surpassed that of consumption for grain and oilseed-based foods. With the increased demand for meat comes an increased demand for livestock feeds.
Since 2000 many smaller trends have occurred that have exacerbated the population and economic growth and their impact on food demand. Those smaller trends include:
1) China made a policy decision to reduce its stocks of food for “just in time” inventory, as a result of readily available global supplies and more liberalized commodity trade.
2) Global stocks have declined from an average of 30% in 1999 to 15% in 2007.
3) In 2000, crude oil prices began a slow, then more rapid rise along with an increased demand for energy.
4) In 2002 the US dollar began to depreciate in value, losing value in relation to the currency of importing countries, and since the US is a major food producer, food exports increased as commodity prices became cheaper to the buyer.
5) Since world commodity and oil prices are denominated in dollars, the declining value of the dollar spurred demand for both food and oil in countries where monetary values were relatively stronger.
Biofuels have had an impact, since ethanol is typically made from corn except in Brazil, and oilseeds are the feedstock for bio-diesel. The movement toward biofuels is global, and many countries are making them, not just the US. China has become a major ethanol producer, and is focusing on cassava and sweet potatoes for feed stocks. The EU is the largest bio-diesel producer and is refining rapeseed as the feed stock, but does not produce enough to meet policy goals. Brazil will be converting interior-produced soybeans into bio-diesel for domestic use, and Argentina will be producing soybean-based bio-diesel for export. In the US, about 24% of the corn crop is used for ethanol and that amount will increase as production increases. In the past five years, US ethanol production has had a more pronounced impact on the world supply/demand balance for grain, and the higher prices of US corn has spilled into world markets. Globally, an estimated 21 million acres were used worldwide to produce feed stocks for bio-fuels, however as the total world area of cropland expands, more of the increase is used for bio-fuel production than for food production.
Many recent developments, both closely and distantly related to food prices, have fueled the fire of rising food prices.
1) High fertilizer, fuel, and pesticide prices have resulted in some production cutbacks, and causing commodity prices to rise.
2) Higher commodity prices in 2006 drew the interest of market speculators, who were not interested in a commodity itself, but in a potential for increasing market values that would benefit their portfolios.
3) The 2005 Energy Policy Act caused a quick replacement of MTBE with ethanol.
4) Many global grain producers experienced adverse weather in 2006 and 2007, reducing supplies in consecutive years.
5) As corn and soybeans reached relatively high prices in 2007, importers tended to buy greater quantities, pushing up prices and reducing stocks.
6) Many countries with large reserves of foreign exchange or oil revenues were able to buy as many food commodities as they wanted.
When food prices began to rise, many nations changed domestic policies that would benefit their citizens, and in many cases caused a further rise in world food prices. Some of those policies either halted or taxed commodity exports in an effort to retain as much food within the country as possible. That reduced the available supply and prices rose. Other countries reduced taxes on imported commodities in an effort to acquire more food at a lesser price to their consumers. That increased the demand and prices rose. Other countries initiated food imports, which additionally increased demand.
The global impact on higher food prices has a greater effect on the lower income populations who 50% of their income on food, than on higher income countries which spend 10% of their income on food. USDA says a 1% rise in food prices in the US would be a 21% rise in that other country. Additionally, many nations receiving food aid donations have received less, because the food is more costly to acquire by the donating country and shipping costs have increased. Consequently, social unrest has occurred in many lesser developed countries were food is either unavailable or too expensive.
Summary:
The price of food is a function of supply and demand. Over the past two years changes in both supply and demand have combined to cause a significant upward spike in global food prices, and in some countries causing social unrest. Regarding supply, adverse weather has reduced production, public policies have reduced stocks, and the trend toward biofuels has shifted supply away from food to fuel. Regarding demand, the devaluation of the dollar has cheapened the price of commodities based on the dollar, many growing economies have larger populations with more buying power and more hunger for higher value foods, and rising petroleum prices have increased production costs or curtailed production.
Posted by Stu Ellis at 12:58 AM | Comments (4) | Permalink
May 6, 2008
The New Farm Bill: What Do We Really Know About It?
The new Farm Bill has not exactly been written in a vacuum, but very little has escaped the Congressional Committee room doors. Even Monday, when the leadership said the document is complete for all practical purposes, they only offered crumbs from the huge cake that has been in the mixing, baking, and decorating process for the last three years. With little else to go on, we’ll look at the crumbs, which do indicate the flavor of the cake.
Senator Tom Harkin, Chair of the Senate Agriculture Committee, said he hopes the proposed legislation will pass muster at the White House and be signed into law. His Committee statement Monday provided few details about the Farm Bill.
Commodities: Some of the features of the 2002 Farm Bill, such as direct payments have been retained, but funding levels were cut. Two years into the plan, producers will be given the option to sign up for a new type of safety net, entitled the Average Crop Revenue program. Senator Harkin indicated it was similar to the Durbin-Brown plan which offered revenue support calculated from state yields and prices.
Conservation: The interest in conservation of Senator Harkin can be seen in the substantial expansion of Farm Bill conservation programs. His new Conservation Stewardship Program is funded with $12 billion over 10 years to enroll 115 million acres into the program. It is a working land program, compared to the Conservation Reserve Program which retires land.
Energy: The primary focus is on biofuels production, and is designed to promote cellulosic ethanol from agricultural biomass. Loan and grant programs would assist new refinery construction and new research on renewable fuels.
Livestock: A new element in the Farm Bill, it addresses some elements of contract production and provides more producer protections dealing with arbitration clauses, and location of court filings. It also modifies the Country of Origin Labeling provisions.
Nutrition: This section received the largest funding increase (reportedly $10.4 billion) and creates a variety of programs to assist children and families improve their access to food.
Research: $78 million in funding is set aside to help producers promote organic food products, and $230 million is appropriated for research on specialty crops.
Rural Development: Funding is appropriated for rural water and wastewater programs, for producers to process their own products and increase the value, and loans for beginning entrepreneurs.
Fresh Fruits and Vegetables: More funding is provided for organic foods, funding for promoting local markets, and $400 million for a 10 year program to improve pest and disease detection.
Summary:
While details are absent and full program descriptions are unavailable, the summary of Farm Bill elements released Monday by the Senate Agriculture Committee gives a hint of changes that have occurred from the 2002 Farm Bill. The contentious and private negotiations primarily involved funding more than policy, and spending has been the reason for veto threats from the White House. Although many producers have already finalized 2008 production plans without knowing how any farm program details will impact the marketing of the crop, most producers probably will sail through 2008 without thinking much about the need for a revenue safety net.
Posted by Stu Ellis at 12:34 AM | Comments (0) | Permalink
May 1, 2008
Is There Any Redeeming Value In Using The Farm Program Payment Information USDA Had To Release?
Probably nothing in agriculture has angered farmers more than the release of details about farm program payments they have received. When the USDA was forced to reveal who received how much in commodity and conservation payments, those names of farmers began to appear in the media with expected retaliation from tax payers. However, the information from the once-private files is being used to identify information about absentee landlords that will be used to develop future commodity policies. And we have an example.
About half of US farmland is operated by someone other than the owner, and when commodity payment information is associated with operators and landowners, USDA economists can determine how farm program payments relate to the actual farm operation. USDA ag economists Michael Brady and Vince Breneman analyzed the information released by USDA for the 2004 crop year. They wanted to determine where payments were being sent in relation to the farm, the use of cash rent versus crop share leases, and whether the ethanol tax credit benefited farm operators or farm owners. You will not find any individual names in this summary of that research.
The 20th Century saw a great transition from farms being owner operated to farms being operated by someone other than the owner. Division of estates further separates owners from their land, by more than just distance. The economists believe this also impacts the health of the rural economy, since money flows out of rural areas into urban areas. The USDA goal is more focused on rural areas, and the economists say the FSA payment information details the location where USDA money is going.
USDA’s 1999 survey of land ownership found that non-operator landlords owned 221 of the 434 million acres of US cropland, most lived within 50 miles of their farm, and most were retired farmers. Since their average age was 63, a lot of ownership would be changing in the near future. Owners over 70 years of age numbered more than the next younger age categories, and the older group increased its holdings by 40 million acres in the decade preceding the 1998 survey. Both the older age group, and their children in the next younger aged groups are likely candidates for cash rental agreements, instead of crop share.
The USDA ownership information covers 2.3 million entities or individuals and includes addresses where checks were sent, the amount, and the reason for the payment. For their study, the economists used 1,381,949 accounts with payments exceeding $15 billion. Since farm program payments are not supposed to be sent to cash rent landlords, the economists estimate the checks were going to crop share landowners. All of the payment recipients were divided into four groups, rural addresses in the same or a different county, and urban addresses in the same or a different county. What they found out:
1) Slightly more than half of all payments4 are sent to the farm or a rural area in the county of the farm.
2) The next largest category is urban, but another county at 17.39%.
3) 27% of the payments went to urban addresses, either the same or another county.
4) It does not appear that there are a significant portion of absentee landowners living in rural areas that are at a significant distance from the farm, which is expected given data from other surveys.
The USDA economists looked at the trends in several Cornbelt states.
1) Looking at the state of Illinois, which has a high percentage of non-operating landlords, approximately half of all checks were not sent to a rural address in the same county as the farm. More than 30% went to urban areas either in or out of the county.
2) If Illinois trends in absentee landlords are similar for cash-rent contracts then a slightly conservative estimate would put the urban, but another county category at a little less than 15%.
3) In Nebraska, 20% of payments are sent to out of county urban landowners. By payment volume the total is only around 5%.
4) The urban, but another county category for Ohio is even smaller at 9% of all payments and less than 3% by volume. When adjacent counties are included in the IU category it constitutes over 90% of the total value of all payments.
5) Values for Indiana and Iowa are more similar to Ohio than Illinois.
Summary:
USDA statistics for distribution of farm payments among farm operators and absentee landowners indicate 28% are sent to urban areas and not farm addresses. Comparing results across states in the Cornbelt show significant variation with Illinois appearing to have more absentee landowners than Ohio, Iowa, or Nebraska. An important question related to the use of the data, and research on absentee land ownership in general, is how land ownership will change in the next decade given the significant amount of farmland owned by people in their 70’s and 80’s.
Posted by Stu Ellis at 12:36 AM | Comments (0) | Permalink
April 30, 2008
The CRP: Keep It, Plant It, Or What?
Grain prices are telling Cornbelt farmers to plant every acre possible; whether that is corn, beans, wheat, hay, or whatever, there will be a good market for it. It seems increased demand for corn has squeezed acreage for other crops while global demand is increasing. So where do we find more land to plant? Well, at one time, about 35 million more acres were planted, but they are now in the CRP. What are the options here?
Despite a doubling of grain prices in the past year, planted acreage is only going to increase about 1% in 2008, and only 2.5% compared to 2006 planted acreage, when prices were well below current values. Iowa State University economists Bruce Babcock and Chad Hart say the lack of an acreage response to the higher prices indicates why biofuels have had the significant impact on commodity prices. And those higher prices will not fall until planted acreage increases.
With global food prices up, planted acreage will increase in many countries, such as Brazil, Argentina, Africa, and Eastern Europe, where land has been idled until now. In the US, over 35 million acres of land remains idled in the Conservation Reserve. But Babcock and Hart content that as CRP contracts expire, the land will return to production because revenue will exceed CRP contracts. That is a bit of the opposite when the CRP was created in 1986 and it was a secondary land retirement program designed to stabilize grain and land prices in the mid-1980’s recession.
As CRP contracts expire yearly, some will be renewed but Babcock and Hart suggest that owners will not opt for renewal to return the land into crops. And they surmise that might be as many as 20 million acres returned to cropland. Other owners will pay the penalty to break their CRP contracts, however penalties are stiff for the original CRP contracts, but minimal for CRP contracts just signed. Among the recently signed CRP contracts, the length of the contract related to the environmental sensitivity of the land. Ironically, the most environmentally sensitive land which received the longest contracts, would make the most sense for an early breaking of the contracts to allow planting.
Perennially, USDA receives pressure from livestock owners and the grain handling industry to phase out the CRP so more grain will be produced and grain prices can fall. That will likely recur this year, while environmental groups continue to lobby for CRP expansion. But Babcock and Hart contend that high grain prices will cause many CRP landowners to suffer the financial penalty and plant their land. If that is the inevitability, Babcock and Hart suggest:
1) USDA should reduce penalties for breaking contracts on the land that will expire in the next three years, which will not be as environmentally sensitive.
2) Some CRP landowners who just re-enrolled environmentally sensitive land will probably break their contracts to allow planting.
3) If USDA sees it is losing control of environmentally sensitive land, it could take new bids on the land, to enable that land to remain out of production, but at a higher cost that more closely parallels current land prices.
4) Re-bidding the land would also allow control over the environmentally sensitive land while opening up less sensitive land to grain production that satisfies the livestock industry.
Babcock and Hart acknowledge that re-bidding the CRP would draw criticism, but it would also address the needs of agriculture to provide both food and fuel at the same time. It would also keep expanded production in the US, rather than have it default to other countries.
Summary:
The Conservation Reserve has locked up 35 million acres that were once in production and could be returned to production to meet the food and fuel needs of the nation. However a systematic approach would be a re-bidding of the CRP contracts to return land to production that is less environmentally sensitive, but keep the most environmentally sensitive land in the CRP at contract prices parallel to current land values. Such a system would increase planted acreage more than 6% at a time when greater production is needed.
Posted by Stu Ellis at 12:15 AM | Comments (2) | Permalink
April 16, 2008
Inside Scoop: Crop Insurance Revealed
Is crop insurance a risk management tool, or a dependable source of revenue for your farm? That depends on where you live, and farmers in some states will be quite upset with this report and farmers in other states will be upset their secret is out in the open. Nevertheless, there are some distinctive inequities to be discussed.
Someone with an idea for a crop insurance program may likely consult with agricultural economist Bruce Babcock at Iowa State University. That is one of his specialties, and he knows the process inside and out. In the Spring edition of the Iowa Ag Review, Babcock reveals how the Cornbelt farmer is more of a contributor than beneficiary to the crop insurance program, in addition to the financial benefits received by crop insurers that administer the program for USDA’s Risk Management Agency.
In 2007:
1) Farmers paid in $6.5 billion in premiums.
2) $3.2 billion was paid out in losses to farmers.
3) $2.8 billion (Babcock’s estimate) will be paid to insurers by taxpayers.
Since 2000:
1) $11.3 billion in net payments to farmers (indemnities received minus farmer-paid premiums)
2) $22 billion paid by taxpayers to deliver $11 billion in net payments to farmers.
Babcock is critical of the inefficiency of the program and alleges that campaign contributions from insurance companies to Congress have maintained the status quo. He also says the benefits to farmers in certain geographical regions have been excessive and their Congressional representatives have kept the program from being overhauled. Babcock says the funding for the program comes from Cornbelt farmers who use crop insurance for risk management, and if that diminished, the program would falter.
Typically, insurance companies offer auto, health, life, and homeowners insurance that is “actuarially sound.” The premiums paid in must cover losses, plus return a profit to the company, but premiums must be competitive within the industry. In crop insurance, the USDA subsidizes the program, which means farmer premiums are not as high as they would be to be actuarially sound. But just focusing on the premiums paid by farmers, Babcock says farmers in Illinois, Indiana, and Iowa have paid in more dollars in premiums than have been returned in indemnity payments.
His research indicates Minnesota and Nebraska farmers have received about $1.25 for each $1 paid in premiums. Dakota, Kansas, and Texas farmers receive $2.25 to $2.75 back for each $1 paid in premiums. Montana and Oklahoma farmers pay $1 in premiums and receive $3 in indemnity checks. Those are averages from 2000 to 2007 that Babcock has calculated. As a result of the computations, Babcock says, “Clearly, the recent experience in crop insurance suggests that Corn Belt farmers are paying too much in premiums, and Great Plains farmers are paying too little.”
In addition to his criticism about the administrative rules of the crop insurance program benefiting insurance companies, Babcock says the profits recorded indicate that Cornbelt farmers are paying premiums that are too high. He says the insurance rates are based on a rolling 25 year average of losses within each state, and excluding some regional droughts in 2002 and 2005, there has not been a serious drought since 1988. Therefore, he says the Cornbelt farmer should receive lower premiums. But in conjunction with that, production risks are falling because of technology advances, and crop insurance premiums have not responded. He does point to the Biotech Yield Endorsement available to farmers planting certain biotech seeds.
As a result of the apparent inequities, Babcock rhetorically asks:
1) Why should (Cornbelt farmers) be asked year after year to generate large underwriting gains so that the industry will be willing to offer insurance in other states?
2) Why should (Cornbelt farmers) keep generating excessive annual (crop insurance companies) agent commissions when they rarely receive payments that exceed their premiums?
Babcock assisted the National Corn Growers Association in the development of its farm policy proposal for the 2007 Farm Bill, which was based on a county-level revenue program, but it was not adopted by either the House or Senate because of opposition by the crop insurance industry and commodity groups in the Great Plains states.
Summary:
Cornbelt farmers have paid more into crop insurance than they have received in indemnity payments for losses, but just the opposite is true for Great Plains farmers who have received more than paid in. While this is not the typical practice of an insurance industry which follows actuarial tables, it has been maintained by politically strong crop insurance companies which have benefited from the way the Congress has kept the program designed.
Posted by Stu Ellis at 12:51 AM | Comments (0) | Permalink
March 24, 2008
The Farm Bill, The WTO, And The Cornbelt Farmer
It has to be frustrating for farm policy writers. The 2007 Farm Bill is not finished and the 2002 policy expired 5 months ago. But at the same time the House, Senate, and Administration are haggling over domestic policy, the enforcers of international farm policy are methodically dismantling the structure of US farm policy. Where do you start in sorting out the issues and its impact on Cornbelt agriculture?
You’ve followed the progress, then lack of progress, in creating a 2007 Farm Bill. The Senate did not like the House version because of its lack of a disaster program and insufficient conservation programs and wrote its own. The Administration did not like either because the House wanted to raise taxes and both would cost more than the Administration wanted to spend. In brief, the stalemate has continued since late last year, but House, Senate, and Administration leaders are talking about their differences, at least.
The basic structure of prior Farm Bills remain in place, although some tweaking has occurred. There are payments to farmers. There are nutrition, crop insurance and rural development programs, plus funding for research. There are also food aid programs, and export promotion programs that offer credit to foreign buyers. While each Farm Bill contains a new program or two and makes minor adjustments in the way price supports are calculated, there is very little difference in them. That is the problem that international critics have with US farm policy, and The Congressional Research Service (CRS) has just provided a summary to Congress that outlines those complaints, just in case Congress wants to reshape domestic policy to comply with international trading rules.
The primary complaints are from Canada, which is our top trading partner, and Brazil which is one of our top trading competitors. They contend that all of the support programs that USDA provides to farmers exceed what is allowed by the World Trade Organization, and violated maximum support limits in 6 of the last 8 years; in addition to the export credit program being an illegal export subsidy since it does not recover its cost.
The Canadian complaint follows several years of arguments about wheat, and then spilled over to corn with the allegation that US corn was being exported to Canada at less than production cost. Although the Canadian government did not officially agree, it succumbed to political pressure to lodge the WTO complaint. Because market prices have risen well above support prices, and were expected to remain for at least ten years, Canada has dropped the complaint about price subsidies.
The Brazilian complaint followed a successful dismantling of the US cotton program and most recently was focused against the US feed grains program. Since the cotton complaint established a legal precedent that US support programs were improper, Brazil decided to press the issue on other US farm programs. Brazil initially joined in the Canadian compliant, but has lodged is own WTO complaint. Because each complaint was joined by a multitude of other nations, both the cases have been merged by the WTO.
The trade complaints contend US spending on various farm programs distort trade and distort the market by nearly $20 billion per year. The US says its support programs are well within WTO spending limits, but Canada and Brazil say the US did not total up everything it should have, and in actuality those spending limits would be surpassed. At issue are Production Flexibility Contract payments, Direct Payments, Non-insured Crop Disaster Assistance Program payments, Emergency Feed, Livestock Indemnity, and Tree Assistance payments. Additionally, both sides differ on how Counter-Cyclical Payments should be treated. Brazil’s also contends the US should be penalized for USDA direct and guaranteed loan programs, exemption of tax for farm use of petroleum, deductions on Schedule F income tax forms, benefits received from membership in cooperatives, and benefits from irrigation that is part of a government program.
The CRS has told Congress that if the WTO agrees the Production Flexibility Contract and Direct Payments are included, then the US farm program has violated the WTO limits in two of the six years. Also, if the market loss assistance and Counter-Cyclical Payments are added in, then the US has overspent its limits in five of the six years.
Regarding the complaint about the export credit programs, the WTO has already ruled in Brazil’s case against the US cotton program that it is illegal because it does not recover all of its costs. Consequently, the complaint is being raised against the program for all other commodities.
An initial ruling on the complaint is scheduled for late this year, but appeals could push a final decision well into the future. If the US is found to be at fault, then Congress would likely have to re-open the Farm Bill and write new commodity programs and other programs that aid farmers. The House and Senate Farm Bill proposals would cure the problems with the export credit programs. However neither version addresses the issues of Direct Payments and maintains the status quo on other programs. But most of the issues have been temporarily resolved by the fact market prices have risen well above support levels and the USDA has substantially reduced its financial outlays.
Summary:
Cornbelt farmers are particularly in jeopardy of losing their safety net, if the WTO finds that many US farm programs are providing more financial help than is allowed. Currently, however commodity prices are above support levels, and USDA expenditures are minimized. The new Farm Bill could address the international trade complaints, but does little to do that, and Congress may have to rewrite the Farm Bill in the next few years the US is held to be in violation.
Posted by Stu Ellis at 12:29 AM | Comments (1) | Permalink
March 17, 2008
Land And Grain Prices: What Happens If Ethanol Demand Increases?
As the grain market bids on corn and soybean acreage for 2008, values of commodity prices rise and fall. But the primary resource being targeted is farmland. Its quantity is finite and the marketplace is attempting to establish a value on it, via the price of grain. But the grain traders are only tools of the food, livestock, and ethanol industries, and it is those entities that are really becoming the land barons of the 21st Century. Which one will dominate the others?
That issue is investigated by a corps of agricultural economists, led by Jacinto Fabiosa, Co-Director of the Food and Agricultural Policy Research Institute at Iowa State University. The analysis explored US and global agriculture production, commodity prices, energy policies, and primarily land allocation, with the impact of Brazil, China, India, and the European Union.
Ethanol demanded a thorough focus and the economists found that Brazil and the US are the largest producers, Brazil is the only exporter, and China, India, and the EU are significant users and those five countries constitute the bulk of the world ethanol market. On the other hand, the lack of profitability in bio-diesel production essentially cancels its consideration in the study. For ethanol, its price impact induces land reallocation away from other crops which may have a softer price.
In the US the researchers found that an increase in ethanol demand will only impact US ethanol expansion, but the impact on feed grain supplies will be felt in other countries which depend on the US for imported grain. That change in coarse grain supplies in the US also impacts the price of wheat and soybeans, as land is shifted from them into corn production.
If Brazil expands its ethanol production and use that action will affect the world ethanol market as well as the land used for sugarcane production. The sugar production will have ripples felt in other sugar producing countries.
The 54¢ tariff applied by the US on imported ethanol insulates the US producers from the world market, and a removal of that tariff would increase the world price of ethanol and jolt the US ethanol market. Brazil would increase its ethanol production to benefit from the higher world price.
The researchers looked for any impact that a 3% increase in US ethanol demand would have. They found:
• The increase in U.S. ethanol use directly affects the corn and sorghum markets, with reduction of stocks, and expansion of land devoted to coarse grains.
• Corn falls as a feed for livestock and is replaced by sorghum, barley, oats, and wheat.
• Feed use of corn falls and seed use increases. Food use falls primarily for high fructose corn syrup.
• U.S. land area allocated to corn increases and could potentially increase by higher rates in the long run when inventories bottom out at their minimum required levels for markets to function.
• In U.S. oilseed markets, there is a sharp reduction in land devoted to soybean and, to a lesser extent, to sunflower. These reductions lead to higher oilseed prices which lead to biodiesel production to fall.
• In livestock and meat markets, the ethanol shock translates into higher feed grain prices, lower DDG prices, and a small increase in meal prices. The shock leads to a small reduction in aggregate meat production. U.S. beef production increases slightly and wholesale meat prices increase moderately. Retail prices increase by even less.
• World land area devoted to corn increases moderately in aggregate, but more substantially in Argentina. Growth in land devoted to corn in Brazil and India follows nearly with the aggregate corn supply. Higher world prices for other feed grains also occur.
• World soybean land allocation falls slightly, but it expands in Brazil, the most competitive soybean producer in the world.
The researchers also looked at a 3% increase in the world ethanol use, which is reflected in nations other than the US. They found:
• The impact on the world ethanol markets has a direct impact on the world ethanol price, as well as, on the local ethanol markets.
• The average impact on the world ethanol price is very high, but the U.S. ethanol price (Omaha price) is left nearly unaffected. This lack of impact is a result of the 54¢ import tariff. Brazilian ethanol exports rise despite the increase in its domestic demand.
• In feedstock markets, the largest price effects are registered for sugar given the importance of sugarcane and sugar by products as a feedstock in Brazil and India.
• The effect on world corn prices is a tenth of that on sugar price, because of the limited size of the grain-based ethanol production outside of the United States, namely in China and the EU.
• Similarly, the price of other feed grains increases slightly. The world ethanol demand increase has some impact on grain stocks and grain trade flows, but land area devoted to grains and grain production remain nearly unchanged in most countries.
• To summarize, the impact on sugarcane and sugar is the only significant change in feedstock markets. Brazil sugarcane area increases substantially
• Sugar production falls as it competes with ethanol for the sugarcane feedstock and sugar exports fall. Other competitive sugar exporters expand their land area devoted to sugar crops.
Summary:
Based on the significant impact that ethanol has had on domestic grain markets and land prices, it will have an even greater impact if demand suddenly increases by 3%. Higher corn prices will boost prices of other commodities and there will be significant land reallocation. However the US and world ethanol markets are separated by the 54¢ import tariff imposed by the US, so the US will be insulated from a 3% increase in ethanol demand in the rest of the world. That will be primarily changed by the expansion of sugar cane production in Brazil where the rest of the world’s ethanol will be produced. The increase in world demand will have little impact on US agriculture.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
March 11, 2008
Buckle Your Seat Belt For The Arrival Of Permanent Agricultural Law
Mark your calendar for Sunday, March 16, 2008. Unless Congress passes a new Farm Bill or extends the 2002 Farm Bill, which Speaker of the House Nancy Pelosi says she will not allow, the 1938 and 1949 permanent farm legislation will go into effect. Buckle your seat belt.
Let us return to those thrilling days of yesteryear when Grandpa and his flock of boys were scratching out a living for the family on 160 acres. It was probably a corn, wheat, oats, and hay rotation, with milk cows, fat hogs, and a yard full of chickens and geese. Grandpa would visit the ASCS office to get his acreage allotments about this time of year. You can do the same, 70 years later. Same name, same farm, just a bit bigger. (And here we thought agriculture had been making progress!)
USDA program staff members have provided Congress with an analysis of how USDA farm programs will be affected without Congressional action by March 15 (Saturday.) In lieu of a new Farm Bill or an extension of the 2002 Farm Bill, there will be considerable changes in farm programs, elimination of others, and some, such as crop insurance, will not be affected. To avoid confusion, keep in mind that when new farm legislation is approved every four or five years, it suspended the permanent legislation implemented in 1938 and 1949, and now the 1938 Agricultural Adjustment Act and the 1949 Agricultural Act are about to come to the forefront.
All of the Direct Payments and Counter-Cyclical Payments in the 2002 Farm bill will come to an end, along with Marketing Assistance Loans, Loan Deficiency Payments, the dairy price support purchase program, and the Milk Income Loss Contract program. When those programs will expire Saturday, they will be replaced with an allotment program, which provides a $7.80 support price for wheat producers with a wheat allotment. Wheat cannot be planted on greater acreage than the allotment, and farmers will have to produce records that their farm had an allotment in 1958, and had also planted wheat the past three years. Since acreage allotments have not been issued since 1971, and USDA does not have your annual acreage records back to that year, it is unclear how the program will be brought into the 21st Century. Don’t worry about soybeans or any other oilseeds, since amendments have eliminated them from allotments and price supports.
Without marketing quotas for feed grains, all corn and other feed grains would be eligible for price supports. The price support for corn would be 50% to 90% of the parity price, as determined by the Secretary of Agriculture. The current parity price is $7.56, so the range would be $3.78 to $6.80 for the Secretary to determine the support level. The Farmer-Owned Reserve will return for wheat and feed grains, as will a base and yield program. There actually seems to be part of the 1949 Act that allows the Secretary to convert commodities into industrial hydrocarbons.
For conservation programs, enrollments would cease at the end of this week; but participants in the CRP and the Wetlands Reserve would still receive technical assistance and program payments. EQIP and CSP programs would continue, but funding ratios, assistance caps, and optional parts of the programs would all be terminated. Compliance parts of the continuing programs would not be terminated.
Since the USDA trade assistance programs developed after the 1949, they would expire this week. That includes PL-480 programs, export credit guarantees, and market access assistance programs.
Food stamps will continue in the 50 states (it will expire in the US territories). Child nutrition programs, school lunches, Women’s Infants, and Children’s and other such programs are authorized under a different schedule and will expire at the end of next year.
Nearly all of the Rural Development programs are expected to continue. Many of them are incorporated into permanent law, such as the Rural Electrification Act, Rural Housing Service, and others. However, their activities are dependent upon annual program funding, and that expired at the end of last September.
Farm loans serviced by the Farm Service Agency received temporary funding for the current fiscal year, and that is considered an implicit authorization. However, some farmers seemingly eligible for renewal of loans will be unable because of an expiration of the authority that allows renewals. Also expiring is the provision that sets aside a portion of the money for beginning farmers.
Crop insurance is governed by a permanent law that does not expire, and that program will continue without being affected.
Summary:
Congress has a deadline of March 15 to either pass a new Farm Bill or renew the 2002 Farm Bill, and if neither occur, the suspension expires for various provisions of the 1938 and 1949 Agricultural Acts and those permanent laws come to the forefront to govern farm programs. While many USDA services like crop insurance, nutrition, and rural development will continue with little change, commodity programs will undergo a major overhaul. Price support mechanisms will convert to base and yield, production allotments, and prices will be supported at a percentage of parity levels.
Posted by Stu Ellis at 12:34 AM | Comments (0) | Permalink
March 3, 2008
Corn Growers Should Not Take The Blame For Poor Nutrition In The US.
Most farmers are pretty independent folks. Give them a farm program, let them grow what they want, and they’ll be happy. But within the framework of the USDA’s farm program, an urban-oriented Congress could say: “US citizens need more nutritious food so here is a list of the foods you are going to grow, and there will be no price support programs for food products not on the list.” A farmer probably would not like that.
Being responsive to the marketplace is one thing, but being responsive to a food and nutrition czar is another. However, the potential exists for the food and nutrition folks in USDA to collaborate with the commodity program folks across the hallway, and farmers could suddenly find their cropping plans a lot different than a corn/soybean rotation. Iowa State economists John Beghin and Helen Jensen provide a flavor of that scenario in their research that links Farm Policies and Added Sugars in US Diets. There is no secret that food consumption has changed in recent years to high fat and higher carbohydrate foods, and the nutrition industry has taken a critical view of corn sweeteners, specifically high fructose corn syrup (HFCS) that is found in thousands of food products.
HFCS is a liquid sweetener and easily added to foods and beverages. Because its prevalence in US foods began about the same time that health professionals began to notice trends toward obesity, HFCS took the blame and some food companies have been converting back to sugar. A loss of the sweetener market would be felt in the price of corn. With US farm policy addressing corn and sugar production, the role of farm policy is also brought into the debate about nutrition.
Beghin and Jensen say, “Although US farm policies have favored the substitution of corn-based sweeteners for sugar, two facts suggest a relatively weak link between the farm policies and resulting consumption today: first, the falling and relatively small farm value share of sweeteners in foods today, and second, experience with increased consumption of sweetened foods and beverages in other countries with different or no commodity programs.” The body cannot distinguish between sugars that are naturally in foods versus added to foods. However, per capita consumption has risen from 25 teaspoons per day in 1970 to nearly 30 teaspoons per day currently.
Over the years, consumption of all caloric sweeteners has increased 40 pounds per capita from 1966 to the current day, and most of that is from corn based sweeteners. The relatively low price of HFCS benefited food companies and has kept low the overall price of sweeteners. The low price of corn for many years also aided in the reduced cost of corn sweeteners, but corn value only represents 44% of the cost of HFCS production.
The Iowa State economists say US public policy has helped finance research and development that has increased production and lowered the unit cost of commodities such as corn and sugar. However, the price of corn has fallen twice as fast as the price of sugar cane and sugar beets as a result of the USDA-financed production research. Similarly, corn yields have grown faster from USDA research than sugar crop research. Regarding commodity policy, Beghin and Jensen say that has favored corn users and disfavored sugar users and promoted the use of HFCS.
Over the past 50 years, the farm value in retail foods has fallen from over 40% to about 20%, but in the past 25 years of HFCS use, the share of sweeteners in food prices has fallen dramatically from 25% to 5% in bakery and cereal products. For sugar prices, farm policy sets the price at the loan rate, but for HFCS, the government only sets the loan rate for corn, which is a distant correlation of price. Subsequently, the economists say the influence of farm policy on sweetener price and use is negligible for corn and small for sugar.
Internationally, the economists looked at prices of sweeteners, per capita consumption, and public policies that might impact production and use of sweeteners, vis-à-vis the obesity rate. They say Australia and the US have a high and rising prevalence of obesity, but opposite sweetener policies. The UK and France have the same sugar policy and prices, but have different sugar consumption patterns and different health outcomes. Therefore the economists say, “Caution should be taken in assessing the impact of sugar farm policy on health.”
Summary:
Due to a recent rise in obesity, particularly in children, sharp criticism has been directed at corn sweeteners, since their popularity has paralleled the nutritional change. However, criticism that farm policy has caused nutritional deterioration is unwarranted because policies in other countries do not share any correlation with the US situation, and US policy promotes more sugar use than corn sweetener use.
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
February 28, 2008
If The US Government Continues Ethanol Subsidies, Then The Corn Market Will Follow Crude Oil Prices.
Pictures of a Middle East oil sheik may foster dislike, anger, frustration, and other negative emotions because they have control over the price we pay for crude oil and eventually gasoline. But standing beside the sheik in his white gown and distinctive head gear may be a Midwestern farmer with his own distinctive head gear with a seed corn logo. As the bio-fuels era moves into a higher gear, it is ironic these boys on the opposite ends of the love-hate spectrum could be in cahoots.
Early in the gasohol era, ethanol promoters touted the slogan “There is an oil well in every cornfield.” So right they were, although it has taken nearly three decades for ethanol prices to become linked to the price of crude oil. They are in lock-step says Purdue economist Wally Tyner and colleague Farzad Taheripour, whose analysis of the integration of the energy and agricultural markets is focused on a new generation of Cornbelt ethanol sheiks. Their research shows there is a very low correlation between energy and agriculture, but when they correlate ethanol with either crude oil or gasoline, the correlation jumps to nearly 90%.
The linkage began growing stronger as ethanol refiners began to consume more than 10% of the corn crop, and with 30% of the crop headed into refinery this year the relationship strengthens further. They suggest it is “perhaps the most fundamentally important change to occur in agriculture in decades.” A major part of the ethanol industry is the governmental subsidy of 51¢ per gallon that petroleum blenders receive in the form of a tax credit. Tyner’s study looks at variations of that subsidy: elimination, fixed per gallon, variable linked to crude oil prices, and a renewable fuel standard.
The economists say the subsidy adds about $1.60/bu. to the breakeven price that a refiner can pay for corn, and without the subsidy, corn prices would be less because ethanol production would be diminished. They say with the subsidy and high oil prices, ethanol is profitable since it is priced parallel to crude oil. Any reduction in demand for oil would be a reduction in demand for ethanol and corn prices would fall. The economists say, “With no subsidy, there is no ethanol production until oil reaches $60. However, by the time oil reaches $120, ethanol production is 12.7 BG. The renewable fuel standard is another mechanism for implementing a variable subsidy. Consumers pay at the pump instead of through their tax bill.”
Parallel with the higher ethanol production, corn production increases with higher crude oil prices, and Tyner says corn production for ethanol reaches nearly 12 billion bushels when crude oil reaches $120 per barrel. But ironically with the federal mandates promoting ethanol production, corn production reaches 12.68 billion bushels at $40 oil since higher oil prices diminish corn profitability. Their analysis says the 51¢ subsidy will push corn prices to $5.65 at $120 oil, and without the subsidy it would be $4.60 at $120 oil. They contend the federally mandated Renewable Fuel Standard does a better job of supporting corn prices because the subsidy at low oil prices is much higher.
At $120 oil, Tyner’s analysis shows the 51¢ subsidy would cause 52% of the corn to be used for ethanol production, and less than 1.5 billion bushels would be exported. Under that same scenario nearly $9 billion would be paid by the government to subsidize ethanol production. They conclude there are large differences in corn production, use, exports, and value all determined by the price of crude oil, as a result of the brotherhood between ethanol and oil. Consequently, the type of subsidy provided by the government to foster more ethanol use has a substantial effect on the corn market.
Summary:
With an increasing among of ethanol being produced from corn, and the ethanol impact on corn production, use, and value, there is a direct connection between the price of crude oil and corn. Higher oil prices will push up ethanol production, as well as push up corn production, use and value, and push down other uses such as corn exports. However the way the government promotes ethanol production through a variety of subsidies will also change the production and value of corn.
Posted by Stu Ellis at 12:12 AM | Comments (5) | Permalink
February 26, 2008
Will Ethanol Require Too Much Farmland?
First it was coffee shop talk. Then it was the market. Lately it was the USDA’s Outlook Conference. At this point there is little doubt that commodity prices are going to remain strong for a while. While beans and wheat try to protect their turf from the corn market, the battle for acreage at the Chicago Board of Trade is about as hot as your neighbors bidding for that 80 acres being auctioned down the road. Do we have a shortage of cropland?
Acreage constraints are being increasingly felt as domestic and foreign markets are demanding a share of the US Cornbelt. With the market rising daily in fear there will be insufficient acreage, USDA economists last week forecast a large increase in planted acreage expected for 2008. In his weekly newsletter, University of Illinois Marketing Specialist Darrel Good notes that USDA’s projection is for 225 million acres of corn, beans, and wheat in 2008, which is 7.4 million more than 2007. He says USDA’s calculation calls for fewer cotton acres, more double-crop wheat and bean acres, and some from the Conservation Reserve that is not renewed. But he said that 5.6 million still leaves a shortfall of 1.8 million acres, unless cattle are sold and pasture is converted to cornfields.
As you review USDA’s acreage projections the 10th PowerPoint slide summarizes the USDA forecast. Economists expect corn acres to slip from 93.6 million in 2007 to 90 million this year. Soybean acres are projected to increase from 63.6 million to 71 million this year and wheat is projected to increase from 60.4 to 64 million acres.
Along with the acreage estimates, USDA forecasts the national average yield at 154.9 bu., which Good says would be a 3.8 bu. jump from 2007. He believes the demand and carryout will be such that more than 90 million acres will be need to reduce the risk of a supply shortage and higher prices.
That is also the concern of a group of Iowa State University economists who’ve calculated commodity prices and biofuel subsidies and find that high commodity prices will result from continued intense competition for planted acres. The research authored by Bruce Babcock and colleagues, indicates that the demand pressure for corn acres has spilled over to soybeans and hay markets.
In one of the Iowa State theories, the corn ethanol industry expands until 18 billion gallons per year are produced, but only from corn and not from biomass products. That theory also suggests the soy biodiesel industry never gets off the ground without substantial subsidies. Their research also finds an equilibrium corn price of $4.76, soybeans at $13.01, and hay or switchgrass at $164.62 per ton, with 61% of acres dedicated to corn, 19% to beans, and 20% to hay or switchgrass.
The researchers conclude that competition for land ensures that providing an incentive to just one crop will increase equilibrium prices of all. They also determine that neither biodiesel nor switchgrass ethanol is commercially viable in the long run, and for it to be viable, it must be subsidized at a $1.55 to $2.11 per gallon rate, compared to $0.22 to $0.78 per gallon for corn ethanol. They contend the result will be more pressure for corn-based ethanol because of the requirement for a lower subsidy and corn takes less land to produce than switchgrass.
Summary:
As the competition for land increases, commodity prices go higher. With the increasing demand for corn to make ethanol, more land will be needed. Yet the federal mandates for biofuels shift the ethanol burden from corn to biomass, those cellulosic sources will consume even more land and require higher subsidies which may not be the best plan for the future.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
February 23, 2008
Special Weekend Edition
The USDA Annual Outlook Conference was held Thursday and Friday near Washington, and anyone who has attended in prior years knows the value of the information provided. This special weekend edition of the farm gate blog will provide some flavor of the Outlook Conference and provide links to some of the presentations of greatest interest to Cornbelt farmers.
Following Keith Collins retirement in December as USDA’s Chief Economist his primary deputy Joe Glauber was named to that position in an acting capacity. Glauber’s presentation at the Outlook conference provided some insight into USDA’s expectations for 2008:
1) Planted acreage will reach about 252 million, up from 243 million in 2005, but still under the 1997 level of 261 million.
2) Soybean acreage will rebound to 71 million, corn acreage declines to 90 million and wheat continues its upward trend to 64 million.
3) Cash spring wheat prices have reached record levels above $18, with hard red winter above $11 and soft red winter above $9.
4) Global wheat consumption has outpaced output for the past 3 years. 2008 production may reach 650 MMT, compared to 600MMT in 2007.
5) Energy demand is driving corn usage, with ethanol taking 31% of production in 2008.
6) World oilseed demand continues to climb faster than corn demand.
7) Hog profitability has declined because of high corn prices. The hog-corn ratio that had reached 25 in 2005, will decline to 10 in 2008.
8) Slaughter cattle prices will remain steady with 2007 at $80. Slaughter hog prices will continue their 3 year decline to $40. Broiler prices will decline slightly from their 2007 high to $75/cwt.
9) Food prices are expected to increase 3-4% following a similar rise in 2007. Those increases are the highest since the nearly 6% rise in 1990.
10) Net cash farm income will exceed record levels again, reaching about $95 billion.
Under Secretary for Farm and Foreign Agricultural Services Mark Keenum presented his outlook on trade for 2008:
1) US exports will reach a record $101 billion in 2008, compared to $82 billion in 2007, and $76 billion in agricultural imports expected in 2008.
2) The agricultural trade surplus of $24.5 billion will approach the 1996 record of $27 billion.
3) US farm exports are driven by global demand, value of the dollar, renewable energy, reduced foreign competition, and changes in trade policy.
4) The greatest growth in global economies expected in 2008 are 8% in Asia and 6% in the Mideast and North Africa.
5) Among the top markets are Canada ($15.7 billion, +162%), Mexico ($14.5 billion, +190%), and China ($8.4 billion, +367%).
6) The US trade agenda is to complete the WTO talks, which may help reduce the 62% average world tariff. Comparatively, South Asian tariffs are 133%, and the US is 12%.
Pioneer HiBred President Paul Schickler was invited by USDA to address biotech seed issues in his presentation.
1) World production and consumption of corn has been at a steady upward climb, however yields peaked in 2004 and have declined the past two years.
2) Corn and soybean demand is driven by population and income. Over the past 10 years population has grown 13%, global income is up 35%, growth in meat consumption is up 25%, but the growth in the global crop acres is up only 4%.
3) Production must increase on existing farmland, or marginal areas will be pulled into production. Since 1980 global corn production has increased 68% with only an 11% increase in acreage.
4) Among new agronomic traits are drought tolerance (with 5-14% yield increase) and nitrogen use efficiency (with 10-25% yield increase in reduced N environments.)
Recent increases in commodity values have been blamed for causing substantial increases in food prices, but USDA ag economist Ephraim Leibtag's presentation at the Outlook Conference dispelled that rumor. An excerpt from his remarks indicates:
1) An 18 ounce box of corn flakes contains about 12.9 ounces of milled corn. Higher corn prices would be expected to raise the price of a box of corn flakes by 1.6 cents or 0.5%.
2) A 2 liter bottle of soda contains about 15 ounces of corn in the form of high fructose corn syrup. Higher corn prices would be expected to raise soda prices by 1.9 cents per 2 liter bottle or about 1%.
3) A pound of retail chicken uses 10.6 cents worth of corn or about 5.2% of the $2.05 average retail price for chicken breasts. Using the same corn data, retail beef prices would go up 14 cents per pound or 8.7%, while pork prices would rise 13 cents per pound or 4.1%.
4) Given that foods using corn as an ingredient make up less than a third of retail food spending, overall retail food prices would rise less than 1 percentage point per year above the normal rate of food price inflation when corn prices increase by 50%.
Many more of the presentations at the conference are available either by webcast of speeches or PDF of PowerPoint presentations. They are available here.
Posted by Stu Ellis at 8:54 AM | Comments (0) | Permalink
February 12, 2008
Crop Disaster Assistance Plan: Is It A Plan Or A Disaster?
Congress is moving quite slowly on reconciling the differences between the House and Senate versions of the Farm Bill. Regardless of the reason, one of the differences is the Senate’s inclusion of a permanent disaster assistance program, which does not exist in the House version. The Crop Disaster Assistance program is a new controversial element usually reserved for ad hoc consideration, and not a permanent fixture of a Farm Bill.
The 2005 drought hurt many Cornbelt farmers, and although there were efforts to pass an assistance program, opponents said production risk should be covered by crop insurance and not an ad hoc financial support program. The same occurred in 2006, and when the Farm Bill debate began in the Senate in 2007, a proposal arose for a permanent program. But Ohio State economist Carl Zulauf and Mississippi State economist Keith Coble have suggested an airing of the issues in the countryside would be an important aspect to the future of the plan. Their analysis does not take any sides in the debate, but asks questions that would help Congress and agriculture come to a conclusion.
The Crop Disaster Assistance (CDA) program provides a payment to farmers if their county or an adjacent county is declared an agricultural disaster area with weather-related production losses exceeding 50% of normal yields. So states with traditionally low yields would be frequent candidates for the payment.
CDA payments would only be made to farmers who carried crop insurance and paid the fee for the non-insured crops. The payment would coincide with the crop insurance deductible. Zulauf and Coble suggest that the CDA payment is a subsidy to purchase crop insurance, as well as to purchase higher levels of crop insurance coverage. Farmers eligible for the CDA payment would not have any fees to pay, other than the fee for CAT insurance, so the only cost is a co-payment for insurance that covers intermediate losses.
The economists also suggest that CDA will most benefit farms that produce only a single crop, since revenue risk declines as the crop diversification increases. So the more crops produced, the less the risk, and the less likely a CDA payment would be received. The economists also suggest that the formula for a CDA payment creates the opportunity for cheating, since the CDA yield guarantee is the largest of three possible scenarios:
1) The farm’s actual production history yield.
2) 85% of the 5-year moving Olympic average yield
3) The farm’s counter-cyclical payment yield.
Zulauf and Coble say it is possible for a farmer to claim a low yield, triggering a CDA payment but suffer no or little reduction in future CDA payments due to the existence of the two alternative yield options.
The accounting rules for filing a claim are written in such a manner as to cause one to wonder why a farm only has to report 20% of direct payments as income, and why marketing loan, counter-cyclical payments, and Average Crop Revenue payments not have to be reported as income. Zulauf and Coble also say Congressional policy writers need to address the use of GRP and GRIP insurance by farmers applying for CDA payments, whether land owners with crop share leases are indemnified also, and what happens to farmers who operate in multiple counties, but only one might be included in the disaster declaration.
Summary:
The Senate’s plan for a disaster payment package in the Farm Bill is a new element in the realm of permanent policy but attempts to encourage farmers to buy crop insurance, knowing that if there is a disaster declaration their insurance deductible would be reimbursed by the disaster payment. However, the various elements to the program that are designed to make it flexible and attractive may also create a moral hazard.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
February 7, 2008
Think About This: Is Production Agriculture Really Benefiting From The Bio-diesel Demand?
Bio-diesel. The exciting new bio-fuel which has pushed the price of beans into the teens. Bio-diesel, a new use for the nation’s surplus stockpile of soybean oil. If we can’t eat it, we can burn it. And soybean organizations nationwide have climbed on the bio-diesel bandwagon to promote the product as an alternative to imported petroleum-based diesel. But who is benefiting from this effort? You may be surprised.
With the help of the new federal energy policy, bio-diesel use is supposed to grow from 500 million gallons next year to one billion gallons in 2012. But the mandated use comes at a time when high prices of soybeans and subsequent high prices of soybean oil are nearly eliminating the margins of the companies which make bio-diesel from soybean oil. Iowa State University economists Miguel Carriquiry and Bruce Babcock write in the winter issue of the Iowa Ag Review that the increased demand will push soybean oil prices higher and further increase the cost of making bio-diesel. That means the cost of the product may be higher than consumers are willing to pay and theoretically, sales and production would be curtailed, as a result of the federal mandate.
But will the industry grind to a halt? The Iowa State economists say investors cannot be expected to finance an industry that makes no profit, and while the 500 million gallon target is supposed to be reached next year, the US actually has the capacity to make 1.85 billion gallons. They say biodiesel was priced at $4.20 per gallon in Iowa in early January, and based on soybean oil consumption, that would be the breakeven price if soybean oil were no more than 48¢ per pound. But it was a half cent higher at the time, and a negative profit margin would cause most plants to stop.
The industry did not stop, because if the demand falls and the price drops below the breakeven point, then plants will resume production since profits would return. So the unused production capacity and another 1.4 billion gallon capacity being built will ensure that soybean oil prices do not fall below the breakeven price. Despite the mandated production, the bio-diesel industry will only benefit if the price of soybean oil is below breakeven levels.
But Carriquiry and Babcock say with soybean oil futures above 50¢ per pound, wholesale soy diesel has to be priced at $4.50 per gallon, which would be a function of crude oil priced at $155 per barrel. An alternative for such a high bio-diesel selling price would be the value that it provides as an oxygenated fuel. Early in January, the spot price of bio-diesel was $4.15 per gallon, and with the $1 per gallon tax credit provided to blenders, the effective price was $3.15. At the time, users compared it equally to petroleum diesel at $2.80 per gallon, negating the 35¢ difference. The economists also say the blender purchase of bio-diesel could be subsidized or the price of bio-diesel could be set by the government at a level allowing the producers to stay in business, and the consumer would have to pay the premium charge.
The interesting aspect of the federal energy requirement is the fact bio-diesel prices cannot fall below the break-even point, but cannot rise too much above it. If that is the case, who benefits? Carriquiry and Babcock say the ultimate beneficiary of the federal bio-diesel mandate is really the farm operator and farm owner who are receiving high prices for soybeans as a result of the high price of soybean oil.
Summary:
The federal energy bill mandated increased production and use of bio-diesel, which not only creates more demand for soybeans and soy oil, but also creates a catch-22 for the biodiesel production industry. The industry has a breakeven point for soybean oil that determines profitability, but prices above or below that point cannot be sustained for any length of time. The breakeven point supports a high price for soybean oil, and production agriculture receives the benefit from high prices for soybeans.
Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink
February 6, 2008
What Is The Potential For Two Checks In The Mailbox?
“Double-dipping” is a term usually reserved for politicians, whom might serve as a full time alderman paid by a big city, then go to the state capital and draw a second salary as a state senator or representative. But the way certain farm programs are written can create similar scenarios for farmers to receive a double payment on the same crop, such as crop insurance and a disaster payment, or a price support payment plus a crop insurance indemnity. When that hits big newspapers or TV network investigators come calling, it is time for crisis management in agricultural public relations.
It is hard to tell just when agriculture will have a new policy, since the Farm Bill is unfinished and there is little movement being reported on reconciling the differences between the House and Senate proposals. But when new policy is created, as is the case with the Senate’s Average Crop Revenue and the House’s Revenue Counter Cyclical Program, there is always the potential for unintended consequences says Ohio State economist Carl Zulauf. He believes that the way those programs are written, there is a chance for a price support payment to be made while farmers are also financially benefiting from a crop insurance indemnity check or even a disaster assistance payment.
Zulauf’s analysis about the double payments indicates the potential for public criticism of farm programs as well as keeping funds from farmers who may need them. There is perennial debate about the potential for doubling up on crop insurance and disaster payments, but Zulauf says his concern is the basic price support programs could also pay off the way they are currently written.
Last summer’s federal disaster aid program that covered agricultural losses since 2005, contained limits on how much aid could be collected by a farmer, and capped it at 95% of normal crop value. It allowed disaster aid to be collected, but only to the extent that it covered crop insurance deductibles and nothing more. Essentially it prevented double payments.
The new price support programs proposed by the House and Senate are different, but are revenue-based, instead of yield or price based. Thus revenue could decline with a large decline in price, which could trigger marketing loan benefits or counter cyclical payments. A double payment would be precluded by the program, but Zulauf says double payments would not be precluded if both the price support program pays off as well as crop revenue insurance or disaster aid payments. Market conditions would determine the extent of the payments.
So what should happen? Zulauf suggests several options, including:
1) Subtract the one of the payments from another to eliminate the double payment.
2) Establish program parameters that preclude double payments, such as in the case of last year’s disaster assistance legislation.
3) Limit total payments to a percent of a farmer’s typical crop income.
Is the double payment potential a concern to you, and if so, what would you suggest?
Summary:
Congress placed limits on the 2007 disaster aid program to prevent a farmer from collecting both from crop insurance and from disaster assistance. However, those payments would still be made, even if one of the new Congressional proposals for a farm safety net also pays off. The Congressional alternatives provide either average crop revenue or a counter cyclical revenue payment, and depending on market conditions, a payment could be triggered from one of those, in addition to the crop loss assistance.
Posted by Stu Ellis at 2:34 AM | Comments (0) | Permalink
January 31, 2008
If You Operate The Largest Farm In Your State, Why Would You Be Interested In Farm Policy?
Imagine that you are involved in a very, very large farming operation. No, much bigger than that. Maybe it is an operation larger than you can imagine. Farm Bill commodity programs are not even a blip on the radar screen of the management, but your Congressman stops by for a tour one day and asks what the federal government can do to help. How do you respond?
Such large farming operations do exits, and generally have acreage or livestock well into the five-digit range. Payment limitations are not even an issue because management time is better spent on maximizing revenue from various profit centers, integrating products and resources with allied industries, and solving million dollar problems. Purdue economists Mike Boehlje and Allan Gray looked at several large agricultural operations in their research on the industrialization of agriculture. They found there were several farm policy issues that need to be addressed which would benefit such operations, and beneficial changes might assist smaller farmers as well. We’ll visit those operations, then review the policies.
Fair Oaks Farms Dairy spreads across I-65 between Indianapolis and Chicago and is partially owned by the Bos family, which also owns the Bos Dairy, and collectively milk 70,000 cows. Fair Oaks has 30,000 cows, milked by 10 units that hold 72 cows with milking underway 24 hours per day. Value added products are integral to the business, which also is concerned with crop production, cow comfort, energy production, and waste handling. Milk is processed in Kentucky to take advantage of a higher price afforded by the Southeastern US Milk Marketing Order.
Tom Farms LLC is composed of 12,000 acres of corn, soybeans, and tomatoes in the US and 4,000 acres in Argentina, with commercial seed corn production being a central focus. It also provides custom farm services to 28,000 additional acres. The operation either produces or manages 30,000 total acres of seed under contract with Monsanto, including processing and transportation to retail locations. Management is focused on return on investment rather than accumulation of land assets.
West Texas Organic Dairy owns 50,000 acres of native pasture and through irrigation is producing corn and soybeans for the dairy rations. The center pivot irrigation systems cover 160 acres, but on the low productive land not reached between the pivots are facilities for 3,500 dairy cows. The organic corn is fed as silage to the cows. The organic soybeans are shipped to a Kansas processor who returns the meal to the dairy, and markets the organic soybean oil. The organic milk is shipped to the Eastern US in return for a substantial premium over conventional milk, valuing the organic corn at $7 per bushel. Another 50,000 acres have been acquired for corn production to provide feedstock for an ethanol plant, as well as ten more dairies with 3,500 cows each.
Louisiana Rice and Row Crop Farm is a Central Louisiana operation with 26,000 acres, including 12,000 laser-leveled acres to supply rice to two rice plants under contract. Investment is being made in a river terminal for both export of products and import of inputs. Another operation of 30,000 adjacent acres may be brought into the business complex.
Past and current farm programs are focused on income transfer based on planting records, price supports, and payment limitations. But economists Boehlje and Gray say the structure of US agriculture continues to move toward industrialization, and many operations have already moved beyond farm programs, except to the dairy operation that is only taking advantage of a distortion in the marketplace created by the milk program. But what would the management of these farms really need in the way of federal farm policy to enhance their operations? Boehlje and Gray suggest:
1) Programs for transition assistance to assist farmers in finding other opportunities, should international competition or other dynamics create a need to buffer farmers from market forces.
2) Develop an institutional structure around a vertical market or supply chain that provides open access to information, prevent anti-trust issues, and help manage risk and rewards in an effort to enhance economic growth.
3) Revisit the rules about intellectual property rights to ensure that current patent and copyright laws are capable of managing the needs of the marketplace in the wake of global competition.
4) Support funding for public sector research and development to ensure that private funding of technology development does not lock it away from the marketplace.
5) Federal support for health care programs, work place safety, and improved immigration laws are needed to ensure a skilled and healthy workforce.
6) Regulations that promote food safety through traceability programs, regulation of antibiotics and additives, and market access to other nations where those issues are of concern.
7) Ensure there are entry-level management positions for young farmers in a career path to accelerate them to be an agricultural leader of tomorrow.
Summary:
While typical Farm bill provisions address the issues needed by most of the farms today, some farming operations are growing well beyond those regulations, and will require some forward thinking policies to allow their growth and success. Some operations with tens of thousands of acres and head of livestock need strategic change in farm policy, not just tinkering with per bushel payment levels.
Posted by Stu Ellis at 12:49 AM | Comments (1) | Permalink
January 29, 2008
The New Federal Energy Bill May Be More Cornbelt Friendly Than The Farm Bill
The new US energy policy that was signed into law late in 2007 boosted the mandates for ethanol and bio-diesel, guaranteeing increasingly higher demand for corn and soybean oil in years to come. But while the targets for use are posted for all to see, the bio-fuels industry will wrangle with Congress in 2010 over extension of the 51¢ ethanol tax credit that have been a foundation block for the industry. Additionally, a tariff that restricts the importation of ethanol and a $1 tax credit for bio-diesel are set to expire later this year. If the tax credits expire or are extended, what will be the impact on commodity prices, bio-fuel use and price, and the rest of the farm economy?
Formally, the policy is known as the “Energy Independence and Security Act of 2007” (EISA) and it mandates that 15 billion gallons of corn-based ethanol be used by 2015, in addition to one billion gallons of bio-diesel used by 2012. Currently, we are at a point less than half of those targets, but corn is already at $5 and soybean oil is over 50¢ per pound. To help Congress understand the impact of its action and prepare for the debate over extension of the tax credits, economists at the University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) programmed their computers to analyze EISA.
The result was dozens of different economic variables within a variety of scenarios with and without the tax credits and tariffs. Among the more important to a corn and soybean producer are these, if the tax credits and tariff are extended:
1) From 2011 to 2016 there will be 1.1 billion more bushels of corn per year refined into ethanol than if EISA did not exist, with 30% of the demand resulting from increased production and 30% resulting from reduced exports. 40% would result from less livestock production.
2) Corn production expands by 2 million acres, but soybean production does not expand because of higher corn prices.
3) Corn prices increase by 8% ($3.37) compared to life without EISA and soybean oil prices increase by 36%, pulling soybean prices up by 9% ($7.25). Soybean meal prices fall with the increased supply and more ethanol means more distillers’ grains.
4) Higher corn prices result in slight reduction in livestock production, further resulting in higher prices for cattle, hogs, and milk.
5) Higher crop prices mean less government payments from 2002 Farm Bill-type programs.
6) Average feed expenses for livestock producers are unchanged because lower costs of soybean meal offset higher prices for corn.
7) Higher crop prices contribute to an increase in cash rent, as well as other production costs because of increased corn production.
If the ethanol and bio-diesel tax credits are allowed to expire, along with the ethanol tariff, much different economic scenarios occur with the EISA mandates:
1) Ethanol production averages only 8 billion gallons per year from 2011 to 2016.
2) Corn prices increase an average of 52¢, and 5 million additional acres are produced.
3) Wholesale prices for bio-diesel double and the large increase in production pushes soybean oil prices up 72%.
4) With higher commodity prices, revenue returns per acre are greater for corn, which causes soybean acreage to fall slightly.
5) Higher corn prices outweigh lower soybean meal prices, so the overall cost of feed impact livestock producers, particularly for hogs.
6) Higher commodity prices mean less government spending for price supports, including for CRP payments because some CRP land is shifted back into production.
Summary:
The new federal energy policy will result in more ethanol and bio-diesel production than would occur without it, and with high levels of bio-fuel production, there is both increased demand and increased production of corn and soybeans, with resulting higher prices for both. That scenario means less dependence on government programs, but with higher production costs, including land costs.
Posted by Stu Ellis at 12:28 AM | Comments (0) | Permalink
January 24, 2008
Oh, I'm Forever Blowing Bubbles......
Some bubbles will give you a headache when consumed. Some bubbles will leave your face a pink, sticky mess when they burst. And some bubbles that burst can leave you with both a headache and mess, particularly if your marketing plan was anchored to it. Is your marketing plan on the bubble?
It is not a case of if, but when, the bubble bursts suggests Iowa State economist Bruce Babcock in the winter issue of the Iowa Ag Review. He says high prices are their own worst enemy because more profits invite more competition and more production. That means lower prices. Babcock says we may have high corn prices now, but in the past 50 years there have only been two occasions when corn prices were high in successive years. Short global crops did the trick in 1973-75, and from 1979 to 1984 prices were kept up with drought and farm policy.
In the mid-1990’s corn futures were in the upper $3 range, then began a five year slide, including a drop in demand cause by the Asian financial crisis. Today, a record corn crop has been followed by record high prices, even while a short soybean crop has been followed by record high prices. Unlike the 90’s, the markets are indicating these prices are not temporary, because 2009 and 2010 futures offer similar prices.
But if these prices are permanent, Babcock says, “The impacts on agriculture would be staggering…” Land rents should increase by a factor of 2.8, land prices should increase, and higher production costs follow. He says the cost of raising hogs, finishing cattle and producing milk and eggs rise dramatically. Those costs are passed on to consumers, but so will higher costs of specialty crops and vegetables, which are displaced by corn and soybean acreage. Babcock rhetorically asks, “But how much faith should we put in the Chicago Board of Trade as a long-run indicator of price levels, particularly when all the world's farmers face an unprecedented incentive to increase production?”
The Iowa State economist points to the recently enacted federal energy policy that amplified the use of corn and soybeans for biofuel production, and says that came at a time when supplies of grains are already tight, telling the markets to encourage world production. He says the US can only expand with the help of good growing weather and some shift of the CRP back into production. South America can slightly increase production acreage. The Ukraine may not have the infrastructure to increase much. The EU will expand pursuant to its own bio-fuels policy. And such a slow response to a call for more production is one reason for high futures prices the next two years.
But Babcock says over time production will increase as a result of the current profit signals which cannot be sustained for the long term. However, he believes the world’s demand for bio-fuels will require more production that may be high cost and require lower yielding acreage. And that he says may keep future prices at a higher level.
Babcock analyzed a variety of scenarios involving corn prices, petroleum prices and the retention and elimination of ethanol subsidies and import tariffs. Those policies help ethanol producers pay higher prices for corn; but a loss of those implies lower corn prices in the wake of high production costs.
Summary:
High grain prices have resulted from a strong demand for grain as well as acreage to produce other crops. Unlike prior times of high prices, the futures market indicates several years of sustainability. However, current values indicate land prices and rents should be higher along with production costs. Today’s strong prices result from the demand on grain to produce both food and bio-fuels, the latter of which is helped by protective policies. The loss of those policies would result in lower grain prices, but land prices and production costs might remain.
Posted by Stu Ellis at 12:14 AM | Comments (0) | Permalink
January 15, 2008
Do You Prefer The House Or Senate Farm Bill; Or Do You Know The Difference?
A handful of Congressmen and Senators soon will meet to iron out differences between the House and Senate versions of the Farm Bill. The House proposal is about 500 pages but the Senate plan is 1,600 pages, so wide differences of opinion about farm policy are obvious. Most Cornbelt farmers will be impacted by the commodity programs, and there again the differences are wide. Do you know which is best for your farm, and have you made that call to lobby for one or another?
The choices that the Congressional Conference Committee has are the Average Crop Revenue (ACR) variable payment program that came from the Senate and the House proposal for a Revenue Counter-Cyclical Program (RCCP). You will be dealing with one or the other for the next five years, so an understanding of the two is necessary for you to make an educated call to your Congressman and Senators.
Ohio State ag economist Carl Zulauf compared the two choices and says they are very different revenue programs:
1) ACR addresses the systemic risk that state revenue at harvest is below state revenue expected at planting. Its revenue target changes with prices, which allows ACR to provide assistance if prices decline from their current high levels. The ACR program uses a 3-year moving average of pre-planting revenue insurance prices along with a trend line yield to determine revenue expected at planting. The ACR revenue target is 90% of that value. Thus the revenue target goes up and down as prices fluctuate.
2) RCCP addresses the systemic risk that U.S. revenue is low. Its revenue target is fixed. Because low price and revenue frequently coincide at the national level, RCCP overlaps considerably with the price counter-cyclical program. The RCCP program will have a fixed revenue target in the Farm Bill that reflects the political consensus of what constitutes low revenue.
So, what is the risk? In the past 14 planting seasons, one year out of five saw the revenue per acre for the major commodities decline by at least 10% between planting and harvest. That is on a national scale. On a state scale, those declines could be larger for a state because yield declines could be larger for a given state than for the national average.
But would crop insurance not manage that risk? The revenue declines were less than 25% in the prior example, so a crop insurance policy with 75% coverage would not have been triggered. Since there is always the chance at revenue decline, to at least the 80% or 85% coverage level, few policies are purchased that would be triggered because of the higher premium rates.
The current economic environment is high prices and high production costs. Economist Zulauf says commodity prices are 65% above the targets set by the House in its RCCP program and an October calculation put production costs 26% above their 5 year average. His point is that with high costs and the uncertainty over prices there will likely be financial stress on the farm before the RCCP target is reached. Comparatively, Zulauf says the ACR program gives more timely assistance since formulas are based on yields and revenues on a more local level.
The RCCP program can be closely compared to the counter-cyclical price program implemented by the 2002 Farm Bill. Although the RCCP program is revenue instead of just price like the CCP program, Zulauf says it would provide only $4 more per acre in payments because the national scope of the calculation.
The impact on markets is more with the RCCP program than the ACR program according to Zulauf, because the RCCP program establishes a floor revenue, and the ACR program adjusts downward, based on a 3-year moving average if prices fall, and conversely if prices rise.
During the Senate preparation for the Farm Bill, considerable effort was made to create a permanent disaster program, which the Senate calls the Crop Disaster Assistance (CDA) program. It covers crop revenue loss not covered by the crop insurance deductible if a farm is in a federal disaster declaration. The fewer the crops produced the greater the chance a farm will benefit. The CDA payment is made with a low yield and a county-based disaster declaration, but an ACR payment is made on revenue, based on total state averages. However, theoretically, both programs could make a payment on the same loss.
Summary:
Congressional conferees reconciling differences in the House and Senate versions of the Farm Bill will be challenged to merge the House Revenue Counter Cyclical Payment program that establishes national target prices and the Senate Average Crop Revenue program which calculates a safety net payment based on state yield and price trends. The ACR program is also supplemented by the Senate’s permanent disaster aid program that covers a crop insurance deductible and other non insured crops when a disaster declaration is made.
Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink
January 14, 2008
The Farm Bill And WTO Agreement: Will There Ever Be A Checkered Flag In This Race?
While much of the world halted its business for the Christmas and New Year holidays, waiting patiently on hold were the new US Farm Bill and the long-negotiated World Trade Organization’s new agreement. If you have slept since you last pondered those agricultural policy issues, let’s get up to speed on what is lying in wait for your attention.
It is widely know in the world of agriculture that the 2002 Farm Bill expired last September and its replacement is still being considered in Congress. Within the next few days members of a Conference Committee will reconcile the House and Senate versions, but over-riding issues will include its impact on the federal budget and how it will be accepted internationally as slow progress is made toward a world trade agreement. That analysis is offered by agricultural economists Bashir Qasmi and Evert Van der Sluis of South Dakota State University.
They point out that the World Trade Organization does not have a deadline for reaching agreement, and the Farm Bill negotiators really don’t have a deadline until the harvest of crops next fall, when 1920’s style parity price supports would go into effect. Reflecting back to the 1996 Farm Bill, the economists say it tried to comply with international trade agreements that were designed to reduce export subsidies, price supports, and implement policies that were less trade distorting. However, as commodity prices fell, its safety net soon gave way to record high levels of financial assistance that were closely tied to production and accused of promoting production to the point of lowering world prices.
Subsequently, the 2002 Farm Bill increased financial assistance distributed to farmers and added more programs that were seen as promoting production and lowering prices. Within the current farm policy debate are budgetary considerations that indicate the Farm Bill proposals are not sustainable over time and growing demands for social programs will soon eliminate some farm program elements.
On a parallel track, but beginning several years ago, the world’s trading nations have been attempting to enhance trade that is widely recognized as fair. To achieve their goals, there have been efforts in several directions:
1) Market Access discussions are directed at reducing tariffs that are applied to goods entering a nation and currently average 51% around the world and can be as high as 300% on a given product.
2) Domestic Support for farmers vary around the world and may include social payments, or government supported research, and such things as federally subsidized crop insurance in the US. Assistance has declined recently as higher commodity prices have prevailed.
3) Export Subsidies have been widely used to eliminate burdensome supplies that reduce market prices, but also include food aid donations to needy countries. There have been some suggestions to totally eliminate all such programs.
4) Special Treatments are a package of considerations for developing countries that would allow them to engage in some level of trade protection for the benefit of their citizens and farm economies.
5) Non-Trade Concerns try to reconcile differences in environmental regulations, rural development, labor standards and food security.
The current discussions on world trade appear to the economists to be stalled in the differences between developed and developing nations. In particular, the US sees a substantial negative impact on land values should farm programs be dissolved. The developing world does not want to give up its mechanisms to protect its farmers. As a result:
1) A weak agreement would erode the effectiveness of the World Trade Organization and more trade barriers would be created.
2) The lack of a world agreement would give Asian and Pacific nations the incentive to create their own protective trade alliance.
3) The lack of a world agreement would spur a multitude of bi-lateral agreements around the world and undermine the WTO.
The researchers believe that the lack of progress toward an international agreement will give the Congress the incentive to include trade programs in the new Farm Bill that will not be internationally acceptable. They look at the current high market prices and lack of need for federal price support programs and see the opportunity for more liberal trade policies. But they say any decline in commodity prices will close that door, particularly with a continued increase in energy prices and land values.
Summary:
Concurrent deliberations on US farm policy and world trading rules have seen little effort at being integrated, particularly in the area of reducing farm price support programs. Even while commodity prices are high and price supports unneeded, Congress has taken little interest in reconciling US farm program and trade policy with US trading partners. The international trade discussions have been painfully slow and if unsuccessful, the WTO would be weakened by independent trade agreements, and by US policy that may retain certain provisions to protect agriculture from higher energy prices and land values.
Posted by Stu Ellis at 12:19 AM | Comments (0) | Permalink
December 27, 2007
Have You Wondered Why Farm Policy Affects You And Your Neighbor Differently? It Is Not Rocket Science!
We have just seen the Congress go through the process of writing a new Farm Bill, in which one of the stated objectives was to reduce farm program payments and payment limits because farm programs were benefiting large farms more than small farms. Whether the objective was achieved remains to be seen, but when you look at the financial diversity of farm families, an agricultural policy designed to apply equally to everyone just won’t work.
Why won’t it work? USDA economists Ashok Mishra and Hisham El-Osta researched the variability in farm household assets and debt, and reported that today’s farms with income from both agricultural and non-farm sources, combined with a blend of farm and non-farm assets and a blend of farm and non-farm debt make the typical farm family one that is difficult to define and assist with common policies in a Farm Bill. The economists say examination of family wealth is important to the analysis, but it is difficult to measure within the agricultural community. They say two households can have the same income, but one may have substantial asset wealth and a high debt, and the other may have few assets and debt, but farm policy may treat them equally.
Farm households are unlike any other in the country, because they have income from both farming and other employment, assets from farming and from other investments, and debt from farming, and non-farm reasons such as credit cards and a home mortgage. In a recent study, the average net worth of farm families was twice that of the non-farming family. With net worth resulting from liabilities subtracted from asset values, the economists contend the variability in those must be understood for meaningful policy to be written.
The USDA economists say almost 80% of the variability in farm household assets originates from real estate holdings, but the source of the variability changes, once farm size is taken into consideration. Small operations may have variability in assets, but those are primarily non-farm assets. For commercial farms variability in real estate is the major contributor to variability in household assets. Farming contributes nearly 88% to the variation in wealth for large farms and 23% of the wealth for small farms. For large farms, agricultural debt is practically all of the debt maintained by the household, but for small farms, agricultural debt is less than half of the household debt. In USDA’s agricultural region known as the Heartland (which is the central 2/3 of the Cornbelt), the economists say, “A large proportion (50%) of the variability in household assets originates from real estate (value of land and buildings). Further, non-farm assets contribute about 16% to Heartland region household asset variability.”
The variability of assets is also distinct between small and large commercial farms. For small farms the assets are in non-farm assets (59%), stocks and mutual funds (10%) cash and retirement accounts (8%). But the variability for large commercial farms comes from land and buildings (75%) and non-farm assets (10%). The economists contend, “Farm assets are strongly and positively associated with total farm household wealth. It appears that the higher the households’ commitment to farming and the higher the proportion of farm assets to total assets, the higher is the contribution of the farming component of assets to the overall variation of total farm household assets.”
Among the findings of the study:
1) Despite having low farm income, many farm families have a substantial amount of wealth or net worth (when assets from farm and non-farm sources are included) compared with average non-farm household wealth.
2) The portfolio of assets held by farm households is heavily weighted toward farm assets relative to housing and other non-farm assets. In contrast, the average non-farm household asset portfolio is most influenced by home values.
3) The diversity in sources of farm household wealth suggests households will respond differently to policy measures.
4) Because farm households are so diverse in their resource base, it is clear that no one policy action focused on the economic well-being of farm households will affect all households in the same way.
5) Farm households’ well-being is affected by changes in real estate values and long-term debt. Any changes in the amount and prices of land, and in the interest rate on long-term debt, will affect the economic well-being of farm households.
Summary:
Farm policy writers have long tried to create farm programs that affect farms equally, but when financial parameters are applied, the wide diversity in agriculture makes the task almost impossible. The blend of agricultural assets, liabilities, and wealth will be quite different between large commercial farms and farms that are smaller operations designed for residential or quality of life purposes. The variability in the farm economy will have different impacts on every farm, as will a uniform farm policy.
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
December 24, 2007
If You Build It, Will They Come? Possibly Not, When It Comes To Broadband Internet Service.
If you are reading this via the Internet, are you using a dial-up telephone line, or some faster broadband service, such as DSL or cable? Numerous farm organizations have been strong advocates for extension of broadband service to rural areas at an accelerated rate, and USDA has implemented several funding programs to achieve that goal. However, the rate at which many people jump the “digital divide” into the world of the Internet may not reflect the availability of broadband service to them.
“I don’t have it, because I can’t get it.”
“I can get it, but I don’t have it.”
Those seem to be the two scenarios discovered by economist Brian Whitacre at Oklahoma State University who says the gap in broadband access rates has remained relatively constant over the past several years despite increased extension of DSL and cable networks through the state of Oklahoma. Taking that state as an indicator of the rest of rural America, Whitacre’s findings may indicate that despite substantial USDA investment to erase the “digital divide,” it may be more of a function of households than being unable to connect households.
Whitacre says, “In the period between 2003 and 2006, rates of residential broadband access increased from 20 to 42 percent throughout the U.S. Over this same period, the number of broadband lines supplied by various providers increased from 23 million to 64 million.” But he says when the broadband infrastructure was available, different segments of the population showed different adoption rates. “The adoption decision is affected by the characteristics of the household. For instance, individuals with higher income and education levels are more likely to be early adopters. This fact is particularly true for broadband access, since its technological nature may be seen as an obstacle for households unfamiliar with its benefits.”
To support his theory about demographic characteristics retarding the adoption of broadband Internet service, Whitacre says in his 2003 to 2006 study, there were numerous changes in Oklahoma demographics, with improvement in education and income particularly:
1) There was a 4% increase in the number of heads of households with a high school diploma, and a 1% increase in college degrees.
2) Household income rose, with a 4% loss in the number under $10,000 and a 4% gain in the number over $100,000.
3) Other household characteristics, including age and household composition characteristics such as the percentage of married household heads, the percentage of male household heads, and the number of children, have remained relatively consistent over the three years.
4) The state did become slightly more diverse over this period, with more Hispanics, Native Americans, and individuals of other racial categories. Rural residents comprise approximately 42% of the state, which is comparable to the rates documented in the 2000 Census.
Comparatively, the proportion of residents with access to both cable and DSL rose from 15% to 34% from 2003 to 2006. “Only 8% of rural residents had both cable Internet and DSL access available to them in 2003. This number rose to 14% by 2006. By contrast, the percentage of urban residents with both types of access available rose from 20% in 2003 to 49% in 2006.” But Whitacre says adoption of broadband Internet service go in different directions when demographic characteristics of education and income are analyzed, “Broadband access rates for households earning less than $30,000 per year increased from 18% in 2003 to 26% in 2006. The statistics do not suggest that the same is happening with education levels. For instance, household heads with a high school education or less had broadband access rates of 23% in 2003 and 24% in 2006.”
Summary:
Rural development policy advocates have strongly pushed for broadband service to rural households; however, even in a rural state like Oklahoma, extension of broadband service does not necessarily mean that households will sign up. Demographic characteristics determine whether a household adopts broadband service, with lower income and higher age being determinants of fewer subscribers to DSL and cable Internet service.
Posted by Stu Ellis at 12:44 AM | Comments (6) | Permalink
December 10, 2007
How Will Your Farm Fare With A New Farm Program Concept?
The US Senate is expected to conclude its debate this week on the Farm Bill amidst a flurry of amendments, before a select group of Members of the House and Senate will meet to reconcile the differences. One of the amendments may be the proposal by Senators Durbin of Illinois and Brown of Ohio to use state-based yield and price calculations to define the financial safety net for farmers, and then integrate it with the crop insurance program. How will that work for you?
Considerably more complex than a national market loan rate, and even more complex than the calculation of Posted County Prices, the Durbin/Brown plan contains a revenue counter-cyclical program which may pay farmers in one state, but not the next, since it is based on localized factors. Ag economists Richard Taylor and Won Koo at North Dakota State University analyzed the proposal, which came close to adoption by the Senate Agriculture Committee, and comes from a concept proposed by the National Corn Growers Association. Since there is very little correlation between a producer’s yield and the national yield, the proposal compares a producer’s yield with the closer state average to determine if a support payment is made. Those correlations are 68% for wheat, 81% for corn, and 79% for beans.
Under the plan, any crop insurance indemnity payment would be reduced by the amount of the Revenue Counter Cyclical Payment (RCCP). For example, multiply the state yield by the state average price to get a revenue target. If your farm’s revenue did not reach 90% of that state target, then you may qualify for an RCCP payment, but not both the payment and a crop insurance indemnity payment. If you carried crop insurance, your revenue shortfall would be covered by an indemnity check, adjusted downward by the amount of the RCCP payment you had received. Farmers would be unable to collect twice for the same production shortfall. Revenue insurance programs could be bought has high as 95% of expected revenue.
The North Dakota researchers developed scenarios based on the House-passed Farm Bill, the Harkin plan to be debated in the Senate this week, a status quo based on current farm safety net calculations, plus a trio with 75%, 85%, and 95% crop insurance guarantees with the RCCP payment program. For the period of 2008 to 2012, all of the proposals return more money to average profit farms than would the current farm program payment mechanism. Taylor and Koo say, “The state-level RCCP proposals provide slightly greater support than the House scenario, but, in most cases, lower than Harkin’s scenario. The main reason for the greater support is that the RCCP proposals utilize Harkin’s higher target revenue levels, but at the state level.” Farms in a higher profit category would benefit the most from the Harkin plan, then the House, then the base plan, but the 95% RCCP plan would eclipse the Harkin plan for revenue. Taylor and Koo say there is only a 2% difference between the 75% and 95% plans when they are averaged over a 5 year period.
While the Durbin/Brown plan is novel, the integration with crop insurance results in a safety net that is quite close to the Harkin and House plans for commodity price supports. The state-level revenue targets do lower income variations since the counter-cyclical program is based on state statistics, and not a national average. Taylor and Koo expect crop insurance costs to decline, “The integration of federal crop insurance with the RCCP will reduce crop insurance premiums in the states. Payments will occur less frequently and at lower levels, but in the long-run, it will not change net farm income levels because insurance premiums will decline.”
To evaluate the Durbin-Brown proposal for your farm, use the Farm Bill Scenario Analyzer.
Summary:
Within a day or two, the Senate will determine whether the Revenue Counter Cyclical Payment program will be part of the Senate Farm Bill, and if so, it will then be discussed by the Conference Committee to reconcile the House and Senate versions. The program is the first to integrate crop insurance and farm price supports, and the first to use state-based yield and price statistics to establish a revenue target as the basis for any safety net payments.
Posted by Stu Ellis at 12:50 AM | Comments (0) | Permalink
December 6, 2007
Headache: Donating Food That Does Not Exist, To Countries That Cannot Handle It, Amidst An International Firestorm
In the season of giving and charity, it may be appropriate to explore what the US does in the way of charitable donations to the world’s family of countries. After all, the food donations to needy countries are produced by farmers, and there are substantial taxpayer funds, farmers included, who pay for commodities to be donated and shipped abroad. Food aid is part of the Farm Bill trade title, so let’s shed some light on it.
The US has donated food to needy countries for many years, but came into prominence with humanitarian relief after World War II and became organized during the Eisenhower Administration’s PL-480 program. Most farmers have taken pride in those efforts, but with the world culture changing, complaints that it is unfair trade, and the high cost of the programs, the entire issue of food aid has come under greater scrutiny. Purdue agricultural economist Phillip Abbott’s Overview of Food Aid & the Farm Bill organizes food aid into three categories:
1) Emergency relief augments food supplies or rebuilds productive assets following natural disasters or political strife.
2) Project food aid funds a wide range of development projects implemented by foreign governments or private voluntary organizations (NGOs).
3) Program aid provides balance of payments support to recipient governments to cover food import costs as well as other foreign exchange needs.
Abbott says program and project aid are often “monetized” as donated food is sold in recipient countries and receipts fund broad development programs and emergency food aid is more likely to use food rather than cash donations.
Those types of aid are included in eight different federal programs, which have budgetary allocations that ranged from $0 to $803 million in 2006. The primary programs which are part of Public Law 480 observed their 50th anniversary in 2004, but were subjected to criticism because of multiple purposes that have changed over time.
One of the biggest challenges to food aid programs is the fact the 1985 and 1995 Farm Bills created policies that ensured the market would handle any production surpluses, instead of the Commodity Credit Corporation, which currently holds no surplus food products. Without surplus food being available for donation, critics rhetorically asked why such programs exist. This parallels the negotiations in the World Trade Organization at which the European Union has offered elimination of its export subsidy program that had shipped food to countries at substantially reduced prices. In turn the EU wanted the US to reciprocate by eliminating programs the EU thought were similar, although the US characterized them as outright donations. As part of the negotiations, several issues become dominant:
1) Cash donations are more easily handled than containers of food products.
2) When the donated commodity gets to its destination, should it be donated or sold?
3) Donated food displaces imports from commercial sources.
4) Food donations create a disincentive for recipient countries to produce their own food.
5) US food donations have to be shipped on US carriers, and freight charges are 40% of the budget.
6) Purchase of local food, or from nearby countries reduce transportation and handling costs.
The US is prohibited by trade agreements from using food aid as an export subsidy, but Abbott says the concern exists because donated food is less available when prices are high and needy countries are less able to purchase it, such as the current situation with many commodities. WTO negotiators have agreed that export subsidies are improper, donated food should not displace commercial purchases, and donors should give cash rather than food products. The US has rejected the concept of cash instead of food, and has said no cash would be forthcoming during natural emergencies, if the rule stands.
As the Congress rewrites the Farm Bill, several issues are noteworthy:
1) Food aid is part of the permanent 1949 legislation, but calls for donations to be made from surplus government stocks.
2) The last major overhaul of food aid programs was in the 1991 Farm Bill.
3) USDA is urging Congress to use some PL-480 funds for the purchase of local foods to assist people in a food aid crisis.
Abbott says food aid is a bargaining chip in the current WTO negotiations with respect to export competition, and any final agreement will contain changes from the current US policy on food aid. It is difficult for both the Congress and trade negotiators to settle upon the same solutions in two different arenas. While cash is a more efficient way of providing aid, but there are strong political interests calling for that cash to be used to buy US commodities. However that issue and the requirement for donations to be shipped on US carriers may take precedent over the most efficient help being provided to the needy.
Summary:
The US has a long and proud history of providing surplus food to needy countries, particularly in times of emergencies. But other nations see the action as displacing sales of their food to the needy, and the US no longer has stores of government owned food to donate. So, change is forcing new rules to be written for food aid donations in the World Trade Organization rules. While this comes at the same time as the Farm Bill and its trade title is being revised, there is no certainty for agreement on policy.
Posted by Stu Ellis at 12:27 AM | Comments (1) | Permalink
December 5, 2007
Crop Insurance And Disaster Aid Are Key Farm Bill Elements Still Unresolved
How much of the risk in farming should fall on the shoulders of the farm operator as opposed to the government. Since the first farm programs, policymakers have decided that some portion of the weather related losses should be USDA responsibility or there may not be enough farmers who plant the crops that are needed. But taxpayer questions about crop insurance subsidies and frequent disaster payments have created a new atmosphere of contentiousness in the 2007 Farm Bill debate.
Part of the permanent farm program authorized in 1938 and 1949 requires federally subsidized crop insurance to be offered to producers by USDA’s Risk Management Agency. Additionally, the Farm Service Agency offers the Non-insurance Assistance Program as well as ad hoc disaster payments when there are widespread problems. To assist Members of Congress understand the players, a scorecard was created by the Congressional Research Service http://www.nationalaglawcenter.org/assets/crs/RL34207.pdf to help clarify the rules of the game.
Crop insurance programs are developed and marketed by private insurance companies, but since the USDA underwrites the risk for farmers and ensures the company can cover its expenses, there is a substantial taxpayer cost. Subsequently, all crop insurance agents have to sell all of the authorized programs and in 2006 that represented over 100 crops covering more than 75% of the US planted acres. Not surprisingly, corn, beans, wheat, and cotton make up 80% of the crop insurance business. Since 2000, crop insurance has cost taxpayers more than $2 billion, and has been as high as $3.5 billion. That includes both the indemnity payments to farmers for production or revenue losses, as well as subsidies to insurance companies for their operating expense and agent commissions.
The program has expanded over the past 25 years with the thought farmers would assume more of their own risk of production, but that has not happened. Nearly every year Congress not only underwrites the cost of the insurance but also appropriates millions of dollars for ad hoc disaster aid, whether farmers had crop insurance or not. In the past year, crop insurance was a requirement for any disaster receipts that might be issued. For those who had enrolled in such a program $1.5 billion in disaster aid was distributed. For the past 18 years over $20 billion in disaster payments have been made, but in the past 6 years disaster aid and crop insurance subsidies have averaged $4.5 billion annually. Congressional supporters of disaster assistance have called for permanent programs, instead of ad hoc programs, but opponents say that would diminish the interest in voluntary crop insurance purchases.
The advent of revenue insurance programs, which have been attractive to farmers, have greatly increased the business being done by insurance companies and the cost to the government has doubled over the past 7 years. Some traction in the current Farm Bill debate has been generated by a revenue insurance on steroids that takes part of the place of a commodity support program. With crop insurance subsidies being a target of complaints by trading partners, the new concept is being promoted as one that will escape such criticism if established within World Trade Organization parameters.
Within the current Farm Bill debate, the House has attempted to renovate the crop insurance program and save some expenses by reducing payments to companies and shifting farmer indemnity payments into the next Farm Bill. But the companies and farmers would shoulder $1 billion more in program costs, with farmers paying more for CAT insurance. The House does not include any provision for a permanent disaster aid program, one of the keystone elements in the Senate’s proposed Farm Bill currently being debated. The Senate also claims a savings of $3.5 billion in the crop insurance program, but only because of timing payments and collection of premiums. Other parts of the savings are reductions in fees paid to insurance companies and an increase in the fee charged to farmers for the CAT program.
The Senate also offers farmers a choice in participation in the average crop revenue program, which includes reduced premiums for crop insurance. Additionally, the Senate has included a permanent fund for disaster assistance. Part of any benefits would be direct payments, and a second part would cover the increased cost of crop insurance which is mandated by the program. The Congressional Research Service says, “Under the proposed program, an eligible farmer in a disaster-declared county would receive 52% of the difference between an established guaranteed level of revenue and actual total farm revenue. The target level of revenue would be based on the level of crop insurance coverage selected by the farmer, thus increasing if a farmer opts for higher levels of coverage.”
Summary:
Risk management is a significant part of agriculture, particularly with high production costs and potentially high amounts of revenue that can be at risk. The new Farm Bill will have some changes to crop insurance programs, and farmers may be asked to pick up more costs, even with the higher rates from higher commodity prices. The major debate will be whether a permanent fund will be included to distribute disaster aid, and how it will be handled for producers with and without crop insurance.
Posted by Stu Ellis at 12:53 AM | Comments (0) | Permalink
November 28, 2007
Delays, Debates, Debacles. What Happens Without A Farm Bill?
The 2007 Federal Fiscal Year expired at the end of September, without a new Farm Bill being enacted, and most observers say it will be early 2008 before any action will be taken. Your farm has not been confiscated. The sun will rise tomorrow. You won’t be getting checks for parity payments. But what will or won’t happen while we are all in agricultural purgatory?
To help Congress understand the ramifications of a delay in the enactment of replacement legislation, Jasper Womach of the Congressional Research Service analyzed the Possible Expiration of the 2002 Farm Bill. Womach says the all-encompassing Farm Bill contains a wide range of programs, some of which are mandatory and require annual appropriations, and some of which are discretionary and change from year to year depending on the level of Congressional appropriation.
A mandatory commodity program was enacted in 1949, but the periodic Farm Bills supersede that federal statute by overriding its provisions for 4 to 6 year periods. The 2002 Farm Bill covered the crops planted in 2007, regarding price supports, crop insurance, and other annual programs. Your 1996 crop was planted about the time the 1995 Farm Bill was finally enacted. You are probably planning your 2008 crops without knowing what, if any, payments will be made. And there are certainly not any acreage setaside programs that require fields to be marked off and oats planted as a cover crop. Womach says, “(The) lack of new commodity support legislation before harvest in 2008 does little harm other than leaving producers of “covered commodities” uncertain about the size of payments they might receive. He says if Congress takes no action before the beginning of the 2008 harvest, then the provisions of the 1938 and 1949 farm laws that never expire will go into effect. But those would be so costly to the government that Congress is unlikely to allow that to happen.
The 1938 and 1949 permanent law provides mandatory support for basic crops with a non-recourse loan that would provide cash flow and forfeiture of the crop. However, there are no Posted County Prices and no Loan Deficiency Payments. Nor are there Counter Cyclical Payments or Direct Payments. However, those would be negligible to the loan rates which are linked to parity prices. The loan rate for corn would be between $4.05 and $7.28. The loan rate for wheat would be between $8.18 and $9.81. Additionally, the Secretary of Agriculture would announce acreage allotments and marketing quotas and then hold referenda to let producers decide whether to implement them. Soybeans would not be included, since they were not part of the permanent farm program. While the USDA has computed the soybean parity price at $17.90, there would be no loan program that would guarantee a support price. Womach says there would be insufficient time before planting season to address the allotment issue. Since the loan rates are all higher than current market prices, most producers would put their crop under loan and forfeit it when the 9 month loan matures. The market would have to bid above those levels to get the grain out of federal warehouses and into the marketing channel, in the unlikely event that would happen.
However, the milk marketing year begins January 1, so parity prices would go into effect in 5 weeks. Milk would be supported between 75% and 90% of the parity price of $30.38, but through the USDA purchase of nonfat dry milk, cheddar cheese, and butter. Womach says, “Under permanent law those purchase prices (based on July 2007 data) would be about three times as high a currently mandated and nearly 50% higher than market prices. Such high USDA purchase prices could result in the government outbidding commercial markets for a sizeable share of processor output.”
Conservation programs are part of discretionary spending with no guaranteed year to year program, and depending upon annual Congressional appropriations. While most conservation programs remain on the books their level of implementation depends upon appropriations. However, the more well known programs such as the Conservation Reserve, the Wetlands Reserve, EQIP, and CSP, do have expiration dates, most of which were September 30th. Many of those programs were all part of the 1985 Farm Bill which created a somewhat permanent structure for conservation, that is extended from one Farm Bill to the next. Since funding expired for the CRP at the end of September, don’t expect new enrollment announcements before a new Farm Bill is announced, but all existing contracts remain in effect.
Nutrition programs, which include food stamp distribution, are authorized in permanent law, but are depending upon annual appropriations. The programs would not change, but Congressional “Continuing Resolutions” are needed to keep the funding for the programs in place, and so far that is until December 14th. The WIC program, the school breakfast program, and other public feeding programs are authorized separately from the Farm Bill and do not depend upon its enactment.
Rural Development programs are part of permanent law, and financed with annual appropriations. A handful of programs new to the 2002 Farm Bill have expired, and may not be re-authorized.
Agricultural research, foreign food aid, and some farm loan programs are all discretionary, and are not only funded from year to year, but may not be renewed in the next Farm Bill.
Summary:
The Farm Bill contains many programs that are temporary and require annual funding to be continued, but also contains mandatory programs that require funding, such as food stamps and commodity programs. Commodity programs were made permanent in 1949 but the provisions change from one Farm Bill to the next, and a new commodity program will have to be in place before next harvest to displace a loan program based on parity prices. Such a supply management program would put grain in federal storage that would be unavailable to the market at current prices, a scenario unlikely for Congress to allow.
Posted by Stu Ellis at 12:28 AM | Comments (2) | Permalink
November 22, 2007
Ethanol: Taking A Look At The Big Picture (Part 2)
The financial future of the Cornbelt farmer is rooted in the price of corn, which is rooted in the price of ethanol, which is rooted in the price of oil. But your profitability depends on the implications of the implications of the implications of economic variables for which you can only hope and pray. On this Thanksgiving, we’ll connect the dots, and try to draw a conclusion, instead of a turkey.
This is Part 2 of the farm gate’s great ethanol adventure, exploring a new academic work by the University of Illinois Department of Agricultural, Consumer, and Environmental Economics. Agricultural economists Darrel Good, Bob Hauser, and Gary Schnitkey delved into the economics of the ethanol sector to help you connect the dots of price relationships.
More corn is being used for ethanol production than for exports, and the industry will nearly double its capacity when planned refineries come on line. While that will produce 14 billion gallons of ethanol, it will also require nearly 5 billion bushels of corn, nearly what is currently being allocated for livestock feed. But there are politically-charged incentive subsidies necessary for that to occur, along with a favorable sale price for the DDGS co-products, and affordable construction costs, an affordable price for corn, and an affordable cost of energy. (In other words, the dots need to form a line.)
Dot 1: Ethanol prices. With 2.8 gallons of ethanol produced from a bushel of corn, a 10% change in the $2.25 price of ethanol implies a 63¢ change in the price of corn. But if corn is $3.75 per bushel coming in, a 10% change is 37.5¢; and DDGS is $130 per ton going out, a 10% change would be 11.5¢ per bushel of corn. With natural gas costing $7 per 10,000 BTU’s, a 10% change alters the operating margin by 7¢ per bushel of corn. But instead of pricing ethanol with a formula of corn, DDGS, and energy, ethanol is priced by the going price of unleaded gasoline. In 2006, if unleaded gas averaged $1.94 per gallon, ethanol would have to be priced at $1.30 per gallon because it has only 66% of the BTU value. But adding the blender credit of 51¢ makes the price $1.81 per gallon for ethanol. Its average price was really $2.58 because of its environmental benefits that could become moot when alternatives disappear. Currently, ethanol is priced at a 45¢ discount to unleaded gas, and since that reduces the operating margin of an ethanol plant the expansion of refineries would decline sharply.
Dot 2: Ethanol and corn prices. The Illinois economists say if ethanol can be sold by the manufacturer at $1.50 per gallon, then it can pay up to $3.65 per bushel of corn and still break even. But they add, “The break-even corn price is particularly meaningful in the case of ethanol because (1) it is considerably higher than traditional corn prices, (2) a relatively large amount of corn production is used for ethanol, and (3) the amount of ethanol produced has very little effect on gasoline price.” The economists believe that if corn prices continue under $3.50, then ethanol production capacity will increase, but it will fall if corn prices remain above $3.50. The price of corn not only determines the growth of refining capacity, but also determines how much corn will be grown. But with the expected price of soybeans at 2.5 times the price of corn, the price of soybeans determines how many acres of corn will be planted.
Dot 3: Production and Consumption shifts. The economists hypothesize there will be significant impacts on consumption if the breakeven price is at $3.75 because of oil prices and federal policies, and if corn users did not have alternative feedstocks. Since the livestock industry is the largest corn user, “In our opinion, a large, long-term increase in ethanol demand would ultimately cause higher retail prices at the meat and dairy counter and higher livestock prices, but a relatively small reduction in livestock production.” Further, they say that most of the exported corn is also for livestock feed, the foreign demand for meat will determine the quantity demanded for export. In total they believe 13% of a fixed amount of corn would be all that is diverted to ethanol from other uses of corn. However, corn production can expand as the price demands, particularly from soybean acreage and what the producer loses is the profit from corn production, vis-à-vis corn yields.
Dot 4: Ethanol Yield per acre of corn. The ethanol yield per acre is a combination of corn yield, and how much ethanol can be produced from a bushel of corn, which is currently about 2.8 gallons, and has increased over time. But seed genetic improvements can raise that number with more starch and starch that is easily obtained. An increase in the ethanol yield will reduce the corn acres needed for ethanol. In recent years, the trend yield of corn has also increased, and at an accelerated rate. While technology has resulted in some of the increase, a more benign weather pattern in the past decade has also helped stabilize and increase corn yields.
Dot 5: World response to increasing crop prices. The higher US price for corn resulted in increased acreage in 2007, and the economists believe that as long as ethanol production expands, prices will remain strong and corn acreage will remain high. But they say the bidding war depends on the price of ethanol and how the world responds to higher crop prices in both consumption and production. Higher corn prices would result in higher prices for corn and alternative crops, particularly for Brazilian soybeans, and that would result in lower prices for US beans and less acreage. Continued high prices would lead to productivity gains in many countries.
Dot 6: Corn price risk. The corn prices important to both the producer and the ethanol refiner are a function of weather driven yields. In the past decade they have been more stable than in the prior 20 years. Shortfalls have existed, but the 1 shortfall in 5 years that occurred from 1970 to 1990 has diminished to 1 in 10 in the past 12 years. However, the potential for a major shortfall has kept corn prices volatile, particularly with the low level of stocks on hand.
Summary:
The ethanol economy has become a dominant factor for Cornbelt agriculture, but its stability relies upon corn yields and prices, oil prices, government policies, alternative crops, and how the world responds to production and consumption changes because of the demand for corn. That combination of factors determines whether corn prices will be above or below a breakeven point for ethanol refineries, and that in turn determines the long range support for corn prices.
Posted by Stu Ellis at 12:46 AM | Comments (0) | Permalink
November 20, 2007
Average Crop Revenue: Will It Benefit Your Farm In The New Farm Bill?
While Senatorial procedural issues have halted debate on the 2007 Farm Bill, it gives Cornbelt farmers the chance to examine one of the key commodity program proposals to determine how hard they want to lobby their Senators to vote it up or down. That is the Average Crop Revenue (ACR) program. Farmers would have a different mechanism for computing the USDA safety net. Critics say it offers no change from the status quo, but most farmers would disagree.
The ACR program provides crop subsidy payments based on state-level revenue per acre falls below a trigger price for a given crop. The revenue trigger is a computation of price and yield. The proposal being debated by the Senate would give farmers a choice of the ACR or a continuation of direct and countercyclical payments and non-recourse loans, but once a farm shifted to the ACR it would not be able to go back to the traditional program.
University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) computed agricultural economic variables over the 5 year life of the Farm Bill, and compared the programs with and without the ACR component. The outcome not only gives the Congress an idea on how much money the program would cost, but also gives farmers an idea of how they would fare under the ACR program. FAPRI estimated that 70% of farmers with wheat, barley, oats and sunflowers would participate, 60% of farmers with soybeans would participate, and 50% of farmers with corn and sorghum would participate.
Under the legislation being debated the ACR program would not be available until the 2010/11 crop year, no payments would be made until after Oct 1. 2011. For the benefit of Congressional spending limits, the cost of the program in the final year of the Farm Bill would not be charged until a new Farm Bill is written.
ACR Program details:
• There are no direct or countercyclical payments, and if a marketing loan is taken on a crop, the loan must be repaid in cash. Crop forfeiture is not an option.
• ACR program participants are paid $15 per base acre on all program crops.
• An additional payment is made if actual statewide revenue (price X yield) is less than a program guarantee. The price factor would be used to determine crop insurance indemnities under a harvest price revenue program.
• The guarantee is computed from trend yields and a 3-year moving average of prices, but may not change more than 15% per year, and equals 90% of that revenue calculation.
• The payment rate on a given farm is further adjusted by the crop insurance APH yield and how it compares to the state trend yield, and the revenue component is paid on 85% of base acres.
• Payments would be made in October, after the marketing year ends, which is 12 months after the harvest of the crop.
In addition to saving money because of the delayed start of the program and shifting the expense for the final year of the Farm Bill into the next Farm Bill, FAPRI says there is very little difference between the ACR and traditional program for the producer. The impact on the commodity market is also minimal, since the program is voluntary. FAPRI says a mandatory program would change acreage balances, since benefits are less for cotton and rice producers, who would opt for more lucrative crops.
• FAPRI estimates the ACR program would mean a $5.07 per acre net loss on corn, an $11.75 net gain per acre on soybeans, and a $2.73 net gain on wheat per acre compared to the traditional program.
• Under the current parameters for the ACR proposal, producers would receive anywhere from $18 (peanuts) per base acre to $26 (soybeans) per base acre. That would be the case as long as per acre revenues held above trigger levels, as they would be in today’s market scenario. However, when the revenue portion of the program is triggered, payments would be much larger because of the fall in either yields or prices or both.
Summary:
The Average Crop Revenue program being considered in Congress for the 2007 Farm Bill would eliminate direct and countercyclical payments, and make changes in the loan program, in return for a per acre payment and a complex mechanism that triggers a payment when commodity revenue falls. The program would be voluntary for farmers who would have the choice of saying with the traditional farm safety net program. While the program is designed to save money, it does not begin until halfway through the tenure of the new Farm Bill, and the final year payments are made after the 2007 Farm Bill expires.
Posted by Stu Ellis at 12:37 AM | Comments (0) | Permalink
November 14, 2007
Ethanol: Taking A Look At The Big Picture (Part 1)
For more than 20 years, the members of the National Corn Growers Association, its state affiliates, and non-affiliated corn farmers across the Midwest have made impassioned pleas to Congress, their state lawmakers, and anyone else they could find who might become an ethanol advocate. They won. But the emotions that have run as deep as a subsoil tillage tool are being challenged by a variety of hard economic realities. Will corn-based ethanol survive?
Ethanol has become one of the first successful alternative fuels available for nationwide use, not only displacing 10% of gasoline, but providing EPA mandated oxygenates in the fuel. “But without the large increase in oil and gasoline prices that has taken place since 2002, we would not be experiencing today’s ethanol boom.” That’s the analysis of Bob Hauser, agricultural economist at the University of Illinois, who heads the Agricultural Consumer, and Environmental Economics Department which has just released an extensive economic evaluation of ethanol and its impact on the US. Pointing to the rise in petroleum prices in the past 5 years and the corresponding ethanol production that began about the same time, Hauser says the price of corn, subsidies, trade barriers, and renewable fuel policy have also helped the surge in ethanol use.
Currently 131 ethanol plants are producing 7 billion gallons, and 82 more are in construction that will produce an additional 6.45 billion gallons; all of which would consume 4.8 billion bushels of corn. Hauser’s colleagues “ran the numbers” on ethanol and using $4 corn with a 12% rate of return, they calculated the break even cost for a new plan would be $2.34 per gallon of ethanol, and at $2 corn the break even price declines to $1.62. But the economists say those prices are also dependent upon the values of co-products, governmental subsidies, and the technical abilities of ethanol as a motor fuel.
The economists contend the 51 cent per gallon federal blending subsidy has been a significant driver of ethanol demand, and if it were eliminated, then the break even level for ethanol production would be the same for both $2 and $4 corn. But Hauser says, “The effect of the subsidy is to create a breakeven ethanol price for $4.00 corn that could only be achieved with $2.00 corn without the subsidy.” Hauser says if the long term expectation for the price of oil is to be $60, then the implied break even price for ethanol refiners to pay for corn is $3.50, and with the significant demand for ethanol, then the equilibrium price for corn will be $3.50 per bushel.
Such a price level for corn would be a 50% increase from the long term equilibrium price that has been $2.40 since the mid-1970’s. And Hauser’s colleagues say that will have an impact on livestock production and the export industry, as well as production of competing crops that do not have the same return per acre, and will go as far as contributing to changes in land values.
The Illinois economists say there are numerous other ethanol factors impacting crop prices in addition to the price of oil, including ethanol blending subsidies, the tariff on imported ethanol, the 10% limitation in blending, foreign demand for US corn, and the production of ethanol from feedstocks other than corn. While those will impact the equilibrium price of corn and the break even price of ethanol, the economists believe the long run price of oil will have the greatest impact on ethanol.
Along with ethanol, a refinery also produces distillers’ dried grains with solubles, commonly known as DDGS. The Illinois economists estimate that 82% of DDGS will be used in cattle feed, 7% by hogs, and 11% by poultry. The current magnitude of production indicates livestock production is being drawn closer to ethanol plants so far in the western Cornbelt, but not yet in the eastern Cornbelt.
The Hauser report also examined other feedstocks for ethanol, such as switchgrass, corn stover, and miscanthus. None of those feed the “food versus fuel” debate, less land is consumed, marginal lands can be used, and there are specific environmental benefits not existent with corn-based ethanol.
The University of Illinois report is extensive and too large to address in a single farm gate posting. Salient portions of the report will be explored over the next several weeks.
Summary:
No one questions the value of ethanol in raising commodity prices following more than two decades of ardent support by corn farmers. However, the relatively sudden demand has been aided by the price of oil, and a prior foundation that included governmental policies. Ethanol has helped corn to a new equilibrium price of $3.50, which will have impact on livestock production, competing crops, land values, and numerous other factors. Ethanol production has also sparked changes in the Cornbelt, including drawing livestock production closer to ethanol plants which produce DDGS. The next generation of ethanol may be oriented away from corn and more toward grasses and corn stalks.
Posted by Stu Ellis at 12:20 AM | Comments (0) | Permalink
November 5, 2007
The Farm Bill: A Little Closer, But Still Far Apart.
The 2002 Farm Bill expired over one month ago, and Congress has not yet settled on a replacement. But proposals are on the table and debate begins this week on the Senate Ag Committee’s version. With so many urban Congressmen and Senators who are not agriculturally oriented, the Congressional Research Service compared the proposals for their benefit. And now you have the benefit of that comparison.
There are thousands of provisions in the Farm Bill, and most of them impact producers outside the Cornbelt, as well as consumers across the nation. The farm gate will attempt to summarize the proposals which have the most immediate impact on grain and livestock producers in the Upper Midwest. For a more detailed summary, consult the published summary of the Congressional Research Service.
Safety net of commodity price support programs:
• The House keeps the Direct Payment program at current levels, and keeps the Counter-cyclical payment program, with increased target prices for wheat and soybeans. The Senate Ag Committee converts these programs into an optional Average Crop Revenue program.
• The House and Senate Ag Committee propose an optional Average Crop Revenue program. The House program is based on national revenue, but the Senate Ag Committee program is based on state revenue. The House program would begin in 2008, but the Senate Ag Committee program is delayed until 2010, and replaces Direct Payments with a $15 per acre direct payment regardless of crop. Payments from the ACR program would be offset if crop insurance indemnity payments are collected.
• The House Marketing Loan program would have slightly higher rates for wheat and remain a non-recourse loan (commodity can be forfeited). The Senate Ag Committee program requires the loan be repaid in cash for those selecting the ACR option, and loan rates would be higher for wheat. The current Marketing Loan program would remain until 2012, when the new program would change in both the House and Senate Ag Committee versions.
Payment limits
• Both the House and Senate Ag Committee have eliminated the 3-entity rule, which allowed one person to collect from multiple operations, and established financial limits.
• The Adjusted Gross Income cap is lowered from $2.5 million to $1 million in both the House and Senate Ag Committee versions. However the cap is only $500,000 in the House unless 67% of AGI is from farming.
• The House raises the limits on Direct Payments to $60,000 and eliminates the $75,000 cap on Marketing Loan gain, and allows the limits to be doubled by allowing a spouse to capture the same benefits. The Senate Ag Committee lowers the limits on the counter-cyclical program to $60,000 and eliminates the maximum on the Marketing Loan gain.
Planting flexibility
• The current prohibition of planting fruits and vegetables on program crop acreage is retained in both the House and Senate Ag Committee, however the Senate Ag Committee version allows fruits and vegetables to be produced on program crop acres if they are destined for a processing plant, and with a 10 thousand acre maximum in IL, IN, IA, MI, MN, OH, and WI.
Dairy
• Both the House and Senate Ag Committee continue the dairy prices support program, but the Senate Ag Committee allows the Secretary to reduce USDA purchase prices, and the House proposal supports the price of cheese, butter, and NFD milk.
• The MILC program is continued through 2012 in both the House and Senate Ag Committee, and the Senate Ag Committee raises the payment rate and the payment cap per farm
Specialty Crops
• Both the House and Senate Ag Committee appropriate $365 million to expand grants to states for specialty crop projects.
• The Senate Ag Committee adds aquaculture to the list of specialty crops.
Livestock marketing and contract regulations
• The House version allows USDA to set standards for arbitration in contracts and allows producers to seek relief in courts, and the Senate Ag Committee version allows arbitration to be voluntary. The Senate Ag Committee restricts the option of an integrator to cancel a contract, and gives producers more options to cancel a contract. The Senate Ag Committee also creates a new position within USDA to investigate and prosecute violations of competition within livestock marketing.
• Both the House and Senate Ag Committee allow interstate shipment of meat from plants with only state inspection.
• Bother the House and Senate Ag Committee implement Country of Origin Labeling by 2008, but only for red meat.
Conservation
• Both the House and Senate Ag Committee add $1.9 billion to multi-year funding.
• The House and Senate Ag Committee expand the EQIP program to include forestry, and the Senate Ag Committee adds organic agriculture
• The House restructures the CSP program, eliminating tiers and payment structure. The Senate Ag Committee also restructures the program and establishes priorities for stewardship.
• The Senate Ag Committee creates a $2.0 billion program that combines EQIP and CSP that would enroll 13 million acres per year.
• Both the House and Senate Ag Committee extend the CRP, with the Senate Ag Committee adding new geographical initiatives, and the House relaxing regulations when beginning farmers take over from retiring farmers.
• The House expands the WRP acreage ceiling, and the Senate Ag Committee expands the program by 250,000 acres per year, and both allocate $1.9 billion more to the program.
• The House puts a limit on conservation payments at $60,000 for any single program and $125,000 on multiple programs.
• Both the House and Senate Ag Committee endorse environmental service markets within the private sector, and create a mechanism for USDA regulations that would oversee carbon sequestration markets and other initiatives.
Bio-fuels programs
• Both the House and Senate Ag Committee continue a grant program for bio-fuel projects. The House splits its $800 million fund among large and small plants. The Senate Ag Committee’s $300 million would give priority to cellulosic ethanol plants.
• The House allocates $420 million for research on biomass fuel research. The Senate Ag Committee provides $135 million in research funding on DDGS and other biofuel product issues.
• The House allocated $1.4 billion for projects that use biomass for heat and power production, while the Senate Ag Committee allocates $245 million to help bioenergy producers acquire feedstocks.
Crop Insurance
• Catastrophic crop insurance (CAT) fees would increase from $100 per crop per county to $200 in both the House and Senate Ag Committee versions.
• Much of the attention on crop insurance in the Farm Bill proposals is paid to the fees that the USDA pays to crop insurance carriers. Both the House and Senate Ag Committee call for the fees to decline over time. The Senate version would have producers pay premiums earlier in the crop year, but not until 2012.
Summary:
With the Senate debate beginning this week on the Farm Bill, numerous issues are different from the House version, particularly in the farm safety net and in conservation funding. When the Senate completes its work, a committee composed of members of each House of Congress will reconcile the differences. There are thousands of elements in the Farm Bill which have differences in the two versions.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
October 31, 2007
Could There Be Any Dark Clouds On The Horizon For Ethanol?
For the most part, agriculture has worked hard to promote pro-ethanol policies to build a new market. The effort has been quite successful in driving commodity prices higher as the result of a demand market. But if those policies change, as they sometimes do, are ethanol and the corn market vulnerable?
Ironically, agriculture has had a lot of doubts about the issue of global warming, but the promotion of ethanol has benefited as the result of advocates of alternative fuels, bio-fuels, and those who prefer to reduce the impact of petroleum on the environment. In the category of politics and environmental issues making strange bedfellows, Cornbelt farmers and the global warming sector are in the same political camp that has pushed upward the target for ethanol production and use. And currently 90% of alternative fuels used in the US is an ethanol blend from corn.
But Iowa State ag economist Bruce Babcock and his colleagues have expressed concerns in the current issue of the Iowa Ag Review that shifting political policies may melt ethanol demand along with glaciers and Polar ice. While federal policy focuses on promoting biofuels, a new California policy says the biofuels must have a 10% reduction in carbon content by 2020, and that goes well beyond federal requirements. Babcock and colleagues say ethanol is in a good position if it does indeed reduce carbon. But there are many variations to the calculations, as well as definitions, and just what all is included in the proof.
Babcock rhetorically asks if the expansion of corn production to produce ethanol reduce the buildup of greenhouse gases? He says if the answer is yes, then corn based ethanol may qualify as a low-carbon fuel, but if not then the California requirement (and there could be others) will threaten the future of ethanol. It all starts with the planting of corn, followed by its refining into ethanol, and concluding with its use as a motor fuel. The analysis also includes US and foreign land use changes that can be attributed to expansion of corn acres.
Ethanol and gasoline can be easily compared in terms of energy, carbon release, and other yardsticks. But Babcock says the decision on whether ethanol is a low carbon fuel must also consider the impact on other crops and their acreage, as well as the impact on other uses of corn, “The two most important determinants of greenhouse gas emissions per gallon of ethanol in the agricultural phase are the yield per acre of land and the amount of nitrogen fertilizer used. And both of these are influenced by whether corn is grown after soybeans or after corn.” They calculate that increased production of corn to meet the ethanol demand requires more nitrogen and its production causes ethanol to be charged with higher carbon emissions. When the corn is refined into ethanol, the energy required at the refinery causes more greenhouse gases, but ethanol should not be charged with all of that, since distillers’ grains also are produced.
On the issue of land use, corn production gets a credit from the fact that soybeans are not produced on that acre which would otherwise be a charge for carbon emissions. If corn is grown on virgin land, it has to be charged with releasing more carbon than if it were going to be produced on typically tilled land, and even on CRP land. But so far, the increased corn acreage has only been at the cost of other crops, and not bringing new land into production. However, with less US soybean acreage resulting from more ethanol demand, the higher prices have resulted in more South American production and more virgin land being planted to a crop.
While Babcock’s crop production and refinery calculations indicate corn-based ethanol reduces greenhouse gas emissions, this conclusion is neutralized by soybean expansion into virgin grass and timberlands in South America. To keep ethanol in a positive light for greenhouse gas emissions, the impact will depend on the type of energy used at ethanol refineries, whether distillers’ grains are sold wet or dry, and the type of land that is used to plant the increased acreage for corn. Babcock says the ethanol refinery will probably make the first decision on energy prices. The second decision depends on the siting of cattle feedlots and local zoning laws. And the last issue is beyond control of the ethanol industry, but could be impacted by USDA policies on CRP contracts. Babcock’s team says the whole issue of whether ethanol is a low carbon fuel may depend on foreign cropping practices.
Summary:
Ethanol is seen as an alternative biofuel designed to replace petroleum, but if public policies require fuels to emit low quantities of carbon dioxide and greenhouse gases, there is a question whether ethanol can meet than requirement. While corn production and refining calculations can be made that indicate ethanol is a low carbon fuel, the deciding factor may depend on soybean acreage expansion in South America, as well as land use policies in the US that allow additional corn acreage.
Posted by Stu Ellis at 12:59 AM | Comments (1) | Permalink
October 24, 2007
The Senate Ag Committee Debates The Farm Bill: Part 3
The Senate Agriculture Committee today is scheduled to debate and approve a proposal for the 2007 Farm Bill that can be considered by the full Senate. The past two editions of the farm gate have summarized many of the elements on the table, and today you’ll get a look at Committee Chairman Tom Harkin’s proposals for Rural Development, Research, and Credit.
A summary of the Harkin proposal is found on the website for the Senate Agriculture Committee.
In the Rural Development portion of the proposal, Senator Harkin endorses mandatory funding for day care, hospital equipment in small towns, broadband grants to libraries, and low interest programs for rural electric cooperatives. On the issue of broadband Internet access, Harkin focuses aid where at least 25% of households do not have such service and restricts aid to areas where there are three or more providers already.
The proposal would continue grants to promote locally grown value added foods, but reduce funding from $500,000 to $300,000. A new element in the Value Added program would bolster rural collaboratives to boost rural economies, quality of life, and job creation. Other programs would support micro-enterprises with assistance and loans for beginning entrepreneurs.
Senator Harkin’s Rural Development programs would exclude cities of more than 50,000 population and areas contiguous to those cities.
The Harkin Research proposal is similar to that proposed initially by the USDA and already adopted by the House of Representatives. It creates a federal agricultural research administrator, similar to the National Institutes of Health, who would coordinate national research priorities and ensure that universities would share in research funding as well as allocate money to competitive grants. The new National Institute of Food and Agriculture would supervise research that would have a high degree of visibility. The proposal also puts funding priority on specialty crops, invasive species, food safety, and organic production.
In the Credit portion of the Harkin proposal, he begins with a pre-amble that indicates the challenges are immense for beginning and socially disadvantaged farmers and ranchers, particularly for obtaining land and equipment, credit, and building equity. Among his proposals are:
1) A subsidized interest rate so beginning farmers can borrow down payment money which would be 4% below standard rates, but no less than 2%. It also reduces the borrowers minimum down payment to 5% of the purchase price, and increases the maximum amount of money that can be borrowed.
2) Establishment of a pilot program to match the savings account of a beginning farmer or rancher designed for capital expenditures, including land, buildings, equipment and livestock.
3) Encourages private land sales that transfer farms from retiring farmers to new farmers, however details are not provided in the summary.
4) Increase direct farm ownership and operating loan limits up to $300,000.
5) Prioritizes funding for farmers wanting to convert from conventional production to either organic or sustainable farming practices.
6) Provides incentives for retiring farmers to aid beginning farmers if the land involved is in the Conservation Reserve Program.
7) Eliminates term limits on guaranteed loans and allows all farming experience to be considered when applying for a loan, and allows guaranteed farm ownership debt to be eligible for direct loans.
Summary:
With the Senate Committee on Agriculture beginning its debate of the Farm Bill, quick movement should be expected toward full Senate action. The Harkin proposal puts major rural development focus on improvement of Internet services to rural areas and other grant programs that will build quality of life and job creation in more rural areas. He also joins the House in creating a National Institute of Food and Agriculture for the purpose of research oversight, and eases credit issues for beginning and disadvantaged farmers.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
October 23, 2007
The Senate Ag Committee Debates The Farm Bill: Part 2
Wednesday is when the US Senate Agriculture Committee will be debating the proposal for the 2007 Farm Bill offered by Chairman Tom Harkin. The farm gate yesterday examined his proposals for commodity programs, crop insurance, and conservation. Today the spotlight turns to Livestock, Energy, and Trade, then this three part series concludes Wednesday.
A summary of the Harkin proposal is available on the website of the Senate Agriculture Committee.
Concerned about competition among the relatively small number of packers, Senator Harkin wants to create a Special Counsel at USDA to enforce the Packers and Stockyards and Agricultural Fair Practices Acts as well as conduct investigations and prosecutions. Additionally, the application of the Fair Practices Act would be extended to members of marketing associations and cooperatives. Under the Packers and Stockyards Act, producers would not have to submit to mandatory arbitration on livestock contracts, but arbitration would be voluntary. On the issue of contracts, if a producer had made a capital expenditure of $100,000 or more to secure the contract, any termination could not be made in less than 90 days.
Under the provisions of the Livestock Mandatory Reporting Act, Senator Harkin wants USDA to conduct a study of wholesale pork reporting.
Senator Harkin proposes restrictions against the use of certain information obtained under the National Animal ID program and restricts the Secretary of Agriculture in the handling and use of the information.
Other proposals:
1) benefit sheep and goat production and research,
2) express concern about the impact of feral swine on domestic pork production
3) authorize a voluntary program for trichinae testing
4) and includes live poultry production under the Packers and Stockyards Act
On the issue of energy, the Harkin proposal strongly supports the production of energy from commodities. Many of the initiatives are federal appropriations for research and program expansion. Among them are:
1) $197 mil. to spur biomass crop production through incentive payments to farmers
2) $422 mil. for grants and loans for bio-refineries and to power them with renewable fuel.
3) $245 mil. to help bio-refineries purchase feedstocks for advance biofuel production.
4) $270 mil. in grants and loans for plants converting animal waste into energy
5) $75 mil. in research for bio-mass research and development.
6) $45 mil for 10 universities to create comparative bio-energy experiments.
7) Funds or policy support for biodiesel education, energy evaluation programs for farmers, and renewable production of nitrogen.
The trade provisions of the Harkin proposal focus on program renewal and creation to enhance agricultural trade. They include:
1) An additional $116 mil. in matching funds for groups promoting commodities or specialty crops over the 5 year term of the Farm Bill.
2) Cleaning up or reforming export promotion programs that are in conflict with the World Trade Organization, and saving $23 mil. over 5 years.
3) Reform of the Food Aid program to address changes recommended by the General Accounting Office.
4) Establishment of a minimum of $600 mil. for the Food for Peace program and an additional $25 mil. for the potential purchase of local foods to be distributed in emergencies.
5) A $78 mil. appropriation to help pay for transportation of commodities being donated in the Food for Progress program.
Summary:
The Harkin proposal for the Farm Bill strengthens the authority of USDA over livestock packers and provides various protections for individual producers. On energy issues, the Harkin plan calls for many grant programs to enhance the production of bio-fuels in rural communities, helping both farmers and bio-refineries. On trade, the Harkin proposal seeks to bring USDA programs into compliance with WTO regulations, but keep many of the appropriations that will fund food donation programs abroad.
Posted by Stu Ellis at 12:45 AM | Comments (1) | Permalink
October 22, 2007
The Senate Ag Committee Debates The Farm Bill: Part 1
The US House of Representatives approved its version of the 2007 Farm Bill in July, and chapter 2 begins Wednesday when the US Senate Agriculture Committee debates the proposal of Chairman Tom Harkin of Iowa. After the Committee and the Senate vote, a conference committee will reconcile the differences. But in preparation for the long-awaited Senate Ag Committee debate, let’s explore what is on the table in a 3 part series. The first segment examines Sen. Harkin’s proposals for farm programs and conservation.
A summary of the Harkin proposal is found on the website for the Senate Agriculture Committee.
The proposal for the farm safety net indicates it will be extended through the 2012 crop year, which confirms the legislation is a 5 year plan, although other time frames had been mentioned. The summary says the proposal:
1. Retains current base acres and creates base acres for newly-eligible crops
2. Rebalances target prices for crops
3. Maintains direct payments
However, it does not provide details on the level of target prices nor the amount of direct payments. The latter had been an unfunded issue late last week. It also maintains planting restrictions for fruit and vegetables, apparently on program crop acreage but that is not specified.
Loan rates will also be rebalanced, but levels are not specified, and it makes an administrative change in the loan deficiency payment to set the rate when beneficial interest is lost.
The proposal also establishes an average crop revenue option, which includes fixed payment rates, recourse loans and a state level revenue program. This would be similar to the National Corn Growers Association plan, which was included in the House, along with the Durbin-Brown plan. The Harkin proposal indicates planting flexibility provisions are under discussion and crop insurance premiums would be re-calculated based on new ratings.
Responding to calls for more support for specialty crop producers, the Harkin proposal establishes $365 million in grants for specialty crops, and a variety of other funding for specific crops, nursery crop protection, and organic crops.
Payment limitation would be reformed to ensure payments go only to payment beneficiaries, but details are not specified, and the three entity rule would be eliminated as it was in the House. Details on cash levels are not revealed.
Other issues in the Harkin plan include a sugar program, extension of the MILC program with increased payments, and a peanut program.
The Crop Insurance program would see the loss ratio reset at 1.0 which means premiums paid by farmers would equal indemnity checks paid to farmers. There would also be many administrative changes including:
1) Farmers who are also agents could not sell to their family operation and get a commission.
2) Organic crops would be rated the same as non-organic crops
3) The fee for CAT insurance would rise from $100 to $200 per crop per county
4) Allows producers with livestock production contracts to obtain crop insurance.
5) Creates crop insurance for crops dedicated to energy production.
The Conservation elements of the Harkin plan call for considerable expansion of those programs as expected, since he was quite critical of the level of conservation program support in the House version of the Farm Bill. Among the programs:
1) Expands the Comprehensive Stewardship Program (CSP) to annually add 13.2 million acres with the help of an additional $1.28 billion above the current 10 year baseline funding, which adds 80 million acres to conservation programs.
2) Better coordination of CSP and EQIP programs.
3) Continue the EQIP at current levels.
4) Maintain the Conservation Reserve (CRP) at 39.2 million acres.
5) Reauthorizes the WRP and enrolls 250,000 acres annually through 2012.
6) Earmarks 10% of conservation funds for beginning or disadvantaged farmers.
7) Calls for a new program to reduce greenhouse gases
Summary:
The Harkin proposal for the 2007 Farm Bill will be debated in his committee beginning Wednesday, but some details have not yet been revealed, such as levels of target and loan rates and direct payments. His proposal does provide for creative programs, such as those proposed by the National Corn Growers Association and Senators Durbin and Brown. Payment limitation will be apparently restricted, but levels were not revealed. Conservation funding will get a large boost with 80 million more acres in the CSP program, an enlarged wetlands program, and maintenance of the CRP program. Other details of the Harkin proposal for the Senate’s version of the Farm Bill will be explored Tuesday and Wednesday.
Posted by Stu Ellis at 12:43 AM | Comments (0) | Permalink
October 18, 2007
Checkoff Programs: What Challenges Are Around The Next Turn?
Very little incites a good coffee shop argument than someone taking a strong pro or con position on a commodity checkoff program. All farmers have opinions, strong opinions, and those who have not served a couple terms on a commodity checkoff board have been those who have attempted to dismantle the programs. With the renewal of the Farm Bill, and perennial challenges about their constitutionality, what are the challenges facing commodity checkoff programs?
Nearly three-quarters of a billion dollars are collected by some of the largest checkoff programs regulated by USDA, and nearly half of that is paid by the dairy producers and the milk processors. Other large programs include soybeans at $88 million, beef at $81 million, cotton at $71 million, and pork at $47 million. All are monitored by USDA’s Agriculture Marketing Service; all are mandatory programs; and all of them have farmers who contribute into the programs make decisions on the use of the funds.
But in preparation for the Farm Bill, Members of Congress were provided fact sheets on commodity checkoff programs developed jointly by the Farm Foundation, Texas A&M University, and the National Public Policy Education Committee, all of which took a neutral position for the purposes of educating Congress. The groups said the generic advertising and promotional programs have come under intense scrutiny and legal challenges in recent years by individuals who question if their mandatory contributions for mass marketing are any better than individually-funded marketing efforts.
Authority for such programs goes back to 1937 with the Agricultural Marketing Agreement, and successive farm policies have enlarged the authority over the years. Early voluntary programs operated with little controversy. Mandatory programs overcame problems with “free riders.” Some programs authorized refunds after collection and expenditure.
But recent years have brought numerous court challenges by non-supporters and parallel concerns have arisen about the programs being compliant with World Trade Organization requirements. The initial Supreme Court decision, which occurred in the beef checkoff, found that USDA regulation of the programs constituted “government speech,” rather than private speech when First Amendment issues arose. Since the days of the early non-controversial programs, agriculture has changed with fewer, larger producers, and the smaller producers believe larger producers are in a better position to profit from the checkoff programs.
With the new Farm Bill, what challenges will face the checkoff programs which have a wide variety of rules and regulations? The study groups point to four possible challenges in their fact sheets:
1) Exemptions and opt-out provisions will be a continuing battle by small producers wanting independence, even though the largest producers of a commodity still produce a small percentage of the total commodity. The larger producers may be in a position to better benefit from the value of the checkoff program by virtue of their structure, and some programs may find a consensus in allowing producers under a certain threshold to opt out without hurting the program with the loss of the majority of producers.
2) The origin of the message will rise in consideration for some checkoff programs and will have to be resolved with all messages funded by the checkoff to be attributed to the federal government, rather than to the board of farmer directors who oversee the allocation of funds. That will reduce the complaints from opponents that some group of farmers is speaking which does not represent them.
3) More research funds may have to be diverted away from basic or advance research and directed at demonstrating to producers opposing the checkoff program about the ways their contribution has benefited them specifically. For example it may show how a specific product developed from the checkoff program increased the value of the commodity and a producer benefited with additional dollars from commodity sales.
4) Many of the commodity checkoff programs have funds allocated for export market development, and the WTO may take the position that such funding is not compliant with its rules and is closer to an export subsidy, which has been determined to be illegal under current regulations.
Summary:
Checkoff programs have touched every farmer in the Cornbelt, and many farmers in the rest of the US, but they remain controversial because the mandatory nature of them is in conflict with the independent nature of the farmer. Recent court challenges have only scratched the surface of issues which question the propriety of the checkoff programs and several other issues may confront checkoff proponents in coming years.
Posted by Stu Ellis at 12:18 AM | Comments (1) | Permalink
October 4, 2007
Is It Thumbs Up Or Down For The State Of Rural Development In Your Region?
Informationally, your world is big and nearly unlimited with the help of cell phones, GPS-guided input application, and the Internet. Physically, your world is small and usually limited to your combine/tractor cab, shop, and farmstead office. But when you look at your rural community, it may be lacking the infrastructure and entrepreneurs that provide a good quality of life for you and your family. And that is because of declining investments in rural development.
The US Senate Agriculture Committee got an earful of facts about declining rural development Wednesday from the Rural Policy Research Institute, a consortium of the Universities of Missouri and Nebraska, and Iowa State, which was designed to spur dialogue that might be converted into Farm Bill programs. RUPRI’s Seven Considerations covered a broad spectrum about the critical need for rural development investment by USDA and other federal agencies.
1) Farming is a pillar of America, but farm earnings have stagnated over the past 30 years while non-farm earnings have tripled. In the past decade, agriculture’s contribution to the Gross Domestic Product has remained steady, while overall GDP has increased by nearly two-thirds. And farm employment has declined over time with a dramatic shrink in the number of counties that have any significant farm employment levels.
2) Farm families, regardless of their wealth, depend on off-farm source of income from nearby communities. In all regions of the country, off-farm income provides at least two-thirds of farm household income. In some regions of the country, off farm income is responsible for well over 90% of farm household income.
3) Only 3% of the current fiscal year USDA budget is dedicated to rural development, and that is up from 2% last fiscal year. Only 9% of the $15 billion allocation for rural development is for rural business, and the balance is to provide housing and utilities in rural areas.
4) Farm program payments only get to 43% of farms, which are concentrated in the Cornbelt, up the Mississippi River valley, and in California.
5) Employment grows the least in counties with the highest amount of farm program payments, which also have the least bank deposits that are indicators of the capacity for local capital investment. And counties with large receipts of farm program payments have the least number of new businesses starting up.
6) RUPRI says USDA’s Rural Development Business & Industry Loan Program has had a significant impact on creating jobs and GDP impact on rural economies. The $304 million investment guaranteed over $6 billion in loans, which created over 97,000 jobs, and created over $8 billion in GDP.
7) Finally, RUPRI says rural America has seen declines in competitiveness because of the declining share of national employment.
Summary:
Main Street America sees businesses come and go, but fewer come, and jobs are lost, and employment skills are lost to a community when that occurs. The relatively low USDA investment in rural development business programs has proven successful when it is adequately funded, but such programs have seen declines in investment programs.
Posted by Stu Ellis at 12:36 AM | Comments (1) | Permalink
October 1, 2007
WTO Trade Complaints? Those Don't Affect Me! Or Do They?
US trade negotiators have been busy. Much like cowboys in the old west, their wagons are circled, but they are being attacked from two directions, one from the north and one from the south, and reinforcements are no where in sight. Trade negotiators from Canada and Brazil have both lodged complaints about US farm program payments going back to 1999. While the outcome is unknown, count on the complaints having an impact on the next Farm Bill.
The complaints are filed within the structure of the World Trade Organization, which governs rules of trade in most countries to ensure it is faire and oversee any punishment if someone steps out of line. The Congressional Research Service was asked by Congress for help in understanding the trade complaints, and the CRS report was just filed on the Canadian complaint as well as the Brazilian complaint.
The Canadian complaint.
The US and Canada exchanged over $533 billion worth of good in 2006, including $25.4 billion in agricultural trade. But the Canadian corn producers complained that the US was dumping US corn into Canadian markets that was lower than the cost of production and unfairly subsidizing it. After Brazil’s prior success in attacking the US cotton support program, the Canadians also wanted to influence the US farm program by reducing support levels received by US farmers. And the Canadian complaint was joined by Argentina, Australia, Brazil, the European Union, Guatemala, Nicaragua, Thailand, and Uruguay, which all contended US farm program subsidies for corn have hurt corn producers in other parts of the world between 1996 and 2006. Additionally, they complained the export credit program is too close to an illegal export subsidy program for all commodities. And lastly, the Canadians alleged that total farm spending was more than $19 billion per year and that was higher than the US was allowed. (The CRS agrees to some extent that the last complaint may be true.) The specific complaints are against the Counter-Cyclical payment program and the Production Flexibility Contracts, which are both based on production. Also, the complaint says the size of the Direct Payment program makes farm spending too much.
Former Secretary of Agriculture Mike Johanns has said the US would vigorously defend its positions, and the US Trade Representative said the Canadian complaint with regard to 2006 was unfair because corn prices were high because of market conditions. The head of Canadian trade says the complaint will not be pushed until the WTO resolves is agricultural trade negotiations, and would drop the complaint against corn.
The consensus is that the Canadian complaint about US farm programs will be first of many, unless something is changed in the 2007 Farm Bill, which puts pressure on Congress to create farm programs that do not include bushel-based subsidies that promoted increased production. The House version of the Farm Bill brings the export credit program into compliance with the WTO, but does not address total spending.
The Brazilian Complaint.
Brazil previously dismantled the Step 2 Cotton program, and shortly after the Canadian complaint was filed, lodged another complaint, similar to the two Canadian complaints that remain. And Brazil was joined by Canada, Guatemala, Cost Rica, the European Union, Mexico, Australia, Argentina, Thailand, India, and Nicaragua. Brazil’s complaint is based on its precedent-setting cotton complaint, but seeks a resolution in the dispute settlement process since the WTO negotiations on new trading rules are stalled. Brazil is also interested in influencing the 2007 Farm Bill to reduce the overall level of support to US farmers.
Brazil’s initial complaint is that total US farm support of more than $19 billion annually exceeds WTO limits, and the US contention that Direct Payments do not distort market prices are incorrect. Brazil also contends other programs that distort market prices are the non-insured crop disaster assistance program, the crop insurance program, emergency feed program, livestock indemnity program, and crop market loss assistance payments. Additionally, Brazil has complained that US farmers also illegally (under WTO rules) benefit from farm loan programs, fuel tax exemption programs, IRS Schedule F deductions, farm marketing and purchasing cooperatives, and Interior Department irrigation programs. Ethanol subsidies are expected to be added to the list. Brazil’s second complaint focuses on the export credit guarantee program.
As in the case with the Canadian complaints, the House version of the Farm Bill addressed the export credit program, but does not address the balance of the complaints, particularly the broad-based programs itemized by Brazil. Since the WTO is not expected to resolve its new trade rules prior to the authorization of the 2007 Farm Bill, the Brazilian complaint may have an impact on farm programs after they are implemented beginning with the 2008 crop year.
Summary:
Although Congress is writing new farm legislation, Canada, Brazil, and many other nations have lodged complaints about past US farm programs as distorting trade and providing too much financial support to US farmers. While some of the complaints will be addressed in the 2007 Farm Bill, not all of them will be resolved to the satisfaction of the WTO and US farm policy may be changing in coming years.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
September 27, 2007
Direct Payments: Beneficial? Vulnerable?
The leadership of the US Senate Agriculture Committee has delayed consideration of the 2007 Farm Bill until funds can be earmarked for conservation and disaster aid programs that are beyond the scope of what has been approved by the House of Representatives. At midweek the word on Capitol Hill was that Direct Payments to commodity producers would be diverted into the conservation and disaster aid programs, which drew considerable criticism from some farm groups. Cornbelt farmers have been receiving Direct Payments, but what are they based on?
Unlike Counter-cyclical payments and Loan Deficiency Payments, eligible farmers receive Direct Payments for the same amount, year after year. Ohio State University ag economist Carl Zulauf writes in a July 2007 newsletter that Direct Payments never vary because of commodity prices. Their origin is in the 1996 Farm Bill and were originally known as payments for Production Flexibility Contracts and were provided to producers of the program commodities. In 2002 they became Direct Payments and were extended to soybeans as well. Congress has been appropriating $5.3 billion per year for Direct Payments, which is close to what Senate Agriculture Committee Chairman Tom Harkin is wanting for additional Farm Bill funding.
The nature of the Direct Payments makes them a major focal point in the negotiations over the World Trade Organization rules. Since the Direct Payment is not tied to production, and cannot promote additional production, they are considered to be safe from the WTO’s proposed spending limits. Such a payment is considered to be a social income transfer instead of a production subsidy, so it has the WTO’s blessing.
The Direct Payments were originally calculated with a production factor, so they are paid on bushels, pounds, and hundredweight of production. Zulauf says the Direct Payment is calculated by multiplying a farm’s program yield (1981-85 yields) by the farm’s base acres (also 1981-85) and then multiplied by 85%. Once that bushel value is determined, it is then multiplied by a Direct Payment rate. Corn receives a 28 cent per bushel payment, soybeans are 44 cents per bushel, and wheat is 52 cents per bushel.
Zulauf says Direct Payments have been guaranteed, which is appreciated by bankers, but do not help manage price or revenue risk. Recent practice for cash rent producers has been to agree to higher rents because of the Direct Payments, in essence turning them over to a landowner. Direct Payments do provide certain cash flow that can be used for operating expenses, but depending upon the crop, can vary widely. Zulauf says the effective benefit of Direct Payments varies from $95 per acre for a rice farmer to $1 per acre for oats.
Summary:
While Direct Payments have been a relatively minor part of the recent farm program, they do provide cash flow and they are compliant with the World Trade Organization rules. Direct Payments provide a more than $5 billion benefit to commodity producers, and because of the high value, may be vulnerable for a shift into programs that may be of a higher priority for Members of Congress.
Posted by Stu Ellis at 12:33 AM | Comments (0) | Permalink
September 24, 2007
Do You Plead Guilty To Raising The Price Of Food?
Farmers, high commodity prices, and the biofuels industry have all received bad public relations recently from consumers and the economists who study food prices. Their analyses end up in the Washington Post, the New York Times, and on evening television news broadcasts and always paint a negative perspective from the viewpoint of Cornbelt agriculture. But is the blame really deserved?
Purdue economists Chris Hurt and Corinne Alexander say the answer is complex, involves global food and energy economics, and raises questions about where US policy should go. Their research in the Purdue Agricultural Economics Report looks at what happened to food prices in the 1970’s when commodity values were strong. At that time general inflation was 6.8% per year, and food prices were rising at 10.3% per year. During the disinflationary period of the early 1980’s the general rate of inflation was 10%, and food prices were only inflating at a 6.8% rate.
Hurt and Alexander say food prices are rising because of the farm level values of raw materials used to produce food, but unlike the 1970’s when farmers received 32% of the consumer food dollar, today’s share is 20%. They also say foods make up a smaller share of the Consumer Price Index. Compared to the 1970’s, a 40% increase in commodity prices would push up food prices by 12.8% and inflation by 2.43%. But today a 40% increase in commodity prices only results in an 8% rise in food inflation, and a modest 1.2% rise in general inflation.
Another issue that diminishes the impact of US agriculture on food prices is the global food market, and a drought in the US is not going to impact food prices as it would have 35 years ago, since the US share of crop production has diminished and the US imports more food than it did in the 1970’s.
While food inflation has been less than the general inflationary rate for the past several years, that changed in 2007 and food inflation has lead the general inflation rate. But interestingly, the higher food prices have been due to prices for fruits and vegetables, wheat products including bread, spaghetti and flour, as well as eggs.
• Fruit and vegetable prices are a function of reduced acres, a California freeze in January, a cold February in Florida, and weather damage to Mexican crops. Also the loss of honey bee colonies reduced production for many food items, but nothing there can be related to the demand surge for biofuels.
• Higher prices for bakery items are a function of tight supplies of wheat in the US and the world, poor crops in Canada and Australia, and crop damage in the Great Plains, but nothing related to biofuels.
• The higher prices for eggs are due to higher corn prices, since the farm share of the retail price of eggs is 53%, which is the highest of any food product.
Hurt and Alexander say a related study at Iowa State suggests that, “Results are for food inflation to be higher than they would have been without biofuels by 1.1 percent to 1.8 percent.” And they report a USDA study does not attempt to link food prices to biofuels, but predicts, “Food inflation in the U.S. will be three to four percent in 2007 and that is up from an annual inflation rate of 2.4 percent in 2006. Thus, this reflects an increase from 0.6 percent to 1.6 percent higher than in 2006.” The Purdue economists say that every $1 increase in commodity values is probably pushed onto consumers who have to pay an additional $1.
Compared to farm prices and consumer costs in 2005/06, the Purdue team says there will be an additional $15 billion or 1.2% increase in food prices for 2006/07, and an additional $22 billion or 1.8% for 2007/08. However, 50% of the impact on food costs is due to higher prices for meats.
Summary:
Food prices will feel some impact from biofuels over the next several years, but to a lesser magnitude than some forecasters. That is because farmer receive a much smaller share of the consumer dollar, consumer spending for food is declining compared to other consumables, and more food comes from foreign sources. Food price inflation is also the result of higher energy costs and poor weather conditions. Food inflation had been lower than the general inflation rate, but for 2007 and 2008 it is expected to surpass it. Nearly half of the food inflation rate can be attributed to livestock prices. The Purdue report suggests food will be able to successfully compete with biofuels, but prices will be higher, however that will depend on yield trends, energy costs, and biofuel production technology, as well as where US biofuels policy heads.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
September 17, 2007
How Would Your Farm Fare With A Revenue Counter-Cyclical Farm Program?
Iowa Senator Tom Harkin, who chairs the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, is within days of beginning its deliberations on the 2007 Farm Bill. One of the major considerations for a commodity program is offered by IL Senator Richard Durbin and OH Senator Sherrod Brown. If it is included in the Committee proposal, adopted by the Senate, and makes it through the Conference Committee with the House of Representatives, farmers would see some significant changes in farm program payment calculations.
Committee Chairman Harkin has delayed the Senate’s consideration of the Farm Bill until he gets additional funding for conservation and other issues and will jumpstart the Committee’s debate when he’s satisfied with the potential funding.
In the meantime, agricultural economist Carl Zulauf at Ohio State University has analyzed the Durbin-Brown plan. He says one of the elements will keep farmers from collecting both farm program payments and crop insurance indemnity payments on the same yield loss, but could also reduce the cost of crop insurance premiums that farmers have to pay.
Zulauf says the Durbin-Brown proposal replaces the loan deficiency program and the price counter-cyclical program with a new safety net that is based on revenue counter-cyclical payments. It does not change the direct payments which are determined by bushels produced.
The revenue counter-cyclical program has several elements:
• Payments will vary from state to state and are based on yield and revenue calculations in that state.
• A state will have a revenue target, and if the state’s revenue is less than the target, a payment would be made.
• The yield calculation for each state is based on the yield trendline beginning in 1980.
• A spring price for row crops or pre-plant price for small grains would be established, which is based on an average of the current and two prior years.
• However, that pre-plant price cannot increase or decrease more than 15% from year to year.
• The revenue for a given state is determined by the state yield, the acres planted, and a harvest price, which parallels the harvest price calculation for current revenue-based insurance.
• The producer would receive a payment if the state revenue calculation is less than the state target revenue.
• The payment would be calculated on 90% of a producer’s acreage, and based on a producer’s actual production history compared to the state expected yield.
Ohio State University’s Zulauf says the Farm Service Agency and the Risk Management Agency will compare their notes to ensure producers are not compensated by both agencies for the same revenue deficiency. But he says payments may be higher depending on the year, the program parameters such as support levels, and how much the price and yield move in relation to each other. He says a state-based program would provide more protection, since it will reflect more localized weather problems. If a state typically has greater revenue variability, it would tend to receive greater payments than under a national program.
Zulauf also suggests the Durbin-Brown program is more flexible than prior Farm Bills because target prices would be based on a 3-year moving average, instead of fixed for the life of the legislation, and payments are based on planted acres, not a historical acreage number. The target payments would move with the market and not have floors or ceilings. By integrating formulas for determining crop insurance indemnity payments, the Durbin-Brown plan creates a farm safety net based on crop insurance concepts. And by using trendline yield statistics, the Durbin-Brown plan allows farmers to update their program yields annually.
Producers wanting to test their farm program numbers in the Durbin-Brown proposal can utilize a special spreadsheet offered by ag economist Gary Schnitkey at the University of Illinois.
Summary:
Although the House of Representatives Farm Bill contains a revenue counter-cyclical program, but a proposal in the Senate would link the revenue counter-cyclical plan to established formulas for crop insurance, and also break out program payments based on state averages instead of a national average. Such changes would also allow farm program payments to more closely follow the market from year to year, and benefit producers where there is greater variability in farm revenue.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
August 28, 2007
How Generous Are You In Giving Away Food?
Ever since President Dwight Eisenhower promoted Public Law 480 because of his knowledge of starving nations after World War II, the US farmer has strongly supported food aid programs. One primary reason is that the USDA bought surplus grain and donated it abroad, reducing the surplus and bolstering the price. With very little surplus grain, are you still in strong support of PL-480 and seven other food aid programs included in the USDA budget?
Food aid programs are part of the trade section in the Farm Bill and are designed to provide food to the hungry, help develop foreign markets, and dispose of surplus. And any food that is shipped abroad must go on US ships, hence the familiar term “cargo preference.” In the 2006 agricultural appropriations, the programs existed but were not funded. When Farm Bills changed to a market oriented policy, the US was no longer generating surpluses.
Food Aid and Farm Bill issues are explored by Purdue economist Philip Abbott, who says the trade fuss with the European Union about its export subsidies has impacted US food donation programs, and both are lumped together in the current WTO debate. While the US might tend to be generous and ship food abroad, critics advocate a cash handout as being more efficient than food aid. The critics won the argument in the WTO and now donations are to be made in cash rather than food, and in grants, rather than loans.
Another problem is the counter cyclical nature of food aid issues. When recipient countries need food aid, there is less available and the short supply drives up the cost of the food, making world prices and import costs high. When food prices are lower, that implies abundance, and fewer countries need any food aid.
USDA recently celebrated the 50th anniversary of PL 480, but in its proposal for a new Farm Bill, Abbott says there is only one modest proposal related to food aid, and is the USDA approach to walking a narrow line between the WTO rules, and typical American generosity. Even the non-governmental organizations that hand out food around the world understand the controversy, as well as the inefficiency of trying to distribute food into war zones and into despotic countries where warlords control the populace with food.
In your job as the greatest food producer the world has ever known, how much of agriculture should be devoted to giving away food to the hungry? Should a trade war with Europe be started because of our desire to feed the world? Should strained tax resources be strained further to buy food from the market and pay the 60¢ that it takes to ship $1 of food abroad? Can you identify surpluses in the marketplace that could easily be transferred to the hungry? Is it better for those hungry folks to have a bag of US grain, or a meal within their cultural needs that might be paid for with a donation of US cash?
Rural America has know about PL 480 for 50 years, and has taken pride in its philosophy, but probably never kept up with what it did from year to year, and may be surprised it is nearly dormant. If you were faced with $1.50 corn and $5 soybeans, and burdensome grain supplies, would your generosity be stronger than it is now with a demand-driven market and negligible surpluses?
Summary:
The majority of the USDA budget helps the hungry, but those are US folks, and our foreign food aid programs have languished in the wake of insufficient funding and international trade politics. One of the reasons for international food aid programs was the US desire to ship our surpluses abroad, but with expensive shipping costs, and now farm policies designed to eliminate surpluses, food aid programs have declined in priority and importance.
Posted by Stu Ellis at 12:45 AM | Comments (0) | Permalink
August 22, 2007
Sugar? Why Should A Corn Grower Be Concerned About Sugar?
Sugar! I don’t raise sugar! This is the Cornbelt and I raise corn. Why should I be concerned about sugar? Don’t talk to me; go to the kids and the candy bar makers.
If that reflects your thoughts, you might want to brush up on how the corn market will be impacted by US sugar policy. There is a closer connection that most farmers realize.
Sugar is part of the Farm Bill, and it is a major crop in sugar cane production areas along the Gulf Coast and in the sugar beet production areas in Minnesota’s Red River Valley. Sugar is the commodity that provides pricing guidelines for High Fructose Corn Syrup (HFCS), a commodity that is produced by our trading partners throughout the Caribbean, and a commodity that can easily replace corn a feedstock for ethanol. Suddenly there is reason to become familiar with sugar politics, and the Congressional Research Service (CRS) has recently issued a report to Members of Congress to help familiarize them with sugar politics.
Sugarcane and sugar beet farmers and the refineries have a market loan program that provides a floor price for sugar and restrictions on how much can be imported. As a result sugar users perennially seek elimination of the program to obtain sugar at a lesser price. The USDA is required to manage the sugar supply so that the program has no cost to the tax payer, and it does that by managing import volumes to achieve a supply/demand balance. At issue in the Farm Bill debate are several issues:
1. Raising support prices. While producers want this, sugar users don’t since US sugar is usually 2 to 4 times as expensive as the world price. But loan rates have not been raised for 15-20 years, and the House version of the Farm Bill raises loan rates by 3%.
2. Managing the domestic supply. USDA allows imported sugar and marketing allotments on sugar refiners to keep the price just above the loan rate. But beginning next January, Mexican sugar will enter the US unrestricted as a result of Mexico having to accept unrestricted amounts of US HFCS.
3. Balancing costs. Because of the expected sugar imports from Mexico and other free trade countries, the USDA expects the sugar program will cost $1.4 billion over the next 10 years, and since the increased supply will likely reduce the market price for sugar, producers and producers will likely forfeit the commodity to repay their marketing loans and the USDA will likely own stockpiles of sugar.
The final issue is the increasing call to convert surplus sugar into ethanol, and that has become louder with the increased targets in the Renewable Fuels Standard. Disregarding the market prices for corn and sugar, it is a cheaper process to use sugar than corn to make ethanol, since there is no need to convert cornstarch to sugar. Brazil has been doing that for years. However, due to market prices for US sugar, sugar-based ethanol is estimated at twice as expensive as corn-based ethanol, and three times as expensive as Brazilian sugar-based ethanol.
In the House version of the 2007 Farm Bill is a requirement for the USDA to sell surplus sugar to the ethanol industry to maintain the sugar program at “no cost.” The CRS report expects a considerable subsidy would be needed for sugar-based ethanol to be economical. Currently operating corn ethanol plants would need to convert their processes, and due to transportation issues, the sugar ethanol plants would probably be limited to sugar beet and sugar cane regions. The Congressional Budget Office anticipates large forfeitures in the sugar loan program, which would increase its cost along with the ethanol production subsidies.
Since the CRS report focuses solely on sugar, it does not address the direct impact on corn. However, Cornbelt economists have indicated that corn prices would soften if ethanol plants in the Upper Midwest began using sugar. Such a softening of the corn market may or may not reach as low as the loan rate, triggering the LDP program; but that would be an additional cost to USDA that does not exist in current market conditions.
Summary:
Proposals to renovate the US sugar program, as a result of trade negotiations and ethanol demand, could have a significant impact on the monopoly corn enjoys for ethanol production. Congress is addressing the controversial sugar program which has had an economic relationship with corn through the contribution corn makes to the sweetener industry. However, with sugar surpluses anticipated by USDA and policy makers, sugar may also find its way into ethanol refineries and that has the potential to soften corn prices.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
August 20, 2007
Sharpen Your Pencil. The New Farm Bill May Ask You To Make A Long Term Financial Decision
The US House of Representatives and its Agriculture Committee have been drawn and quartered by critics wanting major reforms in agricultural policies and programs. While wholesale reform could upset a basic industry and the consumer food system with unforeseen and unintended consequences, there is a potential for evolutionary change that has marked US farm policy since it began in the 1930’s.
Going from nothing to something was revolutionary, but Depression Era economics that were bringing the US food system to a halt signaled the need for a radical change that would keep farmers on the farm and food choices in front of consumers. Since the first elements of farm support policies, change has been more moderate, including the switch from supply management agriculture to market oriented agriculture. The change proposed by the House, which will possibly be included in the Senate Farm Bill proposal, gently nudges farm supports from a price orientation to a revenue orientation, that includes both price and yield. And for that matter, that is exactly what the World Trade Organization wants to see happen or it will continue to dismantle US farm policy.
Extension Farm Policy Specialist Brad Lubben of the University of Nebraska says the change uses the familiar Counter Cyclical Payment concept in the 2002 Farm Bill, but instead of it based on price, it is based on revenue, providing producers with a financial safety net. In his Cornhusker Economics newsletter, Lubben says, “The revenue-based program would add yield to the safety net calculation and would make a payment to participating producers when the combination of national average yield and national average price produced a revenue calculation that fell below a target established in the legislation.”
Each program crop would have a target price fluctuating with a 5-year Olympic average (high and low discarded) that is multiplied by the existing price-based Counter Cyclical Payment. Lubben says the House plan, which has the potential to be adopted by the Senate, calls for “Any shortfall below this target for each crop would be paid out on participating base acres for the respective crop, after adjusting for differences in farm versus national average CCP yield levels, and accounting for payment on only 85% of base acres as with the existing direct and CCP programs.”
If a producer did not like the concept, the current farm program formulas could be retained, or the new revenue concept could be adopted, and that is a one-time decision which producers will have to make at the local FSA office. Sign up would be handled similar to sign up for the 2002 Farm Bill when decisions had to be made about details of participation. Lubben says the House concept does not affect direct payments or the loan program, except for some adjustments to loan rates. “The marketing loan would continue to provide price protection below the loan rate and would be the lower (limit) on the price factor used in the revenue-based CCP, the same as currently exists for the price-based CCP.”
Lubben believes the concept will be attractive to those concerned with the budget, since there will be less variability of revenue than variability of price, which means less stress on the federal budget. The attractiveness of the plan to producers will depend on how it works. With current pricing, corn growers would have a $344.12 target revenue, and the safety net would be only 69% of the current expected revenue from a $3.22 corn price and a 155 bushel average yield. Under the price-based option, the Counter Cyclical Payment would be made at $2.35, which is 73% of the same $3.22 corn price expectation. Lubben says there is a lower chance of a payment under the revenue-oriented proposal than the price-oriented proposal if the program was currently in effect. He says, “As proposed, the revenue-based CCP would not kick in as quickly as the price-based CCP, but it would make larger payments once it does kick in. And, the revenue-based CCP would pay for revenue losses due to price and yield, covering a greater degree of risk than the price-based CCP.”
When the Senate resumes its Farm Bill deliberations, one proposal that will be considered in the formula for farm program payments is the Durbin/Brown proposal to add an additional multiplying factor to have a target price based on 90% of the state trend yield multiplied by a 3-year moving average price. This would bring payments more in line with prices and yields in a given state, instead of national averages. While Lubben says that might make payments more relevant to producers, the 3-year average slowly tracks the market, and any extended period of low market prices such as 1998 to 2001 would result in a lower safety net for that extended period of time.
The current House Farm Bill proposal does not link the revenue safety net to any type of supplementary crop insurance, but the Durbin/Brown proposal contains a payment trigger that Lubben believes “would be a better substitute for farm or county-level crop insurance products currently on the market. As such, it is formally linked with crop insurance, such that any payments received under the revenue-based CCP would reduce any payments received on crop insurance for the crop on the farm.” He says the idea is not designed to eliminate the role of crop insurance, but to allow the farm program payment to address major revenue shortfalls, and to allow individual crop insurance policies to address individual farm production issues.
Summary:
The next evolutionary step in farm policy could see farm program payments switch from price to revenue based which would not only ease international trading tensions, but federal budget issues. While the impact on producers would likely be lower annual income from the USDA, years with low prices and yields would result in larger payments. Since the Senate has yet to decide on its policy, the concept could be discarded or refined further, to link the idea not only with crop insurance protection, but triggered by more localized circumstances than national averages.
Posted by Stu Ellis at 12:18 AM | Comments (2) | Permalink
August 8, 2007
Does Conservation Funding Need Fixing, Or Just Some Minor Repairs?
The U.S. Senate’s debate on the Farm Bill has been postponed until early September, but in the meantime staff members of the Agriculture Committee will be working on the desires of Chairman Tom Harkin to create a proposal for committee consideration. And Senator Harkin has left little doubt that he wants more attention paid to conservation than what appears in the House version of the Farm Bill. But what does that really mean?
Ohio State University economist Brent Sohngren has delved into the process of conservation issues and identified several key issues:
• National environmental groups are focusing on the appeal for more money in the conservation title.
• CRP could end up looking more like an energy program.
• EQIP and other working lands programs need more than just a combining of programs.
National environmental groups are focusing on the appeal for more money in the conservation title. Sohngren says the special interest groups which want more funding for conservation are pushing Congress to fund a backlog of projects they say landowners want, but for which there have been no cooperative funds. Groups such as Environmental Defense Fund, Environmental Working Group, National Wildlife Federation and others have their priority lists of unfunded projects, but he rhetorically asks, “In the real world, is having proposals that go unfunded a bad idea?” Sohngren contends there are many projects in the world that should not be funded because they may not contribute enough payback, and instead of seeking more funding the environmental groups should focus on the process of how funding decisions are made and the performance expected. He believes money should be spent based on the outcome of the project.
CRP could end up looking more like an energy program. With much of the Conservation Reserve Program in grassland, it becomes a candidate to produce grass and similar biomass for harvest of feedstock for cellulosic ethanol plants. The soil conservation benefit of the CRP would not be jeopardized, but the biomass could be collected as it is sometimes used for grazing during periods of drought. However, Sohengren’s concerns about the concept is that the CRP is performing its duties of water quality, wildlife habitat, and other environmental issues, but there is other land that may be better suited for subsidized biomass production and the CRP would not have to be disturbed. He is an advocate for identifying land that should be conserved in the best ways, without focusing on acreage limitations and using better environmental formulas and more flexible contracts.
EQIP and other working lands programs need more than just a combining of programs. Sohengren believes the NRCS staff is too small to function and combining programs would improve efficiencies, “But simply combining programs does not address the fundamental issue raised above – whether the funds being spent are actually helping to improve the environment. If we could spend less money and have more of an impact on the environment, wouldn’t that seem like the win-win we are always seeking?” In all actuality, Sohengren wants Congress to better allocate the funds that exist, instead of seeking additional funds for conservation projects. He says rules that are written in Washington have difficulty working in rural America, but improvements could be made, such as using the CRP’s Environmental Benefits Index in the EQIP and CSP programs, and some of those latter projects could be completed with an EBI-based performance measurement.
Summary:
Sohengren says the key issue in the 2007 Farm Bill should be to increase program efficiency and improve funding allocation processes. There are questions about whether environmental goals have been reached, but changing the process could ensure that projects are successful and serve the public.
Posted by Stu Ellis at 12:33 AM | Comments (1) | Permalink
August 7, 2007
Are Biofuels Really Pushing Up Food Prices?
Grain producers have incurred the wrath of the cowboys over high prices for corn. But what about the non-farm consumer, who is paying higher prices for food, that he or she believes, is the result of more money going into a farmer’s pocket? The tug of war for corn between the food and fuel industries has created an uneasy relationship between the producer and the consumer.
While the typical consumer is unaware that biofuels have eased tight fuel supplies and that they will be paying fewer taxes to support commodity prices, today’s burr under the saddle is a bigger tab at the grocery store. Ag economists Helen Jensen and Bruce Babcock at Iowa State’s Center for Agricultural and rural Development rhetorically ask if Biofuels Mean Inexpensive Food is a Thing of the Past?
For years the proponents of farm programs advocated subsidies to ensure that food was plentiful and inexpensive, since farmers could sell it for less than the cost of production. Without those subsidies, higher priced grain would lead to higher priced food. Currently, we have higher priced corn (ethanol demand driven), higher priced soybeans (acreage demand driven), and higher priced wheat (short supply and acreage demand driven.) Jensen and Babcock say that theory calls for higher subsides to expand production so food prices could be low. They say, “By the same logic, high commodity prices caused by subsidized biofuels should result in a reduction in the production of food and higher food prices.” The economists contend that food prices are largely determined by costs and profits after commodities leave the farm.
The US consumer spends relatively little of his disposable income on food, which was 20% after World War II to about 10% today. That would be even smaller were it not for the cost of food consumed away from home which is 50% of the total food bill. The inexpensive food in the US is attributed to the efficiency of the producers and food companies. But that growth is being impacted by the biofuel revolution.
The demand for corn for livestock feed, for food ingredients, and for biofuels has resulted in higher prices for all. However, Jensen and Babcock say the 2¢ worth of high fructose corn syrup in a $1 can of a soft drink can would be increased to only 4¢ if the price of corn doubles. The economists say their fellow researchers found that a 30% increase in the price of corn, along with relative increases in soybean and wheat prices would increase egg prices by 8%, poultry by 5%, pork by 5%, beef by 4%, and milk by 3%. Incorporating the higher costs of restaurant food, they report that a 30% increase in corn would raise average food prices by 1.1%.
That is not currently the situation in the grocery store. Milk prices are at a record high, and meat and egg prices are high, but not because of high costs of corn. Milk prices are a function of the international demand that has outstripped the supply. At the same time, the motorist is looking to agriculture for biofuels. While the typical consumer may see little change in the cost of food, the low income consumer who is on a budget and is limited to home cooked meals, will be impacted to a greater degree. As a result, federal money once destined for commodity support programs will be needed to provide more food stamps for the low resource consumer.
Summary:
The demand for biofuels has created an increased demand for corn, needed also by the livestock and the food industries. While the cost of corn plays a very small part in the overall cost of food, meat, egg, and dairy prices have risen causing many consumers to blame biofuels for higher food prices. Traditional economic theory will not support the claim, even though farm program payments were designed to keep food prices low. Today those payments will not be going to farmers, but instead to consumers in the form of more food stamps with higher purchasing values.
Posted by Stu Ellis at 12:15 AM | Comments (2) | Permalink
August 6, 2007
Will Farm Programs Turn lnto Pumpkins If Midnight Strikes Without A New Farm Bill?
Congress has two months to finish work on a new Farm Bill before the 2002 legislation expires, and one month of that is summer vacation. What would happen if they don’t get the job done? Will Farm Service Agencies close up shop? Will meat inspectors walk off the kill line and slaughter plants close? Will USDA’s economists get pink slips? Will we revert to the 1938 legislation with Depression Era support prices?
The House of Representatives has finalized a proposal for the 2007 Farm Bill. The Senate Agriculture Committee has not finished its work, and Chairman Tom Harkin anticipates full Senate debate and a vote when Congress returns after Labor Day. That means there will be less than one month for the Senate debate, for the Conference Committee to work out differences, and for each House of Congress to vote on the reconciled version of the 2007 Farm Bill. There is really a lot of work to be done in a short amount of time.
Agriculture Policy Specialist Jasper Womach of the Congressional Research Service anticipated the possibility that the new legislation would not be finished in time for the 2002 Farm Bill to expire. In his CRS Report for Congress, Womach divides duties into mandatory, such as commodity support programs, food stamps, and conservation, compared to discretionary programs that include rural development projects, ag research, and foreign food aid that all need Congressional appropriations.
The permanent law of 1938 is always on the books, and its provisions are periodically modified by four to six year Farm Bills to address current issues and needs. Womach says there is recent precedent for the Farm Bill to miss its implementation deadline when the prior legislation expires. The 1981 and 1985 Farm Bills were enacted in December, and the 1990 Farm Bill arrived in November. The 1995 Farm Bill was more than six months late, but spring arrived on time and crops were planted.
Womach says the only farmers who face some precarious decisions are those who will be planting winter wheat this fall. “Absence of a new farm bill poses some risk for crops harvested in 2008, particularly winter wheat that is harvested in early summer, but typically harvest comes late in the calendar year for most subsidized crops. Lack of new commodity support legislation before harvest in 2008 does little harm other than to leave farmers uncertain about the size of payments they might receive.” Womach says there may be some unanswered questions about payments that can be calculated into repayments for production credit loans.
Some quarters in Washington actually favor an extension of the 2002 legislation, and may push the Senate to delay its action and just renew the provisions of the 2002 Farm Bill for another year. Womach says that would probably not occur until close to the 2008 harvest. Those discretionary programs would need annual funding approved, but that would be little more than the annual agricultural appropriations actions.
For some unanticipated reason that Congress does not get a new Farm Bill enacted before the 2008 harvest, Womach says the 1938 and 1949 laws would kick in; but he says those are so different from programs of the last several decades, Congress would not let that occur. After all, farmers and the FSA staff would have to take a refresher course on parity prices, which gave farmers the same purchasing power as they had in 1901-1914. For example, the loan value on wheat would be 50% of its parity price of $10.80. That would be $5.40 and closer to current market values than one might think. The 1938 and 1949 laws do not have provisions for Loan Deficiency Payments, Direct Payments, or Counter-Cyclical Payments, and only provide for forfeiture of commodities to satisfy the terms of a non-recourse loan.
Summary:
While the House of Representatives made headlines by passing its version of a new Farm Bill, the Senate has yet to debate issues, either in committee or on the floor. With the expiration of the 2002 Farm Bill at the end of September, the new legislation may not be finished, but that does not indicate that out of date farm programs from the 1930’s and 1940’s will become the law of the land. Congress has the authority to extend the 2002 Farm Bill or approve smaller appropriations bills to cover discretionary programs that supplement the mandatory programs which will see no break in stride.
Posted by Stu Ellis at 12:33 AM | Comments (0) | Permalink
July 24, 2007
If The U.S House Version Of The Farm Bill Becomes Law, How Will You Be Affected?
Your Congressman this week will be debating the House version of the 2007 Farm Bill, as will every other member of the House of Representatives. Their constituents all have a stake in the Farm Bill, whether they farm, drive a car, eat, or pay taxes, and that is just about everyone. When the debate ends on Thursday, the Farm Bill will be half way home, only waiting for the Senate to do the same thing after Labor Day. Have you called your Member of Congress about the issues, or don’t you know what is proposed that will impact Cornbelt agriculture?
The House Agriculture Committee proposed 2007 Farm Bill begins with the 2008 crop and expires after the 2012 crop. The $299 billion cost averages about $60 billion per year, down from $90+ billion in the early years of the 2002 legislation. Beyond the $299 billion, there could be an additional $4 billion available for nutrition, $2.5 billion for energy, and $1.6 billion for specialty crop promotion. There is no funding for a permanent disaster aid program.
New farm program payment limits are proposed that were a trade off for the additional funding. If you have more than $1 million in adjusted gross income, you will not get any farm program payments, and 2/3 of your income must be from agriculture, or you will not get any payments if your adjusted gross income exceeds $500,000. Additionally, the three entity rule is eliminated, meaning payments will not be allowed to a person under additional family corporations or partnerships. Counter-cyclical payments are capped at $65,000, Direct payment caps rise from $40,000 to $60,000, generic certificates are eliminated, but there are no caps on LDP’s or marketing loans.
Something new is a choice that will be given for farmers to receive either a price triggered Counter-cyclical payment or a revenue Counter-cyclical payment, and the choice must last for the entire 5 years. A national per acre revenue target would be set at
$344.12 for corn, $231.87 for soybeans, and $149.92 for wheat. Payment per acre yields would be 114.4 bushels for corn, 34.1 bushels for soybeans, and 36.1 bushels for wheat. Additionally, target prices were rebalanced: Corn: $2.63 (unchanged), soybeans $6.10 (up 30¢), and wheat $4.15 (up 23¢). Loan rates are proposed at $1.95 for corn (unchanged), $5.00 for soybeans (unchanged), and $2.94 for wheat (up 19¢).
Conservation programs have some revisions. Conservation payments are capped at $60,000 for one program and $125,000 for multiple programs. The CRP continues with 39.2 million acres maximum, but contracts can be modified if a retiring landowner is transitioning to a beginning farmer. The WRP would extend through 2012, with maximum acreage at 3.6 million acres, and USDA must use fair market value for evaluating appraisals for payments. The CSP contracts will have more funding and is simplified with replacement of the 3-tiered program with an annual stewardship payment. Additionally, the CSP will be applied in more geographic areas. EQIP funding rises to $2 billion by 2012, but 60% remains for livestock production.
Energy funding includes $2 billion in loan guarantees for biorefineries and $500 million for rural energy improvements. Another $1.5 billion is allocated for incentives for biofuels production. Another program creates 5-year contracts for producers to encourage biomass production for biofuel refineries.
Other provisions:
1) Restrictions are developed against the use of arbitration in production contracts and the USDA is authorized to better control the dispute settlement process.
2) Biofuels plants receiving federal grants must pay prevailing wages for construction laborers.
3) An incentive program is created, but unfunded, for oilseed producers to grow low trans-fat oilseeds.
4) Subsidy checks under $25 would not be written, and anyone convicted of defrauding the USDA would be prevented from program participation.
5) FSA and NRCS offices could not close or relocate within a year after enactment of the legislation.
6) A non-binding attempt was made to protect manure from being declared a hazardous waste and subject to EPA superfund regulations.
7) There will be coordination of federally funded agricultural research, similar to the National Institutes of Health, with competitive grants for research.
8) Group crop insurance policies could be obtained in addition to individual crop and revenue policies.
9) Country of Origin Labeling (COOL) is established for implementation 10/1/08 and would label meat as being US raised and slaughtered, or completely of foreign origin, or a blend of domestic and foreign. Fruits and vegetables are not included.
Summary:
Cornbelt agriculture would still be productive under the proposed House Farm Bill, however, some farm operations would notice some financial impact as the result of payment limitations. Other operations would notice increased funding from some payments. Farm operators will need to study the ramifications of having to make a choice between a price-triggered counter-cyclical payment, and one that is triggered by revenue. Extension educators should be consulted for assistance, once program details are published, if the House provision becomes law. If farmers have problems with any of the proposals, Members of Congress should be contacted before this week's debate.
Posted by Stu Ellis at 12:52 AM | Comments (0) | Permalink
July 16, 2007
Should Disaster Assistance Be Part Of The Farm Bill: Are You Pro Or Con?
As years go by, as the farm population declines, and as the federal budget becomes more of a political issue, the Farm Bill becomes more controversial. One of the lightning rod issues this year is proposed permanent funding to provide disaster assistance. While farmers have always fought adverse weather, which was one of the founding reasons for initial farm legislation, disaster aid is a more relatively recent addition. Since disaster aid is issued nearly every year there are strong supporters. Since disaster aid is issued nearly every year there are strong opponents who say the system needs fixed.
Chairman Collin Peterson of the U.S. House Agriculture Committee has included in his version of the Farm Bill provisions for permanent disaster funding, to prevent the need for perennial emergency legislation. Agriculture Policy Specialist Carl Zulauf at Ohio State University says “To qualify for emergency assistance, a producer (A) must have purchased insurance if it exists for the crop at a minimum of 50% yield coverage at 100% of the insurable price or must have paid the fee for a crop covered under the Non-insured Crop Assistance Program, and (B) farm in a county declared a disaster county or in a county contiguous to such county.” While this is a “pay to play” disaster program there is also a $100,000 limit on benefits.
In addition to a tree damage and livestock death loss elements, the heart of the program is a whole farm crop protection program that has many parallels to the crop insurance program. Zulauf’s analysis includes:
• Payment equals 50% of the difference between the farm’s disaster assistance guarantee and total revenue.
• The Disaster Assistance Guarantee for each insurable crop that is calculated on county yield, countercyclical payments, and crop insurance yield guarantee.
• A Disaster Assistance Guarantee for each non-insurable crop is also available.
• A Disaster Assistance Guarantee for a crop can not exceed 90% of the farm’s expected revenue from the crop, which is calculated with grazing value, production history, counter cyclical payment, the insurance price guarantee, and acreage that is planted or intended to be planed.
• Total Farm Revenue for each crop and for the total farm is estimated using acreage harvested or grazed, average market price for the first 5 months of the marketing year, crop insurance indemnity payment, and any other federal disaster payment.
Opponents call for renovation of the crop insurance program to achieve what is needed by producers. Supporters call for assistance to farmers needing to cover the gaps in crop insurance. Zulauf says there are many questions that need to be answered about the proposal from Chairman Peterson.
1) He calls the proposal a shallow los disaster program, since crop insurance indemnities are included in total revenue, but the disaster program covers losses associated with the deductible.
2) No premium is paid for the disaster aid program, but the expected payments provide an incentive to use the already-subsidized crop insurance program.
3) Since crop insurance is already subsidized, should that be deducted from the disaster assistance program payment.
4) Total farm revenue does not include loan deficiency payments or counter cyclical payments, so Zulauf says farmers are being paid twice for the risk of low prices.
5) Zulauf says a moral hazard exists, since there is a floor under the yield guarantee, and with a low yield and no future loss in payments, there may be an incentive to cheat on yield.
6) By farming in multiple counties, maybe only one of which is declared a disaster, that qualification for assistance encourages geographical diversification and larger farms.
That is Carl Zulauf's analysis of the disaster assistance proposal. Your thoughts are welcomed about whether there should be disaster assistance as a permanent element in the Farm Bill or not. Have prior disaster plans helped your operation? Could they be exchanged for improved crop insurance coverage? Use the comment space provided below.
Summary:
The politically charged issue of disaster assistance will soon be debated within the House Agriculture Committee, and possibly the House floor, as part of the 2007 Farm Bill. Despite the lack of consensus on inclusion of disaster aid, the proposal up for debate would require farmers to purchase crop insurance before they could collect disaster aid on areas that crop insurance does not cover. The proposal depends on calculations that are complex, leave out some calculations, and may leave open to door to dishonesty in reporting yields.
Posted by Stu Ellis at 12:23 AM | Comments (2) | Permalink
July 10, 2007
Equity Among Support Prices? You Must Be Kidding!
As the summer heats up in Washington, so does the debate on the 2007 Farm Bill, and Chairman Collin Peterson of the House Agriculture Committee has distributed his proposal for full committee consideration in the next week. After his subcommittee on commodity programs opted for an extension of the 2002 legislation, Peterson has built that into the “Chairman’s Mark.” But what price supports are being proposed?
The Chairman’ Mark proposal extends the safety net programs authorized in the 2002 Farm Bill with minor changes, 1) Increases target prices for wheat, barley, oats, oilseeds and soybeans, which increases producers’ opportunity to receive counter-cyclical payments when prices are low, 2) Continues support for farmers through direct payments, and among other things, 3) “Rebalances loan rates on wheat, barley, oats, oilseed, small chickpeas and graded wool.” What does “rebalance” mean, and does that imply inequity among commodity loan rates, target prices, and other farm program payments?
There is inequity, based on the findings of the Congressional Research Service (CRS), which completed an assessment of the commodity payments after the subcommittees finished their work and before the Ag Committee Chairman posted his proposal. So the report is ripe for inclusion in the new Farm Bill.
There are 18 “covered commodities” in the Farm Bill which have payment programs, and CRS says there is little relationship among them. Their evolution has been a tug of war between farmers who have argued for cost of production and economists who have argued for them to be based on market prices. CRS says with little relationship between commodities, the payment rates have little relationship with each other. “During the past ten years (1997-2006), monthly average market prices for the major “covered commodities” have been below loan rates 36% of the time, and below effective target prices 59% of the time. However, this frequency has varied substantially across crops. This report calculates adjustments to policy parameters that would put each of the commodities “in the money” an arbitrary 30% of the time with regard to marketing loans and an arbitrary 50% of the time with regard to adjusted target prices.” In brief, “Barley, oats, and peanuts have disproportionately lower adjusted target prices and marketing loan rates. The situation is mixed for corn and wheat. Soybean target prices and loan rates are closest to neutral according to the thresholds used in this comparison.”
Although the report covers many more commodities, only the following will be addressed in this abbreviated report. Wheat has a 52¢ direct payment, a $3.92 target price, and a $2.75 loan rate. Corn has a 28¢ direct payment, a $2.63 target price, and a $1.95 loan rate. Soybeans have a 44¢ direct payment, a $5.80 target price, and a $5.00 loan rate.
Over the past 3 years, CRS calculated the payments as a share of the market value of the commodities. That came out to be 21% for corn, 15% for wheat, and 4% for beans. (Rice and cotton were between 50% and 60 %.) When the CRS economists examined the relationship between cost of production and target price, the corn target price was at 98% of the cost of production, beans were at 91% and wheat was at 64%. (Peanuts were at 101% and sorghum was at 47%.) The CRS researchers express their preference for a safety net of support prices just below the long term trend of market price levels. That may be close to USDA’s Farm Bill proposal which has loan rates at 85% of a five year Olympic average. When comparing loan rates, CRS says, “Based on 120 monthly data points for the 1997 through 2006 period, market prices dropped below their corresponding loan rates 36% of the time for nine program commodities. However, wide variation appeared across commodities. For example, upland cotton prices were below the cotton loan rate 77% of the time. In contrast, the barley market price was below the barley loan rate 3% of the time.”
The 2002 Farm Bill brought the concept of counter-cyclical payments to the Cornbelt, which were designed to soften the financial blow when average market prices were below target price levels, but above loan rates. In the past 10 years, corn prices would have been eligible for CCP’s 76% of the time and under the loan rate 28%. Wheat has been under the target price 60% of the time and under the loan rate 23%. Beans have been CCP eligible 40% of the time and eligible for the loan rate 33% of the time. (Cotton is eligible for CCP payments 95% of the time.)
To equalize the loan rates for the covered commodities, corn would have a 1% increase, wheat a 4% increase and soybeans a 2% decrease. (Barley would see a 17% increase in the loan rate, and rice a 41% decrease.) To equalize the target price, corn would see an 11% drop, wheat a 2% drop, and beans a 3% rise in the target price. (Barley would increase 17% and cotton would drop 31%.)
Summary:
With the advent of a new Farm Bill, lawmakers are considering levels of price supports for commodities, which is a push and pull exercise that includes farm organizations and budget cutters. If those levels are to be changed, what logic is used in the process may or may not be based on economic trends or even market prices. However, the numbers will likely be set in the next couple of weeks, and they may or may not be demonstrate any equity in their relationships. They have not in the past, and there is no indicate that 2007 will be the year it will start doing that.
Posted by Stu Ellis at 12:43 AM | Comments (0) | Permalink
July 5, 2007
What Is Your Responsibility In The Consumption Of The Food You Produce?
Millions of readers of the New York Times yesterday saw a picture of an Illinois corn field and corn piled up at a Minnesota elevator illustrating an article that blamed food poisoning and the growth in obesity on the Farm Bill. While the article probably riled many of those readers enough to write their Congressman demanding a change in the Farm Bill, it also serves as “writing on the wall” for the Cornbelt farmer who may soon see a completely different philosophy behind farm programs.
That philosophical change converts farm programs to food programs, particularly if urban lawmakers have to answer their constituents who are paying taxes to support farm programs. While their have been more inflammatory articles than the New York Times article of Wednesday, one of the major issues getting increasing debate is the attempt to connect farm program payments with the food that is produced for consumers, particularly healthier foods.
Certainly you grow corn, beans, wheat, hogs, and cattle to be as healthy as you can, but the critics are focused on high fructose corn sweetener and hydrogenated soybean oil as the culprits in the battle for a healthier society. Corn and soybean producers know that a significant portion of their market income is derived from converting corn into sweeteners and soybeans into margarines and cooking oils that require hydrogenation. But change may be in the offing.
In the current issue of Amber Waves, an electronic magazine published by USDA’s Economics Research Service, an article entitled Insidious Consumption begins by saying, “The prevalence of obesity and diet-related illnesses is rising, despite evidence that Americans are aware of the positive effects of a balanced diet and exercise….For USDA, which devotes considerable resources to nutrition assistance programs like food stamps or school meals, findings from behavioral economics also offer alternative strategies that could be applied to improving the diet quality of program participants without restricting their right to choose the foods they like. This exploration of new ideas, however, is by no means a recommendation or endorsement of any of them. A thorough analysis of costs, benefits, and potential impacts would be needed before any strategy could be considered as a policy option.” Those policy options would eventually find their way into the Farm Bill, whether it will be the 2007 version or a future edition. The impact will be incentives for farmers to producer healthier foods, just like current incentives encourage soil and water conservation. If the incentives do not achieve behavioral change, then the incentives convert to requirements.
Take an initial look at your consumer, whose relationship with USDA is closely linked through the food stamp program. “The idea of earmarking funds and mental accounts may partially explain why several studies have found that food stamp benefits, which can be used only for food purchases, are more effective at raising food expenditures than an equal amount given as cash even when both benefits and cash are used on food.” In other words, the administrators of the food stamp program will be among the early groups which clamor for healthier food products for their clientele, whose existence depends on food stamps. Their recommendations will be among those included in Congressional farm and food policy.
Taking it a step further, “Grocery stores could also choose to offer their customers the option of using a prepaid “healthy” card that might, for example, preclude purchases of snack chips, desserts, and soda pop or only be valid on certain items, such as fruit and vegetables. Accepting food stamp benefits as payment for these “healthy” cards would extend this opportunity to food stamp participants.” So USDA’s consumer arm would be rewarding consumers if they chose healthier products by letting them make more purchases. Those purchases would not include corn syrup and hydrogenated soybean oil, but fruits and vegetables produced under new farm program incentives.
If you are not concerned about food stamp recipients, consider what might happen in the school cafeteria, where future consumers are being educated. “Through prepaid lunch cards, such (health promotion) mechanisms are currently increasing in popularity. Some schools allow parents to track the menu items their children purchase at school and even specify that their prepaid card preclude the purchase of specific items, such as sodas or high- fat desserts.”
Policy options for farm programs are currently under debate in Congressional agriculture committees, but once their recommendations get to the floor of the House or Senate, then more urban-oriented Members of Congress will have amendment opportunities, and some of those could create a closer relationship between the producers and consumers both supported by the USDA. “More innovative strategies to improve food choices can also be applied to USDA’s nutrition assistance programs. Incorporating some of these findings—such as providing smaller, but more frequent distribution of food stamp benefits—into the existing programs would require some augmentation, and would have costs shared by both State and Federal partners. Other options, like using prepaid debit cards or providing participants an option for self-imposed restrictions on food stamp benefits, may be relatively more costly or complicated both in technology and policy impact.”
Summary:
The growing concerns about obesity within society, unhealthy food choices made by food stamp recipients, and similar preferences by consumers of school lunches could be addressed by policy development within the 2007 or future Farm Bills. If the policy calls for healthier food products available for the consumer, it will be incumbent upon the farmer to provide those products, since he is participating in a farm program. Although farmers can do nothing to change societal food choices, they can communicate with input suppliers and output customers to begin a conversation on what can be achieved.
Posted by Stu Ellis at 12:31 AM | Comments (0) | Permalink
June 28, 2007
Conservation Reserve: Past and Future.
The site was a rolling hayfield near a pond just outside Peoria, IL, and then-Secretary of Agriculture John Block outlined to assembled farm reporters the concept of the Conservation Reserve Program which would become part of the 1985 Farm Bill. From that sunny, hot summer afternoon the CRP has been the primary engine of soil and water conservation, pulling many cars behind named WRP, EQIP, CSP, and others. Where has the CRP been over the past 22 years and where is it headed in the next Farm Bill?
Whether the CRP is the mainline engine of conservation or as Purdue’s Otto Doering calls it, “The 800 pound gorilla of American conservation programs—both in budget expenditure and in sheer size and geographical impact.” Doering’s analysis of the CRP reminds us that Congress has little to do with the Conservation Reserve Program, other than setting the acreage cap, which is currently at 39.2 million. The CCC administers the program contracts calling for 10 and 15 year grass and tree plantings on acreage accepted into the CRP program because of the environmental benefits provided idled acreage.
However, Secretary Block and his USDA colleagues were confronted with low grain prices, and the CRP was designed for a second purpose of supply management and income transfer through rental rates. The first big sign-up was in 1987, and since 10 year contracts can be renewed, 2007 will see considerable acreage become eligible for crop production for the first time in 20 years. But when the 1987 contracts for over 20 million acres were set to roll over in 1997 the USDA only accepted 16 million acres based on environmental benefits provided by the reenrollment.
Doering says the volume of acreage is an issue. Environmental groups want an increase to better support wildlife. Grain associations want a decrease in CRP acreage to ensure more grain production. Farmers have expressed concerns about the impact on the local agricultural economy when significant acreage is taken out of production. In 2006 USDA attempted an early extension program to ease the expected 2007 burden of work and 80% of the eligible land was given extensions up to 2010. When grain prices began to climb from acreage demand, there was a debate on whether land could come out of the CRP for corn ethanol production. USDA neatly delayed a decision until the issue was moot because of timing.
As the House Agriculture Committee embarked on Farm Bill debate several issues were posed for consideration as new policy
1) Extend the CRP to 2012 when the 2007 Farm Bill would expire.
2) Extend the pilot program for wetland and buffer enrollment to 2012.
3) Allow limited grazing for control of invasive species on CRP lands.
4) Use surveys in counties with 20,000+ acres to determine cash rents.
5) Allow CRP contracts to be modified where it would benefit social objectives.
6) Allow CRP contracts to be terminated by the landowner after 5 years.
Since the CRP is not likely to be changed very much because of its momentum within the environmental community, Congress will have some opportunity for small modifications, which include:
1) A decision of whether to allow contracts to be dissolved when acreage is needed for either food or fuel production.
2) Would the CRP be opened for biomass production to supply biofuels, and how would those provisions be met by the WTO.
3) Will the bidding process and the environmental rules be changed in ways that conservation becomes an entitlement program for landowners?
Summary:
The CRP will be included in the next Farm Bill because of its popularity. Policy makers are unlikely to shorten is funding because Congress is already insulated from acreage debate issues. However demand for corn acres to address ethanol needs may force the program to be opened at times previously unknown.
Posted by Stu Ellis at 12:23 AM | Comments (1) | Permalink
June 26, 2007
What Is Your Position On Critical Farm Bill Issues, And Will You Tell Your Member Of Congress?
Congressional Subcommittees have been debating and voting on major elements in the 2007 Farm Bill. Most recently, Members expressed a preference for extending the 2002 legislation with minor modifications instead of beginning anew. As Members return home for the Independence Day recess and the August vacation period, farmers will have the opportunity to express their positions. But first, you have to formulate an opinion and that might be easier said than done.
There are numerous issues pending in the Farm Bill debate, and you don’t have to be knowledgeable on every one to be able to express your opinion. However, there are some selected issues that will get more headlines and your Member of Congress will want your ideas. Farm policy economist Carl Zulauf at Ohio State University has assembled a list of key policy questions that will be important to most Cornbelt farmers. Some of those include:
Commodity programs:
1) Should farm programs focus on (1) enhancing farm income or (2) helping farmers manage
price/revenue risk? (Farm income is enhanced with payments that have been criticized by taxpayers and our trading partners, yet have kept many operations afloat. The alternative to per-bushel payments are revenue programs that are designed with payments that bolster the combination of price and yield, not just bushel prices.)
2) Should the direct payment program be redesigned as a “green payments” program? More broadly, should direct payments be reduced, even eliminated; with the $5.2 billion in annual spending redistributed among other programs? (Farmers are currently receiving 28¢ for corn, 44¢ for soybeans, and 52¢ for wheat in the form of a direct payment per bushel. Similar payments are issued for other program crops, but a contrasting viewpoint is to use the money for other areas, such as conservation, rural development, research, etc.)
3) Should permanent disaster assistance be authorized? Currently, disaster assistance is authorized on an ad hoc basis. (Disaster programs are approved by Congress almost every year to help compensate for drought, flood, or pestilence. The contrasting view is to use the money to help build a better crop insurance program and allow farmers to manage their own risk of production.)
4) Should the farm insurance program be brought into the Farm Bill? Historically, insurance has been addressed in separate legislation. (Currently, crop insurance programs will be reviewed and revised in two years, since that program is offset from the Farm Bill. A contrasting view is to include it in the Farm Bill debate.)
5) Should the restriction on planting fruits and vegetables by farm program recipients (e.g. corn and soybean producers) be eliminated to comply with a WTO ruling? If “yes,” what assistance should be enacted for fruit and vegetable (more broadly, specialty crop) producers? (Recent Farm Bills have prevented the planting of fruits and vegetables on base acres for program crops, something that the WTO opposes and would force a change. Would you want more freedom in what you planted, and what would current fruit and vegetable producers have to say about the increased competition?)
6) What should be the limits on farm payments? (With the recent public debate over the amount of money every farm operation and every farmer receives, there will be stronger calls for lower limits, and even implementing a means test that would eliminate some higher income farmers.)
Conservation
1) Should the criteria used to decide which areas and/or farmers receive funds from farm environmental programs be based on (1) the highest environmental benefits or (2) be distributed equally across U.S. farm land? (Early CRP contracts accepted nearly any acreage that was deemed highly erodible. However, recent regulations calculate formulas for environmental benefits that will eliminate some farms from any consideration.)
2) Under what conditions, if any, should Conservation Reserve Program land be opened up to growing crops used for cellulose-derived ethanol? (The demand for food and fuel has put a potential pinch on acreage, and the CRP is seen as a safety valve to allow production of biomass crops that could be used for ethanol production. Do you favor using the CRP for crop production?)
Trade
1) Should Congress act in advance to address programs that may conflict with multilateral trade agreements or maintain them as negotiating positions/tactics? (This reverts to the debate over whether the Farm Bill or the WTO should be negotiated first. As it is now, the WTO debate is floundering, while the Farm Bill debate is progressing. Our trading partners who caused a dismantling of the Cotton Program and threatened the same for corn and soybeans are watching to see what is included in the Farm Bill. Should typical programs be included that encourage production, or should agriculture be supported that will not encourage production and lower the value of commodities in the world market?)
Energy
1) How will jurisdictional issues between the agricultural and energy committees in the House of
Representatives and Senate affect what is written in the Farm Bill? (Recent energy legislation has established goals for ethanol and biodiesel production that did not take into account any farm programs that affect crop production. Should energy issues be included in the Farm Bill or can they be separately addressed?)
2) Should funding be directed at research that increases yields of crops, such as corn, switchgrass, etc.? (While current ethanol production goals are calling for increased production of corn, how does this impact the critical trade issue?)
3) What share of research funding should go to cellulose-based energy? (If federal research investments are directed toward conversion of switchgrass, miscanthus, and other biomass into ethanol, does that detract from the use of corn and will that threaten the demand for corn?)
Summary:
The Farm Bill debate goes far and wide, and covers many more questions that can be feasibly addressed here. However, there are critical issues to be decided on farm program payments and how they are determined, payment limitation issues, the impact of trade and energy legislation on farm programs, and numerous conservation issues that need to be refined. Farmers need to create their positions on the issues and communicate those to their Member of Congress prior to the approval of the Farm Bill, which needs to be completed before the start of the new federal fiscal year in October.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
June 18, 2007
How Will Your Farm Fare Under The USDA Proposal For The Farm Bill?
The Congressional Agriculture Committees this week will be conducting their internal debates on what to include in the 2007 Farm Bill. A multitude of proposals are on the table, from special interest and commodity groups, from USDA, and from the respective committee chairmen. Earlier this spring, USDA offered its proposal as a starting point, which included increases in direct payments, decreases in loan rates, and replacement of the counter cyclical payment with a revenue oriented payment program. If Congress accepts any of those, how will the 2007 Farm Bill impact your farm revenue?
While those proposals seemingly are significant factors that could change your revenue stream, the bottom line may be a bit surprising, according to the economists at the Food and Agriculture Policy Research Institute (FAPRI)a> at the University of Missouri. They calculated hundreds of outcomes based on the USDA proposals under different market scenarios and policy alternatives for the three principal USDA proposals:
1) Direct payments under the USDA program would be slightly larger. For corn and wheat rates are unchanged through 2009. The rates increase for from 28¢ to 30¢ cents in 2010-2012 then return to 28¢ baseline levels in 2013. Wheat payments would be 52¢ and rise to 56¢ in 2010-2012, and then return to 52¢. Soybean direct payment rates remain at baseline levels (44¢/bu.) in 2007 then increase in 2008 and 2009 to 47¢/bu. The rate increases again in 2010-2012, to 50¢/bu, before dropping back down to 47¢/bu in 2013.
2) For the marketing loan, the administration’s proposal is to lower loan rates. Loan rates will be the lesser of: 1) the loan rate for the commodity proposed in the 2002 House farm bill, or 2) 85 percent of an Olympic average (the average of the most recent five years, excluding the high and the low) of season-average farm prices. For most commodities this results in new loan rates at the levels proposed in the 2002 House farm bill. Corn, wheat, and soybeans, loan rates are slightly lower than current levels, as the House version called for lower loan rates than the final bill.
3) The revenue counter cyclical program replaces the current countercyclical payment program, where payments are triggered by price alone, is replaced with a program that triggers payments when the revenue (yields times prices) is lower than national target revenue per acre. For each commodity, a target level of national revenue per acre is determined by subtracting the 2002 farm bill direct payment rate from the 2002 farm bill target price, and multiplying the result by the Olympic average of 2002‐2006 national yields per harvested acre. If actual national-average revenue per acre is less than the target revenue, then payment rates are calculated by dividing the difference by the current national average countercyclical payment yield.
So what happens to your revenue stream if these proposals make it into the 2007 Farm Bill? The economists at FAPRI applied the proposals to farms which had a mix of program crops. “For these 21 farms, average annual direct payments over the outlook period are five percent higher under the administration’s proposal.”
Regarding the lower rates for the marketing loan, FAPRI said, “The result of the lower loan rates has a negative, but small impact on marketing loan benefits on all of the representative farms. Under baseline market conditions, the Feedgrain-soy and Crop-beef farms are projected to receive little marketing loan benefits anyway. Therefore, the lower loan rates in the administration’s proposal have little effect on these farms.”
And for the switch to a revenue counter cyclical program, FAPRI said, “The change in the countercyclical program negatively impacts all (farms). Under baseline market conditions, the feed grain-soy and crop-beef farms are projected to receive very little income from the countercyclical program. The farms in these two categories average about $500 per year in CC payments in the baseline. These payments drop to an average of just over $100 in the administration’s proposal.”
Looking at total revenue:
1) The Feed grain-soy and Crop-beef total government payments increase by an average of three percent annually.
2) Crop prices are not affected much by the change in policy. Corn, soybeans, and wheat prices are within one or two cents of the baseline in the administration’s scenario due to little change in acreage planted for each of these crops nationally. Of the 22 representative farms, 21 have lower average annual market receipts under the administration’s proposal when compared to the baseline.
3) The impact on net cash farm income for the majority of the farms is minimal. Net cash farm income on 21 of the 22 representative farms changes by less than one percent. Five of the 22 representative farms have a reduction in net cash farm income under the administration’s proposal.
4) However, the increase in market receipts is greater than the decrease in government payments and results in an increase in net cash farm income.
Summary:
USDA’s Farm Bill proposal was written to have minimal impact on the federal budget but to remove threats to the US farm programs from their world trade critics. While the trade issues might be smoothed out with the changes, farm families will feel little impact to their bottom line.
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
June 12, 2007
Today's Investment In Ag Research Yields Many Dividends Tomorrow
A recent survey of Cornbelt farmers indicated their belief that agricultural research would generate the greatest benefit toward increasing their profitability in the long term. Research that occurs both in the laboratory and in the field is expensive because of all the attempts needed to get one good result. While seed, chemical, and other input companies conduct their own research, they generally tweak the expensive basic research that occurs at universities and USDA research facilities. As the new Farm Bill is written, the funding mechanism for research will be on the table for a major overhaul.
As unlikely as it seems, funding for research is quite controversial. But there are hundreds of millions of dollars involved, so you should expect everyone wanting a share of the pie. The controversy is generally between those who believe certain universities should get a set share of funding allocated by formulas, versus those who want all universities and researchers to compete for available funding.
Pending in Congress for Farm Bill consideration are several different plans, including a complete USDA proposal for renovating ag research funding. Purdue University’s Farm Bill series includes an analysis of the alternatives.
In recent years, ag research funding has been part of a larger fund that also finances the Forest Service, Extension, and the Economics Research Service, but the funding for the umbrella agency has been flat. Over time research and Extension funding has been unable to keep up with inflation, while other federal research agencies such as the National Science Foundation and the National Institutes of Health have seen their funding increase by leaps and bounds. The result has been limits on ag research initiatives and decay at university facilities.
Numerous advocates of the ag research process have called for increased funding, but critics have contended there is a lack of coordination from state to state. The various state research coordinators contend they are addressing issues in their own states with their research funds, while communicating their findings to others. To solve the process without jeopardizing funding, several alternatives have been proposed:
1) The USDA’s Farm Bill proposal makes some administrative consolidations and creates several funds for research. Initially a $50 million fund would jumpstart bioenergy research, and a $100 million fund would expand specialty crop research. The agency would also research highly infectious foreign animal diseases on mainland locations in the U.S. and invest $10 million toward organic research.
2) The proposed National Institute of Food and Agriculture (NIFA), developed by a USDA panel led by William Danforth, Chancellor Emeritus of Washington University, St. Louis. It does not consolidate any administration, but proposes a new competitive grants program for fundamental research only, starting at $245 million per year and growing to $966 million per year in the fifth year. This new funding would be in addition to existing authorizations for ARS, CSREES, ERS, and the US Forest Service, which will continue to support integrative and applied research programs and invest in capacity.
3) CREATE-21 is an acronym for Creating Research, Extension, and Teaching Excellence for the 21st Century and is proposed by the National Association of State Universities and Land Grant Colleges. It combines elements of the Administration’s proposal and the Danforth Committee’s NIFA proposal. It ensures that adequate funding is available for public agricultural research to be distributed based on competitive and formula approaches, meets fundamental and applied research needs, provides for capacity building and infrastructure, and requires a complete reorganization and consolidation of federal an