Economics and the Farm Bill

Economics and the Farm Economics and the Farm BillBill

Joe L. OutlawCo-Director

Professor and Extension Economist

Eighth Annual Texas Commodity SymposiumDecember 3, 2008

Presentation OutlinePresentation Outline

• Introduction and Overview

• Crop Economics

• Commodity Outlook

• Farm Bill– Focus on ACRE– SURE

• Summary

The Way Forward!

Introduction and Introduction and OverviewOverview

• Current Financial Mess Will Come to Agriculture– Ag lenders facing shortage of money

• Shouldn’t be a Replay of the 1980s for Ag– Shifted from collateral based lending to repayment

capacity– Volatility in prices rather than depressed prices– Overall health in farm sector with strong balance

sheets• Input costs • Land values

• More Worried About Relative Crop Prices • Where Does Ag Fit in Cap and Trade World?

– Carbon footprints???

Futures Prices Relative to Futures Prices Relative to Contract Highs Earlier in 2008Contract Highs Earlier in 2008

Futures Contract

Date Peak Price

Date Current Price

Decline

Dec ’08 Corn

June $7.99/bu Nov 11 $3.74/bu $4.25/bu

Nov ’08 Soybean

July $16.37/bu Nov 11 $9.08/bu $7.29/bu

Dec ’08 Wheat

March $12.75/bu Nov 11 $5.23/bu $7.52/bu

Dec ’08 Live Cattle

June $115/cwt Nov 11 $91.6/cwt $23.4/cwt

Dec ’08 Hog

June $79/cwt Nov 11 $54.98/cwt $24.02.cwt

Source: Agri-Pulse Communications, updated by AFPC, 11-10-08

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Delivery Date

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November 28, 2008

July 3, 2008

NYMEX Crude Oil Forward NYMEX Crude Oil Forward CurveCurve

Prices Go Up and Down Prices Go Up and Down All the TimeAll the Time

Here is the Problem!

U.S. Corn Cost of Production

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$/A

cre

Seed Fertilizer Chemicals

Custom operations Fuel, lube, and electricity Repairs

Other variable expenses Interest on operating capital

Source: FAPRI, August 2008 Baseline

U.S. Grain Sorghum Cost of Production

0.00

50.00

100.00

150.00

200.00

250.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$/A

cre




U.S. Cotton Cost of Production

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$/A

cre



Other variable expenses Ginning Interest on operating capital


U.S. Wheat Cost of Production

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$/A

cre





Index of Prices Paid for Seed, 2000-2007 with FAPRI Projections, 2008-

2013

120

140

160

180

200

220

240

260

280

300

2000 2002 2004 2006 2008 2010 2012


Index of Prices Paid for Fertilizer, 2000-2007 with FAPRI Projections, 2008-2013

100150200250300350400450500550600

2000 2002 2004 2006 2008 2010 2012


Index of Prices Paid for Chemicals, 2000-2007 with FAPRI Projections, 2008-2013

115

125

135

145

155

165

175

2000 2002 2004 2006 2008 2010 2012


Index of Prices Paid for Fuel, 2000-2007 with FAPRI Projections, 2008-

2013

100

150

200

250

300

350

400

450

2000 2002 2004 2006 2008 2010 2012


Index of Prices Paid for Repairs, 2000-2007 with FAPRI Projections, 2008-

2013

120

130

140

150

160

170

180

190

2000 2002 2004 2006 2008 2010 2012


Index of Prices Paid for Machinery, 2000-2007 with FAPRI Projections, 2008-2013

130

150

170

190

210

230

250

2000 2002 2004 2006 2008 2010 2012


Index of Prices Paid for Wages, 2000-2007 with FAPRI Projections, 2008-

2013

135

145

155

165

175

185

195

205

215

2000 2002 2004 2006 2008 2010 2012


Commodity Price OutlookCommodity Price Outlook

• Who Knows?– Gas prices today vs summer?

• Again, Relative Expected Prices Key– Between now and planting will be important

• For Texas producers– Stay on your toes– At some point in 2009 there is likely to be a

price that you can make money at– Back to strategies from a few years ago

• Minimize relative costs with limited price protection from the loan

January and August 2008 Projected Corn January and August 2008 Projected Corn Prices Relative to Loan Rate, and Target Prices Relative to Loan Rate, and Target

Price for CornPrice for Corn

$1.80$2.30$2.80$3.30$3.80$4.30$4.80$5.30$5.80

Jan Baseline Loan Rate Target Price Aug Baseline

Source: FAPRI

January and August 2008 Projected Cotton January and August 2008 Projected Cotton Prices Relative to Loan Rate, and Target Prices Relative to Loan Rate, and Target

Price for CottonPrice for Cotton

$0.25

$0.35

$0.45

$0.55

$0.65

$0.75

Jan Baseline Loan Rate Target Price Aug Baseline

Source: FAPRI

January and August 2008 Projected Wheat January and August 2008 Projected Wheat Prices Relative to Loan Rate, and Target Prices Relative to Loan Rate, and Target

Price for WheatPrice for Wheat

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Jan Baseline Loan RateTarget Price August Baseline

Source: FAPRI

2008 FB Changes2008 FB Changes

• Large comprehensive bill– Boil changes down for the average fan

• Four Major Changes Impacting Commodity Programs– ACRE– Payment limits– AGI eligibility criterion– SURE

• Conservation Funding Received Boost

1940 1963 1998-01 2002 2007

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Farm program spending as share of Federal budget outlays

Source: CBO, OMB, USDA budget projections and historical budget documents. Includes crop insurance premium subsidies and indemnities.

Percent

2008 Farm Bill Spending2008 Farm Bill Spending

69%

11%

8%

12%Nutrition

Farm Programs

Conservation

Other

Source: Congressional Budget Office (5/13/2008)

Commodity Program Commodity Program OverviewOverview

• Commodity provisions very close to previous programs– Continue direct payments– Continue marketing loan gains/LDPs– Maintain counter-cyclical payments (CCPs)

or

– Provides producer option for Average Crop Revenue Election (ACRE) Payment• Producer has to agree to direct payment

and loan rate reductions

Average Crop Revenue Average Crop Revenue Election (ACRE) PaymentElection (ACRE) Payment

• Beginning with the 2009 crop year– One-time irrevocable option to choose:

• CCP, DP (with full payment rates), and MLG/LDPs (with full loan rates) or

• ACRE, DP (with a 20% reduction in payment rates) and MLG/LDPs (with a 30% reduction in loan rates)

– Producers will have to determine whether the loss in guaranteed support is more than made up by potential gain from ACRE

– This election is for all the crops grown on each FSA farm #

• A farmer could choose to select ACRE for certain farms (FSA farm #s) and not others

Don’t have to make choicethe first year

Average Crop Revenue Average Crop Revenue Election (ACRE) Payment Election (ACRE) Payment

(Cont.)(Cont.)• ACRE defined:

– A state level gross revenue protection plan for each covered commodity and peanuts

– The Secretary shall make an ACRE payment on a farm for each crop year if:• The actual State revenue for the crop is less

than the ACRE program guarantee for the crop, and

• The actual farm revenue for the crop is less than the farm ACRE benchmark revenue

For the 2010-2012 crop years, the ACRE state revenue guarantee for a crop shall not decrease or increase more than 10 percent from the guarantee for the preceding crop year


(Cont.)(Cont.)• Where:

– The actual State revenue for a crop is the State yield per planted acre from NASS multiplied times the national average market price (the higher of the 12-month marketing year price or 70% of marketing assistance loan rate)

– The ACRE program guarantee is equal to 90% of the benchmark state yield (5 year Olympic NASS average) multiplied times the ACRE program guarantee price (simple average of 2 previous national average market price)

– The actual farm revenue is the actual yield for the crop on the farm multiplied times the national average market price for the crop

– The farm ACRE benchmark revenue is [(the most recent 5 year Olympic average crop yields for the farm multiplied times the ACRE program guarantee price for the crop) plus the crop insurance premium per acre]


(Cont.)(Cont.)• Where the ACRE payment amount is:

– The lesser of:• The difference between the ACRE state program guarantee

for the crop and the actual State revenue from the crop or• 25% of the ACRE state program guarantee for the crop

– Multiplied by:• The payment fraction (.833 for 2009-11 and .85 for 2012)

multiplied by planted or considered planted acres of the crop

– Multiplied by:• The quotient obtained by dividing the Olympic average

yield per planted acre for the crop on the producers farm for the most recent 5 years by the benchmark State yield for the crop (the Olympic average of the most recent 5 years of State yields)

Average Crop Revenue Average Crop Revenue ElectionElection

State ACRE Guarantee = 90%* 5-Year Olympic State Avg. Yield *2-year Natl. Average Mkt. Yr. Price Restricted to < 10% change/year

>

AND

>

THEN

Farm Payment = 0.833 (0.85 in 2012) * Actual Planted or Considered Planted Acres *

[ Farm's 5-Year Olympic Average Yield / State’s 5-year Olympic Average Yield ] *

MIN[ (State ACRE Guarantee – Actual State Revenue) OR State ACRE Guarantee * 25%]

Actual State Revenue =Actual State Planted Acre Yield * MAX[ Natl. Average Mkt. Yr. Price OR70% Loan Rate]

Actual Farm Revenue =Actual Farm’s Planted Acre Yield * MAX[ Natl. Average Mkt. Yr. Price OR70% Loan Rate]

Farm ACRE Benchmark =Farm's 5-Year Olympic Avg. Yield *2-year Natl. Average Mkt. Yr. Price + Ins Premium

Note: All Yields are Planted Acre Yields

Comparison of Different 2-Year Comparison of Different 2-Year National Average Prices for ACRE National Average Prices for ACRE

Program (12-2-08)Program (12-2-08)

Crops 2006/2007

2007/2008

Corn ($/bu) 3.62 4.07

Sorghum ($/bu) 3.69 3.78

Wheat ($/bu) 5.37 6.48

Upland Cotton ($/lb)

0.529 0.532

Rice ($/cwt) 11.38 13.57

Soybeans ($/bu) 8.27 9.91

Loan Rates Loan Rates

Loan Rates

Crops 2008-09 70%

Corn ($/bu) 1.95 1.365

Sorghum ($/bu) 1.95 1.365

Wheat ($/bu) 2.75 1.92

Upland Cotton ($/lb)

0.52 0.364

Rice ($/cwt) 6.50 4.55

Barley ($/bu) 1.85 1.295

Oats ($/bu) 1.33 0.931

Soybeans ($/bu) 5.00 3.50

Peanuts ($/ton) 355 248.5

20% of Direct Payment20% of Direct Payment

Direct Payments Cost of ACRE

Crops Full 80% 20%

Corn ($/bu) 0.28 0.224 0.056

Sorghum ($/bu) 0.35 0.28 0.07

Wheat ($/bu) 0.52 0.416 0.104

Upland Cotton ($/lb) 0.0667 0.05336 0.01334

Rice ($/cwt) 2.35 1.88 0.47

Barley ($/bu) 0.24 0.192 0.048

Oats ($/bu) 0.024 0.0192 0.0048

Soybeans ($/bu) 0.44 0.352 0.088

Peanuts ($/ton) 36 28.8 7.2


(Cont.)(Cont.)

• AFPC risk-based decision aid to evaluate expected benefits from current programs (DP,LDP,CCP) vs (ACRE and reduced DP, LDP)– The decision has a lot of moving parts

(farm yields, state yields, marketing year prices and expected future prices)

– Correlation of moving parts– Results of Total Gov’t Payments:

Correlation of State and County Correlation of State and County Yields, Selected LocationsYields, Selected Locations

Crops Correlation

Corn (Moore County)

All 43%

Cotton (Dawson County)

Irrigated 95%

Non-irrigated 93%

Cotton (San Patricio County)

Irrigated 13%

Non-irrigated 40%

Wheat (Moore County)

All 93% 89% 69%

WebsterCounty, IA 89%

SummarySummary

• Relatively high and sticky on the way down production costs with declining prices tough combination

• In my opinion, Texas farmers do not have much of a choice for the 2009 crop– Final or nearly final details aren’t available

• Seed has to be purchased• Operating loans secured – based on what?

– Crop prices for some commodities low enough that 30% reduction in loan rates and 20% reduction in direct payments overwhelm potential benefits of ACRE

Thank you…Thank you…

Joe OutlawJoe [email protected]

www.afpc.tamu.eduwww.afpc.tamu.edu979-845-5913979-845-5913

mailto:[email protected]

Documents

Economics and the Farm Bill