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The U.S. Farm Bill: More than just the farm
Kent OlsonDepartment of Applied Economics
University of Minnesota
Minnesota Economic AssociationOctober 26, 2012
Current Crop Commodity Policy
1. Direct payments (DP)
2a. Counter-Cyclical Payments (CCP)• Based on target prices
OR
2b. Average Crop Revenue Election (ACRE)
3. Loan rates
& Loan Deficiency payments (LDP)
Corn example of CounterCyclical
Target price per bushel = $2.63
Target price – DP = $2.35
Loan rate = $1.95
Direct Payment = $0.28
Potential CCP = $0.40
Potential LDP
If U.S. m
arket price > $2.35,
farmers only receive $0.28
(times 83.3% of base acres * D
P yield).
The ACRE payment
• An ACRE payment on a farm is made if:– (1) ACRE program guarantee for the crop is
greater than actual State revenue for the crop– AND– (2) farm ACRE benchmark revenue is greater than
actual farm revenue for the crop
• Farm payment is based on the loss in revenue at the State level and the farm’s planted acreage—adjusted for relative yields
ACRE: State revenue & guarantee
• Actual state revenue for a crop is the State yield per planted acre from NASS times the national average market price – National average market price is the higher of the 12-month
marketing year price or 70% of the marketing assistance loan rate
• State guarantee is equal to 90% of the benchmark state yield (5 year Olympic NASS average) times the ACRE program guarantee price – ACRE program guarantee price is the simple average of 2
previous national average market prices– 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.
ACRE: farm revenue & benchmark
• Actual farm revenue is the actual yield for the crop on the farm times the national average market price for the crop
• Farm ACRE benchmark revenue is:The most recent 5 year Olympic average crop yield
average for the farm times the ACRE program guarantee price for the crop
Plus The crop insurance premium per acre paid by the farm
ACRE PaymentIf the two triggers are met, 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 2009-2011 and 0.85 for 2012)
• Multiplied by the planted or considered planted acres of the crop on that farm
• Multiplied by the quotient: obtained by dividing the Olympic average 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)
Still with me?
State ACRE Guarantee
Actual State Revenue
Actual Farm Revenue
Farm ACRE Benchmark
>
>
THEN, and only then:
ACRE Farm Payment
Summary of ACRE payment triggers
AND
IF
Estimating the impact of CCP vs ACRE
• Program rules and formulae• Actual farm data for acreages plus
yield trends and error distributions - 11 example farms in southern Minnesota - 6 example farms in northwest Minnesota
• Historical prices for distributions• Price projections for expected means
• Food and Agricultural Policy Research Institute (FAPRI)• @RISK within Excel
Index of Total Government Payments (TGP), if ACRE guarantee is “high”
and market prices drop …
0
50
100
150
200
250
300
TG
P I
nd
ex
Co
1
Co
2
Co
3
Fa
1
Fa
2
Go
1
Go
2
Go
3
Pi1
Pi2
Pi3
Pe
1
Pe
2
Pe
3
Po
1
Po
2
Po
3
Example Farms
CP ACRE
6 wheat-SB farms11 corn-SB farms
F1
Pi3 index = 533
Index of Total Government Payments (TGP), if ACRE guarantee is high and market prices remain high …
0
20
40
60
80
100
120
140
160
TG
P I
nd
ex
Co
1
Co
2
Co
3
Fa
1
Fa
2
Go
1
Go
2
Go
3
Pi1
Pi2
Pi3
Pe
1
Pe
2
Pe
3
Po
1
Po
2
Po
3
Example Farms
CP ACRE
F3
6 wheat-SB farms11 corn-SB farms
Food, Conservation and Energy Act of 2008
I. Commodity programs
II. Conservation III. TradeIV. Nutrition V. CreditVI. Rural developmentVII. Research & related
mattersVIII. Forestry IX. Energy
X. Horticulture and organic agriculture
XI. Livestock
XII. Crop Insurance and Disaster Assistance Programs
XIII. Commodity Futures
XIV. Miscellaneous
XV. Trade and tax provisions
S.3240: Agriculture Reform, Food and Jobs Act of 2012
I. Commodity programs
II. Conservation III. TradeIV. Nutrition V. Farm Credit
ProgramsVI. Rural
development Programs
VII. Research, Extension, & related matters
VIII. Forestry IX. EnergyX. HorticultureXI. Crop InsuranceXII. Miscellaneous
Which title has the largest budget?
CBO’s Ten-year Baseline, S.3240$995 billion, FY2013-2022
Crop insurance9.0%
Conservation6.6%
Trade0.3%
Horticulture0.1%
Energy0.0%
Nutrition77.6%
Commodities6.3%
Source: Monke, CRS
CBO’s Ten-year Score of S.3240Net: $969 billion (23.6B less), FY2013-2022
Crop insurance9.8%
Conservation6.1%
Trade0.4%
Horticulture0.1%
Energy0.1%
Nutrition79.1%
Commodities4.5%
Source: Monke, CRS
CBO’s Score of S.3240$billion change, FY 2013-2022
Co
mm
od
itie
s
Co
ns
erv
ati
on
Nu
trit
ion
En
erg
y
Ho
rtic
ult
ure
Cro
p I
ns
ura
nc
e
-25
-20
-15
-10
-5
0
5
10
Ch
an
ge
($
bil
lio
n)
Source: Monke, CRS
No Farm Bill?
• Several programs ended on October 1– Funding for other programs will end soon
• Commodity programs stopped• Crop insurance subsidies cut• No disaster assistance• No MILC payments for small dairies• SNAP is funded for now• On January 1: USDA buys dairy products at
very high prices under 1949 law
“The Farm Bill” is not the only policy to affect farms
• Futures trading rules - derivatives
• Rural policy• Highways• Monetary policy• International trade• Other country’s
policies
• Environment• Energy (incl. ethanol)
• Immigration• Science• Zoning• …
References
Monke, J. 2012. Budget Issues shaping a 2012 farm bill. CRS, R42484.
Olson, K., and M. DalSanto. 2007. Alternative Farm Bills: Impacts on Minnesota Farms. Staff paper P07-5, St. Paul, MN: University of Minnesota, Department of Applied Economics.
