New Rules of the Road: Implementing the 2008 Farm Bill Patrick Westhoff ([email protected])[email protected] Food and Agricultural Policy Research.

New Rules of the Road:Implementing the 2008 Farm Bill

Patrick Westhoff ([email protected])Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri–Columbiawww.fapri.missouri.eduNational Farm Business Management ConferenceSt. Louis, June 15, 2009

Agenda

2008 Farm Bill provisions Modifications of previous law New programs

Implementation issues ACRE and other new programs Payment limitations

Other policies affecting farm sector Biofuel and climate change legislation Budgetary issues

Official title: Food, Conservation, and Energy Act of 2008

14 of 15 titles became law on May 22, 2008 over President’s veto

Override votes (two-thirds required) 316-108 in the House 82-13 in the Senate

Final title became law on June 18, 2008

A few facts about the farm bill

Farm bill spending, 2008-17

Pre-farm bill laws 2008 farm bill

Changes in farm bill spending (FY 2008-17, billion dollars, CBO estimates, relative to continuation of 2002 farm bill provisions)

2008 farm bill changes in 2002 farm bill programs Target prices and loan rates for some crops Base eligible for direct payments Marketing loan program rules Timing of payments Payment limitations Dairy program changes

Loan rates(used in calculating marketing loan benefits)

2002 farm bill 2008 farm bill for 2008/09-2009/10

2008 farm bill for 2010/11-2012/13

Corn/bu. $1.95 $1.95 $1.95

Soybeans/bu. $5.00 $5.00 $5.00

Wheat/bu. $2.75 $2.75 $2.94

Upland cotton/lb. 52.0¢ 52.0¢ 52.0¢

Rice/cwt. $6.50 $6.50 $6.50

Producers may take out a government loan at these rates, or they may earn marketing loan benefits if an indicator price (posted county price or adjusted world price) falls below the loan rate. Benefits are available on all production.

The 2008 farm bill says that prices for the last 30 days should be used to compute benefits. Previously, a daily price was used for some crops.

Direct payment rates(used in calculating direct payments)

2002 farm bill 2008 farm bill for 2008/09-2009/10

2008 farm bill for 2010/11-2012/13

Corn/bu. $0.28 $0.28 $0.28

Soybeans/bu. $0.44 $0.44 $0.44

Wheat/bu. $0.52 $0.52 $0.52

Upland cotton/lb. 6.67¢ 6.67¢ 6.67¢

Rice/cwt. $2.35 $2.35 $2.35

Direct payments = Payment rate * base area * DP yield * proportion of base eligible for DPs.

The 2008 farm bill reduces the proportion of base eligible for DPs from the current 85% to 83.3% for the 2009/10, 2010/11, and 2011/12 crops. The proportion is restored to 85% in 2012/13. Base acreage and DP yields remain fixed at 2002 farm bill levels.

Target prices(used in calculating countercyclical payments)

2002 farm bill 2008 farm bill for 2008/09-2009/10

2008 farm bill for 2010/11-2012/13

Corn/bu. $2.63 $2.63 $2.63

Soybeans/bu. $5.80 $5.80 $6.00

Wheat/bu. $3.92 $3.92 $4.17

Upland cotton/lb. 72.40¢ 71.25¢ 71.25¢

Rice/cwt. $10.50 $10.50 $10.50

Countercyclical payment rate = Greater of zero or Target price – direct payment rate – higher of (loan rate or season average farm price)Payments = Payment rate * base acreage * CCP yield * 0.85

2008 farm bill does not change these payment formulas, and base acreages and CCP yields are fixed at 2002 farm bill levels.

Implications of changes in target prices and loan rates If commodity prices are low enough, the farm bill

changes would result in Increased marketing loan benefits for wheat, barley,

oats and minor oilseeds Increased countercyclical payments for soybeans,

wheat, barley, oats and minor oilseeds Reduced countercyclical payments for cotton

But if commodity prices are high enough, countercyclical payments and marketing loan benefits will be zero, even with the changes

Soybean prices & program provisions History and June 11, 2009 futures

Future farm prices based on Nov. contracts minus assumed $0.30/bu. basis

Corn prices and program provisions History and June 11, 2009 futures

Future farm prices based on Dec. contracts minus assumed $0.30/bu. basis

Cotton prices and program provisions History and June 11, 2009 futures

Future farm prices based on Dec. contracts minus assumed $0.02/lb. basis

Implications of changes in target prices and loan rates revisited At projected prices, appears CCPs and loan

benefits for most crops are unlikely Thus, higher target prices, loan rates may have little

impact on CCPs and loan program benefits

Likely exception: cotton, where the lower target price may reduce payments Reduction in cotton payments could exceed increase

in payments for other crops

Corn program provisions and variable production expenses

Source: Farm bill and FAPRI-MU estimates, January 2009

Note: Variable expenses do NOT include land and other fixed costs.

Timing of payments

Farm bills specify when payments can be made

2008 farm bill delays some payments

These delays are intended to shift government spending from one fiscal year to another to achieve budgetary targets

Timing of payments

2008/09-2010/11 2011/12 2012/13

Direct payment advance 22% 22% 0%

(available Dec. of yr. before harvest)

Final direct payment 78% 78% 100%

(available Oct. of harvest year)

Countercyclical payment advance 40% 0% 0%

(available 180 days into market year)

Final countercyclical payment 60% 100% 100%

(available Oct. of harvest year)

Payment limitations & AGI test

Farm bill tightens payment limitation rules

Eliminates 3 entity rule—payments directly attributed to a human being

Adjusted Gross Income test $500,000 of nonfarm adjusted gross income

disqualifies for many payments $750,000 of adjusted gross farm income disqualifies

for direct payments

Dairy provisions: price supports

2002 farm bill set milk price support ($9.90 per cwt for manufacturing grade milk)

2008 farm bill has no milk price support, but does set price supports for products $1.13 per pound for block cheddar cheese $1.05 per pound for butter $0.80 per pound for nonfat dry milk

No effective change in support levels

Dairy provisions: MILC

Farm bill revises rules for Milk Income Loss Contract (MILC) program Trigger price $16.94/cwt, adjusted if feed costs exceed

$7.35/cwt of milk (April 2009 trigger: $17.14/cwt) Subtract Boston Class I price (April: $13.61/cwt) Multiply difference by 45% for 2008-2012 (April

payment rate: $1.59/cwt) Available on 2,985,000 pounds per fiscal year Various provisions revert to 2002 farm bill levels on

Sep. 1, 2012 (34% of production, 2.4 mil. lbs.)

Average Crop Revenue Election (ACRE) program Short version: make payment if state per-acre

revenues fall below a trigger level Trigger (“benchmark” revenue)

2-year average national price, multiplied by 5-year Olympic average (throw out high and low) of

state yields per planted acre, multiplied by 0.9 Cannot adjust more than 10%/year

Payments made on 83.3% of planted acreage from 2009-2011 (85% in 2012)

ACRE program provisions, continued

Farm must have a loss to get a payment (double hurdle—state and farm loss) Farm level benchmark = Farm 5-year Olympic yield times 2-

year average US price plus crop insurance premiums paid In contrast, state benchmark multiplies by 0.9 and does not

add crop insurance premiums Payments don’t depend on size of farm level loss—but must

have some loss to qualify for payments if state benefits triggered

Farm level payment is adjusted for average yields State level payment rate * ratio of farm to state Olympic

yields

ACRE program provisions, continued

Trade-off: to enter program, farmers must give up 20% of direct payments All countercyclical payments And must accept 30% lower loan rate

Farmers must choose whether or not to enroll First available in 2009: August 14 deadline Once enroll, must stay in program through 2012 If enroll, must enroll all crops on farm

SURE

Supplemental Revenue Assistance (SURE)

Intended to replace ad hoc disaster aid

Payments if various conditions met Disaster county or one contiguous, or farm-level production

down 50% from normal Whole farm revenue less than trigger amount Must have crop insurance or NAP where available

Trigger tied to crop insurance coverage level

Implementation issues

Most programs now available for sign-up

ACRE an example of program requiring many implementation decisions at USDA Which two years’ prices are used in establishing

benchmark revenue? What is a planted acre? What happens if base acres limit acres eligible for ACRE

payments? What if a farmer did not plant a crop in a particular year

—how do you calculate an Olympic yield?

How implementation choices can matter—a lot

2006/07 2007/08 2008/09

Corn farm price $3.04 $4.20 $4.10-$4.30

Some at USDA proposed to read the farm bill to say that the 2009/10 benchmark should depend on prices in 2006/07 and 2007/08. The average of those two years’ prices was $3.67/bu.

Others argued that the farm bill requires that the 2009/10 benchmark should depend on prices from 2007/08 and 2008/09. Although the 2008/09 price still is not known with certainty, the average of the two years is likely to be about $4.20/bu.

The final decision: use 2007/08 and 2008/09.

Implication: the revenue benchmark for 2009/10 is about 14% higher than it would have been otherwise, making ACRE more attractive.

ACRE program: an example

2004 2005 2006 2007 2008 Average

MO corn yield/plant. a. 161 111 138 137 140

w/o high, low 138 137 140 138

US price per bushel $4.20 $4.20 $4.20

Revenue benchmark $522

Farm yield 170 130 100 140 135

w/o high, low 130 140 135 135

Payments would be made to MO corn farmers if the 2009 state yield/acre multiplied by 2009/10 US corn price is less than $523

If 2009 MO yield = 138 and 2009/10 US price = $3.50: revenue = $483State average payment rate: $522 - $483 = $39

Farm payment, if farm has loss: 0.833 times planted acres times $39 times 135/138 = $32 per planted acre

Deciding whether to participate in ACRE Like insurance purchase decision:

Is expected ACRE payment worth the “premium” of payments foregone?

If prices and yields are steady or increase No ACRE payments, But still give up 20% of direct payment

But if US prices or state yields drop Potential payments could be quite large Likely to be larger than foregone payments

US simulation results Annual averages for 2009/10-2012/13

Corn Wheat Soybeans Cotton

Average ACRE payment/acre $10.06 $11.32 $13.00 $11.34

Payments foregone/base acre

$4.81 $3.11 $2.53 $100.21

Net benefit of ACRE/acre $5.25 $8.21 $10.47 -$88.87

Results reflect average of 500 stochastic outcomes. Note that the most likely outcome in any given year for any given commodity in any given state is no ACRE payments. However, when ACRE payments do occur, they can be quite large—much larger than the traditional program payments that producers must give up to participate.

Results are based on FAPRI’s January 2009 baseline. Results are very sensitive to projected prices and yields, and will differ across states and producers. These calculations assume one acre of base for each acre planted. On particular farms, base acreage can be very different than planted acreage.

WA

OR

CA

NV

ID

MT

WY

UT

AZ

ND

SD

NE

KSCO

NM

TX

OK*

MN

IA

MO

AR*

LAMS

AL

GA

WI

IL IN

OHPA

KY

TN NC

SC

FL

VA

ME

NYMI

NH

MA

CTRI

NJ MDDE

WV

VT

DC

Traditional payments greater

ACRE payments greater

ACRE payments vs. traditional paymentsJan. 2009 FAPRI estimates

Chart reflects average results over 2009/10-2012/13

*In Oklahoma and Arkansas, ACRE payments are greater in some years and traditional payments are greater in other years. Over the four years, ACRE payments are greater in Oklahoma and traditional payments were greater in Arkansas.

For more on the ACRE choice

National estimates are interesting, but not sufficient for producers who have to choose

The best choice for a given producer depends on Mix of crops grown on the farm Base acreage and program yields Correlation between farm and state yields Expectations of future prices and yields Much more

FAPRI ACRE tool (at www.fapri.missouri.edu) lets producers use own assumptions

Other farm bill provisions

Conservation program changes Revamped Conservation Security Program Conservation Reserve limited to 32 million acres by 2010

(currently 34.7 mil. acres) More funding for EQIP, other programs

Biofuel policy changes Ethanol tax credit reduced from $0.51 to $0.45/gallon Additional subsidies for cellulosic ethanol

And much, much more

Payment limitations: direct attribution

Payments directly attributed to “warm bodies”

Can get payments from as many entities as desired (no 3 entity rule), but limit is on payments to individuals

For example, individual can only get $40,000 in direct payments regardless of entities

Attributed through 4 levels, and all must be “actively engaged”

Adjusted Gross Income test

$500,000 in nonfarm adjusted gross income: no commodity program benefits

$750,000 in farm adjusted gross income: no direct payments

$1,000,000 in non-farm adjusted gross income: no conservation program payments

Based on 3-year averages

Talk to an expert

Payment limitation rules are complex 2008 farm bill makes major changes Many issues still being resolved by FSA People are still learning how to operate under

the new rules As my wife, the attorney, reminds me, I’m just

an economist and not the right person to go to for legal advice

Other policy issues affecting the farm sector Implementation of 2007 energy bill and other

biofuel issues

Climate change legislation

Health care legislation

Future budget legislation

Implementation of the 2007 energy bill

Energy Independence and Security Act mandates minimum levels of use of 4 classes of biofuels

Major controversies in rulemaking Will ethanol from new corn ethanol plants qualify? How will “grandfathering” of existing corn ethanol plants

work? Will biodiesel from soybean oil qualify? Will imported sugar-based ethanol from Brazil count as

an “advanced biofuel”?

Other biofuel policy issues

Will 12%, 13%, or 15% ethanol blends be allowed?

Will credits and tariffs be extended when they are scheduled to expire at the end of 2010?

Will supportive policies succeed in encouraging rapid growth in cellulosic ethanol production?

Impacts of some biofuel policy options(Average percentage impacts on corn prices, 2011-2018)

Source: FAPRI-MU Report #04-09, “Impacts of Selected US Ethanol Policy Options”

Climate change legislation

Congress is considering cap and trade legislation

Implications for agriculture still unclear Likely to result in higher fuel and fertilizer prices May be possible for farmers to sell credits for reducing

carbon emissions May be important effects on biofuel industry

Process just beginning: a long way from final law

Health care legislation

Under consideration in Congressional committees

More likely to become law in 2009 than climate change legislation

Possible impacts on agriculture Cost of health care services and insurance Taxes or other budgetary offsets

Future budget legislation

FY 2009 now expected to be on the order of $1.8 trillion, and FY 2010 only slightly smaller

For perspective, previous record deficit: $455 billion in FY 2008

Likely to mean future budget cuts across all of government, including farm programs

But when will this occur?

What went up, has come down

Jun 08: $7.08

Dec 08: $3.64

What went up, has come down

Will what’s gone up, come back down?

US corn receipts and variable expenses

Source: FAPRI projections, Jan. 2009.

Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)

Final comments

Farm bill implementation process far along

With a few exceptions, farm bill unlikely to have huge impacts on producer profitability

Other policy debates may be more important to agriculture than the farm bill

Thanks!

Contact me at [email protected] or 573-882-4647

Visit FAPRI-MU web page at www.fapri.missouri.edu