AP CA

A Market Directed Inventory System

(MDIS)

National Farmers Union Annual ConventionOmaha, Nebraska

March 5, 2012

Daryll E. Ray and Harwood D. SchafferAgricultural Policy Analysis Center

University of Tennessee Institute of Agriculture

AP CA

Policy Description

Objectives of MDIS – Bulk of revenue from market receipts– Reduce government payments while

maintaining farm income– Reduce price volatility that otherwise would

cause “viable and profitable” agricultural firms to go out of business including:• Crop farmers• Livestock producers• Ethanol producers• Agricultural processors

AP CA

Policy Description

Two Parts to the MDIS Analysis–Historical• Rerun of history from 1998 to 2010• Except the commodity programs are replaced

with MDIS–Ten Years into Future• Analysis covers 2012 to 2021 using the ten-year

USDA baseline released in February of 2012• The baseline is shocked to mimic the variability

experienced during 1998 thru 2021• Compare MDIS with current program variations

AP CA

Policy Description

MDIS Specifications for Historical Study Period, 1998 thru 2010– Initial corn loan rate set at midpoint between

variable and full cost of production– Indexed with a prices paid by farmers index–Other crop loan rates set to historic loan rate

ratios with corn– Release prices are set at 160% of loan rates

AP CA

Policy Description

MDIS Specifications for 1998-2010 Study Period–MDIS maximums• Corn – 3 billion bushels• Wheat – 800 million bushels• Soybeans – 400 million bushels

– Farmer storage payment rate 40¢/bu./yr– Set-aside available if needed– Eliminate Direct Payments, LDPs, & CCPs

AP CA

Corn Prices

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline

Release Price

Loan Rate

AP CA

Corn Prices

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline

MDIS

Release Price

Loan Rate

AP CA

Corn PricesAverage Per Year Over Each Period

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$2.05

$2.68

$4.02$3.71

$2.81$3.07

AP CA

8 Crops - Government Payments

$0

$5

$10

$15

$20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline

MDIS

$ Billion

AP CA

8 Crops – Government PaymentsAverage Per Year Over Each Period

$0

$2

$4

$6

$8

$10

$12

$14

$16

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$ Billion

$14.8

$4.8

$6.8

$3.6

$11.7

$4.3

AP CA

Corn Exports - Quantity

0

500

1000

1500

2000

2500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline

MDIS

Million Bu.

AP CA

Corn Value of ExportsAverage Per Year Over Each Period

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$ Billion

$3.9

$4.8

$8.3$7.7

$5.6 $5.9

AP CA

8 Crops Value of Exports

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Historic Baseline

MDIS

$ Billion

AP CA

8 Crops - Value of Exports

1998-2005 2006-2010 1998-2010$0

$5

$10

$15

$20

$25

$30

$35

Historic Baseline

MDIS

$ Billion

$15.6

$19.1

$32.8$31.2

$22.2$23.7

AP CA

MDIS Stocks

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

500

1000

1500

2000

2500

3000

3500Corn

Wheat

Million Bu.

Soybeans

AP CA

Corn – Value of Production plus Government Payments

Average Per Year Over Each Period

$0

$10

$20

$30

$40

$50

$60

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$ Billion

$26.4$28.2

$51.5$46.5

$36.1 $35.2

AP CA

Realized Net Farm IncomeAverage Per Year Over Each Period

$0

$10

$20

$30

$40

$50

$60

1998-2005 2006-2010 1998-2010

Historic Baseline MDIS

$ Billion

$49.8 $50.8$55.8

$51.5 $52.1 $51.1

AP CA

Summary Historical Analysis

Over the Study Period, 1998-2010, with MDIS in Place: – Government payments 60% lower– Increased crop prices and increased reliance

on market receipts– Value of exports $20 billion higher– Lower price volatility benefitting:• Crop farmers• Livestock producers and industrial users• Consumers and agricultural processors

APCA

But What About the Future?

Two distinct sets of “future” analyses: – One straight-line “future” represented

by the 2012 USDA baseline– A “future” roughly patterned after the

historical experience of 1996-2010 and the variation we experienced tested against various policies:

a) With current policies in placeb) Elimination of Direct Paymentsc) Raise Loan Rates with no DPsd) MDIS

AP CA

Corn Prices

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Baseline

AP CA

8 Crops – Value of Production

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$50,000

$100,000

$150,000

$200,000

Baseline

Million $

AP CA

8 Crops – Value of Exports

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Baseline

Million $

AP CA

8 Crops – Government Payments

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Baseline

Million $

AP CA

Value of Production + Government Payments - Cash Expenses: 8 Crops

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline

Million $

AP CA

Realized Net Farm Income

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline

Million $

AP CA

But What About the Future?

Two distinct sets of “future” analyses: –One straight-line “future” represented by the

2012 USDA baseline– A “future” roughly patterned after the

historical experience of 1996-2010 and the variation we experienced tested against various policies:

a) With current policies in placeb) Elimination of Direct Paymentsc) Raise Loan Rates with no DPsd) MDIS

AP CA

Corn Yield Shock

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20210

20

40

60

80

100

120

140

160

180

200

Baseline

Yield Shock

Bu/Ac.

AP CA

Corn Prices

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Baseline

Shocked Baseline

Below $3.00

Above $7.00

AP CA

8 Crops - Government Payments

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Baseline and Shocked Baseline

Million $

AP CA

Value of Production + Government Payments - Cash Expenses: 8 Crops

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline

Million $

Shocked Baseline

AP CA

Realized Net Farm Income

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline

Shocked Baseline

Million $

AP CA

But What About the Future?

Two distinct sets of “future” analyses: –One straight-line “future” represented by the

2012 USDA baseline– A “future” roughly patterned after the

historical experience of 1996-2010 and the variation we experienced tested against various policies:

a) With current policies in placeb) Elimination of Direct Paymentsc) Raise Loan Rates with no DPsd) MDIS

AP CA

8 Crops - Government Payments

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

BaselineShocked No DP

Million $

AP CA

Value of Production + Government Payments - Cash Expenses: 8 Crops

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$20,000

$40,000

$60,000

$80,000

$100,000

Baseline

Shocked Baseline

Shocked No DP

Million $

AP CA

Realized Net Farm Income

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline

Shocked Baseline

Shocked No DP

Million $

AP CA

But What About the Future?

Two distinct sets of “future” analyses: –One straight-line “future” represented by the

2012 USDA baseline– A “future” roughly patterned after the

historical experience of 1996-2010 and the variation we experienced tested against various policies:

a) With current policies in placeb) Elimination of Direct Paymentsc) Raise Loan Rates ($3.50 for corn, etc.) with no DPs d) MDIS

AP CA

8 Crops - Government Payments

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Baseline

Shocked New LR No DP

Million $

AP CA

Realized Net Farm Income

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline Shocked New LR No DP

Shocked Baseline

Million $

AP CA

But What About the Future?

Two distinct sets of “future” analyses: –One straight-line “future” represented by the

2012 USDA baseline– A “future” roughly patterned after the

historical experience of 1996-2010 and the variation we experienced tested against various policies:

a) With current policies in placeb) Elimination of Direct Paymentsc) Raise Loan Rates ($3.50 for corn, etc.) with no DPs d) MDIS

APCA

Policy Description

MDIS Specifications for 2012-2021 Study Period

– MDIS corn loan rate set at $3.50– Other crop loan rates set to historic

ratios with corn – Minimize distortion– Release price is set at 160% of loan rate

APCA

Policy Description

MDIS Specifications for 2012-2021 Study Period

– MDIS maximums• Corn – 3 billion bushels• Wheat – 800 million bushels• Soybeans – 400 million bushels

– Farmer storage payment rate 40¢/bu./yr– Eliminate Direct Payments, LDPs, & CCPs

except for rice and cotton

AP CA

Corn PriceLoan Rate and Release Price

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00Release Price

Loan Rate

AP CA

Corn PriceLoan Rate and Release Price with Baseline

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Baseline

Release Price

Loan Rate

AP CA

Corn PriceLoan Rate and Release Price with Scenarios

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Baseline

Shocked Baseline Release Price

Loan Rate

AP CA

Corn PriceLoan Rate and Release Price with Scenarios

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Baseline

Shocked Baseline

MDIS

Release Price

Loan Rate

AP CA

Corn PricesAverage Per Year Over Each Period

2012-2016 2017-2021 2012-2021$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Shocked Baseline

MDIS

$3.43

$4.07

$5.75$5.29

$4.59$4.68

AP CA

MDIS Stocks

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

250

500

750

1000

1250

1500

1750

2000

2250

2500

Corn

Wheat

Million Bu.

Soybeans

AP CA

8 Crops – Value of Exports

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Baseline

Shocked Baseline

MDIS

Million $

AP CA

8 Crops - Value of ExportsAverage Per Year Over Each Period

2012-2016 2017-2021 2012-2021$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Shocked Baseline

MDIS

$ Billion

$29.9

$35.4

$46.5 $47.0

$38.2$41.2

AP CA

8 Crops - Government Payments

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Shocked

Shocked New LR No DP

MDIS

Million $

AP CA

8 Crops – Government PaymentsAverage Per Year Over Each Period

2012-2016 2017-2021 2012-2021$0

$2

$4

$6

$8

$10

$12

$14

$16

Shocked

MDIS

$ Billion

$4.9 $3.0$2.3

$4.9

$2.6$4.9

AP CA

8 Crops – Government PaymentsAverage Per Year Over Each Period

2012-2016 2017-2021 2012-2021$0

$2

$4

$6

$8

$10

$12

$14

$16

Shocked New LR No DP

MDIS

$ Billion

$14.8

$3.0$0.2 $2.3

$6.5

$2.6

AP CA

Value of Production + Government Payments - Cash Expenses: 8 Crops

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$20,000

$40,000

$60,000

$80,000

$100,000

Baseline

Shocked Baseline

MDIS

Million $

AP CA

Value of Production + Government Payments - Cash Expenses: 8 Crops

Average Per Year Over Each Period

2012-2016 2017-2021 2012-2021$0

$10

$20

$30

$40

$50

$60

$70

Shocked

MDIS

$ Billion

$16.0

$33.8

$66.7

$59.5

$41.4$46.6

AP CA

Realized Net Farm Income

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$25,000

$50,000

$75,000

$100,000

$125,000

Baseline

MDIS

Shocked Baseline

Million $

AP CA

Realized Net Farm IncomeAverage Per Year Over Each Period

2012-2016 2017-2021 2012-2021$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Shocked MDIS

$ Billion

$59.2

$70.6

$92.4$88.5

$75.8$79.5

Conclusions and Policy Implications

–MDIS allows market forces to work• Wide price band• Reduces erroneous/exaggerated market signals

that lead to inefficient resource allocation and non-optimal investment decisions

–MDIS provides important trade benefits• Helps ensure grain is available for export even in

the “tight” times so U.S. remains a dependable supplier• Eliminates “dumping” charges by export

competitors and enhances value of exports, improves balance of trade

Conclusions and Policy Implications

– MDIS helps stabilize grain prices internationally• Benefits producers and consumers for which grain is a

staple– MDIS could save tens of billions of dollars in:

• Existing commodity payment programs• Emergency payments that inevitably would come with

a market crash• Government subsidies to exploding revenue insurance

liabilities– Above all, crops farmers get their

income from market and grain demanders are not subsidized or “overcharged.”

Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank You