COMMODITY PROGRAMS:A FARMER’S PERSPECTIVEAAE 320Paul D. Mitchell

Goals• Provide an overview federal farm programs, focusing on commodity crops

• To understand how these commodity support programs operate at the individual farm level

• Cover crop insurance and disaster aid later

USDA spends about $150 billion/year (~4%), mix of mandatory & discretionary

Same data looked at by Department• USDA the 5th

largest bubble

1) DHHS2) SS3) DoD4) Net Interest5) USDA at $154B in 2013

Source: http://www.tableausoftware.com/public/gallery/2013-us-federal-budget

Most USDA Spending for SNAP Benefits83% Mandatory: SNAP, crop insurance, commodity support, conservation programs

Source: http://www.obpa.usda.gov/budsum/FY14budsum.pdf

Farm Bill

• Every 6 years, Congress and the President pass a Farm Bill that sets agricultural, conservation and food policy for several years• Agricultural Act of 2014• Food, Conservation and Energy Act of 2008 • Farm Security and Rural Investment Act of 2002• Federal Agriculture Improvement and Reform Act of 1996• Food, Agricultural, Conservation and Trade Act of 1990

Farm Bill

• Huge document (357 pages), with lots of “titles” that define federal ag programs in that area

• I. Commodities II. Conservation• III. Trade IV. Nutrition• V. Credit VI. Rural Development• VII. Research and Related Matters• VIII. Forestry, IX. Energy• X. Horticulture XI. Crop Insurance• XII. Miscellaneous• See class web page for link

Farm Bill Spending by Category

Source: http://www.ers.usda.gov/agricultural-act-of-2014-highlights-and-implications.aspx

Farm Bill Spending• Most USDA federal spending goes for food and nutrition programs• SNAP (Food Stamps), school lunch/breakfast, etc.

• Payments to Farmers• Crop Insurance, Commodity Support, Disaster

Assistance and Conservation Payments

US Net Farm Income (Cash)

1990 1995 2000 2005 2010 20150

30

60

90

120

150

US

NFI

($B

)

% Net Cash Income from Govt. Payments (not including premium subsidies or indemnities)

Farm Safety

Net$15 B

Risk Management(field & specialty

crops)$8.4 billion

Commodity Programs(field crops)

$5.9 billion

Disaster Assistance

(crops & livestock)

$0.8 billion

Supplemental Revenue Assistance Payments Program

(SURE)

Ad hoc disaster payments

Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Program

Emergency Disaster Loans

Tree Assistance Program

Livestock Forage Disaster Program

Livestock Indemnity Program

Crop Insurance

$8.3 billion

Non-insured Disaster Assistance (NAP)

$0.1 billion

Direct Payments (DP)

$4.9 billionCounter-Cyclical Payments (CCP) $0.559

billion

Average Crop Revenue Election (ACRE) $0.311 B

Marketing Assistance Loans $0.225 billion

Loan Deficiency Payments (LDP) $0.225

billion

OR

Average Annual Outlays

Under 2008 Farm Bill

Source: http://ncseonline.org/NLE/CRSreports/10Oct/R41317.pdf

Farm Safety

Net$15

Risk Management(field & specialty

crops)$8.4 bil

Commodity Programs(field crops)$5.9 bil

Disaster Assistance

(crops & livestock)

$0.75 bil

Supplemental Revenue Assistance Payments Program

(SURE)

Ad hoc disaster payments

Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Program

Emergency Disaster Loans

Tree Assistance Program

Livestock Forage Disaster Program

Livestock Indemnity Program

Crop Insurance$8.3 bil

Non-insured Disaster Assistance (NAP)

$0.1 bil

Direct Payments (DP)

$4.9 bilCounter-Cyclical Payments (CCP) $0.559

bil

Average Crop Revenue Election (ACRE) $0.311

bilMarketing Assistance

Loans $0.225 bil

Loan Deficiency Payments (LDP) $0.225

bil

OR

Average Annual Outlays

Under 2008 Farm Bill

Source: http://ncseonline.org/NLE/CRSreports/10Oct/R41317.pdf

$9.0B (+ 6%)

$4.4B(-25%)

13.4 B(- 10%)

2014

No Chang

e

No Chang

eNo

Change

Geography of Farmer Support

Source: http://www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm

2009 Total Payments (DCP, ACRE, LDP, SURE, MILC, CRP, Premium Subsidies)

Program Payments by Farm Type• Rural Residence:

< $250,000 and not farm as occupation (1.2 million farms)

• Intermediate: < $250,000 and farm as occupation (300,000 farms)

• Commercial: > $250,000 (220,000 farms)

Main Point• Federal commodity support and conservation programs

provide $15 billion/year• Important part of farm income for full-time farms• 37% of all farms received government payments in 2009

• Lots of rural residences do not receive payments• Payments in 2009 averaged $11,549 for those receiving

payments • 5.5% of gross cash income• 23.6% of net cash income

• Lots of different programs

Federal Agricultural Support Programs• Program we will discuss• Commodity Support

• Price Loss Coverage (PLC)• Agricultural Risk Coverage (ARC)• Marketing Assistance Loans (MAL)• Dairy Margin Protection Program (MPP)

• Review each program, focusing on how each program works from a farmer's perspective

• Crop Insurance• Next Section

Conservation Programs: USDA-NRCS Natural Resource Conservation Service

• Conservation Reserve Program (CRP)• Removes land from crop production

• [land sparing]• Environmental Quality Incentives Program (EQIP)• Payments to adopt best management practices

• [land sharing]

• We will not cover conservation programs here, many more programs, see list: http://www.nrcs.usda.gov/programs/

Commodity Support ProgramsUSDA Farm Service Agency (FSA)• Programs administered by the USDA Farm Service Agency (FSA)• PLC, ARC, MAL/LDP, MPP

• Each county has a county FSA office• Farmers/land owners sign up each year—file specific forms for each program by specific dates

• Programs often have reporting requirements: acres of each crop planted, where planted, production (yield) reports

Eligibility for Commodity Support• Farmer must have Base Acres to be eligible for PLC/ARC (commodity support) subsidies• Do not need Base Acres for MPP or MAL/LDP

• Officially designated by FSA Farm Serial Number• Farms often farm more than one FSA farm• Registered with FSA office in each county• Stays with the land, not the farmer

• Each FSA farm has establish Base Acres and Program Yields used for PLC

Base Acres• Average acres of each program crop historically grown on a farm at first enrollment years ago• Updated in 2014 using 2009-2012 averages• Previous update in 2003 using 1998-2001 averages

• Farm could not increase total farm Base Acres, but could reallocate Base Acres to different crops based on shares of crops planted 2009-2012

• Base Acres do not equal what actually plant now• Decoupling: Ag policies are not supposed to directly influence farm production decisions• How many acres and what crops plant• Separate eligibility from what planted now

Payment Yield

• Historical average yield for program crops grown on an FSA farm• Updated in 2014: 90% of 2008-2012 average• Previous update in 2003 using 1997-2001 yields

• Payment Yields lower than farm’s average yields• Final outcome for each FSA farm: Base Acres for each program crop and associated Payment Yield• Example: a 100 acre FSA farm has 50 corn base acres

with a 135 bu/ac payment yield and 25 soybean base acres with a 31 bu/ac payment yield

Program Crops• Barley, Canola, Corn , Cotton, Crambe, Dry Peas,

Flaxseed, Grain Sorghum, Chick Peas (Large and Small), Lentils, Mustard Seed, Oats, Peanuts, Rapeseed, Rice (Long Grain and Medium/Short Grain), Safflower, Sesame Seed, Soybeans, Sunflower Seed, Wheat

• Major WI Program Crops• Corn, Soybeans, Oats, Wheat• Corn silage is a type of corn

• NOT program crops• Alfalfa/hay, fruits and vegetables (potato, cranberry)

New Commodity Support Programs in 2014• Price Loss Coverage (PLC)

• Establishes a price floor based on national marketing year average price

• Can buy Supplemental Coverage Option (SCO) crop insurance as an add-on option [covered later]

• Agriculture Risk Coverage (ARC)• Establishes a revenue floor• County revenue by crop or Individual revenue for whole farm

Commodity Support Programs• 3 Options

1) Price Loss Coverage (PLC)• Agriculture Risk Coverage (ARC)

2) County ARC (ARC-CO) by crop3) Individual ARC (ARC-IC) for whole farm

Price Loss Coverage (PLC)• Each program crop has a set “Reference Price”

• Corn $3.70, Soybeans $8.40, Wheat $5.50, Oats $2.40• If the National Marketing Year Average Price is less than

the Reference Price, PLC payments are made• PLC PaymentRate = ReferencePrice – MYAPrice• PLC Payment = 85% x BaseAcres x PaymentYield x PLC PaymentRate

• Corn/Soy marketing year: Sept 1-Aug 31• If elect PLC, eligible to buy Supplemental Coverage

Option (SCO) crop insurance [covered later]

Simple PLC Example• Suppose USDA announced 2014 National Marketing Year

Average Price of corn is $3.50• The corn Reference Price is $3.70, so PLC Payment Rate

= $3.70 – $3.50 = $0.20/bu• If have 100 corn Base Acres with a Payment Yield of 140

bu/ac, then your PLC payment would be• 85% x 100 ac x 140 bu/ac x $0.20/bu = $2,380

• USDA Announced 2014 MYA prices in September 2015: • Corn: $3.70, Soybean $10.10, Wheat $5.99 • None these triggered PLC payments for 2014

Think Break #15• You have a farm with

a) 30 corn base acres with a 130 bu/ac payment rateb) 20 soybean base acres with a 30 bu/ac payment rate

• You signed up for PLC and the national marketing year average price is $3.55 for corn and $8.50 for soybeans

• What is your PLC payment?• Reference Prices: Corn=$3.70, Soybeans=$8.40• PLC PaymentRate = ReferencePrice – MYAPrice • PLC Payment = 85% x BaseAcres x PaymentYield x PLC

PaymentRate

Agriculture Risk Coverage (ARC)• County ARC payments made if Actual County Revenue is

less than County Guarantee• County Benchmark = 5-Year Olympic Average County

Yield x 5-Year Olympic Average MYA Price• Use PLC Reference Price if higher than MYA Price• Use 70% County T Yield if higher than County Yield

• County Guarantee = 86% of County Benchmark • Actual Revenue = County Average Yield x MYA Price• ARC Payment Rate = County Guarantee – Actual County

Revenue, up to 10% of County Benchmark • ARC Payment = 85% x Base Acres x ARC Payment Rate

Unofficial Corn 2014 Example for St. Croix County

Year Yield Price2013 85.4 4.462012 165.6 6.892011 164.6 6.222010 172 5.182009 167 3.55

• Olympic Average Yield = 165.7• Olympic Average Price = 5.29• ARC County Benchmark = 5.29 x 165.7 = $876.55• ARC Guarantee = 86% x $876.55 = $753.83• Maximum ARC Payment = 10% x $753.83= $75.38

Unofficial Corn 2014 Example for St. Croix County

• Hypothetical Example: Suppose 2014 County ARC Guarantee is $753.83 for corn in St. Croix County

• Suppose 2014 actual USDA yield in St. Croix County is 160 bu/ac and 2014 MYA corn price is $3.50

• Actual revenue is 160 x 3.50 = $560/ac, triggers payment• ARC Payment Rate = 753.83 – 560.00 = $193.38/ac, but

exceeds max payment, so ARC Payment Rate = $75.38• ARC Payment = 85% x BaseAcres x ARC Payment Rate• ARC Payment = $75.38 per corn base acre• ARC pays well in times of long-term declining prices due

to 5-year Olympic averages

Source: FarmDOC, U of IL: http://farmdocdaily.illinois.edu/2015/11/2014-arc-co-payments-release-county-yields.html

Source: FarmDOC, U of IL: http://farmdocdaily.illinois.edu/2015/11/2014-arc-co-payments-release-county-yields.html

Source: FarmDOC, U of IL: http://farmdocdaily.illinois.edu/2015/11/2014-arc-co-payments-release-county-yields.html

Main Point• County ARC varies by county• Main idea: like county-level revenue insurance with an 86% coverage level

• Difference from Crop Insurance• Uses 5-Year Olympic Average prices and yield to determine guarantee

• Uses national marketing year average price as the actual price

Agriculture Risk Coverage (ARC)• Individual ARC based on revenue from all program crops

as a whole for an FSA farm, not crop by crop• To be simple, assume 2 program crops (corn & soybeans)• Benchmark Revenue by Crop = 5-Year Olympic Average

of (Yield per Planted Acre x MYA Price)• Individual Benchmark Revenue = (Corn Acres/Total Acres) x Corn Benchmark Revenue + (Soy Acres/Total Acres) x Soy Benchmark Revenue• Individual Guarantee = 86% of Farm Benchmark Revenue

Agriculture Risk Coverage (ARC)• Individual ARC Payment Rate = Farm Guarantee – Actual

Farm Revenue, up to 10% of County Benchmark • Individual ARC Payment = 65% x Base Acres x Individual

ARC Payment Rate• Maximum is 10% of County Benchmark

• Actual Revenue = (Corn Production x MYA Corn Price) + (Soy Production x MYA Soy Price) / Total Planted Acres• Use PLC Reference Price if higher than MYA Price• Use 70% County T Yield if higher than your Yield

Corn Year Yld Price Revenue2013 175 4.50 787.50

Acres 2012 150 6.89 1,033.50300 2011 185 6.22 1,150.70

2010 170 5.18 880.602009 150 3.55 532.50

Crop Benchmark 900.53

Soy Year Yld Price Revenue2013 4312.70 546.10

Acres 2012 4514.40 648.00200 2011 5112.50 637.50

2010 43 11.30 485.902009 35 9.59 335.65

Crop Benchmark 556.50

Hypothetical Example• Individual Benchmark =

(300/500) x 900.53 + (200/500) x 556.50 = $762.92

• Individual Guarantee = 86% x $762.92 = $656.11

• “Actual” 2013 Corn = (300 x 160 x $4.62) + (200 x 40 x $11.36) /500 = $625.28/acre

• Payment Rate = 656.11 – 625.28 = $30.83

• ARC Payment = 65% x Base Acres x $30.83

ARC/PLC• In fall 2014 and winter 2015, land owners and operators• Reallocated base acres among crops• Chose ARC or PLC for their program crops

• Lots of Extension programming, ag media attention, etc.• A few slides from my outreach

Decision Aids: U of IL with USDA Funding http://fsa.usapas.com/ (no longer active)

ARC-CO

SCO

PLC

St Croix County

Comparing Average ARC Payments ($/Ac) Across Counties (with CBO prices)

Buffalo Pepin Pierce Dunn Eau Claire

St Croix0

5

10

15

20

25

30

35

40

CornSoybean

Main Point• When choosing Base Acre Reallocation

• Get as many Corn base acres as you can• Corn > Soybean ≥ Wheat >Oats

• What about County ARC versus PLC?• Depends on prices use/assume, but generally ARC does better

• Tool has 3 options for average price• 1) CBO futures prices: higher• 2) USDA WASDE prices: lower• 3) FAPRI price estimates: just below CBO

These are MEAN prices

CORN

SOYBEAN

ARC-CO

PLC + SCO

PLC + SCO

ARC-CO

PLC + SCO

ARC-CO

ARC versus PLC for Corn and Soybean• If your focus is on total payments, which is better depends on where you think crop prices are going over the next 5-6 years

• If you are optimistic on corn prices, ARC does better than PLC + SCO: (by ~$15 in Pierce)

• If you are pessimistic on corn prices, PLC + SCO does a better than ARC: (by ~$3 in Pierce)

• ARC on soybean always does better than PLC + SCO (by $5-$10/ac in most counties)

• Similar trends for corn and soybeans in different counties, but dollar amounts differ

ARC versus PLC• Corn & Soybean: ARC much higher than PLC if average to

high prices, only a little less than PLC if low prices• If PLC beats ARC, on average it will not be by a lot

• For most farms, ARC will do just fine and not be much less than PLC payments if PLC turns out to be better

• Note: PLC also requires buying SCO too: more money up front and more paperwork

• Wheat/Oats: PLC seems better: about same as ARC if average to high prices, much better than ARC if low prices• Reduce crop insurance coverage level and rely more on

SCO to increase payments and reduce insurance costs?• Can mix ARC and PLC across crops if you want

ARC PLC Summary• ARC: revenue floor• Pays if county average yield and national MYA prices below your county's guarantee

• Need base acres and payment yields

• PLC: price floor• Pays if national MYA price falls below Reference Prices: $3.70 corn, $8.40 soybeans, $5.50 wheat

• Need base acres and payment yields

Marketing Assistance Loans (MAL) & Loan Deficiency Payments (LDP)

• MAL: loans to help farmers manage cash flow (pay off operating loans), so can wait to sell grain when prices are higher

• LDP: Payments that give farmers a price floor equal to the Loan Rate• Picks up price support for prices below the Loan Rate, where counter cyclical payments stop (CCP eliminated now)

• MAL-LDP programs meant to work together• Not tied to Base Ares or Program Yields

Marketing Assistance Loans• Farmers receive a marketing assistance loan (MAL) from the Commodity Credit Corporation (CCC), using their harvested grain as collateral• Your harvested grain, no matter acres grown on• Receive $/bu in loan equal to the Loan Rate• Corn $1.95, Soybeans $5.00, Wheat $2.94

• Payback the loan with cash + interest or deliver the grain to the CCC• Payback with cash if Crop Price > Loan Rate• Payback with grain if Crop Price < Loan Rate• Delivery never really occurs, payback at the Marketing

Loan Repayment Rate, less than the Loan Rate

MAL Payback• Farmer picks a day to “sell” and payoff loan

• Actual physical sale may occur later, but not earlier• Each day, there is a Posted County Price (PCP) for each commodity, the FSA official estimate of the local price

• If PCP > Loan Rate, farmer pays back MAL in full, plus small interest payment

• If PCP < Loan Rate, farmer pays back MAL at Marketing Loan Repayment Rate ≈ PCP

• Loan Deficiency Payment (LDP) = Loan Rate – PCP • Simplification: Don’t take loan and pay it back, but receive LDP = Loan Rate – PCP, if PCP < Loan Rate

Marketing Assistance Loans (MAL) & Loan Deficiency Payments (LDP)

• Main idea: Program works to give farmers a price floor equal to the Loan Rate• Reality is that loan rates are so low for corn soybeans and wheat that no one expects LDPs, just use as a cheap loan program

• Note: Based on local prices and actual farmer harvested production• Does not use National MYA prices, Base Acres or Program Yields

Think Break #16• Suppose planted and harvested 5,000 bu of soybeans

and enroll all 5,000 bu for a Marketing Assistance Loan• Soybeans has a $5.00/bu loan rate, so how much will

your MAL be?• Suppose you pay back the MAL on Feb 1st when the

posted county price for soybean is $6.00/bu, • What is your Loan Deficiency Payment?• How much will you pay back? • Suppose you pay back the MAL on Feb 1st when the

posted county price for soybean is $4.50/bu, • How much will you pay back? • What is your Loan Deficiency Payment?

Summary of Loan Deficiency Payments (LDP)

• LDP ($/harvested bushel)• LDP = Loan Rate – PCP, if PCP < Loan Rate

• Depends on local Posted County Price when you “sell” the crop (may not be price actually receive when physical sale occurs)

• Depends on how many bushels harvested, not acres harvested

• Gives farmers the Loan Rate as minimum price on all bushels enrolled• Corn $1.95, Soybeans $5.00, Wheat $2.94

Marketing Assistance Loans

• Many farmers still participate in the program, even though they do not expect to receive a LDP• About 6% total US production for corn

• Use the loans to manage cash flow, because they charge low interest rates

• Store grain for sale later, use the marketing assistance loan to pay operating loans due late fall/early winter

2009 Marketing Assistance Loans Made ($/ac)

• 2014 Farm Bill Created the Dairy Producer Margin Protection Program (MPP)• Voluntary insurance program • Protects dairy producers from lower mailbox

price, increasing feed costs, or both• Pays indemnities when difference between

• USDA’s average national All-Milk price and a program-defined fixed feed ration valued at U.S. average feed prices falls below producer chosen insured IOFC (income over feed costs)

Dairy Margin Protection Program

2.00

3.75

5.50

7.25

9.00

10.75

12.50

14.25

Estimated MPP Bi-Month IOFC's: 1980-Present ($/cwt)

Why Focus on Dairy Margins?

April 22, 2023

Standard Coefficient Average Deviation of Variation1980-89 8.03 0.96 0.121990-99 8.32 1.51 0.182000-09 8.60 2.47 0.292010+ 8.22 2.75 0.33

What Have Been Historical MPP Margins?

2008

2009

2010

2011

2012

2013

2014

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00 $/cwt

Margin Protection Available from $4.00 - $8.00/cwt

Historical IOFC Margins

2014 IOFC Forecast Margin

Dairy Margin Protection Program• Replace MILC with Dairy Margin Protection Program• Margin insurance program: producers choose a milk

margin, get $4/cwt margin for free, buy higher coverage• Pays when Actual Dairy Production Margin falls below

selected Coverage Level Threshold• Actual Dairy Production Margin = All-Milk Price minus

Average Feed Cost (cost index)• Feed Cost = 1.0728 x Corn Price + 0.00735 x Soybean Meal Price

+ 0.0137 x Alfalfa Price• Payments = 1/6 x Actual Dairy Production History x

Percentage of Coverage x (Coverage Level Threshold – Actual Dairy Production Margin)

Dairy Margin Protection Program• Coverage Level Threshold (Margin Guarantee)

• $4.00/cwt to $8.00/cwt in 50¢ increments• Percentage of Coverage (Payment Rate)

• 25% to 90% in 5% increments• Payment rate for each $ Actual Margin < Guarantee

• Voluntary program with annual coverage decisions• Uses pre-set 2 month periods (JF, MA, MJ, JA, SO, ND)• Farmer gets $4/cwt margin for free, pay for higher margin,

with higher premium for production over 4 million pounds• Can’t have Dairy Margin Protection and LGM Dairy Policy

Hypothetical Example• Produce 3 million pounds/year• Chose $4.00/cwt margin (free)• Chose 90% Coverage Percentage• Suppose Actual Margin is $3.50 for Jan-Feb of 2015

• Low milk prices relative to feed costs• $4.00 < $3.50 = so trigger a payment of $0.50/cwt• Payments = 1/6 x Actual Dairy Production History x

Percentage of Coverage x (Coverage Level Threshold – Actual Dairy Production Margin)

• Payment = 1/6 x 30,000 cwt x 90% x $0.50 = $2,250

Premium Costs ($/cwt) for Dairy Margin Protection

Margin ($/cwt)First 4 million

poundsAbove 4 million

pounds$4.00 0.000 0.000$4.50 0.010 0.020$5.00 0.025 0.040$5.50 0.040 0.100$6.00 0.055 0.155$6.50 0.090 0.290$7.00 0.217 0.830$7.50 0.300 1.060$8.00 0.475 1.360

FreeFree

Hypothetical Premium Example• Produce 30,000 cwt/year• Chose 90% Coverage

Percentage (max)• Annual Premium Cost =

90% x 30,000 x Rate• Note: calendar year 2014

& 2015, Premiums for 1st 4 million lbs are 25% lower, except for the $8/cwt margin

• Note: sign-up is for the whole year, not every 2 month period

Margin Rate Cost$4.00 0.000 $0 ‘14/’15$4.50 0.010 $270 $203$5.00 0.025 $675 $506$5.50 0.040 $1,080 $810$6.00 0.055 $1,485 $1,114$6.50 0.090 $2,430 $1,823$7.00 0.217 $5,859 $4,394$7.50 0.300 $8,100 $6,075$8.00 0.475 $12,825

Dairy MPP Summary• Farmers will have to choose during annual sign-up period1. No program2. LGM-Dairy3. Dairy Margin Protection Program

• What margin and coverage percentage to use?