The U.S. Farm Bill: More than just the farm Kent Olson Department of Applied Economics University of Minnesota Minnesota Economic Association October 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. market price > $2.35, farmers only receive $0.28 (times 83.3% of base acres * DP 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 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 Payment If 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 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)

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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 within Excel

Index of Total Government Payments (TGP), if ACRE guarantee is “high” and market prices drop … 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 … F3 6 wheat-SB farms11 corn-SB farms

Food, Conservation and Energy Act of 2008 I.Commodity programs II.Conservation III.Trade IV.Nutrition V.Credit VI.Rural development VII.Research & related matters VIII.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.Trade IV.Nutrition V.Farm Credit Programs VI.Rural development Programs VII.Research, Extension, & related matters VIII.Forestry IX.Energy X.Horticulture XI.Crop Insurance XII.Miscellaneous Which title has the largest budget?

CBO’s Ten-year Baseline, S.3240 $995 billion, FY Source: Monke, CRS

CBO’s Ten-year Score of S.3240 Net: $969 billion (23.6B less), FY Source: Monke, CRS

CBO’s Score of S.3240 $billion change, FY 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 Budget Issues shaping a 2012 farm bill. CRS, R Olson, K., and M. DalSanto Alternative Farm Bills: Impacts on Minnesota Farms. Staff paper P07- 5, St. Paul, MN: University of Minnesota, Department of Applied Economics.

Thank you! Questions, comments Kent Olson Applied Economics