APCA A Market Directed Inventory System (MDIS) National Farmers Union Annual Convention Omaha, Nebraska March 5, 2012 Daryll E. Ray and Harwood D. Schaffer Agricultural Policy Analysis Center University of Tennessee Institute of Agriculture

APCA 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

APCA 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

APCA 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

APCA Policy Description MDIS Specifications for 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

APCA Corn Prices Historic Baseline Release Price Loan Rate

APCA Corn Prices Historic Baseline MDIS Release Price Loan Rate

APCA Corn Prices Average Per Year Over Each Period Historic Baseline MDIS $2.05 $2.68 $4.02 $3.71 $2.81 $3.07

APCA 8 Crops - Government Payments Historic Baseline MDIS $ Billion

APCA 8 Crops – Government Payments Average Per Year Over Each Period Historic Baseline MDIS $ Billion $14.8 $4.8 $6.8 $3.6 $11.7 $4.3

APCA Corn Exports - Quantity Historic Baseline MDIS Million Bu.

APCA Corn Value of Exports Average Per Year Over Each Period Historic Baseline MDIS $ Billion $3.9 $4.8 $8.3 $7.7 $5.6 $5.9

APCA 8 Crops Value of Exports Historic Baseline MDIS $ Billion

APCA 8 Crops - Value of Exports Historic Baseline MDIS $ Billion $15.6 $19.1 $32.8 $31.2 $22.2 $23.7

APCA MDIS Stocks Corn Wheat Million Bu. Soybeans

APCA Corn – Value of Production plus Government Payments Average Per Year Over Each Period Historic Baseline MDIS $ Billion $26.4 $28.2 $51.5 $46.5 $36.1 $35.2

APCA Realized Net Farm Income Average Per Year Over Each Period Historic Baseline MDIS $ Billion $49.8 $50.8 $55.8 $51.5 $52.1 $51.1

APCA Summary Historical Analysis Over the Study Period, , 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 and the variation we experienced tested against various policies: a)With current policies in place b)Elimination of Direct Payments c)Raise Loan Rates with no DPs d)MDIS

APCA Corn Prices

APCA 8 Crops – Value of Production Million $

APCA 8 Crops – Value of Exports Million $

APCA 8 Crops – Government Payments Million $

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

APCA Realized Net Farm Income Million $

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 and the variation we experienced tested against various policies: a)With current policies in place b)Elimination of Direct Payments c)Raise Loan Rates with no DPs d)MDIS

APCA Corn Yield Shock Baseline Yield Shock Bu/Ac.

APCA Corn Prices Shocked Baseline Below $3.00 Above $7.00

APCA 8 Crops - Government Payments Million $

APCA Value of Production + Government Payments - Cash Expenses: 8 Crops Million $ Shocked Baseline

APCA Realized Net Farm Income Million $

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 and the variation we experienced tested against various policies: a)With current policies in place b)Elimination of Direct Payments c)Raise Loan Rates with no DPs d)MDIS

APCA 8 Crops - Government Payments Million $

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

APCA Realized Net Farm Income Million $

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 and the variation we experienced tested against various policies: a)With current policies in place b)Elimination of Direct Payments c)Raise Loan Rates ($3.50 for corn, etc.) with no DPs d)MDIS

APCA 8 Crops - Government Payments Million $

APCA Realized Net Farm Income Million $

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 and the variation we experienced tested against various policies: a)With current policies in place b)Elimination of Direct Payments c)Raise Loan Rates ($3.50 for corn, etc.) with no DPs d)MDIS

APCA Policy Description MDIS Specifications for 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 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

APCA Corn Price Loan Rate and Release Price

APCA Corn Price Loan Rate and Release Price with Baseline

APCA Corn Price Loan Rate and Release Price with Scenarios

APCA

APCA Corn Prices Average Per Year Over Each Period Shocked Baseline MDIS $3.43 $4.07 $5.75 $5.29 $4.59 $4.68

APCA MDIS Stocks Corn Wheat Million Bu. Soybeans

APCA 8 Crops – Value of Exports Million $

APCA 8 Crops - Value of Exports Average Per Year Over Each Period Shocked Baseline MDIS $ Billion $29.9 $35.4 $46.5 $47.0 $38.2 $41.2

APCA 8 Crops - Government Payments Million $

APCA 8 Crops – Government Payments Average Per Year Over Each Period Shocked MDIS $ Billion $4.9 $3.0 $2.3 $4.9 $2.6 $4.9

APCA 8 Crops – Government Payments Average Per Year Over Each Period Shocked New LR No DP MDIS $ Billion $14.8 $3.0 $0.2 $2.3 $6.5 $2.6

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

APCA Value of Production + Government Payments - Cash Expenses: 8 Crops Average Per Year Over Each Period Shocked MDIS $ Billion $16.0 $33.8 $66.7 $59.5 $41.4 $46.6

APCA Realized Net Farm Income Million $

APCA Realized Net Farm Income Average Per Year Over Each Period 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.”

Thank You