1. COMMODITY PROGRAMS: A FARMER’S PERSPECTIVE AAE 320 Paul D. Mitchell

2. 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

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

4. Same data looked at by Department USDA the 5 th largest bubble 1) DHHS 2) SS 3) DoD 4) Net Interest 5) USDA at $154B in 2013 Source: http://www.tableausoftware.com/public/gallery/2013-us-federal-budget

5. Most USDA Spending for SNAP Benefits 83% Mandatory: SNAP, crop insurance, commodity support, conservation programs Source: http://www.obpa.usda.gov/budsum/FY14budsum.pdf

6. 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

7. Farm Bill Huge document (357 pages), with lots of “titles” that define federal ag programs in that area I. CommoditiesII. Conservation III. TradeIV. Nutrition V. CreditVI. Rural Development VII. Research and Related Matters VIII. Forestry, IX. Energy X. HorticultureXI. Crop Insurance XII. Miscellaneous See class web page for link

8. Farm Bill Spending by Category Source: http://www.ers.usda.gov/agricultural-act-of-2014-highlights-and-implications.aspx

9. 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

10. US Net Farm Income (Cash)

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

13. 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 billion Counter-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

14. 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 bil Counter-Cyclical Payments (CCP) $0.559 bil Average Crop Revenue Election (ACRE) $0.311 bil Marketing 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 Change

15. Geography of Farmer Support Source: http://www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm

16. 2009 Total Payments (DCP, ACRE, LDP, SURE, MILC, CRP, Premium Subsidies)

17. 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)

18. 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 averaged $11,549 for those receiving payments 5.5% of gross cash income 23.6% of net cash income Lots of different programs

19. 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

20. Conservation Programs 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/

21. Commodity Support Programs 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

22. 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

23. Base Acres Average acres of each program crop historically grown on a farm Last updated with 2002 Farm Bill: 1998-2001 averages Update currently in progress: 2009-2012 averages Farm cannot increase total farm Base Acres, but can 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

24. Payment Yield Historical average yield for program crops grown on an FSA farm Last update: 2002 based on 1997-2001 yields Update currently in progress: 90% of 2008-2012 average 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: 50 corn base acres with a 105 bu/ac yield and 25 soybean base acres with a 31 bu/ac yield

25. 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)

26. New Commodity Support Programs 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

27. Multi-Step Process with Different Deadlines Step 1: Keep or Update Yields Step 2: Maintain or Reallocate Base Acres Step 3: Elect PLC/ARC-CO/ARC-IC By 3/31/2015 Step 4: Consider SCO By 3/15/2015 Step 5: Enroll in PLC/ARC By Summer 2015 Farmers and land owners will have to choose PLC, County ARC by Crop or Individual ARC for Whole Farm Irrevocable choice for 2014 – 2018 crop years October 2015: PLC & ARC payments made for the 2014 crop if criteria met By 2/27/15

28. New Commodity Support Programs 3 Options 1) Price Loss Coverage (PLC) Agriculture Risk Coverage (ARC) 2) County ARC (ARC-CO) by crop 3) Individual ARC (ARC-IC) for whole farm

29. 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]

30. Simple PLC Example Suppose 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

31. Think Break #15 You have a farm with a) 30 corn base acres with a 108 bu/ac payment rate b) 20 soybean base acres with a 32 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

32. Updating Payment Yields Payment yields haven’t been updated since 2002 Farm Bill, based on 1997-2001 yields 3 Options 1. Keep current yields 2. Update yields to 90% of your 2008-2012 average, using 75% county average if your yield lower 3. Take FSA offered option if no yield data = 75% of 90% of county average Recommendation: Choose option that gives you the highest Program Yields Need production data to document yields, if insufficient records, get substitute yield = 75% county average

33. Updating Base Acres Base acres haven’t been updated since 2002 Farm Bill, based on 1998-2001 plantings 2 Options 1. Keep current base acres 2. Keep same total base acres, but update shares to match 2009-2012 average shares Recommendation: Choose option that puts more acres into Corn: crop with highest expected payments Corn > Soybean = Wheat > Oats Farm cannot increase total base acres, only reallocate total based on acreage shares planted during 2009-2012

34. 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

35. Unofficial Corn 2014 Example for St. Croix County YearYieldPrice 201385.44.46 2012165.66.89 2011164.66.22 20101725.18 20091673.55 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

36. 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

37. Main Point County ARC is complicated and varies by county Main idea: like county-level revenue insurance with an 86% coverage level Difference Uses 5-Year Olympic Average prices and yield to determine guarantee Uses national marketing year average price as the actual price

38. 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

39. 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

40. CornYearYldPriceRevenue 20131754.50787.50 Acres20121506.891,033.50 30020111856.221,150.70 20101705.18880.60 20091503.55532.50 Crop Benchmark900.53 SoyYearYldPriceRevenue 20134312.70546.10 Acres20124514.40648.00 20020115112.50637.50 20104311.30485.90 2009359.59335.65 Crop Benchmark556.50 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

41. Decision Aids: U of IL with USDA Funding http://fsa.usapas.com/ http://fsa.usapas.com/

42. ARC-CO SCO PLC

43. St Croix County

44. Buffalo County ARC-CO PLC + SCO

45. Pepin County ARC-CO PLC + SCO

46. Dunn County ARC-CO PLC + SCO

47. Eau Claire County ARC-CO PLC + SCO

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

49. Waupaca County ARC-CO PLC + SCO

50. Winnebago County ARC-CO PLC + SCO

51. Main Point When choosing Base Acre Reallocation Corn > Soybean ≥ Wheat >Oats Get as many Corn base acres as you can 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

52. These are MEAN prices

53. CORN SOYBEAN

54. ARC-CO PLC + SCO

55. ARC-CO

56. PLC + SCO ARC-CO

57. 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: (Pierce ~$15) If you are pessimistic on corn prices, PLC + SCO does a better than ARC: (Pierce ~$3) ARC on soybean always does better than PLC + SCO by $5-$10/ac Similar trends for corn and soybeans in different counties, but dollar amounts differ

58. 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

59. 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 better 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

60. 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

61. 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

62. Marketing Assistance Loans (MAL) & Loan Deficiency Payments (LDP) Main idea: Program works to give farmers a price floor equal to the Loan Rate Picks up price support for prices below the Loan Rate, where CCP used to stop Note: Based on local prices and actual farmer harvested production, not Base Acres and Program Yields as used for DCP

63. 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 1 st 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 1 st when the posted county price for soybean is $4.50/bu, How much will you pay back? What is your Loan Deficiency Payment?

64. 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

65. 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

66. 2009 Marketing Assistance Loans Made ($/ac)

67. 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)

68. 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

69. 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

70. Premium Costs ($/cwt) for Dairy Margin Protection Margin ($/cwt) First 4 million pounds Above 4 million pounds $4.000.000 $4.500.0100.020 $5.000.0250.040 $5.500.0400.100 $6.000.0550.155 $6.500.0900.290 $7.000.2170.830 $7.500.3001.060 $8.000.4751.360 Free

71. 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 1 st 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 MarginRateCost $4.000.000 $0‘14/’15 $4.500.010 $270$203 $5.000.025 $675$506 $5.500.040 $1,080$810 $6.000.055 $1,485$1,114 $6.500.090 $2,430$1,823 $7.000.217 $5,859$4,394 $7.500.300 $8,100$6,075 $8.000.475 $12,825

72. Dairy Summary Farmers will have to choose during annual sign-up period 1. No program 2. LGM-Dairy 3. Dairy Margin Protection Program What margin and coverage percentage to use?