Transcript Provisions of the Food, Conservation, and Energy Act of 2008

Economics and the Farm Bill
Joe L. Outlaw
Co-Director
Professor and Extension Economist
Eighth Annual Texas Commodity Symposium
December 3, 2008
Presentation Outline
• Introduction and Overview
• Crop Economics
• Commodity Outlook
The Way
Forward!
• Farm Bill
– Focus on ACRE
– SURE
• Summary
Introduction and Overview
• Current Financial Mess Will Come to Agriculture
– Ag lenders facing shortage of money
• Shouldn’t be a Replay of the 1980s for Ag
– Shifted from collateral based lending to repayment
capacity
– Volatility in prices rather than depressed prices
– Overall health in farm sector with strong balance sheets
• Input costs
• Land values
• More Worried About Relative Crop Prices
• Where Does Ag Fit in Cap and Trade World?
– Carbon footprints???
Futures Prices Relative to
Contract Highs Earlier in 2008
Futures
Contract
Date
Peak
Price
Date
Dec ’08
Corn
June
$7.99/bu
Nov 11
$3.74/bu
$4.25/bu
Nov ’08
Soybean
July
$16.37/bu
Nov 11
$9.08/bu
$7.29/bu
Dec ’08
Wheat
March
$12.75/bu
Nov 11
$5.23/bu
$7.52/bu
Dec ’08
Live Cattle
June
$115/cwt
Nov 11
$91.6/cwt
$23.4/cwt
Dec ’08
Hog
June
$79/cwt
Nov 11
$54.98/cwt
$24.02.cwt
Source: Agri-Pulse Communications, updated by AFPC, 11-10-08
Current
Price
Decline
Delivery Date
2018-Jan
20
2017-Jan
40
2016-Jan
2015-Jan
2014-Jan
2013-Jan
2012-Jan
2011-Jan
2010-Jan
2009-Jan
2008-Jan
$/bbl.
NYMEX Crude Oil Forward Curve
160
140
120
100
80
60
November 28, 2008
July 3, 2008
0
Prices Go Up and Down All
the Time
Here is the Problem!
U.S. Corn Cost of Production
500.00
450.00
400.00
$/Acre
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
Seed
Fertilizer
Chem icals
Custom operations
Fuel, lube, and electricity
Repairs
Other variable expenses
Interest on operating capital
Source: FAPRI, August 2008 Baseline
2012
2013
U.S. Grain Sorghum Cost of Production
250.00
$/Acre
200.00
150.00
100.00
50.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
Seed
Fertilizer
Chem icals
Custom operations
Fuel, lube, and electricity
Repairs
Other variable expenses
Interest on operating capital
2012
2013
U.S. Cotton Cost of Production
700.00
600.00
$/Acre
500.00
400.00
300.00
200.00
100.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
2012
Seed
Fertilizer
Chem icals
Custom operations
Fuel, lube, and electricity
Repairs
Other variable expenses
Ginning
Interest on operating capital
Source: FAPRI, August 2008 Baseline
2013
U.S. Wheat Cost of Production
200.00
180.00
160.00
$/Acre
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
Seed
Fertilizer
Chem icals
Custom operations
Fuel, lube, and electricity
Repairs
Other variable expenses
Interest on operating capital
Source: FAPRI, August 2008 Baseline
2012
2013
Index of Prices Paid for Seed, 2000-2007
with FAPRI Projections, 2008-2013
300
280
260
240
220
200
180
160
140
120
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Index of Prices Paid for Fertilizer, 2000-2007
with FAPRI Projections, 2008-2013
600
550
500
450
400
350
300
250
200
150
100
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Index of Prices Paid for Chemicals, 2000-2007
with FAPRI Projections, 2008-2013
175
165
155
145
135
125
115
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Index of Prices Paid for Fuel, 2000-2007
with FAPRI Projections, 2008-2013
450
400
350
300
250
200
150
100
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Index of Prices Paid for Repairs, 2000-2007
with FAPRI Projections, 2008-2013
190
180
170
160
150
140
130
120
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Index of Prices Paid for Machinery, 2000-2007
with FAPRI Projections, 2008-2013
250
230
210
190
170
150
130
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Index of Prices Paid for Wages, 2000-2007
with FAPRI Projections, 2008-2013
215
205
195
185
175
165
155
145
135
2000
2002
2004
Source: FAPRI, August 2008 Baseline
2006
2008
2010
2012
Commodity Price Outlook
• Who Knows?
– Gas prices today vs summer?
• Again, Relative Expected Prices Key
– Between now and planting will be important
• For Texas producers
– Stay on your toes
– At some point in 2009 there is likely to be a price that
you can make money at
– Back to strategies from a few years ago
• Minimize relative costs with limited price protection from the
loan
January and August 2008 Projected Corn Prices
Relative to Loan Rate, and Target Price for Corn
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
$5.80
$5.30
$4.80
$4.30
$3.80
$3.30
$2.80
$2.30
$1.80
Jan Baseline
Source: FAPRI
Loan Rate
Target Price
Aug Baseline
January and August 2008 Projected Cotton Prices
Relative to Loan Rate, and Target Price for Cotton
$0.75
$0.65
$0.55
$0.45
$0.35
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
$0.25
Jan Baseline
Source: FAPRI
Loan Rate
Target Price
Aug Baseline
January and August 2008 Projected Wheat Prices
Relative to Loan Rate, and Target Price for Wheat
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
$2.00
Jan Baseline
Target Price
Source: FAPRI
Loan Rate
August Baseline
2008 FB Changes
• Large comprehensive bill
– Boil changes down for the average fan
• Four Major Changes Impacting Commodity
Programs
– ACRE
– Payment limits
– AGI eligibility criterion
– SURE
• Conservation Funding Received Boost
Farm program spending as share of Federal budget outlays
Percent
4
3
2
1
0
1940
1963
1998-01
2002
2007
Source: CBO, OMB, USDA budget projections and historical budget documents. Includes crop insurance premium subsidies and indemnities.
2008 Farm Bill Spending
12%
Nutrition
8%
Farm Programs
11%
Conservation
69%
Other
Source: Congressional Budget Office (5/13/2008)
Commodity Program Overview
• Commodity provisions very close to previous
programs
– Continue direct payments
– Continue marketing loan gains/LDPs
– Maintain counter-cyclical payments (CCPs)
or
– Provides producer option for Average
Crop Revenue Election (ACRE) Payment
• Producer has to agree to direct payment and
loan rate reductions
Average Crop Revenue Election
(ACRE) Payment
• Beginning with the 2009 crop year
– One-time irrevocable option to choose:
Don’t have to make choice
the first year
• CCP, DP (with full payment rates), and MLG/LDPs (with full loan
rates) or
• ACRE, DP (with a 20% reduction in payment rates) and
MLG/LDPs (with a 30% reduction in loan rates)
– Producers will have to determine whether the loss in
guaranteed support is more than made up by potential
gain from ACRE
– This election is for all the crops grown on each FSA farm
#
• A farmer could choose to select ACRE for certain farms (FSA
farm #s) and not others
Average Crop Revenue Election
(ACRE) Payment (Cont.)
• ACRE defined:
– A state level gross revenue protection plan for
each covered commodity and peanuts
– The Secretary shall make an ACRE payment on
a farm for each crop year if:
• The actual State revenue for the crop is less than the
ACRE program guarantee for the crop, and
• The actual farm revenue for the crop is less than the
farm ACRE benchmark revenue
For the 2010-2012 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
Average Crop Revenue Election
(ACRE) Payment (Cont.)
• Where:
– The actual State revenue for a crop is the State yield per planted
acre from NASS multiplied times the national average market
price (the higher of the 12-month marketing year price or 70% of
marketing assistance loan rate)
– The ACRE program guarantee is equal to 90% of the benchmark
state yield (5 year Olympic NASS average) multiplied times the
ACRE program guarantee price (simple average of 2 previous
national average market price)
– The actual farm revenue is the actual yield for the crop on the farm
multiplied times the national average market price for the crop
– The farm ACRE benchmark revenue is [(the most recent 5 year
Olympic average crop yields for the farm multiplied times the ACRE
program guarantee price for the crop) plus the crop insurance
premium per acre]
Average Crop Revenue Election
(ACRE) Payment (Cont.)
• Where 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 2009-11 and .85 for 2012)
multiplied by planted or considered planted acres of the crop
– Multiplied by:
• The quotient obtained by dividing the Olympic average yield per
planted acre 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)
Average Crop Revenue Election
State ACRE Guarantee = 90%
* 5-Year Olympic State Avg. Yield *
2-year Natl. Average Mkt. Yr.
Price
>
Restricted to < 10% change/year
Actual State Revenue =
Actual State Planted Acre Yield *
MAX[ Natl. Average Mkt. Yr. Price OR
70% Loan Rate]
AND
Farm ACRE Benchmark =
Farm's 5-Year Olympic Avg. Yield *
2-year Natl. Average Mkt. Yr.
Price + Ins Premium
>
Actual Farm Revenue =
Actual Farm’s Planted Acre Yield *
MAX[ Natl. Average Mkt. Yr. Price OR
70% Loan Rate]
THEN
Farm Payment = 0.833 (0.85 in 2012) * Actual Planted or Considered Planted Acres *
[ Farm's 5-Year Olympic Average Yield / State’s 5-year Olympic Average Yield ] *
MIN[ (State ACRE Guarantee – Actual State Revenue) OR State ACRE Guarantee * 25%]
Note: All Yields are Planted Acre Yields
Comparison of Different 2-Year National
Average Prices for ACRE Program (12-2-08)
Crops
Corn ($/bu)
Sorghum ($/bu)
Wheat ($/bu)
Upland Cotton ($/lb)
Rice ($/cwt)
Soybeans ($/bu)
2006/2007 2007/2008
3.62
4.07
3.69
5.37
0.529
11.38
3.78
6.48
0.532
13.57
8.27
9.91
Loan Rates
Loan Rates
Crops
Corn ($/bu)
Sorghum ($/bu)
Wheat ($/bu)
2008-09
1.95
1.95
2.75
70%
1.365
1.365
1.92
Upland Cotton ($/lb)
Rice ($/cwt)
Barley ($/bu)
0.52
6.50
1.85
0.364
4.55
1.295
Oats ($/bu)
Soybeans ($/bu)
Peanuts ($/ton)
1.33
5.00
355
0.931
3.50
248.5
20% of Direct Payment
Direct Payments
Crops
Full
80%
Cost of
ACRE
20%
Corn ($/bu)
0.28
0.224
0.056
Sorghum ($/bu)
0.35
0.28
0.07
Wheat ($/bu)
0.52
0.416
0.104
0.0667
0.05336
0.01334
Rice ($/cwt)
2.35
1.88
0.47
Barley ($/bu)
0.24
0.192
0.048
0.024
0.0192
0.0048
0.44
0.352
0.088
36
28.8
7.2
Upland Cotton ($/lb)
Oats ($/bu)
Soybeans ($/bu)
Peanuts ($/ton)
Average Crop Revenue Election
(ACRE) Payment (Cont.)
• AFPC risk-based decision aid to evaluate
expected benefits from current programs
(DP,LDP,CCP) vs (ACRE and reduced DP,
LDP)
– The decision has a lot of moving parts (farm
yields, state yields, marketing year prices
and expected future prices)
– Correlation of moving parts
– Results of Total Gov’t Payments:
Correlation of State and County Yields,
Selected Locations
Crops
Correlation
Corn (Moore County)
All
43%
Cotton (Dawson County)
Irrigated
95%
Non-irrigated
93%
Cotton (San Patricio County)
Irrigated
13%
Non-irrigated
40%
Wheat (Moore County)
All
93% 89% 69%
Webster
County, IA
89%
Summary
• Relatively high and sticky on the way down
production costs with declining prices tough
combination
• In my opinion, Texas farmers do not have much of
a choice for the 2009 crop
– Final or nearly final details aren’t available
• Seed has to be purchased
• Operating loans secured – based on what?
– Crop prices for some commodities low enough that 30%
reduction in loan rates and 20% reduction in direct
payments overwhelm potential benefits of ACRE
Thank you…
Joe Outlaw
[email protected]
www.afpc.tamu.edu
979-845-5913