Farm Bill Impacts
on Southern Producers
2008 Southern Region Outlook Conference
September 22-24, 2008
Steven L. Klose
Financial And Risk Management Assistance
Department of Agricultural Economics
Texas AgriLife Extension Service
The Texas A&M University System
2008 Farm Bill,
Southern Impacts


Loan Rates
ACRE Program



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
Details
Critical Factors
AFPC Representative farms
Sensitivity
Conclusion
Loan Deficiency Payments
(LDPs)/Marketing Loan Gains (MLGs)


Generally work as in the past except…
Repayment of loans for loan commodities other
than (upland cotton, rice, els cotton, and
sunflower seed) will be at the lesser of:




The loan rate established for the commodity plus
interest or
A rate calculated based off of the average market
prices for the loan commodity during the preceding 30day period or
An alternative developed by the Secretary
Cotton and rice continue to use an adjusted world
market price formula
Example of New Grain PCP Calculations vs Actual
LDP Rates for 05/06 Wheat, Moore County, TX
0.50
Month LDP uses an average of 25 reporting days per month
0.45
30 Day LDP uses the previous 30 reported prices
0.40
LDP Rate is the rate reported by FSA
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
9/1/2005
10/21/2005
12/10/2005
1/29/2006
LDP Rate
3/20/2006
Month LDP
5/9/2006
30 Day LDP
6/28/2006
8/17/2006
ACRE Program

Irrevocable Election beginning 2009

Current program
or


ACRE + 80%DP + 70%LR
Choice by Farm Number
Average Crop Revenue Election
State ACRE Guarantee = 90%
* 5-Year Olympic State Avg. Yield *
2-year Natl. Average Mkt. Yr.
Price
State Revenue =
> Actual
Actual State Planted Acre Yield *
MAX[ Natl. Average Mkt. Yr. Price OR
70% Loan Rate]
Restricted to < 10% change/year
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
Average Crop Revenue Election
(ACRE) Payment (Cont.)

The total number of planted acres for which payments
are received cannot exceed base acres on the farm




Producer has option to choose planted acres to enroll in ACRE
The bill reads as if the reduction in LRs applies to entire
farm
There are provisions for assigning yields, etc. by using
yields from a similar state
There are provisions for determining whether a state
will have both irrigated and non-irrigated state
guarantees

If a state has at least 25% of the acres of a crop that are
irrigated and at least 25% of the acres of the crop that are
non-irrigated then Secretary shall calculate separate irrigated
ACRE Choice Critical Factors



Price / Local Yield / State Yield
Correlation
Relevance of existing TP / LR at current
price levels
Base years for price calculation
Corn Price-Yield Correlation
Correlation Coefficient
Les s than -0.5 (Stronges t)
-0.5 - -0.25
-0.25 - -0.1
Greater than -0.1 (W eakest)
Cotton Price-Yield Correlation
Correlation Coefficient
Les s t han -0.5 (St ronges t)
-0.5 - -0. 25
-0.25 - -0. 1
Great er t han -0.1 (W eakest )
Cotton Revenue Risk
Coefficient of Variation
Less than 30
30 - 40
40 - 50
Greater than 50
LR & TP Relevance
Crops
Corn ($/bu)
Sorghum ($/bu)
Wheat ($/bu)
Upland Cotton ($/lb)
Rice ($/cwt)
Barley ($/bu)
Oats ($/bu)
Soybeans ($/bu)
Peanuts ($/ton)
Loan Rates
2008-09
70%
1.95
1.365
1.95
1.365
2.75
1.92
0.52
0.364
6.50
4.55
1.85
1.295
1.33
0.931
5.00
3.50
355
248.5
TP
2.63
2.57
3.92
0.7125
10.50
2.24
1.44
5.80
495
Outlook
2009
5.22
4.91
6.68
0.74
14.19
5.22
3.55
11.58
473
20% of Direct Payment
Direct Payments
Crops
Full
80%
Cost of
ACRE
20%
Corn ($/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:
Cotton
Texas Southern Plains (3745 Acres)
Comparison of Average Annual Payments under ACRE and CCP in TXSP3745
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000
150,000
200,000
Sum ACRE
250,000
300,000
Sum CCP
350,000
400,000
450,000
Cotton
Alabama (3000 Acres)
Comparison of Average Annual Payments under ACRE and CCP in ALC3000
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000
150,000
Sum ACRE
200,000
Sum CCP
250,000
300,000
Cotton
Tennessee (4050 Acres)
Comparison of Average Annual Payments under ACRE and CCP in TNC4050
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000
150,000
200,000
Sum ACRE
250,000
Sum CCP
300,000
350,000
400,000
Cotton
Georgia (2300 Acres)
Comparison of Average Annual Payments under ACRE and CCP in GAC2300
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000
150,000
Sum ACRE
200,000
Sum CCP
250,000
300,000
350,000
Cotton
North Carolina (1500 Acres)
Comparison of Average Annual Payments under ACRE and CCP in NCC1500
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
20,000
40,000
60,000
Sum ACRE
80,000
Sum CCP
100,000
120,000
140,000
ACRE Choice: Cotton farms
Certainty Equivalent
Farms
ACRE
Old Program
(06-07 Base)
Texas (3745)
175,195
102,674
Alabama (3000)
106,590
126,684
Tennessee (4050)
118,331
139,003
Georgia (2300)
126,126
158,370
47,275
49,492
North Carolina (1500)
Grain
Texas Northern Plains (8000 Acres)
Comparison of Average Annual Payments under ACRE and CCP in TXNP8000
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
100,000
200,000
300,000
400,000
Sum ACRE
500,000
Sum CCP
600,000
700,000
800,000
Grain
Iowa (3400 Acres)
Comparison of Average Annual Payments under ACRE and CCP in IAG3400
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000
150,000
200,000
Sum ACRE
250,000
Sum CCP
300,000
350,000
400,000
Grain
Tennessee (2750 Acres)
Comparison of Average Annual Payments under ACRE and CCP in TNG2750
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
20,000
40,000
60,000
80,000 100,000 120,000 140,000 160,000 180,000 200,000
Sum ACRE
Sum CCP
Grain
South Carolina (3500 Acres)
Comparison of Average Annual Payments under ACRE and CCP in SCG3500
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000
150,000
Sum ACRE
200,000
Sum CCP
250,000
300,000
ACRE Choice: Grain farms
Certainty Equivalent
Farms
ACRE
2006-07
Old Program
Texas (8000)
252,444
147,373
Iowa (3400)
105,808
74,981
63,099
42,387
148,716
104,120
Tennessee (2750)
South Carolina (3500)
Wheat
Washington (3500 Acres)
Comparison of Average Annual Payments under ACRE and CCP in WAAW3500
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
10,000
20,000
30,000
40,000
Sum ACRE
50,000
60,000
Sum CCP
70,000
80,000
90,000
Wheat
Kansas (4000 Acres)
Comparison of Average Annual Payments under ACRE and CCP in KSCW4000
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
20,000
40,000
60,000
Sum ACRE
80,000
Sum CCP
100,000
120,000
140,000
ACRE Choice: Wheat farms
Certainty Equivalent
Farms
ACRE
2006-07
Old Program
Washington (3500)
32,201
28,664
Kansas (4000)
60,005
58,803
Rice
Arkansas (3240 Acres)
Comparison of Average Annual Payments under ACRE and CCP in ARSR3240
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
50,000
100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000
Sum ACRE
Sum CCP
Rice
Louisiana (1000 Acres)
Comparison of Average Annual Payments under ACRE and CCP in LASR ($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
20,000
40,000
60,000
Sum ACRE
80,000
Sum CCP
100,000
120,000
Rice
California (2365Acres)
Comparison of Average Annual Payments under ACRE and CCP in CAR2365
($s)
1
Prob
0.8
0.6
0.4
0.2
0
-
100,000
200,000
300,000
Sum ACRE
400,000
Sum CCP
500,000
600,000
ACRE Choice: Rice farms
Certainty Equivalent
Farms
ACRE
2006-07
Old Program
Arkansas (3240)
228,701
198,391
Louisiana (1000)
59,271
58,345
California (2365)
226,274
255,865
Average Crop Revenue Election
(ACRE) Payment (Cont.)


FSA currently working on rules for 2009 2012
Current controversy over whether USDA
will use 2006 and 2007 price or 2007 and
2008 price to determine revenue
guarantee

Bill clearly says the previous two years
ACRE: Cotton Price Base
0.9
0.8
0.7
0.6
0.5
0.4
0.3
2006
Price
2007
06-07Min
2008
2009
06-07Max
2010
2011
07-08Min
2012
07-08Max
ACRE Choice: Cotton farms
Certainty Equivalent
Farms
ACRE
ACRE
(07-08 Base)
(06-07 Base)
Old
Program
Texas (3745)
204,228
175,195
102,674
Alabama (3000)
121,679
106,590
126,684
Tennessee (4050)
146,667
118,331
139,003
Georgia (2300)
149,818
126,126
158,370
57,869
47,275
49,492
North Carolina (1500)
Conclusion
It depends...
Interpretation
Expected Price Level
Interaction of program & crop revenues
Education is a moving target