2024 Farm Bill Dilemma, 1981 Farm Bill and 2018 Farm Bill Price Support Adjustments • farmdoc daily

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The 1981 Farm Bill made a policy error that could inform the next Farm Bill. He raised support prices on the assumption that high commodity prices and high inflation would continue in the future. Instead, both declined as demand for agricultural products weakened and the Federal Reserve raised interest rates to reduce inflation. As a result, support prices were too high, leading Congress to reduce them in the 1985 Farm Bill to bring them in line with market prices. As in 1981, much discussion is currently taking place on the need to increase statutory reference prices in response to rising crop prices, production costs and inflation. However, unlike the 1981 Farm Bill, the 2018 Farm Bill has adjustment mechanisms that allow for higher support prices while avoiding a potential pitfall of the 1981 Farm Bill. price support in the context of the 2024 farm bill dilemma.

2018 Farm Bill Adjustment Mechanisms

The Agriculture Improvement Act 2018 included a reference price indexation clause. Specifically, the effective reference price is the greater of (a) the legal reference price set out in the 2018 Farm Bill or (b) 85% of the Olympic average price (excluding high and low prices) for the last 5 seasons. completed, but capped at 115% of the legal reference price (US Congress, 2018). Price indexing is discussed in depth in a June 29, 2022 daily farmdoc article.

Like the reference price escalation, the price component of the ARC (Agricultural Risk Coverage) commodity program option is calculated as the Olympic average price for the last 5 completed crop years. Reference price indexing and the ARC price calculation method allow support prices to increase if market prices increase for a period of 2 years or more.

There are three important differences between the calculation of the ARC price and the indexation of the reference price:

  • The price of ARC is not capped. Reference prices are capped at 115% of the legal reference price.
  • The ARC price is the greater of a crop’s marketing year price or its effective reference price. Reference price escalation uses the crop year price without substitution.
  • The price adjustment factor is 86% for the ARC against 85% for the indexation of the reference price.

These differences imply that the ARC price has a higher potential than the effective reference price.

Analysis

The ARC price and the effective reference price are calculated for the 2024 crop year, the first year of the new farm bill. The 5-year price calculation window for the two 2024 support prices is 2018-2022. Support prices are calculated for barley, maize, seed cotton, oats, long grain rice, sorghum, soybeans and wheat. These crops are selected because total cost of production projections are available for the 2022 crop year from the United States Department of Agriculture Economic Research Service (USDA, ERS) (see data note 1). The cost of production serves as a benchmark for support prices. Prices for the 2018-2021 crop years are from the USDA, Farm Service Agency (FSA). The prices for 2022 are the prices projected in the June 2022 WASDE (Estimates of world agricultural supply and demand). (See data note 2)

Results

The relationships between support prices and the total cost of production per unit of production (see Figure 1 and data note 3) suggest that the 8 crops can be grouped into 4 categories:

  1. Corn and soybeans have a 2024 ARC price and a 2024 effective reference price that exceed the current legal reference price. The ARC price is close to the total production cost per bushel of 2022.
  2. Sorghum, wheat and oats have an ARC of 2024 whose price exceeds both reference prices. The ARC price of 2024, especially for oats, is lower than the total cost per bushel of 2022.
  3. Barley has an ARC 2024 price lower than the effective 2024 reference price, which is equal to the current legal reference price. All 2024 support prices are below the 2022 total cost per bushel.
  4. Groundnuts, long grain rice and seed cotton have a 2024 ARC price lower than the current legal reference price, which is equal to the effective 2024 reference price. The legal reference price is close to the total cost per pound of 2022 .

Summary observations

Reference price indexing and in particular the ARC’s uncapped price calculation procedures provide a means of increasing support prices while avoiding the error of the 1981 Farm Bill of setting support, in particular legal reference prices, which are too high in anticipation that commodity prices and inflation will remain high.

Both support price adjustment mechanisms are likely to increase support prices for at least a few years of the next Farm Bill for a number of program commodities, in particular the ARC price for corn and soybeans.

The price of the 2023 agricultural campaign will be important for the drafting of the next agricultural law. If prices remain high in 2023, market prices will be high for at least two years into the support price calculation window for many program commodities, including corn and soybeans, during each of the 5 years forecast of the agricultural bill of 2024.

For corn and soybeans, the 2024 ARC price is close to the total cost of production per bushel projected for 2022. For peanuts, long-grain rice, and seed cotton; their current statutory reference price is close to their total cost per book. Caution seems warranted for any general increase in legal reference prices.

A potential transition aid issue that may arise is the desire to accelerate the rise in support prices given the sharp increase in production costs. A simple way is to convert the 5-year Olympic average to a 5-year average. This change advances the increase by not eliminating the first year of a multi-year increase. It also extends the transition assistance period by not eliminating the last high year from the calculation window when markets move from a multi-year period of higher incomes to a multi-year period of lower incomes. . The trade-off is a smaller support price increase. So the cost should be similar.

Data notes

  1. USDA reports 2022 costs only for all US rice. To estimate the total cost of long-grain rice, the total cost of U.S. rice is multiplied by 93.3%, the 2021 average total cost ratio for regions where long-grain rice is primarily grown (Mississippi River Delta , Gulf Coast and non-Delta Arkansas) to the total cost of all rice in the United States in 2021.
  2. WASDE projects prices for lint cotton, not seed cotton, to 2022. It does not present information on groundnuts. The 2022 price for peanuts was assumed to be the 2021 price. A seed cotton price projection was calculated by multiplying the cotton lint price projection by 50%, the 2017-2021 average ratio of seed cotton price to the price of cotton lint.
  3. The total cost reported by USDA, ERS is divided by the linear trend line of harvested yield per acre for 2022 to obtain the total cost per unit of production. Trend yields harvested by crop are barley (75), maize (178), seed cotton (2130), oats (66), long grain rice (7701), sorghum (71), soy (50) and wheat (49).

References and data sources

American Congress. December 10, 2018. Agriculture Improvement Act 2018. Conference report to accompany HR 2. https://www.agriculture.senate.gov/imo/media/doc/CRPT-115hrpt1072.pdf

United States Department of Agriculture, Farm Service Agency. June 2022. Cost of production. https://www.fsa.usda.gov/programs-and-services/arcplc_program/index

United States Department of Agriculture, Farm Service Agency. June 2022. ARC/PLC program. https://www.fsa.usda.gov/programs-and-services/arcplc_program/index

US Department of Agriculture, Office of the Chief Economist. June 10, 2022. Estimates of world agricultural supply and demand. WASDE 625. https://www.usda.gov/oce/commodity/wasde

Zulauf, C., G. Schnitkey, K. Swanson, N. Paulson, and J. Coppess. “Effective Reference Price – Past and Future.” daily farmdoc (12):97, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, 2022 Jun 29.


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