Evaluating commodity program choices in the new farm bill
Real challenges emerged, however, and significant concerns were raised with the two main policy proposals. Crop insurance already provides valuable risk management tools that many were reluctant to interfere with, while federal subsidies tied too close to actual production risk raised concerns about distorting production decisions creating market and trade problems. Therefore, the final agreement decoupled both Title I programs and they end up being more of an approximation of risk-based assistance than actual risk management -- supplement to what is provided through crop insurance. While this is familiar territory for price-based programs, decoupling revenue policy from production is a new direction that has yet to be tested. It remains to be seen how well revenue payments on base acres will function on the farm. Experience on the ground will inform the next debate.
ARC provides assistance in the deductible range of crop insurance utilizing indications of actual losses (county-wide or multiple-commodity revenue movements from a recent average) and an emphasis on multi-year price risk. Concerns were expressed that the market-oriented nature of the assistance could become ineffective if prices are depressed for a sustained period of time. PLC is traditional income support policy utilizing price floors for commodities to help with market uncertainties such as sustained, low prices. Concerns about the distortive potential of this policy were strongly voiced in the wake of Brazil's successful challenge of cotton supports at the WTO. Concerns were also raised that policies using reference prices fixed for the life of the farm bill may not reflect actual market conditions. In this view, if the prices are fixed too low then the program may not help with actual price risk, missing the impact on tight farm margins from volatile markets and input costs; fix the prices too high and they run the risk of being viewed like direct payments, criticized for providing assistance in times when farm incomes are strong.
While the legislative, policy and political parameters are finally known, further analysis is needed to estimate how each program will likely function for most commodities and farms under different risk scenarios. Comparing ARC and PLC (including updated yields and SCO) for commodities and farms, looking at farm finances, breakeven price levels, production costs, market expectations and how the programs fit with crop insurance could be valuable to the decision making process. For example, a recent estimate (available here) indicating the break-even price for corn at $4.30 per bushel raises a question about whether the $3.70 per bushel PLC corn reference price will be effective. A similar question exists for soybeans where a recent estimate (available here) of the break-even price is $10.70 per bushel and well below the PLC soybean reference price of $8.40 per bushel. By comparison, the benchmark levels for ARC need to be calculated. The ARC structure also needs to be evaluated for how it relates to break even prices or other metrics for farm risk, as well as how it compares to PLC. Such analysis should go a long way towards helping individual farmers determine which program might be more effective.
The 2014 Farm Bill's safety net requires farmers and landowners to elect which program design they prefer based on what they think will be most effective for their operation, particularly in conjunction with crop insurance. Significant analysis is needed to compare the new programs and provide valuable information to the farm's decision makers, who will be locked into the program choice for the life of this farm bill.
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