House Puts Forth Farm Bill Plan
Published: Friday, May 24, 2024
The following is from Scott Gerlt, chief economist for the American Soybean Assn.
The farm bill renewal process is heating up. The last farm bill, passed in 2018, was set to expire in 2023. No draft legislative text was released last year for a new farm bill. Instead, the 2018 Farm Bill was extended into 2024 to allow more time to work on the legislation. Congressional agriculture committees are starting to release summaries of new legislative language, an important but early step in the process. The actual legislative text must be filed and go through the agricultural committees in the House and Senate before going to the full chambers and eventually the president to sign. The committee review is known as "markup."
The House Agriculture Committee's bill is scheduled to undergo markup this week. While not all the details have been released, this article will analyze the released portions to understand how it could change the farm safety net for soybean farmers.
To understand how the House proposal would affect the safety net, a brief review of the existing programs is helpful. There are several legs of the safety net in the current law, and the principal programs for crops are outlined below.
• Price Loss Coverage (PLC) benefits are determined by the difference between the effective reference price (ERP) and the higher of the loan rate defined in statute or the national marketing year average price for a commodity. This amount is multiplied by the PLC yield and base acres for a farm, as well as a few other factors. The PLC yield and base acres are determined by historical production on a farm to decouple current planting decisions from program benefits. The effective reference price is the higher of the statutory reference price set in the farm bill or 85% of the five-year Olympic average farm price. An Olympic average discards the high and low values and averages the remaining observations. The ERP cannot exceed 115% of the statutory reference price. Soybeans have a statutory reference price of $8.40 per bushel, which results in an ERP bounded between $8.40 and $9.66 for the commodity.
• Agriculture Risk Coverage-County (ARC-CO) provides a safety net based on revenue. A benchmark is determined by multiplying an Olympic average county yield by the Olympic average national price. The county yields are adjusted for historical trend increases, and the national prices use the ERP if it is higher than the national price in any of the five years. As a result, the ERP is used in both PLC and ARC-CO. If the higher of the loan rate and the current year national price multiplied by the current year county yield is less than 86% of the benchmark, the payment rate is equal to the difference. However, the payment rate cannot exceed 10% of the benchmark. As a result, ARC-CO covers losses between 76% and 86% of the benchmark. The payment rate is multiplied by base acres and a few other factors.
• Marketing loan-based programs also provides support when prices fall below loan rates determined in statute, but those levels are less than in the PLC program. The latter program maxes out at the point where the loan-based programs begin so that coverage is not overlapped. The marketing loan program benefits are provided on actual production and use local prices for the calculation. Farmers can alternatively take out non-recourse loans at the loan rate to remain solvent while waiting to sell their crop after harvest.
• Crop insurance is in the farm bill, but most of the policies are not determined in the legislation. An exception to this is the Supplemental Coverage Option (SCO). This policy provides shallow loss, county-based buy-up coverage for participants. It covers the band between 86% and the coverage level of the principal elected for the crop. SCO can provide either revenue or yield coverage as it mimics the behavior of the principal policy. The producer is responsible for 35% of the SCO premium cost.
Several important points should be made about the programs and their interactions. First, PLC and ARC-CO do not depend on current plantings or production while marketing loans programs and crop insurance do. PLC and ARC-CO are paid upon base acres that are tied to historical production of crops on the farm. Additionally, producers cannot be simultaneously enrolled in ARC-CO and PLC programs for a crop but can make a crop-by-crop enrollment election annually. In either case, the producer is eligible for marketing loan programs. Also, if a producer elects ARC-CO for a crop, that crop is ineligible for SCO on that farm. Last of all, SCO requires an out-of-pocket premium to participate while the other programs do not.
As aforementioned, the House Agriculture Committee has released a summary of the chairman's farm bill proposal. The farm bill is a massive piece of legislation with many sections (titles). A summary of the changes in portions of Title I (Commodities) and Title XI (Crop Insurance) related to the soybean safety net follows:
• All statutory reference prices will be increased by 10 to 20% based on cost of per-unit production cost increases since 2014. This inherently increases the maximum ERP since it is set at 115% of the statutory reference price.
• Increase the ARC-CO guarantee to 90% of the benchmark from the current 86%. The maximum payment rate is also increased from 10% to 12.5%. This effectively changes the band of coverage for ARC-CO from between 76% and 86% to between 77.5% to 90%.
• Current base acres are maintained, but those whose cropland acres exceed base acres have a one-time opportunity to add acres based on this difference. The period of 2019 to 2023 will be used as the basis for the determination.
• Marketing loan rates will receive slight increases.
• The coverage level will be increased from 86% to 90% for SCO and the producer-paid portion of the premium will be lowered to 20%.
The proposed changes would enhance the Title I safety net, which has seen a continual decline for the past 20 years (Figure 1). The 2014 Farm Bill moved Title I programs away from fixed benefits to benefits triggered by adverse market conditions. This is consistent with a safety-net philosophy but does create larger variability in benefits. However, while variability of has increased, the actual benefits have generally decreased due to fixed parameters in the legislation that become more irrelevant in the presence of inflation.
While the House has released a broad outline of enhancements, the specifics have not been released at the time of publication of this article. Table 1 shows some of the potential new reference prices for soybeans based upon the published information. The calculations are based upon farm price projections from FAPRI that have been updated with the latest WASDE prices and projections. The statutory reference price will be between $9.24 to $10.08 per bushel for soybeans.
Given some of the soybean price increases since 2020, the ERP will be higher than the statutory price and is projected to reach $10.50 per bushel in 2026 and 2027 for all potential ERP scenarios below; importantly, $10.50 is based on price projections and is below the maximum ERP under new statutory reference prices. By 2029, all of the ERPs decline to the statutory reference price. Given the backward-looking nature of ERPs, the calculated values for the first few years are relatively unchanging.
Also clear is the current ERP cap of $9.66 per bushel based on soybean's current statutory reference price of $8.40 is quite limiting. However, these numbers do not account for uncertainty in the projections, which could change the values below after the first few years.
To quantify the change in the safety net from the proposal, an ASA model of market risk was employed. It uses projections from FAPRI-MU and the May 2024 WASDE with measures of price, yield and other risks to measure potential revenue risks and potential Title I support in response. For this work, we assumed a 15% increase in statutory reference prices, as that lays in the middle of the potential range. We also incorporated the changes in the ARC-CO coverage. We did not include the changes in loan rates or base acres, as the necessary details for analysis are publicly unavailable. The model simulates 500 different outcomes based upon distributional assumptions.
Table 2 shows some of the simulation results for the 2026 crop year. A single year is shown to summarize the general effects without presenting five different tables. The 500 simulations had the average market outcome subtracted and then divided into five groups by ranking the change from market revenue per planted acre from smallest to largest. The smallest group (quintile 1) contains the 100 outcomes with the least market revenues. This bucket contains the worse financial years, and the outcomes were $148.38 below the average market outcome. On the other side, the fifth quintile contains the 100 best outcomes that averaged $145.34 above the average market outcome. Keep in mind the difference from the average is not the same as profitability, which is not estimated by the model. Instead, the measure shows the dispersion of outcomes.
The third and fourth columns of Table 2 add the Title I benefits to the change from market revenues for the quintile for current law (current) and the House proposal (House). Both significantly improve upon the pure market revenues, but the House proposal increases the safety net, particularly during especially bad outcomes. In the worse outcome quintile, current law improves the revenues from $148 below the mean to $76 below the mean. The House proposal increases that another $15 to $51 below average. In the second quintile, market revenues are $55 below average. The current farm bill improves that to $14 below average, and the House proposal takes that to $1 above the mean. The pattern is largely repeated for the third quintile.
While the change from market revenue changes from negative to slightly positive for this middle 20% of outcomes, bear in mind this is not the same as profitability. The Title I benefits disappear in the fourth and fifth quintiles as revenues climb. One can conclude that the programs are performing consistent with the intention to provide support in adverse events. The House proposal provides noticeably more ability to help offset adverse market revenues in those conditions.
Several assumptions about the analysis were mentioned earlier that warrant further consideration. First, the assumed 15% increase in statutory reference prices will likely be wrong when the legislative text is released but cannot be more than five percentage points off. Obviously, a higher statutory reference price would further improve the performance of the House proposal, and vice versa.
Second, increasing the loan rate would likely not change the displayed numbers much since an increase in the loan rate would increase marketing loan benefits while reducing PLC and ARC-CO benefits. This is due to the assumption in the analysis that a soybean base acre is equal to a soybean planted acre. These are, however, different entities, as a base acre only exists in policy and does not have to be planted to soybeans. Yet, if there is an adverse event that disproportionally affects soy such as the trade war with China, the relationship between planted and base matters, as benefits are paid on base acres. The most recent base acre data from 2023 shows 53.8 million base acres of soybeans whereas producers reported they expect to plant 86.5 million acres in 2024. At the national level, one planted acre of soy equates to only .62 base acres. If adding an increase in loan rates to analysis that accounted for this discrepancy, the benefits would be larger than shown.
Including the House provisions to add new base aces would have helped minimize this difference while also allowing producers a better safety net. Without more details, it is impossible to estimate the number of new soybean base acres. However, for the 2019 to 2023 crop years, soybeans represented 33% of acres planted to major crops. While the additional acres may not be evenly distributed in areas that represent these crops, soybeans should be a significant beneficiary of new base acres based on this formula.
The difference between planted and base acres for soybeans bleeds into the last important assumption, which is the exclusion of SCO changes in the analysis. Including SCO in the analysis would improve the outcomes for the House proposal. However, this effect is expected to be limited. In the analysis, ARC-CO payments are higher by almost $9 per base acre on average for the 2026 crop in the results. The scenario has about 80% of base acres enrolled in ARC-CO for this reason, which makes much of soy ineligible for SCO. Soybeans have never received a PLC payment, and producers have historically enrolled between 80% to almost 100% of base in ARC-CO. In 2023, less than 5 million soybean acres had SCO policies. In effect, 44.5 million soybean base acres enrolled in ARC-CO that year made many more planted acres than that ineligible for SCO. For this reason, including the SCO provisions in the analysis would likely have made little difference.
In conclusion, House Agriculture Committee Chairman Thompson's farm bill proposal appears to contain noticeable benefits for soybeans. While details are lacking at this point that would allow a full analysis, preliminary work with the information at hand shows farmers would gain a stronger safety net after years of decline in Title I programs. ASA analysis exhibit that, in adverse market conditions, soybean producers would realize around $15 per acre in increased benefits above the current farm bill. While this would not return them to average levels of profitability, it would shrink the difference. As a result, the House farm bill proposal represents a positive change for soybean farmers in adverse conditions.
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