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New analysis of the legislation shows passage would leave producers with tough decisions to make.Mississippi State University study looks at major farm bill program proposals, the options available in each, and how farmers would likely be impacted in various scenarios.

David Bennett 1, Associate Editor

June 19, 2012

9 Min Read

As the Senate tackles the farm bill, new analysis of the legislation shows if it passes producers will have some tough decisions to make. The study looks at major program proposals, the options available in each, and how farmers would likely be impacted in various scenarios.

See analysis here.

Keith Coble – who authored the analysis with fellow Mississippi State University economistsBarry Barnett, Corey Miller, and David Ubilava – spoke with Farm Press about the quartet’s findings just after the study’s release. Among his comments:

On the Agriculture Risk Coverage (ARC) program…

“Many focused on ARC in the Senate bill. It’s a shallow-loss program from 89 to 79 percent. That’s a fairly tight window.

“Farmers have the possibility of taking ARC coverage at a farm level or county level. Payment acres are involved in either case.

“So, a producer may say ‘if all else is equal I prefer a farm trigger rather than a county trigger.’ However, the payment rate is 65 percent of your acres at the farm level. At the county level the rate is higher. That’s the tradeoff – (using a farm trigger), you’ll be paid on a smaller percentage of your acres but it will be tied to your own production experience.

“ARC would be delivered by the FSA and would have no premium associated with it. That means it would look a bit like the ACRE program in the last farm bill.”

On the Stacked Income Protection Plan (STAX) and Supplemental Coverage Option (SCO)…

“STAX is an insurance program and is a proposal that came from the National Cotton Council. STAX looks an awful lot like the Group Risk Income Protection plan that we’ve had.

“Both STAX and SCO would be delivered as crop insurance and they’d both have a premium. Farmers need to keep that in mind. Another thing: both are area-based.

“As I understand it, STAX allows for an upside price protection. It also allows you to vary how much coverage you purchase. That way, if your expected yield is above or below the county average yield, you can adjust coverage to reflect that.

“SCO is based on a design that came out of the High Plains of Texas. Texas Rep. Randy Neugebauer’s proposal looked at lot like SCO. It will function in a similar fashion.

“But with both STAX and SCO producers need to realize that they allow two insurance policies on the same crop acre. We’ve never had that before. If you plant 300 acres of cotton then you could have STAX and individual level crop insurance as well. In the past, with such area revenue insurance products it with either/or.”

On examples…

“It’s been difficult to sort out exactly how some of these (proposed programs) would work. We’ve illustrated how they’d have worked in the past few years. Producers can look at the analysis and remember what the weather and prices were like in, say, 2009.

“With STAX and SCO, you’d use a springtime futures price as guarantee. ARC, meanwhile, would use an Olympic average.

“In a time when prices are moving down the Olympic average would fall more slowly than a futures price. On the other hand, when prices are going up it will climb more slowly. That’s a fundamental difference between ARC and STAX/SCO.

“Another consideration is that there are payment limits associated with ARC that aren’t with either SCO or STAX.”

Scenarios, pay-out probabilities, more on STAX

On farm scenarios…

“There is no target price in the Senate farm bill. We included that, of course, because the rice and peanut industries have pushed hard for target prices.

“This table (Table 4 on page 5 of the study) is included to provide examples of how a target price of $13.98 would have worked in the past. If we’d had the target price program that was in the bill drafted (in conjunction) with the ‘super committee’ last fall, it would have had something that looked like this.

“The $13.98 price is above CBO-projected levels.

“The interesting thing about a target price program is that, as it was proposed last fall, it would pay on planted acres. In many Mississippi cases that would be less than base acres. It would pay on program yields, which in many instances are now relatively low.

“That means while rice producers might say ‘that target price sounds good’ they need to keep in mind that planted acres in historical counter cyclical payment yields are, in many cases, about half their expected yield. For example, if you’re dealing with the insurance products, your current yield history would be used. That would guarantee a lot more yield than with the target price program.

“When we get to representative farm scenarios (beginning with Table 5 on page 5), we looked at six scenarios for all crops except cotton. We looked at the ARC program – either farm or county; we looked at SCO – either as a standalone or with ARC. That’s allowed in the legislation. And we look at two insurance coverage levels.

“In Table 5, you’ll see ‘SCO 90/60’ or ‘90/70.’ That means SCO would trigger at 90 percent and cover down to 60 percent. We’re assuming you bought a 60 percent coverage revenue insurance policy.

“Looking at revenue insurance 70, we’re assuming the same SCO except that you bought a higher level of crop insurance.”

That would mean $39.31 and $46.76 for a Delta corn farm…

“That’s right, the total of the two. There’s a tradeoff there. If I buy 70 percent crop insurance the net, after premium, would be higher than if I went to 60 percent coverage and my SCO would be lower.

“In the case of the corn example, SCO at the 70 percent coverage pays about $6 more than going to 60 percent coverage. However, SCO would be county-triggered. If you don’t think your yields match the county, it may not be a good risk protection instrument.

“The other thing with the tables is these are average results coming out of our computers looking at probabilities of disastrous yields or big price declines. Also, they look at great crop weather and great price movements.

“All the products you see will have years when they pay zero. That’s different than the direct payment program. We have scenarios where none of the programs pay and years where they pay a lot more than the average.”

On probabilities of proposed program pay-outs…

“When we talk about 90 percent coverage on SCO or STAX, you probably won’t collect more than 40 percent of the time. Out of the next five years, you might collect twice. And you may have a big hit one year and nothing for four years. That’s very plausible.

“People need to realize that about these proposed programs. From a cash-flow standpoint, producers will have to get into a new mindset. Payments won’t come yearly but when there’s a bad event.

“The idea behind these programs is that the payments will come when there is low revenue. If you add a government payment to market revenue, they want the programs to smooth out producer income.

“I really think farmers and lenders will have to have serious conversations if we pass this farm bill. Both producers and lenders will have to dig in and understand how these programs work, when they’ll pay. Lenders won’t be able to just pencil in ‘X’ dollars.

“The complexity is high. (Agricultural economists) do this for a living and we’ve been pulling our hair out trying to figure out all the possible scenarios.

“Before the Senate changed the bill, SCO looked really good in terms of expected payout. But once they made the change to a 10 percent deductible on top of SCO, in many simulations the average payment has a bit of variation. But the difference between participating in ARC plus some SCO versus staying out varies little -- $46.76 and $47.31 are within the margin of error.

“And the story with other crops, the story is similar. Our simulations show it’s almost a toss-up between participating in ARC and staying out with SCO. That leads me to believe farmers more worried with payment limits might be inclined to go towards SCO. Someone who believes their yields don’t match up with the county might prefer farm-triggered ARC instead.

“And once you make the county/farm decision on ARC, you’re locked in for the (life of the farm bill). You can jump in-and-out of SCO or STAX every year.”

More on cotton and STAX…

“Cotton is different because ARC isn’t available. In (table 7 on page 6 of the study) we have SCO and STAX side-by-side.

“STAX is paying out a bit more per acre. We’ve assumed the producer has taken the 1.2 factor and that STAX has upside price protection.

“One caution: these results are for a typical farm in terms of yield variability in the county. If your yields are significantly different than the county, your results could be different than what the table shows.”

About the Author(s)

David Bennett 1

Associate Editor, Delta Farm Press

David Bennett, associate editor for Delta Farm Press, is an Arkansan. He worked with a daily newspaper before joining Farm Press in 1994. Bennett writes about legislative and crop related issues in the Mid-South states.

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