Government Intervention in Agriculture

1
Government Intervention in Agriculture
Supply Control Conservation Price Support
Risk Management Trade Promotion Food
Security
2
Current Farm Program Structure
Fixed decoupled payments Risk management
programs Trade promotion programs
3
Fixed Decoupled Payments
Payments that provide income support to
farmers Fixed do not change with
agricultural conditions Decoupled do not
change with individual decisions
4
Payment Base
Payments are based on historical acreage and
yields Payment rate is set by law Producers
know the exact amount they will receive each year
5
Why Did We Come Up With This Program?
Previous farm bills had supply control programs
where payments varied with price
levels Producers agreed to crop and acreage
restrictions in exchange for payments
6
Why? Continued
Congress wanted to provide financial support to
agriculture without drastically impacting
production decisions Instead of creating a
completely new program, adapt supply control
program into an income support program
7
Program Adaptation
Keep acreage bases, remove most crop
restrictions, change payment rates from variable
to fixed Changes a supply controling, trade
affecting program into an income supporting,
non-trade affecting program
8
How Do Programs Affect Trade?
If the payments affect your production decisions,
then they affect trade Look at supply and demand
curves
9
Supply Under Old Program
Supply
Demand
Price
P0
Q0
Quantity
10
New Program Shifts Supply
Price
Supply
Demand
PL
P0
PN
Q0
QN
Quantity
11
Fixed Payments and Supply
With the current system of fixed payments, you do
not have to produce to receive payments So
payments do not move with production and the
supply curve does not shift
12
Risks in Agriculture

• At planting time, agricultural producers face two
  major risks
• Yield uncertainty
• Input application, crop insurance
• Price uncertainty
• Marketing strategies and tools

13
Government Sponsored Risk Management Programs

• Marketing Loan Program
• Marketing Loan vs. Loan Deficiency Payments
• Crop Insurance
• Yield vs. Revenue Insurance

14
Marketing Loan Program

• Government program meant to provide cash flow
  support during the marketing year
• Loans are nonrecourse, this means that the crop
  can be used as payment for the loan
• Available for over 20 commodities

15
Marketing Loans and LDPs

• The program sets rates at the county level by
  crop
• Eligible production may either be put under
  loan or have a loan deficiency payment (LDP)
  taken on it
• The amount of the loan or LDP depends on the
  quantity you wish to use in the program

16
A County-by-County Program

• The program is based on the county in which you
  will store your crop, not the county in which
  you produce the crop
• There may be advantages to growing the crop in
  one county and storing in another

17
Loan Eligibility

• Must be enrolled in the farm program
• Comply with applicable conservation
  requirements
• Report planted acreage of the crop
• Have beneficial interest of the crop at the
  time of the loan or LDP request

18
Loan Rates

• National rates are established for each
  commodity and are equal to the minimum of the
  1995 loan rate or 85 of the Olympic average of
  the last 5 crop year prices
• County rates are set by adjusting the national
  rate for transportation costs to relevant
  terminal markets and average production in the
  county

19
Marketing Loans

• Loans are for 9 months, but can be redeemed at
  any time
• To pay back the loan, you may either forfeit
  the crop as payment or pay an amount set by the
  minimum of the posted county price (PCP) or the
  loan rate plus interest
• Possible to pay back the loan at less than face
  value

20
Posted County Prices (PCP)

• Estimate of local market prices
• Usually based on 2 terminal markets, takes the
  higher price
• Terminal prices are adjusted for
  transportation costs and other factors

21
PCP Calculation

• Example Story County, Iowa, Corn 11/26/01

PCP 1.71
22
Loan Deficiency Payments (LDP)

• Alternative to taking the loan
• Works like taking the loan and paying it back
  the same day
• Can not take the loan and LDP on the same
  quantity
• If the PCP is greater than the loan rate, then
  you can only take the loan

23
LDP Calculation

• Example Story County, Iowa, Corn 11/26/01

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Loan vs. LDP

• The loan is like a free put option at the loan
  rate
• The loan protects you against downside price
  movements, but costs you interest if prices
  exceed the loan rate
• The LDP exposes you to downside price
  movements, but there are no interest charges

25
Crop Insurance

• One of many risk management strategies
• Traditionally set up to protect farmers in times
  of low crop yields
• Now offers coverage for low prices
• Available on over 100 commodities

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Federal Crop InsuranceTotal Acres Insured
27
Why Crops Fail
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Crop Insurance Subsidies
Coverage Level Subsidy 50 -
55 67 55 - 65 64 65 -
75 59 75 - 80 55 80 - 85 48 ?
85 38
29
Types of Crop Insurance

• Individual Yield (APH)
• Area Yield (GRP)
• Individual Revenue (CRC, IP, RA)
• Area Yield - Individual Revenue Combination
  (GRIP)

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Individual Yield Insurance (APH)

• Farmer chooses percentage of expected yield to
  insure
• Expected yield measured by average yield
• Price at which the crop is valued is set up
  front and does not change
• If yields are 50 bushels per acre, the farmer
  receives 50.00 per acre 2.00/bu.(75
  bu./acre - 50 bu./acre)

31
Yield Insurance Payout Graph
No Payout
Payout
32
Area Yield Insurance (GRP)

• If county yields are 50 bushels per acre, the
  farmer receives 50.00 per acre 2.00/bu.(75
  bu./acre - 50 bu./acre)
• If farm and county yields do not move together,
  you could receive payments when you do not need
  them or not receive payments when you do

33
Individual Revenue Insurance (CRC, IP, RA)

• Farmer chooses percentage of expected revenue
  to insure
• Expected revenue measured by average yield
  times initial crop price
• Price at which the crop is valued can move with
  price changes in the market

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Revenue Insurance Example

• If yields are 50 bushels per acre and harvest
  prices average 2.50, the farmer receives
  25.00 per acre
• 0.752.00/bu.100 bu./acre - 2.50/bu.50
  bu./acre

35
Revenue Insurance Payout Graph
No Payout
Payout
36
Individual Revenue Insurance (CRC and RA)

• These policies have a harvest price option
• If the harvest price is greater than the
  planting price, then the harvest price is
  used in all calculations

37
Harvest Price Option Example

• If yields are 50 bushels per acre and harvest
  prices average 2.50, the farmer receives
  62.50 per acre
• 0.752.50/bu.100 bu./acre - 2.50/bu.50
  bu./acre

38
Insurance Payout Graph
Only RI Pays
Neither Pay
Only YI Pays
Both Pay
39
Program Interactions
Loan Rate
Yield Insurance
Revenue Insurance
40
The New Farm Bill
Continues fixed decoupled payments, crop
insurance, and marketing loan programs Makes
soybean a program crop Creates a new price
countercyclical program