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Impact of Farm Bill on producers’ income begins to sink in
SoVaNow.com / July 10, 2014After waiting nearly two years for Congress to pass a Farm Bill, many Virginia agriculture producers are just now finding out how the reforms touted in the 2014 law will affect them.
Signed into law in February, the $956.4 billion Farm Bill eliminates direct payments, also known as farm subsidies, for all commodities except cotton.
The direct payment program had been in effect since the 1930s. In addition, the bill cut funding for food stamps by nearly $9 billion over a 10-year period, and expands programs for specialty crops, organic farmers, bio-energy, rural development, and for assisting farmers and ranchers just starting out in the business.
The 2014 Farm Bill applies to crop years 2014 through 2018.
Dr. Jim Pease, professor of Agriculture & Applied Economics at Virginia Tech, spoke this week at an agriculture meeting in South Hill to explain one of the more complicated reforms — new risk management options available to farmers.
Pease explained that in the past, the USDA’s commodity programs supported farmers who produced traditional crops such as corn, wheat, soybeans, cotton, rice and peanuts. Under the new Farm Bill, all of these payments — except for cotton — are eliminated.
Two other subsidies, the counter-cyclical price program and average crop revenue election program, also have been replaced. Previously, farmers received a combination of direct payments each year based on their production of covered crops, regardless of harvest quality or commodity market price.
To qualify for direct payments, a farmer had to meet only two requirements: produce a covered crop, and have less gross income than the threshold set by law.
Now, instead of direct payments, farmers can qualify for subsidies to purchase crop insurance, which according to the Congressional Budget Office “offers farmers an enhanced safety net against catastrophic losses.”
To soften the financial blow that farmers could suffer from the loss of direct payments, the government agreed to make crop insurance more affordable, and to pay out some benefits at lower levels than previously allowed.
Pease said that there are two option for coverage: Price Loss Coverage (PLC) or Agricultural Risk Coverage (ARC). Farmers must select their coverage option before the end of 2014 and will be locked into that choice for the term of the bill, which is until 2018.
Whether choosing PLC or ARC, farmers will have to weigh a great deal of information about their farms, said Pease — including the crop mix, production history, and the average county yield for each crop. Each factor could be important in deciding which option will pay the highest amount over the next five years, he added.
PLC is similar to the previous counter-cyclical price program, noted Pease. Farmers are covered if the price for their insured commodity drops below its “reference price,” which is determined in the Farm Bill.
Several farmers present at the meeting groaned when Pease shared the pricing thresholds. For example, crop insurance payments will kick in when wheat is priced at $5.50 per bushel, corn at $3.70 per bushel, and soybeans at $8.40 per bushel.
These prices are considerably lower than current local market averages. As of July 3, hard red winter wheat was selling at $7.97 a bushel, corn at $4.78 a bushel and soybeans at $14.58 a bushel on the commodities market, which is well above the reference price set in the farm bill.
The groans grew louder as farmers learned that the potential payout under the PLC option is fixed, using a complicated mathematical formula that equals 85 percent of the difference between the reference price and the national market yearly average price for the affected commodity.
Pease stressed that in light of the potential for low payouts, particularly for farmers who choose the PLC option, the importance of updating the commodity yield information for each commodity a farmer grows this year is paramount, as that number will be used to calculate the amount of any insurance payment awarded through the PLC option.
PLC payments will be made on Oct. 1 following reported losses.
One positive note for farmers who are enrolled in the PLC program, according to Pease, is that they have the option of purchasing a new form of crop insurance called “Supplemental Coverage Option.”
It supplements PLC payments when a farmer’s loss exceeds 14 percent of normal levels.
The second option available to farmers is the ARC program. Pease said under this program, the USDA will pay for a covered crop for any year that the “actual crop revenue” for that crop is less than the “agriculture risk guarantee” for the crop.
The agriculture risk guarantee equals 86 percent of what Pease called benchmark revenue, which is the average historical county yield for the covered crop for the most recent five years, excluding the years with the highest and lowest yields.
This number is then multiplied with the national average market price received by producers during the 12-month marketing year for the most recent five crop years, excluding the years with the highest and lowest prices.
Like the PLC, ARC payments are not made until Oct. 1 of the year following the loss. Before this coverage takes affect, however, farmers must decide if they want the coverage to be based on county yield averages or the yield averages for the individual farm. Pease said that farmers should weigh the benefits and detriments in four main areas:
1. County coverage uses county average yields while individual coverage uses the producer’s actual production.
2. County coverage pays on a per crop basis while individual coverage pays on a farm basis.
3. County coverage pays on 85 percent of base acres while individual coverage pays on 65 percent of base acres.
4. All crops on a farm must be selected for individual coverage, whereas the election is made crop by crop for county coverage.
Left unanswered in Pease’s presentation were questions about who, if anyone, really benefits from the risk management provisions of the new Farm Bill, and whether the enhanced crop insurance program is needed.
Agriculture Secretary Tom Vilsack stated in a June 30 press release, “These improvements to crop insurance programs will provide better protection from weather disaster, market volatility, and other risk factors to ensure farmers aren’t wiped out by events beyond their control.”
But the Environmental Working Group, which tracks subsidy payments to farmers, argues that the USDA representation is a bit misleading. Federally subsidized crop insurance programs already pay almost two-thirds of a farmer’s premium, as well as most insurance claims.
The EWG contends this is tantamount to a guarantee of revenue regardless of crop failure or even price swings. The current farm bill expands the program by $7 billion over the next ten years.
Moreover, despite poor conditions last year, including a Midwest drought, net agriculture income increased 15 percent. Arguably the biggest beneficiaries of crop insurance subsidies are the private insurance companies that administer the program, the EWG claims: it cites USDA payouts of $1.3 billion for administrative expenses in 2011, the most recent year for which records exist.
CommentsNothing in the "Farm Bill" is for farmers. The wide majority is welfare.
No help for the producers of the food that all of the parasite, I mean welfare class consumes.
- By Farmer on 07 / 12 / 14
CommentsWait till the big corn producers start squalling. Or is that ethanol subsidy separate from the normal price supports?
No different from when the tobacco price supports went away. Everyone thought then the tobacco farmers all became millionaires from the buyout. All it ever did for me was complicate my taxes... it was either take a big tax hit on a lump sum payout, or pay for preparing an extra tax form for ten years. Either way it didn't make me anywhere close to a millionaire. Truth be known it barely paid the taxes on the place.
- By powerhouse on 07 / 14 / 14
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