During 1995 , the U.S. 104th Congress will evaluate the food and agricultural policy situation and consider new legislation. This periodic review and resulting omnibus legislation, commonly called the farm bill, provides the opportunity to carefully reexamine agricultural programs and pol ides. The programs being reviewed, some of which expire in 1995, deal with price and income support, trade, conservation, research, domestic food assistance, credit , crop insurance, and rural development

Meyers, William H.

Smith, Darnell B.

English

During 1995 , the U.S. 104th Congress will evaluate the food and agricultural policy situation and consider new legislation. This periodic review and resulting omnibus legislation, commonly called the farm bill, provides the opportunity to carefully reexamine agricultural programs and pol ides. The programs being reviewed, some of which expire in 1995, deal with price and income support, trade, conservation, research, domestic food assistance, credit , crop insurance, and rural development.</p

Smith, Darnell

Meyers, William

Digital Repository @ Iowa State University (ISU)

Iowa Ag Review 1\ PuiJiicntion from f11e Center fm· Agticulluml and Ruml DeveiOJ'IIII!IIt, Dcl'mtmcnt of EcotJomics, College of 1\g.iculturc june 1995 What~ Inside? The Current Situation T he Story Behind the Hog Breeding Herd Revision .......................... 2 Budget Cut Proposals .............. ................ 3 low a Commodity Prices ... ....................... 4 CARD/FAPRI Analyses Three Comers: FAPRI Examination of Fann Bill Alternatives ...... .... .... .. .. ....... 1 Risky Business: Measuring Monetary and Nonmonetary Benefits 0f lnsurance Programs ............................ 6 CARD 1995 lowa Baseline Results .. ........ 8 Special Articles Specialty Soybeans: New Markets for lo.wa ....... ......... ........... 10 Emerging Issues Hard Choices ......................................... 12 Weather Uncertainty and Financial Risk ............. .. ....... .............. ... l3 Fall Policy Conference .......... ... ......... .... 14 Meet the Staff Keith Heffernan, Assistant Direclor, CARD, and Editorial Commiuec, Tow a Ag Review . . .. .. .. . . . . .. .. . . . .. . .. .. . . . . . . . . ... . 15 Recent CARD Publications ..... .. ..... 16 IOWA STATE UNIVERSITY OF SC:If.NCE A\10 fE C HNOLOGY Quanerly Vol. l , No.3 Three Corners: FAPRI Examination of Farm Bill Alternatives (Dame// B. Smith, 5151294-1 1 8-f) (Willicun /-/.Meyers. 515/294-J 18-f) During L995 , the U.S. l04th Congress will evaluare the food uncl agrLcultural policy situation and consider new lcgislnt.i.on. This periodic review and resulLing omnibus legislation. commonly called the l"arm bill, provides the opportunity to carcfullr reexamine agricultural programs and pol ides. The programs being re\' iewcd, some of which expire in 1995, deal with price and income support, trade, conservation, research , domestic food assistance, credit , crop ins~1 rance, and rural development. Without n 1995 Farm Bill , permanent statutes incom-patible with currcn1 national t•cmwmic obJecl ives, global trading rules, and federal bl1dge1 or regulatory policies would take elJcct (Congrcssio11al Research Service Fann Bill Report ). AI this lime there is general agrccmelll on onl}' one item of the 1995 Farm Bill discussions-rhattbc final resuiL will differ from its predecessors. To aid legislauvc deliberations, the Food and Agricul-llJral Policy Research Institute (FAPRI) researchers ar lt)wn SLate University and the University of MissoUJi-C~llumbia have analyzed three program alternatives. The three altcmaLivc analyse..-; requested by Congress represent "'corner·· scenarios because their program emphasis is based on a dHTerent set of philosophies regarding curretll farm problems, the future of produc-tion agriculture in tl1e United States. and the evolut.ion of itS rural communities. The scenarios that were eval uated represent l h rce discrete direcLions for policy change a11d emphasis in 1995: 1. No P'rogram. This alternative eli minates the exist ing structure of target prices. del'icic.ncy payments, (Couliuucd, page -f) Iowa Ag Review Average Fann Prices Received By Iowa Fanners Mar Feb 1995 1995 $/Bushel Corn 2.21 2.13 Soybeans 5.41 5.25 Oats 1.50 1.4' $/l"on Alfalfa 84.00 83.00 All l-lay 81.00 80.00 $/Cwt. Steers & Heifers 70.70 72.00 Feeder Calves 77.40 79.80 Cows -+0. 70 42.10 l3am;>ws & GilLs 39.10 40.70 Sows 33.00 30.90 Sheep 26.40 34.90 Lambs 73.20 67.20 $/lb Turkeys 0.38 0.37 $/Dozen Eggs 0.37 0.35 $/CwL All Milk 12.40 12.20 $/Head Milk Cows NA NA Iowa Fann IJJcome Indicators 199+ 1993 Million Dollars Crop Cash Receipts jan - Dec l "otal 5.034 4.l74 Liveswck Cash Receipts jan - Dec Total 5,105 5,829 Mar 1994 2.68 6.65 1.59 1.00.00 96.00 74 .. 80 96.30 0.00 45.40 39.50 J9.60 58.00 0.00 0.00 LJ.lO NA 1992 4,810 5.600 set of programs. The House needs lO make larger cuts in general. because of the tax cuts that were part of weir package. If the size of the tax cnts is lim ited by Senate objections, cuts in agriculture programs would likely be closer to the Senate ligures. It seems quite likely that the budgcl For agriculture programs will be cut by $6 billion to $8 billion over the next five years, and there rna}' als~l be an elTon w puLa cap on spending in any one year. . CARD/FAPRI Analysis Three Corners: FAPRI Examination of Farm Bill Alternatives (Co11Limu?cl from ptcge 1) loan rmes, cxpon enham:ement, and dairy price supppn s, as well as many special.lty programs such as for cottonseed oil ~mel sunllower. ll also eliminates Acreage Reduction Programs (ARP) <md Lhe 0-50/85 program. 2. Marketing Loan Program. Under this oplion. target prices, loan rates, ARPs, and 0-50/85 would tlisappear and be replaced by a system of recourse marketing loans, wilh loan rates set in pro port ion to eac.;h otl1er. Soybeans would be added to the comrp<)d-ity programs, Expon En.haucemem is elim inated, but dai ry and o ther speciali ty programs arc re tained. 3. Revenue Assurance. This alternative would do away wilh target v rices, marketing loans. ARPs, and 0-50/85. Instead , producers would be ensured of receiving 70 percent of revenue, based on a five-year moving average of coumy price times a producer's five-year average yield. ln addition, transition paymems would start at. 80 percen t of historic deficiency pay-ments in 1996 and decline to zero percen t by the year 2000. Export enhancement, dairy, and other speciality programs arc retained. ln all scenarios, the Conserva-tion Reserve Program is assumed to decline to the L 7 mlllion-acn: level projected by the Congressional. Budget OITi.ce. while none of the scenarios incorporate •mnual ARPs. Across rhe scenarios, 1 he safet )' net con figuration. especially in terms of income enhancement. and risk sharing, sht>ws considerable variation. Other t.han c;ror insuri'lnce. the safety net is completely gone in the no-program scenario, The marketing lQan option provides ~ome red uc1 ion of price risk. and enhance-ment of i m:ome, bu t has basically the same hudget ouUays as current programs . 'Revem1e assurance offers signilka-11L reduction of cash Gow risk l'or producers and provides substantial budgetary savings. but reduces the level of goverument support for producers by eliminating· the direct income transfer aspect of cutTent programs (i.e., deficiency and loan deficiency payments would be c.llminateq). Comparison of Scenarios and EAPlU Baseline When compared lO the 1995 FAPRl basel ine, Lhe estim;'\ttd effc<.:ts ou scJcctcd variables, as illusu·ated in the included 1able, show s ignilkam early varialion Page 4 CENTER FOR AGRICULTURAL AN D RURAL DEVELOPMENT June 1995 Average Annua l Effects on Selected Variables Area Planted to 8 Major Crops (corn, sorghum, harley. oats, soybeans, wheat. colton, rice) Crop Years Baseline Va lue Marketing Loan Revenue Assurance No J>rogram Crop Receipts Baseline Value Marketing Loan Revenue Assurance No Program 1996/87-2000/0 I 2003/04 254 mill ion acres Up 2.92 milliou acres Down l.38 million acres Down f.98 million acres 263.3 mil lion acres Up 1.20 million acres Down 0.1.0 m iII ion acres Down -+.80 million acres CaiCJJdar Years 1996·2000 2004 $93.25 billion Down $1.73 billion Down 50.57 bill ion Down S 1.48 billion S I 07.2 billion Down $2.85 billion Down $0.-+2 billion Down $2.20 billion Government Payments Calcnd:u Years Basl· linc Value Marketing Loan Revenue Assurance 1 o Program Net Farm Income Baseline Value Marketing Loan Revenue Assurance No Program 1996-2000 2004 $8.03 billion Up $1.79 bill ion Down $3.58 billion Down $6.10 billion $4.86 bill ion Down $0.17 billion Down $3.75 biliion Dow'll $3.75 billion Calendar Years 1996-2000 2004 $43.48 billion Down 5l.l6 billion $52.-+5 bil lion Down $2.97 billion Down !ii2.87 billion Down $2.55 billion Down $6.89 billion Down $4.05 billion Es timated insurance Indemnities Baseline Value* Marketing Loan Revenue Assurance No Program Net CCC Outlays Baseline Value Market ing Loan Revenue Assurance No Program Fiscal Years 1996-2000 2004 S 1.05 billion 51.06 billion No Change Up SO.-f7 billion No Change No Change Up $0.65 billion No Change Fiscal Years 1996·2000 $8.36 billion Down $0.59 billion Down 53.83 bil lion 2004 $5.62 bill ion Up $0.10 billion Down $4.39 billion Down 57.5-f billion Down $5.43 billion * Estimated as 80 percent of total crop insurance indemnities across the alte rnatives. The effects also show that farm income genera ll y tends to converge toward the end of the period. The reader should no te t.hatthe fa rm income numbers in the various scenarios do no t include any estimated crop insurance or Revenue Assurance indemnities, nor do they reOect any o ther risk reduction benefits that producers would receive. Thus, our results would tend to underestimate the benefits to producers from increased insurance Iowa Ag Review payments and reduction of cash flow risk. The a rticle following this one explains the process of estimating these nonmonetary bene£its. Marketing loan In the Marketing Loan program, plantings would increase by about 2 million acres annually; however, crop receipts decllne by roughly $2 billion per year. The decline in crop receipts in the early years is offset by higher government payments; but by the year 2004, government payments also decline slightly. From the point of view of government program efficiency, the analysis indicates that ne t CCC outlays are virtua lly unchanged over the ful l pe riod , while net fa rm income declines by $2 billion per annum. This implies that when compared to the baseline cont inua tion of ctm·ent programs, th is alternative is less dficient, as iL costs the same to operate but resul ts in less income to producers. Revenue Assurance For Revenue Assurance, area planted and crop cash receipts average very close LO baseline levels over rhe full proj ection period while ne t CCC outlays decrease by approximate ly $4.5 bill ion annually. The loss of government payments is offset in the early years by tl1e decoupled t ransition payments provis ion. Due to inc reased market orientation, the reduc tion in govern-ment payments does not fully impact net farm income, as income decl ines by less than $3 bill ion on average. In the final year, among the three options, net farm income is highest for Revenue Assurance. Thus. an efriciency gain is achieved compared to the other alternatives. This effi ciency gain occurs even without inclus ion of insurance indemni ties benefits. No Program The No-Program analysis shows steep declines in area plamed, cash receipts, government payments, net farm income, and government expenditures. This plan, like Revenue Assurance, demonstrates efficiency gains from the market orientation as CCC outlays drop more than net farm income declines. However, in this scenario the declines ill income are severe enough to warrant real concern about d isruption in fin ancial sectors, especially s ince a ll safety nets a re removed except crop insurance. A few items included in the forthcoming FAPRI report on policy options for tbe 1995 Farm Bill, but no t listed above, should be briefly discussed. Along with tl1e june 1995 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT Page 5 Iowa Ag Review declines in farm income across all scenarios, land values also show decreases compared to baseline values. In 2004, the final year of the projection period, all three of the scenarios have nominal land values projected above what they were in 1994, though not as high as they would be with continuation of current programs. The baseline projects a 15 percent increase in average nominal land values from 1994 to 2004 compared with 11.6 percent for the Marketing Loan option, 8.6 percent for the Revenue Assurance option. and 5.4 percent for the No-Program option. However. some regions would see nominal land values decline from current levels, the most severe declines being under a No-Program option. The implication is that only with the No-Program option are financial markets likely to be severely strained. There would be regional variation with elimination of commodity programs of course. For instance, rice net returns decline signifi-cantly compared to a relatively modest impact on corn net returns. Thus, some regions would find credit markets strained more severely than others. Conclusions The three policy options discussed here share one policy continuation (CRP is continued) and one major policy shift (ARPs and 0/50-85/92 programs are elim inated). Also, as crop base restrictions are elimi-nated, with the exception of the Marketing Loan option, the market drives production decisions and shifts of acreage between crops. For the Marketing Loan option, production decisions are driven by the loan rates rather than the market prices. Further, in all scenarios government stockholding is reduced and, for the most pan, stocks of most commodities remain low compared to historical pallems. Farm income tends to decline in all of the alternatives and the decline in the No-Program option is severe enough to generate real concerns about disruption of financiaVcredit sectors. Land values decline relative to baseline projections, but average nominal land values at the end of the period are higher than 1994 in all scenarios. It is interesting to note that in the year 2004, even without insurance indemnities or nonmonetary risk reduction benefits included in the analysis, net farm income is highest for the Revenue Assurance alternative. And if increased insurance benefits are added, net farm income, plus increased insurance benefits under this plan, recovers to levels close to the baseline and at a much lower cost to the U.S. government. Risky Business: Measuring Monetary and Nonmonetary Benefits of Insurance Programs (Darnell B. Smith, 5151294-1184) (Dermot]. Hayes, Associate Professor of Economics, 5151294-6217) Because farmers are exposed to a relatively large amount of business risk, aspects of government farm programs designed to remove or reduce risk can be of particular imponance. Given a choice between a very risky activity and a slightly less profitable activity with much lower risk, many farmers (or their bankers) will choose the less risky activity. These aspects of pro-grams can be viewed in t.enns of having a direct monetary impact on expected profi tability, and an indirect, very illusive, nonmonetary impact on pro-ducer welfare. In the final analysis, it may not be preferable to have programs that increase expected profitability but also increase volatility in a producer's cash flow. lt may be more desirable to have a program that results in slightly lower levels of expected profit-ability but reduces cash flow volatility and reduces producer risk. It is very difficuiL to incorporate these risk effects into policy models because il is impossible to anticipate weather patterns and other sources of risk over the projection period. However, if we completely ignore these risk effects, policy analysis results will be biased against programs that are designed primarily to reduce risk. A comparable situation exists if one is evaluating two employment opportunities that have the same salary but only one provides full medical insurance coverage. The income numbers are the same, but the full remuneration package is much different. This issue is particularly important to the revenue assurance farm bill proposal because, under this plan, in an "average" year (i.e., the type of year incorporated in most projections and baselines), no farmer would receive a cash payment, but the risk structure is much d1fferent. For Iowa's agricultural producers and rural communi-ties, this question translates into, "Is the value of a doUar's worth of government payments received in bad crop years when cash flow is sLrai ned any different from a dollar in payments made in good years when cash is more abundant?" Technically, the answer to this question is that a dollar is just a dollar. However, if we remember the floods of 1993, the underlying value of disaster payments that prevented financial chaos for families all over the Midwest was higher than if that same amount of money were to be transferred Page 6 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT June 1995 

Three Corners: FAPRI Examination of Farm Bill Alternatives

https://dr.lib.iastate.edu/handle/20.500.12876/45084

Three Corners: FAPRI Examination of Farm Bill Alternatives

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