Dobbs, Thomas L.

Murra, Gene E.

English

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South Dakota State UniversityOpen PRAIRIE: Open Public Research Access InstitutionalRepository and Information ExchangeEconomics Commentator Department of Economics1-26-1994Stewardship Payments: A Potential New PolicyDirection for the 1995 Farm Bill; Cattle and HogOutlook: 1994Thomas L. DobbsSouth Dakota State University, thomas.dobbs@sdstate.eduGene E. MurraSouth Dakota State UniversityFollow this and additional works at: http://openprairie.sdstate.edu/econ_commPart of the Agricultural and Resource Economics Commons, and the Regional EconomicsCommonsThis Newsletter is brought to you for free and open access by the Department of Economics at Open PRAIRIE: Open Public Research AccessInstitutional Repository and Information Exchange. It has been accepted for inclusion in Economics Commentator by an authorized administrator ofOpen PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. For more information, please contactmichael.biondo@sdstate.edu.Recommended CitationDobbs, Thomas L. and Murra, Gene E., "Stewardship Payments: A Potential New Policy Direction for the 1995 Farm Bill; Cattle andHog Outlook: 1994" (1994). Economics Commentator. Paper 300.http://openprairie.sdstate.edu/econ_comm/300ECONOMICSCOMMENTATORSTEWARDSHIP PAYMENTS: APOTENTIAL NEW POLICY DIRECTIONFOR THE 1995 FARM BILLThomas L. DobbsEconomics ProfessorA new Federal "Farm Bill" will be duein 1995 if legislation is rewritten according to the normal 5-year cycle. Dialoguehas already begun on potential directionssuch legislation might take, and alternatives are likely to come into sharper focusin 1994 and to be intensely debated in 1995.The history of most farm legislationsince the 1930s has been one of "marginal"or incremental changes over time, with theoverall structure remaining largelyunchanged. This policy structure is one inwhich prices of major food grains, feedgrains, and cotton are "supported" through acombination of loan and deficiency payments.In return, farmers normally must "set aside"(idle) some of their acreage, limit theacreage of program crops they plant, and--starting in recent years--begin to complywith certain resource conservationstandards.The attention to resource conservation,environmental quality, and long-term sus-tainability concerns increased substantiall};in the 1985 Farm Bill and was broadened andreinforced in the 1990 Bill. Every indication is that those concerns will continue toreceive major attention in 1995 and beyond.It is also possible that changesembodied in the 1995 Farm Bill may-besomewhat "radical", not just "marginal".For example, some individuals are beginningto advocate a new policy direction in whicha substantial portion of funds currentlydevoted to traditional commodity supportpajnnents would be shifted to "stewardshippayments" (or "green payments") directlyaimed at amelioration of environmentalproblems in agriculture. The nature andimplications of such a new policy directionare briefly explored in this issue of theCommentator. (Continued on p.2)SOUTH DAKOTA STATE UNIVERSITYNo. 331 Jan. 26, 1994CATTLE AND HOGOUTLOOK - 1994Gene E. MurraExtension LivestockMarketing SpecialistIn many respects, the cattle and hogindustries will be heading in oppositedirections in 1994. For example, cattleprices, at least in the first half of 1994should be lower than they were in 1993.For hogs, prices in 1994 likely will behigher than they were in 1993. The cattleindustry likely will continue the slowexpansion noted for the past two or threeyears. Hog numbers could be lower in 1994than in 1993, a continuation of the smallreduction noted in 1993 compared to 1992.It is easy to see why some of thechanges are expected in 1994. For cattle,cow-calf producers have had severalprofitable years. Profits, first notedagain in 1986 after several bad years,encourage expansion. In addition, weatherconditions helped produce very favorablepasture conditions and large supplies ofroughage in the major cow-calf areas of theU.S. This helped to encourage an expansionin the total inventory of cattle.(Continue on p.3)GRAIN PRICE POTENTIALRichard ShaneExtension GrainMarketing SpecialistThe January USDA Supply and DemandReport was bullish as the grain trade hadexpected. The numbers in the reportindicated a further reduction in corn andsoybean production compared to the Decemberreport and a further reduction in marketyear ending stocks for all three U.S. majorgrain commodities--corn,soybeans and wheat.(Continued on page 3)Stewardship payments, a potentialnew directionPage 2A stewardship payments program woulduse payments to farmers as direct incentives to induce changes in farming practices and systems. Some Federal programsintroduced on a modest scale in recent yearsthat are of this nature include theIntegrated Crop Management Program and theWater Quality Incentive Program. Stewardship program advocates feel that throughthis approach farmers would be providedincentives to respond to both: (a) marketforces, regarding which crops to grow, and(b) society's growing demands for resourceconservation and a reduction in agriculture's adverse environmental effects (suchas ground water contamination).The stewardship payments would be tiedeither (a) to farming practices intended toaccomplish specific environmental results or(b) to actual environmental results. Astewardship program presumably would bequite broad, so that environmental objectives in ragriculture could be pursuedlargely through this program, rather thanthrough continued marginal changes incommodity-based income support programs.Designing a cost-effective stewardshipprogram would be a challenge. Part of thechallenge would be to design it in such away that it is tailored to the particularagro-climatic conditions and environmentalproblems of different regions but is not toocomplex to administer. Basing the stewardship payments on actual environmentalresults is the economic ideal, but that maynot generally be administratively feasible.Basing payments on results, at this time,would require the kind of monitoring thatlikely would be prohibitively expensive orsometimes impossible. Instead, it probablywould be necessary to base payments oncompliance with sets of practices. Whereverpossible, farmers would be permitted tochoose among alternative practices that arejudged adequate (on the basis of currentscientific knowledge) to achieve the relevant environmental results. In this way,within certain constraints, farmers would beable to seek least-cost alternatives.However, the danger from the environmentalpoint of view is that, over time, therewould be .tremendous political pressure tobroaden the list of "qualifying practices"beyond those which could reasonably bewarranted on technical grounds.Potential implications of a ,stewardship program 'A stewardship program could entailsubstantial administrative costs for theimplementing agencies. However, those costsmight be offset at least in part by reducedadministrative costs for the conventionalcommodity programs if those programs wereeliminated or reduced and simplified.A key issue is whether or not astewardship program is the most cost-effective way to achieve environmentalobjectives related to agriculture. To tti.extent that farmers reduce environmentalexternalities, their costs of production arelikely to go up some. The intent of stewardship payments would be to induce farmers tomake least-cost changes in farming practicesand systems in order to reduce externalcosts to acceptable levels. Costs to theFederal budget and to consumers (in the formof higher food prices) associated with astewardship program need to be comparedwith those associated with other means ofpursuing the same environmental objectives.Of course, considerations of "fairness"also are part of the policy determinationprocess.Shifting a substantial portion of theFederal farm program budget from commodityprograms to a stewardship program wouldconstitute a major shift in policy. Unlesspolitical economy compromises"are carefullycrafted, this shift could result in majorincome gains to some regions and majorlosses to others. Some farming areas thatcurrently are quite dependent on commodityprogram payments may not be eligible forvery much income transfer in the form ofstewardship payments, depending upon howenvironmental criteria are specified andweighted. Conversely, some areas whichcurrently receive little in the form ofcommodity payments may have agriculturallyrelated environmental problems which societyconsiders to be quite severe, thus makingfarmers in those areas eligible forstewardship payments that could besubstantial, in aggregate.Politically acceptable compromises mayneed to take a broad view of agriculturalsustainability issues, initially allocatingabout the same amount (or proportion) ofdollars to stewardship programs in eachregion that are "taken out" of commodityprograms in that region. Those dollarsPage 3could then be focused on the most severeenvironmental problems associated with theagriculture of each respective region. Evenif such political compromises are struck,there could be gainers and losers amongfarmers and among other economic entitieswithin areas if Federal policy were to shiftemphasis to stewardship payments. However,some agriculture groups eventually mayendorse a stewardship program if theyconclude that their economic losses would beeven greater with continued erosion ofpublic support for farm programs in theirpresent form.For more information, readers may requestcopies of Policy Studies Program Report No.2, Enhancing Agricultural SustainabilitvThrough Changes in Federal Commodity Policv:Marginal Versus Radical Change, by Thomas L.Dobbs, at a cost of $6.00 per copy from:Henry A. Wallace Institutefor Alternative Agriculture9200 Edmonston Road, Suite 117Greenbelt, Maryland 20770(301) 441-8777(Cattle & Hog Outlook ... Cont'd from p.l)For hogs, lower prices in much of 1993along with higher corn prices helped put alid on expansion. While it is not clear ifall segments of the industry are cuttingback, many are, especially those in the"small-size" producer category.In general, both industries will continue "concentration" trends which startedin the cattle industry in the 1970's buthave been more noticeable in the hogindustry in recent years. Fewer participants at all levels, from producer toprocessor to wholesaler, along with morevertical integration will push livestockmore toward the situation noted in thepoultry industry. While both have a longway to go to be like poultry, moves will bein that direction rather than away from it.Demand increases in foreign marketsnoted in recent years in both industriesshould be maintainable. Some smallincreases could even be noted. In thedomestic market, beef may have a moredifficult time "holding its own" than willpork. Price could be a key factor here.The price outlook for pork producersis somewhat optimistic. Granted, early1994 has not been profitable and probablywon't be. Slaughter hog prices in the lowto mid-$40's could hang around for a monthor so. The mid-$40's by Spring and the low$50's by Summer are expected. Some drop-ping off to the mid-to-high $40's for thisFall would be above levels seen in late1993.Fed cattle producers won't enjoy theabove $80 levels seen early in 1993. Eventhe raid-$70's may be tough to reach. Themost likely time for 1994's peak would bethis Spring. Then, above $75 is possiblebut $80 seems out-of-reach.Feeder cattle prices in 1994 probablywill be $10 or more below 1993 levels.Lower fed cattle prices, higher grainprices (at least early in the year), andlosses by feedlots should pressure prices.Even then, prices for Fall calves in the$90's could be possible.In general, 1994 could be one of smallprofits for hog producers, medium losses tofed cattle producers (exceptions could befor those who have low cost, poor qualityfeed to use), and small profits for cow-calf operators. The situation is notexpected to be as wild as some years in thepast, either from a "good" or "bad"perspective.(Grain Price Potential-- Cont'd from p.l)Corn surplus is estimated by USDA tobe at an 18 year low of around 800 millionbushels. Surplus was near one billionbushels in 1983-84 and 1980-81. Each ofthese years was followed by a "normal"production year and corn prices trendeddown through harvest to around $2.00 perbushel. This is the most probable outcomefor 1994 as well--down trend with normalcrop. But, hold on to your hats, a smallsurplus coupled with flooding this springor drought this summer could push cornprices to all time highs. The trade willbe very sensitive to weather conditions andwill over react to any "abnormalities"giving producers opportunities to forwardprice at the best prices since 1988. Beprepared because these psychologicalmarkets are characterized by quick spikesup and even faster falls. Now is the timeto write down your price targets and pricestrategy to capture that price. You mayeven want to consider some of the currentforward pricing opportunities as theseSOUTH DAKOTA STATE UNIVERSITYEconomics DepartmentBox 504ABrookings, SD 57007Address Correction Requestedprices do exceed the five year harvest timeaverage.Soybean surplus is also projected tobe lov7 at 150 million bushels. Soybeansurpluses have been nearly this low five .other times in the past twenty years. Ineach of these five years, farmers had theopportunity to sell beans at $7.00 perbushel or more. This year, however, recordsoybean production is expected in Braziland Argentina and the market year pricepeak is past unless the weather turns badat planting time in the U.S. Currentprices should be considered in a step upforward pricing strategy for 1994 soybeanproduction as the current price offeringsare above the five year harvest timeaverage. Holding 1993 crop beans means youare speculating on a weather rally in thespring or summer and are passing up thecurrent five year highs for this time ofyear. Consider an out-of-the-money calloption as an alternative to continuedstorage. The option gives you upsidepotential but no down side as the beanshave already been sold. As with corn, beready to price 1994 production on a weathermarket this spring or summer. Weathermarkets lead to marketing opportunitiesseveral months before harvest so forwardpricing techniques must be used to capturethe highs.Wheat surplus in the U.S. has been lowfor the last two years and have been thislow only one other year in the last twenty.So why haven't prices soared? Worldsupplies have been plentiful and U.S.exports have been subsidized through thePage 4 - 'Export Enhancement Program. U.S. share ofworld trade has been falling. The uptrendin the wheat market is looking very toppyand most likely will trend down into harvesttime if a normal seasonal pattern emergeswith normal weather this spring. As withcorn and soybeans, a weather market coulddevelop. Be ready to price wheat on suchdevelopments.Forward pricing techniques will mostlikely be required to take advantage of aspring market rally related to weather.Sunflower prices are currently veryhigh compared to historical levels. Oldcrop sun seed prices could go higher on aweather rally, but keep in mind therelatively high price now and the potentialto price some of 1994 expected productionat relatively good prices. Sunfloweracreage is expected to increase sharply in1994. The next report that will affect ourpricing is the March USDA ProspectivePlantings. Otherwise, weather is the onlyfactor which will create large price movesto the upside in the next few months.* * * AA' 'A'A-* A' ieick* * * A'A"A"A A'A•k-k-k* *.AAA'k AAA"A"A-A A'A"*"A"A-A'.ECONOMICSCOMMENTATOREDITOR: Donald C. Taylor, Agricultural EconomistECONOMICS DEPA^ENTSouth Dakota State UniversityBox 504ABrookings, SD S7007Phone: (60S) 688 - 4141475 copiea of this n««l#ttsp w#r# produced at a costof less than tlOO

Stewardship Payments: A Potential New Policy Direction for the 1995 Farm Bill; Cattle and Hog Outlook: 1994

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Stewardship Payments: A Potential New Policy Direction for the 1995 Farm Bill; Cattle and Hog Outlook: 1994

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