Minding Ag's Business

My head is still spinning after delving into dozens of economic studies last week at the American Agricultural Economics Association meeting in Louisville on revenue protection under the new farm bill (see "Two Farm Bills a Toss Up" on the Farm Business page). I didn't even dive into cotton's separate revenue protection program yet, fearing statistical overload.

One important conclusion for corn and soybean growers: You'll need to reassess the total package of revenue protection--commodity supports, conventional crop insurance and the buy-up insurance rider called SCO (Supplemental Coverage Option) in both House and Senate versions of the farm bill. (Some important studies ignored conventional crop insurance coverage, which is the foundation of most farmers ' defense for 75% or more of their base revenue and the main disaster protection going forward. Some study just one year results, others study 500 years of price simulations, some examine the best options given realistic price forecasts over the term of the farm bill.)

You'll need an educated guess on what you think future prices will be over the next five years or so, as this will affect your risk management choices. University of Illinois economist Gary Schnitkey thinks corn-soybean growers would fare better under the Senate package because House support levels are set so low (at $3.70 corn and $8.40 soybeans), he doubts they would ever trigger. But forecasting prices is tough: In the Food and Agricultural Policy Research Institute( FAPRI) computer simulations, the chance than corn would top $7 and national yields fall to the 120-bu. level as it did in 2012 was supposed to happen only once every 250 years, FAPRI Director Pat Westhoff told me. Obviously, they are fixing their odds, but 2012 was an extremely rare event like a historic flood, not the norm. Currently FAPRI pegs the average cash price of corn the next 5-10 years at under $4.50, but some years higher and some years less.

Brad Lubben and other ag economists at the University of Nebraska studied how alternative farm program and crop insurance choices (the whole package) might have performed for eight sample farms in their state in 2013. They simulated 24 different scenarios, depending on levels of insurance and which features of the House or Senate bill growers might choose.

For corn-soybean country , the Senate revenue safety net dominates at current price expectations--far above the fixed reference prices in the House, says Lubben. (In a different year, if corn prices really did plunge below $3.70, things might be different).

While the average returns for a lot of the farm program options are similar--only about $20/acre differences-- they do have substantial differences in design, Lubben said. Some commodity programs are tied to a 5-year Olympic average price while SCO is tied to that year’s base insurance price, so results could vary more substantially over the years as prices move. "But, since our study looked at just this year for potential impacts, we saw more modest differences," Lubben said.

Another result of the Nebraska study was the conclusion that farmers should participate in the Senate's Agriculture Risk Coverage (ARC), purchase crop insurance at higher levels like 75% or 85% Revenue Protectionand then fill the gap with SCO as allowed.

"That generally says farmers should purchase as much crop insurance as allowed, but we know some farmers don’t max out on insurance purchases, either because they look at cash outlays for premiums, or are averse to the thought of known premiums paid for potentially no indemnities," Lubben said. "We would argue they need to look at the whole portfolio when making risk management decisions and not each tool individually (i.e. crop insurance is a risk reduction tool for overall crop revenue, not a risky, isolated investment of premiums against a return of potential indemnities). And, when looking at crop insurance as a risk reduction tool, given it is also substantially subsidized, it is difficult not to conclude that the economic optimum is to buy up on crop insurance coverage with individual and SCO coverage."

Once you buy up on crop insurance and match it as allowed with the similar revenue-based commodity programs, then you can effectively combine a portfolio of tools to cover your overall crop revenue risk , Lubben concluded.

Conferees will begin farm bill deliberations soon. If a bill passes, commodity program alternatives won't kick in until the 2015 crop at the very earliest, with decision deadlines starting next summer. For some in-person counseling, join Nebraska's Brad Lubben and DTN Farm Policy Editor Chris Clayton at the DTN Ag Summit Dec. 9-11 in Chicago. Details at www.dtnagsummit.com

In the meantime, for everything you ever wanted to know about the new farm program economics, you'll soon be able to read dozens of scholarly papers from this seminar at the Southern Risk Management Education Center website http://srmec.uark.edu/…

Follow Marcia Taylor on Twitter@MarciaZTaylor.

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