Carl Zulauf Ag. Economist, Ohio State University

1. COMMODITY PROGRAM IMPACTS AND ANALYSIS FOR MIDWEST PRODUCERS Carl Zulauf Ag. Economist, Ohio State University Presentation at “Farm Bill Education Conference,” Kansas City, Missouri July 8, 2008 Carl Zulauf, Ohio State University

2. Policy Objectives of Farm Support and Risk Management Programs • Traditional Price Support Programs: assist with managing systemic risk of chronic low market prices over an extended period of years • Crop Insurance: assist with managing farm specific crop production risk (called idiosyncratic risk) that occurs between planting and harvest • SURE (Supplemental Revenue Assistance): assist with managing whole farm losses due to adverse weather and associated with the deductible part of crop insurance • ACRE (Average Crop Revenue Election): assist with managing systemic risk of a decline in revenue (price times yield) of a crop over a short period of years Carl Zulauf, Ohio State University

3. Incidence of U.S. Systemic Yield, Price, and Per Acre Revenue Risk between Planting and Harvest, 1974-2006 Systemic price and revenue risk is much greater at 10% than is systemic yield risk. Systemic risk is much less at 25%. Pre-planting and harvest revenue insurance prices were used (October for corn and July-August Chicago contract for wheat). Yields were from the U.S. Department of Agriculture, National Agricultural Statistics Service. An Olympic moving average (removes high and low yield) for the 5 previous crop years was used to estimated expected yield. Yields were converted to a planted acre basis. Carl Zulauf, Ohio State University

4. SURE: Thumbnail Sketch Assumes: crops for which crop insurance exists and use of insurance values in SURE’s calculations ► SURE’s coverage unit is entire farm (all crops; all counties) ► To be eligible for SURE, a producer must purchase insurance for all insurable crops ► To receive a SURE payment, a producer must farm in a declared disaster (or contiguous) county, or have adverse weather reduce farm’s total production 50% or more ► SURE’s payment = [60% of (farm’s SURE guarantee minus farm’s total crop revenue)] ▲ Guarantee per planted (and prevented planted) acre is basically 115% of the selected per acre insurance coverage level. Value summed for all insured crops.  Guarantee per crop is capped at 90% of crop’s expected revenue (essentially 100% insurance coverage value per acre). Value summed for all insured crops. ▲ Farm’s revenue is the sum for all crops of [(A) insurance indemnities, (B) prevented planting payments, (C) other Federal disaster aid for the same loss, (D) 15% of direct payments, (E) counter-cyclical, ACRE, and market loan payments, and (F) the value of a crop based on harvested acres, actual yields, and U.S. season average cash price adjusted for local/regional quality losses and excess moisture from adverse weather For a more detailed presentation on SURE see Carl Zulauf, “Supplemental Agricultural Disaster Assistance in Food, Conservation, & Energy Act of 2008.,” AEDE-RP—0107-08, May 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

5. SURE: Some Initial Thoughts on Implications • 1. SURE is an incentive to buy at least 75% individual crop insurance coverage (115% of 75% is 86%, or just below the 90% cap on SURE’s guarantee). • 2. SURE most benefits areas with higher yield variability (ceteris paribus). Yield variability increases the chance of a county disaster designation (or a 50% or more decline in a farm’s production). • SURE most benefits single-crop farms because crop diversification reduces revenue variability (ceteris paribus). Thus, SURE could affect crop rotation decisions. • ► Will farmers adopt an all-crop alternative year rotation, (100% corn one year; 100% soybeans the next year)? • ► Will farmers eliminate small acreage crops, such as wheat in the Midwest? Carl Zulauf, Ohio State University

6. ACRE: Thumbnail Sketch ► ACRE is a state revenue protection program. A payment is made if a state’s realized revenue (state yield time U.S. average cash price for the crop year) is less than its revenue guarantee. ▲ ACRE’s per acre revenue guarantee for a crop equals: [(90%) times (2-year moving average of U.S. crop year cash price) times (5-year Olympic moving average of prior state yields)].  Revenue guarantee cannot change more than 10% from prior year guarantee.  ACRE’s payment is capped at 25% of the state revenue guarantee.  State revenue payment is adjusted to individual farm by yield ratio. ► If ACRE is elected, a farm’s direct payments are reduced by 20%. In addition, the marketing loan rates for the farm’s crops are reduced by 30%. ► Payment is based on acres planted to a crop, but an ACRE payment cannot be received on more acres than the farm’s total base acres. ► ACRE payments are crop specific (for example, corn but not wheat can receive a payment), but a farmer must elect ACRE for all eligible crops grown on the farm. For a more detailed discussion of ACRE see Carl Zulauf, ACRE (Average Crop Revenue Election) Provisions in Food, Conservation, & Energy Act of 2008, ” AEDE-RP—0104-08, May 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

7. Breakeven Price Between ACRE and Traditional Suites of Farm Programs, Average for 26 States Includes direct, marketing loan, price counter-cyclical, and ACRE revenue payments If U.S. cash market price is expected to average above the breakeven price through the 2012 crop, expected payments from ACRE are higher despite the reduction in direct payments under ACRE. Note, that actual payments from the ACRE revenue program may be zero if cash market price is above the breakeven price. Thus, even if market price is above the breakeven price, the traditional programs may pay more. For details on this analysis see Carl Zulauf, “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

8. 20% of Average U.S. Direct Payment Per Acre At breakeven price, (expected ACRE revenue payment minus expected marketing loan and counter-cyclical payments) equal ACRE’s 20% reduction in direct payments. Reduction in direct payments can be considered an ACRE risk management fee. Calculation is made using data from the U.S. Department of Agriculture. Carl Zulauf, Ohio State University

9. Share of Years with an ACRE Revenue Payment, Average for 26 States Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

10. ACRE Revenue Payments Tend to Occur in Consecutive Years ACRE provided payments during multiple-year, large declines in state revenue Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

11. A Reason for Consecutive Year ACRE Payments is 10% Limit on Year-to-Year Change in Revenue Guarantee Cup is the name for a 10% limit on declines in ACRE revenue guarantee from the prior year’s guarantee. Cap is the name for a 10% limit on increases in ACRE revenue guarantee from the prior year’s guarantee. Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

12. State Yield Declines Were an Important Trigger for ACRE Payments An ACRE payment was made in approximately two-thirds of the years in which state yield declined by 10%. Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University

13. Change in State Yield Explained a Small Share of Change in Yield on Individual Illinois Farms Source for farm data is Illinois Farm Business Farm Management project. Data set is 552 farms with corn and soybean acres each year from 1996 through 2006. Year-to-year change is measured as (ln change). Carl Zulauf, Ohio State University

14. ACRE: Some Initial Thoughts on Implications • 1. ACRE provides risk protection against revenue declines that extend beyond crop insurance’s planting-harvest period. • ▲ Should encourage short-term, multiple year investments, such as potassium and phosphorus application. • 2. ACRE is a poor substitute for crop insurance. A farmer who elects ACRE should carefully consider purchasing crop insurance to help manage the production risks associated with his/her farm. • 3. ACRE most benefits areas with higher yield variability (ceteris paribus). • 4. ACRE’s expected payment (not maximum or actual payments) should be capitalized into the value of land. • 5. Because ACRE does not provide a floor, farmers will have to adjust to lower market revenues although their adjustment time is lengthened. • 6. While ACRE likely will be classified as amber box under World Trade Organization guidelines, its distortion of trade is limited by the fact that its payments will become zero within a few years. Carl Zulauf, Ohio State University

15. Concluding Thoughts 1. ACRE and SURE are potentially significant new programs to help farmers manage revenue risk, especially now when prices are high (not chronically low) and volatile. 2. In regard to the decision on ACRE, the central question is: ► Over the period of participation, is the 20% reduction in direct payments more than compensated for by ACRE’s improved management of systemic revenue risk relative to the Counter-Cyclical price program given today’s high and volatile prices? 3. Given SURE, an hypothesis that will be tested by farmer decisions: Is the optimal individual crop insurance coverage now 75%? 4. Yet-to-be written regulations will impact how ACRE and SURE operate. 5. Unexpected impacts are to be expected. Carl Zulauf, Ohio State University

16. Questions ? Carl Zulauf (614) 292-6285 Zulauf.1@osu.edu Carl Zulauf, Ohio State University

17. Appendix: Brief Outline of Analytical Parameters of the Breakeven Price Analysis • Breakeven price is an average of the weighted average breakeven price derived from two analyses, both involving 26 states and using data for 1974-2006 crop years. One analysis used (a) percent deviation for a state’s yield for a year from its trend-line yield estimated using linear regression and (b) percent deviation of U.S. price for a year from the average price for 1974-2006. The second analysis used (a) percent ratio of a state’s yield for a year relative to the state’s average yield for 1974-2006 and (b) percent deviation of U.S. price for a year from the average price for 1974-2006. A weighted average breakeven price was calculated for both analyses. The weight was the state’s share of acres planted to the crop in the 26 states in 2006-08. The 26 states accounted for 94%, 96%, and 83% of U.S. acres planted to corn, soybeans, and wheat, respectively, in 2006-08. The yield distribution was centered on the average yield used by the Congressional Budget Office for 2009–12. • The data for historical prices, yields, and acres are from the U.S. Department of Agriculture. • Program parameters are from 2008 Farm Bill. Marketing loan and price counter-cyclical prices are for 2010-12. The 83.3% payment factor is used. Planted acres are assumed to sum to base acres. • The calculation for ACRE does not include separate programs for irrigated and dryland acres when at least 25% of a state’s acres are irrigated and at least 25% are in dryland production. • No adjustment was made for the change in calculating loan deficiency payments: a 30-day moving average of cash prices replaces a single day’s cash price. • SOURCE: Carl Zulauf., “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” AEDE-RP—0109-08, June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21 Carl Zulauf, Ohio State University