Looking ahead to the new year will bring a new session of Congress and a formal start to deliberations on what is due to be the 2023 Farm Bill.
There have been field hearings and some committee meetings to date — along with numerous interest group meetings and press releases of farm bill preferences — but we are still awaiting a formal discussion of what may be in the next farm bill.
One of the major topics for discussion will be the future direction of the farm income safety net. The safety net has historically been a complex mix of commodity programs, crop insurance and disaster assistance. In recent years, the safety net has been complicated even more by the addition of ad hoc disaster assistance and supplemental payments to producers beyond the small, mostly livestock disaster assistance programs permanently authorized in the farm bill.
The additional assistance has far exceeded the underlying commodity program with more than $84 billion paid out in disaster and supplemental payments over the past five years, as compared to just over $16 billion paid out in commodity programs over the same period.
The proposals
With the shake-up in payments and programs, as well as current market price and input price considerations, there have been several ideas floated about changing commodity programs in the next farm bill.
The first proposal of note coming from multiple ag interest groups has been to raise reference prices in the Price Loss Coverage program. With current prices far above the underlying PLC reference price for most commodities, the safety in the PLC safety net has largely disappeared.
In 2019, the PLC reference rate of $3.70 per bushel for corn provided substantial downside price protection, and ultimately paid out to producers when the 2019 crop marketing year national average price ended up at $3.56 per bushel. Since then, marketing year price expectations have risen to a little less than $7 per bushel, meaning that for all the price uncertainty and volatility in the market, there is more than $3 of downside price risk before the PLC safety net would kick in.
A similar budget challenge exists for other commodity program proposals. One idea is to simplify the current annual decision between Agriculture Risk Coverage and PLC by combining the two programs into one. The combined ARC-PLC program would offer the potential advantage of more revenue (and yield) protection when prices are high, and more price protection when prices fall.
For corn, this would matter as soon as 2024, when the effective reference price would grow to $4.01 per bushel. It could grow further to $5.26 per bushel in 2025 under current price projections, but that is as far as it could go before hitting a cap of no more than 115% of the legislated reference price.
While producers may look for more support, any changes to increase the reference price will require more budget dollars. Even if the increases remain substantially below current price levels, the cost of the proposed program must be estimated not only against expected prices, but also against a wide distribution of possible price scenarios around expectations. That distribution includes potential lower prices that trigger at least some PLC payments, and thus, any increase in reference prices would trigger even more payments.
A similar budget challenge exists for other commodity program proposals. One idea is to simplify the current annual decision between Agriculture Risk Coverage and PLC by combining the two programs into one. The combined ARC-PLC program would offer the potential advantage of more revenue (and yield) protection when prices are high, and more price protection when prices fall.
The combined program would certainly make more total payments to producers, although the added budget cost may be difficult to determine relative to the current policy of producers deciding annually which program they think offers better support.
Margin-based safety net
Another idea that has gained attention with high prices and high input costs is the development of a margin-based safety net program. The dairy sector has a margin program based on milk prices — less feed costs. There is also a Margin Protection crop insurance pilot program available for some crops that covers crop revenue — less fuel, fertilizer and interest expenses.
The margin program could better address the true risk that producers face not only from price and yield risk, but also input price risk. However, a margin program for crops would be more complex than dairy.
While the dairy margin is calculated month-to-month, the crop margin calculation could stretch over two years based on input price risk period before planting, yield risk during the growing season, and market price risk that is not settled until the end of the marketing year nearly a year after harvest. The margin protection idea seems destined to receive more attention during the farm bill debate ahead, but like other ideas, it would almost certainly need more funding to be viable.
One more idea for expanding the safety net is developing a permanent disaster assistance program for crops to complement the permanent disaster assistance already in place for livestock. The distinction goes back to 2008 when both crop and livestock disaster assistance were included in the farm bill to preclude the almost annual calls for ad hoc agricultural disaster assistance.
The 2014 Farm Bill maintained the livestock disaster assistance and provided permanent authority and funding, but let the crop disaster assistance lapse based on the general perception that the federal crop insurance program provided broad and adequate protection for producers and negated the need for further crop disaster assistance.
Alas, there have been repeated calls for crop disaster assistance since 2014, and there have been programs implemented to cover crop disaster losses in each of the past five years, leading to calls for crop disaster assistance in the next farm bill, something that would cost more dollars.
The one sector of the safety net that is not necessarily looking for new funds is crop insurance, but it already has permanent authority, and supporters often go into farm bill debates with the goal of simply protecting crop insurance from possible cuts. Among the proposals for more spending, there are groups calling for cuts in safety net spending as well, largely with arguments used many times before to tighten payment limits or eligibility rules.
Whether any of the ideas discussed above will be considered and whether there are any additions or cuts to the farm bill safety net remains to be seen, but the discussion ahead should be interesting.
Lubben is the Extension policy specialist at the University of Nebraska-Lincoln.
Policy Report: As the talks heats up, there are several options — especially on the crop side — that will be discussed.
