by: Dr. Cameron S. Thraen, Associate Professor and OSUE State Dairy Markets and Policy Specialist, Department of Agricultural, Environmental and Development Economics, The Ohio State University, Thraen.1@osu.edu

Policy Update: Dairy Producer Margin Protection Program (DPMPP)

By now you are quite familiar with the broad outlines of the DPMPP. Participating producers will establish a base production history (bph) based on the highest annual production from the 2011, 2012 or 2013 calendar year. Once established a farm’s production base will be allowed to increase by the U.S. average production growth.  There is no penalty for increasing production over this level other than the stipulation that extra production will not be eligible for the coverage under the DPMPP.  Coverage rates will be 25% to 90% of the established production base.

The premiums will follow a two tier schedule.  For a production base at 4 million pounds or less there is one schedule and for those farms with a production base over 4 million pounds another, more expensive schedule.  Those producers whose annual production is at or below 4 million pounds the cost of coverage all the way up to $6.50 remains very reasonable, only become more expensive at the $7 to $8 levels.  For a producer whose annual production base is above the 4 million pounds, the cost is still modest up to the $5 level, but then increases rather significantly above that point. 

There are other provisions for new farms, farms with mutiple owners, and owners with multiple farms.  Producers will not be allowed to simultaneously use Livestock Gross Margin Insurance and this program.  The program will not start until September of 2014 and decisions on coverage will be made on an annual basis.  The text of the farm bill specifies September 1, 2014 as the deadline to have these rules in place.  Final DPMPP rules will be announced by the USDA Farm Services Agency.

In addition to the DPMPP the farm bill language directs the Secretary of Agriculture to implement a dairy product purchase and donation program to augment commercial demand with the intent of increasing the milk price in times of low margins.  Much of the operational details for this product purchase and donation program have been passed along to the USDA Secretary of Agriculture and are not known at this time.

If you would like to read more about these programs, link into the policy papers on the Farmdocdaily website (http://farmdocdaily.illinois.edu/authors/john_newton/)

Dairy Margin Update

The DPMPP margin is forecast to stay above $11.00 / cwt. through the next 12 months.  This forecast is updated daily.  If you wish to follow the Dairy Markets and Policy DPMPP margin forecast go to the DmaP website (http://dairy.wisc.edu/Tools/MILC-MPP.html).

by: Carl Zulauf, Professor, Ohio State University, June 2014

Overview:  This article addresses the potential for overlap that can exist between crop insurance and the Price Loss Coverage (PLC) program option in the 2014 farm bill.  To provide perspective, the historical overlap that existed between target prices and crop insurance prices from 1974 through 2006 is examined.  The article ends with summary observations including implications for policy and the upcoming farm program decision by farmers. To download the pdf file click here

Policy Background:  Target prices began with the 1973 farm bill.  They have existed ever since except for the 1996-2001 crop years when the 1996 farm bill replaced target price payments with direct payments.  PLC is the latest version of target price programs.  It refers to target prices as reference prices.  All target price programs have made payments when the market price is below the target price, although different farm bills have used different measures of market price.

Price Decline Overlap:  PLC and crop insurance can make payments for the same price decline if

(1)  price declines between the insurance pre-plant and harvest price discovery periods, and

(2)  the price decline continues throughout the ensuing crop marketing year resulting in a crop year average price that is less than the PLC reference price.

Analysis:  The potential for this overlap is examined using target prices for the 1974-1995 and 2002-2006 crop years for the economically and politically important crops of corn, rice, sorghum, soybeans, upland cotton, and wheat.  This period was selected in part because market prices exhibited no sustained upward or downward trend.  Trends affect the probability of payment by target price programs.

The target prices are from Agricultural Statistics, an annual U.S. Department of Agriculture (USDA) publication (http://www.nass.usda.gov/Publications/Ag_Statistics/index.asp.)  Crop year average prices are from the USDA, National Agricultural Statistics Service (NASS) Quick Stats database (http://quickstats.nass.usda.gov/).  Consistent with PLC, per unit deficiency payment is calculated as the Target Price minus the U.S. crop year average price.

Insurance prices for 2000 and forward are from the Risk Management Agency (RMA) website, http://www.rma.usda.gov/.  For earlier years, a data set created by Art Barnaby of Kansas State University is used (http://www.agmanager.info/crops/insurance/workshops/default.asp).  RMA did not compute harvest insurance prices prior to the introduction of revenue insurance, which began with Crop Revenue Coverage (CRC) in 1996.  However, Art estimated harvest prices for prior years using RMA methods.  Note that crop insurance was not offered for rice until the 1987 crop year and the insurance price used for wheat is the price based on the Chicago futures market.

Findings:  The insurance price declined between the pre-plant and harvest price discovery periods in about 50% of all years as well as during only those years in which a deficiency payment occurred (Figure 1).  Such a finding was expected because insurance prices for the examined crops are based on futures prices.  It is widely-accepted that futures prices are unbiased price estimates and that new bullish and bearish price information is generated randomly.  Hence price increases and decreases about 50% of the time.

During the years a deficiency payment was made and insurance price declined, average per unit deficiency payment expressed as a percent of the pre-plant insurance price exceeded average decline in insurance price for all crops (Figure 2).  The smallest difference is for corn:  a -15% decline in insurance price vs. a per unit deficiency payment that averaged 18% of the insurance pre-plant price.  The largest difference is for rice: a -18% decline in insurance price vs. a deficiency payment that averaged 59% of the insurance pre-plant price.  It should be noted that the average decline in insurance price is similar among crops, ranging from -13% for wheat to -18% for rice.  Again, this finding was expected for reasons discussed in the previous paragraph.

Summary Observations

►   An overlap can exist between target price deficiency payments and declines in crop insurance price between the pre-plant and harvest price discovery periods.

►   The exact degree of overlap expected between PLC and crop insurance is difficult to calculate because PLC pays on 85 percent of FSA farms’ base acres while insurance pays on 100% of acres planted on the insured unit.  Nevertheless, this overlap has the potential to be large as illustrated by the historical experiences during the 1974-1995 and 2002-2006 crop years.

►   A policy issue is whether the deficiency payments that coincide with the insurance deductible is an overlap.  Farmers will not likely view this part of PLC payments as an overlap.  However, the social contract which underpins public subsidies for farm insurance is that a partnership exists between society and farmers in managing farm production and revenue risk.  The farmer’s share of this partnership involves the insurance deductible and payment of a premium.  PLC payments alter the deductible component of the social contract.

►   Given that crop revenue insurance is a key, if not the key, component of the crop safety net, an obvious policy question is whether the overlap between PLC reference prices and crop revenue insurance prices should be considered when designing the crop safety net?  More specifically, should the overlap be eliminated by integrating the prices of the two programs?

►   A related, interesting historical policy question is whether the elimination of target prices between 1996 and 2001 by the 1996 farm bill allowed revenue insurance products to gain traction, thereby altering the future path of farm policy debates?

►   Farmers should consider the insurance – PLC overlap when making their farm program choice.  Overlapping payments would provide additional government assistance if prices decline and stay below the PLC reference prices.  Electing PLC also creates the potential for substituting PLC for crop revenue insurance in providing assistance against price declines when a PLC payment is expected.  This substitution allows farmers to replace revenue insurance with cheaper yield insurance.

►   Because the new insurance Supplemental Coverage Option is only available if PLC is elected, insurance companies and agents have an economic self-interest in promoting PLC as the farm program choice.  However, the potential to replace higher premium revenue insurance with lower premium yield insurance when deficiency payments are expected blunts this economic self-interest.  It will be interesting to see how these competing impacts play out.

This publication is also available at http://aede.osu.edu/publications.

by: Carl Zulauf, Professor, Ohio State University, and Gary Schnitkey, Professor, University of Illinois at Urbana-Champaign, June 2014

 Overview:  The Agriculture Risk Coverage – Individual Farm Coverage (ARC-IC) option in the 2014 farm bill has, in general, received less attention than the other 2 program options:  ACR-CO (ARC – County Coverage) and PLC (Price Loss Coverage).  A potential reason is that ARC-IC is operationally more complex and thus harder to explain and understand.  However, this post argues that an operator who has a very risky Farm Service Agency (FSA) farm may wish to consider electing ARC-IC for that FSA farm.

ARC-IC:  ARC-IC provides revenue loss coverage for all acres on the ARC-IC farm unit planted to covered farm program crops.  The ARC-IC farm unit is the sum of a producer’s share in all FSA farm units that he/she enrolls in ARC-IC in a state.  Payments are made when the average per acre actual revenue of all program crops planted on the ARC-IC farm unit is less than 86% of the average per acre ARC-IC benchmark revenue for the ARC-IC farm unit.  Coverage is limited to losses between 76% and 86% of the ARC-IC farm unit’s benchmark revenue.  Payment depends on the planting of covered crops, but payment is limited to 65% of the total base acres on the ARC-IC farm unit.  In essence, ARC-IC is a whole farm program option based on the average experience of covered crops planted on the ARC-IC farm unit.  In contrast, ARC-CO and PLC are simpler operationally because they are for an individual program crop on an individual FSA farm.  Last, in many respects, ARC-IC can be viewed as the successor to the SURE (Supplemental Revenue Assistance) program in the 2008 farm bill.

Situations in which ARC-IC should be considered:

(1)  From all accounts, ARC-IC was designed to address the situation in which a farm’s yield is not correlated with its county yield.  In other words, a farm’s yield does not increase (decrease) when its county yield increases (decreases).  In this situation ARC-CO provides little risk assistance.  A specific argument is that the farm-county yield correlation is likely to be near zero in counties located west of the Mississippi River due to the larger size of these counties.  While not likely to be common, if the farm-county yield correlation is negative, ARC-CO may increase the variability of the farm’s revenue as ARC-CO payments occur when the farm’s revenue is high relative to county revenue.

(2)  ARC-IC also is worth considering when crops, especially a single crop, is grown on a FSA farm for which production is highly variable from year to year.  The probability of payment is high given the highly variable production, and no premium is paid.  An operator could also create an ARC-IC farm unit by combining FSA farms whose yields are both highly variable and correlated with each other, provided the same crop is planted on all FSA farms in the ARC-IC farm unit.

Summary Observations: 

●    The appropriate farm program choice is about the production attributes of an individual FSA farm as well as the more discussed crop(s) grown on the farm.  ARC-IC is designed for the production risk attributes of the farm.

●    ARC-IC is an option to consider when (1) the farm’s yield has a low correlation with its county yield and (2) when the FSA farm unit has highly variable production.

●    Given that farm program decision are made for individual FSA farms, that many, notably larger, farm operations are composed of multiple FSA farms, and that FSA farms may have highly variable production; more operators than commonly thought may find it worthwhile to consider ARC-IC.

●    A policy question is whether FSA will allow an existing FSA farm to be divided into the previous FSA farms combined to form it or allow new FSA farms to be created for election into ARC-IC?

●    In summary, this post is not an argument for electing ARC-IC.  It is, however, an argument for not dismissing ARC-IC without thinking about the individual FSA farm.

 This publication is also available at http://aede.osu.edu/publications