A Closer Look at the Farm Safety Net

Purdue University agricultural economist¬†Michael Langemeier indicated recently at the farmdoc daily blog (“An Update on the Farm Safety Net“) that, “In an earlier article (farmdoc daily, April 28, 2016), we projected earnings for a case farm in west central Indiana, and examined the sensitivity of earnings and farm program payments to changes in price and yield. Using base corn and soybean prices of $3.75 and $8.73, projected earnings for a corn/soybean rotation in our earlier article was a loss of $126 per acre. This article updates projected earnings and reexamines the sensitivity of farm program payments to possible prices and yields for this fall’s crops.”

The update noted that, “When the crop insurance and farm programs were initiated, it was anticipated that they would provide an effective safety net for farmers who might encounter significant price and/or yield reductions due to changing market conditions or weather/disease events. But crop insurance indemnities adjust to market conditions over time. If prices systematically decline, the potential indemnity also declines. Farm program payments under the ARC-CO program are capped, and they decline as market prices increase. So in contrast to the most recent direct payment program that resulted in a pre-specified amount of income and cash irrespective of market prices, under the current program higher prices may result in more income from the market and less from the government in many circumstances (a ‘dead zone’). Also, it is important to note that cash payments from the ARC-CO program are not received until approximately a year after the crop is harvested, so they are not available to meet cash flow requirements in the year of actual production.”

The farmdoc update stated that, “Average projected gross revenue and earnings for the 2014 to 2018 period are presented in table 1 for an Indiana case farm in west central Indiana (White County). Actual county yields were used for 2014 and 2015. Crop prices for the 2014/15, 2015/16, and 2016/17 crop years were estimated using the September 2016 WASDE report (USDA, 2016). Yields for 2016 were assumed to be 10 percent above trend yields. Base prices (medium price scenario in table 1) for corn and soybeans in 2016 were $3.20 and $9.05 per bushel, respectively. Trend yields were used to estimate 2017 and 2018 crop yields. The medium price forecasts for the 2017 and 2018 crop years were obtained from FAPRI; these prices are $3.57 and $3.80 for corn, and $9.44 and $9.64 for soybeans, respectively. The low price scenario and the high price scenario assumed that corn (soybean) price was $0.25 ($0.60) lower and higher, respectively, from 2016/17 to 2018/19, than the medium price forecasts. Purdue crop budgets for average productivity soil (Dobbins et al., 2016) and cash rent estimates reported in the latest Purdue cash rent and land value survey (Dobbins and Cook, 2016) were used to estimate production costs for 2014, 2015, and 2016. With the exception of cash rents, the other production costs were assumed to remain constant in 2017 and 2018. Cash rent per acre was assumed to decline 5 percent in 2017 and an additional 5 percent in 2018.”

Table 1

After more detailed analysis regarding the sensitivity of ARC-CO program payments to prices and yields and the sensitivity of the farm safety net (including crop insurance) to prices and yields, Dr.¬†Langemeier concluded the farmdoc update by pointing out that, “This article examined earnings per acre projections for a case farm in west central Indiana. Under the price and yield combinations or scenarios examined in this paper, annual projected earnings per acre were negative from 2014 to 2018 for the case farm. The results also illustrated the gaping holes in the farm safety net. The safety net for 2016 was of particular interest in this article. The strong expected yields this fall have improved the outlook for earnings in 2016 from previous estimates. However, expected earnings are still relatively low. Even with ARC-CO payments and crop insurance indemnity payments, 44 percent of the 2016 price/yield combinations examined had negative earnings that exceeded $100 per acre. Using base corn and soybean prices of $3.20 and $9.05 per bushel, projected earnings for a corn/soybean rotation was a loss of $96 per acre, which is $30 higher than our April projection.

“In summary, there are three issues related to the farm safety net we are currently facing. First, the ARC-CO payment caps limit mitigation of downside risk. Second, as crop prices increase, the ARC-CO payments often decline, resulting in a less effective safety net. Third, the decline in the crop insurance revenue guarantee since 2012 has contributed to the large decline in the case farm’s ability to mitigate downside risk. Further adjustment of the ARC-CO payments and crop insurance indemnities to expected future continued weak market conditions suggest that the farm safety net will likely be lowered further in 2017 and 2018.”

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