Category: Agricultural Policy

Farm Bill 2014: Dairy Program sign-up to begin September 2, 2014

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The USDA has announced in a press conference Thursday morning that sign-ups for the new Dairy Margin Protection Program (MPP) will begin next week. Producers can begin signing up at their local FSA office beginning on September 2 and must sign up by November 28, 2014 to be covered for the 2015 production year. Future years will have a sign-up period from July 1 to September 30, and if the deadline is missed there will be no future opportunities to sign up for that year. One additional stipulation is that once a producer signs up, he/she will be enrolled until December 2018 when the program is set to end.

The Margin Protection Program is a safety net program that pays out when the actual dairy margins fall below a producer selected coverage level and is open to all dairy operations, regardless of size. There is a $100 administration fee due upon sign-up, and producers can choose a coverage level that guarantees a margin of between $4.00/cwt and $8.00/cwt. Producers can also choose to cover between 25% and 90% of their production history. Producers can choose a coverage level annually during the sign-up period, and the premium payment is due upon signing up. When signing up for the first time, two forms must be filled out. One form will establish the farm’s production history, while the second form will establish the coverage level and the amount of production covered.

Overall, the program appears to be a great, low-cost safety net for diary producers. Producers electing coverage for a $4.00 margin will pay only a $100 administration fee, with the premiums rising as coverage levels increase. The FSA has a very useful online resource to help producers select a coverage level at www.fsa.usda.gov/mpptool. An additional breakdown of what we knew about the MPP prior to Thursday morning’s press release can be found here. We will also be posting additional resources in the coming days to further break down the new Margin Protection Program and help producers determine the coverage level that will be best for them.

Five things you need to know about County-triggered Shallow Loss Programs

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The Supplemental Coverage Option (SCO), Stacked Income Protection Program (STAX) insurance and county Agricultural Risk Coverage (ARC) programs in the new farm bill are novel risk protection products.  All three cover a band of shallow losses and leave the producer exposed to more severe losses unless otherwise protected by crop insurance or by some other means.  Shallow loss programs are new, but most people understand the concept of layering risk protection.  What is less clear is how well people can evaluate county- versus farm-triggered programs. County-triggered programs are not new.  They have been around for decades in the form of area coverage insurance. This type of insurance is currently known as Area Risk Protection Insurance (ARPI) and was formerly called the Group Risk Plan (GRP) and Group Risk Income Protection (GRIP).  ARPI is a county-triggered alternative to farm-triggered insurance whereas STAX, SCO, and ARC are supplements to farm-triggered insurance (e.g., Yield Protection and Revenue Protection).  Over the years we have probably studied and evaluated area risk protection products as much as anybody.  So here are a few pointers.

 

  1. For an area triggered program to exist, county yields must be estimated and reported.  In the past ARPI programs have been based solely on NASS county yield estimates.  A historical series is used to predict expected yield and an actual yield is necessary to determine actual yield (or revenue) shortfalls in the insured year.  NASS does not report county yields for every commodity in every county.  They are unlikely to report in counties where the commodity is grown on relatively few acres and/or where few farms produce the commodity.  To increase the availability of STAX and SCO it is likely that RMA will, at least in some crops/areas, use aggregated yield reports from farm-triggered crop insurance policies to construct county yields.  It is less clear what FSA will use for ARC calculations.  The bottom line is no county yield equals no program.
  2. Risk protection from area products all depends on correlation.  Correlation is a statistical concept that simply means, two variables are related to each other rather than independent.  For area shallow loss programs, this may be translated to, “To what degree does county revenue go up (or down) when my farm revenue goes up (or down).  What we find is that this relationship is driven by the farm-county yield relationship.  Typically county yield and farm yield move up and down together, but not perfectly.  Further we find wide differences across farms in the relationship between farm yield and county yield.  Think of a farm using typical production practices on the predominant soil type in the center of a county versus a farm using an atypical practice on a less common soil type at the edge of the county.  The correlation of farm-county yields will likely be less for the atypical farm and a county triggered program will provide poorer risk protection.  Some have suggested that with the availability of county-triggered shallow loss products, growers should reduce the coverage level on their underlying farm-triggered insurance. Before making this decision growers should think very carefully about how correlated their yields are with the county yield.  Likewise, a number of shallow loss “decision aids” are becoming available and more will likely follow.  Growers should determine whether these decision aids allow for differences across farms in the correlation between farm yield and county yield. Ideally they would also help in measuring that correlation. Unfortunately, this is not that easy to do and many of the decision aids we have seen implicitly assume that farm-yield and county-yield are independent.  Growers should be aware that any decision aid that does not adequately address correlation is likely to provide erroneous guidance on decisions about shallow loss programs.
  3. What is not very important is whether your average yield is higher or lower than the county average.  With both farm-triggered crop insurance products and county-triggered shallow loss programs, payments occur when the realized percentage shortfall exceeds the percentage deductible. The percentage deductible is just 100% minus the coverage level (thus a crop insurance policy with a 75% coverage level has a 25% deductible). The percentage shortfall and percentage deductible are both calculated relative to the expected yield or revenue. For county-triggered programs it doesn’t really matter whether your excepted farm yield is higher or lower than the expected county yield. What matters is how closely the percentage shortfall on your farm matches with the percentage shortfall at the county level. If the county experiences a 25% revenue shortfall and your farm also experiences a 25% revenue shortfall then the county-triggered program should do a nice job of covering your losses.  However, if your revenue falls 25% but the county revenue only falls 15% you will not be fully covered.
  4. County yields are less variable than the average variability of farms in the county. This is the result of the county yield being an average of all the farms in a county.  Past research typically finds the average farm is about 30% riskier than the county in which it resides.  What does this mean for STAX, SCO, and ARC?  It means that, all else equal, a layer of county-triggered coverage will pay less than the same layer of farm-triggered coverage for the typical farm. This is actually the motivation behind the scale option in ARPI and STAX products.
  5. Get ready for differing USDA estimates of county yields.  FSA, RMA, and NASS may each use different data and different procedures for estimating realized county yields.  Thus, it is quite possible that these various USDA agencies will generate different estimates of the realized county yield in a given year and these different estimates will be used to determine payments for different programs.  If that seems strange, know that the 2014 Farm Bill did not define how these county yields would be developed.   Good luck to the USDA officials who have to explain the differences.     

 

 

 

 

 

Supplemental Coverage Available for 2015 Mississippi Winter Wheat

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The Supplemental Coverage Option (SCO) crop insurance endorsement will be available to winter wheat producers in Bolivar, Coahoma, Sunflower, Tallahatchie and Washington counties for 2015. SCO was authorized in the Agricultural Act of 2014 and will provide an indemnity payment when yield or market revenue (depending on whether the producer has a yield protection or revenue protection policy) measured at the county level falls below 86 percent of the expected county revenue as determined from county yield histories and futures prices.

The SCO indemnity payment size is determined by the proportion of the range of the loss below 86 percent down to the nominal coverage level of the producer’s farm-level crop insurance. A producer will pay 35% of the actuarially-fair premium (65% subsidy) for SCO coverage. While the indemnity is triggered by county level production or revenue, the producer’s actual production history yield is used calculate both the SCO indemnity and SCO premium.

Winter wheat producers in the five eligible counties will need to make SCO participation decisions by the September 30, 2014 sales closing date. Risk Management Agency will have the projected price for winter wheat available after September 14, 2014, at which time premiums will also be calculated.

A producer is not required to purchase SCO coverage. SCO is not available for acreage enrolled in the Farm Service Agency’s (FSA) Agricultural Risk Coverage (ARC) program. For fall planted wheat for the 2015 crop year only, an insured who applies for SCO and later elects to participate in ARC for winter wheat has until the earlier of the acreage reporting date or December 15, 2014 for any fall-planted wheat with an acreage reporting date after December 15, 2014 to withdraw SCO coverage on winter wheat on the farm for which ARC was elected for winter wheat and owe no premium. This is a one-time exemption that will only be allowed for 2015 crop year for fall planted wheat, to recognize that the ARC program rules may not yet be available to the public (FCIC-18180).

Producers who intend to plant winter wheat this fall in the five eligible counties are encouraged to contact their crop insurance agents regarding this important decision.

A Look at U.S. Crop Insurance “Buy-Up” Participation

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Crop insurance continues to gain importance which is reflected in the 2014 Farm Bill. Given the extreme weather events in the past few years, coupled with price uncertainty, U.S. producers are aware of the pitfalls of not having insurance. However, many options exist with respect to the level of coverage a producer can obtain. At the minimum a producer can purchase “CAT”, or catastrophic coverage, that will protect up to 50% of his crop if a loss occurs. In all areas of the U.S. producers can “buy-up” to higher levels of coverage with some locations having the option to insure up to 85% of their crop [1]. Coverage levels for crop insurance increase from the 50% level to the 85% level, in 5% increments. The maps below show the average level of coverage for each county in the U.S. where crop insurance purchase data are available.

A few patterns stick out. First, it is noticeable that with corn and soybean insurance producers in the Cornbelt (primarily Iowa, Illinois, and Indiana) buy-up to higher levels of coverage. This is not surprising since the uncertainty around yield is small relative to other regions, which implies the insurance product is typically less expensive (in other words, the premium is cheaper [2]). Also, with respect to revenue insurance products, given that the bulk of these two crops are produced in this region there is a ‘natural hedge’ relationship between yield and price. So, when yield is low prices are high and vice versa, which provides a smoother revenue outcome compared to other locations. As a result these premiums are typically less than in other regions.

Also, we notice that coverage levels are low (averaging from 50% to 70%) in the Mid-South, southern Georgia and South Carolina, and the southwestern U.S. This is most likely the result of the inverse that was noted above. In these instances yields are less certain and typically carry a higher premium which decreases the incentive to buy-up to higher premium levels. More specifically, across all crops, the counties in eastern Arkansas and Louisiana (with some spillover in to the boothill of Missouri) as well as the counties from southeast Alabama through southern South Carolina, the coverage level is consistently very low (50% to 65%).

… Click each map for a larger view …

2013 Soybean coverage levels  2013 Corn coverage levels2013 Cotton coverage levels2013 Wheat coverage levels2013 Rice coverage levels 2013 Sorghum coverage levels

[1] In relation to an automobile insurance policy, this would imply the producer’s crop insurance carries a 15% deductible whereby a $20,000 vehicle with a $1,000 deductible would equate to a 5% deductible.

[2] Again, using the automobile insurance example, the premium for a 40 year old female driver will be less than a 18 year old male driver since the younger male is typically more reckless behind the wheel and therefore poses a higher risk for the insurance company. Here the older female is the Cornbelt and the 18 year old is the southwestern U.S.

Analyzing Mississippi Soybean Producers’ Farm Bill Alternatives

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With the recent passage of the 2014 Agricultural Act a number of new choices are available for producers, while many of the previous options are no longer available. The analysis here examines these choices for soybean production in Mississippi. The report can be viewed at this LINK (Adobe Reader required to view the report).

New Revenue Options in the 2014 Farm Bill

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The Agricultural Act of 2014 introduces three county-triggered shallow loss programs – Supplemental Coverage Option (SCO), Stacked Income Protection Program (STAX) for cotton, and the county triggered version of Agricultural Risk Coverage (ARC).  All three programs have the potential to be used as a risk management substitute for individual coverage crop insurance.  However, it is important to note that aggregate county revenue is less variable than the average farm in that county.  This largely stems from less than perfect correlation of yields within the county.  The bottom line when one evaluates a county-triggered program versus and farm-triggered program, one needs to recognize (1) county-based programs will usually trigger less frequently and pay less indemnity than an identical layer of farm level coverage, and (2) county-based programs are not perfectly correlated with farm losses because farm and county yields do not rise and fall in perfect lockstep with each other.

The following chart focuses on the first issue – county revenue tends to be less variable than farm revenue for a commodity.  Computer simulations of farm and county revenue risk for hundreds of counties were conducted to determine the frequency that farm revenue and county revenue fall below 86% of expected revenue (the trigger point for ARC and SCO).  The results are averaged by each of five crops.  While there is variation within the data, county-triggered programs are about 10% less likely to trigger than a typical farm in the county, and all else equal, pay less than the same layer of crop insurance protection.  The exception to this will be when the farm is significantly less risky than the county average.  For example an irrigated farm in a mostly non-irrigated county.

Farm or County Revenue Less Than 86 Percent of Expected

Farm Bill Presentations, Support Tools, and Calculators

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This page will provide links to presentations and various tools that we create. Please check back frequently as new tools will be added and updates to existing tools will be provided. If you have any questions or find any errors with any of these tools please feel free to contact us or leave a comment below.

Farm Bill Learning Session Presentations (December 2014):

All About the 2014 Farm Bill

Farm Bill Decision Aids (part 1)

Farm Bill Decision Aids (part 2)

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Base Reallocation Calculator v 1.0  [updated April 8, 2014]

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Generic Base Distribution Calculator v 1.1 [updated April 14, 2014]

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  • v 1.0, April 8, 2014

USDA Encourages Early Registration for FSA Programs

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The U.S. Department of Agriculture’s (USDA) Farm Service Agency (FSA) Administrator Juan M. Garcia today recommended that farmers and ranchers who plan to participate in FSA programs register in advance. Producers are encouraged to report farm records and business structure changes to a local FSA Service Center before April 15, 2014.

Enrollment for the disaster programs authorized by the 2014 Farm Bill, including the Livestock Indemnity Program (LIP) and the Livestock Forage Disaster Program (LFP) will begin by April 15, 2014.

Farm Bill 2014: The Dairy Title

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The 2014 Farm Bill is officially in the books. While there are a few rules and regulations that have yet to be written, we now know the bulk of what the farm bill has to offer. In terms of dairy policy, there is a new program about to be rolled out called the Margin Protection Program. But before going into detail about that program, I want to mention what will be phased out over the course of the next several months. The Dairy Product Price Support Program, the Dairy Export Incentive Program, the Federal Milk Marketing Order Review Commission, and the Milk Income Loss Coverage (MILC) are all eliminated in the 2014 Farm Bill. The MILC program will be phased out by September 1, 2014 or when the Margin Protection Program is up and running, whichever comes first. The programs that are either new or are renewed from the previous Farm Bill include the new Margin Protection Program, the new Dairy Product Donation Program, the renewal of the Dairy Promotion and Research Program, the renewal of the Dairy Indemnity Program, and the renewal of the Dairy Forward Pricing Program.

The Margin Protection Program is the biggest dairy program in the 2014 Farm Bill. It is a safety net program that pays out when the actual dairy margins fall below a producer selected coverage level. The program will be established no later than September 1, 2014 and is open to all dairy operations, regardless of size. There is a $100 administration fee due upon sign-up, and producers can choose a coverage level that guarantees a margin of between $4.00/cwt and $8.00/cwt. Producers can also choose to cover between 25% and 90% of their production history. A producer’s production history is defined as the highest production level from 2011, 2012, and 2013. If a producer is trying to grow his/her operation, he/she can increase their production history annually by an amount no greater than the national annual average growth in production.

The margin is defined as the difference between the “all milk price” and the “average feed cost.” The all milk price is the average price received for a cwt of milk by all dairy operations for all milk sold to dealers in the U.S. The price is reported monthly by the USDA in the Agricultural Prices Report released toward the end of each month by the National Agricultural Statistics Service (NASS). The average feed cost is the average cost of feed used by a dairy operation to produce a hundredweight of milk and is intended to include the feed cost of both lactating cows as well as dry animals in the herd. The average feed cost is defined as 1.0728 times the price for a bushel of corn plus 0.00735 times the price for a ton of soybean meal plus 0.0137 times the price of a ton of alfalfa hay. Each of these prices are monthly average national prices. The corn price and the alfalfa price are reported in the monthly Agricultural Prices Report released by NASS, while the monthly Soybean Meal price can be found at the bottom of the daily Central Illinois Soybean Processor Report released each day by the Agricultural Marketing Service (AMS). Any payments under the Margin Protection Program are triggered by this calculation and are independent of an individual producer’s margins.

Producers will need to sign-up annually for the program and will have the flexibility to choose a different coverage level each year. As mentioned above, there is a $100 administration fee to sign up for the program in addition to the premium for the coverage. The premiums are shown in the table below and will not change over the course of the current farm bill. There are two sets of premiums, those for producers with more than four million pounds of annual milk production and those for producers with less than four million pounds of production. In addition, there will be a 25% reduction in the premium rate for producers with less than four million pounds of production for 2014 and 2015. The rate reduction is intended to encourage smaller producers to sign up. Producers with more than four million pounds of production will have their rates pro-rated based on their production level. In other words, the proportion of their production that is insured under each rate will be equal to their proportion of production that is over/under four million pounds. For example, a producer with six million pounds of production will have two thirds of their covered production charged at the lower rate and one third of their covered production charged at the higher rate. The total premium for the Margin Protection Program is calculated as the coverage percent multiplied by the production history times the premium per hundredweight as show below.

Premium Paid = Coverage % * Production History * Premium/cwt.

Coverage Level Premium (Under 4 Million Pounds) Premium (Over 4 Million Pounds)
$4.00 None None
$4.50 $0.01 $0.02
$5.00 $0.025 $0.04
$5.50 $0.04 $0.10
$6.00 $0.055 $0.155
$6.50 $0.09 $0.29
$7.00 $0.217 $0.83
$7.50 $0.30 $1.06
$8.00 $0.475 $1.36

Under the Margin Protection Program, payments will be made on protected production any time margins averaged over two consecutive months falls below the selected coverage level. As shown below, the payments will be equal to the difference between the coverage threshold (the coverage level for which a producer is paying) and the actual margin multiplied by the coverage percentage (25% to 90%) multiplied by the production history (in cwt) divided by six. The production history is divided by six under the assumption that a two-month period is equal to 1/6 of a producer’s annual production.

Payment = (Coverage Threshold – Actual Margin) * (Coverage %) * (Production History/6)

While many of the details surrounding the Margin Protection Program are known, there are still several rules that have yet to be written. All rules for this program must be written by September 1, 2014. Among those rules include details on sign-up periods and payment timelines. There are also several things to think about before signing up. First of all, it is important to remember that the margins covered do not include fixed costs as well as costs such as labor, veterinary expenses, or utilities. It is also important to remember that payments are triggered on a national margin, not an individual producer’s margins. These things should be included when deciding optimal coverage levels. It should also be noted that a producer cannot participate in both the Livestock Gross Margin Program and the Dairy Margin Protection Program. For more information on the Dairy Title in the Farm Bill, click this link: Dairy Farm Bill.

Highlights of the Agricultural Act of 2014 for Specialty Crops

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Important implications for the U.S. Specialty Crop industry can be found in several titles of the recently passed 2014 Farm Bill. Key programs to solve critical issues in the industry have been reauthorized and changes related to funding level and matching requirements have been incorporated in some of these programs. For instance, the Technical Assistance for Specialty Crops (TASC) program, the Healthy Food Financing Initiative (HFFI), the Specialty Crop Research Initiative (SCRI), the Farmers’ Market and Local Food Promotion Program (FMPP), and the Specialty Crop Block Grants program have been reauthorized. Three key farm bill programs that have formed the success of U.S. organic farmers over the past decade: The Organic Agriculture Research and Extension Initiative (OREI), the Organic Production and Market Data Initiatives (ODI), and the National Organic Certification Cost-Share Program (NOCCSP), have also been reauthorized.

Moreover, changes in the definition of a “Retail Food Store” in the Nutrition title allow agricultural producers who market directly to consumers (i.e. Farmers’ Markets, CSAs, roadside stands) to accept SNAP benefits. The feasibility of redeeming these benefits through on-line and mobile transactions will be tested through pilot projects. If these pilot projects prove to be successful and are implemented nationwide, agricultural producers who sell directly to consumers may be able to accept SNAP benefits through on-line and mobile transactions starting in 2017. Overall, this bill contains considerable support for direct-to-consumer marketing, locally or regionally produced agricultural products, Farm-to-School efforts, organic agriculture, and food safety initiatives – all crucial topics for stakeholders in the U.S. Specialty Crop industry. For a summary of these and other important implications, click HERE.