University of Illinois analysis suggests that a target price-based risk management program that could accompany the House Agriculture Committee’s version of the 2012 Farm Bill may offer a far more favorable safety net for some crops than for others.
Gary Schnitkey, an agricultural economist at the University of Illinois, issued a study showing the benefit to producers in each commodity group under the target price-based program included in the farm bill crafted by the House and Senate Agriculture Committees. These target prices may serve as the starting point for the House Ag Committee’s proposal expected to be unveiled soon.
In Schnitkey’s analysis, target prices for soybeans and corn are significantly lower than those for other crops and the relative projected prices for each crop under the Congressional Budget Office 10-year baseline. While soybean and corn target prices in the proposal would be set at 77% of projected prices, requiring a 23% drop in price before triggering a payment, target prices for rice and peanuts would be set at 106% of projected prices, triggering far more frequent payments.
When Schnitkey looked back at historical prices for commodities during the 37-year period from 1975 to 2011 and set the soybean and corn target prices at 77%, wheat at 93%, and rice and peanuts at 106% of those average historical prices, Schnitkey found that this disparity in treatment of commodities resulted in dramatic differences in the safety net support offered to producers of crops. Schnitkey’s analysis showed:
- A target price for soybeans that is 77% of long-run price results in payments in only two out of 37 years, representing a payment in 5% of the years.
- A target price for corn that is 77% of the long-run average would have made payments in four out of 37 years, representing a payment in 11% of the years.
- A target price for wheat that is 93% of long-run price results in payments in twelve out of 37 years, representing a payment in 32% of the years.
- A target price for peanuts that is 106% of long-run price results in payments in 20 out of 37 years, representing a payment in 54% of the years.
- A target price for rice that is 106% of long-run price results in payments in 23 out of 37 years, representing a payment in 62% of the years.
“Our top priority in this entire farm bill process has been to maintain planting flexibility,” said ASA First Vice President Danny Murphy, a farmer from Canton, Miss. “We want the marketplace to influence our planting decisions, not the potential for a payment through a government program. If farmers see that there’s a lopsided and likely government payment coming in one crop or group of crops, there’s real potential there for significant planting distortions. The inequitable safety net among crops also could cause farmers or their lenders to favor the planting of certain crops.”
As an alternative to the target price program espoused by the House, soybean farmers have advocated the revenue-based Agriculture Risk Coverage program currently in the Senate’s version of the bill. Additionally, ASA has suggested that if target price program is to be included in the House Agriculture Committee’s bill, it should be fully decoupled from current year planting decisions, similar to the current Counter Cyclical Payment program that uses target prices.
“What the Schnitkey analysis tells us is that inequitable target price levels among crops will result in real disparities in safety net protection for farmers. Such disparities in government safety net support is bound to influence planting decisions,” added Murphy. “Regardless of what comes out in the end, soybean farmers need to have a risk management program that treats soybeans equitably with other crops and avoids government-induced planting distortions.”
For a full transcript of Schnitkey’s study, click here.