Perspective on Grassley's Target on Southern Commodities

Posted on 06/12/2018 11:51 AM

Some farm-state senators are not on board the farm bill train

Between Sens. John Thune, (R-S.D.), Sherrod Brown (D-Ohio) and Sen. Chuck Grassley (R-Iowa), the coming Senate farm bill markup in the Ag Committee on Wednesday is certainly not the all-in festival most have indicated, even though it could end up that way due to a lack of taxpayer money to fund what the three previously mentioned senators prefer for their version of the over 1,000-page bill.

Sen. Grassley on Monday said he may offer several amendments on farm subsidies besides his well-expected proposal from the past aimed at limiting who is eligible for commodity payments.

Speaking Monday at the Heritage Foundation, Grassley said he would vote for a proposal by Sen. Jeanne Shaheen (D-N.H.) and Pat Toomey (R-Pa.) that would repeal parts of U.S. sugar policy, including restrictions on domestic production. If you wonder how many sugar beet growers there are in Iowa, wonder no more — sugar beets are not commonly grown in Iowa.

Grassley also said he will help build support for an amendment that attempts to “adjust” two commodity support programs known as Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC). In the case of PLC, Grassley thinks it spends too much money and wants to lower reference (target) prices. In the case of ARC, the word “adjust” is an understatement when it comes to soybeans, where he wants a wholesale change.

There is great disparity between the amount of assistance individual crops get,” Grassley said, noting that peanuts, rice and cotton — as a share of their production value — received the largest payments. “For PLC, these crops have payment triggers well over their 10-year price average."

But figures Grassley did not note is that corn received about 46% of commodity subsidies, while wheat and soybeans received 16% and 15%, respectively, between 2014 and 2016. Peanuts, rice and cotton combined collected 17% of payments, according to a Congressional Research Service (CRS) report. Commodity subsidies have averaged nearly $13 billion a year.

Thune and Brown have introduced legislation that would cap PLC reference prices at their 10-year market average and change the formula for calculating ARC subsidies in a way that boosts them primarily for the Midwestern corn and soybean farmers who enrolled. Thune, during an interview Monday on WNAX, a local station in South Dakota, said “We’ll see where that ends up” in reference to his ARC amendment.

Senate Ag Chairman Pat Roberts (R-Kan.) said he resisted efforts to include portions of a proposal from Sens. Thune and Brown that was designed to increase ARC subsidies while reducing payments from PLC, which mostly Southern producers are enrolled in. “We’re not going to have one region improve at the expense of another, especially at a time when more farmers are likely to go into the PLC program,” Roberts said.

The Thune/Brown push would boost the budget baseline for soybeans by 150%, but peanuts would see a 55% decrease. The Thune/Brown proposal would base the PLC reference prices on the 10-year average, but then cap them at the current statutory levels. In most cases, the current statutory reference price is well below the 10-year average (with the exception of crops like peanuts), leaving PLC participants with nothing but downside risk in a program initially designed to limit downside risk when prices are chronically low.

Thune/Brown also propose taking the loss threshold in ARC from 86% up to 90%, bolstering shallow loss coverage in the midst of a farm recession.

Meanwhile, crop insurance is arguably the best risk management tool in the ag sector. Grassley should know that, as crop insurance covers just about all of the risk his producers face. In spite of that, no one has seen more benefit from Title 1 than the Midwest. Over the first two years of the 2014 Farm Bill — when ARC/shallow loss farming was at its zenith — more support was provided to Iowa than to 31 other states COMBINED. Over that same period — when everyone was feeling the pain — more support was provided to corn than to all of the other covered commodities (at least 24 other crops)… COMBINED.

Looking at the 2.8 million base acres of peanuts as Grassley's barometer for the fact that “as a government we need to get smarter about how we spend money,” some budget watchers are asking, “How was ARC smart spending?”

Grassley is largely targeting peanuts. The current 10-year average price is $476/ton. That is lower than the $535/ton reference price, so he argues that the Reference Price (RP) for peanuts needs to come down (i.e. the 10-year average price is only 89% of the RP). Peanut program naysayers made this same argument starting in 2011 when the ratio was 76%...but it’s now climbed back to 89%.

Recalling that the RP is paid on 85% of base on at most 90% of the 5-year yield average (updated in 2014), the effective RP is just $409/ton ($535 x 85% x 90%), well below the long-run price.

This also ignores the fact that the peanut market is still growing post-quota system. It further ignores the extra risks imposed by the fact that it is largely contract grown (i.e. no publicly traded price discovery). Further, it ignores the extra complication of averaging across the various peanut types (e.g. runners, etc).

So, note the regional potshots being taken among some of the Senate Ag members from both political parties. They are trying to re-ignite all of the battles from 2014, which many (including Roberts, House Ag Chairman Mike Conaway (R-Texas), and the commodity groups) have all sought to avoid.



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