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October 2011, Week 3

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Farmer-Owned reserves: Study Key Findings
National Farmers Union
September 2011
http://www.nfu.org/study

In the current economic climate amid a growing budget
deficit, federal spending on agriculture programs will
likely be cut and the next farm bill will likely face
significant funding reductions. The goal of the next
farm bill, therefore, should be to provide an effective
safety net for family farmers, improve the efficiency of
existing programs and reduce overall costs. This study,
conducted by the University of Tennessee's Agricultural
Policy Analysis Center and commissioned by National
Farmers Union, presents an alternative policy approach
that will reduce overall farm payments. The policy
approach includes a combination of farmer-owned
reserves, increased loan rates, set-asides, the
elimination of direct payments, and reduced reliance on
other government payment instruments. The policy will be
referred to in this report as farmer-owned reserves. The
study examines what the effects of farmer-owned reserves
would have been during the period from 1998 to 2010.

Key Findings

    Throughout the study period, government payments for
    crops totaled $152.2 billion. If farmer-owned
    reserves had been in place during those years,
    government payments would have been $56.4 billion,
    or less than 40 percent of what the U.S. government
    actually spent on crop programs in those years.

    Farmer-owned reserves would have provided nearly the
    same amount of net farm income.

    Government costs would have been lower in large part
    because the loan rate would have been paid on only
    the portion of the crop that was put into farmer-
    owned reserves and not on every bushel that was
    produced.

    Over the complete study period, the value of exports
    would have been $4.9 billion higher with farmer-
    owned reserves in place than under historical
    conditions for that period.

    Because the U.S. would have held some buffer stocks
    under farmer-owned reserve policies, importers of
    U.S. corn, wheat and soybeans would have been
    assured of a stable supply of storable commodities,
    reducing the need for countries to protect local
    supplies of grains.

    Farmers would have benefited from price signals that
    more accurately reflect the supply/demand situation
    at a given time, than when futures prices reflect
    herd-following speculative behavior on the part of
    some market participants.

    Livestock producers and industrial users such as
    biofuels producers are vulnerable to rapidly
    increasing prices. Farmer-owned reserve policies
    would have provided livestock producers and
    industrial users with security in the availability
    of feed supplies and the range of prices they can
    expect.

    For the entire 13-year period, the value of
    production under the baseline policies was $413
    billion while with farmer-owned reserves it would
    have been $446 billion - a difference of $2.6
    billion a year.

    Over the entire study period, corn prices would have
    averaged $0.26 higher, wheat prices would have been
    $0.48 higher, and soybean prices would have averaged
    $1.09 per bushel more under farmer-owned reserves
    than they actually were.
    
[moderator: the complete draft report is here -
http://www.nfu.org/images/stories/policy/091211_Report.pdf
the introduction is reproduced below]

A Study of the Impact of a Reserve Program Had One Been in
Effect in the Period, 1998 to 2010
Harwood D. Schaffer, Research Assistant Professor
Chad Hellwinckel, Research Assistant Professor
Daryll E. Ray, Professor and Director
Daniel G. De La Torre Ugarte, Professor and Assistant Director
Agricultural Policy Analysis Center,
Department of Agricultural and Resource Economics,
University of Tennessee Institute of Agriculture
Knoxville, Tennessee
September 10, 2011
http://www.nfu.org/images/stories/policy/091211_Report.pdf

Introduction

It is widely acknowledged that the next farm bill, which
is the omnibus, multi-year legislation that guides most
federal farm and food policies, will be written with
less money than previous farm bills. In the current
economic climate and growing budget deficits,
agriculture will be called upon to cut its budget in
order to help get the U.S. fiscal house in order. Given
these constraints on federal spending, the 2012 Farm
Bill budget faces significant reductions. The goal of
the next farm bill, therefore, should be to provide an
effective safety net for family farmers, improve the
efficiency of existing programs and reduce overall
costs.

Price volatility in commodity markets is costly for the
agricultural economy as well as the federal government.
Price and income problems have plagued American farmers
for centuries. Over time, the causes of extreme price
volatility have been identified. In recent decades and
even prior centuries, policymakers have tried a variety
of solutions to address the lack of timely market self-
correction when crop prices plummet. Some of these
solutions have treated the causes of this dynamic while
others have treated the symptoms. The current set of
federal policies tends to treat the symptoms of
agriculture's chronic price and income problems. After
trying both approaches over the last half century,
addressing the causes is generally less expensive and
less destabilizing to the agricultural sector than
ignoring the problem or treating the symptoms.

This study presents an alternative policy approach that
will reduce farm payments. The policy works with market
forces but also reins in prices when they are most
extreme and disruptive to producers and users of
agricultural commodities.

If this alternative approach had been in effect over the
1998 to 2010 period, government outlays to farmers would
have been cut in half while providing farmers with the
same level of total income they received over the
period-income received through cash sales and often
massive government checks primarily in the form of
emergency payments, direct payments, and the marketing
loan program. At the same time, the alternative policy
would have buffered extremes in crop prices.

The next section describes the policy features analyzed
in this study. Several sections follow that present
POLYSYS simulation results for key economic indicators
of major commodities and aggregate agriculture. This is
followed by discussions of major policy impacts on
agricultural producers, consumers, and other
stakeholders. The next sections give a brief history of
reserves and discuss and evaluate the criticisms of
previous policy sets similar to the one analyzed. The
last section, prior to the study summary, discusses the
unique characteristics of crop agriculture and an
interpretation of the corresponding policy implications.

Policy Description

So how would one put together a set of commodity
programs that could reduce government agricultural
payments while maintaining the same level of farm income
using 1998 to 2010 as the study period, with times of
extreme low and high crop prices? That is the focal
question of this study.

The policy approach analyzed is designed so that farmers
receive the bulk of their revenue from market receipts.
It includes a combination of farmer-owned reserves,
increased loan rates, set-asides, the elimination of
direct payments, and reduced reliance on other 2
government payment instruments. The policy will be
referred to in this report as the farmer owned reserves.

The analysis of the policy began by setting the 1998
loan rate for corn at the midpoint between the variable
cost of production and full cost of production for the
1998 crop, as calculated by the U.S. Department of
Agriculture (USDA). All other crop loan rates were
pegged to the corn loan rate based on the ratio between
corn and the other crops, as found in the 1996 Farm
Bill. The two exceptions are grain sorghum, which was
increased to the same price as corn and soybeans raised
from where the loan rate was to $6.32. Thereafter, all
loan rates were raised or lowered based on the change in
the rolling three-year average of the chemical input
index of prices paid by farmers. For corn, that
calculation resulted in a loan rate of $2.27 in 1998,
increasing to $2.60 by 2010. These loan rates
approximate the historical ratio between the price of
corn and the other crops, facilitating the arbitrage of
crops to the most profitable mix for each farm, with
minimal influence from the loan rate.

When the market price falls below the loan rate, farmers
would have the opportunity to place their grain into a
farmer-owned reserve. The farmer would be paid $0.40 a
bushel/year as a storage payment. The release price was
set at 160 percent of the loan rate to allow for a
sufficiently wide band within which the market could
efficiently allocate resources. Once the price exceeds
160 percent of the loan rate, the crop would be released
into the market until the price falls back below the
release price. Reserves were held in corn (3 billion
bushels), wheat (800 million bushels) and soybeans (400
million bushels). With the right balance in the loan
rates, reserves of these three crops would maintain the
prices of other crops within their price bands.

In the model, all of the crop allocation decisions were
made at the county level as a proxy for farm-level
decisions. When the reserve is full (comparable to 3
billion bushels corn, 800 million bushels of wheat, and
400 million bushels of soybeans), a set-aside is
triggered if prices drop below the loan rate. The farm-
level set-aside is based on whole-farm acreage and not
allocated crop-by- crop as in the past. Set-asides would
be allocated at the county level and farmers would have
the opportunity to bid acreage into the set-aside.
Participation in the setaside by any given farmer would
not be mandatory, but all farmers would have the
opportunity to offer a bid on acreage they would be
willing to put in the set-aside. As in the past, farmers
would be required to maintain an appropriate cover crop
on the land. Farmers would be free to allocate the mix
of crops based on the profitability of the crops.

Direct payments would be eliminated, and with the use of
a farmer-owned-reserve, the marketing loan and
countercyclical programs would also be eliminated.
Commodity payments would only be paid for quantities
actually placed in the reserve and not for every bushel
produced, as in the case of the marketing loan program
or a large proportion of the bushels produced for other
payment programs. As a result, the level of government
payments would be significantly reduced.

___________________________________________

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