Sep 07, 2023
By Scott Gerlt • ASA Chief Economist
The agricultural safety net programs are intended to help producers remain solvent during adverse conditions. Title I of the farm bill contains programs in particular that are designed to mitigate structural risk. The 2019 crop year provided a stress test for the soybean sector as a trade war cut demand for the commodity by almost one-third in a very short period of time. Yet, the Title I programs provided minimal benefits compared to the losses incurred. This “Economist’s Angle” builds upon a previous one regarding Title I programs during the 2019 crop year to show how modifications to the program would have improved farm safety net responsiveness that year for soybean farmers.
The 2019 crop year was a particularly difficult one for soybean farmers. The national average soybean yield of 47.4 bushels per acre was the lowest in five years. A trade war with China, U.S. soybean’s largest commercial importer, was in full swing. China implemented retaliatory tariffs of 25% in July of 2018 and added another 2.5% in September. During this time, China’s purchases of U.S. soybeans remained low. The trade war ended with the signing of the Phase I agreement in January 2020, although China’s purchases of U.S. beans did not start in earnest until August of that year. The result was that the 2019 crop largely lacked the demand from China, which normally bought about 30% of the crop.
USDA’s Economic Research Service estimated that soybeans suffered over 70% of the $27.2 billion agricultural loss during the trade war. They estimated that annualized losses for soybeans were about $9.4 billion during this time. While this time period does not correspond perfectly to the 2019 crop year, it still provides a useful estimate of effects as most U.S. soybeans are exported between October and February. The $9.4 billion in annualized losses translates to about $123 per planted acre for the 2019 crop.
Another way to frame the losses for the 2019 crop is to compare returns per acre to previous years. According to data from ERS, soybeans market returns averaged $9.10 per acre over the previous five years and $62.39 over the previous 10 years (Figure 1). However, in 2019, the market returns fell to negative $68.30 per acre.
The losses accrued by soybean farmers for the 2019 crop depends upon the reference point. Producers lost $123 per acre of potential income due to geopolitical issues. However, the farm bill programs tend to use the last five years as the point of comparison. In this case, soybean returns were $77.40 below average. Note that the prior five years were generally low returns to begin with.
The two largest programs in Title I of the farm bill, Agriculture Risk Coverage-County (ARC-CO) and Price Loss Coverage (PLC), both utilize price and fixed, historical acreage in determining farmer benefits, but the programs have important differences. Producers cannot be simultaneously enrolled in these ARC-CO and PLC programs but can make a crop-by-crop enrollment election.
PLC benefits are determined by the difference between the effective reference price (ERP) and the national marketing year average price for a commodity. This amount is multiplied by the PLC yield and base acres for a farm, as well as a few other factors. The PLC yield and base acres are determined by historical production on a farm to decouple current planting decisions from program benefits. The effective reference price is the higher of the statutory reference price set in the farm bill or 85% of the five-year Olympic average farm price. An Olympic average discards the high and low values and averages the remaining observations. The ERP cannot exceed 115% of the statutory reference price. Soybeans have a statutory reference price of $8.40 per bushel, which results in an ERP that is bounded between $8.40 and $9.66 for the commodity.
While PLC provides a safety net based on prices, ARC-CO provides a safety net based on revenue. A benchmark is determined by multiplying an Olympic average county yield by the Olympic average national price. The county yields are adjusted for historical trend increases, and the national prices use the ERP if it is higher than the national price in any of the five years. As a result, the ERP is used in both PLC and ARC-CO. If the current year national price multiplied by the current year county yield is less than 86% of the benchmark, the payment rate is equal to the difference. However, the payment rate cannot exceed 10% of the benchmark. As a result, ARC-CO covers losses between 76% and 86% of the benchmark. The payment rate is multiplied by base acres and a few other factors.
For the 2019 crop year, the ERP did not exceed the statutory reference price of $8.40 per bushel for soybeans. The farm price of $8.57 that marketing year, while low, was not low enough to trigger PLC payments despite the large losses. ARC-CO did trigger some payments, but due to a need to incur a 14% loss compared to the five-year average before payments trigger and the 10% cap on the payment rate, the average soybean ARC-CO payment was about $16 per base acre enrolled in ARC-CO. The effectiveness of this amount was diluted by the difference between planted and base acres. In 2019, soybean plantings were fairly low at 76.1 million acres, but base acres were only 53.3 million acres. This meant that PLC and ARC-CO soybean benefits totaled only about $11 per planted acre even though producers were losing $68 per acre. While the 23 million acres of soybean without soy base could have received payments if enrolled in Title I programs for other crops, keep in mind that over 70% of the trade war losses were for soybeans.
Given that the current farm bill is expiring and a new one is being drafted, it is worth considering whether some simple changes to program parameters could have made a difference in 2019. To do this, files from USDA’s Farm Service Agency that contained historical program data were utilized. Sequestration is not considered in this analysis, and counties that have irrigated/non-irrigated broken practices out for ARC-CO are assumed to have a 50-50 split. For these reasons, these numbers do not align exactly to historical numbers in the no policy change case.
Several potential scenarios were considered. The first is the removal of the 10% cap on ARC-CO benefits and the 15% cap on potential ERP movement. As mentioned in the previous “Economist’s Angle,” these caps arbitrarily set limits on the risk protection of the programs and do not allow them to fully respond to market conditions. The next scenario continues the removal of the caps but increases the coverage level in ARC-CO from 86% to 90% and in the ERP calculations from 85% to 90%. The last scenario is similar but moves the coverage levels to 95%.
Figure 2 shows the results of the scenarios for producers who had opted into the respective program. In other words, it includes payments for participating soybean base acres. It also includes the 85% payment rate calculation. The production loss is the most conservative potential reference point as it doesn’t represent the lost trade opportunities or deviations from normal years, but only market sales above financial costs. Removing the caps from ARC-CO and the ERP would have had limited effects in 2019 as ARC-CO benefits would have increased only about $4 per base acre from the actual and PLC benefits would have remained at zero. While removing the caps had benefits, it alone would not have been adequate in 2019. Adding an increase in the coverage levels to 90% for both ARC-CO and the ERP would have provided a bit more of a safety net. ARC-CO would have had a payment rate of $32 per base acre while PLC would have made a payment, but only $3 per base acre. Continuing the removal of the cap but increasing the coverage levels to 95% would have resulted in $51 per base acre in ARC-CO benefits and $20 per base acre in PLC benefits. Keep in mind that these still remain less than the loss of $68 per planted acre.
Several important items should be kept in mind when looking at the results. First, base acres are not the same as planted acres. In 2019, there were only .70 soybean base acres for every planted acre. As such, the chart makes it appear that the program benefits were more closely aligned with losses than actually would have occurred. Second, program calculations are dependent upon the last several years of history, so implementing the scenarios now could have very different effects than in 2019. For instance, with much higher prices the past few years for soybeans, changing the ERP formulas would show more PLC benefits in 2024 than in 2019.
Nevertheless, the scenarios make a very important point. While the arbitrary caps in the ARC-CO and PLC calculations should be removed as outlined in a previous article, increasing the coverage levels in the programs is also an important consideration. In one of the worst years for soybeans in recent times, the combination of the changes could have provided a safety net more closely aligned with losses. Like removal of the caps, increasing coverage level factors allow the programs to provide a safety net that updates through time with price inflation without requiring additional spending in future farm bills. Most importantly, it can help provide a safety net to soybeans, one of the largest crops in the U.S., which has historically been excluded from the practical value of Title I.