Constituent policy

The 2024 Farm Bill and Price Support Adjustments – AgFax

Farm storage bins. Photo by Mike Staton, Michigan State University

The 1981 Farm Bill made a policy error that could inform the next Farm Bill. He raised support prices on the assumption that high commodity prices and high inflation would continue in the future. Instead, both declined as demand for agricultural products weakened and the Federal Reserve raised interest rates to reduce inflation.

As a result, support prices were too high, leading Congress to reduce them in the 1985 Farm Bill to bring them in line with market prices. As in 1981, much discussion is currently taking place on the need to increase statutory reference prices in response to rising crop prices, production costs and inflation.

However, unlike the 1981 Farm Bill, the 2018 Farm Bill has adjustment mechanisms that allow for higher support prices while avoiding a potential pitfall of the 1981 Farm Bill. price support in the context of the 2024 farm bill dilemma.

2018 Farm Bill Adjustment Mechanisms

The Agriculture Improvement Act 2018 included a reference price indexation clause. Specifically, the effective reference price is the greater of (a) the legal reference price set out in the 2018 Farm Bill or (b) 85% of the Olympic average price (excluding high and low prices) for the last 5 seasons. farms completed, but capped at 115% of the legal reference price. Price indexation is discussed in depth in a June 29, 2022 daily farmdoc article.

Like the reference price escalation, the price component of the ARC (Agricultural Risk Coverage) commodity program option is calculated as the Olympic average price for the last 5 completed crop years. Reference price indexing and the ARC price calculation method allow support prices to increase if market prices increase for a period of 2 years or more.

There are three important differences between the calculation of the ARC price and the indexation of the reference price:

  • The price of ARC is not capped. Reference prices are capped at 115% of the legal reference price.
  • The ARC price is the greater of a crop’s marketing year price or its effective reference price. Reference price escalation uses the crop year price without substitution.
  • The price adjustment factor is 86% for the ARC against 85% for the indexation of the reference price.

These differences imply that the ARC price has a higher potential than the effective reference price.

Analysis

The ARC price and the effective reference price are calculated for the 2024 crop year, the first year of the new farm bill. The 5-year price calculation window for the two 2024 support prices is 2018-2022. Support prices are calculated for barley, maize, seed cotton, oats, long grain rice, sorghum, soybeans and wheat.

These crops are selected because total cost of production projections are available for the 2022 crop year from the United States Department of Agriculture, Economic Research Service. The cost of production serves as a benchmark for support prices. Prices for the 2018-2021 crop years are from the USDA, Farm Service Agency (FSA).

The prices for 2022 are the prices projected in the June 2022 WASDE (Estimates of world agricultural supply and demand.

Results

The relationships between support prices and the total cost of production per unit of production (see Figure 1 and data note 3) suggest that the 8 crops can be grouped into 3 categories:

  1. ARC 2024 prices for corn, soybeans, sorghum and oats exceed their 2024 effective reference prices which exceed their statutory reference prices. All support prices for these crops are below their 2022 total cost of production per bushel. However, the range is wide even among ARC prices: -9% for ARC corn price to -67% for ARC price oats.
  2. ARC 2024 prices for wheat and barley are below their effective 2024 reference prices, which are equal to their statutory reference prices. Their statutory reference prices are below their 2022 cost of production.
  3. ARC 2024 prices for groundnuts, long grain rice and seed cotton are lower than their effective 2024 reference prices, which are equal to their statutory reference price. The statutory reference prices for each crop approximate its total cost of production per pound in 2022.

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Summary observations

The ARC price calculation procedures and reference price indexing provide a way to increase support prices while avoiding the 1981 Farm Bill error of setting support prices, in particular legal reference prices, which are too high in anticipation that commodity prices and inflation will remain high.

Both support price adjustment mechanisms are likely to increase support prices for at least a few years of the next Farm Bill for a number of program commodities, including corn and soybeans.

The price of the 2023 agricultural campaign will be important for the drafting of the next agricultural law. If prices remain high in 2023, market prices will be high for at least two years into the support price calculation window for many program commodities, including corn and soybeans, during each of the 5 years forecast of the agricultural bill of 2024.

Current statutory reference prices for groundnuts, long-grain rice and seed cotton are close to their full 2022 cost per pound. Caution seems warranted for any general increase in statutory reference prices.

A potential transition aid issue that may arise is the desire to accelerate the rise in support prices given the sharp increase in production costs. A simple way is to convert the 5-year Olympic average to a 5-year average. This change advances the increase by not eliminating the first year of a multi-year increase.

It also extends the period of transition assistance by not eliminating the last high year from the calculation window when markets move from a multi-year period of higher incomes to a multi-year period of lower incomes. . The trade-off is a smaller support price increase. Program payments/cost should therefore be similar.

Carl Zulauf, Gary Schnitkey, Krista Swanson, jonathan coppesand Nick Paulson