Ethanol Producers Must Engage in Upcoming Farm Bill Debate

A drastically changed farm economy means the next bill will likely be very different than past ones. The National Sorghum Producers share things to know as the debate begins in this contribution in the June print edition of EPM.
By John Duff | May 17, 2017

It is hard to believe the current Farm Bill expires in less than 18 months. Considering the arduous path to approval taken by the Agricultural Act of 2014 (the first field hearing was held in Lubbock, Texas, in early 2010), it is ironic many of the bill’s programs reached the end of their useful lives so quickly. There are several reasons for this, but the primary culprit is a drastically changed farm economy. Although many new proposals have included minor adjustments to current programs, stakeholders—especially ethanol producers—must keep in mind the next Farm Bill is likely to look much different than past ones.

Figure 1 illustrates the decline in profitability for sorghum producers. The situation for corn producers is no better, and the Food and Agricultural Policy Research Institute projects this situation will not change anytime soon. It is hard to comprehend the magnitude of this change in farm fortunes in the U.S. since the current bill was enacted. The high point in return over variable costs, depicted in figure 1, is 126 percent higher than the projected low point. With commodity program payments at their lowest levels in a quarter century, many producers are already in need of assistance. Unfortunately, due to the structure of current key Farm Bill programs, not only has this assistance declined, but the decline itself will place significant constraints on the architects of the next Farm Bill as well.

It is fitting the agriculture committees are in dire financial straits, given the producers they represent are facing their worst losses since the 1980s. Due to the rolling nature of the Agriculture Risk Coverage program’s revenue benchmark, coverage levels for producers enrolled in the program are in the midst of a precipitous decline. Figure 2 depicts the falling ARC guarantees for sorghum producers in Rooks County, Kansas. After payments of over $30 per acre in the first two years of the program, sorghum producers there face three consecutive years where the actual revenue is above the guarantee and ARC payments are $0. Figure 3 projects October 2017 corn ARC payments and illustrates the need for more assistance in the upper Midwest.

This decline has helped drain the Farm Bill’s programs of baseline funding, or the funding that will be used as a starting point for the next bill. Figure 4 depicts the latest baseline projections for corn ARC and Price Loss Coverage payments from the Congressional Budget Office. The baseline projects total corn ARC payments will fall from a high of $4.1 billion in 2017 to a low of $118 million in 2022. If not for the CBO’s assumption that corn producers enrolled in ARC would switch to PLC after a hypothetical extension of the current bill, baseline funding for the next bill’s corn safety net would be almost nonexistent.

Why such a steep decline? The corn market is partially to blame. ARC is based on a rolling revenue benchmark calculated by multiplying the five-year national marketing year average price by the five-year Olympic average county yield. As long as prices stay firm, ARC complements multiple peril crop insurance by providing an additional band of coverage and added price protection. Prolonged periods of low prices, on the other hand, lower the revenue benchmark to levels where all but the most severe yield losses fail to trigger a payment.

Large ARC payments were a virtual certainty in the program’s first two years as revenue guarantees for sorghum and corn were based on five-year national marketing year average prices of $5.10 and $5.29, respectively. Today, the situation is radically different with projections pegging these benchmarks near $4.00—a level completely insufficient for covering production risk.

Other Farm Bill initiatives are similarly underfunded. Almost 40 programs lack baseline funding. These programs contributed $2.6 billion in five-year baseline funding to the current Farm Bill, and several have been highly beneficial to sorghum producers. For example, the bioenergy program for advanced biofuels was originally funded at $75 million over five years. Authorized by section 9005 of the Farm Bill, this program has returned over $60 million to sorghum ethanol producers since it began in 2010. This funding helped facilitate sorghum use and led to ethanol becoming the foundation of domestic sorghum demand.

The commodity title has other challenges as well. The most well-known ARC problem that does not involve the budget is the possibility of large payment inequities across county lines. These possibilities can be partially remedied by a migration to the Risk Management Agency as the primary data source, but a hybridized approach—or even a complete restructuring of the program—may be necessary to fix this problem. Aside from structural changes, smaller, seemingly cosmetic modifications are also needed. For example, as credit tightens, adjustments in payment timing (i.e., payments that come sooner than 12 months after the crop is harvested) could help producers with cash flow problems. The same could be said for higher loan deficiency payment rates; however, neither of these changes comes free of a cost.

How will the next Farm Bill look given all the changes needed and the lack of baseline funding? There has been no shortage of proposals so far. Possibly the only consensus proposal involves the migration to RMA data for ARC; however, this is one of only a few simple proposals. The other relatively simple change would involve moving all producers to a PLC-type program. PLC has worked very well for many sorghum producers, and although most would rather have a strong price and receive no program payments, few would argue the coming payments will be insignificant. The final national marketing year average price is yet to be known, but current Kansas State University projections peg this price at $2.72. The resulting $1.23 price loss should translate to around $400 million in total sorghum PLC payments this October.

Moving corn producers to PLC would be simple enough, but the cost would result in sticker shock. According to the CBO, the national average PLC yield for corn is 115.9 bushels, a value that would likely go up upon such a change, given most areas currently enrolled in PLC have much lower yields. Corn base acres total 94.8 million, and the current price loss (i.e., the corn reference price of $3.70 less the national marketing year average price) projected by Kansas State University is 35 cents. This implies total corn PLC payments of $3.3 billion with a participation rate of 100 percent. Raising the reference price from its current level to $4.00—a common proposal—increases this total to $6.1 billion. Pulling off this change in the current budget environment will be a tall order.

Less simple proposals involve moving or expanding the window for calculating ARC’s rolling revenue benchmark and introducing various floors and triggers into the program’s payment calculation methodology. There are dozens of ways such changes could be implemented, so speculation and extensive modeling now will ultimately yield little insight. Instead, stakeholders should focus their attention on those more complex proposals that include specific policy prescriptions and whose impacts on grain markets can be more easily calculated. For example, significant changes to conservation programs have been proposed, and these changes could affect all of agriculture.

Figure 5 maps losses in conservation reserve program (CRP) acres since their 2007 peak of 36.7 million. Most of these losses are a direct result of the 24 million-acre cap placed on CRP acreage by the current Farm Bill. Many see raising this cap as a way to curb supply and send much-needed support to rural America. The two most vocal supporters of increased conservation acreage so far have been Sen. John Thune, R-S.D., and Rep.  Collin Peterson D-Minn. Thune has already introduced two pieces of legislation designed to increase conservation acreage—one focused on a shorter-term program with added haying and grazing flexibility, and one focused on adding similar flexibility along with an additional six million acres to the current CRP program.

In the House, Peterson recently made headlines when he called for an increase in CRP acres to 40 million. While a CRP increase of 16 million acres is unlikely, the chances of some level of increase along with more haying and grazing flexibility are rising. It is unclear the exact impact these changes would have on grain markets given much of the land leaving production would be marginal at best, and many fear the impact to young producers. There will undoubtedly be consequences, but additional detail will be needed for more reliable analysis.

A large amount of uncertainty surrounds the next Farm Bill, and it appears the only absolute certainty is U.S. producers need assistance sooner rather than later. Regardless of whether the changes to the Farm Bill’s programs are small or large, they will need to provide significant support. Stakeholders should strongly consider making their voices heard in the coming debate.

Author: John Duff
Strategic Business Director, National Sorghum Producers