a new approach to providing an agricultural safety net
DESCRIPTION
A New Approach to Providing an Agricultural Safety Net. Bruce A. Babcock Center for Agricultural and Rural Development Iowa State University Presented at Informa Economics Roundtable Arlington, VA Jan 25, 2006. Expenditures on Current Safety Net. US WTO Proposal Would Require Spending Cuts . - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/1.jpg)
A New Approach to Providing an Agricultural Safety Net
Bruce A. Babcock
Center for Agricultural and Rural Development
Iowa State UniversityPresented at Informa Economics Roundtable Arlington, VA
Jan 25, 2006
![Page 2: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/2.jpg)
Expenditures on Current Safety Net
0
5
10
15
20
25
30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$ B
illio
n
AMSU.S. Limit on AMS
Note: Direct and AMTA payments follow current USTR designation as being amber box following cotton case.
![Page 3: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/3.jpg)
US WTO Proposal Would Require Spending Cuts
• Should cuts be made in existing programs?– Lower loan rates, effective target prices,
proportions of production eligible for support• Should we redesign the US safety net to
– meet WTO and budget objectives– improve the effectiveness of existing
program?
![Page 4: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/4.jpg)
Structure of Program Paymentsfor Corn
Target PriceDirectPayment
Loan Rate
Counter-CyclicalPayment
Loan DeficiencyPayment
NotTiedTo
Prod
ProdReq.
$2.63
$0.28
$2.35
$1.95
RegardlessOf Market
Only if price is here
“Effective”Target Price
![Page 5: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/5.jpg)
Impact of U.S. WTO Proposal on Current Program
Current NewCorn absolute percent Loan rate 1.95 1.74 -0.21 -11.00% Target price 2.63 2.45 -0.18 -7.00%Soybeans Loan rate 5.00 4.45 -0.55 -11.00% Target price 5.80 5.39 -0.41 -7.00%Wheat Loan rate 2.75 2.45 -0.3 -11.00% Target price 3.92 3.65 -0.27 -7.00%Cotton Loan rate 52.00 46.28 -5.72 -11.00% Target price 72.40 67.33 -5.07 -7.00%Rice Loan rate 6.50 5.79 -0.72 -11.00% Target price 10.50 9.77 -0.73 -7.00%Raw sugar loan ($/lb) 18.00 15.12 -2.88 -16.00%Milk support price ($/cwt) 9.90 8.81 -1.09 -11.00%Sugar non-NAFTA TRQ (mmt) 1,229 1,984 755 61.50%
Change
![Page 6: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/6.jpg)
Does a Price Safety Net Make Sense?
• High yield, low price: Payment received, but payment will be excessive
• Low yield, high price: No payment received, but cash receipts will likely be down for some farmers
• High yield, high price: No payment needed and no payment received
• Low yield, low price: Payment received, but no compensation for low yields
*******
![Page 7: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/7.jpg)
Market Value and Payments to Iowa Corn Producers in 2002
$4.290$0.408
$0.000
$0.007
$0.415
Value of Production Direct PaymentsCountercyclical Payments Marketing Loan Payments
Total Value = $4.705 Billion
![Page 8: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/8.jpg)
Market Value and Payments to Iowa Corn Producers in 2004
$4.260
$0.408
$0.444 $0.535
$1.387
Value of Production Direct PaymentsCountercyclical Payments Marketing Loan Payments
Total Value = $5.647 Billion
![Page 9: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/9.jpg)
When Do Payments Arrive?(Assuming current program in place since 1985)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1980 1985 1990 1995 2000 2005 2010
$ m
illio
n
Government payments
Market
![Page 10: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/10.jpg)
Does a Revenue Safety Net Make Sense?
• High yield, low price: Payment received if revenue is below target revenue
• Low yield, high price: Payment received if revenue is below target revenue
• High yield, high price: No payment needed and no payment received
• Low yield, low price: Payment received, full compensation to target revenue
*******
*******
*******
*******
![Page 11: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/11.jpg)
Design of a "Green Box" Income Support Program
0
20
40
60
80
100
120
140
160
180
200
1975 1980 1985 1990 1995 2000 2005Year
$/ac
re
County revenueOlympic 5-year average of county revenue
WTO Green Box Income Guarantee
![Page 12: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/12.jpg)
Average Payment to Steele County Wheat Producers under a "Green Box" Income Insurance Program
0
2
4
6
8
10
12
14
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
$/ac
re
Average payment = $4.00/acre
![Page 13: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/13.jpg)
Green Box Support Would Arrive when Steele County Wheat Farmers Need It
0
2
4
6
8
10
12
14
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
$/ac
re
0
20
40
60
80
100
120
140
160
180
200
$/ac
re Average PaymentAverage County Income
![Page 14: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/14.jpg)
New Amber and Blue Box Programs
• Amber Box– Define target county revenue as the product of
expected county yield and a target price– Define actual county revenue as the product of county
average yield and national season-average price– Payments flow when actual county revenue is less
than amber coverage level times target county revenue guarantee
– Maximum payments reached when actual county revenue falls below 70% of target county revenue
– Payments made on actual farmer-planted acreage
![Page 15: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/15.jpg)
New Amber and Blue Box Programs
• Blue Box– Payments flow when actual county revenue is
less than blue coverage level times target county revenue
– Maximum payments reached when actual county revenue falls below the target county revenue times the amber coverage level
– Payments made on fixed base acreage
![Page 16: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/16.jpg)
![Page 17: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/17.jpg)
How Much Safety Under U.S. Proposal?
• Problem: Maximize sum of amber and blue coverage subject to spending limits on amber and blue box under the U.S. proposal– Use 1980 – 2004 data
• Amber box limit of $7.64 billion• Blue Box limit of $5.75 billion• Dairy gets $750 million of amber box and $500
million of blue box• Sugar gets $300 million of amber box and $250
million of blue box• Account for crop specific amber box limits
![Page 18: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/18.jpg)
What Prices to Use?
• Effective Target Prices for 2002 Farm Bill
Wheat - $3.40/bu Corn - $2.35/buSoy - $5.36/bu Oats - $1.416/buPeanuts - $0.2295/lb Barley - $2.00/buCotton - $0.6573/lb Rice - $8.15Grain sorghum - $2.22/bu
![Page 19: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/19.jpg)
Maximum Safety Levels
• 85% amber box coverage level for all crops and counties– crop specific limits start binding
• 95% blue box coverage level– aggregate limit begins to bind
![Page 20: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/20.jpg)
Effect on Steele County Wheat Revenue from New Amber and Blue Box Proposals
0
20
40
60
80
100
120
140
160
180
200
1975 1980 1985 1990 1995 2000 2005Year
$/ac
re
No Safety Net
![Page 21: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/21.jpg)
Effect on Steele County Wheat Revenue from New Amber and Blue Box Proposals
0
20
40
60
80
100
120
140
160
180
200
1975 1980 1985 1990 1995 2000 2005Year
$/ac
re No Safety Netwith Amber
![Page 22: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/22.jpg)
Effect on Steele County Wheat Revenue from New Amber and Blue Box Proposals
0
20
40
60
80
100
120
140
160
180
200
1975 1980 1985 1990 1995 2000 2005Year
$/ac
re No Safety Netwith Amberwith Amber and Blue
![Page 23: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/23.jpg)
County Revenue Under Current Programs and New Amber and Blue Box Proposals
0
50
100
150
200
250
1975 1980 1985 1990 1995 2000 2005Year
$/ac
re with Amber and Bluewith Current Programs
![Page 24: A New Approach to Providing an Agricultural Safety Net](https://reader036.vdocuments.us/reader036/viewer/2022062520/56815de1550346895dcc0763/html5/thumbnails/24.jpg)
Impact of Proposed Programs
• Provides effective safety net within WTO limits as proposed by the U.S.
• Consolidates crop insurance, commodity programs, and disaster aid
• Adopts the target (revenue) that farmers prefer
• Would be a departure from 70 years of supporting prices