The 1-2-3 Scenarios An Analysis of Safety Net Alternatives andThe Flex-fallow Program

The 1-2-3 was Prepared at the Request of Rep. Charles StenholmThe Flex-fallow was Prepared at the Request of Senators Harkin, Daschle, and Johnson

January 16, 2001Presentation to the Texas Cattle FeedersAmarillo, TX

FAPRIwww.fapri.missouri.edu

www.afpc.tamu.edu

Direct Government Payments

11.8

16.7

14.513.4

12.2

20.6

23.3

12.4

9.5

0

5

10

15

20

25

1979 1983 1987 1991 1995 1999

Bil

lion

Dol

lars

Direct Payments 1986-2000 Average = $12.0 Billion

FAPRI

Standard Deviation = $4.8 Billion

Direct Government Payments

0

5

10

15

20

25

1979 1983 1987 1991 1995 1999 2003 2007

Bil

lion

Dol

lars

Direct Gov't Payments 2002-09 Avg = $7.0 Bil

FAPRI

First, a word about the baseline...

Analysis, prepared at the request of Rep. Charles Stenholm, is compared to the FAPRI January, 2000 baseline.

– The baseline assumes provisions of the FAIR Act with 2002 levels extended for the life of the baseline.

We need to remember a few things about the baseline because it does have a bearing on the outcome of the scenarios.

FAPRI

1

2

3

4

5

6

7

8

91 93 95 97 99 01 03 05 07 09

Do

lla

rs p

er B

ush

el

Corn Soybeans Wheat$2.44 avg $6.01 avg $3.47 avg

US Crop Prices

In general, baseline crop prices are weak in the near term before showing recovery in later years.

For soybeans and cotton, loan rates continue to play a large role through 2005.

FAPRI

Scenario Assumptions

For the scenarios, all baseline policies remain in place, i.e. AMTA payments remain.

In addition, assume authority exists for additional spending above baseline levels for the 2001-05 crops.

– Average $1 Billion/Crop Year ($5 Billion Total)

– Average $2 Billion/Crop Year ($10 Billion Total)

– Average $3 Billion/Crop Year ($15 Billion Total)

FAPRI

More Assumptions

Spend the additional money in three ways

– Modified Supplemental Income Payments (MSIP) - Payments based on 1995-99 reference period.

– Higher Marketing Loan Rates (LR) - Increase all loan rates by the same percentage in order to achieve the additional spending.

– Market Loss Assistance (MLA) Payments - Distributed in the same fashion as the previous MLA payments. Some money included for oilseeds.

Precise levels for loan rates and SIP triggers set so as to spend on average the same amount as the increase in MLA payments.

FAPRI

Corn Value vs. MSIP Reference Value

270

280

290

300

310

320

330

340

01 02 03 04 05

Dol

lars

per

Acr

e

Value/Acre 1995-99 Reference

Modified SIP for Corn:Where the Baseline Is Important

Relative to the FAPRI baseline, MSIP will play a larger role in the early years as the value per acre falls well below the 1995-99 average.

Over time, stronger prices and increasing yields reduce the gap between the value and the reference period.

FAPRI

MSIP Trigger Levels

•Corn -- $306.73

•Cotton -- $402.14

•Rice -- $516.11

•Soybeans -- $232.36

•Wheat -- $135.38

FAPRI

Corn Loan Rate vs. Farm Price

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

00 01 02 03 04 05

Dol

lars

per

Bu

Baseline LR $2 Bil Scenario LRBaseline Farm Price

Loan Rate Formulas for Corn:Where the Baseline Is Important

In the FAPRI baseline, loan rates are held fixed through the 2001 crop and then allowed to adjust to minimum levels based on the formulas.

– Rice loan rate remains at $6.50 in the baseline.

The scenarios maintain this convention with loan rates for all crops increased by the same percentage above baseline levels.

FAPRI

Allocation of MLA Payments

Oilseeds8%

Rice8%Cotton

10%

Feed Grains50%

Wheat24%

Market Loss Assistance

Market Loss Assistance payments are allocated based on percentages from the previous assistance packages.

Feed grains receive 50% of the money under these rules.

Rice receives 8% of the money.

FAPRI

$1 Billion $2 Billion $3 Billion

MSIP (Trigger %) 89.80% 93.86% 96.75%

LR Increase Above Base 3.50% 6.67% 9.60%

MLA Payments $1 bil/crop yr $2 bil/crop yr $3 bil/crop yr

Policies Analyzed in this Study

3 ways to spend an additional money above baseline spending over the 2001-05 crops.

Avg Annual Additional Spending

FAPRI

90

100

110

120

130

140

150

160

170

00 01 02 03 04 05 06 07 08 09

Looking at one possible path doesn't provide enough information.

Program must be evaluated over a number of runs. We have done 500 simulations.

Graph shows 10 of the 500 corn yield paths used in this analysis.

Remember - all other shocks are being introduced at the same time.

FAPRIMultiple Draws Must Be Done,Example for Corn Yields

U.S. Corn Yield

U.S. Corn Farm Price ($/Bu)

1.0

1.5

2.0

2.5

3.0

3.5

99 01 03 05 07 09

Baseline Price 25th & 75th Percent5th & 95th Percent

Generating Results, Developing Probability Ranges

The results of the 500 draws will give variability around production, consumption and prices.

We can develop probabilities ranges or the likelihood that price will be in a certain range.

FAPRI

Change in Per-Acre Returns2001-05 Average

0

10

20

30

40

50

Corn Soybeans Wheat Cotton Rice

Dol

lars

per

Acr

e

MSIP2 LR2 MLA2

Change in Per-Acre Returns,$2 Billion Scenario

Of the 3 optionsCotton receives the most

under SIP

Rice payments are highest under MLA

Corn receives largest payment under MLA

Soybeans receive the most under LR

Wheat payments are highest under MLA

Rankings the same under alternative spending levels.

FAPRI

Average spending levels are similar under all 3 programs ($12.6 Bil)

With fixed payments, there is a higher minimum under MLA.

In all cases, much more upside spending potential than downside.

Distribution of Gov't Outlays,$2 Billion Scenario

Average

FAPRI

Average returns under LR2 and MLA2 are $165/ac. Average under MSIP2 is $169.

Note the different shape relative to corn returns

– Skewed in the opposite direction.

Distribution of Cotton Returns,$2 Billion Scenario

Average

Distribution of Cotton Per-Acre Net returns, 2004$2 Billion Scenario

25 50 75 100 125 150 175 200 225 250 275

Net Returns (Dollars per Acre)

Fre

quen

cy

MSIP2LR2 MLA2

Averages

FAPRI

165 165 169

Distribution of Corn Per-Acre Net Returns, 2002$2 Billion Scenario

75 100 125 150 175 200 225 250 275 300

Net Returns (Dollars per Acre)

Fre

qu

en

cy

MSIP2LR2 MLA2

Returns average $155 under MSIP2 and MLA2. Average is $151 under LR2.

SIP reduces more of the downside risk in returns.

Distribution of Corn Returns,$2 Billion Scenario

Averages

FAPRI

151 155 155

Distribution of Soybean Per-Acre Net returns, 2002$2 Billion Scenario

75 100 125 150 175 200

Dollars per Acre

Fre

quen

cy

MSIP2 LR2MLA2

Returns average $132 under MSIP2 and $135 under LR2. Average is $128 under MLA2.

SIP reduces more of the downside risk in returns.

Distribution of Soybean Returns,$2 Billion Scenario

Averages

FAPRI

128 132 135

Distribution of Wheat Per-Acre Net returns, 2002$2 Billion Scenario

25 50 75 100 125

Dollars per Acre

Fre

quen

cy

MSIP2LR2 MLA2

Returns average $72 under MSIP2 and $67 under LR2. Average is $73 under MLA2.

SIP reduces more of the downside risk in returns.

Distribution of Wheat Returns,$2 Billion Scenario

Averages

FAPRI

67 72 73

MSIP Points

PROS Based on high income period of time Most downside protection Based on harvested acres

CONS Local yields vs. national yields Regional weather

FAPRI

Loan Rate Summary

PROS Favors areas with high yields and low yield variability Paid on actual bushels produced

CONS Paid on actual bushels produced (No crop = No payment)

FAPRI

Market Loss Assistance Summary

PROS Best for grain, wheat, and rice Greatest pass through of dollars from government to the farm

sector Frozen base and yields

CONS Least protection in bad years Frozen base and yields

FAPRI

Consideration for Future Analysis

Of the 3 counter-cyclical options, which worked best (based on national average net returns) for

Highest Average Down Side Risk

Rice MLA MSIP

Cotton MSIP MSIP

Wheat MLA MSIP

Corn MLA & SIP MSIP

Soybeans LR MSIP

Total Farm ?? ??

FAPRI

Flex-fallow Analysis

Requested by Senators Harkin, Daschle, and Johnson

FAPRI

Scenario Assumptions

Producers have the ability to voluntarily reduce plantings in exchange for higher loan rates on remaining production.

The maximum diversion rate is 30% of planted acreage for the crop.

The higher loan rate applies to bushels up to the expected county yield. Bushels in excess of the expected county yield are not eligible for the higher rate.

The program applies to all loan-eligible crops.

Program is assumed to start with the 2000 crop and is measured against the FAPRI January 1999 baseline.

FAPRI Analysis of the Flexible Fallow Proposal

0% 5% 10% 15% 20% 25% 30%

% Set-Aside

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80

Dol

lars

per

Bus

hel

Corn Loan Rate Schedule

For wheat, feed grains, and oilseeds, loan rates increase by 1% for each percent of idling up to 10%.

After 10%, growth is accelerated. For corn, an additional 1 cent credit is awarded for 11%-30% diversion.

FAPRI Analysis of the Flexible Fallow Proposal

Switch-Over Price

Corn

Wheat

Soybeans

Cotton

Rice

2.41

3.53

5.75

76.04

9.87

Switch-Over Prices Under the Flexible Fallow Proposal

As market prices increase, it becomes more profitable for producers to stop idling land and plant those acres.

For cotton and rice, the switch-over prices are above the 30% loan rate. This is due to the LDP being based on the AWP, which runs well below the farm price.

FAPRI Analysis of the Flexible Fallow Proposal

00 01 02 03 04 05 06 07 080

10

20

30

40

Mill

ion

Acr

es

Idled AreaDecline in Plantings (Change from Baseline)

Program Participation and 8-Crop Acreage Impacts

With relatively low prices projected for 2000, area idled in the program is projected at 35 mil ac. Due to slippage, plantings are expected to fall by only 22 mil ac.

By 2008, declining participation results in 16 mil ac idled with plantings off by 7 mil ac.

FAPRI Analysis of the Flexible Fallow Proposal

00 01 02 03 04 05 06 07 080.00

0.50

1.00

1.50

2.00

2.50

Dol

lars

per

Cw

t

Fed SteersBarrow&Gilts

Broilers

Livestock Prices Adjust due to Higher Feed Costs

With higher feed costs, the livestock sector adjusts by lowering production levels. This results in a modest increase in meat prices.

Pork shows the largest increase, with prices averaging $1.10 per cwt, or 2.7%, above the baseline.

FAPRI Analysis of the Flexible Fallow Proposal

00 01 02 03 04 05 06 07 08 Avg-2.0

-1.5

-1.0

-0.5

0.0

0.5

Bill

ion

Dol

lars

Impacts on Net Income of the Livestock Sector

Higher feed prices more than outweigh increased livestock prices. As a result, net income of the livestock sector declines.

For 2000-08, net income falls by an average of $600 million, or 1.3%, from baseline levels.

FAPRI Analysis of the Flexible Fallow Proposal

00 01 02 03 04 05 06 07 08 Avg0

10

20

30

40

50

60

Bill

ion

Dol

lars

BaselineScenario

Impacts on Total U.S. Net Farm Income

Total net farm income increases by an average of $4.8 billion under the scenario during the 2000-08 period.

This represents a 10% increase above the baseline.

FAPRI Analysis of the Flexible Fallow Proposal

00 01 02 03 04 05 06 07 08 Avg

0.0

1.0

2.0

3.0

4.0

Bill

ion

Dol

lars

Increased Gov't Payments Contribute to Farm Income

Higher loan rates under the scenario result in increased LDP's and marketing loan gains.

For the 2000-08 period, direct gov't payments average $2.7 billion above the baseline.

FAPRI Analysis of the Flexible Fallow Proposal

Summing It All Up

Given short-term price projections, participation in land idling in exchange for higher loan rates is quite attractive.

Incentives decline as prices strengthen longer term.

The crops sector is the big winner with higher income levels.

Other sectors are worse off under the scenario.Export MarketsInput SuppliersGovernment OutlaysLivestockConsumer Food Expenditures

FAPRI Analysis of the Flexible Fallow Proposal

The 1-2-3 Scenarios:An Analysis of Safety Net Alternatives

All Commodity GroupAmarillo, TXJanuary 16, 2001

AFPCAGRICULTURAL & FOOD POLICY CENTER

TEXAS A&M UNIVERSITY SYSTEM

Edward SmithDistinguished Roy B. DavisProfessor of Agricultural Cooperation(979)845-1751afpc1.tamu.edu

Characteristics of Representative Farms Used for the Analysis

IAG2400 598.2 Corn 1200

Soybeans 1200

TXNP6700 1606.1 Corn 3350

Sorghum 335

Wheat 1675

KSSW3180 331.1 Wheat 2258

Sorghum 652

Corn 56

Soybeans 87

NDW4850 678.8 Wheat 2585

Barley 470

Soybeans 705

Sunflowers 940

TXSP3697 1066.9 Cotton 2665

Peanuts 285

TX3750 1311.9 Long Grain Rice 1500

Farm NameCash Receipts ’99

($1,000) AcresCrops

342.4

172.9

88.7

65.5

327.3

179.5

90.1

62.2

325.1

169.8

89.3

65.9

298.3

158.9

101.8

71.3

0

100

200

300

400

Base

MSIP

LR

MLA

Impacts of Alternative Farm Programs on Mean and Relative Risk of Net Cash Farm Income, 2003

NCFI ($1,000) CV (%)

TXNP TXNPIAG IAG

179.5

233

41

62.1

170.9

225.5

42.8

63.6

176.2

238.9

39.7

57

165.4

214.8

44.5

67.4

0

50

100

150

200

250

300

Base

MSIP

LR

MLA

Impacts of Alternative Farm Programs on Mean and Relative Risk of Net Cash Farm Income, 2003

NCFI ($1,000) CV (%)

KSSW KSSWNDW NDW

265.5

158

63.173.8

268.9

121.8

64.6

92.2

312.1

149.7

55.5

77.7

243.6

76.8868.7

152.1

0

50

100

150

200

250

300

350

Base

MSIP

LR

MLA

Impacts of Alternative Farm Programs on Mean and Relative Risk of Net Cash Farm Income, 2003

NCFI ($1,000) CV (%)

TXSP TXSPTXR TXR

Im p a c ts o f F o u r A lte rn a tiv e F a rm P ro g ra m s o n E c o n o m ic V ia b ility o f R e p re s e n ta tiv e F e e d G ra in F a rm s , 2 0 0 3

F a rm sP ro b a b ility D e fic it

in 2 0 0 3P ro b a b ility L o s s

N e t W o rth in 2 0 0 3

T X N P 6 7 0 0

B A S E 5 4 .2 4 1 .2

M S IP 5 2 .2 3 2 .2

L R 5 1 .2 3 3 .0

M L A 5 0 .6 3 3 .4

IA G 2 4 0 0

B A S E 4 6 .4 3 3 .2

M S IP 4 0 .0 2 4 .2

L R 3 5 .6 2 0 .6

M L A 3 9 .2 2 6 .2

B a s e is c o n tin u a tio n o f '9 6 fa rm b ill.S IP is S u p p le m e n ta l In co m e P a ym e n t b a s e d o n 1 9 9 5 -9 9 to ta l re ve n u e .L R is h ig h e r m a rk e tin g L o a n R a te s fo r a ll c ro p s .M L A is M a rke t L o s s A s s is ta n c e d is tr ib u te d a s in th e p a s t.

Im p a c ts o f F o u r A lte rn a tiv e F a rm P ro g ra m s o n E c o n o m ic V ia b ility o f R e p re s e n ta tiv e W h e a t F a rm s , 2 0 0 3

F a rm s P ro b a b ility D e fic itin 2 0 0 3

P ro b a b ility L o s sN e t W o rth in 2 0 0 3

N D W 4 8 5 0

B A S E 4 7 .2 3 4 .2

M S IP 3 9 .8 1 8 .4

L R 4 5 .0 2 7 .4

M L A 4 2 .4 2 5 .0

K S S W 3 1 8 0

B A S E 1 6 .0 1 .6

M S IP 9 .4 0 .2

L R 1 3 .0 1 .0

M L A 8 .8 0 .6

B a se is co n tin u a tio n o f '9 6 fa rm b ill.S IP is S u p p le m e n ta l In c o m e P a ym e n t b a se d o n 1 9 9 5 -9 9 to ta l re ve n u e .L R is h ig h e r m a rke tin g L o a n R a te s fo r a ll c ro p s .M L A is M a rke t L o ss A ss is ta n ce d is tr ib u te d a s in th e p a s t.

Im p a c ts o f F o u r A lte rn a tiv e F a rm P ro g ra m s o n E c o n o m ic V ia b ility o f R e p re s e n ta tiv e C o tto n a n d R ic e F a rm s , 2 0 0 3

F a rm sP ro b a b ility D e fic it

in 2 0 0 3P ro b a b ility L o s s

N e t W o rth in 2 0 0 3T X S P 3 6 9 7 B A S E 4 2 .4 2 1 .4 M S IP 2 7 .6 6 .6 L R 3 9 .2 1 7 .2 M L A 3 9 .0 1 7 .2T X R 3 7 5 0 B A S E 5 7 .8 6 1 .2 M S IP 3 1 .8 2 4 .8 L R 3 7 .2 4 2 .0 M L A 3 0 .4 2 8 .0

B a s e is co n tin u a tio n o f '9 6 fa rm b ill.S IP is S u p p le m e n ta l In c o m e P a ym e n t b a s e d o n 1 9 9 5 -9 9 to ta l re ve n u e .L R is h ig h e r m a rk e tin g L o a n R a te s fo r a ll c ro p s .M L A is M a rk e t L o s s A s s is ta n c e d is tr ib u te d a s in th e p a s t.

Preliminary Conclusions

All three program alternatives (MSIP, LR, and MLA) increase farm profitability and reduce economic risk relative to the BASE.

AFPC/TAMU

P re lim in a ry C o n c lu s io n s

IA G L R L R L R L R

T X N P M L A M L A M L A M S IP

K S S W M L A M S IP M L A M S IP

N D W M S IP M S IP M S IP M S IP

T X S P M S IP M S IP M S IP M S IP

T X R M L A M L A M L A M S IP

In c o m eIn c o m e

R is k L iq u id ity S o lve n c y

P e rfo rm a n c e V a ria b le

F a rm s