the 1-2-3 scenarios an analysis of safety net alternatives and the flex-fallow program the 1-2-3 was...
Post on 21-Dec-2015
221 views
TRANSCRIPT
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
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