Field of Schemes Mark II: The Taxpayer and Economic Welfare Costs of Price Loss Coverage and Supplementary

Insurance Coverage Programs

Vincent H. Smith Montana State University Bruce A. Babcock Iowa State University Barry K. Goodwin* North Carolina State University

September 12, 2012

This draft working paper (#2012-03) is part of AEIs American Boondoggle: Fixing the 2012 Farm Bill series. Vincent H. Smith is Professor of Economics at Montana State University and a visiting scholar at the American Enterprise Institute. Bruce A. Babcock is Professor of Economics at Iowa State University. Barry K. Goodwin is the William Neil Reynolds Professor of Agricultural Economics at North Carolina State University.

Introduction Since 2007, American farmers have consistently enjoyed record prices, increasing yields, and record farm incomes and this pattern is expected to continue in 2012. Even though 2012 is a severe drought year, US agricultural producers, including crop producers in the Corn Belt, are expected to enjoy record or near record net farm incomes (USDA Economic Research Service, 2012). The USDA has predicted that despite the drought, net farm income will rise 3.7 percent this year to over $122 billion, largely as a result of high commodity prices and crop insurance payments, which are largely funded by payments from the US Treasury (and not from farmerpaid premiums, as one might suspect). Nevertheless, farm commodity groups still want as many farm subsidies as they can get, ideally through programs that lock farmers into record levels of net farm income. Most, though not all, farm lobbies have recognized that the Direct Payments program, a five-billion dollar a year welfare program in which payments mainly go to larger and wealthier farms, is no longer politically viable because it so obviously gives farmers and non-farmer land owners something for nothing every year. So, many farm groups such as the National Corn Growers Association have rushed to advocate shallow loss programs like the Aggregate Revenue Coverage (ARC) program embedded in the Senates version of a 2012 Farm Bill.1 Nevertheless, enthusiasm for the Senates proposed ARC program among commodity groups has not been universal. Rice, peanut and cotton producers were concerned that the ARC and other Senate Bill programs would give them a smaller share of the total subsidy pie than they had enjoyed under the Direct Payments program and that they view as their just desserts under

Smith, Babcock and Goodwin (2012) provide a detailed description of the Senates shallow loss ARRM program and estimates of the programs costs for five major crops - corn, cotton, rice, soybeans and wheat under CBO baseline projections for prices and the assumption that prices would return to their historical average levels over the past fifteen years. Peanuts were not included in their analysis because of the relatively small are planted to the crop.

any new subsidy program. In response, their lobbies pressured the leadership and members of the House Agricultural Committee for a different program that would give rice, peanut and cotton growers a larger share of total taxpayer funded farm subsidies. Representatives Frank Lucas (R-OK) and Colin Peterson (D-MINN) complied with the wishes of the rice, peanut and cotton lobbies and, with the support of other (but not all) House Agricultural Committee members, introduced a Price Loss Coverage (PLC) program. In some important respects the PLC, which would be managed by the USDA Farm Service Agency, is very close to being a new price support program. Under the provisions of the House Agricultural Committees bill, farmers could also participate in a new heavily subsidized insurance-based program called the Supplementary Coverage Option (SCO) as well as the PLC. The SCO program would be managed by the USDA Risk Management Agency because it is a subsidized insurance program that, in effect, covers shallow losses when, on a county basis, yields and revenues fall below 90 percent of their recent average levels. This study examines the structure and potential budgetary costs of the House Committees proposed PLC and SCO programs. The results indicate that the PLC program has the potential to be very costly and the SCO program will also generate substantial subsidies for farmers as well as considerable additional taxpayer funded revenues for crop insurance companies.2 The House Agricultural Committees proposed bill also provides a subsidized shallow loss program option for farmers. However, the House Bills shallow loss program appears to be considerably less generous to farmers than the Senate program and, if selected by a

Crop insurance companies already receive substantial taxpayer subsidies, recently estimated to be over $3 billion a year over the next ten years by the Congressional Budget Office, and are perhaps the most strident lobbying group for the continuation and expansion of the current heavily subsidized federal crop insurance program. These issues and the role of the crop insurance industry in the federal subsidy program have been carefully examined by Vincent Smith (2011, 2012), Vincent Smith and Joseph Glauber (2012), Vincent Smith and Barry Goodwin (2010), and Bruce Babcock and Chad Hart (1996).

farm, precludes the farm from participating in the SCO insurance plan. In other words, the House committee stacked the deck in favor of its combined price loss coverage and SCO program and against a shallow loss program,3 with the overriding goal of increasing subsidies for peanut, rice and cotton growers, mainly at the perceived expense of producers of small grains and oilseed crops like corn, soybeans, and wheat. The potential taxpayer costs of the proposed House Revenue Loss Coverage (RLC) shallow loss program are not estimated here because the structure of the RLC is designed to make it less attractive than the Senates shallow loss program.4 The Price Loss Coverage (PLC) program in the House Agricultural Committees Bill (not yet voted on by the entire House) has the following general structure. A reference or target price is established for each eligible commodity. When the national average market price for the commodity falls below the reference price, farmers who raise the crop will almost certainly receive a payment on every acre they planted to it.5 The farmers total PLC subsidy is determined as the difference between the reference price and the national average price multiplied by the farms pre-determined per acre yield and 85% of the total acres planted to the

Under the House Agricultural Committees shallow loss program (called Revenue Loss Coverage), payments would be triggered at the county level but not at the farm level, although payments would be made on 85% of planted acres rather than 60%, as in the Senate Bill (a more favorable treatment). However, in the House version payments would be triggered only when county revenues fell below 85% of their expected levels. In the Senate Bill, ARC payments would be triggered when county revenues fell below 89% of their expected levels, leading to more frequent payments and, on average, larger payments, even though both bills cap maximum payments at 10% of expected county levels. By allowing farmers to participate in the SCO insurance program, using a lower trigger for shallow loss program payments, and removing the farm level shallow loss option, the House Bill makes the PLC more attractive for most producers. 4 Taxpayer cost estimates have previously been estimated for the Senates shallow loss program by the authors of this study using CBO baseline and recent historical average price scenarios that are identical to those examined in this analysis (Smith, Babcock and Goodwin, May 2012). 5 The national average price for a crop is the average price reported by the USDA National Agricultural Statistical Service for the first five months of a harvested crops marketing year.

crop.6 Typically, the farms payment yield will be the farms Olympic average yield for a crop over the period 2008-2012.7 The House Agricultural Committees subsidized insurance program, the Supplementary Coverage Option (SCO), works as follows. A farm that has already purchased an insurance product to cover crop or revenue losses at the farm level (which includes almost all farms) will be able to purchase a county yield-based insurance product to cover what is often called the deductible associated with the farm level crop insurance policy. For example, a farm may have purchased a federally subsidized individual crop insurance product for corn which triggers payments when the farms average yield for the crop falls below 75% of its expected level (the farms average corn yield over the past four to ten years). Under the SCO, that farm could then purchase an insurance product in which indemnities would be triggered when the county-wide yield for corn falls below 90% of its expected or average level. The farm is constrained to receive a maximum payment under the area yield contract equal to the indemnity it would be paid if the county yield was 75% of its average level. The reason is that the farm purchased a 75% coverage contract to protect itself against crop specific losses at the farm level. Had the
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The actual rules are fairly complex. A farm cannot receive a PLC payment on more than the sum of the base or payment acres for all the crops the farm raises that are eligible for PLC coverage divided by 85%. These base or payment acres are the acres on which the farm is eligible to receive subsidies under the Direct Payments program. Suppose, for example, that a farm currently receives direct payments on 1500 acres of corn and 1,000 acres of soybeans. The farms total area eligible for direct payments is therefore 2,500 acres. The farms area eligible for PLC payments would therefore be 2,941 acres (2,500 acres/0.85). If a PLC were available only for one commodity in any given year, say corn, the farm could receive a PLC payment on up to 2,941 acres of corn. So if the farm planted 2,000 acres of corn it would receive a PLC payment on every acre planted. Similarly, if PLC payments were available for both corn and soybeans and the farm planted those two crops on a total of less than 2,941 acres, it would receive a PLC payment for each planted acre. Farmers are also given the option of updating their base acreage to reflect recent production or, alternatively, to maintain historical base levels if they are more advantageous. Unambiguously, the PLC program ties payments to current production decisions about planted acres and therefore, as discussed below, is clearly a World Trade Organization amber box, production distorting domestic support program. 7 An Olympic average yield is computed by ordering yields for each of the five years from their lowest to their highest values, dropping the lowest and highest values and using the remaining three yields to compute the average. For example, suppose a soybean farmer has the following five per acre yields over the period 2008-2012: 70 bushels, 110 bushels, 90 bushels, 100 bushels and 120 bushels. The low and high yields (79 and 120 bushels) would be dropped and the remaining three yields (90, 100 and 110 bushels) would be used to compute the farms predetermined PLC payment yield (100 bushels per acre).

farm purchased an 80% coverage individual yield contract, its maximum SCO indemnity would be five percent smaller, restricted to the area yield payment it would receive if the county yield were 80 percent of the county average. Under the House Bills SCO provisions, the farm only has to pay 30% of the actuarially fair premium for the contract. The taxpayer picks up the remaining 70% of that premium and pays an insurance company an additional subsidy to cover the insurance companys administration and operations expenses, likely about 25% of the actuarially fair premium. The SCO is therefore a great deal for the farmers; for every $3 a farmer pays out for insurance coverage, she can expect to get an average of $10 back in indemnity payments (not the usual commercial property and casualty insurance deal where, for every $3 laid out for coverage the purchaser expects to receive $2 back in indemnity payments with the other dollar covering the insurance companys costs of providing the product). It is also not a bad deal for the insurance companies; they receive additional revenues to cover administrative and operating (A&O) costs but face no risk of loss and, because payments are driven by county yields and national prices as reported by NASS, incur very few additional costs (for example, there is no need for loss adjusting, a major expense for most insurance products). The taxpayers (and the budget deficit) are the ones who suffer. When the SCO is combined with the PLC, taxpayer losses are compounded while farm benefits increase substantially. In this study, we examine the potential costs of the House PLC and SCO programs over the duration of a five year 2012 Farm Bill (2013-2017) under two scenarios. The first is that the expected prices for the affected agricultural commodities will be those assumed by the Congressional Budget Office in its March 2012 baseline forecasts. The second is that

commodity prices will be at about their recent fifteen year historical average levels (over the period 1996-2011). The costs of the House committees PLC program are dramatically different under the two scenarios. For the five crops examined in this study corn, soybeans, wheat, rice and peanuts under CBO base line price assumptions the PLC program would cost an estimated average of $1.1 billion a year over the period 2013 2017. However, under the fifteen year historical price scenario, annual taxpayer PLC program costs for the same five commodities explode to an estimated average of $18.8 billion. The down side risk for taxpayers associated with the House committees PLC program is therefore simply enormous. A legitimate question is whether a return to the crop prices that, on average, have been received by farmers over the past fifteen years is likely to occur. The answer is that substantial reductions in corn, wheat and soybean prices (the big three in terms of potential taxpayer subsidy expenditures) could well take place over the next five years if, as many legislators are now advocating, the federal ethanol use mandate, called the Renewable Fuels Standard (RFS), is abandoned or temporarily suspended. So the downside risk for the federal budget associated with the proposed PLC program is a significant concern for policy makers focused on fiscal responsibility and deficit reduction and for the US taxpayer who, in the end, carries the fiscal burden of such subsidies. The heavily subsidized SCO is also potentially costly. Producers of corn, peanuts, rice, soybeans, and wheat are estimated to receive an annual average of $2.1 billion in taxpayer subsidies as a result of participating in the SCO if prices remain at or close to current near record levels. The benefits heavily concentrated among corn, wheat and soybean producers if prices remain at or close to current levels and about forty percent lower if prices return to recent

historical average levels. Moreover, insurance companies would also receive about half a billion dollars in additional taxpayer subsidies to deliver the SCO policies to farmers. The SCO subsidies would be about 40 percent lower if crop prices moderated to their recent historical average levels. Adding the SCO taxpayer costs to the estimated PLC taxpayer costs, under the CBO baseline price scenario, tax payer costs for both programs would be around $3.7 billion. This is roughly the amount of play money the House Committee believed it could spend on new farm subsidy programs given the late 2011 deal between the deficit reduction Super Committee and the House and Senate Agricultural Committees.8 However, in the historical price scenario, together the PLC and SCO program would cost taxpayers over $20 billion a year, a huge increase in farm subsidy outlays. The fact is that such programs, which base support levels on uncertain prices and yields, are difficulty to score accurately with a high degree of confidence. Moreover, as SCO subsidies would be uncapped at the farm level, and because many farmers have been very successful in legally circumventing payment limitations in other programs, most of the $20 billion or more tax dollars would continue to go to large and relatively wealthy farm operations. In addition, it is also important to recognize that the fundamental structures of each of the proposed PLC and SCO programs violate US World Trade Organization (WTO) commitments to avoid introducing new or expanding existing amber box policies providing production incentives for crops, opening up the potential for numerous WTO trade dispute complaints that
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Under the deal with the Super Committee, the House and Senate Agricultural Committee Chairs and Ranking Members agreed to reduce total spending on farm bill programs (including nutrition and conservation) by $2.3 billion a year ($23 billion over ten years). A core element of the agreement was the requirement that direct payments be ended, saving $5 billion. The leadership of the two Agricultural Committees also agreed that nutrition program spending would be cut by $0.5 billion and spending on conservation programs by about an additional $0.3 billion. These cuts, coupled with a Super Committee overall deficit reduction requirement of only $2.3 billion provided the Committees with about $3.5 billion to spend on new farm subsidy programs.

the United States will find difficult to refute. The bottom line, therefore, is that the PLC program and the SCO program are highly problematic from an income transfer and welfare program perspective. They represent a step backwards in that they would replace the Direct and Countercyclical Payments Programwhich did not substantively distort planting decisionswith one that does distort these decisions. In that dimension (as well as other dimensions), the PLC and SCO programs are similar to, and at least as problematic as, the Senates proposed shallow loss program. The PLC and SCO are also economically inefficient and wasteful of resources, not least because of the production distorting incentives they provide, perhaps especially for increased production in areas of the country like Texas and Montana where marginal crop lands are highly erodible. Hence, from a budget, environmental, trade, economic efficiency and social fairness perspective, neither the PLC nor the SCO program achieves any sort of passing grade. The programs should not be introduced just because congressional delegations are sensitive to pressures from agricultural lobbies seeking government handouts for their wealthiest members. Public policies that direct billions of dollars of taxpayer resources to a segment of society that tends to be wealthy and enjoy high incomes are difficult to justify using almost any public policy rationale, and that is especially the case given the current fiscal conditions that the US economy and the federal government face. It is relevant to note that cuts in other USDA programs, including the nutrition programs that provide food stamps to needy households, are also a part of the proposed omnibus legislation.

The Structure of the PLC and Other Price Related Income Transfer Programs Income transfer programs in which taxpayer funded subsidy payments are driven by the relationship between minimum prices or trigger prices and market prices have been an explicit
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element of U.S. farm programs since at least 1948, when the first loan rate or price support programs were introduced. The 2008 Farm Bill included two such programs: the loan rate program and the countercyclical payments program. The loan rate program is essentially a price support program. The government is ready to purchase any amount of an eligible crop the farmer offers it at a minimum price or to pay the farmer the difference between the loan rate (or support price) for the crop and the market price on all of the farmers current year crop. There is no limit on the amount of payments a farm can receive under this program and, if payments are available because market prices are lower than the guaranteed loan rates, those payments are made on all production of the crop. Therefore, as discussed blow, loan rate subsidy payments are crop-specific WTO amber box payments. The countercyclical payments program (CCP) pays the farmer the difference between the effective reference price for an eligible crop (the difference between the crops CCP trigger price and its direct payment rate) and the national average market price (capped at the difference between that effective price and the loan rate) on an historically predetermined amount of the crop. The predetermined amount of crop is 85% of the farms payment acres multiplied by the farms payment yield (determined either by the farms planted acres and yields for the crop between 1983 and 1986 or through an updating process based on the farms planting decisions over the period 1998-2002). Countercyclical program payments have also been determined to be WTO amber box subsidy payments because they are linked to current market prices, but because they are not linked to current production CCP payments could be reclassified in a new WTO agreement. On a per eligible person basis (of which there are two per farm), CCP payments are capped at $65,000 ($130,000 per farm).

The House committees proposed 2012 Farm Bill would replace the current CCP (as well as the current shallow loss Average Crop Revenue or ACRE program) with the PLC (or its Average Revenue Loss version of a shallow loss program) but the Bill would retain the Loan Rate program as currently structured. The CCP effective reference prices, Loan Rate program price supports and PLC reference prices are presented in table 4 for the five commodities examined in this study: corn, soybeans, wheat, rice and peanuts. The exceptionally generous structure of the PLC program is illustrated in in the last column of table 4, which shows the ratio of the PLC reference price to the CCP effective trigger price. The PLC reference price is 17% higher than the CCP effective trigger price for peanuts, 51% higher for soybeans and wheat, 57% higher for corn and 72% higher for rice. In addition, in contrast to the CCP program, effectively farmers would receive a PLC payment on all of the acres they plant to an eligible crop. Of course, PLC trigger prices are also much higher than the loan rates for each crop. Finally, PLC payments would likely be capped at $125,000 per

eligible person on each farm, of which there are a maximum of two per farm under current payment limitation rules for CCC and Direct Payment program subsidies but farmers have proved to be very adept at legally circumventing such limitations.9

Crop Prices and Congressional Budget Office (CBO) Scoring The CBO is responsible for scoring Congressional proposals for current and new programs, including the price loss coverage and shallow loss proposals put forward by the Congressional Agricultural Committees. Scoring involves estimating the costs of a program in
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There is currently a per eligible person cap on of $65,000 on CCP payments and a separate per eligible person cap of $40,000 on direct payments, resulting in a total per eligible person cap of $105,000 for the two programs. The PLC would replace both the CCP and the Direct Payments programs and, therefore the difference in the PLC cap and the joint cap for the two programs it would replace is $10,000.Producers of peanuts would enjoy a more liberal cap on total PLC payments, with one payment limit for peanuts and a separate limit for other crops.

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terms of federal spending under a set of baseline assumptions about key factors that will affect expected federal budget outlays on the program. These include parameters such as the economys growth rate or, in this case, the future path of the prices for commodities included in the program. The current CBO practice is to score programs over a ten-year time frame, which requires projecting prices for that period. As noted above, the CBOs current baseline expected prices for the five commodities examined in this study corn, soybeans, wheat, rice and peanuts are presented in table 1 for the period 2010-2017. The CBOs current baseline assumes that average prices for corn, wheat, soybeans and rice will remain close to or above current and recent record levels. Of course, predictions and assumptions are just that educated guesses about what future prices will be. Any such predictions are subject to a large degree of uncertainty, as are the scoring estimates based on those predictions. There is no guarantee that this will be the case. Suppose, for example, that the ethanol mandate is allowed to lapse and crude oil prices drop substantially. Then what would happen to prices for corn, other animal feed grains, oilseeds such as soybeans that also generate feed products, and food grains such as wheat that can also be used for feed? It is not clear that corn, wheat, and other crop prices would return to pre-2006 levels; it is clear, however, that they would be lower in the absence of the ethanol mandate and with lower crude oil prices.10 To illustrate the point, historical prices for the five commodities included in this study are presented in table 2 for the period from 1996 to 2012. Prices for corn, rice, soybeans, and wheat commodities have been much higher since 2007 than they were before 2007. Average prices for those crops were much lower between 1996 and 2006 than between 2007 and 2011. For example, per bushel corn prices averaged $2.23 between 1996 and 2006 before ethanol
10

For example, the demand for food and feed grains has increased substantially over the past seven years, in large part because of rapid economic growth in both China and India.

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production took off, but $4.64 between 2007 and 2011. Similarly, soybeans averaged $5.73 per bushel and rice averaged seven cents per pound in the 1996 to 2006 period. However, these two commodities respectively averaged $10.53 per bushel and fourteen cents per pound between 2007 and 2011. While abandoning the ethanol mandate may not result in prices returning to their pre2007 levels, prices are likely to fall substantially if the mandate is allowed to lapse and crude oil prices decline. A variety of other market developments could also result in lower commodity prices. Here, therefore, we examine the impacts of the PLC program under two price scenarios: the CBO baseline for the five crops (corn, wheat, soybeans, rice and peanuts) and a low-price scenario in which average prices for those crops are expected to be about forty percent lower than the CBO baseline but still well above the average prices for corn, soybeans, rice and wheat during the 1996 to 2006 period. Peanut prices have actually fallen to about the prices assumed for that commodity in the recent historical average price scenario in some years since 2007. The expected crop prices used in that recent historical price scenario are presented in table 3. We also estimate the costs of the proposed Supplementary Coverage Option in the baseline scenario. Estimates under the historical price scenario are about forty percent lower high because the per unit crop values (prices) used to determine losses are about forty percent lower. In estimating SCO taxpayer costs for each crop, we assume that farmers purchase either a revenue or yield insurance contract based on the farms actual production history in which indemnities are paid when yields or revenues fall below 75% of the farms expected yields or revenues.11 Hence, farmers are assumed to obtain SCO contracts based on county yields in

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Over 90% of all federally subsidized crop insurance contracts purchased by farmers (measured in terms of liability) are either yield or revenue contracts based on a farms actual production history. Farmers who purchase group risk yield or revenue products to cover deep losses on planted acres are treated as if they had purchased federally subsidized individual farm based yield or revenue insurance products for those acres. In estimating SCO

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which indemnity payments are triggered when county per acre yields and revenues fall below 90% of their expected levels and capped at 15% of those expected revenues.

Price Loss Coverage and Supplementary Coverage Option Subsidy Cost Estimation Methods At the beginning of any given crop year, when farmers plant a crop neither they nor anyone else knows what the price for the crop will be at harvest or over the following marketing year. However, information about expected prices is available from several sources, including futures markets, USDA projections, and private sector projections. Hence there is an expected price for each crop, and a distribution of possible prices around that expected price. Similarly, at the time crops are planted, no one knows with certainty what per-acre crop yields will be at the county level. For each crop, there is also an expected county per-acre yield and a distribution of possible yields around that expected level. In addition, yield realizations and price realizations may be statistically correlated because lower yields at the national or regional level tend to result in higher crop prices (and vice versa). To estimate expected SCO net indemnity payments on a per-acre basis, for each crop we construct distributions for correlated prices and yields in each year at the county level for the period 2013-2017. These distributions are based on an analysis of a long-term series of detrended county yields (to current year levels) and yield deviations, as well as data on price volatility, links between prices and yields, CBO expected prices, and expected low-price scenario values for each crop. For each crop, we then take twenty-five thousand draws from the county price-yield distributions (with one hundred representative farms in each county) for each
costs, farmers who insured their crop in 2012 are assumed to insure the same acreage under through an SCO contract; that is, the participation rate in the SCO assumed to equal the participation rate in deep loss federal crop insurance programs.

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year, compute PLC program payments for each draw, and compute average per-acre payments at the county or farm level for all 25,000 draws using CBO baseline prices. These are then aggregated from the county level, assuming the area planted to each crop remains constant at current levels, to obtain state and national estimates of the resulting subsidy payments. Price Loss Coverage program subsidies are paid when the market price of a crop falls below the reference price for that crop (shown in table 4). Price distributions for each crop are centered on the CBO baseline prices in Scenario 1and recent historical average prices in Scenario 2. Subsidy costs for the PLC program are estimated by taking 25,000 draws from each distribution for each year, computing per unit of crop production subsidies (bushels for corn, soybeans and wheat and pounds for peanuts and rice) for each draw and averaging those values over all 25,000 draws. Those per unit of production estimates are then multiplied by 85% of average per acre crop payment yields (computed as the Olympic average of county crop yields over the period 2007-2011) and current planted acres in each county to obtain county level estimates of PLC subsidies. These county level subsidy estimates are then aggregated to obtain state wide and national estimates for each crop.

National and Crop Specific Price Loss Coverage Program Taxpayer Costs Estimated aggregate national taxpayer costs of the PLC program are presented in table 5 for each of the five commodities corn, soybeans, wheat, rice and peanuts under both the CBO scenario and the recent historical price scenario. In the CBO baseline price scenario, total PLC subsidies are relatively modest, averaging about $1.1 billion a year over the period 20132017. The proportional distribution of those total annual average PLC subsidies among the five crops is shown in figure 1. In the baseline scenario, in descending order, wheat producers

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receive 34% of total PLC subsidies ($375 million), corn producers 34% ($360 million), rice producers 18% ($204 million), peanut producers 8% ($92 million), and soybean producers 6% ($70 million). Given the very small amounts of land allocated to rice and peanut production as compared to soybean production, it is remarkable that in the CBO baseline scenario soybean producers receive a smaller share of total PLC subsidies than do rice and peanut producers, another clear indication of the House Committees objective to redistribute subsidies towards those commodities through the PLC program. Per acre PLC subsidy payments for each crop under the CBO price scenario, presented in Table 6, provide further insights about the relative benefits of the program for producers of those crops. In the CBO baseline scenario, peanut and rice producers respectively receive very similar average annual per acre subsidies of $67.93 and $68.36. In contrast, on average soybean producers receive less than one dollar per acre, corn producers $4.02 per acre, and wheat producer $7.07 per acre each year. In other words, on a per acre basis, rice and peanut producers get more than fifteen times the amount of taxpayer dollars that corn producers receive and ten times the amount that wheat producers receive. The picture changes very substantially in Scenario 2 in which the expected price for each crop is assumed to be at about its recent fifteen-year historical average (as shown in table 3) and generally considerably lower than the PLC reference price for the crop established in the House bill. For example, in Scenario 2, the 2013 per bushel expected price for corn is $2.821 and the PLC reference price is $3.70. Similarly, the Scenario 2 per bushel expected price for wheat in 2013 is $3.50 and the PLC reference price is $5.50. In Scenario 2, estimated average annual PLC subsidy expenditures are enormous, about $18.8 billion dollars, almost eighteen times larger than in the CBO price environment. They are about as much the annual average spent by

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the federal government on all farm related programs over the past five years (including an average of $5 billion on direct payments, $7-$9 billion on crop insurance subsidies, and $5-$8 billion on conservation programs). As discussed above, it is well within the bounds of possibility that market prices for corn, rice, soybeans and wheat could become much closer to their recent 15 year historical averages than they are now. Hence, the House Committees PLC creates a substantial downside risk for taxpayers and the federal deficit and could well lead to unprecedented expenditures on farm subsidies that, as shown below, are also likely to have serious consequences for US trade relations with other countries. In Scenario 2, the distribution of those subsidies among crops is very different than in Scenario 1, as illustrated in figure 2. Corn receives 50% of total annual PLC subsidies ($9.4 billion), soybeans receives 25% ($4.7 billion), wheat receives 18% ($3.4 billion), rice 5% (almost $1 billion), and peanuts 2% ($297 million). Lower prices for corn, soybeans and wheat, commodities to which many millions of acres are planted, result in very substantial PLC subsidies for those crops. Nevertheless, even though rice and peanut producers shares of total PLC subsidies decline in Scenario 2, those producers do extremely well. As shown in table 6, on a per acre basis, peanut and rice growers remain the PLC subsidy winners. On average, per acre, rice producers would receive $322.72 and peanut producers $220 each year, while annual per acre subsidy payments would average $104.89 for corn, $64.78 for wheat, and $61.99 for soybeans. These are all very substantial returns to PLC participation, on average over 350% larger than the $5 billion in annual subsidies currently being paid out to all eligible crops under the direct payments program. For example, direct payment yields are in the 110-130 bushel range for many corn producers and in the 20-30 bushel range for many wheat producers because they

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were established in the early to mid-1980s. At per bushel direct payment rates of $0.24 cents for corn and $0.52 for wheat, per acre direct payments are typically in the range of $20 to $26 for corn producers and $9 and $12 for wheat producers. These per acre direct payments are substantially less than corn and wheat producers would receive under the PLC program in an environment in which prices shifted towards their longer term averages.

The Regional Distribution of Price Loss Coverage Subsidies Different crops are more or less intensively raised in different regions of the United States. Ten mainly Mid-Western states raise most of the corn produced by US farmers with production concentrated in Iowa, Illinois, Indiana, Minnesota and Ohio, while wheat is grown in many regions but concentrated in areas with drier climates like Western Kansas, Oklahoma, North Dakota and Montana. Some crops, like peanuts and rice, are grown only in a small number of states. Hence PLC subsidy payments are not evenly distributed among the states. Figures 3-8 show the distribution of estimated total PLC subsidies and PLC subsidy payments by crop over the entire five year period of the farm bill, 2013-2017, for each state under the CBO baseline price scenario. Figures 9-14 show the geographic distribution of estimated total PLC subsidies and PLC subsidy payments by crop over the same period for each state in the fifteen year historical average price scenario. The data in figure 3 show that, under the CBO baseline, while total PLC subsidies for all crops are relatively modest, they are largest in the Mid-West corn belt states, including Nebraska, Kansas (the largest wheat producing state), Texas (which has wheat, rice and peanuts), Georgia (where peanut production is concentrated) and California (which is one of the main rice producing states). Other West Coast states, Nevada and Utah (with very little crop production),

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and the New England states receive very little in the way of subsidies. Alabama, Florida, North Carolina and South Carolina receive relatively large amounts of subsidy, mainly because those are states that raise a wide variety of crops including peanut production in the Florida panhandle, Alabama and South Carolina (figure 8 shows the distribution of PLC peanut subsidies by state). States like Arkansas, with rice production concentrated in a few counties, as well as other rice states like Mississippi and Louisiana, also receive fairly substantial PLC subsidies (figure 7 shows the distribution of rice subsidies by state). Figure 9 shows the geographic distribution of total PLC subsidies for all crops over the period 2012-2017 in the historical fifteen year average price scenario. Clearly, in scenario 2 PLC subsidies are much larger than in scenario 1in all of the states that produce the five crops examined in this study. However, there are some somewhat subtle but important differences. Subsidies become even more heavily concentrated in Corn Belt states because per acre corn and soybean PLC subsidies increase substantially (figures 4 and 10 show the distributions of PLC corn subsidies in the two scenarios) and somewhat more concentrated in wheat producing states like Montana and Oklahoma (see figures 6 and 12). While the relative distribution of total subsidies moderates in rice and peanut producing states like Georgia, Texas, California and Florida, as discussed above, peanut and rice PLC subsidies are very substantial on a per acre basis, indicating that producers of those commodities would enjoy substantial gains under the House PLC program.

National and Crop Specific Supplementary Coverage Option Insurance Program Taxpayer Costs
Estimated national annual average aggregate costs and crop specific taxpayer costs of the Supplementary Coverage Option heavily subsidized insurance program proposed by the House 18

Agricultural Committee are presented in table 7. As discussed above, only one set of SCO cost estimates is reported. The estimates are based on CBO baseline prices and therefore applicable to scenario 1. As expected prices are used to value county level losses, SCO costs will be about 40 percent lower in Scenario 2 because recent fifteen year historical average prices are about 40 percent lower than the prices used in the CBO baseline scenario.

The SCO program involves two separate subsidies. The first is the premium subsidy that allows farmers to pay a premium that covers only 30% of the indemnities they can expect to receive (the actuarial fair program). Estimates of these costs are presented in the column entitled Net SCO Indemnities in table 7. The second subsidy is the amount paid by the federal government to private insurance companies, notionally to cover their operations and administration (A&O) expenses (which are likely to be very small because the companies have no loss assessment costs and minimal additional data collection requirements in order to process SCO policies). The federal government payment is expected to make A&O payments at a rate equal to about 25% of the net indemnities farmers receive (approximately 18% of the total premiums paid by the government and the farmers into the insurance pool which is the current A&O reimbursement rate for many federally subsidized insurance products). These A&O subsidy estimates are also presented in table 7, along with estimates of annual average total SCO subsidies and the five year (2013-2017) total cost of the SCO program. Premium or net indemnity subsidies, the difference between the indemnities received by farmers and the premiums they pay, are estimated to average $2.16 billion a year in Scenario 1. Corn producers are likely to receive over half of those payments ($1.23 billion), soybean producers about a quarter of the total ($583 million), and wheat producers about 16% ($345 billion). Rice and peanut producers are respectively to receive about $3 million and $1 million in SCO premium subsidies, largely because relatively little land is planted to those crops and, in
19

many counties, rice yields vary relatively little from one year to the next. Delivery subsidies under the proposed SCO program will be substantial, about $540 million, and will provide crop insurance companies with a significant 18% increase in their gross revenues from federal subsidies which, without the SCO, are forecasted to be around $3 billion a year in the current CBO baseline forecast. The total estimated annual average cost of the SCO program for the five crops is $2.7 billion under the CBO baseline forecast price scenario and, by itself, represents a substantial outlay by taxpayers. These annual average SCO subsidies would be about forty percent lower, about $1.5 billion, if prices moderated towards their longer run historical levels. The House Bill does not include any substantive payment limits for SCO subsidy payments and therefore SCO subsidies are effectively payments made on a per insured acre basis. A direct consequence is that, as with most other federal subsidy programs, SCO subsidies will disproportionately flow to large farms owned and operated by households that are wealthy and enjoy incomes well in excess of the median and average incomes of non-farm households and most taxpayers (Goodwin, 2011; Goodwin, Smith and Sumner, 2011). When the SCO subsidy estimates are added to the estimates of annual average PLC subsidies under CBO baseline assumptions about expected crop prices ($1.1 billion), the estimated annual joint costs of the SCO and PLC programs in that scenario are about $3.8 billion. As discussed above, this amount is very close to the bait and switch budget the House and Senate committees believed they could spend on new farm programs and still meet the objective of an annual $2.3 billion cut in total farm bill spending laid out in negotiations with the deficit reduction Super Committee. However, if crop prices moderate and return to their recent fifteen year average levels then, as also discussed above, PLC subsidy payments explode, SCO

20

subsidies remain relatively stable, and the total annual taxpayer costs of the two programs balloon to about $20 billion. This, as also previously discussed, is more than the taxpayer currently spends on all farm-oriented programs, including straightforward make famers richer programs like direct payments and crop insurance subsidies, as well as other programs targeted to research and development, education and technology transfer that actually provide benefits for everyone (consumers as well as farmers) by improving agricultural productivity.

The House PLC and SCO Program and the Senate ARC Shallow Loss Program A similar modeling approach and the same two price scenarios were used by the authors of this report to obtain estimates of the costs of the Average Revenue Coverage (ARC) shallow loss program proposed in the Senate version of the 2012 Farm Bill for four of the five commodities included in this study corn, rice, soybeans and wheat as well as cotton (but not peanuts for which ARC costs were expected to be very small). Those estimates are also

reported in tables 8 and 9 of this study for the two options within the ARC (using farm yields or county yields) between which farmers would be able to choose. Under the CBO baseline assumptions, for which estimates are reported in table 8, the Senate ARC shallow loss program is likely to cost taxpayers at least $2.6 billion a year, the estimated cost of all farmers choose the farm based program, and more probably about $3.1 billion, given that some farmers would prefer the county based ARC option. In Scenario 2, when crop prices are assumed to be at or close to their fifteen-year historical averages, annual average expenditures under the Senates ARC program increase substantially and are likely to fall into the high end of the range between $5 billion and $7.5 billion.

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These represent very substantial taxpayer expenditures on farm subsidies that would also disproportionately flow to large and wealthy farm operations because the program links them directly to current planting decisions and the total acres planted to each eligible crop. The Senate program also, therefore, violates current US WTO commitments and creates incentives for other countries to file WTO complaints against the United States. The only thing, therefore, to be said in favor of the Senate ARC shallow loss program is that from a policy, taxpayer, trade relations, economic efficiency or equity perspective it is somewhat less terrible and fiscally irresponsible than the House PLC and SCO proposal, which could well cost the taxpayer over $20 billion in some years. However, neither the Senate ARC nor the House PLC/SCO programs can be justified on any reasonable public policy grounds that seriously value economic efficiency, equity, and fiscal responsibility.

Trade Relations Implications of the Price Loss Coverage Program The World Trade Organization (WTO) implications of the numerous domestic subsidy proposals that are being considered in the 2012 Farm Bill deliberations do not appear to have played much of a role in the discussions. Nevertheless, WTO issues will matter in the end. Trading competitors and partners of the US will carefully evaluate the implications of each of the proposed new domestic support programs for their own agricultural sectors and markets and whether or not initiatives like the Senate ARC shallow loss program and House PLC and SCO programs violate current US commitments under existing trade agreements. Part 6 of Annex 2 of the Uruguay Round Agreement on Agriculture discusses the basis for exemptions from agreedupon reductions in domestic supports for agricultural commodities. This part of the Annex states that decoupled payments made to agricultural producers are exempt from commitments to

22

reduce domestic supports (farm subsidies) as long as they satisfy a number of specific conditions. Part 6.c of Annex 2 is the section most relevant to the PLC and other proposals that have included shallow loss payments. Part 6.c of the annex includes the following statement with respect to domestic subsidy program payments a country seeks to view as exempt from any reductions: the amount of such payments in any given year shall not be related to, or based on, the prices, domestic or international, applying to any production undertaken in any year after the base period. It is transparently obvious that payments made under the PLC program, the SCO program, and all of the shallow loss programs that have been proposed by the House and Senate Agricultural Committees do not satisfy this requirement and will not qualify for an exemption. All such payments will therefore be counted against the US limit on domestic supportsthe socalled amber box programs. The PLC payments, as discussed above, are determined using a product of a payment rate (determined by the price shortfall) and 85% of the payment yield. The payment yield will be determined by the farms current countercyclical payment yield (i.e., the base yield) or, at the farmers option, on an updated yield basis using yields for the period 2008-2012. Farmers can choose on a crop by crop basis of whether to establish yields on the basis of the 2008-2012 average yield, with the updated payment yield being set at 90% of this five-year average. With the possible exception of 2012, yields have been strong for most crops in most regions and have reflected a continuous upward trend in yields for most crops over the last 20 years. Farmers will obviously choose the yield option that provides the highest payment yield. The US currently has a commitment to limit domestic support, as defined by the Uruguay Round Agreement, to be no more than $19.103 billion each year. Under the current accounting

23

method used in classifying domestic support, US agricultural subsidies have been well below this ceiling over the period 2006-2012. However, the current US approach and the reported amber box payments reflect one important fact. Crop and revenue insurance programs are not counted as commodity-specific support but, instead, are counted as non-commodity specific support that is subject to a de minimis exclusion that allows countries not to report such payments if they are less than 5% of the total value of agricultural output. In particular, the difference between indemnities received and premiums paid by farmers are reported as non-commodity specific support by the United States. This would appear to be a glaring example of how an important program in fact, the most important and costly subsidy program in recent yearsis currently not counted against domestic support limits. So far, the United States has been able to report those expenditures in this way, in spite of the fact that such protection is most certainly coupled to production, acreage, and market prices. However, the current US approach has not yet been subject to a serious challenge and, as Smith and Glauber (2012) have noted, may not survive such a challenge. The point is relevant here because the PLC program bears many similarities to existing revenue insurance programs which cost taxpayers approximately $10 billion each yeara total that will be far higher in 2012 due to widespread production losses. In recent years, US agricultural programs have increasingly become the target for WTO complaints by many trading competitors. In particular, Brazil successfully challenged certain provisions on the US cotton program. As a result, the US is currently making production assistance payments to Brazilian cotton growers in order to maintain the generous support provided to US cotton growers. If prices remain high, the chances of the US coming into a violation of its overall cap on amber box support may remain low. Under the baseline scenario, total annual PLC payments are projected to be about $1.1 billion (Table 5).

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If, however, prices fall to levels that characterized agricultural markets only a few years ago, annual outlays could exceed $18 billion. Taken together with other domestic price and income subsidies (including crop insurance subsidies), which have tended to be around $6-7 billion in recent years, PLC is subsidies are likely to place the US in violation of its WTO commitments, making the country vulnerable to unfair trade challenges under the provisions of the WTO agreement. The problem would be compounded by the $2.1 billion in annual average premium subsidies that would be received by farmers under the proposed SCO crop insurance program. In fact, in a market environment in which crop prices return to their longer run average levels, by themselves PLC and SCO subsidies would exceed current US WTO commitments on domestic supports. The demonstrated willingness of many of US competitors to challenge agricultural subsidies under the WTO should serve as a clear signal that the PLC program, the SCO program, the Senate ARC shallow loss program and other similar policy proposals are almost certain make the US a target for new WTO complaints. The amount of PLC subsidy payments (as well as payments under the Senate ARC shallow loss program) clearly depends on the future path of prices and no one can predict with any degree of certainty what prices will be, even over a relatively short horizon, much less over the five-year term of the next farm bill. However, as discussed above, the potential for the PLC program to generate very huge subsidies is substantial. Concerns about WTO have been largely ignored by the House and Senate Agricultural Committees in the farm bill deliberations. Whether this reflects a substantial and perhaps heroic degree of confidence that prices will remain high or, more likely, an overall lack of concern over the WTO treaty promises made by the US is unclear. However, WTO challenges to programs

25

like the House PLC and SCO and the Senate ARC proposal will almost certainly be made if corn, soybean, wheat and other crop prices return to the levels witnessed only a few years ago. This is especially the case, given that WTO dispute resolution panels have tended to determine that policies like the House PLC and Senate ARC cause price suppression (lower prices than would otherwise occur) when world prices fall at the same time that domestic subsidies increase. This, of course, is exactly what would happen under either the PLC or the ARC program.

Summary and Conclusions In this study we have developed estimates of the taxpayer costs of the two major new Title I farm programs, the Price Loss Coverage revenue support program and the heavily subsidized Supplementary Coverage Option insurance program, proposed by the House Agricultural Committee in its version of a 2012 Farm Bill. The estimates are for five important crops to which the programs would be applied: corn, soybeans, wheat, rice and peanuts. Corn, soybeans and wheat account for over 85 percent of the cropland that would be planted to all crops eligible for PLC and SCO subsidies. Peanuts and rice are included because the lobbying groups for the producers of those commodities appear to have been very influential in the House Agricultural Committees Farm Bill deliberations. The major findings of this study are as follows: 1. The Price Loss Coverage program is likely to be very expensive for taxpayers if crop

prices moderate towards their recent historical average levels. While, if crop prices remain at or close to current record levels, expenditures on PLC subsidies would be relatively modest (about $1.1 billion), subsidy costs would explode if crop prices moderate and could well reach in excess of $18 billion a year if those prices return to their recent fifteen-year average levels, almost four

26

times the current cost of subsidies paid under the Direct Payments program, which the PLC would replace. 2. The heavily subsidized Supplementary Coverage Option is estimated to cost taxpayers

about $2.6 billion a year for the five crops considered in this analysis if prices remain at current levels and about $1.5 billion if prices moderate towards their recent historical average levels. If crop prices remain at their current record levels, farmers will receive about $2.1 billion a year, with most of the subsidies going to large and wealthy farm operations and land owners because they are directly linked to the amount of cropland being tilled by a farm. Crop insurance companies will also receive a new taxpayer funded revenue boondoggle of about $0.5 billion a year to manage the program for USDA, increasing the taxpayer funded subsidies they currently receive for managing other subsidized crop insurance programs by about 18% from their current annual average level of about $3 billion to about $3.5 billion. 3. If crop prices moderate towards their recent fifteen-year historical average levels,

together the House PLC and SCO programs will cost taxpayers over $20 billion a year, more than all current spending on farm oriented programs, including publicly funded R&D and education programs that generally benefit consumers and processing companies in addition to farmers by improving agricultural productivity, as well as current programs mainly targeted towards enhancing farm incomes like the subsidized crop insurance, direct payments, disaster aid, and loan rate programs. 4. Rice and peanut producers, who lobbied intensively for the House PLC program, will

receive substantial benefits from that program, whether or not crop prices remain at their current record and near record high levels. Under the CBO baseline forecasts of expected prices, both

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peanut and price producers would receive an average annual subsidies of about $68 on every acre they plant. A rice or peanut producer who planted 1,000 acres would therefore receive an annual PLC check of $68,000 a year, about 40% more than the total income received by the median non-farm household in the United States. If crop prices moderated towards their fifteen-year historical average levels, per acre PLC payments would increase to $224 for peanuts and $327 for rice. 5. Essentially, the PLC and SCO programs would be new and potentially very lucrative

entitlement programs for farmers that together could well cost taxpayers more than four times as much as that Direct Payments program they would replace. 6. Under both the PLC and SCO programs, the total amount of subsidy a farm household

received would be tied to the amount of land the household farmed, as is currently the case with direct payments and crop insurance subsidies. As a result, the largest and wealthiest farm households would receive most of the tax payer funded welfare payments that would be made under those programs. 7. The PLC and SCO programs also have potentially important adverse implications for US

trade relations with other countries because, without question, both policies represent new programs that provide incentives for increased crop production because subsidies are tied to current production decisions. These consequences are likely to include reduced access to export markets for agricultural commodities and, as in the recent Brazilian cotton case, penalties for violating existing trade agreements that fall on taxpayers. Further, given the scope that countervailing measures by other countries are allowed to take against the United States if it

28

violates its WTO commitments, access could be restricted to export markets for non-agricultural commodities, including intellectual property based products and services. In summary, the PLC and SCO programs have the potential to be hugely expensive for the US taxpayer and, to an even greater degree than the Senates ARC shallow loss program, budget busters that will increase (not reduce) the federal deficit. They will create incentives for economic inefficiencies by distorting crop production choices and, in some areas of the country, will encourage expanded production on environmentally sensitive lands. The programs will channel most of the subsidies they provide to large wealthy farms and large land owners in an agricultural sector that is financially perhaps the most stable and successful sector of the US economy and least in need of government welfare checks. And they will almost certainly have a substantial adverse effect on US trade relations with other countries, both with respect to agricultural and on-agricultural export markets. Hence, especially in economic times that genuinely require the federal government to be fiscally responsible, it is difficult to see why Congress would support the introduction of the PLC and SCO proposed by the House Agricultural Committee or, for that matter, the Average Revenue Coverage shallow loss program proposed in the Senate 2012 Farm Bill which, to a greater or lesser degree, shares all of the same drawbacks.

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Bibliography Babcock, Bruce A., and Chad E. Hart. Crop Insurance: A Good Deal for Taxpayers? Iowa Ag Review 12(3): 1-10, 2006. Goodwin, Barry K. Were Not in Kansas Anymore: Is There Any Case for Ag Subsidies. American Enterprise Institute, July 2011, available September 6, 2012 at http://www.aei.org/paper/economics/fiscal-policy/federal-budget/were-not-in-kansas-anymoreis-there-any-case-for-ag-subsidies/. Goodwin, Barry K., Vincent H. Smith, and Daniel A. Sumner. American Boondoggle: Fixing the 2012 Farm Bill. American Enterprise Institute, July 2011, available September 6, 2012 at http://www.aei.org/files/2011/11/03/-americanboondoggle_174848782104.pdf. Goodwin, Barry K., and Vincent H. Smith.. Private and Public Roles in Providing Agricultural Insurance in the United States. 173-209 in Public Insurance and Private Markets, edited by Jeffrey Brown. Washington, D.C.: AEI Press, 2011. Smith, Vincent H. Premium Payments: Why Crop Insurance Costs Too Much. American Enterprise Institute, July 2011, available September 6, 2012 at http://www.aei.org/article/premium-payments-why-crop-insurance-costs-too-much/. Smith, Vincent H. The Grim Reapers of Crop Insurance. The American, August 2012, available at http://www.american.com/archive/2012/august/the-grim-reapers-of-crop-insurance. Smith, Vincent H., and Joseph W. Glauber. Agricultural Insurance in Developed Countries: Where Have We Been and Where Are We Going? Applied Economic Perspectives and Policy: Winter 2012, 34(3). Smith, Vincent H., Barry K. Goodwin, and Bruce A. Babcock. Field of schemes: The taxpayer and economic welfare costs of shallow-loss farming programs. American Enterprise Institute, May 2012, available September 6, 2012 at http://www.aei.org/paper/economics/fiscalpolicy/field-of-schemes-the-taxpayer-and-economic-welfare-costs-of-shallow-loss-farmingprograms/. United States Department of Agriculture Economic Research Service. 2012 Farm Income Forecast. August 2012, Washington, DC,. Available September 6, 2012 at http://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/2012-farm-sectorincome-forecast.aspx. World Trade Organization. 2012. Uruguay Round Agreement on Agriculture. Available July 1, 2012 at: http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm.

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Table 1. CBO Baseline Prices: 2010-2017 Corn ($ per bushel) $5.180 $6.120 $4.964 $4.538 $4.652 $4.692 $4.708 $4.736 Peanuts ($ per lb.) $0.225 $0.300 $0.310 $0.260 $0.253 $0.250 $0.250 $0.249 Rice ($ per lb.) $0.127 $0.142 $0.125 $0.128 $0.131 $0.131 $0.132 $0.132 Soybeans ($ per bushel) $11.300 $11.700 $11.000 $10.471 $10.682 $10.804 $10.838 $10.903 Wheat ($ per bushel) $5.700 $7.300 $6.050 $5.630 $5.690 $5.790 $5.870 $5.950

Year 2010 2011 2012 2013 2014 2015 2016 2017

Source: United States Congressional Budget Office Note: Prices are included for 2007 to 2017 because five years of historical prices are used to compute revenue guarantees in the shallow loss programs most commonly being considered by Congress. Hence, for example, to obtain estimates of potential program costs, price data are required for 2008-2012.

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Table 2. Historical National Average Annual Prices for Major Row Crops: 19962011

Year

Corn Prices $ per bushel $2.71 $2.43 $1.94 $1.82 $1.85 $1.97 $2.32 $2.42 $2.06 $2.00 $3.04 $4.20 $4.06 $3.55 $5.18 $6.12 $4.96 $2.23 $4.68 $3.10

Soybean Prices $ per bushel $7.35 $6.47 $4.93 $4.63 $4.54 $4.38 $5.53 $7.34 $5.74 $5.66 $6.43 $10.10 $9.97 $9.59 $11.30 $11.70 $11.00 $5.73 $10.61 $7.45

Wheat Prices $ per bushel $4.30 $3.38 $2.65 $2.48 $2.62 $2.78 $3.56 $3.40 $3.40 $3.42 $4.26 $6.48 $6.78 $4.87 $5.70 $7.30 $6.51 $3.30 $6.27 $4.35

Peanut Prices $ per lb. A

Rice Prices $ per lb. $0.100 $0.097 $0.089 $0.059 $0.056 $0.043 $0.045 $0.081 $0.073 $0.077 $0.100 $0.128 $0.168 $0.144 $0.127 $0.142 $0.125 $0.07 $0.14 $0.10

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average Prices (19962006) Average Prices (20072012) Average Prices (19962012)
A

$0.182 $0.193 $0.189 $0.173 $0.177 $0.205 $0.230 $0.217 $0.225 $0.300 NA A $0.23 $0.21 A

Peanuts were produced and marketed under a complex quota system until the 2003 crop marketing year. Average annual prices are therefore only reported for the period 2003-2012. As a result, average prices for peanuts are not computed for the period 1996-2006 and the average price reported for peanuts for the entire period is for 2003-2012. In contrast to other crops, generally peanut prices were only about 20% higher during the period 2007-2012 than between 2003 and 2006. Source: USDA National Agricultural Statistical Service and USDA Economic Research Service

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Table 3. Recent Historical Price Scenario Crop Prices: 2010-2017 Corn ($ per bushel) $5.180 $6.120 $4.964 $2.821 $2.861 $2.837 $2.807 $2.786 Peanuts (cents per lb.) $0.225 $0.300 $0.310 $0.162 $0.156 $0.151 $0.149 $0.146 Rice (cents per lb.) $0.127 $0.142 $0.125 $0.080 $0.081 $0.079 $0.078 $0.078 Soybeans ($ per bushel) $11.300 $11.700 $11.000 $6.509 $6.571 $6.531 $6.462 $6.414 Wheat ($ per bushel) $5.700 $7.300 $6.050 $3.500 $3.500 $3.500 $3.500 $3.500

Year 2010 2011 2012 2013 2014 2015 2016 2017

Source: Authors information. Note: Prices are included for 2007 to 2017 because five years of historical prices are used to compute revenue guarantees in the shallow loss programs most commonly being considered by Congress. Hence, for example, to obtain estimates of potential program costs, price data are required for 2008-2012.

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Table 4. Price Loss Coverage Reference Prices, Effective Countercyclical Payment Price Triggers and Price Support Loan Rates PLC Reference Price CCP Effective Trigger A Price Support Program Loan Rate Ratio of PLC Reference Price to the CCP Effective Trigger Price 1.57 1.51 1.51 1.72 1.17

Corn Soybeans Wheat Rice Peanuts

$3.70 per bushel $8.40 per bushel $5.50 per bushel $14.00 per cwt $535.00 per ton

$2.35 per bushel $5.56 per bushel $3.65 per bushel $8.15 per cwt $459.00 per ton

$1.95 per bushel $5.00 per bushel $2.94 per bushel $6.50 per cwt $355.00 per ton

The CCP effective trigger price for a crop is the difference between the target price and the direct payment rate for the crop. For example, the target price and direct payment rate for wheat are $4.17 per bushel and $0.52 per bushel. The effective CCP trigger price for wheat is therefore $3.65 per bushel.

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Table 5. Price Loss Coverage Program: National Estimated Annual and Five Year Average Federal Budget Costs)

Case 1: CBO Baseline Price Payments ($ millions) 2013 Corn Soybeans Wheat Rice Peanuts Total 2014 2015 2016 2017 Five-Year Total Annual Average Outlays

$471 $99 $498 $233 $79 $1,381

$368 $74 $433 $197 $91 $1,162

$336 $62 $354 $202 $95 $1,049

$324 $59 $314 $198 $95 $990

$304 $54 $278 $191 $99 $926

$1,802 $348 $1,877 $1,021 $460 $5,508

$360 $70 $375 $204 $92 $1,102

Case 2: Low-Price Payments ($ millions) 2013 Corn Soybeans Wheat Rice Peanuts Total 2014 2015 2016 2017 Five-Year Total Annual Average Outlays

$9,356 $4,709 $3,530 $950 $295 $18,841

$9,032 $4,558 $3,420 $940 $296 $18,247

$9,283 $4,663 $3,401 $973 $296 $18,616

$9,565 $4,826 $3,401 $990 $297 $19,079

$9,782 $4,942 $3,401 $1,003 $299 $19,427

$47,017 $23,699 $17,152 $4,856 $1,484 $94,208

$9,403 $4,740 $3,430 $972 $297 $18,842

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Table 6. Estimated Price Loss Coverage Program Subsidy Payments Per-Acre by Crop over the Period 2013-2017

Case 1: CBO Baseline Price PLC Payments Per Planted Acre by Crop 2013 Corn Soybeans Wheat Rice Peanuts 2014 2015 2016 2017 Annual Average Per Acre Outlays $4.02 $0.91 $7.07 $67.93 $68.36

$5.29 $1.30 $9.14 $78.71 $57.66

$4.10 $0.96 $8.21 $65.92 $67.36

$3.74 $0.81 $6.75 $66.77 $71.41

$3.60 $0.77 $5.97 $65.49 $71.04

$3.38 $0.70 $5.29 $62.77 $74.31

Case 2: Low-Price PLC Payments Per Planted Acre by Crop 2013 2014 2015 2016 2017 Annual Average Per Acre Outlays $104.89 $61.99 $64.78 $322.72 $220.49

Corn Soybeans Wheat Rice Peanuts

$105.02 $61.63 $64.78 $320.29 $214.67

$100.82 $59.83 $64.78 $314.40 $219.23

$103.41 $61.01 $64.78 $322.27 $221.81

$106.47 $63.03 $64.78 $326.74 $222.73

$108.73 $64.47 $64.78 $329.91 $224.01

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Table 7. Supplementary Coverage Option (SCO) Annual Average and Total Five Year Federal Budget Costs under CBO Baseline Price Forecasts A

Net SCO Indemnities (subsidies to farmers) A Corn Soybeans Wheat Rice Peanuts Total
$1,225.70 $583.10 $345.80 $2.80 $1.05 $2,158

SCO Budget Costs ($ millions) Delivery Cost Annual SCO (A & O) Budget Subsidies to Outlays Insurance Companies B
$306.43 $145.78 $86.45 $0.70 $0.26 $540 $1,532.13 $728.88 $432.25 $3.50 $1.31 $2,698

Total SCO Budget Outlays over the period 2013-2017

$7,661 $3,644 $2,161 $18 $7 $13,490

Net indemnities, defined as the difference between total indemnities and farmer paid premiums, are computed as 70 percent of estimated expected gross indemnities because premium subsidies are defined as 70 percent of the estimated actuarial fair premium which are also the expected or average total indemnities.
B

Delivery cost subsidies, the estimated payments to agricultural insurance companies for the delivery of SCO insurance products, are assumed to be 25% of total premiums (which equal estimated average total indemnities). Source: The authors.

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Table 8. Stabenow-Roberts Senate Bill Mark Up Shallow Loss Program: National Estimated Annual and Five Year Average Federal Budget Costs under CBO Baseline Expected Price Forecasts
Farm Based Option ($ millions) 2013 Corn Cotton Rice Soybeans Wheat Total $1,224 $128 $70 $766 $358 $2,545 2014 $1,349 $153 $65 $787 $321 $2,677 2015 $1,427 $158 $57 $784 $253 $2,680 2016 $1,442 $157 $53 $788 $247 $2,688 2017 $1,273 $145 $54 $748 $246 $2,467 Five Year Total $6,717 $742 $299 $3,874 $1,425 $13,057 Annual Average Outlays $1,343 $148 $60 $775 $285 $2,611

County Based Option ($ millions) 2013 Corn Cotton Rice Soybeans Wheat Total $794 $116 $46 $448 $416 $2,562 2014 $936 $160 $33 $457 $348 $1,934 2015 $1,037 $167 $18 $430 $229 $1,880 2016 $1,044 $162 $13 $424 $217 $1,860 2017 $764 $139 $13 $352 $211 $1,479 Five Year Total $4,574 $744 $122 $2,110 $1,421 $8,972 Annual Average Outlays $915 $149 $24 $422 $284 $1,794

Source: Vincent H. Smith, Barry K. Goodwin, and Bruce A. Babcock. Field of schemes: The taxpayer and economic welfare costs of shallow-loss farming programs. AEI, May, 2012, available at http://www.aei.org/paper/economics/fiscal-policy/field-of-schemes-the-taxpayer-and-economic-welfare-costs-ofshallow-loss-farming-programs/.

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Table 9. Stabenow-Roberts Senate Bill Mark Up Shallow Loss Program: National Estimated Annual and Five Year Average Federal Budget Costs under Low Expected Price Forecasts
Farm Based Option ($ millions) 2013 Corn Cotton Rice Soybeans Wheat Total $2,891 $229 $148 $1,676 $647 $5,592 2014 $3,175 $270 $147 $1,752 $608 $5,953 2015 $2,946 $272 $138 $1,706 $485 $5,547 2016 $2,677 $228 $96 $1,383 $403 $4,787 2017 $1,636 $154 $64 $873 $279 $3,005 Five Year Total $13,324 $1,153 $593 $7,391 $2,423 $24,883 Annual Average Outlays $2,665 $231 $119 $1,478 $485 $4,977

County Based Option ($ millions) 2013 Corn Cotton Rice Soybeans Wheat Total $4,290 $340 $248 $2,606 $957 $8,441 2014 $4,694 $401 $250 $2,707 $906 $8,958 2015 $4,380 $404 $239 $2,653 $733 $8,409 2016 $3,996 $340 $173 $2,184 $598 $7,291 2017 $2,340 $211 $83 $1,152 $368 $4,154 Five Year Total $19,700 $1,695 $993 $11,301 $3,563 $37,253 Annual Average Outlays $3,940 $339 $199 $2,260 $713 $7,451

Source: Vincent H. Smith, Barry K. Goodwin, and Bruce A. Babcock. Field of schemes: The taxpayer and economic welfare costs of shallow-loss farming programs. AEI, May, 2012, available at http://www.aei.org/paper/economics/fiscal-policy/field-of-schemes-the-taxpayer-and-economic-welfare-costs-ofshallow-loss-farming-programs/.

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Figure 1. Distribution of Total Annual Average Price Loss Coverage Subsidy Payments Among Crops: Scenario 1 (CBO Baseline Prices): $ millions

Peanuts, $92, 8%

Rice, $204, 19%

Corn, $360, 33%

Wheat, $375, 34%

Soybeans, $70, 6%

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Figure 2. Distribution of Total Annual Average Price Loss Coverage Subsidy Payments Among Crops: Scenario 2 (Fifteen Year Average Prices): $ millions
Peanuts, $297, 2% Rice, $971, 5%

Wheat, $3,430, 18% Corn, $9,403, 50%

Soybeans, $4,740, 25%

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