Audio Transcript:

Brady Brewer: Dr. Brad Lubben, who’s an extension policy specialist at the University of Nebraska-Lincoln, gave a talk at the 2024 Top Farmer Conference on the 2024 policy outlook specifically related to the farm bill. Brad, welcome to the podcast.

Brad Lubben: Well, Brady, thank you for the opportunity to visit. As I talk about the Farm Bill, we’re always talking about the new farm bill to come and the decisions for producers specifically relating to commodity programs. Well, we’re at that stage today where producers have program enrollment decisions here in early 2024. As a result of the fact that we didn’t finish a farm bill on time in 2023 and we ended up with a one year extension.

Brady Brewer: Welcome to the Purdue Commercial AgCast, the Purdue University Center for Commercial AgCast podcast featuring farm management news and information. I’m your host, Brady Brewer, and we are going to be giving a recap of Dr. Brad Lubben’s talk that he gave at the 2024 Top Farmer Conference here in West Lafayette on the 2024 policy outlook specifically related to the farm bill. Before we get into the topic, I want to remind all the listeners, you can find the podcast on the Center for Commercial Agriculture’s website at purdue.edu/commercialag.

So how did, why, why, why didn’t we get a new farm bill in 2023? Because that’s what a lot of people expected to happen.

Brad Lubben: The farm bill was due in 2023 in September before the existing 2018 farm bill expired. But it faces the same sort of challenges, economic and, and budget and political challenges, that we’ve seen over many, many years. The 2023 Farm Bill was really the debate was somewhat similar to what we saw back in 2012 and through 2014, and also in 2017, 2018.

The Farm Bills are large, what we call omnibus pieces of legislation that have multiple titles and multiple constituencies and generally cross the finish line with strongly bipartisan support, Republicans and Democrats, and also strong support across sort of all divides. Rural and urban, farm and non-farm, food and farm interest. It takes it takes the whole coalition generally to get a farm bill through both the House and the Senate. Well, we’ve seen history in the 2014 farm bill and in the 2018 Farm Bill, where that debate actually failed and the Farm Bill failed on the floor of the House before being resurrected and ultimately passed. And we saw that same sort of flavor, at least in 2023, where we had large, principled, somewhat rhetorical fights about the parts of a Farm Bill. That it would take compromise to get done. But never an effort to actually formally debate and compromise on those things. And, long story short, we didn’t get a farm bill done on time. We, before the end of the year, moved to a one year extension. And we get to start the farm bill debate all over again in 2024.

Brady Brewer: Yeah, there’s a lot of different titles within a Farm Bill that allows for a lot of different opinions to come about. And a lot of people got to coalesce around one general consensus, which is hard.

Now you mentioned different economic landscape as well, not just the political. So what? How does the different economic landscape play into where we are today?

Brad Lubben: Right. Well, the economics here in 2024 look a little bit different than the last time we passed a farm bill back in 2018. We were concerned about low price levels. We were concerned about the importance of the safety net at that point in time. And as a, as a factual sort of reference here, the 2018 Farm Bill ultimately was passed as a very status quo bill. It maintained safety net tools. It didn’t have new budget money to, to spread around, so it largely maintained existing tools. But that gave producers the same ARC and PLC decisions that they’ve grown familiar with in a time period when the, the downside support provided by those programs is pretty important. In the last two to three years with market prices at higher levels where they’ve been, those same safety nets have been sort of further and further out of the money. Which means there’s an awful lot at risk before the safety nets would kick in. That led many producer groups to say, hey, we need to strengthen the safety net. And that means we want to raise the reference prices, or we want to improve the payment rates, or, or somehow bring the safety net up. Because prices are higher, but we have concerns about them going down. The costs are also higher, and we have concerns about them staying high. Which means that profits could disappear long before the old safety net would kick in. That’s the concern that led to the debate, or at least part of the debate over this bill.

There are features of the Farm Bill, though, that do ramp up that safety net for 2024. They were part of the 2018 Farm Bill legislation. And that is that there’s actually a higher reference price for 2024 then there was for 2023, because it’s now tied to either the higher of the legislated reference price, 3.70, for example, in the case of corn or 85 percent of the five year olympic average price. And if you do the calculations, we’ve now had enough years of higher prices. That means the five year average is higher, which means that that number is 4.01. So in 2024 for corn, the reference price goes up almost 10 percent from 3.70 to 4.01. Those are big changes to a producer’s analysis here in early 2024. And that means the decision actually perhaps matters more this year than it did for the last couple.

Brady Brewer: Yeah, so there’s some looming decisions and we’ll get to those here in just a second on what producers are going to be deciding between here for the 2024 growing season. In your talk, you also mentioned some directions and challenges with the current farm bill for 2024. One of those was the commodity program revision. So what’s going on with some of the revisions that you’re expecting with the commodity programs?

Brad Lubben: Yeah. Well, as, as we face this sort of changing economic environment in 2024, higher prices mean that the safety net actually bumps up higher under existing legislation. But we still have this concern about shrinking margins as price outlook maybe looks a little bit lower. But commodity production costs are still sticking pretty high and concerns about the need to raise a safety net. Well, we may have interest. We may have groups that want to push for a stronger safety net. But a stronger safety net costs more money. And that’s the big challenge about what do we do about the safety net in Title I? Well, whatever it is you want to do, it costs money. And finding money is maybe the biggest obstacle we’ve had to the idea that we can get something done with this new farm bill.

Brady Brewer: Yeah, balancing the congressional budget and finding that money in the budget is a big challenge here moving forward.

You also mentioned conservation program spending as a big challenge here. So what, what do we need to know about the conservation programs maybe changing or, or going forward through the next farm bill?

Brad Lubben: Well, on, on the face of it, one of the things we see in conservation is, oh, there’s new money. That might be one of the bank accounts that that we see to say, how can we pay for the things we want?

But it’s more complicated than that. There’s existing dollars in conservation that have been part of previous farm bills that are part of what we call the baseline. And that offers a, a level of expectations for what we can fund going forward, for CRP, and EQUIP, and CSP and those kinds of things. That’s about 6 billion a year of total spending. 60 billion plus over a 10 year budget horizon. But then there was the Inflation Reduction Act. Which was passed by Congress, a trillion dollar plus bill that included about twenty billion dollars of additional spending on conservation targeted to those working lands programs for specific practices related to climate smart goals and, and objectives.

So there’s new money, extra money in conservation that’s authorized. With two very important caveats. One, it’s, was only a one time authorization. So, it’s projected to be spent over the next several years, but it’s not officially part of a long run baseline for reauthorizing a farm bill. So, we could simply keep it as is, and spend those dollars down and be done. Or we could see creative attempts to try and turn those one time dollars into a longer run commitment of continuing dollars as a way to ramp up the overall conservation spending. That’s part of the question. Can we just find a way to keep that money around. The second part is but it’s for climate smart and there’s a whole lot more than just climate practices that are demanded in from conservation interests. And then of course there’s a third debate of well, but that’s a big account of money and maybe that would help us pay for other things, too There’s a big fight over it just because it’s a big dollar amount. But we also see interest saying, thou shalt not touch conservation dollars. It’s a, it’s a pretty big ask to think that it would go anywhere but stay in conservation.

Brady Brewer: And then the final direction challenge that you mentioned in your talk that I want to discuss real quick is the largest expenditure of the Farm Bill, and that is nutrition assistance. You know, formerly known as Food Stamps . What, what do we see happening with the nutrition assistance title of the Farm Bill?

Brad Lubben: Well, you’re right. As we know, the Nutrition Assistance title funds the Supplementary Nutrition Assistance Program. SNAP is the modern version of what we originally implemented as food stamps decades ago. But it has become more than 80 percent of the total bill. And it overwhelms the rest of the, the legislation to the point that even an administrative change in SNAP benefits as a result of requirements in the last Farm Bill, even an administrative change in the calculation of benefits actually resulted in more new spending than the rest of the Farm Bill put together. It’s that big. It’s a, it’s a big part. And historically, there was this sort of compromise coalition. Urban food interests coalesced with rural farm interests to say, well, if, if you support our farm bill, we’ll support your food bill. And there was a balance of, of support, and that’s the coalition that helped get a large omnibus farm bill to the finish line.

That coalition still theoretically exists. It’s hard to imagine a farm bill that doesn’t include food, but it’s, it’s so overwhelmingly the biggest part of the bill, the, the biggest elephant in the room by far, that we know we’ll get a food bill. We don’t know whether that brings any momentum to get the rest of the bill across the finish line by itself. So, so, there’s, most of the dollars are spent in that area. There is no sense that we could do things and save dollars there that can go somewhere else. That’s an independent fight and argument. And the reality is, we’ve also been fighting about that for more than 10 years too. That’s one of the big holdups in getting a farm bill done is coming to some agreement or consensus on what we should spend or what we shouldn’t spend in that area. Completely separate from the rest of the bill.

Brady Brewer: So that’s an overview of the current landscape and some of the directions and challenges for the, the current farm bill and the new farm bill. But Brad, they have a decision. Farmers have a decision to make here this spring. So what are some of the key inputs to that decision and, and what do farmers need to be thinking about with the decisions they have coming up?

Brad Lubben: Well, as you’re right, Brady, as you know, so we didn’t get a new farm bill. Well, we got a simple one year extension, but included in that means we have a new decision over farm program participation. The farm bill now contains an annual decision, and we have that decision again this year. What’s different this year is that for the first time, I think for some of our at least primarily midwestern commodities, the comparison of the safety net choices are much more complex and much closer than they’ve been.

We’re talking about ARC and PLC. ARC, or Agricultural Risk Coverage, is the, is the moving average revenue based safety net. PLC, Price Loss Coverage, is the traditional sort of price safety net. Well, when we first faced this decision a decade ago, the moving averages were coming off of high prices, which meant that the ARC protection looked better than PLC, and overwhelmingly corn and soybean producers chose ARC. Grain and sorghum, wheat and sorghum producers in the, in the midwest and the great plains waffled a bit between them. And when you move to the south, rice and peanut producers overwhelmingly chose PLC.

Then you move forward to the last Farm Bill, the 2018 Farm Bill, the first decision was in 2019 and 2020. Prices had come down over those preceding years, which meant that the average came down, which meant that the relative protection in ARC came down, which meant that PLC looked better for most commodities, and enrollment shifted dramatically towards PLC.

Now it’s 2024. One of the important features of the 2018 Farm Bill was that there’s a new calculation and the PLC reference price level climbs for corn, as an example, from 3.70 to 4.01. The ARC protection level, if you indulge me to sort of do a calculation, there’s a benchmark yield times a benchmark price times 86 percent gives you an ARC guarantee. And revenue losses below that are covered by the program for the first 10 percent. Just to make it more complex. If you assume benchmark yields, then you take benchmark price times 86 percent. That’s effectively where ARC kicks in. Assuming you hit trend yields. That’s 4.08 for corn. So do I want 4.01 protection in PLC? Or do I want 4.08 protection at trend yields in ARC? It’s a whole lot closer decision, more difficult, decision this year than it’s been previously.

Brady Brewer: Yeah, because you’re making some pretty big assumptions there on trend yield, what’s weather going to be and stuff like that. That’s going into that.

Brad Lubben: If, if I’m just comparing PLC and ARC, I’m fundamentally thinking, well, ARC is this county based revenue safety net. I’m not even talking about individual ARC. Very few people choose it. It’s very complex. It might be relevant, but it’s a small number. County based ARC looks like a county based revenue insurance policy. Tied to, but tied to a moving average price, not tied to this year’s market insurance price. Given that we’re coming off of higher averages, that suggests that a county based revenue safety net tied to a moving average looks pretty good this year. It’s like a higher level county based insurance policy. Almost like the SCO or even the ECO supplemental policies that we could choose today. So that’s, that’s worth something.

Well, so is PLC. PLC is effectively a put option on your base acres, program payment yield, 85 percent of that. It’s a put option on some of your bushels at 4.01. Market, national market, your average price. Well, compare that to a 4 put in the futures market today. The market thinks that’s worth about 5 cents a bushel. That’s 5 cents a bushel translates into 5 to 10 dollars an acre itself. So they’re both worth something, which is more than we could save for the last 2 to 3 years. And, and so it’s worth thinking about.

To complicate it just a bit more. If you can see my hands waving here on, on radio. It’s not just ARC versus PLC, because, if you’re in ARC, you cannot purchase SCO, the supplemental coverage option, because they both look like a county based tool that roughly kicks in at the same parameters. If you’re in PLC, you could purchase SCO. So it’s not just ARC versus PLC, it’s perhaps it’s ARC versus PLC plus SCO. Okay. Well, I’m, I don’t have the numbers to tell you whether you should or shouldn’t buy SCO, but if I’m trying to do economic analysis of it SCO costs money.

Brady Brewer: Yep.

Brad Lubben: We don’t know what we’ll get back from it. But we do know how federal crop insurance works, and it’s subsidized, which means that expected indemnities over time are, are greater than producer paid premiums.

So what’s it worth? In the long run, it looks like it’s worth something. So, so maybe you have to analyze all of them to figure out which ones really fit where? Which ones better protect my risk? Do I really face price or do I really face revenue? Which ones better fit my risk management plan before I can fundamentally make a decision?

Brady Brewer: So this is a complicated decision. I’ll, I’ll give you a second here. Dr. Lubben, do you do you have any decision tools or anything that farmers can go to that you can point us to on the web or on University of Nebraska’s website that may help with this decision?

Brad Lubben: You know, I believe the, the long running decision tools, there have been some farm program decision tools developed previous, both in the last Farm Bills, I think they’re still active. There’s, there’s a decision tool on the University of Illinois Farm Doc site. Or, or at least connected to that, to that site that was produced that helps analyze farm program decisions and choices. It really is just ARC versus PLC. It doesn’t specifically think about SCO. There’s a similar decision tool that was created in parallel at that time at Texas A& M University and their Ag and Food Policy Center. So that’s another option to say, well, if I want to say the numbers. I think both those decision tools are still there, and can they be updated for this year’s decision? I think they’re there.

The, the reality is the, the, the difficulty of this decision is, do I try and pencil out and think, well, what do I think the payment’s going to be? And I’m just comparing size of payments? Or am I really comparing which one really gives me better risk protection? What’s my greater downside risk? Is it price? Then maybe PLC fits, but I could also choose a put option instead. Or is it revenue? And there may be SCO fits along with my underlying crop insurance decisions to go along with it. So, so it’s, it’s more, I think it’s more conceptually difficult than it is mathematically difficult.

Brady Brewer: So there you have it. Some resources to go to and maybe some, some key things to think about as you’re making the decisions here through the spring of 2024. I just want to remind all the listeners for more farm management news and economic information visit us at the Purdue Center for Commercial Ag’s website at purdue.edu/commercialag. You can also find us on Twitter with the handle @PUCommercialAg. On behalf of the Center for Commercial Agriculture, here at Purdue University, we thank you for listening.