The 2012 Farm Bill, Part 1

Earlier this month, the U.S. Senate passed its version of the 2012 Farm Bill. Every five years, a new farm bill sets federal agricultural policy in theUnited States. The most recent version, S. 3240, the Agriculture Reform, Food and Jobs Act of 2012, features many similarities to previous bills, with its focuses on insurance, conservation, and public benefits. However, there are some important differences that farmers should know.

Importantly, the proposed bill would repeal the current direct payments to farmers in an effort to scale back federal spending. It also repeals the counter-cyclical payments (which were made when the marketing year average price was less than an arbitrary target price set by Congress), and the average crop revenue election program (ACRE), which was a more advanced regime that took into account production risk and the actual number of crops or acres grown by a farmer.

In their place, the bill introduces Agricultural Risk Payments. Payments are made to farmers if the actual crop revenue for a covered commodity (corn and soybeans) for the crop year is less than the agricultural risk coverage guarantee for the crop year.

Actual crop revenue is the product of the actual average individual yield or the actual average county yield, depending on the producer’s election, multiplied by the midseason price.

The agricultural risk coverage guarantee is 89% of the average yield for the most recent five crop years, excluding the highest and lowest yields, multiplied by the average national market year average price for the most recent five crop years, excluding the highest and lowest prices.

To put this into practical terms, suppose a farmer elects to be covered based on the actual average county yield. Next, suppose that the actual average county yield for corn was 180 bu/acre and for soybeans was 52.45 bu/acre. Those were roughly the actual average county yields forButler County,Iowa in 2011 according to the National Agricultural Statistics Services. A rough estimate of the midseason price, using previous years’ midseason prices can be set at $5.26 for a bushel of corn and $11.35 for a bushel of soybeans. This would bring the actual crop revenue for purposes of the 2012 Farm Bill to $946.08 for corn and $595.20 for soybeans.

Now, we have to figure out the agricultural risk coverage guarantee. Once again, we start with the actual average county yield, but now we have to multiply it by .89. This brings a total of 160.20 bu/acre of corn covered and 46.68 bu/acre of soybeans covered, using the Butler County 2011 average yields. Next, multiply that by the national average market price for the past five years, excluding the lowest and highest. For corn, that is roughly $4.26/ bushel and for soybeans, that is roughly $10.29/bushel. The total for the agricultural risk coverage guarantee is thus $682.45 for corn and $480.34 for soybeans.

Now we can bring this all back home under the Agricultural Risk Payments. As stated above, payments in the proposed 2012 Farm Bill crop insurance regime are made to farmers if the actual crop revenue for a covered commodity (corn and soybeans) for the crop year is less than the agricultural risk coverage guarantee for the crop year.

If a producer’s average corn yield is 180 bu/acre, the Midseason price would have to be below $3.79 to collect an Agricultural Risk Payment. For soybeans at 52.45 bu/acre, the Midseason price would be below $9.16. In our example, because the Midseason price was at $5.26 for corn and $11.35 for soybeans, the actual crop revenue ends up greater than the agricultural risk coverage guarantee, so no payments would be made to the Butler County farmer there.

We will be paying close attention to the development of the 2012 Farm Bill and will try to keep the blog updated on significant happenings as it makes its way through the legislature. Stay tuned for further updates.

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