Ag Policy Blog
Chris Clayton DTN Ag Policy Editor

Thursday 03/13/14

FAPRI Projects Billions More in PLC Payments Than CBO Numbers

Lower projected farm prices for some key commodities over the next decade have the University of Missouri Farm and Agricultural Policy Research Institute forecasting nearly $21 billion in spending on the farm bill's new target-price program than the Congressional Budget Office scored for the Price Loss Coverage Program.

The $21 billion higher cost estimate less than two months after the new farm bill passed now has conservative group Heritage Action crowing "We told you so."

FAPRI came out with its 10-year baseline projection for commodities, looking at future production, prices, farm subsidies and overall farm income.

FAPRI's forecast shows the new target-price program -- PLC -- would cost about $34.2 billion over 10 years because a high percentage of farmers in some crops would enroll heavily in the program and trigger PLC payments due to lower long-term forecasts for commodity prices.

In comparison, the Congressional Budget Office projection for PLC was about $13.1 billion over 10 years. That's $21 billion spread in the cost forecasts between FAPRI and CBO on that one commodity program.

PLC will pay farmers when the average market price for a commodity averages below the target price for the marketing year. Some of those target prices include: wheat, $5.50 a bushel; corn, $3.70 a bushel; soybeans, $8.40 a bushel, barley, $4.95 a bushel; grain sorghum, $3.95 a bushel and rice, $14 per cwt.

FAPRI projected the other major commodity program, Agriculture Risk Coverage, or ARC, would cost $14 billion over 10 years. That actually closely matches the CBO projection of $14.1 billion. ARC is a revenue guarantee program that is expected to pay higher coverage levels in the early years of the farm bill, but would taper off if commodity prices remained lower and dragged down the average revenue guarantee as well.

FAPRI estimates that as commodity prices decline then the PLC payments will become larger in later years. FAPRI noted that "Unlike direct payments, future ARC and PLC payments may vary greatly from one year to the next." FAPRI noted that PLC payments could be large if prices drop far below the set target prices.

ARC payments would have about 1.4 billion a year. Due to higher average revenue over the past five years, ARC payments would be more in 2014-2016, but decline because of lower overall revenue protection levels in later years. ARC has more of a cap on possible payments because ARC payments are limited to 10% of the benchmark revenue.

FAPRI's forecasts are factored using an average of 500 different market and production scenarios.

While corn and soybean producers are more likely to trigger ARC payments early on, other commodities are more likely to trigger PLC payments longer-term so enrollment would be more heavily weighted toward PLC. Wheat, sorghum, barley and rice are more likely to trigger PLC payments.

Heritage Action, which aggressively lobbied against the farm bill, issued a news release "Farm Subsidies Grow, Told You Sow." The group noted it had actually forecast higher ARC payments, but had also criticized the PLC.

As Heritage stated, Conservatives had long been aware that the new farm bill would be more costly, and we took issue specifically with these new crop insurance programs. ”While some bad subsidies and programs were removed, lawmakers replaced them with even riskier taxpayer-funded programs.”

Heritage added, "We highlighted the risks associated with including the Senate’s Agriculture Risk Coverage (ARC) program, which according to analysis by the American Enterprise Institute could coast at much as $7 billion annually based on the 15-year historical average price. We warned against the House’s Price Loss Coverage (PLC) program, which set the baseline for commodity prices higher than what would be necessary to cover major losses.

“These baseline scoring gimmicks could wipe out all the “savings” that negotiators are touting in the conference report,” Heritage noted.

FAPRI's forecast projects overall lower farm income in the coming years compared to record revenue of $130.5 billion in 2013. FAPRI shows overall farm income averaging closer to $84 billion a year throughout the next decade with 2014 likely being the high income year at $97.8 billion.…

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Posted at 4:55PM CDT 03/13/14 by Chris Clayton
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