What is in this article?:
- With a risk management focus, Farm Bill negotiations will need to answer seven questions.
Price or revenue protection
Question 3: Will the across-year programs focus on price or revenue protection?
It is easier to forecast payments with a price program. Prices lower than the support price will results in payments.
In contrast, payments by a revenue program depend on low revenue not low price. Low prices may be offset by high yields resulting in no payments.
Thus, forecasting payments by a revenue program requires consideration of the interactions of yield and price when determining revenue and thus revenue program payments. On the other hand, low revenues, not low prices, are generally a more accurate indicator of poor financial performance.
Thus, revenue programs generally are viewed as targeting payments better to years in which revenues are low.
Question 4: Will the support levels for across-year programs react to changes in market conditions?
The revenue programs in last year's Farm Bill drafts had support levels that reacted to the market. The revenue support targets were set using the product of a moving average of historical prices and historical yields.
In contrast, the target price proposals in last year's House Agricultural Committee Farm Bill did not react to the market. The target prices were set at levels fixed for the life of the farm bill.
Most target price programs have not had market moving targets built into the program. However, it is possible to build a target price program that would react to the market.
Rather than having legislated fixed prices, target prices could be set using an average of previous prices that move over time. Lower market prices would lower the target price while higher market prices would increase the target price.
Reacting to the market implies certain characteristics. Of particular importance, a period of low prices that persist for several years will result in lower payments during later years of the low price cycle.
Conversely a program that does not react to the market will have similar payments in the first and later years of the low price cycle. These differences have important international trade implications.
In the first situation, U.S. agriculture adjusts while in the second situation all of the adjustment is borne by foreign countries. The latter situation increases the likelihood of U.S. programs being sued at the World Trade Organization.
To summarize, arguments for adjustments are that farmers need to react to new market conditions and declining payments from a commodity program give farmers' time to react. Arguments against market oriented targets are that adverse conditions cause pain whether the adjustments occur during the early or later years of changes in market conditions.