On the study’s advocacy of farmer owned reserves (FORs)…

“There is a loan rate set and the farmer has the option, at any time, to look at the price offered in his local community and determine what is in his best interest. Traditionally, people begin using the loan rate when the market price is within a certain margin of the rate. It doesn’t have to get down to, or below, the loan rate for farmers to use it.

“By putting corn, wheat or soybeans under loan, the farmer will find it is under loan for a longer period of time. Historically, it’s a three year period. But in our model we didn’t set a specific period for the loan.

“However, farmers could put it in and use on-farm grain storage. The local (USDA) office would have to come out and certify they’d put the right amount of grain under seal. Then, it could only come out when the price exceeds the release price.

“That means the farmer holds it for the long-term, for those periods when there’s a shortage of supply and we experience the sort of spikes that peaked in 2007, 2008 and again in 2010. During those years, farmers would be allowed to release grain.

“The mechanisms for getting farmers to do that were not part of this study. We didn’t go into policy-making. Traditionally, farmers were incentivized by saying ‘at the release price, the government no longer will provide storage payments.’ The release price was set at 160 percent of the loan rate.

“Also – again, it wasn’t a part of our study – historically, when the price reached 175 percent, farmers were forced to pay the loan back. That meant they had to sell into the market. Of course, they saw some gain.”  

Would there have been any value in lengthening the period for your study?

“We tried to pick a time period that was long enough to allow us to see how well the policy functioned in extremely low and extremely high prices. That was the criteria for picking that period.

“There was no reserve policy in effect during those years. That allowed us to compare the impact of a reserve policy – which deals with the causes of price/income problems on the farm – with the ‘throw money at it’ approach that was instituted in the 1996 farm bill and in subsequent legislation.”  

On key study findings…

  • Throughout the study period, government payments for crops totaled $152.2 billion. If farmer-owned reserves had been in place during those years, government payments would have been $56.4 billion, or less than 40 percent of what the U.S. government actually spent on crop programs in those years.

“You’d have all the savings from direct payments since those wouldn’t be made. You have all the savings of the massive emergency payments in 1998 through 2001.

“You’d also have the savings in LDPs, which were paid on every bushel of grain produced. When we segregate some of the stock from the market in reserves, we’re only paying storage costs on a portion of the production, not every bushel.  That means lower costs.

“When we segregate some grain from the market, the market price then rises. It will rise closer to the full cost of production. The users must pay the full cost of production instead of buying grain at costs far below the cost of production but with significant government subsidies.

“So, it would substitute market revenue for government revenue. It provides a mechanism by which excess supplies can be segregated from the market, allowing the market price to rise and providing a signal to the market that comes close to matching cost of production. That would mean major savings during such years.”

Schaffer refers to a chart available here.

“If you look at government payments to farmers, there are two large peaks. In the first peak, prices were extremely low.

“For the second peak, prices weren’t extremely low but there were times during the year when the local county posted price went below the loan rate. That meant farmers received significant LDPs. Then, when the price rose above the loan rate later in the season, the farmers captured nice profits in addition to the LDPs.

“In later years, the high prices are due to the difference in direct payments. The blue line in the later years reflects direct payments.”

  • Farmer-owned reserves would have provided nearly the same amount of net farm income.

Does that hold across all financial levels? Small farms versus large?

“We allocated acreage at the county level, not the farm level. At the county level, given the cost of production for various crops, what mix of crops would provide the greatest income.

“At the same time, we recognize that there are certain limits on a farmer’s ability to move crops. For example, there is some rationale for a corn/soybean rotation. In addition to price, it takes some work to move some crops.

“Because of the way it operates, (the study’s plan) should provide benefits across various farm sizes.”