Column: Is transition assistance freedom to fail?
KNOXVILLE, Tenn. -- We recently read an article indicating the primary role of the Agricultural Risk Coverage-County program is to provide "transition assistance" so farmers have time to transition their farms to more profitable activities or crops.
KNOXVILLE, Tenn. - We recently read an article indicating the primary role of the Agricultural Risk Coverage-County program is to provide “transition assistance” so farmers have time to transition their farms to more profitable activities or crops.
We don’t recall discussion of transition assistance when the program was designed and during the lead-up to the 2014 farm bill. We’ll bet there are few farmers who were asked to support the program because it would provide them with transition assistance so they could leave farming or shift to another set of crops - assuming some other crops required additional production.
We also never heard anyone describe it as transition assistance when the decision tools were providing farmers with the information they needed to see which program - ARC-CO or Price Loss Coverage - would provide them with the largest payments over the five-year life of the farm bill. To our knowledge, no one said, “If you elect ARC-CO, you need to have a transition plan in place, because if prices decline and remain there for an extended period of time, ARC-CO will provide bubkes” (Yiddish for goat droppings).
It was not a part of the discuss-
ion. Conventional wisdom at the time left people convinced corn prices had established a plateau and would remain above the cost of production, or at least above $4 per bushel, for the foreseeable future.
It was designed as protection for year-to-year price declines matching revenue insurances protection for in-season price declines at levels that were already good.
When we raised the issue of protection for long periods where prices might be well below the variable cost of production, few listened.
Some farmers with crops other than corn and soybeans opposed a farm bill in 2013 because they thought ARC-CO and revenue insurance would provide little price protection for many of their crops, which had not enjoyed the same high prices as corn and soybeans. PLC was then designed to bring them on board so a farm bill could get passed in 2014. PLC provides protection based on historic yields and a reference price. PLC is a countercyclical program. If prices fall below the reference price, payments increase as prices decline.
While ARC-CO uses the PLC reference price as a minimum price to be used to calculate the five-year Olympic average price in determining the per-acre protection level - providing some small measure of support assistance - it provides ever smaller payment levels the lower the price falls and the smaller the year-to-year variability.
Like revenue insurance, ARC-CO is an upside down safety net. It provides high payments during generally prosperous times to compensate for periods of revenue shortfalls, but little help during extended periods of low prices. Since revenue insurance payments are not countercyclical, they fail to deliver when they are needed most.
Corn Belt farmers fought for the ARC-CO program, and if the prices remain below the reference price ($3.70 per bushel for corn) for a series of years, they could find they receive minimal, if any, payments.
The same is true for revenue insurance - the lower the price, the smaller the revenue being protected, even with increasing yields. Crop insurance is at its best during disasters that cut yields significantly. But because it is price-following, it is less useful as a safety net program if prices are below the cost of production when the policy is purchased and remain there at harvest time. The lower the price, the lower the level of revenue being protected.
In terms of the expectation that in times of low prices farmers would use the ARC-CO payments to transition cropland out of crops, we need to look at history. There was little transition in the last period of low prices, even though for a major producing state such as Illinois, in at least one year, farm program payments were 200 percent of net farm income.
For seven decades, Congress has had crop farmers’ backs. Even if the farm bill proved inadequate to deal with price and income realities, Congress could make adjustments in the farm bill or take other actions to help farmers. Things might be different now. Many policymakers have said or implied they see no need for farm commodity programs. Other policymakers want to cut back on federal programs, and will not vote to authorize additional spending or programs.
That leaves us worried, especially if spring planting goes well and we get timely rains during the summer.
Editor’s note: Schaffer is a research assistant professor in the Agricultural Policy Analysis Center at the University of Tennessee. Ray is the former director of APAC.