The House Agriculture Committee is considering raising reference prices based on a commodity’s relative input costs, an approach that could benefit some southern crops over commodities such as soybeans and corn.
Committee Chairman Glenn “GT” Thompson, R-Pa., and Rep. Austin Scott, the Georgia Republican who chairs the Subcommittee on General Farm Commodities, Risk Management and Credit, have both said in recent interviews that they favor modifying reference prices based on their relative input costs. That approach could be cheaper than a more costly across-the-board increase.
The lawmakers have not provided details of how the increases would be calculated, including what input costs would be included, but crops such as cotton and rice tend to have higher input costs relative to their market prices than corn and especially soybeans.
“Farming is a business. It's not what you bring in, it's what you're left with after you pay your bills,” Thompson said in an interview with Agri-Pulse.
“Every commodity is different, right?” he added. “Some commodities are starting to get to the point where they're above water and there's others that are probably still struggling with (the) inflation we have right now.”
In a recent meeting with agricultural journalists, Scott said “commodities that require more input costs probably are the ones that need the reference price (increase) the most.”
The reference prices determine when the farmers enrolled in the Price Loss Coverage program get subsidies. PLC triggers payments when the average marketing price for a year is lower than the reference price for the commodity.
The 2018 farm bill allows the PLC reference price for a commodity to rise during periods when market prices are elevated, but the increase is capped at 15% above the statutory reference price, which is $8.40 per bushel for soybeans, $5.50 per bushel for wheat, $3.70 per bushel for corn, $14 per hundredweight for rice and 36.7 cents per pound for seed cotton. PLC payments for cotton growers are based on the price of seed cotton.
A second major commodity program, Agriculture Risk Coverage, provides payments to farmers when area crop revenue falls below a five-year Olympic average. Under an Olympic average, the highest and lowest years aren’t counted.
If lawmakers raise the PLC reference prices based on what economists classify as variable production costs, which exclude land and machinery, cotton growers could be the most likely to see an increase.
Market returns for cotton are estimated to be $731 per acre in 2024, while variable production costs for cotton are projected to be $541 an acre, according to the latest forecast by the Food and Agricultural Policy Research Institute at the University of Missouri, which provides analysis to Congress. That puts the ratio of revenue to costs at 1.35.
By contrast, soybeans are expected to return $613 an acre with variable production costs of $229 an acre, a revenue-to-cost ratio of nearly 2.7; FAPRI's analysis calculates the ratio at 1.84 for rice and 2.06 for corn.
Variable production costs include seed, fertilizer, fuel, chemicals, interest, hired labor, and, in the case of cotton, ginning expenses.
Thompson and Scott's potential approach is in line with how the current reference prices were originally set in the 2014 farm bill.
Bart Fischer, a Texas A&M University economist who was the chief economist for House Ag's GOP staff at the time, said the prices were calculated based on both relative production costs as well as target prices in the old countercyclical support program that PLC replaced.
Fischer said an across-the-board increase in PLC reference prices could penalize farmers who don’t grow corn, soybeans and wheat, which together account for 85% of the acreage eligible for the program. Crops such as rice, he added, also don’t benefit from the Renewable Fuel Standard, which drives demand for corn and soybeans used for biofuel production.
An across-the-board increase in reference prices wouldn't address differences in economics between commodities, he said.
“Why should (rice growers) be constrained to a certain across-the-board increase in reference prices driven by spending on corn and beans when they have no government mandate for their crop, crop insurance deductibles are significantly larger for rice, and the price of rice is dominated by decisions made by the governments of China and India? To some extent, the same could be said of wheat as well (compared to corn and beans),” Fischer said in an email to Agri-Pulse.
Fischer said Thompson “is spot-on in his approach.”
Bart Fischer, Texas A&MBut Jonathan Coppess, a University of Illinois professor who was chief counsel for the Senate Agriculture Committee's Democratic majority when the 2014 bill was written, said tying reference prices to production costs is an inherently flawed approach that doesn't reward farmers for becoming more efficient or account for the cost of conservation practices.
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“Input costs are something a farmer can manage, and it seems counterproductive to issues like nutrient loss and climate change if we’re tying payments to fertilizer purchases and seed purchases,” said Coppess, a former Farm Service Agency administrator during the Obama administration.
He notes that an across-the-board increase in the rates would be significantly more expensive than targeted increases.
Corn, soybeans and wheat together accounted for 210 million of the 245 million eligible base acres in 2022, according to USDA data. Fischer has estimated that a 10% increase in reference prices would cost taxpayers $20 billion; a 20% increase would drive the cost to $50 billion.
Scott Gerlt, an economist for the American Soybean Association, said variable costs for soybeans are 30% higher in the latest FAPRI forecast than they were during the 2014 farm bill. He also notes that including land expenses in reference price calculations would reduce the relative cost difference between commodities.
“The impact of input costs has gone up significantly,” Gerlt said in an email. “ASA’s concern is that the Title I safety net needs to be more responsive for soybeans. This includes increasing the statutory soybean reference price, adjusting the effective reference price and ARC calculations and providing an optional base acre update that allows new acres to participate in the safety net.”
Jake Westlin, a spokesman for the National Association of Wheat Growers, said in an email that lawmakers should “ensure parity” in linking statutory reference prices and production costs, and also consider modifications to the escalator provision.
“It shouldn’t be an either-or approach, as these facets of Title I should work together to assist the producer in changing markets,” he said.
It’s less clear how the Senate Agriculture Committee will approach modifications to the commodity programs. The committee’s top Republican, John Boozman of Arkansas, has repeatedly said he won’t support a bill that doesn’t provide for an increase in reference prices.
Committee Chairwoman Debbie Stabenow, D-Mich., has not said what she wants to do. In the past, she has pushed back against policies that she felt disproportionately favored southern farmers.
At a recent hearing, she noted that the cost of fertilizer and diesel fuel have both dropped sharply since last year. “We're going to watch it (input costs) closely because hopefully (2022) was an anomaly,” she said.
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