Are you ready for production quotas and parity prices in ag?

Most of agriculture, and particularly dairy and livestock producers, consider the Congress to be the Christmas “Grinch” for its failure to approve a successor to the expired 2008 Farm Bill. It ceased to exist on Oct. 1, and three months later the Congress may be no closer than Feb. 27 in addressing itself to a renewal of farm policy. 

While cash and futures markets are continuing to operate without problems, while wheat remains dormant, and while USDA employees continue to report for work, what could be the problem, if there is any problem? If the U.S. farmer and consumer can survive three months without a Farm Bill, why can’t they survive three more months, or three more years? There are reasons.

The lack of a 2012 Farm Bill, which soon will be re-labeled a 2013 Farm Bill, may not have an impact at the grocery store today, or in the feedlot today, or in the machine shed today, but overtime a finely tuned food machine will begin to show wear and tear without the daily maintenance that is necessary. 

Where we are now

When Congress recessed for the election, the Senate had passed its Farm Bill proposal that cut $23 billion from the 10-year baseline for agricultural appropriations. The proposal included a stronger crop insurance program and nearly full funding of USDA’s nutrition programs. In the House, only the Agriculture Committee has approved a proposal, which cuts $35 billion from the 10-year baseline spending, half of that in nutrition programs. 

House leadership has not called the bill for a vote, contending there are insufficient votes to pass anything. Since the election recess and the lame-duck session, there has been no overt effort to approve farm legislation and the Chairman and ranking Democratic member of the House Agriculture Committee both say they cannot see the opportunity to address the issue before the end of February. 

What is the impact of the delay?

Any government support programs, such as direct payments, marketing loans, ACRE are in effect for a commodity until the end of the current marketing year.  For example, that will be June 30, 2013 for wheat and August 31 for corn and soybeans. However, the dairy support program ended September 30, 2012 without any replacement. Under 1949 Permanent Law, parity prices become effective January 1, 2013 for any commodity for which the Permanent Law has not been suspended. (Typically, each new Farm Bill suspends the 1949 legislation, but that has not happened.)  Subsequently, at the expiration of the current marketing year for a commodity, familiar commodities will have some unfamiliar prices that the USDA says producers shall be paid. USDA economists calculated those prices at the end of November to be:

Corn                $12.00 per bushel

Soybeans         $28.90 per bushel

Wheat              $18.30 per bushel

Beef cattle       $292.00 per cwt.

Hogs                $160.00 per cwt.

Milk                 $52.10 per cwt.

(Note: Dairy prices are to be set at 75 percent to 90 percent of parity, so a $52 parity price would be adjusted to $39 to $47.) 

Parity prices for a multitude of other commodities are calculated monthly by USDA statisticians in the National Agricultural Statistics Service. The November 2012 report of commodity prices contains parity prices on pages 30 and 31.

Parity prices are part of an economic base for agriculture using the relationship between market prices and the cost of production between the years of 1910-1914. While this formula worked 100 years ago, there are few, if any, who believe it would work today. Nevertheless, that is where we are.  

What does that mean for 2013?

That is very interesting to contemplate. If we don't amend the permanent legislation, the 2013 crop will be covered by an ancient non-recourse loan program. A floor would be put under prices at between 50 and 90 percent of parity. Parity is based on a 1910-14 purchasing power index. That means we have a 100-year-old policy.

“Parity prices for 2013 include wheat at $18, corn at $12, beans at $27, cotton at $2 a pound, milk at $52 a hundredweight. Secretary of Agriculture Tom Vilsack will be required to hold producer referenda by April on marketing quotas and production controls on wheat and cotton.

“Who loves this? Our competitors. Our Canadian friends think it's great because we'll put a floor price down and they'll beat us on prices and our grain will be in government storage. I don't think agriculture has awoken to this. I don't think they know how inept this is."

One of more immediate issues is the impact of the lack of farm policy on the U.S. dairy program.  Beginning January 1, 2013, the lack of a dairy program will force the USDA to begin implementing the 1949 Permanent Law for dairy producers. In brief, that will require the USDA to purchase milk, store it as cheese and powdered milk, and remove enough of it from the market to cause prices to rise from the current $18 per cwt to the adjusted parity price of $39 to $47 per cwt. Such a shortage of milk is expected to push consumer prices to $6 a gallon or more. 

One of the more outspoken critics of the lack of farm policy inaction is U.S. Senator Patrick Leahy (D-Vt.) who addressed the Senate on Dec. 21. He said, “The Secretary of Agriculture and his staff have been -- quite literally -- dusting off old paper files and mimeographed notes from the 1940s and 50s to review the Agricultural Act of 1949….This archaic law will force the Federal Government to spend billions of dollars to buy and store dairy products to help raise the price of fluid milk for dairy farmers. The Secretary will have to keep spending until he is able to raise the price of fluid milk by 60 or 70 percent…..Never before has the Farm Bill expired like this. And now on January 1 we will implement market-distorting dairy policy so old that 49 current members of the Senate -- including the Chairwoman of the Senate Agriculture Committee -- were not even born when it was signed into law by then-President Harry Truman.”

Summary:

The Sept. 30 expiration of the 2008 Farm Bill without a replacement was not a crisis on Oct. 1.  However, three months later, it is beginning to look like that. On Jan. 1, the U.S. dairy industry will see prices determined by parity, which is based on a 1949 law that uses economic formulas developed 100 years ago and will push milk prices to the $6-8 per gallon range. As commodity marketing years expire, the 1949 Permanent Law will take effect and raise prices as the government is forced to impose production quotas to keep enough of the commodity off the market that will allow prices to rise to established levels that are two to four times current market prices.

Source: FarmgateBlog.com

1. Corn futures relapse in wake of Wednesday's rally
2. Wet U.S. Midwest sections may lead to fewer corn acres
3. Where’s the rain? Parched states can’t shake the drought
4. Ouch — I stuck myself!
5. World Dairy Expo announces dairy cattle show manager
6. Program planned for first U.S. Precision Dairy Conference, Expo

1. 4 rules for growing a business or industry
2. Commentary: Milk faces branding dilemma
3. Chocolate milk a top post-workout food
4. Seven jobs more dangerous than farming
5. What do dairy exports mean for Minnesota?
6. Salma Hayek: Milk part of 'perfect' breakfast

1. Seven jobs more dangerous than farming
2. 2014 Farm Bill: Are we near an agreement?
3. Farm bill and immigration reform action needed
4. Class III futures close out quietly last week
5. 4 rules for growing a business or industry
6. White House urges Senate to cut crop insurance in farm bill