What if the Farm Bill PLC program had a declining price clause?
A potential new option to increase support provided by the Price Loss Coverage (PLC) program.
Reform proposals are a key part of creating a new Farm Bill. A program in high demand for change is the Price Loss Coverage (PLC) program, which offers producer support in times of poor market prices. With higher-than-expected market prices, support from PLC has been almost non-existent since passage of the 2018 Farm Bill. Many calls for 2024 reform focus on realignment towards increased costs and tightening farm margins. However, with congressional budgetary restraints, reforms many be challenging to get passed. Such challenges require alternative options for Congress to consider in improving support. One alternative to consider is including a declining price clause.
A declining price clause works by establishing a “market catch price” in years of significant price decreases. For a payment to trigger, a crop’s season average price must fall below the market catch price. The intent of such a clause would be to deliver payments on a faster timeline, allowing producers to cover losses when a huge price decline occurs. Most importantly, this clause would provide added support during unexpected price shocks, when farmer needs are the most urgent.
Current Structure of Price Loss Coverage
Any solution to improve Price Loss Coverage requires understanding its intentions and limitations. The 2014 Farm Bill introduced PLC as an option to mitigate price risk. Specifically, it focused on providing support when price shocks were felt during “relatively stable” marketing periods. If prices fell below a set of reference prices, support payments were issued. Reference prices for corn were at $3.70, soybeans at $8.40 and wheat at $5.50.
The 2018 Farm Bill kept reference prices the same but introduced an escalator clause to assist when market levels shift over time. The clause outlines that if 85% of an Olympic average of prices from a crop’s past five years is greater than the reference price, then reference prices would increase to match. In an Olympic average, both highest and lowest values are removed before calculating an average. The escalator clause refers to any new price as an “effective reference price.” However, the clause also states that any increase to original reference prices is capped at 115%. This cap limited an effective price to $4.26 for corn, $9.66 for soybeans and $6.33 for wheat.
Effectiveness of Price Loss Coverage
Since the passage of the 2018 Farm Bill, market prices have shifted dramatically. Policymakers could not plan for how significant price shifts would be. Nor could they foresee how severely production costs have risen relative to market prices. The current concerns of higher input costs and tightening margins have unintentionally exposed a substantial limitation of Price Loss Coverage.
Even with an escalator clause, reference prices have yet to exceed their original levels. Historical prices have remained too low compared to recent price spikes. Preventing an effective reference price adjustment to trigger. It is possible that 2023 will see effective reference prices used for the first time. However, price forecasts from USDA’s Economic Research Service indicate season average prices will remain too high to trigger support payments. Overall, this has left PLC largely unable to deal with current challenges facing producers.
Many calls for reform have focused specifically on increasing reference prices to align with heightened production costs. Although many proposals provide sound reasoning, any approved increases to reference prices directly are expected to face significant challenges. First, many Congressional agriculture committees are facing considerable pressure to not increase budgetary spending. Second, there are some congressional concerns about offering too much support. Leading programs to be viewed as alternatives to fundamental financial and risk management planning. Farm Bill programs have always been intended to assist farms. Especially when impacted by significant changes outside of a farm’s control. They are not meant to entirely replace good management practices (i.e., marketing, insurance). If reference prices are unlikely to be changed, alternative options need to be considered.
Improve PLC support by including a Declining Price Clause
For PLC to offer more reactive support, it needs an ability to address sharp declines in market prices. That ability could be established by creating a declining price clause and use of a market catch price.
The market catch price would be equal to 85% of a crop’s previous year season average price. If a production year’s price fell lower than 85%, the market catch price would then be used in place of a reference price.
Market Catch Price = 85% of previous year’s season average price
Declining Price Clause: Market Catch Price – Current Season Average Price = Support Payment Amount
A declining price clause would not be used if payments would still trigger using either current or effective reference prices. This provision would allow PLC’s existing structure to provide its originally intended support.
Table 1: Comparison of Declining Price Clause to Current Structures for Corn Growers
The table above illustrates how a declining price clause compares to PLC’s current structure if both were available from 2009-2023. In 2013, corn’s season average price fell to $4.46 per bushel. A $2.43 per bushel decrease compared to 2012’s record high of $6.89. Such a decrease would have seen a large payment from a declining price clause. In 2014 and 2023, payments would have also been received. Under current PLC guidelines, a refence price payment would not have been received until 2015. Two years after market prices initially began to fall.
The declining price clause does have its disadvantages. In most cases, a trigger event would likely be in the first year of price declines. Subsequent years would see either no trigger or only small amounts, as illustrated in 2014. The cost of a large payment following a massive fall in market prices would also be costly to administer.
Final Improvements can Include Multiple Options
Ideally, improvements to Price Loss Coverage would address immediate market declines and adjust to market conditions more easily. A differing proposal by The University of Illinois Farmdoc outlines achieving more frequent adjustments by changing PLC’s escalator clause. Their proposal still fully relies on the Olympic average, which drops the highest and lowest prices of the last five years. But recommended adjustments would provide better price support in subsequent years following downward market prices compared to the current PLC program. However, a declining price clause would still provide more immediate support in an initial price loss scenario. Nonetheless, either proposal would offer producers substantially more support reflective of market conditions than PLC currently provides. The key to these proposals being viable in farm bill negotiations is finding a level of support that meets congressional budget constraints.