Biden's Plan to Boost Wheat, Soybean Acres Called ‘Baffling, Convoluted’ Without Much Impact
The Biden administration wants more total planted acres with a focus on soybeans and wheat. That is the clear conclusion from what the administration is proposing as part of its latest wish list for Congress.
As first detailed in a special report Thursday, the proposals need congressional approval and likely would be altered by lawmakers if it ever gets out of both chambers. The requests include dramatic boosts in commodity loan rates for selected crops, including soybeans, wheat, rice and pulse crops. But not corn and cotton. It would also pay a $10-an-acre crop insurance subsidy that would be paid to farmers who double-crop soybeans and wheat.
It's part of a larger plan announced Thursday. President Biden is seeking an additional $33 billion in aid for Ukraine, to fund weapons and provide longer-term economic and humanitarian aid to Ukraine, as the country’s conflict with Russia enters its third month, which was outlined in a White House fact sheet.
Reaction to Policy Proposal
The following is initial analysis of the administration’s farm policy proposals, based on talks with and emails from several contacts:
- The projected market prices are significantly above loan rates (even these new loan rates). So, while it may be nice to have a little more liquidity at harvest, these loans will likely all have to be repaid. If my problem is tight margins due to historically high costs of production, exactly how am I supposed to get excited about a loan that must be repaid within the marketing year?
- For the double-crop incentive, is it only in counties with approved double cropping? Regardless, what exactly is $10/ac. supposed to incentivize that $17/bu. in the market won’t already?
- Since Congress would have to approve all of this, why aren’t they sending up a proposal to help offset skyrocketing costs?
- The proposal in total is estimated to cost $400 million over two years. Are there costs associated with the significant boosts in selected commodity loan rates?
- This is clearly a proposal that shows the administration’s concern about 2023 crops since little if anything can be done to impact 2022-crop plantings.
- The proposals could skew plantings in 2023 if corn prices decline relative to soybeans and even wheat.
- The crop insurance program is again being used relative to trying to adjust farmer planting behavior.
Related news: White House Asks Congress for Additional $33 Billion in Aid for Ukraine
Wheat: The proposal would increase the wheat loan rate (2022 and 2023 crops) to $5.52 per bushel from the current $3.38 per bushel.
• July Chicago wheat futures closed Thursday at $10.85 3/4.
• 2021 season average cash price: $7.60.
• 2021 production: 1.645 billion bushels.
• 2021 put under loan: 10.057 million bushels.
• 2021 loan value: $34.572 million.
• 2021 loans outstanding: $13.873 million as $20.698 million has already been repaid.
• Less than 1% of 2021 crop was put under loan.
Soybeans: The proposal would boost the 2022 and 2023 loan rate by 40%, setting it at $8.68 per bushel versus the current $6.20 per bushel.
• November soybean futures closed at $15.21 on Thursday.
• 2021 crop season average cash price forecast for 2021/22 is $13.25.
• 2021 production: 4.435 billion bushels.
• 2021 put under loan: 80.143 million bushels.
• 2021 loan value: $499.16 million.
• 2021 loans outstanding: 43.469 million bushels with a value of $270.18 million as producers have already repaid $470.55 million.
• Less than 2% put under loan.
Ukraine's Impact
“USDA expects that U.S. farmers may be able to increase production during the 2023 crop year and make up almost 50% of the level of wheat typically exported by Ukrainian farmers.” Ukraine exports are forecast at 19 million tonnes in 2021-22; exports were 16.85 million tonnes in 2020-21 and 21.02 million tonnes in 2019-20. If the administration wants to increase production by 50% of the exports by Ukraine, that would mean an increase in production of around 10 million tonnes or 800 million bushels based on the 2021-22 export forecast. The administration is not identifying an increase in production for soybeans.
Low-Cost Money
The April CCC interest rate on a loan taken out in April was 2.125%, up from 1.250% in January. If the same pace of increase took place, that would put the interest rate at 2.75% in July and 3% in August. While these rates are below commercially available rates, the monthly interest rate levels will be increasing as the Fed raises interest rates. USDA sets the interest rates on CCC loans at the level USDA is charged for the money by the U.S. Treasury plus 1%.
Producers can obtain a marketing assistance loan by pledging the commodity as collateral, with the interest rate on the loan set in the month the loan is disbursed. Producers have to have title to the grain and cannot sell the quantity under loan without first repaying the loan. Producers have to repay the loan plus interest at maturity.
With a marketing loan in place, that allows producers to repay their loans at potentially less than the loan rate if prices fall below the loan rate levels — referred to as a marketing loan gain. However, more producers have opted to capture that difference between the loan rate and the loan repayment rate via a loan deficiency payment (LDP). The producer does not have to pledge the commodity as collateral for a loan nor make any repayment of the loan.
The loans are also a non-recourse loan which means producers have the option of delivering the pledged collateral to satisfy the outstanding loan at maturity. A settlement value is determined and applied to the outstanding loan principal and interest.
The loan program has seen declining usage over the years and a small percentage of U.S. production typically is put under loan, particularly soybeans and wheat. A greater percentage of minor oilseed crops in the U.S. are put under a CCC loan.
Given that most planting decisions have been made for 2022, it seems unlikely there would be little impact to production in 2022. The exception might be via the double-crop provisions, but there are also questions where that could be allowed given that a limited number of areas of the country are considered double-crop areas.
Bottom Line
The action is clearly signaling the administration wants more wheat and soybean acres in 2023. That would appear to be at the expense of corn and cotton acres, given the statement that feed and fiber farm program provisions would be kept the same. Increasing rice acres would seem to be difficult given that is a far different production system than soybeans or wheat.
The proposals almost seem to work at cross purposes. While it would give producers financing at a favorable interest rate, the goal is to boost production, i.e., make more supplies available to the market. If the crop is under loan, producers would have to repay the loan for those bushels to be made available to the market.
Other questions:
• What impact might the actions, labeled as just two-year actions, have on the next farm bill? (Recall that the last farm bill rejected some calls for a 12-month commodity loan program, but the administration proposals have this feature for selected crops.)
• Will the proposals skew the policies that are developed as part of a new farm bill?
• Will the proposals distort the costs for farm programs relative to the baseline? However, being as they are billed as temporary, that should not affect the baseline.
Still, higher loan rates for some crops versus others will raise an equity debate in the farm bill process. And the word equity is paramount to the current group of Democrats and White House. That could be used by some lawmakers to boost loan rates permanently under the next farm bill, potentially increasing farm program costs as increased production will at some point push prices lower, potentially below loan rates, exposing the government (taxpayers) to higher outlays. And the loan rates come into play for the Price Loss Coverage program. Would these higher loan rates then also expose the government to more potential outlays under that program? And if loan rates are increased via the next farm bill because of this temporary effort, could that also skew program participation?
Upshot
Most sources do not see much impact, with some calling the proposals “baffling” and “convoluted.”
Related News
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White House Asks Congress to Significantly Boost Some Commodity Loan Rates for Two Years
