Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

SHOULD THE DISASTER CAP BE BASED ON NASS PRICES?[1]

I received a recent phone call from a Washington economic analyst, who claimed the recent disaster aid questions posted on the Web page missed the target.  The disaster aid questions posted on the Web page assumed the value of the crop was based on the expected crop value at planting time.  The language in the Law states: “may not exceed 95 percent of what the value of the crop would have been in the absence of the losses, as estimated by the Secretary”.  The analysts’ interruption of the Law is the value of the crop, in absence of the disaster, is determined after harvest.  Of course, this approach assumes that the yield and prices are held constant because if all farmers had a good crop and only one individual suffered a disaster, price would have fallen.  Lower prices would have caused the counter cyclical payment to be paid to farmers, even to those who had yield losses.

Under this approach, her argument is that any MPCI or revenue insurance price election is the wrong value to use.  This approach would have valued 2001 losses based on the National Agricultural Statistics Service (NASS) average price for the marketing year for 2001/2002.  For 2002/2003, she would have used the higher of the loan rate or the projected USDA national average price to set both the payment cap and the salvage value of the crop.

Everyone agrees that the Law says to use 95 percent times historical yield.  Most analyst agree the historical yield will be defined as the higher of the Actual Production History (APH) proven yield under the crop insurance program or a 5 year county average yield.  A few analysts also want to use the Farm Service Agency (FSA) program yield, but this is unlikely.  On those two variables there seems to be little debate inside USDA and the definition of “historical yield” may have already been decided.  The other decision that appears to have been settled is premiums will be deducted first, and only the net insurance payments will count against the cap. 

The major issue is the price definition.  USDA will have to determine the price used to set the cap on payments, the price used to determine disaster payments, and the price used to determine the salvage value of the crop.

The 2001/2002 NASS average market price for corn was $1.97, wheat $2.78, milo $1.94, soybeans $4.38 and 29.8 cents for cotton.  The Agricultural World Outlook Board publishes the World Agricultural Supply Demand Estimates (WASDE) and the current March price for corn is $2.30, wheat $3.60, milo $2.35 and soybeans $5.40.  They are not allowed to publish an estimated price for cotton.  Because cotton prices are below the loan rate, one would use the loan rate for cotton under this plan. 

It is likely the NASS wheat price for 2002/2003 marketing year will be available before any disaster payments are paid.  The other crops will likely have NASS monthly prices for September through May or June available before payment of any disaster aid.  Therefore USDA could use the available NASS prices to calculate an “average” price rather than the WASDE forecasted prices. 

The argument for using the NASS price is because it is closer to prices actually received by farmers.  Under this argument neither the MPCI price election or the revenue insurance prices are relevant.  If the NASS average price for 2002 corn[2] is $2.30 that would increase the cap and reduce the number of insured growers who would suffer a reduction in disaster aid.  The $2.30 NASS price would also increase the salvage value of the damaged crop.  Under this approach while NASS or other USDA prices would set the cap and the crop salvage value, the MPCI price election would be used to calculate the disaster payment.  The corn disaster payment would be based on $2.00 in 2002 and $2.05 in 2001.  Using this method, the corn cap would be lower in 2001 with $1.97 NASS price but the disaster payment would be larger in 2001 with a MPCI-APH corn price election of $2.05.

This debate is going on inside USDA and depends on how one interprets the Law.  Should USDA value the crop at harvest time or the expected crop value?[3]  The USDA debate will continue on the price used to set the cap, calculate crop salvage value, and to calculate the disaster payments.  It is possible that different prices will be used for each one of these formulas.  It is also clear that some Washington policy makers want a narrow interpretation so that disaster aid will stay within budget.  However, this will likely reduce disaster aid for many “highly” insured growers.

An alternative for those who reached the per acre cap limit.  In 2002, with severe losses in Kansas and high levels of insurance coverage, some growers may discover they are ineligible for disaster payments, depending on how this per acre cap is finally defined by USDA.  If growers are unfortunate enough to have also suffered a 35 percent yield loss or more in 2001, they may find it to their advantage to switch and claim the disaster payment on a 2001 loss. 

There is also some suggestion that these disaster payments will follow the insurance unit structure.  The question has also been raised if farmers will be able to switch between 2002 and 2001 losses based on each unit.  Again, that is just one of the many ideas that are being debated internally and externally within USDA. 

It appears that all competing ideas on how to define the cap and the ultimate disaster aid payments are in the mix and nothing has been ruled out or ruled in at this point.  Also, this particular disaster aid payment has to be funded internally.  Some policy makers will want the disaster aid payments to remain within the OMB projected budget estimate rather than exceeding the budget and taking money out of other USDA programs.

The other consideration is that a very restrictive cap on disaster aid payments will lower the incentive for farmers to purchase higher levels of insurance coverage in the future.  Farmers may not reduce their coverage because this is a single year disaster program that “officially will not be provided” in the future.  However, there have been many examples where Congress has provided a disaster program and if that does occur in the future there is no guarantee future disaster programs will look like this one.  It is probably reasonable to assume that if there is another disaster program debate greater attention will be made to prevent penalizing insured farmers.

It is clear this is going to be a complicated disaster program and it will probably be several more weeks before final decisions are made and payments are delivered to growers.