Jul 23 | Closing Market Report

Todd Gleason: 00:00

This is the Wednesday July 23 edition of the closing market report. I'm out of the office for the afternoon so we'll hear an excerpt from the Farm Doc Daily webinar dealing with the one big beautiful bill act and its impact on agricultural commodity programs including crop insurance, ARC and PLC. Jonathan Koppas, Gary Schnitke, and Nick Paulson gathered for that webinar. We'll hear from Jonathan and Gary primarily though Nick will join in at the end of this program today. Again, it's an excerpt and you may find the whole of the PharmDoc Daily webinar online at pharmdocdaily.illinois.edu in the archive section for the webinars or just at youtube.com/pharmdoc.

Todd Gleason: 00:50

Now let's pick up with the webinar. Join near the end when they begin to discuss crop insurance. Here's Gary Schnitke.

Gary Schnitkey: 01:00

Let's turn now specifically to crop insurance, and there was a couple things in the farm bill, or excuse me, not the farm bill. One big beautiful bill act that did deal with crop insurance. And there's two provisions that we want to highlight today. The first is that the premium support on farm level crop insurance products, the bill does include an increase in premium support for basic and optional units. So you can see there for 85% that premium support will go up from 38% to 41%.

Gary Schnitkey: 01:39

The bill did not specifically mention enterprise and whole farm units. The statute does say that commensurate increases should be made to enterprise and whole farm units. What those are is anybody's guess. So one would expect those to be one would expect the enterprise and whole farm unit subsidies to go up as well. So we will see how that plays out.

Gary Schnitkey: 02:13

But in general what that will mean is that more of the premium will be paid by the federal government and less by the farmer themselves. The other big change was to supplemental coverage option and what this one does is increase the premium support rate from 65%. So if you look at SEO currently, it's subsidized at a 65% rate. It will now be subsidized at an 80% rate, and it increases the coverage level from 86% to 90%. So currently, SCO's county coverage going from 86% down to the underlying RP, RPHPE, and YP prime.

Gary Schnitkey: 03:11

And it will go from now from 90%. And one of the things that we would suggest is that every farmer should consider the revised SCO, which doesn't mean that it's a good policy, but you need to consider it. And let me just give you an example here. This is from McLean County And SCO for corn in this example is $36 per acre. So $36 per acre is the total premium.

Gary Schnitkey: 03:42

Total premiums are set by our MA supposedly to reflect the expected payment from that crop insurance product over time. So over time, a farmer that buys in McLean County, SCO for corn at 90% should expect to pay $7.20 and on average get back $28 and $80 what this bill does is increase 86% to 90, and then also increases the subsidy level so that $7.20 is actually 20% of that $36 which means that $28.80 is 80% of the total premium. So over time, I mean, Illinois or McLean County farmers should expect an increase in payment. Our understanding would be that these subsidy increases would start until the twenty twenty six year, not the twenty twenty five years. So that's the example here.

Gary Schnitkey: 05:03

And so, you know, paying $7 on average net $28 seems like you should take it. But one of the things that we observe is that this hasn't happened in the Midwest. In Illinois in specific, we stimulated if the supplemental coverage option had existed from 2015 to 2023, what would have happened here? You can note here the regs mean that farmers paid in more than they received back, and this is non irrigated corn, so you see that a lot of Illinois has negative numbers. Same with Iowa, Illinois, Ohio, and Indiana.

Gary Schnitkey: 05:51

Two quick

Jonathan Coppess: 05:52

things on that. One, that's pretty standard with what we see from insurance overall. Many of these Midwestern areas are paying in more than they receive out. And also just as a clarification, this is a simulation if this is not anything actual. This is a simulation if this change had been applied back in 2014.

Jonathan Coppess: 06:14

2015 to 2020. Right, so this would simulate what this gives us a sense of what might happen with the changes going forward.

Gary Schnitkey: 06:20

Yep, yep. And here's what soybeans would look like. So it would be all negative for Ohio, Indiana, Illinois, and Iowa, and positive for the other parts of the state. We had a question that the expected yields seem too low. I would agree with you.

Gary Schnitkey: 06:40

The expected yields have not kept up for Illinois, Indiana, Ohio, and particular soybeans. I would also say that this is something that we need to keep an eye on because this is now a major major income support program so that should treat the Midwest and Illinois quote unquote fairly compared to other parts of the country and in particular we look at stacks that has worked well for cotton farmers and so should SCL. So we have this question, is investment toward insurance better than direct payments to farmers? That's a good question. I would say not in the Midwest yet.

Gary Schnitkey: 07:27

But and the other thing about direct payments is you didn't have to pay in for them. So there is there is that. And then it seems like destroying the double snap dollars where eligible SNAP recipients got twice the aid to use that farmer's marker, thereby putting more money directly in farmer's hand. So yeah, the politics of this we can see play out over time.

Jonathan Coppess: 07:57

Yeah. And it's one of the things that I think, Gary, we've talked about. We've been discussing and trying to wrap our heads around with these changes to crop insurance on top of what we've seen in recent years is how much the insurance program is trending towards this kind of payment program or acting much more like a payment program in Title I. Of course, it's not a Title I payment program because farmers are paying into it. And so what we are seeing is kind of a combination of those payments transferring both taxpayer funds in terms of the premium subsidy, but also farmer funds, which farmers portion of premium paid into it is transferring over to these high loss areas.

Jonathan Coppess: 08:40

And one of our concerns is that increasing SEO and driving more participation in SEO will exacerbate, will magnify that situation and make it more and more like crop insurance as a direct payment program similar to ARC and PLC with the big exception that farmers pay a portion of that premium. So we are transferring from farmer to farmer. And this raises questions for how it's rated and how RMA runs a program and a lot to really work on, I think, if we ever revisit farm policy again in the future.

Todd Gleason: 09:13

Well, I do have a follow-up question because are we not scheduled to revisit the farm program in the fall or during the summer months at some point? Do you think

Jonathan Coppess: 09:24

that Everything will here is extended through 2031 with one exception, which is the conservation reserve program was not extended. So we don't know what happens there. I guess the other exception is a suspension of permanent wall. So Congress is going to have to do something

Gary Schnitkey: 09:37

about those.

Jonathan Coppess: 09:38

But in terms of revisiting a full farm bill after doing all of this

Todd Gleason: 09:43

But didn't GT Thompson mention that last week? I feel

Jonathan Coppess: 09:46

like he did. I mean, I've seen talk in the press about skinny farm bills. What I presume they mean by that at most is extending bench of the permanent wall, maybe dealing with CRP, the Conservation Reserve Program, and some of other authorizations that expire. What we're talking about is the things that have already been enacted in the law which are not likely to change anytime soon given the complex politics and challenges, particularly the challenges after they cut SNAP by $200,000,000,000 to help offset some of these costs. So it's going to be very controversial and complicated to revisit these policies, particularly in the next month or two.

Gary Schnitkey: 10:27

So just to summarize here, increase on ARC and PLC support will have higher reference prices, higher effective reference prices, ARC coverage and larger payment ranges. We have had crop insurance changes, increase in subsidy rates for basic and optional units that may extend to enterprise unit and increase subsidy rate and coverage level for SCO. There were large cuts to the nutrition program, right, Jonathan?

Jonathan Coppess: 10:58

In the reconciliation legislation, is about $200,000,000,000 over ten year reduction to food assistance through the Supplemental Nutrition Assistance Program. A portion of that, about 60,000,000,000 to $70,000,000,000 of it was then used to cover these increased payments, this increased crop insurance. And this is, well, this is the only time we've seen that in the history of farm policy in which we've cut food assistance through increased farm assistance. That's hugely controversial. It's part of the reason why it was in reconciliation instead of regular order.

Jonathan Coppess: 11:30

And that truly complicates, if not clouds, the future Farm Bill authorization efforts in significant ways. I'd also add that conservation was also reduced by about $2,000,000,000 over ten years. Mostly that is a move of the Inflation Reduction Act conservation funding increases, moving them into the permanent baseline. And so there's a loss of about $2,000,000,000 in doing so. But we would presume if Congress doesn't cut those programs further in future efforts that that would eventually be made up over time.

Jonathan Coppess: 12:01

It just takes quite a few years to make that up. We're working on some analysis on that right now. So that's kind of the big overview. There's increases in funding from market access and foreign market development programs, some other kind of items that were also funded through this. But there are also a significant amount of the authorizations in what would traditionally be a farm bill that have not been extended through 2031 the way these programs have.

Jonathan Coppess: 12:28

And that, I guess, leads to some of this talk about a skinny farm bill or some extension type effort, I would expect that to

Todd Gleason: 12:37

be very limited. We've been joined on this Farm Doc Daily webinar by Jonathan Koppas, Nick Paulson, and Gary. Nikki, anything else that you see that we should answer before we go, Gary? If So just John

Jonathan Coppess: 12:53

Yeah, what's the clarification? Please clarify on the AGI. The limits so right, AGI does not apply in the future once this is implemented. Let's not mix up our time frame. But basically, if 75% of the total adjusted gross income is attributable to farming that's farming, ranching, still field culture then those operations are exempted from the AGI limit.

Jonathan Coppess: 13:19

But that is only commodity title programs, loans, and conservation. There are no AGI provisions in terms of crop insurance. The ECAP that's already gone out and that just I think that had the same kind of provision in it. So I think that is what you'll see under the ECAP provision. I'd have to double check that, but I do believe it included that AGI exception.

Jonathan Coppess: 13:48

Hopefully that clarifies a never quite clear policy. Yeah,

Gary Schnitkey: 13:54

but we had a question of whether we will be able to update the PLC yields, and the answer is no. Those will remain fixed. Do the subsidy increases for SEO apply to the twenty fifth twenty five crop year? No. And will it start in 2026?

Gary Schnitkey: 14:11

Yes. We've gotten a number of questions about SEO in 2025, and this yeah. You if you took our county and we're unallowed to SEO, your official answer is you're probably not gonna get it.

Jonathan Coppess: 14:24

And Right. We see so let's be clear. One, there's nothing in the statutory provisions from the reconciliation bill that would change that SEO operation for 2025. We think it's highly unlikely that RMA or USDA will make a change to an insurance program that's already in operation for crop already growing. So we presume that the hire of the ARC County PLC payment will happen without any changes to SEO.

Jonathan Coppess: 14:56

So to Gary's point, if you took ARC County, you were ineligible for 2025 SEO. We presume that continues and you will not get SCO even if PLC is the higher payment on those base acres. Because of the difference in crop insurance and commodity title program payments, at least for now, it seems unlikely would go that extra step and then up in what could potentially be some significant payments out of SEO for those that did not sign up or pay for it. Again, another question asked about paying premium. We assume you don't have to pay for premium if you don't have SEO where you selected ARC County and were ineligible for SEO.

Jonathan Coppess: 15:39

So presume for now until we hear differently from USDA that SEO stands as the decision was made in March. And only the Orange County PLC payments will change depending on which is the higher at the end of that marketing year into October. That is our presumption until we hear differently from FSA or USDA and RMA. That is our presumption. I don't know if there's anything else we can provide on that at this point in time, but we will certainly update if we get information on that.

Todd Gleason: 16:09

Okay. We have expired our time, although I'm going to take just a little bit more because I want to know from the three of you what you think the most important takeaways for the moment are for producers. I'm going to guess that the very first one is that they are now signed up essentially for both ARC and PLC across the board, and whichever one is the higher paying of the two will be their payment on this year's crop, but that won't come until the fall of twenty twenty

Jonathan Coppess: 16:40

six. Gary, what else?

Gary Schnitkey: 16:42

Actually, I think the biggest change in this farm bill is one that is the SCL. Going from 90% down to the coverage level and the 80%, you're effectively adding a farm program with no debate. And in there, and if they if it's rated properly, there's going to be large amounts of funds going out. You're also going to have to think about what this means in risky areas, because you're going to subsidize riskier crops and riskier areas more. And if you have a choice between a risky crop and the non risky crop, the the decision is now tied to planted acres.

Gary Schnitkey: 17:21

So the crop insurance payout could come into that decision. So and we've generally tried to avoid that. Nick from your remote spot, what what were you following along? And what do

Todd Gleason: 17:33

you think are the most important things for a producer to recall? SEO? What else?

Nick Paulson: 17:39

Yeah. I think I think Gary's points are are are the big ones for Midwest producers in terms of, like, practical steps, decision making, whether it's needed now or later. I think some bigger picture stuff, and Jonathan can elaborate further on this, is just, again, where this puts the farm bill moving forward. You know, some of the differential in you know, everybody's getting something more

Gary Schnitkey: 18:08

out of it,

Nick Paulson: 18:10

in terms of higher reference prices, maybe adding some base acres, but, you know, the relative increases vary quite a bit across commodities, which which vary by region. And I think that's an important thing to to monitor from a from a Midwest producer's perspective. It's kind of amplifying some of those differences that we've seen historically.

Todd Gleason: 18:36

To be clear, not everybody is getting something out of this bill because it did decouple, relatively speaking, the food and feeding programs and they or and or they ended up with a loss, usually part of the farm bill. So that has changed. That's a difference. And anything from the base acres that you think is most important? No.

Jonathan Coppess: 18:58

I mean, agree with Nick and Gary on this, which I try not to do very often. And I think particularly Nick's point about the really big picture and to Todd's point, I think we are entering a new era of some form or fashion in Farm Bill policy, Farm Bill history. While they didn't technically decouple SNAP and payments, I mean, the fact that we took $60 to $70,000,000,000 from food assistance to pay for these increases that are also drastically tilted towards one regional set of crops really complicates the politics going forward. If I were to say one thing in this that jumps out at me that I'm still trying to wrap my head around, it's this qualified pass through entity and what it might mean in reality. Think it's one of those things where forming an LLC is a business decision.

Jonathan Coppess: 19:46

But this is written as a loophole in payment limits, which means as those farms are able to increase payments, then you're likely to see those farms go out and compete for cash rent and drive up cash rents and land prices locally and get bigger and bigger. So I'm worried that that provision could very well be an accelerator to the consolidation trends we've seen with real implications for farmers, beginning farmers, younger farmers, and rural communities. That was not really considered, debated, deliberated, or otherwise analyzed before it was put into law. So I think that's a big concern as well, but we'll have to wait and see how that plays out.

Todd Gleason: 20:22

Jonathan Kopas is a member of the PharmDoc team. He, Nick Paulson, and Gary Schnitke hosted a PharmDoc webinar last week exploring the One Big Beautiful Bill Act and its impact on the farm economy. You've been listening to the closing market report. I'm Todd Gleeson.