High prices bring joy, but invariably they do not last

It is hard to imagine the run-up in commodity prices that coincided with the Great Recession almost 10 years ago. Optimism in agriculture soon reached a record high, and it was not hard to believe farm prices had undergone a permanent upward adjustment.

However, National Sorghum Producers’ grower-leaders were adamant price protection should be a top priority in the 2014 Farm Bill. We made this type of safety net a top priority, and that decision is now providing significant support to producers weathering the most challenging agricultural economy in over three decades.

Everyone wants to see prices stay high. However, farm programs are an essential component of U.S. policy for good reason — challenging times are always just a year or two away. So, we worked hard to provide a hedge to producers at the same time we were hoping the hedge would not be needed.

NSP believed the best hedge afforded by the 2014 Farm Bill to be the price loss coverage (PLC) program.
PLC is based in large part on a reference price, so we knew sorghum producers needed this value to be as close to the costs of production as possible.

After lengthy discussions with producers, economists and congressional staff, we determined a $3.95 reference price would cover the production costs of the largest number of sorghum producers. Data released by the Farm Service Agency largely confirmed we were correct in our assumptions as producers in areas we felt could grow sorghum near a cost of $3.95 chose PLC almost exclusively.

Sixty-six percent of U.S. sorghum producers elected PLC, including 54% of producers in Kansas and 94% of producers in Texas. When payments were made in October 2016, producers that chose PLC collected $197 million in payments. This value could be even higher in October 2017, as current World Agricultural Supply and Demand Estimates peg the price of sorghum at $2.90. This would result in a price loss of $1.05.

PLC payments for sorghum were largest in Texas at $80 million, Kansas at $68 million, Missouri at $12.6 million, New Mexico at $9 million and Nebraska at $8.9 million. While we wish prices would have remained high, it is nice to see producers collecting significant payments when they need them most.

The $3.95 reference price is also important to producers that chose the agricultural risk coverage (ARC) option. ARC was elected on 2.9 million sorghum base acres, so the price benchmark on these acres can never fall below $3.95. Given the rolling average that determines this benchmark is set to include a price below $4 by October 2017, the $3.95 reference price will soon be very important to producers who chose ARC as well.

With these large payments, producers must be mindful of payment limits. For example, producers who collected large loan deficiency payments (LDPs) on 2016 wheat will see these payments counted against the same $125,000 payment limit against which 2017 PLC and ARC payments will be counted.

Producers can avoid this situation in 2018 by using the commodity certificate exchange (CCE) program. Doing so would entail purchasing CCE certificates, taking out a marketing loan, forfeiting the grain and repaying the marketing loan with the certificates. Producers executing these transactions on a single day would collect a payment equivalent to that day’s LDP.

Fortunately for U.S. agriculture, markets swing like a pendulum. Until this pendulum reverses its current course, sorghum producers have a strong reference price against which to lean.

Chris's columns appear in Kansas Farmer magazine monthly. You can view this column published in the online edition here.