Impact of the 1996 Farm Bill on Southern Commodities:
Soybean Policy Impacts

Mark L. Waller and John R. C. Robinson

Associate Professor and Extension Economist-Grain Marketing, Department of Agricultural Economics, Texas A&M University, College Station, Texas; Assistant Specialist for Public Policy, Department of Agricultural Economics, Mississippi State University, Mississippi State, Mississippi, respectively.


After lengthy political debate, Congress has finally passed and the President has signed a new farm bill, the Federal Agricultural Improvement and Reform Act of 1996 (FAIR). In many ways the new law is a substantial departure from previous farm bills. Two of the notable changes are that it provides full planting flexibility, with the exception of fruits and vegetables, and the switch from target prices and deficiency payments to transition payments, which effectively decouples payments from production decisions and market prices. These changes could have a substantial impact on production patterns across the southern states as producers consider their new planting flexibility, and the relative risk and returns of various crop alternatives under the new farm law. While soybeans were not covered by the previous target price/deficiency payment program, and they will not be included in the transition payment program, soybean acreage and production will be impacted because of its change in profitability relative to traditional program crops such as cotton and rice.

In considering the short-run and longer-run impacts of the 1996 Farm Bill, this paper will rely on analysis performed by FAPRI/AFPC based on the provisions of the Federal Agricultural Improvement and Reform Act of 1996. The first section of the paper considers the share and competitiveness of the southern states in U.S. and world soybean production and demand. The next section presents the provisions of the 1996 Farm Bill that relate directly to soybeans. The third section presents potential short- and longer-run impacts on soybean acreage in the southern U.S. The final section considers some of the implications of the new farm law, and the challenges to be faced by producers and agribusinesses in the future.

U.S. Soybean Production and Southern Share

Soybeans are a major U.S. crop, with soybean acreage, on average, accounting for about 59-61 million acres, or 22 percent of the total planted acres for major agricultural grain and oilseed crops produced in the United States annually. Due to its adaptability, soybeans are planted across much of the eastern half of the United States (Figure 1), stretching from the Texas High Plains, Central Oklahoma, and Central Kansas eastward to Virginia and the Carolina's. The heaviest production regions, however, are the Corn Belt states and the Delta states. Five Corn Belt states -- Illinois, Iowa, Minnesota, Indiana, and Ohio -- account for approximately 60 percent of the nation's annual production, while the Delta states of Arkansas, Tennessee, Kentucky, Mississippi, and Louisiana account for approximately 13 percent of the production (Table 1.). As can also be seen in Table 1, yield per acre in the Delta and other Southern States, on average, is only about 60-80 percent of the yields in the Corn Belt states.

During the 1970's, expanding domestic and world demand boosted soybean prices, and lead to an expansion in U.S. production. By 1979, U.S. production was a record 2.26 billion bushels and plantings totaled 71.4 million acres. During that time the growth in soybean acreage was fairly evenly distributed across the major producing areas. As the 1980s arrived, slowing U.S. and world economies coupled with increasing foreign competition halted the growth in demand for U.S. soybeans, and prices declined. By the early 1990's planted acreage had declined 19 percent to just over 59 million acres. The decline in acreage came almost entirely from the Southern States, where low yielding soybeans were unable to remain competitive with the returns of other program crops due in part to the relatively high target prices of those other crops. The CRP program was another factor responsible for attracting acres out of soybean production during the mid-late 1980s.

U.S./World Production and Trade

Soybean production accounts for approximately 45-50 percent of total world oilseed production (Figure 2.), and the United States accounts for about half of the world's total soybean production (Figure 3). As a result, what happens in the United States has a major impact on world oilseed and product supplies and prices. The other major soybean producing regions, South America (Brazil, Argentina, and Paraguay) and China, account for about 30 percent and 10 percent of world production, respectively. U.S. average yields are above those of most of the major producing countries, and the United States is usually considered to be very competitive in the world soybean market. However, when we make the comparison by states, we find that the Corn Belt states' yields are higher, but the Southern States' yields are about equal to, or possibly a little below, those of other major producing countries. This may help to explain why soybean production in the Southern States has appeared to be more vulnerable to competition from foreign competitors such as Brazil and Argentina.

While the United States accounts for about half of the world's soybean production, it accounts for 60-70 percent of the world's soybean exports. Brazil and Argentina together account for about another 20 percent. If we look at soybean meal exports, the percentages change some. The United States accounts for 15-20 percent of world soybean meal exports, while Brazil and Argentina account for about 60 percent. The United States has continued to sell most of its soybean exports in raw bulk form, while the South Americans have pursued a policy of selling the processed products rather than raw soybeans in an attempt to keep the employment and value-added returns at home. If we consider soybeans and soybean meal together, Brazil and Argentina have continued to gain ground on the United States as a percent of world trade. In fact, on a meal equivalent basis, Brazil and Argentina's exports together have surpassed the United States in five of the last eight years.

World Demand Growth

World production of soybeans and total oilseeds continues to trend higher over time as breeding and other technological improvements continue to increase yields. However, world population growth and income growth, especially in developing economies such as Southeast Asia, have lead to a growth in oilseed demand that has exceeded supply in recent years. As a result, projected world ending stocks have declined to their lowest level in 10 years, and the U.S. stocks-to-use ratio has declined to its lowest level in 20 years. This slow, steady growth in demand could possibly allow for higher soybean prices, or some expansion in soybean acreage and production without serious price declines.

New Farm Bill Provisions

Soybean provisions of the 1996 Farm Bill are summarized in Table 2. Since soybean production was not included under the target price/deficiency income support section of the 1990 Farm Program, it is also not included in the transition payments.

The nonrecourse soybean loan rate is calculated as under the 1990 law but cannot exceed a maximum of $5.26/bushel or fall below a minimum of $4.92/bushel. The marketing loan provisions are changed. The repayment rate under the 1990 Farm Bill was based on the posted county price. Under the 1996 Farm Bill, the repayment rate is mandated to be designed to reflect market conditions and prevent CCC forfeitures.

Enrollment in the CRP program is capped at 36.4 million acres. Producers would be able to exit the program early without penalty if 60 days written notice is given.

Transition payments are limited to $40,000 per person, and marketing loan gains continue to be limited to $75,000 per person. Since the three entity rule is maintained, total payments are limited to $230,000 per person, which is down from the present limit of $250,000 per person.

Program Impacts

The original farm legislation of the 1930's did not include soybeans as a supported "basic" commodity. The present soybean program provisions consist mainly of nonrecourse loan and marketing loan program. Soybeans, thus, differ from other program crops in the potential impact of changing farm program provisions. With no history of soybean support payments, the expected effects on soybeans of changing farm policy do not involve decreased government payments. Rather, the impact on soybeans from the 1996 Farm Bill will result from the change in the relative risk and profitability of soybeans compared to other program crops as payments on those other crops are reduced and or decoupled from production.

The major program crops which compete for acreage with soybeans have had greater potential as cash crops, especially after government payments are included. Soybeans tend to be viewed as a low-risk, low-return crop when compared to cotton, rice, and corn. This is particularly evident in comparing soybeans with farm program corn, cotton, or rice where the difference in mean net returns is $40, $100, and $145 per acre, respectively (Table 3). Soybean net returns compare much more favorably with free market rice, corn, and cotton, but cotton net returns are still higher (Table 3).

The riskiness of soybeans is correspondingly lower, as measured by the standard deviation of net returns (Table 3). The financial risk of soybeans is also less than either corn or cotton from the standpoint of production costs. For example, soybeans in the Mississippi Delta require an average investment of $86 in direct cash expenses, as compared to $165, and $395 for corn, and cotton, respectively (1996 Planning Budgets, Mississippi State University). From a risk management perspective, this analysis suggests that in situations where producers have the proper climatic conditions, and the soils are adaptable to soybean production, more southern acreage could shift into soybean production.

A shift into soybeans and the eventual loss of government subsidies suggests that farming operations will need to continue to increase in size if they do not want their net income to decline. Since soybeans require less intense management and fewer resources than cotton or rice, further growth may be possible for some farms.

Short-Run Production Shifts

In the short run (i.e. 1996), southern producers may, given an increased degree of flexibility, opt to shift acres into corn from other crops rather than soybeans. There are several reasons for this shift, and the shift could be even larger in the Corn Belt than it is in the south.

Typically, soybean prices are between 2.4 and 2.6 times the value of corn (Figure 4 and Figure 5). As that ratio increases above 2.6, producers give greater consideration to shifting more acres to soybeans; and as the ratio drops below 2.4, producers give greater consideration to shifting more acres to corn. The current ratio of cash soybean/corn prices is well below that range suggesting a shift into corn.

There are also a number of last year's cotton producers across the south who were disappointed with last year's high costs and lackluster returns that are looking for a lower production cost crop this year. In some cases, the lender is making this choice. Some Texas producers are considering feedgrains as an alternative to cotton, while the Boll Weevil Eradication Program is being implemented. While this may sound like a good alternative to some producers, especially when they can lock in a favorable price now, they need to be sure they are aware of what all they may be taking on.

Different crops bring different challenges. Corn, for example, can grow and perform well in certain climates and soils of the southern states. However, too much heat and stress can lead to serious aflatoxin problems and severely limit the profitability of the crop. Texas producers have struggled with this issue several times in the last ten years.

In the Longer Run

If the price relationship between soybeans and corn reverts back to its 2.5:1 relationship, it would appear that some southern producers would select to shift acreage from the traditional higher cost of production crops such as cotton and rice to soybeans. The combination of lower production costs, less intensive management requirements, and lower returns per acre than cotton or rice under the old farm programs, may provide some very strong incentives to shift production.

While the FAPRI data make soybeans look like a very viable alternative, it is important to keep in mind that those are U.S. net returns figures, and can not necessarily be used to make a valid regional comparison. By comparing these numbers with USDA/ERS cost of production estimates, it may be concluded that yields and net returns are likely to be lower in the South than in the Midwest. Still, there is definitely grounds for further investigation.

While world demand is growing and the supply/demand balance in the United States and the rest of the world appears to be in the tightest position for the last 10-20 years, remember that the balance is rather fragile. A large shift of U.S. acreage to soybean production could quickly lead to an oversupply situation and much lower prices. Such a situation would quickly reduce any further incentive to shift acreage to soybean production.

Implications for Industry

The 1996 Farm Bill is likely to have a profound impact on the structure and performance of southern agriculture over the next 10 to 15 years. While the 1990 Farm Bill provided some flexibility, it was nothing compared to the full flexibility offered by the 1996 Farm Bill. Producers and other agribusinesses need to remember that not only will that flexibility provide more opportunity, along with that opportunity will come a whole new set of complexities requiring new and different production and marketing skills, equipment, business agreements and structures if they are to survive in a much more rapidly changing environment. In a similar vein, but on a different scale, remember what happened to grain marketing when options on futures started trading. The following are a few of the challenges/concerns that the industry will be facing in the coming years.

Flexibility and Prices. Producers will no longer be tied to producing their base crop, but will have the opportunity to make major changes from year-to-year, depending on what they perceive to be the most viable alternatives. This may well press the need for a greater reliance on hired production and marketing expertise (consultants). It will be difficult at best for producers to keep pace with rapidly changing production technology and market price outlook for an entire series of potential crops. Some large firms will try to hire the needed expertise rather than rely on consultants. The cost of hiring that expertise could be high, pressuring the firm to grow even larger to spread costs.

The machinery mix will also be a concern since different crops have different needs. This may also lead to greater reliance on leased equipment or on custom operations such as planting and, especially, harvesting.

Structure. Both agribusiness and producers will find that flexibility will lead to a greater degree of uncertainty. Elevators, processors, and feeders will be faced with greater uncertainty regarding their ability to find a stream of supplies. As a result they will likely evolve toward a more integrated structure either through formal partnerships or through contractual arrangements. Producers, on the other hand, will be more concerned about finding a market for their products. Without production controls or price supports, there will be greater price volatility and risk associated with producing a crop that has not already been marketed. Some producers will deal with the problem by trying to do more forward pricing while others will turn to more group marketing and cooperatives to reduce their marketing risk.

The loss of support payments and potentially lower prices in an agriculture without production controls will continue the pressure for farm operations to get larger in order to produce an adequate level of income. Operations will continue to strive to lower their production costs. The most efficient farms will grow larger, while those who are not competitive will rent their land or go out of business.

Landlord/Tenant Relations. In the short run, transition payments are going to force changes in the way land leases are structured and handled. A seven year transition payment contract could force longer-term rental arrangements between landlords and tenants, or there will need to be specific agreement on how the transition payments are handled under all possible circumstances. Payment rules could influence the comparative merits of crop share versus cash leasing. Decisions on what crop to produce each year and how it will be divided and sold will also cause concerns.


References

Anonymous. "Cotton: 1996 Planning Budgets." Department of Agricultural Economics, Report 71. Mississippi State University.

Anonymous. "Corn, Grain Sorghum & Wheat: 1996 Planning Budgets." Department of Agricultural Economics, Report 72. Mississippi State University.

Anonymous. "Soybeans: 1996 Planning Budgets." Department of Agricultural Economics, Report 74. Mississippi State University.

FAPRI. "1996 Preliminary Baseline." Food and Agricultural Policy Research Institute, University of Missouri-Columbia.