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PLAIN ECONOMIC SENSE
For release after Feb. 1, 1999
Column 366
Policy Alternatives for Hog Farm Assistance
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
An analysis by Iowa State University Economist Bob Jolly based on Iowa Farm Business Association hog producers shows that 47 percent of the hog producers will likely be in a financially weak or worse position at the end of the next 12 to 24 months. This group accounts for 59 percent of the farm debt in the sample. On the other hand, this also means that 53 percent of Iowa's traditional hog producers will still be in stable or strong financial shape in 12 to 24 months.
In light of the new era of USDA's direct federal payments to the nation's hog producers, the suggestion that all hog operations are not in the same boat raises an important question about what kind of farm safety-net should we have? Should other livestock producers and/or crop farmers be included? ... should a safety-net be based solely on prices? ...a safety-net for the smallest hog producers only? ...a targeted safety net for only those who are financially stressed? ...or no safety-net at all? Here are three state and federal policy alternatives being discussed.
Option 1. A Marketing Loan Program for Hogs. One proposal by some of Iowa's congressional delegation would set up a hog marketing loan program. The loan rate would be 85 percent of the five-year average price but not more than $30 per cwt. To be eligible, a producer could not market more than 5,000 hogs per year starting Oct. 1, 1998. The nine-month loan plus interest must be repaid at the loan rate or at a rate set by the secretary of agriculture. The secretary is to set a rate that "will minimize loan forfeitures, minimize stock accumulation, minimize costs, and allow the commodity to be marketed freely and competitively in domestic and world markets." Minimizing all at the same time is impossible, so the secretary's discretion becomes important.
Those who produce less than 5,000 hogs per farm account for 95 percent of the farms with hogs but only sell 40 percent of the hogs marketed. So, if the Iowa proposal makes it through Congress, only smaller producers raising 40 percent of hogs would qualify for the program. The net loan payments would be subject to a $75,000 payment limitation, which means a farmer with 5,000 hogs could receive a maximum of $15 per head. At that rate, the total cost of the proposal would be about $500 million.
Option 2. Interest Buy Down and Loan Guarantees. Another approach is modeled after a 1980s-era state level farm debt buy-down program. Pork producers would be assisted in obtaining low interest operating loans using the existing USDA Guaranteed Operating Loan Program. An interest buy down could equal up to 7 percent for one year on a $100,000 note. USDA finances 2 percent, the local lender finances 2 percent and the state finances 3 percent.
This approach targets only the financially stressed hog producers that could still be made to cash flow. In contrast to industry-wide aid proposals, this approach does not distribute dollars to financially strong hog farms or operations that will never cash flow again.
A buy-down of 7 percent on a $100,000 note means a maximum assistance of $7,000 per hog operation and the loan must still be repaid. If a third of the hog producers qualified for the buy-down program, nationally it would cost about $210 million -- $60 million for FSA, $60 million for lenders, and $90 million for the states. But, not all states are likely to participate or develop the same program unless it is proposed regionally or nationally.
Option 3. State-backed Marketing Cooperative for Independent Producers. Another proposal suggests creating a new state-backed closed marketing cooperative that would make payments up to $40,000 per hog farm for those who become members. The marketing co-op purpose would be to guarantee a floor price ($28 cwt. is suggested) for member hogs sold during depressed markets. The coop's cash flow reverses during higher hog prices. A checkoff is paid by each member for each hog above a ceiling price ($38 cwt. is suggested). A minimum $25 million capital threshold is required before the co-op could start operations. Members cannot exit the co-op until their debt is repaid. Loan losses would be covered by member fees, grants from the state economic development department, private contributions and promissory notes pledging future checkoff revenues of members.
If packers provide larger hog operations with more favorable ledger contract terms in the future as suggested by recent research from ISU and the University of Missouri, the marketing co-op concept would assist independent hog producers with a competitive set of contract terms. The concept also accomplishes some things for hog producers similar to revenue assurance and tax deferred Farm And Ranch Risk Management (FARRM) account concepts discussed nationally. Farmers pay in during good years and get back revenues in poor years.
In the final analysis, farmers have faced greater price and income variability since the U.S. farm policy transition began in 1996. It remains to be seen whether industry-wide, sector-wide, or farm-level tools will prove to be the more successful safety concept. There are tradeoffs in the costs and consequences of the alternative proposals. Option 1 direct payments cost more than loan guarantees and interest rate buy downs. Private sector solutions like the Option 3 will face more difficulty, as long as government solutions like Option 1 are supported on an ad hoc basis whenever a crisis develops.
Finally, none of the proposals includes decision-making support, financial restructuring, stress and career counseling assistance. Without some additional funding for the people decision-making assistance programs, the other proposals will likely result in more costly outcomes.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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