New farm bill debate: House vs Senate proposals

Chris: Welcome everybody to another episode of the Ag View Pitch. Today you have Chris Barron with Paul Niefer. Paul, how's it going?

Paul

Neiffer: Good. Doing good down in Arizona. Going to go play golf tomorrow, but today no golf.

Chris: Yeah. Yeah. Well, today as we record this and we're recording this on a Saturday, the 4th of May. A lot of guys are wishing they were planting corn as we record this. And I think a lot of guys are, are probably either in the shop or in the house or doing something in the office, something other than planting in a lot of areas, although planting progress has come along pretty good so far this year. What are you hearing from some of your guys you work with?

Paul

Neiffer: Well, I think, you know, It just depends on what part of the country you're in. I know on my— I get an app that tells me if my field had rain. My Missouri farm had rain, but it was only like 0.2 of an inch. But they've already planted the corn and the soybeans down there pretty much. So again, you know, if you're in that Iowa, Indiana, Illinois, Minnesota, Nebraska, where you've had some rain, you probably are a little wet. I know I was in Kansas City earlier this week, flew in there and there was a lot of fields that were underwater. I mean, you could see from the plane. I mean, it wasn't a lake, but it was certainly quite a bit of water. They're not planting for probably a week or two based on what I saw from the, from the air.

Chris: Yeah, I know we're in that drought zone in Iowa supposedly that, that it wasn't supposed to do. It was real. But we've, we've fixed a lot of it. I think we're a long ways away from getting the subsoil filled up again. But This isn't the time of year we want to fill the subsoil. No, we want to, we want to get the crop in. So.

Paul

Neiffer: Yeah, yeah, exactly.

Chris: Exactly. We'll get to the topic now here today. First of all, I want to apologize for my voice. I sound like Kennedy that's running for president with the way my voice is right now. So I apologize for that. But we're going to talk about the Senate versus House farm bill. And I know you do a lot of studying, obviously, on this kind of stuff. You're always up on this stuff, know what's going on, paying attention. What we're— I'd like to have you do today is just talk a little bit about the difference between the House and the Senate bill. And, you know, like we kind of talked offline, you can kind of give it a grade between the two and tell us a little bit about it. So let's start with ARC and PLC. Those are a couple of the areas that are important to all of us.

I think it feels like we're a long ways away from that actually being a any, in an area that actually covers us or keeps us in business. But go ahead and hit on those two first.

Paul

Neiffer: Yeah, I think the key thing is that both the House and the Senate is trying to increase the effective reference price. You know, that's the price where either a PLC payment or an ARC payment— well, technically ARC isn't based on effective reference price. It's based on benchmark, but if you, if you boost up that effective reference price, it also increases potentially the benchmark price. So it is important. Now what we've heard over on the Senate side is there's an automatic 5% increase for rice, cotton, and peanuts because historically their price just hasn't gone up as much. But the Senate seems to indicate that over the 5-year period of the farm bill, we're going to get a 10 to 15% increase in effective reference prices for all the commodities. Now, do I believe that? Not sure.

Over on the House side, the House side really is a little skimpy on the details, but it does indicate that there will be an increase in reference prices and certain commodities are going to get more of an increase versus other commodities. And again, I'm, I'm thinking likely or I mean corn and soybeans, they're already getting a boost in the reference price because of the current pricing. I think it's that rice, cotton, peanuts, and so on that will probably get a boost there. Now on the details of ARC, both the House and the Senate wants to increase the guarantee. Just remember for everybody, when you have your— let's say your benchmark revenue is $1,000 for corn, just as an example. The final harvest price revenue has to drop below $860 before you get any ARC payment. So your, your first 14% drop, no benefit to the farmer. Now the House boosts that up to 90%.

So you'll start getting a payment at $900. So you're going to get that extra $40 per acre before you'd ever get a payment under the current rules. Now, the Senate side, instead of boosting it up to 90%, only boosted up to 88%. So again, the House is going to be better. The Senate keeps the current 10% maximum payment. So if you're— again, if your benchmark revenue is $1,000, the maximum payment you can get is $100 per acre. The House actually boosts that up to 12.5%. So the maximum payment you're going to get in that case, again, using the $1,000 benchmark revenue, is $125. So both the House kicks in quicker and you're going to have a bigger payment, at least a 25% larger payment than you would under the Senate proposal. So, so definitely if I'm scoring it on a grade, I would give the House an A+ on, on ARC and I'd give the Senate maybe a B-.

I mean, it definitely— they're improving it, But certainly a house is a much better improvement. Now, over on the PLC side, as far as we can see, there's no changes on the house other than the fact that the effective reference price is higher. You know, that, that is definitely a benefit. The Senate is actually putting in some restrictions on it. Remember that ARC has a limit of 10% of the benchmark revenue. Over on PLC, currently there is no limit, but the Senate is proposing that the maximum limit is going to be based on 20% of the effective reference price. So let's take corn as an example. Currently at the $4 level, I think it's $4.01, but let's round it to $4. The loan rate— so your maximum payment on PLC is the difference between your reference price your loan rate. I think the loan rate for corn is 220.

So for corn, you could have a maximum payment under current rules of $1.80 per bushel, whereas the new, new Senate proposal would cap that at $0.80. So almost across the board, it's like a 40 to 65% reduction in the maximum payment. Now some people are saying, well, corn's never been anywhere near that. Well, that's true. But wheat has hit the maximum payment or pretty close. And rice and peanuts and cotton have come pretty close before. So something just to be concerned about.

Chris: How do you— how do you— what's your final grade then for the House versus the Senate?

Paul

Neiffer: The House proposal, I think the final grade for me would be again, B+, A-, you know, they're not screwing with it. The Senate proposal, C-. Or maybe a D+. Also, but no details, the House wants to increase the payment limit and then index it to inflation, but no details. Is the increase $10,000? Is it $50,000? You know, if it was $50,000, that would be an A+. If it's $5,000, you know, well, that's a B-, you know. You know, so it just— it's hard to know what without the details exactly what it might be. But certainly the House proposal for Production Act is definitely much better than the Senate proposal.

Chris: Okay. Talk a little bit about payment limitations. I think that's going to be a big area for people to—

Paul

Neiffer: Yeah.

Chris: —understand.

Paul

Neiffer: Yeah. It appears that the House really is not making any changes on the payment limits other than increasing the payment limit, like I said. But over on the Senate side, we have, you know, it's interesting that there's a clause in there, but no details that says if an investor purchases farmland, and if their AGI is greater than $700,000, then according to the verbiage, nobody gets a payment on that acre. So even though the farmer that's farming that land is under $700,000, potentially there's not going to be any ARC or PLC payment allowed because the investor that owns it, their AGI is over $700,000. Now, again, that's the wording. You know, there's no details. So I may be wrong. I'll tell people that I may be wrong also. They want to drop the AGI limit across the board for production ag down to $700,000. You're currently at $900,000. And remember, that's gross income or AGI.

That's before your itemized deductions and some other deductions. But if you're a specialty crop farmer and remember Senator Stabenow from Michigan and they have a lot of specialty crops up there, they want to boost that AGI limit up to $1.5 million. And then there's also a proposal in there that sounds like they're bringing in what I call the Senator Grassley-Senator Brown bill that came out last year to restrict general partnerships to only 2 payment limits for a general partnership. So they don't go into those details. They just say they want to close a loophole that allows people to qualify for a payment limit without having, quote, dirt under their fingernails. So, you know, so, so, you know, when they start having that type of terminology, that sounds like the Senator Grassley, Senator Brown bill.

So, so again, grading it, House, I give an A because they haven't screwed it up and they're increasing payment limits. Over on the Senate side, I'd give it an F-minus right now based on what I've heard.

Chris: It just seems a little bit— I don't know what the adjective is. It just seems kind of funky that they're going to restrict a farmer's payment because of the landowner. So the landowner is supposed to subsidize the farmer then? Yeah. Yeah.

Paul

Neiffer: Well, and the other thing I forgot to mention is on base acres, the— again, excuse me, I think my voice is almost like yours, Chris. I don't know what's going on today. It's early in the morning, I guess. The House proposal allows base acres to be increased if your planting has been greater than base acres. They're going to allow you to increase your base acres. The Senate proposal says, yeah, we're going to let you increase your base acres again if your planted acres have been more than base acres, especially if you're a young and beginning farmer. But what they said We're going to restrict it only to underserved farmers. Well, Chris, you and I, we're white males. We're not underserved. So all the white males out there are not going to be able to increase their base acres.

I'm starting to believe, as we start to see both the USDA do this and Congress do it, personally, I think if you're a husband and wife, you should have your wife own 99% of your farm and you should only own 1%. Because then you qualify for all these underserved benefits. You know, they're penalizing a white male and then they're rewarding everybody that's not a white male. Hmm. Interesting.

Chris: Yeah. A lot of things to think about there. One other thing I want to come back to. You had mentioned the general partnerships. There's a lot of people that set up GPs in the past and I don't want to go down a rabbit hole here, but, you know, when we're helping people put together business structure, that's usually not an area we go into. We look at each individual legitimately farming their own and then, you know, structuring an equipment company that serves as a service division. So each of those entities— is anything changing there? Because that seems like a way better deal than a GP And, you know, talk about that for a second. Is there, is there a structure that makes sense or is there something that people need to be aware of?

Paul

Neiffer: Well, I think for, for the majority of the listeners on this podcast, the majority of them doing that structure is fine. You are going to have a small segment, you know, outside the bell curve, so to speak. That, you know, you have 6 or 7 family members, you know, they have a large farm operation and the only way that they can get all of their payment limits is to be structured as a GP. You know, the Senator Grassley-Senator Brown bill went through, they'd only be able to get 2 payment limits. You know, so really, I think that makes it even worse because then what's going to happen you're going to take this larger partnership that is economically feasible. You know, it has the Equipment LLC to provide the equipment and so on. But now instead of having one GP, you might end up with 6 GPs. You know, they're not going to eliminate the payment limits.

You're just going to create more entities, which is just what we need is more entities just for a farm bill. So, yeah, that's, that's the reality. But I would say for the majority, especially if they do increase the payment limits, you know, our current planning structures work just fine.

Chris: Okay. Yeah, and that's a whole nother topic probably for another time you and I need to have a conversation on as far as the business structure as we navigate through some of this stuff. Crop insurance, hit on that too. Any new news there? Anything on crop insurance we need to be aware of?

Paul

Neiffer: Yeah, definitely both the House and the Senate want to increase the premium subsidies. Uh, it depends on whether it's SEO that they want to boost up or if it's just the regular RP coverage. Uh, both of them I would give a grade of a B+. Um, you know, I'm, I'm— again, we don't have all the details on the House bill, so it's hard to grade it, the House versus the Senate. Um, but they definitely want to increase the premiums to make it easier to qualify maybe for the 80-85% level for those farmers outside of the true Corn Belt, you know, more like North Dakota or Texas or wherever it might be, which for them, well, even my, you know, my ground down in southwest Missouri versus the ground that's near you, you know, the to cover or to pay for insurance in Iowa, it's, let's say, I'm just throwing out a number, it's $10 an acre. At the same coverage in Missouri, it's $40 an acre.

So, you know, the more that you can help the farmer get better coverage at a reduced rate, the better off we are. But again, we need the details. They don't provide all the details. This is just based on either what is in their summary, or what we hear in the media.

Chris: Gotcha. Also, you know, as you think about all the stuff that's going on with carbon credits and everything, what, what if anything is in there? Does it matter on the administration? Anything going on there that's being discussed that's connected, I guess I should say? Yeah.

Paul

Neiffer: Well, certainly the Senate side is continuing to promote what President Biden got pushed through with the Inflation Reduction Act. Which, you know, you talk about a misnomer on a name. It's only increased inflation. It's never reduced it. But that's for another day. The House side is wanting to take some of those conservation funds that were in the IRA and sort of redirect them still for conservation, but more what I call production-friendly type benefits, whereas the Senate side wants to continue to, you know, push their agenda, so to speak. Now, some of that is beneficial to farmers. But as we saw, you know, in the— and I know you had a podcast on, on the guidance that came out earlier this week on the GREEP model, you know, if they're going to say the only way that we can get corn ethanol, it has to do, you know, cover crops, has to do no-till.

Now, we know there's some exceptions, but and then has to do enhanced nitrogen fertility. You know, half of the farmers, especially in the north, they can't plant a cover crop anyway. Or, or Chris, what are you going to do if you're up in North Dakota? You're just going to go out there and throw a bunch of seed out there and say, hey, I planted a cover crop, it just didn't come up. Right. I mean, that's, that's the reality. I'll plant it. You know, I did everything you told me to do, but it was basically worthless and you, and you forced me to spend an extra $10 an acre. So, Yeah, I think, you know, if Biden gets reelected, they're going to continue to push that. They're going to try to enhance it. If, if Trump gets elected, yeah, it's hard to know what, what he might do.

You know, my personal opinion is the only way that corn ethanol is really going to benefit the farmer on the SAF side is Congress eventually is going to have to mandate airlines have to use SAF at least for a certain percentage, similar to ethanol mandates. So, so we'll see, you know, I, you know, it's going to take several years before we even know.

Chris: It sounds like there's going to be traction for the farmer from the standpoint of that. And then, you know, if they can decouple the, the, you know, the no-till, the COVID crop and the, you know, they can decouple that stuff so that people can be rewarded for stepping into, you know, climate, quote unquote, climate smart activity. You know, that would be, you know, probably a smarter way to approach it instead of trying to— Right.

Paul

Neiffer: And the other thing we have to realize is what was in that guidance was just a safe harbor. That is not how the updated GREET model is really going to treat all these practices. What it was saying is if the farmer does these 3 practices, we're going to grant you for the tax credit calculation an extra 10 points. So right now, based on how I read the guidance, they said that with that extra 10 points, your efficiency for ethanol is going to be at 53%. So in order to get that $1.25 credit, you have to be at 50%. So that's telling me right now corn ethanol without those— that benefit is at about 43%. It's got a long ways to go to get up to that 50% level. So, you know, Safe Harbor is just that. It's a safe harbor. But the actual GREET model is probably going to come out and say, hey, if you do no-till, instead of being 43%, you're going to be at 46 or 47%.

If you do a cover crop, that's going to boost you up to 49%. And then this nitrogen thing gets you to 53% or something like that. So maybe you don't have to do all 3, but if you only do 2 of the 3, you still can't get above the 50% level.

Chris: Mm-hmm. Gotcha. It'll be interesting. Yeah. All right. Yeah.

Paul

Neiffer: The good news is I have plenty to write about on my blog. So, yes, especially over the next few months as the Farm Bill gets, you know, supposedly And, you know, Congressperson G.T. Thompson of Pennsylvania is going to have, you know, a markup, an actual markup. You know, right now it's a, you know, it's a fuzzy summary, but an actual markup of the bill either the week of the 13th or the week of the 20th. So once that comes out, you know, certainly we'll have to circle back and go through the nitty-gritty details because right now we're just sort of— I won't say we're Shooting from the hip, but pretty close.

Chris: Mm-hmm. So I have 3 questions to wrap up. The next one is, or the first one of the 3, I did the math. So you're given the House a B+ and you're given the Senate a D-. What are we going to end up with?

Paul

Neiffer: I'll be happy if we end up with at least a B-. You know, because again, the Senate tends to have a little more power than the House, in my opinion. You know, and part of this is this assumes that they get a bill passed this year. I think the chance of that happening is still less than 60% because, you know, if we go into much past June, it's politics season. You know, nobody's going to be interested in passing a bill. But I'd be happy if we have at least a B-.

Chris: My next question is kind of a big one, and my last one is going to be really— this next one is very macro. My last one's micro. The national debt, every 100 days we're going up a trillion bucks. Yep. What in the hell do we do here? I mean, is that sustainable? I mean, you're a math guy. You're probably one of the most intelligent math guys I know. Is that, is that not an issue or is it an issue? I mean, because we're spending money everywhere.

Paul

Neiffer: Yeah. As long as we have the ability to print that money, you know, print that debt and get people to buy it at a reasonable interest rate, they're going to kick the can down the road. The day that we, A, don't meet that, then we're going to become like Greece or whatever else. So, um, we still have capacity, but, you know, if we're going at $3 trillion every single year— that's why you got Trump and you got Biden. And I'm, I'm, I'm like anybody else, I want to pay the least amount of taxes as I can, but you're not going to grow yourself out of this. This country cannot grow at, at a greater rate than 2 to 3%, and you're not going to grow your way out of it. We're going to have to, you know, we're going to have to face it and start paying some taxes at some point. So, yeah, yeah.

Alone, for every point on the interest, the average interest rate goes up is about $350 billion of extra costs. So we've had a 3 to 4 point increase. You know, that's at least a trillion extra costs. That's what's causing part of the deficit right now.

Chris: Right. Okay, my last question. If you, if you look at everything we just talked about, and you're a producer listening to this, you put your farmer hat on, other than staying tuned and coming back and seeing what's really there, what should farmers be doing and thinking about with respect to, you know, the Farm Bill, what they need to be doing, what they need to be paying attention to? What's the takeaway?

Paul

Neiffer: Yeah, I think for me the biggest takeaway is even though I think I'm going to call it the carbon incentives, maybe a few years down the road, I think paying attention to that is important. Finding out what you do need to do to enhance your practices, you may get a payoff. But I think if you simply ignore it, and don't pay attention and don't do some of those practices, you may be behind your neighbors, or instead of getting a premium for your crop, you're going to get a discount for your crop. And, you know, that's the last thing you want to do is get a discount for your crop. So the actual Farm Bill, the other stuff, you know, most of that is sort of cut and dried. You know, we'll see what it is. But I think the, the whole carbon area is still, you know, too soon to know whether it's really going to benefit the farmer or not. I think eventually it will.

It's just going to take time.

Chris: Yeah, I think, I think it's a good conversation. I think there's still the basics. I guess my takeaway is we still, as producers, got to focus on the basics, the things we can control. Yeah. What we're spending ourselves in our operations. Making sure that we're doing our math right, making sure we know, you know, what our cost of production is. I just put a bunch of targets in the other day, went back and figured up kind of where we're at with planting and where we're at. And I think we're going to all need to probably step back and make sure we're doing our own due diligence on our operations more often than we have when these margins are tight like this.

Paul

Neiffer: But yeah, I think this is not the year to be greedy. This is the year to take advantage of this little weather rally we're having, whether it's not just our weather, it's, it's Argentina, it's Brazil, it's Russia. And, and don't expect it to add $2 per bushel to corn. It's probably going to add $0.75 here in the next couple of months.

Chris: Well, I hope so. That would be awesome if it did. We'll see.

Paul

Neiffer: Yeah, I may be wrong, but I think, you know, you know, if you look at it almost every year, May, June, early July is your, your best pricing., and we just sometimes don't take advantage of it. Yeah. And that's exactly it.

Chris: I mean, you gotta have these targets in though, cuz you know, usually those opportunities last just a couple of minutes and, and if you don't have the targets in and they happen at night often.

Paul

Neiffer: Yep. So, yep, exactly.

Chris: Exactly. Paul, as usual, you have a, a ton of information. You're the, you're the researcher of researchers, I guess you could say, as far as figuring that stuff out and, gonna be real excited to have you back so we can talk about kind of the next, the next phase of where we're at on the farm program. And hopefully we can get something that has some meat on the bone so that it has value not only for the farmers, but for the consumers and for the country. So yeah, exactly.

Paul

Neiffer: Thank you very much. You're welcome, Chris.

Chris: Thanks for having me on. Yep, anytime. We'll appreciate it, everybody. And if anybody's got other topics, things they'd like us to be hitting both on the Ag View Pitch or on 19 Minutes, let us know. And We'll be back again soon. Thanks. Catch you next time.