2002 farm bill

Allan W. Gray, Purdue University

2002 Farm Bill

Decision Time

Allan GrayPurdue University


2002 Farm Bill

• 6 Year bill• Costs $180 billion over 10 years• Almost a $6.0 billion dollar increase in

annual spending for program crops• Similar to emergency legislation

spending from 1997-2001• $17 billion in additional spending for

Environment


What is in the Commodity Title of the Bill?

• Three Basic Support Mechanisms

– Marketing Loans

– Direct Payments

– Counter-Cyclical Payments

• Soybeans and Peanuts become complete program crops

• Lentils, small chickpeas, wool, mohair, and honey are new commodities

• Dairy gets a counter-cyclical program


Comparison of Loan RatesCurrent Policy

2002 Farm Bill

2002-2003

2002 Farm Bill

2004-2007

Wheat ($/bu.) 2.58 2.80 2.75

Corn ($/bu.) 1.89 1.98 1.95

Sorghum ($/bu.)Relative to

Corn1.98 1.95

Cotton ($/lb.) 0.5192 0.52 0.52

Rice ($/cwt.) 6.50 6.50 6.50

Soybeans ($/bu.) 5.26 5.00 5.00


Comparison of DirectPayment Rates

1996 Farm Bill (2001)

2002 Farm Bill

Wheat ($/bu.) .46 .52

Corn ($/bu.) .26 .28

Sorghum ($/bu.) .31 .35

Cotton ($/lb.) .057 .067

Rice ($/cwt.) 2.05 2.35

Soybeans ($/bu.) N/A .44


Counter-Cyclical Payment Rates

2002 Farm Bill

2002-2003

2002 Farm Bill

2004-2007

Wheat ($/bu.) 3.86 3.92

Corn ($/bu.) 2.60 2.63

Sorghum ($/bu.) 2.54 2.57

Cotton ($/lb.) .724 .724

Rice ($/cwt.) 10.50 10.50

Soybeans ($/bu.) 5.80 5.80


Computing Payments• Direct Payments (DP)

– DP per unit X Base acres X DP yield X 0.85 = Direct Payment

• Counter Cyclical Program Payments (CCP)– Target Price – DP per unit – higher of (loan rate

or market price) = CCP per unit– CCP per unit X Base acres X CCP payment yield

X 0.85 = CCP Payment

• Marketing Loan Payments (LDP)– (Loan Rate – Market Price)*Current Production


$2.52

$ .03

$ .21

$ .00

$2.28

$1.98

$2.60

$2.81$2.46Total

$ .00$0.34 ($0.27)Counter Cyclical

$ .21$ 0.28 ($0.21)Fixed

$ .00$ .29LDP

$2.60$1.69Market Price

$1.98$1.98Corn Loan

$2.60$2.60Corn Target

Payments Under Various Market Price Scenarios


Summary of Risk Impacts of 2002 Farm Bill

• Potential to substantially reduce downside cash flow risk

• Does not do a good job of protecting against yield drops


Impact of Yield Drops on Total Revenue

20%

40%

60%

80%

100%

120%

140%

90.00 92.00 94.00 96.00 98.00 100.00

National Yield Index

% C

han

ge

in R

even

ue

Market Receipts Government Payments Total Revenue


Impact on Revenues from Various Drops in Farm Level Yields When National Yields are Down 10%

96%103%

109%116%

129%

48% 48% 48% 48% 48%

88% 93% 98% 104%114%

0%

20%

40%

60%

80%

100%

120%

75.00 80.00 85.00 90.00 100.00

Yield Index

% C

han

ge

in R

ecei

pts

Market Receipts Government Payments Total Revenue


Updating Base Acres and Yields

• Five Basic Options– Make No Changes– Don’t update base acres or yields and simply add

soybeans to fully base your acres– Maximize soybean base– Update base acres and CCP payment yields

• Don’t update yields is an option• using 70% of the difference between 98-01 average yield

and 1985 program yield• using 93.5% of the 98-01 average yield

– Trade base acres of other crops for bean base


General Rules of Thumb for Updating Bases and Yield

• Corn is king– The more corn base you can have the better

• Generally, 60 percent based in corn or more would lead you to option 2 if you have been planting less corn.

• Need to prove soybean yields no matter what option if at all possible– Or else 75% of county * 78% for direct pmt yields

• Fruits and vegetables will tend to lead you to option 1.


What to bring the FSA.

• Historical Farm Acreage (1998-2001)– FSA has sent a letter with this information

• Historical Farm Yields (1998-2001)– Don’t have to have the proof at sign-up– Must verify upon request

• Select appropriate option for each farm– Options 1-5


Verifiable Production Records Stored or Sold Off-Farm

• Warehouse receipts

• Warehouse ledgers

• Load summaries

• Settlement sheets

• Scale tickets or weight slips supported by a sales document

• LDP Records


Verifiable Production Records Stored or Used On-Farm

• LDP Records

• FSA measurements for grain that was fed or is still stored on the farm

• FSA appraisals

• RMA appraisals (loss purposes only)

• RMA measured production if commodity fed or still on the farm

• Farm records for seed used on the farm.


Purdue University Decision-Support Spreadsheet

• Here is the website for Farm Bill Spreadsheet:

• http://www.agecon.purdue.edu/ext/policy.asp

• Spreadsheet Example

http://www.agecon.purdue.edu/ext/policy.asp


Contact Information

• [email protected]

• [email protected]

mailto:[email protected]

mailto:[email protected]


Corn Safety Net

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$1.50 $1.60 $1.70 $1.80 $1.90 $2.00 $2.10 $2.20 $2.30 $2.40

Market Price

Eff

ecti

ve P

rice

Market Price LDP Direct CCP


Begin Issuing Advance

Direct Payments

('03)

Dec

Current Year Payments

Begin Issuing 2nd Advance

CCP('03)

Issue Final Wheat, Barley, and Oats

CCP('03)

Issue Final Corn, Grain Sorghum, and

Soybean CCP('03)

Feb July OctJan

Begin Issuing 1st Advance CCP

('04)

Issue SY

Issue Final Direct

Payments('04)

Begin Final Direct

Payments('02)

"Fall"

2002AMTA

Sept

Issue Final Direct

Payments('03)

Jan Oct DecJulyFeb

Begin Issuing1st Advance

CCP('02)

'03 Year Of Harvest

Begin Issuing Advance

Direct Payments

('04)

Begin Issuing 1st Advance CCP

('03)

Issue Final Corn, Grain Sorghum,

and Soybean CCP('02)

Issue Final Wheat,

Barley, and Oats CCP('02)

Begin Issuing 2nd Advance

CCP('02)

Timing of Payments


Critical Issues

• WTO negotiations• Competitiveness• Market responsiveness• Value of land and farmland rents• Budget costs• Treating symptoms versus curing

problems


WTO Negotiations

• Substantial increases in legislated amber box spending

• 19 to 20 percent chance of exceeding the $19.1 Billion spending limit in ‘02 market yr.

• Seem to be playing games with the rules

• Negotiators are in a tough position


WTO Negotiations


Competitiveness

• World prices versus U.S. prices

• Incentives for continued efficiency gains

• Market share or profits?


Market Responsiveness

• Overproduction

– Buffered from market signals

– Would likely produce anyway

• Adjustments in resource prices

• Increased efficiency

• Soybean base reduces flexibility


100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007

Base Compromise Emergency

Returns to Land Under Alternative Government Programs

$21/acre

$6/acre


Probability of Returns to Land Exceeding Production Costs and Land Rents

0.10 0.05 0.04 0.03

0.64

0.470.39 0.33

0.260.48 0.57 0.64

0%10%20%30%40%50%60%70%80%90%

100%

No Program 1996 Farm Bill 1996 Farm Bill + 2002 Farm Bill

P(Returns<0) P(0<Returns<135) P(Returns>135)


Budget Costs

2% 2% 4%

12%17% 19%

40%

50%55%

0

0.1

0.2

0.3

0.4

0.5

0.6

1996 Farm Bill 1996 Farm Bill+ 2002 Farm Bill

Minimum Average Maximum


Budget Costs


Soybeans Safety Net

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$4.50 $4.60 $4.70 $4.80 $4.90 $5.00 $5.10 $5.20 $5.30 $5.40

Market Price

Eff

ecti

ve P

rice

Market Price LDP Direct CCP


Treating Symptoms or Curing Problems?

• Will this farm bill reduce dependence on government?

• Will this farm bill improve crop prices?

• Will this farm bill encourage free trade and competition?

• Will this farm bill provide opportunities or maintain status quo?

2002 farm bill

Documents

corn base

unit x base acres x

yield dropsupdating

changesdont update base

average yieldtrade base

farm billpotential

farm bill spreadsheet

historical farm acreage