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What to Expect from Government Payments for the 2003
Crop
October and November is a bustling time for producers in
Indiana as harvest continues across the state. But, this
time of year also marks a busy period for the local FSA
office as government payments begin to come into focus for
many producers. With the low corn prices there should be
some government support available to the farmer, but what
about soybeans and wheat? How much might a producer expect
to receive in government support on a particular farm? This
article explains the various commodity program payments
available to producers and how to calculate the amount a
producer can expect for corn, soybeans, and wheat for a
particular farm.
What are the types of payments?
The 2002 Farm Bill contains three different payment mechanisms
to support producers’ incomes, particularly when prices
are low. These mechanisms include: Direct Payments (DP),
Counter Cyclical Payments (CCP), and Loan Deficiency Payments
(LDP). A producer may expect to receive any or all of these
payments for any or all of their crops. Much of the support
will be determined by the base acres and program yields
that producers had the opportunity to update during the
signup period for the 2002 Farm Bill, last year.
First, we need to identify a few critical numbers for the
analysis. Figure 1 shows the applicable national payment
rates for the crops discussed in this article.
Figure 1: National payment rates for applicable
crops.
To better explain the various payments, an example farm
has been created. The example farm, described in Figure
2, has 100 total acres with 50 acres of corn base, 40 acres
of soybean base, and the remaining 10 acres in wheat base.
For the 2003 crop, the producer chose to plant 40 acres
of corn, 40 acres of soybeans, and 20 acres of wheat. The
direct payments yields are 120, 50, and 50 bushels for corn,
soybeans, and wheat, respectively. Since the example farm
chose to update its acres and yields in the 2002 Farm Bill
the CCP yields are somewhat higher, with 140, 50, and 60
bushels for corn, soybeans, and wheat respectively. Throughout
this article the example farm will be referenced for clarification
on all payments. For explanation purposes the farm is located
in Tippecanoe County therefore the county loan rates of
$2.03, $5.13, and $3.66 for corn, soybeans, and wheat will
be used, which are somewhat higher than the national rates
reported in Figure 1. Loan rates are used to determine LDP’s
and change from county to county . It should be noted that
the target price and direct payment rates stay constant
across the nation.
Figure 2: Descriptive Information for the Example
Farm
Figure 4 illustrates the calculations discussed throughout
this article and provides the aforementioned rates and background
information. It is copied directly from the Government Payment
Calculator available on the Purdue Department of Agricultural
Economics website. The Calculator also provides a list box
where producers can select the county where the specific
farm is located and receive the loan rates for that county.
Now that we have set the stage for our example farm, the
remainder of the article will focus on explaining each of
the commodity support programs.
What is expected from Direct Payments?
Direct payments are effectively updated AMTA payments from
the 1996 Farm Bill. The direct payments are based on historical
acreage (base) and yields and not tied to current production
or current prices. The acreage bases are based on the producer’s
chosen base established during the signup period for the
2002 Farm Bill. Direct payment yields are based on 1985
frozen program yields. Direct payment base acres and yields,
for all crops, can be determined by contacting the local
FSA office.
Below is the simple math equation used to calculate Direct
Payments:
Direct Payment Rate per Bushel * Direct Base Acres * Direct
Yield * 85%
The direct payment rates for corn, soybeans, and wheat
are $0.28, $0.44, and $0.52, respectively. Our example farm
would be receiving $1,428 for corn; this was achieved through
the following calculations:
$ 0.28/bushel * 50 acres * 120 bushels * 85%
The same calculations can be performed to determine the
direct payment rate for soybeans and wheat. Figure 4 shows
$748 for soybean and $221 for wheat resulting in a total
of $2,397 in direct payments for this farm. Direct payments
for all crops are available beginning in December of the
previous year, at that time the producer can receive 50%
of the total direct payments for a farm. The final payment
is available in October of the year the crop is harvested;
therefore many producers may have already received all of
their direct payments for the crops harvested during 2003.
What should you expect from Counter Cyclical Payments?
Counter Cyclical Payments are very similar to the target
price/deficiency payment system used in the 1990 Farm Bill.
These payments are not related to current production on
the farm, but are related to current crop prices. Lower
prices “trigger” the counter cyclical payments
to engage and provide economic assistance to farmers. The
payment is paid on the base acres and yields that were established
during the signup period for the 2002 Farm Bill. To determine
possible counter cyclical payments we first need to determine
the expected per bushel CCP rate. The following math equation
shows how to compute the CCP rate:
(Target Price – Direct payment) - (higher of the
national loan rate or the 12-month marketing year average
price)
Determining the CCP rate requires the 12-month marketing
year average price (MYA). The final MYA price is not determined
until the end of the marketing year (July for wheat and
September for corn and soybeans). Thus, we must use USDA
estimates of the MYA price to determine the expected CCP
rate. These estimates can be found in the World Agricultural
Supply and Demand Estimates reports that are published monthly
during the marketing year. USDA uses this MYA price estimate
to issue advanced counter cyclical payments to producers.
The first advanced CCP is 35 percent of the total expected
CCP payment and is available in October while the crop is
being harvested. In February, USDA will review the MYA price
estimate and issue a 2nd advanced payment as long as the
total of the 1st payment and 2nd payment does not exceed
70% of the total expected CCP. At the end of the marketing
year (July for wheat and October for corn and soybeans)
USDA will determine the final CCP based on the final MYA
price and issue any remaining CCP’s owed to the producer.
Since the advanced payments are based on estimates, overpayment
of CCP’s is a possibility and could require repayment
of the excess amount by the producer at the end of the year.
Repayment would likely occur by reducing the amount of direct
payments the producer would receive in the next year rather
than having the producer actually pay back the CCP.
The October estimates of MYA prices are $2.10, $6.50, and
$3.55 for corn, soybeans, and wheat, respectively. Based
on these MYA prices we can compute the expected CCP rate
for each crop. The target price for corn is $2.60 and the
direct payment is $0.28. The national loan rate for corn
is $1.98, so in this example; the MYA is higher than the
loan rate and will be used to determine the CCP rate. The
equation below shows the expected CCP rate as of October
2003.
($2.60 – $0.28) - $2.10 = $0.22 per bushel
The same calculations can be made for soybeans and wheat.
For wheat the resulting CCP rate is $0.09 per bushel. At
this time, the MYA price for soybeans is higher than the
effective target price of $5.36 (target price minus the
direct payment) so there is no expected CCP. Remember, the
payment rates are estimates as of October 2003 and could
change as the marketing-year progresses. If prices fall
then CCP rates would go up. If prices rise over the marketing
year then CCP rates would go down.
Total CCP for the example farm are computed by inserting
the CCP rate, the CCP base acres, and CCP’s yields
into a math equation, similar to the direct payment equation,
as follows:
Total Counter Cyclical Payment = CCP rate * CCP Base Acres
* CCP Yields * 85%
For corn on our example farm this calculation would be:
Total CCP = $0.22 per bushel * 140 bushels * 50 acres *
85% = $1,309
This $1,309 is an estimate of what the final CCP will be
for corn on this farm. This estimate will be used to determine
the 1st advanced payment available in October of 2003. The
producer would receive 35% of this amount or $458.15. Once
again the same calculations can be completed to determine
the CCP amounts for wheat and soybeans. In this example
there would be no CCP’s for soybeans and $45.90 in
expected wheat CCP’s of which the producer could receive
$16.06 in October.
What should you expect from Loan Deficiency Payments
(LDP)?
Loan deficiency payments are tied to current production
and prices. LDP’s are designed to off-set low prices
for farmers. LDP’s have been available since the 1996
Farm Bill and work the same in the 2002 Farm Bill as they
have in the past. Loan deficiency payments are expected
(at this time) to be available in wheat and corn, but are
unlikely to occur this year for soybeans.
The first step in determining LDP’s is to see if
the county’s loan rate is above the posted county
price. The posted county prices changes on a daily basis
and can be determined by contacting your local FSA office
or by going to the national FSA website’s LDP rate
calculator . If the loan rate for the county is above the
posted county price the producer can choose to receive the
difference per bushel on all bushels that the producer currently
owns. The equation below illustrates this point:
(Loan rate – posted county price when exercised)
* Current Acreage * Current Yield
For the example farm in Tippecanoe County the local corn
loan rate is $2.03. On October 17, 2003 the posted county
price was $1.98. Therefore the total per bushel amount available
to the producer is $ 0.05. For the example farm this equates
to $310 in total Loan Deficiency Payments available to the
producer as seen in the following calculations:
($2.03-$1.98) * 40 acres * 155 bushels = $310
Similar calculations can be completed to determine wheat
and soybean LDP rates, if applicable. In the example, the
producer could receive an additional $855 in LDP’s
for wheat if they exercised their option on October 17,
2003. Loan deficiency payments can be claimed at any time
after harvesting the crop and before the crop is sold.
Conclusion
Based on our example calculation the example farm is expected
to generate a total of $2,397 in direct payments, $1,355
in CCP’s, and $1,165 in LDP’s if they exercise
their LDP’s on October 17, 2003. This amounts to a
total of $4,917 or about $49 per acre. In October, the producer
would receive half of the direct payment ($1,198), 35% of
the expected CCP’s or $474, plus the $1,165 in LDP’s
for a total of $2,838 associated with the crop that is harvested
this October. The diagram in Figure 3 illustrates the timing
of payments for the example farm.
Figure 3: Payment Timing for the 2003 Crop
An important point that this article does not discuss in
detail is payment limits. According to the 2002 Farm Bill
producers are eligible for payment of $40,000 for direct
payments, $65,000 for CCP’s, and $75,000 for LDP’s.
Depending on how the farm is structured, an individual farm
family may qualify for as much as $120,000 in direct payments,
$195,000 in CCP’s, and $225,000 in LDP. In addition,
the 2002 Farm Bill allows producers to restructure their
operation to avoid the payment limits, but these topics
are beyond the scope of this article. Additional information
concerning payment limits can be found at your local FSA
office. It is highly recommended that a producer visit the
local FSA office to check the rules concerning re-organization
before any organizational changes are made.
A Government Payment Calculator is available on the World
Wide Web at http://www.agecon.purdue.edu/staff/gray/Extension/Agricultural%20Policy/extensionpolicy.htm.
This calculator allows producers to input the data for a
particular farm. The spreadsheet will do all of the calculations
and provide the producer, or landowner, with an estimate
of the expected direct, counter cyclical, and loan deficiency
payments for the farm. If you have questions about using
the calculator please contact Andrew Falwell at (765) 494-3259
or falwella@purdue.edu. Happy Calculating!
Figure 4: Government Payments Calculator for Example Farm
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