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Commodity Programs: A Farmer’s Perspective

Commodity Programs: A Farmer’s Perspective. AAE 320 Paul D. Mitchell. Goals. Provide an overview federal farm programs, focusing on commodity crops Price support Revenue support To understand how these commodity support programs operate at the individual farm level

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Commodity Programs: A Farmer’s Perspective

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  1. Commodity Programs:A Farmer’s Perspective AAE 320 Paul D. Mitchell

  2. Goals • Provide an overview federal farm programs, focusing on commodity crops • Price support • Revenue support • To understand how these commodity support programs operate at the individual farm level • Cover crop insurance and disaster aid later • Guest speaker for fairy programs later

  3. Farm Bill • Every 6 years, Congress and the President pass a Farm Bill that sets agricultural, conservation and food policy for several years • Food, Conservation and Energy Act of 2008 • Farm Security and Rural Investment Act of 2002 • Federal Agriculture Improvement and Reform Act of 1996 • Food, Agricultural, Conservation and Trade Act of 1990

  4. Farm Bill • Huge document, with lots of “titles” that define federal ag programs in that area • 2002 had 10 titles • 2008 has 15 titles (see class web page) • I. Commodity Programs, II. Conservation, III. Trade, IV. Nutrition, V. Credit, VI. Rural Development, VII. Research and Related Matters, VIII. Forestry, IX. Energy, X. Horticulture and Organic Agriculture, XI. Livestock, XII. Crop Insurance, XIII. Commodity Futures, XIV. Miscellaneous, XV. Trade and Tax Provisions

  5. Farm Bill Spending by Category All Other 6% Farm & Commodity Programs 13% Conservation & Forestry 7% Nutrition 74%

  6. Farm Bill Spending • Most USDA federal spending goes for food and nutrition programs • Food stamps, school lunch/breakfast, etc. • Payments to Farmers • Commodity Support, Disaster Assistance, Crop Insurance and Conservation Payments

  7. U.S. Net Farm Income and Commodity Payments (not including Crop Insurance) Source: USDA Economic Research Service

  8. Crop Insurance Program Costs Have Surpassed Commodity Program Costs in Recent Years

  9. Geography of Farmer Support Source: http://www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm

  10. 2009 Total Payments (DCP, ACRE, LDP, SURE, MILC, CRP, Premium Subsidies)

  11. Program Payments by Farm Type • Rural Residence: < $250,000 and not farm as occupation (1.2 million farms) • Intermediate: < $250,000 and farm as occupation (300,000 farms) • Commercial: > $250,000 (220,000 farms)

  12. Main Point • Federal commodity support and conservation programs provide $10-$15 billion/year • Important part of farm income for “real” farms • 37% of all farms received government payments in 2009 • Lots of rural residences do not receive payments • Payments averaged $11,549 for those receiving payments • 5.5% of gross cash income • 23.6% of net cash income • Lots of different programs

  13. Federal Agricultural Support Programs • Program we will discuss • Commodity Support • Direct and Counter-Cyclical Payments (DCP) Program • Marketing Assistance Loans and Loan Deficiency Payments (LDP) Program • Average Crop Revenue Election (ACRE) Program • Disaster Assistance • Ad hoc Disaster Programs • Supplemental Revenue Assistance Payments (SURE) • Crop Insurance • 4 Main Crop Insurance Options: YP, RP, GRP, GRIP • Changes with new Farm Bill (2013? 2014?)???

  14. Conservation Programs • Conservation Reserve Program (CRP) • Removes land from crop production • [land sparing] • Environmental Quality Incentives Program (EQIP) • Payments to adopt best management practices • [land sharing] • We will not cover conservation programs here, many more programs, see list: http://www.nrcs.usda.gov/programs/

  15. The Commodity Title • Direct and Counter-Cyclical Payments (DCP) Program • Marketing Assistance Loans (MAL) and Loan Deficiency Payments (LDP) Program • Average Crop Revenue Election (ACRE) • Review each program here • How each works from a farmer's perspective

  16. Commodity Programs • Programs administered by the USDA Farm Service Agency (FSA) • Each county has a county FSA office • Farmers/land owners sign up each year—file specific forms for each program by specific dates • Programs often have reporting requirements: acres of each crop planted, where planted, starting to add production (yield) reports as well • Electronic payments possible, advance payments also possible, but being phased out

  17. Eligibility for Commodity Support • Farmer must have Base Acres to be eligible for DCP or ACRE (commodity support) subsidies • Officially designated by FSA Farm Serial Number • Farms often farm more than one FSA farm • Registered with FSA office in each county • Stays with the land, not the farmer • Each FSA farm has establish Base Acres and Program Yields used for DCP and ACRE

  18. Base Acres • Acres of each crop you grow (actually grew), but farms cannot establish new Base Acres • Established under older Farm Bills • Update based on actual crops planted: last time allowed was 2002, previously 1996 • Acres enrolled in conservation programs can change/update base acres • Payment Acres = 85% (or 83.3%) of Base Acres • Acres eligible to receive support payments • 85% is max allowed under WTO/GATT • 83.3% was used to help balance budget (2009-2011) • Base Acres do not equal what actually plant now

  19. Payment Yield • Typical yield for crops you grow (grew) • Established under previous Farm Bill rules • Last time was 2002, previously 1996 • Options exist for updating, see FSA • Farm Average1998-2001 x Ratio, with Ratio = National Avg1981-1985/National Avg1998-2001 • Payment Yields usually lower than farm’s actual average yields

  20. Direct Payments • DP = PymtRateDP x 85% x BaseAcx PymtYld • Direct Payment Rates (PymtRateDP) • Corn $0.28/bu, Soybeans $0.44/bu, Wheat $0.52/bu, Oats $0.024/bu, Barley $0.24/bu • Example: corn Base Acres = 100 and Payment Yield = 100 bu/ac, then • Direct Payment = $0.28/bu x 85% x 100 bu/ac x 100 ac = $2040, or $20.40 per acre • Direct Payment Rate is like “price” & rest is yield and acres: You get 85% of this revenue • Note: 83.3% used for 2009-2011

  21. Think Break #14 • Suppose you have • a) 30 corn base acres with a 108 bu/ac payment rate • b) 20 oat base acres with a 52 bu/ac payment rate • What is your direct payment? • How do these payments change if you plant only soybeans on these acres? • How do these payments change if you plant only alfalfa on these acres? • How do these payments change if you plant only potatoes on these acres?

  22. 2009 Direct Payments ($/ac)

  23. Counter-Cyclical Payments • When crop prices are low, triggers payments, with larger payments when prices are lower • CCP paid if Effective Price < Target Price • Effective Price = PymtRateDP + max{MYAPriceUS, Loan Rate} • MYAPriceUS = US marketing year avg price • Corn/Soybeans: 9/1 to 8/31, Wheat 6/1 to 5/31 • Loan Rates: Corn $1.95, Soybeans $5.00, Wheat $2.94 • Target Prices: Corn $2.63, Soybeans $6.00, and Wheat $4.17

  24. Counter-Cyclical Payments • CCP = PymtRateCCP x 85% x BaseAcx PymtYld • PymtRateCCP = TargetPrice – PymtRateDP – max{MYAPriceUS, Loan Rate} • CCP triggered if market price (MYAPriceUS) is below Target Price – DP Rate (PymtRateDP) • CCP Pymt Rate (PymtRateCCP) increases 1¢ for each 1¢ market price below TargetPrice – PymtRateDP • Max CCP Pymt Rate (PymtRateCCP) is TargetPrice – PymtRateDP– Loan Rate

  25. Counter-Cyclical Payments

  26. Counter-Cyclical Payments Graphics for Corn CCP Payment Rate 0.40 Market Price 1.95 2.35 2.63 Loan Rate Target Price – DP Payment Rate Target Price

  27. Counter-Cyclical Payments Graphics for Soybeans CCP Payment Rate 0.56 Market Price 5.00 5.56 6.00 Loan Rate Target Price – DP Payment Rate Target Price

  28. 2009 Counter-Cyclical Payments ($/ac)

  29. Think Break #15 • Suppose you have 30 base acres of corn with a 108 bu/ac payment rate and the national MYA corn price is $2.10/bu • What is your counter cyclical payment? • How does your CCP change if you sell the corn for $2.50/bu? • How does your CCP change if you sell the corn for $2.00/bu? • How does your CCP change if you grew alfalfa on the land?

  30. Summary of Direct and Counter Cyclical Payments (DCP) • Compensate farmers for low prices down to Target Price minus DP Payment Rate • $2.35 corn, $5.56 soybeans, $3.65 wheat • “Low Price” is measured by USDA national Marketing Year Average (MYA) price • Corn/soybeans: 9/1 to 8/31, Wheat 6/1 to 5/31 • Payments made to farmers using Base Acres and Payment Yields • 85% of Base Acres X Payment Yields

  31. Summary of Direct and Counter Cyclical Payments (DCP) • DCP payments paid whether farmer grows the crop or not, but must have Base Acres • Direct payments paid regardless of market prices • Counter-cyclical payments paid regardless of the price farmer actually receives and the yield farmer actually produces • Wisconsin has almost 5,322,000 base acres • Total acres of corn, corn silage, soybeans, wheat, oats and barley (program crops) was 5,910,000 acres in 2010

  32. 2009 DCP Enrolled Base Acres as % Cropland

  33. DCP Fact Sheet: Eligibility & Restrictions • Use base acres for ag or related activities • Share in risk for crops grown on base acres and share in marketing of production • Annual signup and reporting requirements • Comply with conservation and wetland protection requirements, protect land from erosion and control weeds (“conservation compliance”) • Comply with planting flexibility requirements • No fruits or vegetables or wild rice • New in 2008: Allow processing vegetables on total of 9,000 ac in WI (different acres in few other states) • Meet Adjusted Gross Income (AGI) limits • < $500,000 non-farm AGI • <$750,000 farm AGI • <$1,000,000 total AGI

  34. Marketing Assistance Loans (MAL) & Loan Deficiency Payments (LDP) • MAL: loans to help farmers manage cash flow (pay off operating loans), so can wait to sell grain when prices are better • LDP: Payments that give farmers a price floor equal to the Loan Rate • Picks up price support for prices below the Loan Rate, where CCP stop • MAL-LDP programs meant to work together • Not tied to Base Ares or Program Yields

  35. Marketing Assistance Loans • Farmers receive a marketing assistance loan (MAL) from the Commodity Credit Corporation (CCC), using their harvested grain as collateral • Your harvested grain, no matter acres grown on • Receive $/bu in loan equal to the Loan Rate • Corn $1.95, Soybeans $5.00, Wheat $2.94 • Payback the loan with cash + interest or deliver the grain to the CCC • Payback with cash if Crop Price > Loan Rate • Payback with grain if Crop Price < Loan Rate • Delivery never really occurs, payback at the Marketing Loan Repayment Rate, less than the Loan Rate

  36. MAL Payback • Farmer picks a day to “sell” and payoff loan • Actual physical sale may occur later, but not earlier • Each day, there is a Posted County Price (PCP) for each commodity, the FSA official estimate of the local price • If PCP > Loan Rate, farmer pays back MAL in full, plus small interest payment • If PCP < Loan Rate, farmer pays back MAL at Marketing Loan Repayment Rate ≈ PCP • Loan Deficiency Payment (LDP) = Loan Rate – PCP • Simplification: Don’t take loan and pay it back, but receive LDP = Loan Rate – PCP, if PCP < Loan Rate

  37. Marketing Assistance Loans (MAL) & Loan Deficiency Payments (LDP) • See “Understanding MAL/LDP” 5 examples • 1) Just a LDP • 2 & 3) MAL with a Market Loan Gain, so payback at less than the Loan Rate • 4 & 5) MAL with no Market Loan Gain, so payback at the Loan Rate • Options 2 vs 3 and 4 vs 5 deal differently with taxes on income from sale and govt. payment • Actual sale occurs on different day than “sell” for MAL settlement and LDP payment

  38. Marketing Assistance Loans (MAL) & Loan Deficiency Payments (LDP) • Main idea: Program works to give farmers a price floor equal to the Loan Rate • Picks up price support for prices below the Loan Rate, where CCP stop • Note: Based on local prices and actual farmer harvested production, not Base Acres and Program Yields as used for DCP

  39. Loan Deficiency PaymentsGraphics for Corn (Assume $1.80 for posted county price) LDP 0.15 Market Price 1.80 1.95 2.35 2.63 Posted County Price Loan Rate Target Price – DP Payment Rate Target Price

  40. Think Break #16 • Suppose planted and harvested 5,000 bu of soybeans and enroll all 5,000 bu for a Marketing Assistance Loan • Soybeans has a $5.00/bu loan rate, so how much will your MAL be? • Suppose you pay back the MAL on Feb 1st when the posted county price for soybean is $6.00/bu, • What is your Loan Deficiency Payment? • How much will you pay back? • Suppose you pay back the MAL on Feb 1st when the posted county price for soybean is $4.50/bu, • How much will you pay back? • What is your Loan Deficiency Payment?

  41. Summary of Loan Deficiency Payments (LDP) • LDP ($/harvested bushel) • LDP = Loan Rate – PCP, if PCP < Loan Rate • Depends on local Posted County Price when you “sell” the crop (may not be price actually receive when physical sale occurs) • Depends on how many bushels harvested, not acres harvested • Gives farmers the Loan Rate as minimum price on all bushels enrolled • Corn $1.95, Soybeans $5.00, Wheat $2.94

  42. Marketing Assistance Loans • Many farmers still participate in the program, even though they do not expect to receive a LDP • About 6% total US production for corn • Use the loans to manage cash flow, because they charge low interest rates • Store grain for sale later, use the marketing assistance loan to pay operating loans due late fall/early winter

  43. 2009 Marketing Assistance Loans Made ($/ac)

  44. Implication of DP and CCP and MAL/LDP Programs • Conceptually, DCP and LDP are price support programs to give farmers a price equal to the Target Price or better • Doesn't quite work this way • DP and CCP for 85% (or 83.3%) of Base Acres at Payment Yield, triggered by National MYA price • LDP for actual yields and local prices (PCP)

  45. Combined DP, CCP, and LDPAssume $1.80 “market price” • Farmer receipts $1.80 Farmer Price (= Posted County Price) + $0.28 Direct Payment + $0.40 County-Cyclical Payment + $0.15 Loan Deficiency Payment $2.63 Target Price • Never works exactly this way: • 85% Base Acres ≠ actual acres • Program Yield ≠ actual yield • Posted County Price ≠ National Marketing Year Average Price ≠ Actual Price received by farmer

  46. Loan Deficiency Payments Graphics for CornIf $1.80 posted county price = MYA price = actual farmer price and 85% base acres = actual acres and payment yield = actual yield Payment ($/bu) LDP = $0.15 CCP = $0.40 DP = $0.28 “Market Price” 1.80 1.95 2.35 2.63 Posted County Price Loan Rate Target Price – DP Payment Rate Target Price

  47. MAL/LDP Fact Sheet • Eligibility: comply with conservation and wetlands requirements • Acreage report for all cropland on farm • Maintain beneficial interest (own grain) • Meet Adjusted Gross Income (AGI) limits • < $500,000 non-farm AGI • <$750,000 farm AGI • <$1,000,000 total AGI • Interest Rate on MAL is low: 1% point above US Treasury Rate to CCC • Example: April 2013 = 1.125%

  48. Graphics of Commodity Support • Assume farmer actually plants specified crop on Base Acres and harvests Payment Yield • Ignore the 85% (83.3%), i.e., assume paid for 100% of base acres • Assume Posted County Price for LDP is the same as Marketing Year Average Price used for DCP • Plot program payments and farm price • Program tries to give farmers the Target Price

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