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Farm_Programs by wuyunqing


									Commodity Programs:
A Farmer’s Perspective

        AAE 320
     Paul D. Mitchell
   Overview of federal farm programs,
    focusing on commodity crops
       Price support
       Revenue support
   How these programs operate at the
    individual farm level
   Cover disaster aid and crop insurance in
    the next section
                        Farm Bill
   Every 6 years, Congress and the President pass a
    Farm Bill that sets agricultural, conservation and
    food policy for the next 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 (―Freedom to Farm‖)
       Food, Agricultural, Conservation and Trade Act of 1990
                        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
       Farm Bill Spending by Category

                          Crop Insurance                                  Conservation
                               10%                 Commodities                 8%


Note: Based on CBO cost estimate for the farm bill conference report of $605 billion plus $167 in
   Child Nutrition over 10 years. The conference report contains $4-5 billion in budget gimmicks,
   including the elimination of advance direct and counter-cyclical payments by 2012.
              Farm Bill Spending

   Most of the money goes for food and
    nutrition programs
       Food stamps, school lunch/breakfast, etc.
   Commodity Support, Disaster Assistance,
    and Crop Insurance are a large part of
    subsidies to farmers
Crop Insurance Program Costs Have Surpassed
  Commodity Program Costs in Recent Years



    Billion Dollars




                           2000   2001   2002    2003     2004     2005       2006       2007      2008
                                          Commodity Programs       Crop Insurance

  Commodity programs: Production Flexibility Contracts, Direct Payments, Counter-Cyclical Payments and
  Marketing Loan Benefits. Crop insurance costs: premium subsidies and administrative and operating subsidies
  and net underwriting gains.
                U.S. Net Farm Income and Commodity
               Payments (not including Crop Insurance)

                  1970        1975         1980     1985   1990    1995     2000    2005

                                Net Farm Income (Less Govt Pay)   Government Payments

           Source: USDA Economic Research Service
                 Ad Hoc Disaster Payments are not a large
                       part of Commodity Support






                  1996                      1999          2002              2005

                                  Govt Payments (Less Ad Hoc Pay)   Ad Hoc Payments

           Source: USDA Economic Research Service
         Federal Agricultural Support
            Programs in the U.S.
   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
       Four Main Options: APH, CRC/RA, GRP, GRIP
         The Commodity Title
   Direct and Counter-Cyclical Payments
    (DCP) Program
   Marketing Assistance Loans and Loan
    Deficiency Payments (LDP) Program
   Average Crop Revenue Election (ACRE)
   Review each program: How each works
    from a farmer's perspective
          Commodity Programs
   Programs administered by the USDA Farm
    Service Agency (FSA)
   Each county has a county FSA office
   Farmers must sign up each year—file specific
    forms for each program by specific dates
   Programs often have reporting requirements:
    acres of each crop planted where, moving to
    production reports too
   Electronic payments now possible, advance
    payments possible, but being phased out
    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 usually 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
                      Base Acres
   Main idea: acres of each crop you grow, but
    farms cannot establish new Base Acres
   Option 1: Established under older farm bills
   Option 2: Update based on actual plantings,
    adjusted for conservation program acre changes
   Payment Acres = 85% (or 83.3%) of Base Acres
       Acres eligible to receive support payments
       85% is max allowed under WTO/GATT
       83.3% used now to help balance budget
                Payment Yield
   Main idea: typical yield for crops you grow
   Established under previous Farm Bill rules
   Options exist for updating—meet with
    County FSA office to get details
   Oilseeds (soybeans): Update
   Farm Average1998-2001 x Ratio, with
    Ratio = National Avg1981-1985/National Avg1998-2001
   Payment Yields usually lower than farm’s
    actual average yields
                Direct Payments
   DP = PymtRateDP x 85% x BaseAc x 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 price
   Note: 85% is 83.3% for 2009-2011
        Counter-Cyclical Payments
   When crop prices are low, triggers payments
    that are larger 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
   Target Prices: Corn $2.63, Soybeans $6.00, and
    Wheat $4.17
       Counter-Cyclical Payments
   CCP = PymtRateCCP x 85% x BaseAc x 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
       Counter-Cyclical Payments
Crop       Target   DP Pymt   CCP    Max CCP  Loan
            Price    Rate   Trigger Pymt Rate Rate
Corn       $2.63     $0.28   $2.35    $0.40   $1.95

Soybeans   $6.00     $0.44   $5.56    $0.56   $5.00

Wheat      $4.17     $0.52   $3.65    $0.71   $2.94
             Counter-Cyclical Payments
CCP Payment Rate
                 Graphics for Corn


                                                   Market Price

              1.95           2.35         2.63
            Loan Rate    Target Price –   Target
                        DP Payment Rate    Price
             Counter-Cyclical Payments
CCP Payment Rate
                 Graphics for Soybeans


                                                      Market Price

              5.00                5.56         6.00
            Loan Rate    Target Price –   Target
                        DP Payment Rate    Price
    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% (or 83.3%) of Base Acres X Payment Yields
    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
   Counter-cyclical payments paid regardless
    of the price farmer actually receives and
    the yield farmer actually produces
                DCP Fact Sheet:
           Eligibility and 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
   Comply with planting flexibility requirements
       No fruits or vegetables or wild rice
       New in 2008: processing vegetables, 9,000 ac in WI
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 combined programs to work together
        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 price > Loan Rate
       Payback with grain if price < Loan Rate
       Delivery never really occurs, payback at the Marketing
        Loan Repayment Rate, less than the Loan Rate
                     MAL Payback
   Farmer picks a day to ―sell‖ and payoff loan
       Actual physical sale may occur on a different date
   Each day, there is a posted county price (PCP) for
    each commodity (the FSA official estimate of the
    local price)
   If Loan Rate < PCP, farmer pays back MAL in full,
    plus small interest payment
   If Loan Rate > PCP, farmer pays back MAL at the
    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
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
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
          Loan Deficiency Payments
              Graphics for Corn
  LDP     (Assume $1.80 for posted county price)


                                                       Market Price

           1.80     1.95         2.35         2.63
          Posted     Loan    Target Price –   Target
        County Price Rate   DP Payment Rate    Price
              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
     Marketing Assistance Loans

   Many farmers still participate in the
    program, even though they do not expect
    to receive a LDP
   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
        Implication of 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)
        Combined DP, CCP, and LDP
        Assume $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
                        Loan Deficiency Payments
                            Graphics for Corn
      If $1.80 posted county price = MYA price = actual farmer price and
        85% base acres = actual acres and payment yield = actual yield
    Payment ($/bu)

LDP = $0.15

CCP = $0.40

DP = $0.28

                                                             ―Market Price‖
                 1.80      1.95        2.35         2.63
                Posted     Loan    Target Price –   Target
              County Price Rate   DP Payment Rate    Price
            MAL/LDP Fact Sheet
   Eligibility: comply with conservation and
    wetlands requirements
   Acreage report for all cropland on farm
   Maintain beneficial interest (still own it)
   Meet Adjusted Gross Income (AGI) limits
   Interest Rate on MAL is low: 1% point
    above US Treasury Rate to CCC
       Example: Feb and March 2010: 1.375%
          New with the 2008 Farm Bill

   Updated Target Prices and Loan Rates for
    some crops (soybeans, wheat)
       Also barley, oats, and other oilseeds
       Added dry peas, chick peas, and lentils
   85% is 83.3% for 2009-2011
   Created a New Commodity Program
       Average Crop Revenue Election (ACRE)
     Average Crop Revenue Election
   Subsidy program for commodity crop farmers
   Works to create a revenue floor, while DCP/LDP
    work to create a price floor
   Alternative to DCP and reduce MAL/LDP
   Replace CCP Payments with ACRE Payments
       So eligibility still requires Base Acres
   Give up 20% of Direct Payments
   Receive 30% lower Loan Rates for MAL
          ACRE Payment Triggers
   ACRE payments have two triggers
      Actual State Revenue must be less than State
       ACRE Guarantee
      Actual Farm Revenue must be less than Farm
       ACRE Guarantee
   Purpose: tie payments to local conditions and
    pay farmers only when have losses
   Kind of like a crop insurance policy
       Receive an indemnity if low revenue (in the state)
       ―premium‖ is 20% of direct payments, all counter-
        cyclical payments, 30% lower loan rate
         State ACRE Guarantee

   5-Year Olympic average of state yield per
    planted acre x 2-Year national price for
    marketing year x 90%
      USDA-NASS Yield per planted acre

      Olympic average: drop highest & lowest

      Marketing year price: Sept 1 to Aug 31

         Finish 2009 marketing year Sept 2010
            ACRE State Yields

   NASS yield/planted acre fine for most crops
   Corn the exception, NASS counts silage as
    planted acres, but does not yield any grain
      20%-30% WI planted acres are silage

      NASS corn yield per planted acre low in
       WI = 108 bu for 2004-2008
   FSA adjusted NASS data for silage, so more
    reasonable, 138 bu/ac for 2004-2008
        WI ACRE State Yields
Year      Corn    Soybeans Wheat         Oats
2004      135       33.5    55.4          65
2005      148       43.0    52.2          64
2006      142       43.5    76.1          63
2007      135       40.0    66.8          67
2008      136       34.5    63.4          62
ACRE      138       39.0   61.9           64
2 or 3 times out of the last 5 years, actual
state yield below ACRE benchmark yield
         What happened in 2009?
   Bizarre weather in 2009
       Wet spring—Reduced planted acres
       Cool summer and fall—Worry about early frost
       Wet fall—Delayed harvest, some still standing
   NASS announced preliminary estimates of
    2009 yields on Jan 13, 2010
       Record yield for corn (153), high yields for
        soybeans (40), wheat (68) and oats (68)
       Actual State Yields higher than ACRE
National Marketing Year Average Price
   Corn & Soy marketing year Sep 1 to Aug 31
   For 2009, ACRE uses avg of 2007 and 2008
      2007: $4.20 corn & $10.10 soybeans

      2008: $4.06 corn & $9.97 soybeans

   2009 ACRE guarantees
      $4.13 corn and $10.04 soy

      $6.63 wheat and $2.89 oat prices

   Will not know prices when/if sign up for
    ACRE for 2010
     2009 State ACRE Guarantee
   90% x Benchmark State Yield x 2-Year
    National MYA price
   2009 State ACRE Guarantee set Oct 2009
       Corn: 90% x $4.13 x 138 = $512.95/ac
       Soybeans: 90% x $10.04 x 39 = $352.40/ac
       Wheat: 90% x $6.63 x 61.9 = $369.36/ac
       Oats: 90% x $2.89 x 64 = $166.46/ac
   State ACRE Guarantee cannot change
    more than 10% from previous year
         Farm ACRE Guarantee

   5-year Olympic avg farm yields x 2-year
    avg national price + crop insurance
    premiums paid
   Same prices, your yields instead of state’s,
    plus add crop insurance premiums
         Farm ACRE Guarantee
   Establish historical farm yields 2004-2008
      Crop insurance or similar records

      Silage: number of loads, or other
       measures, then FSA help convert to
       grain equivalents
      Silage & Grain: Carry grain yields over
       to silage acres
      Continuity rules apply: Cannot drop or
       ―lose‖ records for bad years
       Farm ACRE Guarantee for
     Farmers without yield records
   Use yield ―plugs‖ = 95% of NASS county
    avg yield, officially posted by FSA
   Get max of own yield & plug for each year
   Give ―benefit of the doubt‖ for sign-up
   Begin keeping production records
   Each year FSA drops one plug
   Accurate reporting of acreage intentions
Dane County ACRE Yield Plugs

   Year       Corn Soybeans Wheat   Oats
   2004       154.3  42.2   52.3    56.0
   2005       152.9  49.6   60.9    62.5
   2006       163.6  49.6   82.9    74.9
   2007       145.0  46.4   70.3    74.4
   2008       126.1  34.3   60.4    59.2
Olympic Avg    151    46     64      65
             ACRE Payments
   If BOTH triggers satisfied, then ACRE
    payment calculated as Planted Acres x
    83.3% x (Farm Yield/State Yield) x
    (State Guarantee – Actual State Revenue)
   Planted or considered planted acres
   83.3% (or 85%) standard multiplier
   (Farm Yield/State Yield) adjusts for your
    farms’ greater yield potential
   ―Income Loss‖ = State Guarantee – Actual
    State Revenue
        ACRE payments for 2009?
   State yields: 150 corn & 40 soybean
   State guarantees: $512.95 and $352.40
   Need national MYA prices below $3.42 and
    $8.81 to meet state triggers
       Still need to meet farm trigger too
   Prices Sep-Mar 2009/10: corn has averaged
    $3.54 and soybeans averaged $9.55
       With high state yields, need avg prices of
        $3.25 and $7.76 for rest of market year
        for ACRE payments for 2009 crop year
                       ACRE vs DCP
   ACRE benefits vs DCP
       Planting flexibility: shift benefits to crops actually planted
       Lock in high price guarantees for 2009 and later
       Silage: state yields adjusted & reasonable grain equivalents
   ACRE Cost
       20% DP ≈ $4-$6/ac for corn/soybean base
       All CCP, and likely all LDP with 30% lower loan rates
       Means more grain into MAL to manage cash flow
       Report yields/production to county FSA, not just acres
       Irrevocable choice for life of 2008 Farm Bill
         ACRE Flexibility Advantage:
         Base Acres vs Planted Acres
   Base acres establish total acres eligible for ACRE
    payments, but not eligible crops
   Suppose farm has 50 ac of oat base, but plants
    100 ac of corn
       Give up 20% of oat DP & enroll 50 corn acres in ACRE,
        even if farm has no corn base acres
   Suppose farm has 50 ac of corn base, but just
    seeded it down to alfalfa
       Can’t enroll alfalfa in ACRE, stay in DCP until later
   Allows farmers to shift ACRE benefits to crops
    plant now, not crops that established base acres
ACRE Guarantees will Remain High

   High grain prices in 2007 and 2008
   ACRE ―locks in‖ these prices by using the
    average of the last 2 marketing years
       2008: $4.06 Corn & $9.97 Soybeans
       2009 so far: $3.54 Corn & $9.55 Soybeans
   ACRE guarantee cannot rise/fall more
    than 10%
       Record grain yields in 2009
                 Loan Rates
                      corn soybeans wheat
Current Loan Rate    1.95     5.00      2.94
Loan Rate w/ ACRE 1.37        3.50      2.06

LDP = (Loan Rate – Posted County Price)
      x Harvested Bushels
With ACRE, you will not receive LDP’s until Posted
County Prices are 30% lower
Need more grain in MAL to pay off operating loans
           ACRE Final Comments

   ACRE has an annual signup period
       2010 currently open until June 1, 2010
   ACRE irrevocable choice
   All landowners & tenants must sign
    election form
   After that, operator fills out ACRE
    enrollment form
                ACRE Summary
   Very quick overview, see the fact sheets
       FSA Fact Sheet and FSA ACRE Backgrounder:
        both have examples
       UWEX: ACRE Overview and Thinking about
   Example farms to work out payments for
    problem set
       DCP, LDP, MAL and ACRE
       Use official FSA ACRE calculator to enter farm
   Overviewed federal commodity crop support
       Price support: DCP, MAL/LDP
       Revenue support: ACRE
   Explained how these programs operate at the
    individual farm level
   Know the terminology and general mechanics of
    how the programs work
   Be able to understand specific examples and
    work simple cases

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