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New Farm Bill Features Better Loan Rates, Counter-Cyclical Payments By Tracy Sayler Wheat growers wanted better balanced loan rates and a counter-cyclical payment included in the new farm bill: mission accomplished. “Our organization has worked on a farm bill for two years, and it is gratifying to have a bill in place for the 2002 crop year,” said Gary Broyles, a Montana farmer and president of the National Association of Wheat Growers, after the House and Senate passed the Farm Security and Rural Investment Act of 2002. The new farm bill was signed into law on May 13 by President Bush, with NAWG leaders present at the bill signing ceremony. The NAWG has been concerned that the insecurity under the previous law resulted in the reluctance of lenders to extend financing, and that four consecutive years of emergency payments illustrated the seriousness of the situation in farm country. Broyles said that the new law will give farmers, as well as their lenders and suppliers, security for the current crop and the duration of the six-year program, which extends through the 2007 crop year. “This farm bill represents a balanced bill that provides a safety net and flexibility,” said Rep. Collin Peterson, Minn. James Little, administrator of the USDA Farm Service Agency, said in a prepared statement that the FSA is now preparing to implement the new law. FSA has already developed and transmitted software to the field to help county offices update producers’ bases and yields. Program fact sheets and “FAQs” (frequently asked questions) explaining what the new legislation means to farmers are being developed and will be posted on the FSA website, www.fsa.usda.gov. FSA web sites for states in the region are www.fsa.usda.gov/nd, www.fsa.usda.gov/mn and www.fsa.usda.gov/sd/. Program sign-up may start sometime mid- to late-summer at county FSA offices. The new farm bill increases national crop loan rates for wheat from $2.58 per bushel to $2.80. Barley loan rates will increase from $1.65 per bushel to $1.88 per bushel, and corn by nine cents per bushel, to $1.98. The national soybean rate was lowered from $5.26 to $5.00 per bushel. However, soybeans and other oilseed crops were added as “program crops.” Producers of program crops are eligible for a fixed, direct payment each of the six years of the Farm Bill. The direct payment rates per bushel are 28 cents for corn, 44 cents for soybeans and 52 cents for wheat. The direct payments replace the current annual Agricultural Market Transition Act (AMTA) payments. “Most crop producers are satisfied that almost total planting flexibility has been maintained in the new Farm Bill,” says Kent Thiesse, University of Minnesota extension farm program specialist. Loan deficiency payments (LDPs), will continue in the new farm bill. Further, producers will have the option to keep current farm program base acres and yields, or to update base acres and yields based on 1998-2001 planted acres and harvested yields. Provisions will be made to add soybean base acres and yields. Both direct and counter-cyclical payments will be made on 85% of base acres for a given crop. Covered commodities or program crops under the new farm bill include wheat, corn, grain sorghum, barley, oats, soybeans and other oilseeds. Other oilseeds include sunflower, rapeseed, canola, flax, mustard and others as designated by the Secretary of Agriculture. Prior to this Act, soybeans and other oilseeds were not “program” or “contract” commodities but were eligible for loan support. Under the covered commodities classification, their support under the new commodity program is broadened, points out Montana State University economist James B. Johnson. Now, all covered commodities will benefit from a three-pronged commodity program that includes marketing assistance loans, direct payments and counter-cyclical payments. Also in this bill, dry peas, lentils and small chickpeas (also referred to as garbonzo beans) are designated loan commodities for the first time. Dwight Aakre, NDSU extension farm management specialist, says that the reduction in the soybean loan rate will likely mean about $8- $10 less return over direct costs per acre for soybeans, while increases in all other loan rates will likely add $5- $10 return over direct costs per acre for all other commodities affected by loan rates. Counter-Cyclical Payment Example “The direct and counter-cyclical payments are decoupled from production,” Aakre explains. “So they don’t need to be a factor in deciding which crops to plant this spring. In fact, these payments will be made even if a producer chooses to idle the land for the entire season.” The payments are based on a mathematical formula of historical acreage and yields on each farm. Any time the national average price for a commodity plus the direct payment is lower than the target price, there will be a counter-cyclical payment, says Thiesse. Maximum levels of counter-cyclical payments per bushel are 34 cents for corn, 36 cents for soybeans and 54 cents for wheat. Johnson gives a hypothetical example of a counter-cyclical payment for a producer with 2,000 acres of wheat base and a payment yield of 30 bushels per acre. If the national average marketing year price for wheat in 2003 turned out to be $3.10 per bushel, the national average price would exceed the national loan rate of $2.80 for that year. The per bushel counter-cyclical payment rate would be: counter-cyclical payment rate = $3.86 target price - 3.10 national average price - 0.52 direct payment rate = $0.24. The farm-level counter-cyclical payment for wheat would then be: $0.24 per bushel x 30 bushels per acre x 0.85 (2,000 acres) = $12,240. As counter-cyclical payments are decoupled from current production, a person with the appropriate production history will receive the counter-cyclical payments whether or not they produce the subject “covered commodity.” But, unlike the direct payments, the counter-cyclical payments won’t kick in if prices (national average price plus the 52-cent direct payment) rise above the $3.86 target price. In the previous example, if a widespread drought in the U.S. wheat production region resulted in a national average marketing year price of above $3.34, the effective price for wheat would exceed its target price and reduce the counter-cyclical payment to zero. Direct payments will be a function of historical bases, yields, and the specified payment rates. For direct payments, alternatives will be provided for specifying bases for each “covered commodity” and for specifying yields for oilseed crops. Counter-cyclical payments will also be driven by historical bases and payment yields, and producers will be given alternatives for specifying base acres and payment yields for all covered commodities. Information on the alternatives for updating will be forthcoming from the FSA. Thiesse says the FSA will need to provide producers and landowners with the basic data base acreage and yield data, to help them decide whether or not to upgrade base acreage and payment yield on a farm unit, or to continue with current base acreage and yields. Producers and landowners should hold off on contacting county FSA offices this spring with specific questions regarding the new Farm Bill, Thiesse advises. He points out that local FSA offices are extremely busy gearing up to administer the farm program (in addition to other programs) and will be sending out the official procedures and information on the new farm program as soon as it becomes available. Thiesse has written a backgrounder on commodity program provisions of the new Farm Bill, including an example that compares the payments on corn and soybeans under the new law to likely payments under the old law. Some of Thiesse’s information follows; it can also be found in its entirety on the Internet under the “Farm Management” link at www3.extension.umn.edu/county/blueearth/ Payment Timing Direct Payments—Producers may elect to receive up to 50% of the direct payment after December 1, the year prior to the crop year, and the balance after October 1 during the crop year. Counter-Cyclical Payments—A producer can receive up to 35% of the projected payment after October 1 in the year the crop is harvested, an additional 35% of the projected payment in February of the following year, and the balance at the end of the 12-month marketing year for a specific crop. Base Acres • Retain current AMTA Crop Base Acres and add Oilseed Acreage. • Update Base Acres using 1998 - 2001 average planted and prevented planted acres. Payment Yields for Direct Payments Payment Yields For Calculation Of Counter-Cyclical Payments • 70% of the difference between the actual average yield from 1998 - 2001 and the AMTA payment yields for each crop. Example: 115 Bu./A. + (165 Bu./A. - 115 BU./A. X .70) = 150 Bu./A. • 93.5% of the 1998 - 2001 average yields on planted acres. Example: 165 Bu./A. X .935 = 154 Bu./A. Note: A “plug” yield of 75% of the county average yield is used when the actual yield for a crop in a given year is less than the average county yield. Payment Calculations Direct Payments = (Base Acres x .85) x Payment Yield x Payment Rate Counter-Cyclical = (Base Acres X .85) x Payment Yield x Payment Rate Counter-cyclical Payment Rate = Target price minus (Higher of national loan rate or 12 month average price) + direct payment rate Example using soybeans: $5.80/bu. - ($5.00/bu. + $.44/bu.) = $.36/bu. Payment Limits Direct Payments: $40,000 per year Counter-Cyclical Payments: $65,000 per year LDP & Marketing Loan Gains: $75,000 per year The “Triple Entity Rule” and full spouse payment limit allowance will continue, which essentially doubles the allowable payment limits. Total maximum payment limit would be $360,000 per year. Generic commodity certificates may be used and are not counted toward the $75,000 LDP and Marketing Loan Gain payment limit. Persons with average “Adjusted Gross Income” of $2.5 million or more will not be eligible for participation in farm programs or to receive payments.
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