Counter-Cyclical Payments

A closer look at how they work and when they might be triggered

Prices in the last marketing year (2002-03, which ended May 31) were high enough to prevent farmers from receiving a counter-cyclical payment for wheat, barley, and oats, and it appears that corn and soybean prices will be high enough to prevent CC payments for those crops as well.

It could be a different story next year, however, if average prices during the 2003-04 marketing year fall enough to trigger a 2003 crop year CC payment.

A quick refresher course on the mechanics of the farm bill and how farm payments are made:

The current farm bill, scheduled to run six years, from 2002-07, reintroduced the concept of target prices and established eligibility of new counter-cyclical payments for all program crops. The counter-cyclical payments—spearheaded by the National Association of Wheat Growers—were intended to eliminate the need for Congress to pass emergency farm legislation each year to supplement income for crop producers due to low commodity prices.

Both direct and counter-cyclical payments are decoupled from production, based on a mathematical formula of historical acreage and yields on each farm.  Any time the national average price for a program crop plus the direct payment is lower than the target price, there will be a counter-cyclical payment (except for minor oilseeds, which are not eligible for CC payments). Producers remain eligible for loan deficiency payments (LDPs) when prices fall below the loan rate.

The CC payment rate is the difference between the target price and the sum of the direct payment plus the higher of the loan rate or the 12-month average market price. The market year (which for small grains runs May 31-June 1, and for corn and soybeans, Aug 31-Sept 1) average price is calculated by multiplying the monthly price by the percent of the crop marketed that month and summing over all months.  Both CC and direct payments are made on 85% of base times the payment rate times the program yield.

Last year’s national average wheat price ($3.56/bu weighted avg, all wheat classes) combined with the 52-cent direct payment adds up to $4.08/bu — which easily exceeds the current wheat target price of $3.86. Hence, no CC payment.  The same scenario looks to be the case for corn and soybeans, where the national average price combined with the direct payment exceeds the target price. USDA will know and release its determination officially on Oct. 1, a month after the close of the current marketing year for corn and soybeans.

Lower prices could mean CC payments during the 03/04 marketing year, however.  Supply and demand numbers this summer have resulted in prices which could trigger CC payments (see chart on page 40, based on early projections).  Maximum levels of CC payments per bushel are 34 cents for corn, 36 cents for soybeans and 54 cents for wheat.

With direct payments, producers may elect to receive up to 50% of the direct payment after Dec 1, the year prior to the crop year, and the balance after October 1 during the crop year.

When CC payments are triggered, producers 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.

Thus, if CC payments were triggered in the 2003-04 marketing year, producers could elect to receive up to 35% of the projected payment after October 1, 2003; an additional 35% of the projected payment in February, 2004; and the balance in July, 2004 for small grains and October, 2004 for corn and soybeans.

Example
Here’s 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 2003-04 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.

The average marketing year price USDA uses to determine counter-cyclical payments is calculated by multiplying the monthly price by the percent of the crop marketed that month and summing over all months. Monthly prices are published by USDA at the end of each month and can be found online: http//usda.mannlib.cornell.edu/reports/nassr/price/pap-bb

Counter Cyclical Payment Projected for 2003-04
Based Primarily on USDA July S & D

				MY Price Projected	Counter-Cyclical Payment Projected
	Target Price	DP Rate	Loan Rate
Wheat	3.86	0.52	2.80	3.10	0.24
Barley	2.21	0.24	1.88	1.81	0.09
Oats	1.40	0.02	1.35	1.35	0.03
Corn	2.60	0.28	1.98	2.10	0.22
Soybean	5.80	0.44	5.00	4.85	0.36

Direct Payments and Maximum Counter-Cyclical
Rates, Crop Years 2002-2007

Minimum** Effective Price Maximum Counter-Cyclical Rate Commodity* Target Price Direct Rate Loan Rate 2002-03 Wheat 3.86 0.52 2.80 3.32 0.54 Corn 2.60 0.28 1.98 2.26 0.34 Sorghum 2.54 0.35 1.98 2.33 0.21 Barley 2.21 0.24 1.88 2.12 0.09 Oats 1.40 0.024 1.35 1.37 0.026 Soybeans 5.80 0.44 5.00 5.44 0.36 Other Oilseeds 9.80 0.80 9.60 10.40   n/a 2004-07 Wheat 3.92 0.52 2.75 3.27 0.65 Corn 2.63 0.28 1.95 2.23 0.40 Sorghum 2.57 0.35 1.95 2.30 0.27 Barley 2.24 0.24 1.85 2.09 0.15 Oats 1.44 0.024 1.33 1.35 0.086 Soybeans 5.80 0.44 5.00 5.44 036 Other Oliseeds 10.10 0.80 9.30 10.10 n/a

Timetable For Direct and Counter-Cyclical Payments. 
The payment schedule for the 2004-2007 crop years
parallels the schedule for the 2003 crop year.

Month-Year	Wheat/Barley/Oats	Corn/Soybeans	Minor Oilseeds
Fall 2002	2002 1st Adv CC	20021st Adv CC	2002 Final Direct
	2002 Final Direct	2002 Final Direct
Dec 2002	2003 Adv Direct	2003 Adv Direct	2003 Adv Direct
Feb 2003	2002 2nd Adv CC	2002 2nd Adv CC
Jul 2003	2002 Final CC
Oct 2003	2003 1st Adv CC	2002 Final CC	2003 Final Direct
	2003 Final Direct	2003 1st Adv CC
		2003 Final Direct
Feb 2004	2003 2nd Adv CC	2003 2nd Adv CC
Jul 2004	2003 Final CC
Oct 2004		2003 Final CC
CC - counter-cyclical           Adv – Advance Direct payments are decoupled from production and guaranteed regardless of crop price.  CC payments are also decoupled from production, but received only when the national average price for a program crop plus the direct payment is lower than the target price.