2002 FSRIA. Farm Security & Rural Investment Act. (2002 Farm Bill) How much money is spent with the United States Department of Agriculture (USDA)?

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1 2002 FSRIA Farm Security & Rural Investment Act (2002 Farm Bill) Some general background: How much money is spent with the United States Department of Agriculture (USDA)? How much money is spent on farm and commodity programs? 2006 Federal Budget (estimated) Inflows: Billion Dollars Billion Dollars Individual Income Tax 1,044 Corp. Income Tax 354 Social Security & Medicare 838 Other 171 Total 2,407 Outflows: Discretionary 1,017 Mandatory Social Security 544 Medicare 325 Medicaid 186 Other 357 Sub-Total 1,412 Total 2,655 Net (265)

2 USDA Budget (estimated) Category Billion Dollars Percent Domestic Food Assistance Programs % Farm and Commodity Programs % Conservation and Forestry Programs % Research, Inspection & Administration 5.6 6% International Programs 2.8 3% Rural Development 1.9 2% Total % Total Federal Budget 2,655.0 Approximately 3.5% of the total federal budget is spent at USDA Approximately 0.77% of the total federal budget is spent on farm and commodity programs. Almost all of this is scored as mandatory spending. The 2002, as well as the 2007 (2008), farm bill has specific sections, or titles, that discuss: Commodity programs o Field crops Corn Soybean Wheat Barley Oats Rice Other oilseeds (sunflower, canola) Dry Peas, Lentils & Chickpeas o Sugar o Dairy o Cotton o Tobacco o Peanut o Honey o Wool & Mohair o

3 3 Conservation Credit Energy Forestry Nutrition Programs Research Rural Development Trade Other federal crop insurance We will only discuss the basics of the commodity title. Three general categories of commodity program provisions: 1. Direct Payments 2. Counter Cyclical Payments 3. Commodity Loans a. Marketing Loans b. Loan Deficiency Payments Direct Payments: these payments are calculated using historical acreage and production information, and are NOT linked to actual production (acres or yields). These payments are guaranteed, regardless of the commodity prices. Each farm unit (typically contiguous land owned by same person) enrolled in the program has historical base acres and historical yields. Initial sign-up, in 2002 Production Flexibility Contract (PFC), allowed land owners to update historical base and yield information, as well as add Soybean and Oilseed base acres. One half of direct payment is made in December, prior to the new production season, and the remaining one half is made the following October.

4 4 Table 1. Direct Payment for 2007 (2008) Corn Soybean Wheat Base Acres 100 a. 100 a. 100 a. Program Yield 130 bu/a 40 bu/a 50 bu/a Direct Payment $0.28/bu $ 0.44/bu $0.52/bu Adjustment 85% 85% 85% Total Direct Payment $ 3,094 $ 1,496 $2,210 December 2006 Payment $ 1,547 $ 748 $ 1,105 October 2007 Payment $ 1,547 $ 748 $ 1,105 Total = 100 a. x 130 bu/a x $0.28/bu x 85% = $3,094 Counter Cyclical Payments: these payments are made when the effective price of the commodity falls below the target price for the commodity. These payments are only available on eligible production (same production amounts as direct payments). Effective Price is higher of the national average marketing year price or the national average loan rate, PLUS the direct payment rate for the commodity National Average Marketing Year Price is the weighted average cash price paid during the 12 months following harvest. Price is weighted by grain sales during the marketing year September 1 for corn & soybeans June 1 for wheat (2008) Target Prices, Direct Payments and Trigger Prices Crop Target Price ($) Direct Payment ($) Trigger Price ($) Corn Soybean Wheat Grain Sorghum Barley Oats Other oilseeds 0.098/lb Rice 10.50/cwt Upland Cotton 0.724/lb

5 5 Table 2. Counter Cyclical Payment Corn Soybean Wheat CCP Trigger Price $2.35/bu $5.36/bu $3.40/bu Season Average Price $2.12/bu $5.10/bu $3.00/bu CCP Rate $0.23/bu $0.26/bu $0.40/bu Base Acres 100 a. 100 a. 100 a. Program Yield 140 bu/a 46 bu/a 60 bu/a Adjustment 85% 85% 85% Total CCP $ 2,737 $ 1,017 $ 2,040 1 st Payment (up to 35%) $958 $356 $714 2 nd Payment (up to 35%) $958 $356 $714 3 rd Payment $821 $305 $612 Total CCP = $0.23/bu. x 100 a. x 140 bu/a x 85% = $2,737 Projected CCP can be requested in advance: Up to 35% of projected amount in previous October (2006) Up to 35% of revised projection in previous February (2006) Final payment in September (2007) If advanced payments exceed final payment you must repay the difference Marketing Loans: actual production of program crop can be used as security for a non-recourse loan, at below market interest rates, for up to 9 months. Marketing loans can be taken out or paid back at any time during the marketing season National Average Loan Rates Commodity Corn Soybean Wheat Grain Sorghum Barley Oats Other oilseeds Rice Upland Cotton Loan Rate $ 1.95 / bu. $ 5.00 / bu. $ 2.75 / bu. $ 1.95 / bu. $ 1.85 / bu. $ 1.33 / bu. $ / lb. $ 6.50 / cwt. $ 0.52 / lb.

6 6 Each county in the U.S. has slightly different loan rates. Rates are adjusted for distance from terminal markets. Producer (borrower) has four options for repaying the marketing loan: 1. Repay the original loan plus interest. This is usually done when prices have increased. 2. Forfeit the commodity to USDA, and the loan plus accumulated interest is cancelled. This used to be very common, but current incentives do not encourage this option. 3. Buy Back the loan at the Posted County Prices (PCP) and the accumulated interest is waived. The marketing loan gain does count towards the per person limit. 4. Buy Back the loan with generic commodity certificates purchased at the current Posted County Price. The gain does NOT count towards the per person limit. Posted County Price (PCP): an estimated local market price based upon a combination of specific futures market prices and interior terminal prices, adjusted for transportation costs (assumes same differentials as the count loan rates). PCPs change every day, so the farm manager must check current values. Although the county PCPs follow local market prices closely, they are not exact. Table 4. Marketing Loan Example Corn Soybean Wheat Original Loan Harvested Acres 100 a. 100 a. 100 a. Harvested Yield 160 bu/a 55 bu/a 70 bu/a County Loan Rate $ 1.90/bu $ 4.90/bu $ 2.68/bu Marketing Loan Amount $30,400 $26,950 $18,760 PCP Below Loan Rate Today s County PCP $ 1.72/bu $ 4.65/bu $ 2.40/bu Repayment Amount $27,520 $25,575 $16,800 Marketing Loan Gain $2,880 $1,375 $1,960 PCP Above Loan Rate Today s County PCP $1.95/bu $5.10/bu $2.75/bu Repayment Amount $30,400 $26,950 $18,760 Acc. Interest (3% for 6 months) $ 456 $ 404 $ 281

7 7 Loan Deficiency Payments (LDP): rather than taking a marketing loan, a farm manager can apply for a loan deficiency payment that is equal to the difference between the PCP and the county loan rate. However, once an LDP has been taken for a bushel of production, that bushel cannot be used as collateral for a marketing loan. Farm manager must maintain beneficial interest in the grain, which requires: 1. Control of the commodity 2. Risk of loss in the case of damage 3. Title to the commodity The grain can be forward contracted or hedged. But, be sure to discuss the LDP process with your local grain dealer before signing delivery contracts. LDPs are available for actual production. Production amounts can be determined by: 1. Field direct LDP payment is based on actual bushels delivered. 2. Certified LDP producer certifies (estimates) production in farm storage. Actual production is verified once grain is sold. 3. Measured LDP Farm Service Agency will measure stored grain and certify production. 4. Warehouse stored LDP producer delivers grain to elevator for storage. Warehouse receipts (scale tickets) are used to certify production. Table 3. Loan Deficiency Payments Corn Soybean Wheat County Loan Rate $1.90/bu $4.90/bu $2.68/bu Today s PCP $1.72/bu $4.65/bu $2.40/bu Today s LDP $0.18/bu $0.25/bu $0.28/bu Harvested Acres 100 a. 100 a. 100 a. Harvested Yield 160 bu/a 55 bu/a 70 bu/a Total LDP Received $2,880 $1,375 $1,960

8 8 Payment Limitations Per Person: $40,000 per person for Direct Payments $65,000 per person for Counter Cyclical Payments $75,000 per person for Loan Deficiency Payments and Marketing Loan Gains o There is no limit on the LDP or MLG per bushel, only the total received. All of this is subject to change within the 2007 (2008) Farm Bill!!