Allan W. Gray, Purdue University 2002 Farm Bill Decision Time Allan Gray Purdue University
Dec 21, 2015
Allan W. Gray, Purdue University
2002 Farm Bill
• 6 Year bill• Costs $180 billion over 10 years• Almost a $6.0 billion dollar increase in
annual spending for program crops• Similar to emergency legislation
spending from 1997-2001• $17 billion in additional spending for
Environment
Allan W. Gray, Purdue University
What is in the Commodity Title of the Bill?
• Three Basic Support Mechanisms
– Marketing Loans
– Direct Payments
– Counter-Cyclical Payments
• Soybeans and Peanuts become complete program crops
• Lentils, small chickpeas, wool, mohair, and honey are new commodities
• Dairy gets a counter-cyclical program
Allan W. Gray, Purdue University
Comparison of Loan RatesCurrent Policy
2002 Farm Bill
2002-2003
2002 Farm Bill
2004-2007
Wheat ($/bu.) 2.58 2.80 2.75
Corn ($/bu.) 1.89 1.98 1.95
Sorghum ($/bu.)Relative to
Corn1.98 1.95
Cotton ($/lb.) 0.5192 0.52 0.52
Rice ($/cwt.) 6.50 6.50 6.50
Soybeans ($/bu.) 5.26 5.00 5.00
Allan W. Gray, Purdue University
Comparison of DirectPayment Rates
1996 Farm Bill (2001)
2002 Farm Bill
Wheat ($/bu.) .46 .52
Corn ($/bu.) .26 .28
Sorghum ($/bu.) .31 .35
Cotton ($/lb.) .057 .067
Rice ($/cwt.) 2.05 2.35
Soybeans ($/bu.) N/A .44
Allan W. Gray, Purdue University
Counter-Cyclical Payment Rates
2002 Farm Bill
2002-2003
2002 Farm Bill
2004-2007
Wheat ($/bu.) 3.86 3.92
Corn ($/bu.) 2.60 2.63
Sorghum ($/bu.) 2.54 2.57
Cotton ($/lb.) .724 .724
Rice ($/cwt.) 10.50 10.50
Soybeans ($/bu.) 5.80 5.80
Allan W. Gray, Purdue University
Computing Payments• Direct Payments (DP)
– DP per unit X Base acres X DP yield X 0.85 = Direct Payment
• Counter Cyclical Program Payments (CCP)– Target Price – DP per unit – higher of (loan rate
or market price) = CCP per unit– CCP per unit X Base acres X CCP payment yield
X 0.85 = CCP Payment
• Marketing Loan Payments (LDP)– (Loan Rate – Market Price)*Current Production
Allan W. Gray, Purdue University
$2.52
$ .03
$ .21
$ .00
$2.28
$1.98
$2.60
$2.81$2.46Total
$ .00$0.34 ($0.27)Counter Cyclical
$ .21$ 0.28 ($0.21)Fixed
$ .00$ .29LDP
$2.60$1.69Market Price
$1.98$1.98Corn Loan
$2.60$2.60Corn Target
Payments Under Various Market Price Scenarios
Allan W. Gray, Purdue University
Summary of Risk Impacts of 2002 Farm Bill
• Potential to substantially reduce downside cash flow risk
• Does not do a good job of protecting against yield drops
Allan W. Gray, Purdue University
Impact of Yield Drops on Total Revenue
20%
40%
60%
80%
100%
120%
140%
90.00 92.00 94.00 96.00 98.00 100.00
National Yield Index
% C
han
ge
in R
even
ue
Market Receipts Government Payments Total Revenue
Allan W. Gray, Purdue University
Impact on Revenues from Various Drops in Farm Level Yields When National Yields are Down 10%
96%103%
109%116%
129%
48% 48% 48% 48% 48%
88% 93% 98% 104%114%
0%
20%
40%
60%
80%
100%
120%
75.00 80.00 85.00 90.00 100.00
Yield Index
% C
han
ge
in R
ecei
pts
Market Receipts Government Payments Total Revenue
Allan W. Gray, Purdue University
Updating Base Acres and Yields
• Five Basic Options– Make No Changes– Don’t update base acres or yields and simply add
soybeans to fully base your acres– Maximize soybean base– Update base acres and CCP payment yields
• Don’t update yields is an option• using 70% of the difference between 98-01 average yield
and 1985 program yield• using 93.5% of the 98-01 average yield
– Trade base acres of other crops for bean base
Allan W. Gray, Purdue University
General Rules of Thumb for Updating Bases and Yield
• Corn is king– The more corn base you can have the better
• Generally, 60 percent based in corn or more would lead you to option 2 if you have been planting less corn.
• Need to prove soybean yields no matter what option if at all possible– Or else 75% of county * 78% for direct pmt yields
• Fruits and vegetables will tend to lead you to option 1.
Allan W. Gray, Purdue University
What to bring the FSA.
• Historical Farm Acreage (1998-2001)– FSA has sent a letter with this information
• Historical Farm Yields (1998-2001)– Don’t have to have the proof at sign-up– Must verify upon request
• Select appropriate option for each farm– Options 1-5
Allan W. Gray, Purdue University
Verifiable Production Records Stored or Sold Off-Farm
• Warehouse receipts
• Warehouse ledgers
• Load summaries
• Settlement sheets
• Scale tickets or weight slips supported by a sales document
• LDP Records
Allan W. Gray, Purdue University
Verifiable Production Records Stored or Used On-Farm
• LDP Records
• FSA measurements for grain that was fed or is still stored on the farm
• FSA appraisals
• RMA appraisals (loss purposes only)
• RMA measured production if commodity fed or still on the farm
• Farm records for seed used on the farm.
Allan W. Gray, Purdue University
Purdue University Decision-Support Spreadsheet
• Here is the website for Farm Bill Spreadsheet:
• http://www.agecon.purdue.edu/ext/policy.asp
• Spreadsheet Example
Allan W. Gray, Purdue University
Contact Information
Allan W. Gray, Purdue University
Corn Safety Net
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$1.50 $1.60 $1.70 $1.80 $1.90 $2.00 $2.10 $2.20 $2.30 $2.40
Market Price
Eff
ecti
ve P
rice
Market Price LDP Direct CCP
Allan W. Gray, Purdue University
Begin Issuing Advance
Direct Payments
('03)
Dec
Current Year Payments
Begin Issuing 2nd Advance
CCP('03)
Issue Final Wheat, Barley, and Oats
CCP('03)
Issue Final Corn, Grain Sorghum, and
Soybean CCP('03)
Feb July OctJan
Begin Issuing 1st Advance CCP
('04)
Issue SY
Issue Final Direct
Payments('04)
Begin Final Direct
Payments('02)
"Fall"
2002AMTA
Sept
Issue Final Direct
Payments('03)
Jan Oct DecJulyFeb
Begin Issuing1st Advance
CCP('02)
'03 Year Of Harvest
Begin Issuing Advance
Direct Payments
('04)
Begin Issuing 1st Advance CCP
('03)
Issue Final Corn, Grain Sorghum,
and Soybean CCP('02)
Issue Final Wheat,
Barley, and Oats CCP('02)
Begin Issuing 2nd Advance
CCP('02)
Timing of Payments
Allan W. Gray, Purdue University
Critical Issues
• WTO negotiations• Competitiveness• Market responsiveness• Value of land and farmland rents• Budget costs• Treating symptoms versus curing
problems
Allan W. Gray, Purdue University
WTO Negotiations
• Substantial increases in legislated amber box spending
• 19 to 20 percent chance of exceeding the $19.1 Billion spending limit in ‘02 market yr.
• Seem to be playing games with the rules
• Negotiators are in a tough position
Allan W. Gray, Purdue University
Competitiveness
• World prices versus U.S. prices
• Incentives for continued efficiency gains
• Market share or profits?
Allan W. Gray, Purdue University
Market Responsiveness
• Overproduction
– Buffered from market signals
– Would likely produce anyway
• Adjustments in resource prices
• Increased efficiency
• Soybean base reduces flexibility
Allan W. Gray, Purdue University
100
120
140
160
180
200
2000 2001 2002 2003 2004 2005 2006 2007
Base Compromise Emergency
Returns to Land Under Alternative Government Programs
$21/acre
$6/acre
Allan W. Gray, Purdue University
Probability of Returns to Land Exceeding Production Costs and Land Rents
0.10 0.05 0.04 0.03
0.64
0.470.39 0.33
0.260.48 0.57 0.64
0%10%20%30%40%50%60%70%80%90%
100%
No Program 1996 Farm Bill 1996 Farm Bill + 2002 Farm Bill
P(Returns<0) P(0<Returns<135) P(Returns>135)
Allan W. Gray, Purdue University
Budget Costs
2% 2% 4%
12%17% 19%
40%
50%55%
0
0.1
0.2
0.3
0.4
0.5
0.6
1996 Farm Bill 1996 Farm Bill+ 2002 Farm Bill
Minimum Average Maximum
Allan W. Gray, Purdue University
Soybeans Safety Net
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$4.50 $4.60 $4.70 $4.80 $4.90 $5.00 $5.10 $5.20 $5.30 $5.40
Market Price
Eff
ecti
ve P
rice
Market Price LDP Direct CCP