2002 FARM ACT: The Farm Security

1
2002 FARM ACT The Farm Security Rural
Investment Act of 2002 (FSRIA)

• Lesson 5cAGEC 3703
• Larry D. Sanders
• Fall 2005

Dept. of Agricultural Economics Oklahoma
State University
2
Issues Affecting the Development Implementation
of the 2002 Farm Bill

• Public hidden agendas of Congress President
• The disappearing budget surplus
• Compliance with WTO
• 2002 election
• Agriculture split on desired goals how to
  achieve them
• Taxpayer backlash on welfare for the wealthy
• HAVE PRIORITIES CHANGED SINCE 9/11/01?

3
The Farm Security Rural Investment Act of 2002
(FSRIA)

• Cost 180 bil-200 bil if in place 10 years
• Includes extra 73.5 over prev. budget
• 50 bil commodities
• 17 bil conservation
• 1 bil rural development

4
FSRIA 02Overview

• 6-year act (2002-2007)
• 3 types of commodity support
• Direct payments continue above 2002 levels,
  decoupled from production decisions and prices
• Counter-cyclical program w/ target prices
  decoupled from production decisions but tied to
  market prices
• Marketing loan gains Loan Deficiency Payments
  continued, and tied to production decisions and
  market prices

5
FSRIA 02Overview (continued)

• Increase CRP acreage funding expand EQIP new
  Conservation Security Program
• Maintain/increase most trade, rural development
  nutrition programs
• Special incentives for beginning producers,
  limited-resource farms Tribes for conservation
  programs
• Country of origin labeling for meat, fish,
  produce, peanuts
• Food stamps for illegal aliens

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FSRIA 02

• Payment Limits for Commodity Programs
• Counter-Cyclical payments w/65,000 payment
  limit.
• Direct payments w/40,000 payment limit
• Payments on 85 of base acres
• Marketing loan gains Loan Deficiency Payments
  w/75,000 limit
• Generic Certificates continued
• 3 - Entity Rule continued
• Producers with AGI over 2.5 million not eligible
  for program participation, unless ¾ of AGI from
  agriculture
• In effect NO LIMITS FOR LARGER PRODUCERS

7
FSRIA Commodity Programs Market Loss Assistance
(MLA) Loan Deficiency Payments (LDP)

• Eligible Production for MLA or LDP
• Producers of any quantity of a loan commodity
  produced on a farm.
• Compliance with Conservation and Wetland
  Requirements
• 9 month loans beginning 1st of month loan is
  entered into

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FSRIA Commodity Programs MLALDP

• Repayment of MLA--Lesser of
• Loan rate or
• a rate Secretary determines will
• minimize loan forfeiture
• Minimize stock accumulations
• Minimize government storage costs
• Enable marketing in free market
• Minimize MLA benefit differences between counties
  

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FSRIA Commodity Programs MLALDP

• LDP rules
• Secretary may provide an LDP to producers on a
  farm that produce unshorn pelts or hay and silage
  derived from a loan commodity.
• If producer agrees to forgo any other harvesting
  of wheat, barley or oats, an LDP may be made on
  these crops where the producer has agreed to
  graze livestock.

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FSRIA 02 Marketing Loan Rates
Commodity 1996 Farm Bill 2002 Farm Bill 2002 Farm Bill
Commodity 2001 Rate 2002-2003 2004-2007
Corn (bu) 1.89 1.98 1.95
Sorghum (bu) 1.71 1.98 1.95
Barley (bu) 1.65 1.88 1.85
Oats (bu) 1.21 1.35 1.33
Wheat (bu) 2.58 2.80 2.75
Soybeans (bu) 5.26 5.00 5.00
Minor oilseeds (cwt) 9.30 9.60 9.30
Upland cotton (lb) 0.5192 0.52 0.52
Rice (cwt) 6.50 6.50 6.50
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FSRIA Commodity Programs Direct Payments

• Primary income support feature of 1996 Farm Bill
• Payments are decoupled from price and production
• Payment rates fixed through 2007
• Rate fixed over life of program, not declining
  each year
• Rate fixed per bushel, not fixed in total
  spending
• Payments include commodities covered under 1996
  Production Flexibility Contract (PFC) plus
  oilseeds
• Payments have been green box payments under WTO
  commitments
• Annual Acreage reports will be required to
  receive payments

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FSRIA Commodity Programs Direct Payments

• Commodity 1996 Farm Bill 2002 Farm Bill
• 2002 Payment 2002-2007
• Corn (bu) 0.261 0.28
• Sorghum (bu) 0.314 0.35
• Barley (bu) 0.202 0.24
• Oats (bu) 0.022 0.024
• Wheat (bu) 0.461 0.52
• Soybeans (bu) -- 0.44
• Minor oilseeds (cwt) -- 0.80
• Upland cotton (lb) 0.0572 0.0667
• Rice (cwt) 2.05 2.35

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FSRIA 02 Base Options

• FSA provides owners with 5 base options
• Retain 2002 PFC acres
• Retain 2002 PFC, add oilseeds without PFC offset
• Retain 2002 PFC, add oilseeds with max PFC offset
• Update bases using the 98-01 ac of covered
  commodities
• Retain 2002 PFC, add oilseed w/partial PFC offset

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FSRIA 02 Yield Options

• Statute provides for 95 payment yields
• 95 yields used for PFC (96-01)
• Payment yields frozen (86-01)
• Some opportunities for yield updates
• Counter-cyclical payment yield

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FSRIA Commodity Programs Direct Payments

• Acreage base determined by producer
• Average acreage for all covered commodities for
  1998-2001
• Includes planted and prevented planted acres for
  each crop over all four years
• OR
• Acreage eligible for 2002 PFC payment plus
  average oilseed acreage for 1998-2001
• Includes planted and prevented planted acres for
  oilseeds over all four years
• Payment base equal to 85 percent of acreage base

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FSRIA Commodity Programs Direct Payments

• Yield for base fixed at existing program yield
  levels
• Program yields for traditional program
  commodities have been frozen since 1985
• Program yields for oilseeds will be local
  1998-2001 average yields backed up to equivalent
  1981-1985 yields (approximately 78 ).

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FSRIA Commodity Programs Direct Payments

• For 2003-2007
• Up to 50 percent of the direct payment beginning
  December 1 of the calendar year prior to harvest
  (on month of producers choice)
• Remainder of direct payment in October of the
  calendar year of harvest
• May change in rules and regulations or technical
  corrections legislation

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FSRIA Commodity Programs Counter-Cyclical
Payments

• Similar to target price/deficiency payment system
  in farm programs prior to 1996
• Payments are decoupled from production, but not
  from price
• Target prices fixed for 2002-2003, rise for most
  commodities for 2004-2007
• Payments include commodities covered under 1996
  Production Flexibility Contract (PFC) plus
  oilseeds
• Payments are expected to be amber box payments
  under WTO commitments

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FSRIA Commodity Programs Counter-Cyclical
Payments

• 1990 Farm Bill
  2002 Farm Bill Target Prices
• Commodity Target Price 2002-2003 2004-2007
• Corn (bu) 2.75 2.60 2.63
• Sorghum (bu) 2.61 2.54 2.57
• Barley (bu) 2.36 2.21 2.24
• Oats (bu) 1.45 1.40 1.44
• Wheat (bu) 4.00 3.86 3.92
• Soybeans (bu) -- 5.80 5.80
• Minor oilseeds (cwt) -- 9.80 10.10
• Upland cotton (lb) 0.729 0.7240 0.7240
• Rice (cwt) 10.71 10.50 10.50

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FSRIA Commodity Programs Counter-Cyclical
Payments

• Yield base
• Use previous program yield
• OR
• Partially updated program yield using both
  existing program yields and 1998-2001 average
  yields
• Updated yield (average yield for 1998-2001 minus
  existing program yield) 70 existing
  program yield
• OR
• Partially updated program yield using 1998-2001
  average yields
• Updated yield (average yield for 1998-2001)
  93.5
• (minimum yield of 75of county average)

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FSRIA Commodity Programs Counter-Cyclical
Payments

• Payment calculations
• Counter-cyclical payment (CCP)/bu.
• Target Price Direct Payment (higher
  of Loan Rate or market price) x (85 base acres)
• Example - Wheat
• (3.86 - .52 2.80 ) x .85 .459
• MLA 2.80 MP 2.95
• DP .442 DP .442
• CCP .459 CCP .332
• Total 3.701 Total 3.724

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FSRIA Commodity Programs Counter-Cyclical
Payments

• BUT CURRENT ESTIMATES SUGGEST NO CCP (for this
  year)
• Calculation
• Counter-cyclical payment (CCP)/bu.
• Target Price Direct Payment (higher
  of Loan Rate or market price) x (85 base acres)
• Example - Wheat
• (3.86 - .52 4.00 ) x .85 0.00
• MP 4.00
• DP 0 .442
• CCP 0.00
• Total 4.442

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FSRIA Commodity Programs Counter-Cyclical
Payments

• Timing of Payments
• Made as soon as practicable after the end of the
  12 month marketing year
• May 30 for Wheat, Barley, Oats
• August 30 for Corn, Sorghum, Soybeans
• July 30 for Cotton and Rice
• Partial payment may be made
• First payment in October (35)
• Second payment in February (70)
• Final Payment at end of marketing year

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FSRIA 02 Advance Payments

• 75 of countercyclical available at end of 1st 6
  months of marketing year

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Peanut Program

• Peanut quota buyout - .11/lb, 5 years (lump sum
  up front or 5 annual payments)
• Peanuts program becomes like other commodity
  programs (direct countercyclical payments, MLA
  LDP)
• Same but separate payment limitations from other
  commodity programs (a producer with both peanut
  and other commodity base will not have payment
  limits of one affect the other)

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FSRIA 02 Dairy

• Maintains 9.90/cwt support price
• Direct payments when Boston Class I below 16.94
  (13.74 BFP)
• Payment 45 of 16.94 less actual
• Capped at 2.4 mil (135-140 cows)/family member
• Retroactive to Dec. 1, 2001
• Runs to Sept. 30, 2005

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FSRIA Commodity Programs Summary

• Marketing loan benefits are based on bushels of
  actual production, loan rates and market prices
• Fixed payments are based on 85 percent of old
  or new acreage and old yields, decoupled from
  actual production and market prices
• Counter-cyclical payments are based on 85 percent
  of old or new acreage and old or new
  yields, decoupled from actual production
• Peanuts become like other commodity programs
• Dairy support continues but changes

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FSRIA 02 Conservation Programs

• Quadruples EQIP
• Conservation Security Program (Harkin) 2 billion
  total
• Adds 4 bil acres to CRP, WRP

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An Evolving Conservation Philosophy

• Previous programs focused on protecting
  environment/natural resources compensating
  producers/landowners
• New philosophy is shifting toward working
  farmland with a conservation ethic (increase from
  current 7 to new 40 of program costs)
• Farmers and ranchers should manage farmland to
  provide cheap, high quality food and fiber and
  environmental amenities (e.g. clean air and
  water, wildlife habitat, open space, sequestered
  carbon).
• Additional 9 bil thru 2007 authorized

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FSRIA 02 Conservation Programs

• Conservation Reserve Program (CRP)
• expands previous program
• Conservation Security Program (CSP)
• major new program
• Environmental Quality Incentive Program (EQIP)
• expands previous program
• Grassland Reserve Program (GRP)
• new program
• Wetlands Reserve Program (WRP)
• expands previous program

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FSRIA 02 Conservation Programs

• Wildlife Habitat Incentive Program (WHIP)
• expands previous program
• Farmland Preservation Program (FPP)
• expands previous program
• Small Watershed Restoration Program (SWRP)
• expands previous program
• Conservation Compliance/ SodbusterSwampbuster
• continued

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Farm Economy Problems Does FSRIA have the
solutions?

• Price income issues (competition profits?)
• Production likely to increase, w/downward
  pressure on price
• May have complicated WTO issues
• More farm income will come from taxpayers
• Government support distribution issues
• Free market failed government support necessary
• No solution to distribution issues?
• Natural resource issues
• some innovation (CSP)
• Structural issues
• No solution likely encourage concentration
• Food safety availability issues
• additional funds

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Preliminary Evaluation of FSRIA

• Higher payments, with distribution similar to
  current program
• If youve been generally satisfied w/payments of
  past 6 years, youll probably like FSRIA in
  short run in long run???
• Bill effectively proves that the free market is
  not what agriculture wants
• Not size-neutral, but encourages concentration
• May not be WTO-compatible
• Expansion of conservation programs
• May encourage stewardship

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Preliminary Evaluation of FSRIA (cont.)

• Livestock receipts likely to increase
• Related to cheap available feed?
• Related to producers looking for profit
  alternatives when crop prices down?
• Farm land values likely to increase
  (capitalization)
• Equipment other input prices likely to increase
• Government support to agriculture likely to
  increase beyond projections be reconsidered in
  3-4 years

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Preliminary Evaluation of FSRIA (cont.)

• More farms likely to go out of business or
  increase proportion of income from non-farm
  sources
• Larger farms may do well
• Landlords and landowners will do well short run

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APPENDIX

• Marketing Loan Mechanics
• WTO Restrictions
• Proposals that did not survive to final bill

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FSRIA 02 Marketing Loan Program Mechanics

• Potential LDP or MLG is equal to the loan rate
  minus the PCP
• PCP is equal to the higher of two terminal market
  prices minus the county differential relative to
  each terminal market
• Differences in county differentials to terminals
  similar to differences in loan rates across
  counties
• PCP reflects terminal prices from previous days
  market

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Marketing Loan Program Mechanics (cont)

• Producer can take LDP any day after harvesting
  crop and before losing beneficial interest in the
  commodity
• LDP equal to loan rate minus that days PCP
• OR

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Marketing Loan Program Mechanics (cont)

• Producer can take out marketing loan and receive
  loan rate
• Loan can be repaid before maturity at lower of
  loan rate plus interest or PCP
• A PCP can be locked in once for 60 days and the
  loan repaid anytime in that 60 days at that
  locked-in PCP
• If not repaid in that 60 days, locked-in PCP
  expires and loan can be repaid at that days PCP
• OR
• Loan can be repaid with generic certificates
• OR
• Loan can be held to maturity and forfeited to
  government

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Add the wrinkle of whether farm program changes
pass WTO test

• Amber box policies that are trade distorting
  targeted for reductions under the URA (price
  supports, marketing loans, payments based on ac
  or of livestock, input subsidies, etc.)
• Blue box policies that are trade distorting but
  exempt from reductions under URA, including
  direct payments linked to certain
  production-limiting policies (US crop deficiency
  payments, EC compensatory payments, etc.)
• Green Box policies that are non-trade
  distorting are acceptable under URA, including
  taxpayer-funded and non-transfers from consumers
  (research, extension, pest/disease control, crop
  insurance, marketing/promotion, natural disaster
  relief, conservation programs, public
  stockholding, decoupled income support, income
  safety nets, etc.)

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Provisions That Did Not Survive to Final Bill

• Effective and Targeted Payment Limits
• Packer Ownership Ban
• Cuba Provision
• More restrictive/comprehensive country-of-origin
  labeling rules
• Major shift from commodity support programs to
  either risk management or green payment programs