FARM ACT: The Farm Security & Rural Investment Act of 2002 (FSRIA) Lesson 5c—AGEC 3703 Larry D. Sanders Fall 2005 Dept. of Agricultural Economics Oklahoma State University

2 Issues Affecting the Development & Implementation of the 2002 Farm Bill u Public & hidden agendas of Congress & President u The disappearing budget surplus u Compliance with WTO u 2002 election u Agriculture split on desired goals & how to achieve them u Taxpayer backlash on “welfare for the wealthy” u HAVE PRIORITIES CHANGED SINCE 9/11/01?

3 The Farm Security & Rural Investment Act of 2002 (FSRIA) u Cost $180 bil-200 bil if in place 10 years u Includes extra $73.5 over prev. budget u $50 bil – commodities u $17 bil – conservation u $1 bil – rural development

4 FSRIA 02—Overview u 6-year act ( ) u 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 02—Overview (continued) u Increase CRP acreage & funding; expand EQIP; new Conservation Security Program u Maintain/increase most trade, rural development & nutrition programs u Special incentives for beginning producers, limited-resource farms & Tribes for conservation programs u Country of origin labeling for meat, fish, produce, peanuts u Food stamps for illegal aliens

6 FSRIA 02 u 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 u Generic Certificates continued u 3 - Entity Rule continued u Producers with AGI over $2.5 million not eligible for program participation, unless ¾ of AGI from agriculture u In effect: NO LIMITS FOR LARGER PRODUCERS

7 FSRIA Commodity Programs – Market Loss Assistance (MLA) & Loan Deficiency Payments (LDP) u Eligible Production for MLA or LDP –Producers of any quantity of a loan commodity produced on a farm. –Compliance with Conservation and Wetland Requirements u 9 month loans beginning 1 st of month loan is entered into

8 FSRIA Commodity Programs – MLA&LDP u 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

9 FSRIA Commodity Programs – MLA&LDP u 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.

10 FSRIA 02: Marketing Loan Rates Commodity 1996 Farm Bill2002 Farm Bill 2001 Rate 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 Minor oilseeds (cwt)$9.30$9.60$9.30 Upland cotton (lb)$0.5192$0.52 Rice (cwt)$6.50

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

12 FSRIA Commodity Programs –Direct Payments Commodity1996 Farm Bill2002 Farm Bill 2002 Payment 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)$0.0572$ Rice (cwt)$2.05$2.35

13 FSRIA 02: Base Options FSA provides owners with 5 base options: 1. Retain 2002 PFC acres 2. Retain 2002 PFC, add oilseeds without PFC offset 3. Retain 2002 PFC, add oilseeds with max PFC offset 4. Update bases using the ac of covered commodities 5. Retain 2002 PFC, add oilseed w/partial PFC offset

14 FSRIA 02: Yield Options u Statute provides for 95 payment yields u 95 yields used for PFC (96-01) u Payment yields “frozen” (86-01) u Some opportunities for yield updates –Counter-cyclical payment yield

15 FSRIA Commodity Programs –Direct Payments u Acreage base determined by producer –Average acreage for all covered commodities for »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 »Includes planted and prevented planted acres for oilseeds over all four years u Payment base equal to 85 percent of acreage base

16 FSRIA Commodity Programs –Direct Payments u 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 average yields backed up to equivalent yields (approximately 78 %).

17 FSRIA Commodity Programs –Direct Payments For Up to 50 percent of the direct payment beginning December 1 of the calendar year prior to harvest (on month of producer’s choice) Remainder of direct payment in October of the calendar year of harvest May change in rules and regulations or technical corrections legislation

18 FSRIA Commodity Programs –Counter-Cyclical Payments u Similar to target price/deficiency payment system in farm programs prior to 1996 u Payments are decoupled from production, but not from price u Target prices fixed for , rise for most commodities for u Payments include commodities covered under 1996 Production Flexibility Contract (PFC) plus oilseeds u Payments are expected to be “amber box” payments under WTO commitments

19 FSRIA Commodity Programs –Counter-Cyclical Payments 1990 Farm Bill 2002 Farm Bill Target Prices Commodity Target Price 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$0.7240$ Rice (cwt)$10.71$10.50$10.50

20 FSRIA Commodity Programs –Counter-Cyclical Payments u Yield base –Use previous program yield OR –Partially updated program yield using both existing program yields and average yields »Updated yield =(average yield for minus existing program yield) * 70% + existing program yield OR –Partially updated program yield using average yields »Updated yield = (average yield for ) * 93.5% u (minimum yield of 75%of county average)

21 FSRIA Commodity Programs –Counter-Cyclical Payments u Payment calculations Counter-cyclical payment (CCP)/bu.= [Target Price – Direct Payment – (higher of Loan Rate or market price)] x (85% base acres) u Example - Wheat ( $.52 –2.80 ) x.85 = $.459 MLA = 2.80MP = 2.95 DP =.442DP =.442 CCP =.459 CCP =.332 Total = Total = 3.724

22 FSRIA Commodity Programs –Counter-Cyclical Payments u BUT CURRENT ESTIMATES SUGGEST NO CCP (for this year) u Calculation: Counter-cyclical payment (CCP)/bu.= [Target Price – Direct Payment – (higher of Loan Rate or market price)] x (85% base acres) Example - Wheat ( $.52 –4.00 ) x.85 = $0.00 MP = 4.00 DP = CCP = 0.00 Total = 4.442

23 FSRIA Commodity Programs –Counter-Cyclical Payments u 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

24 FSRIA 02: Advance Payments u 75% of countercyclical available at end of 1 st 6 months of marketing year

25 Peanut Program u Peanut quota buyout - $.11/lb, 5 years (lump sum up front or 5 annual payments) u Peanuts program becomes like other commodity programs (direct & countercyclical payments, MLA & LDP) u 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)

26 FSRIA 02: Dairy u Maintains $9.90/cwt support price u Direct payments when Boston Class I below $16.94 (13.74 BFP) u Payment 45% of $16.94 less actual u Capped at 2.4 mil # ( cows)/family member u Retroactive to Dec. 1, 2001 u Runs to Sept. 30, 2005

27 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

28 FSRIA 02: Conservation Programs u Quadruples EQIP u Conservation Security Program (Harkin) $2 billion total u Adds 4 bil acres to CRP, WRP

29 An Evolving Conservation Philosophy u Previous programs focused on protecting environment/natural resources & compensating producers/landowners u New philosophy is shifting toward working farmland with a conservation ethic (increase from current 7% to new 40% of program costs) u 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). u Additional $9 bil thru 2007 authorized

30 FSRIA 02: Conservation Programs u Conservation Reserve Program (CRP) –expands previous program u Conservation Security Program (CSP) –major new program u Environmental Quality Incentive Program (EQIP) –expands previous program u Grassland Reserve Program (GRP) –new program u Wetlands Reserve Program (WRP) –expands previous program

31 FSRIA 02: Conservation Programs u Wildlife Habitat Incentive Program (WHIP) –expands previous program u Farmland Preservation Program (FPP) –expands previous program u Small Watershed Restoration Program (SWRP) –expands previous program u Conservation Compliance/ SodbusterSwampbuster –continued

32 Farm Economy Problems: Does FSRIA have the solutions? u 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 u Government support & distribution issues –Free market failed & government support necessary –No solution to distribution issues? u Natural resource issues –some innovation (CSP) u Structural issues –No solution; likely encourage concentration u Food safety & availability issues –additional funds

33 Preliminary Evaluation of FSRIA u Higher payments, with distribution similar to current program –If you’ve been generally satisfied w/payments of past 6 years, you’ll 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 u Expansion of conservation programs –May encourage stewardship

34 Preliminary Evaluation of FSRIA (cont.) u Livestock receipts likely to increase –Related to cheap available feed? –Related to producers looking for profit alternatives when crop prices down? u Farm land values likely to increase (capitalization) u Equipment & other input prices likely to increase u Government support to agriculture likely to increase beyond projections & be reconsidered in 3-4 years

35 Preliminary Evaluation of FSRIA (cont.) u More farms likely to go out of business or increase proportion of income from non- farm sources u Larger farms may do well u Landlords and landowners will do well short run

36 APPENDIX u Marketing Loan Mechanics u WTO Restrictions u Proposals that did not survive to final bill

37 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 day’s market

38 Marketing Loan Program Mechanics (cont) u Producer can take LDP any day after harvesting crop and before losing beneficial interest in the commodity –LDP equal to loan rate minus that day’s PCP OR…

39 Marketing Loan Program Mechanics (cont) u 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 day’s PCP OR –Loan can be repaid with generic certificates OR –Loan can be held to maturity and forfeited to government

40 Add the “wrinkle” of whether farm program changes pass WTO test: u 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.) u 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.) u 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.)

41 Provisions That Did Not Survive to Final Bill u Effective and Targeted Payment Limits u Packer Ownership Ban u Cuba Provision u More restrictive/comprehensive country-of-origin labeling rules u Major shift from commodity support programs to either risk management or “green payment” programs