ML, DP, CCP, and ACREML, DP, CCP, and ACRE

Prepared by:Joe L. Outlaw

Professor and Extension EconomistCo-Director, AFPC

DisclaimerDisclaimer

• This Information is Based on My Reading of the Bill and Interaction With Congressional Staff regarding Their Intent and Recent FSA Notices– I fully expect that FSA will interpret some of the

changes in law differently than I did– Happened a lot in the 2002 Farm Bill– There is a process that FSA and the Congress go

through to work out the differences

Presentation OutlinePresentation Outline

• General Overview• DP• LDP• CCP• ACRE• Payment Limits ML, DP, CCP, and ACRE

• 5 year farm bill beginning in 2008 and ending in 2012– A number of provisions do not take effect until the 2009 crop

year• Comprehensive bill covering:

– Commodity programs– Conservation– Trade– Nutrition Programs– Credit– Rural Development– Research and Related Matters– Forestry– Energy– Horticulture and Organic Agriculture– Livestock– Crop Insurance and Disaster Assistance Programs– Commodity Futures– Trade and Tax Provisions– Miscellaneous

General OverviewGeneral Overview

}New titles in 2008 FB

General Overview (Cont.)General Overview (Cont.)

• Four Major Changes Impacting Commodity Programs– ACRE– Payment limits– AGI eligibility criterion– LDP posted county prices

• As a condition to receive benefits, bill requires producers to submit annual acreage reports and annual production reports

General Overview (Cont.)General Overview (Cont.)

• Commodity provisions very close to previous programs– Continue direct payments– Continue marketing loan gains/LDPs– Maintain counter-cyclical payments (CCPs)

or

– Provides producer option for Average Crop Revenue Election (ACRE) Payment• Producer has to agree to direct payment

and loan rate reductions

DefinitionsDefinitions

• Covered commodities:– wheat, corn, grain sorghum, barley, oats,

upland cotton, long grain rice, medium grain rice, pulse crops, soybeans, and other oilseeds (sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe, sesame seed, or any oilseed designated by the Secretary)• DCP-187 indicates peanuts are treated as a

covered commodity

• Loan Commodities:– Covered commodities plus extra long

staple cotton, graded wool, nongraded wool, mohair, honey, dry peas, lentils, small chickpeas and large chickpeas.

Direct PaymentsDirect Payments

• Same formulaDirect Payment = (payment rate x (base acres x payment fraction) x Direct payment yield)– Where the payment fraction is .85 for 2008 and 2012 and .833 for

2009, 2010, and 2011

• Timing– 2009-2012 not before October 1 of the calendar

year in which the crop of the covered commodity is harvested

• Advance Payments (22%)– Producer Option

• For 2008, advances began being issued July 7th• For 2009-2011, Beginning December 1 of the year before

crop is harvested• For 2012, advance direct payments are not available

– Remaining 78% paid after October 1st (the date payment is otherwise made if advance is not chosen)

Direct Payment Rates (2008-Direct Payment Rates (2008-12)12)

Crops 2002 Farm Bill 2008 Farm Bill

Corn ($/bu) 0.28 0.28

Sorghum ($/bu) 0.35 0.35

Wheat ($/bu) 0.52 0.52

Upland Cotton ($/lb)

0.0667 0.0667

Rice-Long & Med. Grain ($/cwt)

2.35 2.35

Barley ($/bu) 0.24 0.24

Oats ($/bu) 0.024 0.024

Soybeans ($/bu) 0.44 0.44

Minor Oilseeds ($/cwt)

0.80 0.80

Peanuts ($/ton) 36 36No Change

Loan Deficiency Payments Loan Deficiency Payments (LDPs)/Marketing Loan Gains (LDPs)/Marketing Loan Gains

(MLGs)(MLGs)

• Generally work as in the past except…• Repayment of loans for loan commodities

other than (upland cotton, rice, els cotton, and sunflower seed) will be at the lesser of:– The loan rate established for the commodity plus

interest or– A rate calculated based off of the average

market prices for the loan commodity during the preceding 30-day period or

– An alternative developed by the Secretary

• Cotton and rice continue to use an adjusted world market price formula

0.00

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0.40

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0.60

9/1/2005 10/21/2005 12/10/2005 1/29/2006 3/20/2006 5/9/2006 6/28/2006 8/17/2006

LDP Rate Month LDP 30 Day LDP

Example of New Grain PCP Calculations vs Example of New Grain PCP Calculations vs Actual LDP Rates for 05/06 Corn, Webster Actual LDP Rates for 05/06 Corn, Webster

County, IACounty, IA

Month LDP uses an average of 25 reporting days per month

30 Day LDP uses the previous 30 reported prices

LDP Rate is the rate reported by FSA

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0.25

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0.35

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0.45

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9/1/2005 10/21/2005 12/10/2005 1/29/2006 3/20/2006 5/9/2006 6/28/2006 8/17/2006

LDP Rate Month LDP 30 Day LDP

Example of New Grain PCP Calculations vs Example of New Grain PCP Calculations vs Actual LDP Rates for 05/06 Wheat, Moore Actual LDP Rates for 05/06 Wheat, Moore

County, TXCounty, TX

Month LDP uses an average of 25 reporting days per month

30 Day LDP uses the previous 30 reported prices

LDP Rate is the rate reported by FSA

Loan RatesLoan RatesCrops 2002 Farm

Bill 2008 Farm Bill

2007 2008 2009 2010-12

Corn ($/bu) 1.95 1.95 1.95 1.95

Sorghum ($/bu)

1.95 1.95 1.95 1.95

Wheat ($/bu) 2.75 2.75 2.75 2.94

Upland Cotton ($/lb)

0.52 0.52 0.52 0.52

Rice ($/cwt) 6.50 6.50 6.50 6.50

Barley ($/bu) 1.85 1.85 1.85 1.95

Oats ($/bu) 1.33 1.33 1.33 1.39

Soybeans ($/bu)

5.00 5.00 5.00 5.00

Loan Rates (Cont.)Loan Rates (Cont.)

Crops 2002 Farm Bill

2008 Farm Bill

2007 2008 2009 2010-12

Other Oilseeds ($/cwt)

9.30 9.30 9.30 10.09

Dry Peas ($/cwt) 6.22 6.22 5.40 5.40

Lentils ($/cwt) 11.72 11.72 11.28 11.28

Small Chickpeas ($/cwt)

7.43 7.43 7.43 7.43

Large Chickpeas ($/cwt)

n/a n/a 11.28 11.28

Peanuts ($/ton) 355.0 355.0 355.0 355.0

Loan Rates (Cont.)Loan Rates (Cont.)

Crops 2002 Farm Bill

2008 Farm Bill

2007 2008 2009 2010-12

Graded wool ($/lb)

1.00 1.00 1.00 1.15

Nongraded wool ($/lb)

0.40 0.40 0.40 0.40

Mohair ($/lb) 4.20 4.20 4.20 4.20

Honey ($/lb) 0.60 0.60 0.60 0.69

Counter-Cyclical PaymentsCounter-Cyclical Payments

• Commodity specific based off of national price trigger• Base owners and/or producers will receive a payment

that depends on the effective price for the commodity:

Target price - Effective price

Counter-cyclical payment rate ($/unit)

CCP = CCP rate x (Base acres x .85) x CCP Payment Yield

• Effective price equals the higher of market price or loan rate plus the direct payment rate

• The national market price is the 12 month marketing year average for the crop

Commodity Marketing Commodity Marketing YearsYears

• Wheat, barley, oats, canola, rapeseed, and flaxseed

– June of year crop is harvested through next May

• Corn, sorghum, soybeans, sunflower seed, safflower, and mustard seed

– September of year crop is harvested through next August

• Upland cotton, rice and peanuts– August of year crop is harvested through

next July

Counter-Cyclical Payments Counter-Cyclical Payments (Cont.)(Cont.)

• Advance payments (up to 40%) of the projected counter-cyclical payment– Producer Option

• For 2008, after signup • For 2009-2010, after the first 180 days of the

marketing year• Beginning with the 2011 crop year, advance

CCPs are not available

– Remaining 60% paid after October 1st (date payment is otherwise made if advance is not chosen)

Target PricesTarget Prices

Crops 2002 Farm Bill

2008 Farm Bill

2007 2008 2009 2010-12

Corn ($/bu) 2.63 2.63 2.63 2.63

Sorghum ($/bu) 2.57 2.57 2.57 2.63

Wheat ($/bu) 3.92 3.92 3.92 4.17

Upland Cotton ($/lb)

0.724 0.7125 0.7125 0.7125

Rice1 ($/cwt) 10.50 10.50 10.50 10.50

Barley ($/bu) 2.24 2.24 2.24 2.63

Oats ($/bu) 1.44 1.44 1.44 1.79

Soybeans ($/bu) 5.80 5.80 5.80 6.00Long and medium grain rice have the same rates.

Target Prices (Cont.)Target Prices (Cont.)

Crops 2002 Farm Bill

2008 Farm Bill

2007 2008 2009 2010-12

Other Oilseeds ($/cwt)

10.10 10.10 10.10 12.68

Dry peas ($/cwt)

n/a n/a 8.32 8.32

Lentils ($/cwt) n/a n/a 12.81 12.81

Small Chickpeas ($/cwt)

n/a n/a 10.36 10.36

Large Chickpeas ($/cwt)

n/a n/a 12.81 12.81

Peanuts ($/ton) 495.0 495.0 495.0 495.0

Average Crop Revenue Average Crop Revenue Election (ACRE) PaymentElection (ACRE) Payment

• Beginning with the 2009 crop year– One-time irrevocable option to choose:

• CCP, DP (with full payment rates), and MLG/LDPs (with full loan rates) or

• ACRE, DP (with a 20% reduction in payment rates) and MLG/LDPs (with a 30% reduction in loan rates)

– Producers will have to determine whether the loss in guaranteed support is more than made up by potential gain from ACRE

– This election is for all the crops grown on each FSA farm #

• A farmer could choose to select ACRE for certain farms (FSA farm #s) and not others

• Failure of all producers on a farm to make the ACRE election by the deadline will result in the CCP option for all participants

Don’t have to make choicethe first year

Average Crop Revenue Average Crop Revenue Election (ACRE) Payment Election (ACRE) Payment

(Cont.)(Cont.)• ACRE defined:

– A state level gross revenue protection plan for each covered commodity and peanuts

– The Secretary shall make an ACRE payment on a farm for each crop year if:• The actual State revenue for the crop is less

than the ACRE program guarantee for the crop, and

• The actual farm revenue for the crop is less than the farm ACRE benchmark revenue

For the 2010-2012 crop years, the ACRE state revenue guarantee for a crop shall not decrease or increase more than 10 percent from the guarantee for the preceding crop year

Average Crop Revenue Average Crop Revenue Election (ACRE) Payment Election (ACRE) Payment

(Cont.)(Cont.)• Where:

– The actual State revenue for a crop is the State yield per planted acre from NASS multiplied times the national average market price (the higher of the 12-month marketing year price or 70% of marketing assistance loan rate)

– The ACRE program guarantee is equal to 90% of the benchmark state yield (5 year Olympic NASS average) multiplied times the ACRE program guarantee price (simple average of 2 previous national average market price)

– The actual farm revenue is the actual yield for the crop on the farm multiplied times the national average market price for the crop

– The farm ACRE benchmark revenue is [(the most recent 5 year Olympic average crop yields for the farm multiplied times the ACRE program guarantee price for the crop) plus the crop insurance premium per acre]

Average Crop Revenue Average Crop Revenue Election (ACRE) Payment Election (ACRE) Payment

(Cont.)(Cont.)• Where the ACRE payment amount is:

– The lesser of:• The difference between the ACRE state program guarantee

for the crop and the actual State revenue from the crop or• 25% of the ACRE state program guarantee for the crop

– Multiplied by:• The payment fraction (.833 for 2009-11 and .85 for 2012)

multiplied by planted or considered planted acres of the crop

– Multiplied by:• The quotient obtained by dividing the Olympic average

yield per planted acre for the crop on the producers farm for the most recent 5 years by the benchmark State yield for the crop (the Olympic average of the most recent 5 years of State yields)

Average Crop Revenue Average Crop Revenue ElectionElection

State ACRE Guarantee = 90%* 5-Year Olympic State Avg. Yield *2-year Natl. Average Mkt. Yr. Price Restricted to < 10% change/year

>

AND

>

THEN

Farm Payment = 0.833 (0.85 in 2012) * Actual Planted or Considered Planted Acres *

[ Farm's 5-Year Olympic Average Yield / State’s 5-year Olympic Average Yield ] *

MIN[ (State ACRE Guarantee – Actual State Revenue) OR State ACRE Guarantee * 25%]

Actual State Revenue =Actual State Planted Acre Yield * MAX[ Natl. Average Mkt. Yr. Price OR70% Loan Rate]

Actual Farm Revenue =Actual Farm’s Planted Acre Yield * MAX[ Natl. Average Mkt. Yr. Price OR70% Loan Rate]

Farm ACRE Benchmark =Farm's 5-Year Olympic Avg. Yield *2-year Natl. Average Mkt. Yr. Price + Ins Premium

Note: All Yields are Planted Acre Yields

Average Crop Revenue Average Crop Revenue Election (ACRE) Payment Election (ACRE) Payment

(Cont.)(Cont.)• The total number of planted acres for which

payments are received cannot exceed base acres on the farm– Producer has option to choose planted acres to enroll in ACRE

• The bill reads as if the reduction in LRs applies to entire farm

• There are provisions for assigning yields, etc. by using yields from a similar state

• There are provisions for determining whether a state will have both irrigated and non-irrigated state guarantees– If a state has at least 25% of the acres of a crop that are

irrigated and at least 25% of the acres of the crop that are non-irrigated then Secretary shall calculate separate irrigated and non-irrigated ACRE program guarantees

Average Crop Revenue Average Crop Revenue Election (ACRE) Payment Election (ACRE) Payment

(Cont.)(Cont.)• Developed risk-based decision aid to

evaluate expected benefits from current programs (DP,LDP,CCP) vs (ACRE and reduced DP, LDP)

• Preliminary results for our Representative Farms indicate very few “rules of thumb”– The decision has a lot of moving parts

(farm yields, state yields, marketing year prices and expected future prices)

– Correlation of moving parts

Planted Acres Base Acres DP Yield CCP Yield Ins Prem/AcreDry Cotton 250 400 375 467 9 Dry Wheat 250 200 29 39 11 Dry Sorghum 500 1,200 63 83 12 Dry Corn 1,000 200 70 94 12

Historical Yield DataYield 1998 Yield 1999 Yield 2000 Yield 2001 Yield 2002 Yield 2003 Yield 2004 Yield 2005 Yield 2006 Yield 2007

Dry Cotton 212 409 269 359 713 531 729 618 436 475 Dry Wheat 36 30 30 32 43 35 35 22 18 24 Dry Sorghum 46 85 88 74 78 86 88 65 42 58 Dry Corn 10 64 66 35 58 68 69 54 14 71

Texas Hill County 2200 Acre Texas Hill County 2200 Acre Representative Grain and Cotton Representative Grain and Cotton

FarmFarm

FAPRI February 2008 Baseline FAPRI February 2008 Baseline PricesPrices

Cotton Wheat Sorghum Corn Barley Oats Soybeans Rice Long Peanuts2008 0.6479 5.27 3.52 3.89 4.07 2.51 10.44 10.49 0.23572009 0.6358 5.20 3.62 3.87 3.96 2.53 9.84 11.10 0.23352010 0.6369 5.16 3.49 3.76 3.81 2.49 9.99 11.04 0.22672011 0.6312 5.23 3.57 3.80 3.84 2.49 9.88 11.44 0.22782012 0.6263 5.28 3.59 3.85 3.85 2.50 10.03 11.42 0.2269

Rankings for a Normal Risk Averse Decision Maker Using Certainty Equivalence of Average Annual PaymentsACRE CCP Preferred Program Lost DPs with ACRE

Hill County Texas 43,213 43,945 CCP 7,196 Dry Cotton 9,523 16,160 CCP 1,667 Irr Cotton (0) (0) - Dry Wheat 2,601 2,525 ACRE 502 Irr Wheat (0) (0) - Dry Sorghum 19,709 21,978 CCP 4,373 Irr Sorghum (0) (0) - Dry Corn 11,401 3,282 ACRE 653 Irr Corn (0) (0) - Dry Soybeans (0) (0) - Irr Soybeans (0) (0) - Medium Rice (0) (0) - Long Rice (0) (0) - Dry Peanuts (0) (0) - Irr Peanuts (0) (0) - Sunflowers (0) (0) -

Dry Cotton Dry Wheat Dry Sorghum Dry CornP(StatePay) 0.53 0.56 0.434 0.386P(Farm Pay) 0.68 0.306 0.402 0.572P(State&Farm) 0.412 0.136 0.168 0.298

Comparison of Average Annual Payments under ACRE and CCP in Hill County Texas 2,200 Acre Farm ($s)

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Sum ACRE Sum CCP

Comparison of Average Annual Payments under ACRE and CCP for Dry Cotton ($s)

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ACRE Dry Cotton CCP Dry Cotton

Comparison of Average Annual Payments under ACRE and CCP for Dry Wheat ($s)

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ACRE Dry Wheat CCP Dry Wheat

Comparison of Average Annual Payments under ACRE and CCP for Dry Sorghum ($s)

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ACRE Dry Sorghum CCP Dry Sorghum

Comparison of Average Annual Payments under ACRE and CCP for Dry Corn ($s)

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ACRE Dry Corn CCP Dry Corn

Rankings for a Normal Risk Averse Decision Maker Using Certainty Equivalence of Average Annual PaymentsACRE CCP Preferred Program Lost DPs with ACRE

Hill County Texas 2,200 Acre Farm45,725 38,515 ACRE 7,196 Dry Cotton 8,597 10,730 CCP 1,667 Irr Cotton (0) (0) - Dry Wheat 2,676 2,525 ACRE 502 Irr Wheat (0) (0) - Dry Sorghum 20,114 21,978 CCP 4,373 Irr Sorghum (0) (0) - Dry Corn 14,390 3,282 ACRE 653 Irr Corn (0) (0) - Dry Soybeans (0) (0) - Irr Soybeans (0) (0) - Medium Rice (0) (0) - Long Rice (0) (0) - Dry Peanuts (0) (0) - Irr Peanuts (0) (0) - Sunflowers (0) (0) -

High Grain and Cotton Price ResultsHigh Grain and Cotton Price Results

Low Grain and Cotton Price ResultsLow Grain and Cotton Price ResultsRankings for a Normal Risk Averse Decision Maker Using Certainty Equivalence of Average Annual Payments

ACRE CCP Preferred Program Lost DPs with ACREHill County Texas 2,200 Acre Farm68,885 167,720 CCP 7,196 Dry Cotton 13,348 46,259 CCP 1,667 Irr Cotton (0) (0) - Dry Wheat 5,011 13,638 CCP 502 Irr Wheat (0) (0) - Dry Sorghum 27,944 68,482 CCP 4,373 Irr Sorghum (0) (0) - Dry Corn 22,592 39,529 CCP 653 Irr Corn (0) (0) - Dry Soybeans (0) (0) - Irr Soybeans (0) (0) - Medium Rice (0) (0) - Long Rice (0) (0) - Dry Peanuts (0) (0) - Irr Peanuts (0) (0) - Sunflowers (0) (0) -

Iowa 3400 Acre Iowa 3400 Acre Representative Corn and Representative Corn and

Soybean FarmSoybean Farm

Planted Acres Base Acres DP Yield CCP Yield Ins Prem/Acre2,040 1,700 130 151 4.551,360 1,700 37 44 2.92

Historical Yield Data1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

130 155 158 152 179 172 191 189 172 17846 45 46 43 50 35 48 51 49 50

Comparison of Average Annual Payments under ACRE and CCP in Iowa 3400 ($s)

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Comparison of Average Annual Payments under ACRE and CCP for Dry Corn ($s)

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ACRE Dry Corn CCP Dry Corn

Comparison of Average Annual Payments under ACRE and CCP for Dry Soybeans ($s)

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ACRE Dry Soybeans CCP Dry Soybeans

Payment Limitations andPayment Limitations and Direct Attribution Direct Attribution

• Continues $40,000 limit on direct payments and $65,000 limit on counter-cyclical payments and ACRE– If ACRE is chosen then reduction in DP is added to ACRE

limitation• Loan deficiency payments and marketing loan gains

are not limited• Eliminates 3 entity rule and uses Direct attribution

to a living person– IF one spouse is assumed to be actively engaged then both

spouses are assumed to be eligible– Payments for children under 18 are attributed to parent(s)– Will trace through 4 levels of ownership in legal entities to

attribute payments• Prohibition on all payments if sum of base acres on

farm is less than or equal to 10 acres– Unless socially disadvantaged– Unless limited resource

Adjusted Gross Income Eligibility Adjusted Gross Income Eligibility TestTest

• Replaces the $2.5 million adjusted gross income limitation to receive commodity, disaster, or conservation benefits with:– A person with more than $500,000 in

average adjusted nonfarm income will be ineligible for direct payments, counter-cyclical payments, ACRE payments, marketing loan gains, loan deficiency payments, MILC payments, and the noninsured assistance program

– A person with more than $750,000 average adjusted gross farm income will be ineligible for direct payments

CottonCotton

• Economic Adjustment Assistance to Users of Upland Cotton– Beginning August 1, 2008 and ending July 31,

2012 domestic users of upland cotton will receive a payment of $0.04/lb used regardless of origin of the cotton

– Beginning August 1, 2012 the payment rate is $0.03/lb

• USDA no longer prohibited from publishing cotton price forecasts

• Reduces storage payments for cotton by 10% in 2008, 2009, 2010, and 2011 and 20% in 2012

PeanutsPeanuts

• Peanuts continue to be covered by a separate subtitle from other crops– Continue to have separate payment limits– Same basic programs and options as

other crops– Beginning with the 2008 crop, the

Secretary shall pay handling and associated costs (other than storage) when peanuts are placed under loan

Planting FlexibilityPlanting Flexibility

• Maintains prohibition of planting fruits and vegetables on base acres as in 2002 Farm Bill

• Planting Transferability Pilot Project– Permits cucumbers, green peas, lima

beans, pumpkins, snap beans, sweet corn, and tomatoes for processing to be planted on base acres

– Pilot basis in IL, IN, IA, MI, MN, OH, and WI

SummarySummary

• As additional details are provided, there will be continual updates to this power point

• Check at agecoext.tamu.edu