2002 farm act: the farm security & rural investment act of 2002 (fsria)

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2002 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

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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?

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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

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FSRIA 02—Overview

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

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FSRIA 02—Overview (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

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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 – MLA&LDP

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 – MLA&LDP

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

Commodity1996 Farm Bill 2002 Farm Bill

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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Commodity 1996 Farm Bill 2002 Farm Bill2002 Payment 2002-2007

Corn (bu) $0.261 $0.28Sorghum (bu) $0.314 $0.35Barley (bu) $0.202 $0.24Oats (bu) $0.022 $0.024Wheat (bu) $0.461 $0.52Soybeans (bu) -- $0.44Minor oilseeds (cwt) -- $0.80Upland cotton (lb) $0.0572 $0.0667Rice (cwt) $2.05 $2.35

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FSRIA 02: Base Options

FSA provides owners with 5 base options:1. Retain 2002 PFC acres2. Retain 2002 PFC, add oilseeds without PFC

offset3. Retain 2002 PFC, add oilseeds with max PFC

offset4. Update bases using the 98-01 ac of covered

commodities5. 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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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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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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For 2003-2007

• 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

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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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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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Yield base– Use previous program yieldOR– 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 75%of county average)

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Payment calculationsCounter-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 = 2.95DP = .442 DP = .442CCP = .459 CCP = .332Total = 3.701 Total = 3.724

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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 = $0.00MP = 4.00DP = 0 .442CCP = 0.00

Total = 4.442

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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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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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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 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

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 day’s 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 day’s 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 day’s 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

2002 farm act: the farm security & rural investment act of 2002 (fsria)

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