Economics: July 2002

On May 1, the House of Representatives passed a new farm bill. The Senate passed the bill on May 8, and President Bush signed it into law on May 13, 2002. The official title of the new farm bill is the Farm Security and Rural Investment Act of 2002, and it is applicable for 2002 through 2007. The new farm bill denotes a complete change in philosophy from the 1996 Farm Bill. Many of the details are not public and are yet to be decided by USDA. However, the following is an attempt to summarize some of the highlights of the new bill.

First, for a producer to receive benefits under Title 1 ? Commodity Programs, they must have base acres for one or more covered commodities. A covered commodity is wheat, corn, grain sorghum, barley, oats, upland cotton, rice, soybeans and other oilseeds. A producer can elect to use the base acres they had under the 1996 Farm Bill or the four-year average of acreage planted (or prevented from being planted) on the farm to covered commodities for harvest, grazing, haying, silage or other similar purposes for the 1998 through 2001 crop years for a covered commodity. If a covered commodity was not planted at least once from 1998 to 2001, zero acres will be used for that year to determine the four-year average. Note that a producer can add base acres of a covered commodity under the new farm bill that they did not have under the 1996 Farm Bill. Payment acres are considered to be equal to 85 percent of the base acres for the covered commodity.

There are basically three ways a producer can receive payments if they have a base acreage for a covered commodity. The first way is a direct payment, which will be available in 2002 to eligible producers of wheat, corn, barley, grain sorghum, oats, upland cotton and rice. New payments are established for soybeans, other oilseeds and peanuts. Payment rates, target prices and loan rates specified in the 2002 Farm Act are seen in the following table.

The second way a producer can receive benefits is from counter-cyclical payments. Counter-cyclical payments will be available for covered commodities whenever the effective price is less than the target price for the commodity. The effective price is equal to the sum of the higher of the national average farm price for the marketing year, or the national loan rate for the commodity and the direct payment rate for the commodity. The payment amount for a farmer equals the product of the payment rate, the payment acres, and the payment yield (i.e., wheat: [acre base x 85% = payment acres] x 38 bu/ac yield x payment rate of $.10/bu = $3.80/payment acre). The payment acres are equal to 85 percent of the base acres. Base acres can be updated during the one-time signup if a producer so chooses. Payment yields for direct payments will not change except for soybeans and other oilseeds. Payment yields for counter-cyclical payments may be updated only during the signup period.

The third way a producer can receive benefits is loan deficiency payments. Loan deficiency payments are calculated the same way as under the 1996 Farm Bill. A producer is eligible to receive a loan deficiency payment when the loan rate is above the average national price for a covered commodity. The payment rate will be the amount by which the loan rate exceeds the average national price. If payment rates are established for wheat, barley or oats, a producer can receive a loan deficiency payment even though they elect to graze out the crop with livestock and forego any other harvesting.

The new farm bill has overhauled the peanut program. The former peanut price support program has been converted to a system of direct and counter-cyclical payments, and nonrecourse loans with marketing loan provisions. Peanuts will be treated similarly to many other program crops such as grains and cotton, with identical marketing loan provisions available to all peanut producers. A base acreage and yield will be established for producers with a history of peanut production. It will be based on yield on acres grown from 1998 to 2001. The payment acres will be based on 85 percent of the base acres. There is an option to substitute three of the base years with the average of the 1990 to 1997 county yield. All farmers with a history of peanut production during 1998 to 2001, whether quota-holders or not, are eligible for fixed direct payments of $36 per ton and for counter-cyclical payments. Marketing quota is eliminated with a quota buyout. Farmers no longer have to own or rent peanut marketing quota rights to produce for domestic edible consumption. Compensation is provided to quota holders for elimination of the peanut quota system. Owners of peanut quota under prior legislation will receive payments in five annual installments of $0.11 per pound during fiscal years 2002 through 2006, or the quota owner may opt to take the outstanding payment due to them in a lump sum of $0.55 per pound. There is very little information on the tax implications of the annual versus lump sum payment.

The conservation programs in the new farm bill will receive increased funding for almost every agri-environmental program. Producers will be able to choose from an array of voluntary conservation and environmental programs designed to protect a wide range of resources. The Conservation Reserve Program (CRP) cap will be increased from 36.4 million acres to 39.2 million acres. The Wetlands Reserve Program (WRP) will provide cost sharing and/or long-term or permanent easements for restoration of wetlands on agricultural land. The Environmental Quality Incentives Program (EQIP) has funding for technical assistance, cost sharing and incentive payments to assist livestock and crop producers with conservation and environmental improvements. The Wildlife Habitat Incentives Program (WHIP) will provide cost-share money to landowners and producers to develop and improve wildlife habitat. A new program called the Conservation Security Program (CSP) will be established for 2003 through 2007. This is a working lands program intended for producers that will concentrate on soil, water and other conservation problems. Cost-share payments will be provided at the rate of 75 percent or less. Many of the programs mentioned here are funded at considerably higher levels than in the 1996 Farm Bill.

The bottom line to the new farm bill is that there is something for just about everyone. Those who have maintained good farming practices and improved yields will benefit the most. Good marketing and risk management will again likely pay huge dividends. Only major items in the bill that will be important to producers in the Noble Foundation service area have been mentioned here. In addition to the highlights discussed, there are many more details of which producers need to be aware. I encourage you to be diligent in educating yourself to the particulars of the program(s) in which you are specifically interested.