U.S.D.A. proposes revamping of agricultural commodity programs

by Editorial Staff
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WASHINGTON — Secretary of Agriculture Mike Johanns on Jan. 31 tabled a comprehensive proposal for the 2007 farm bill. The cornerstone of any farm bill is its commodity programs. Secretary Johanns’ proposal leaves intact the basic structure of farm commodity programs, but with some significant modifications that aimed to make them more market-oriented and less susceptible to challenge by trading partners and competitors.

The marketing assistance loan program, loan deficiency payments and counter-cyclical payments remain. But changes to the programs are proposed that the department projects would reduce federal spending on commodity programs by $4,494 million over 10 years (2008-2017) compared with a baseline projecting extension of current services.

The marketing assistance loan program is the foundation of government income support to producers. Loan deficiency payments and counter-cyclical payments rest on this foundation.

Under the marketing assistance loan program, producers are eligible to receive nine-month non-recourse loans against which their program crops are held as collateral. This enables producers to benefit from immediate cash flow from the loans while deferring sales of their program commodities in the hope prices move higher. Typically, enrollments are heaviest at harvest, when prices usually are lowest.

Currently, the producer may redeem his crop anytime during the nine-month period of the loan by paying an amount equal to the marketing assistance loan rate plus interest, or an amount equal to the posted county price of the crop (a price based on local market price movements and updated daily) plus interest, whichever is lower. Alternatively, the producer may forfeit his crop to the government, an option not much used any longer.

If the producer elects not to take out a marketing loan, he may apply for a loan deficiency payment (L.D.P.) in the event the market price of his crop (as reflected in the posted county price) falls below the marketing loan rate. The L.D.P. is an amount that is paid to producers to fill the gap between the P.C.P. and the marketing loan rate. Essentially, the L.D.P. guarantees producers receive a price no less than the marketing loan rate.

Again, loan deficiency payment activity mostly takes place around harvest when prices tend to be lowest. A problem identified by the U.S.D.A. is that farmers tend to lock in L.D.P.s when market prices are lowest and then hold onto their crop and market it when prices are higher, sometimes much higher. The producer may receive a hefty L.D.P. early in the marketing year and later sell his crop well above the marketing loan rate, obtaining a benefit not intended.

Marketing loan rates for the program commodities are fixed under the 2002 farm bill. The U.S.D.A. noted the fixed marketing loan rates for many of the commodities have exceeded actual crop prices in many years, encouraging producers to base their planting decisions on expected government benefits rather than market signals.

The U.S.D.A. proposed that marketing loan rates be set for any given year based on 85% of the recent five-year average market price of a commodity but not to exceed the rates contained in the House version of the 2002 farm bill. In the case of wheat, the current marketing loan rate is $2.75 a bu, which is above the rate proposed by the House in 2002, which was $2.58 a bu. The U.S.D.A. proposal, then, would result in reducing the marketing loan rate on wheat to $2.58 a bu, and no matter the market conditions, the loan rate on wheat would not exceed $2.58 a bu for the term of the 2007 farm bill.

The current corn marketing loan rate is $1.95 a bu. Under the U.S.D.A. proposal, the corn marketing loan rate would not exceed $1.89 a bu. The current soybean marketing loan rate is $5 a bu. Under the U.S.D.A. proposal, the soybean marketing loan rate would not exceed $4.92 a bu.

To better manage the marketing loan program and L.D.P.s, the U.S.D.A. proposed to substitute a monthly posted county price for a daily P.C.P.

"The monthly P.C.P. would be an average of five daily P.C.P.s on pre-set days during the previous month, excluding the high and low daily P.C.P.," the U.S.D.A. proposal said. "A producer who elects to forgo a marketing assistance loan and receive an L.D.P. during any month would receive the L.D.P. rate in effect on the day the producer loses beneficial interest in the commodity. The L.D.P. rate would be the difference between the applicable loan rate and the monthly P.C.P."

The producer no longer would be able to lock in an L.D.P. at a harvest level and then sell his crop later in the marketing year when prices could be much higher. Collecting an L.D.P. would be contingent on marketing (ceding beneficial interest) his commodity at the same time.

"For a producer who elects to take out a marketing assistance loan, the loan repayment rate would be the loan rate plus interest, unless the producer loses beneficial interest immediately upon repayment of the loan," the U.S.D.A. continued. "In that case, the loan would be repaid at the P.C.P. in effect for the month if the P.C.P. is less than the loan rate plus interest."

According to the budget score provided in the U.S.D.A. proposal, changes to the marketing assistance loan program and the P.C.P. and the loan repayment changes would result in a savings of $4,750 million over 10 years compared with a baseline incorporating continuation of the status quo.

Producers currently receive direct payments regardless of market price or planting decision. The direct payment each producer receives is equal to the product of the payment rate of a program commodity (set by law), the payment acres (85% of a producer’s historical base acres established under the 1996 farm bill if not revised in 2002) and the payment yield (the historical yield of the producer’s base acreage as established under the 1996 bill). Since direct payments are not tied to current planting decisions, yield or production, they are viewed as minimally trade distorting and less at risk of challenge under current and prospective World Trade Organization rules.

The U.S.D.A. proposal would increase direct payments to producers during the 2010-2012 crop years. In the case of wheat, the current direct payment is 52c a bu. Under the U.S.D.A. proposal, that level of direct payment would continue for 2008-2009, increase to 56c a bu for 2010-2012 and revert to 52c a bu for 2013-2017. The corn direct payment would hold at the current 28c per bu in 2008-2009, rise to 30c in 2010-2012 and revert to 28c in 2013-2017. The soybean direct payment would be 47c in 2008-2009 (up 3c from currently) rise to 50c in 2010-2012 and revert to 47c in 2013-2017.

The proposal would pay farmers an additional $5.5 billion over 10 years, according to the U.S.D.A.

The U.S.D.A. proposed to replace the current price-based counter-cyclical payment program for a commodity with revenue-based counter-cyclical payments for that commodity.

Currently, counter-cyclical payments are triggered when the "effective" price of a covered commodity is less than the target price set for that commodity in the 2002 farm bill. The target price for wheat under the 2002 bill is $3.92 a

bu, with corn at $2.63 a bu and soybeans at $5.80 a bu.

The "effective" price as defined in the 2002 farm bill is equal to the sum of the higher of the national average farm price of a commodity for the marketing year, or the national loan rate for the commodity, and the direct payment rate for the commodity. Like direct payments, counter-cyclical payments are applied against 85% of a producer’s historical, not current, base acres of a program commodity, and historical, not current, yields on the base acres. Hence, producers are guaranteed the target price for their covered commodities.

The U.S.D.A. noted under the current program, when market prices drop below the level that triggers a counter-cyclical payment, payments are made regardless of the level of current yields. "By failing to take into account actual production per acre, current counter-cyclical payments tend to under-compensate producers when yields decline, and over-compensate producers when yields increase," the U.S.D.A. said.

Under the U.S.D.A.’s proposal for the 2007 farm bill, a revenue-based counter-cyclical payment for a commodity would be triggered when the actual national revenue per acre for the commodity is less than the national target revenue per acre.

"The national target revenue per acre for the commodity would equal the 2002 farm bill’s target price minus the 2002 farm bill’s direct payment multiplied by the national average yield for the commodity during the 2002-2006 crop years, excluding the high and low years," the U.S.D.A. said. "The national actual revenue per acre for a commodity would equal the national average yield for the commodity times the higher of the season-average market price or the loan rate for the commodity.

"If a payment is triggered, the national revenue-based payment per acre would be converted to a payment rate for producers by dividing the national revenue payment per acre by the U.S. average payment yield per base acre under the 2002 farm bill counter-cyclical payment program. An individual producer’s revenue-based counter-cyclical payments would be determined by multiplying the national average payment rate for the commodity times 85% of the producer’s base acres times the producer’s program payment yield under the 2002 farm bill counter-cyclical program."

The U.S.D.A. added base acres and program yields would remain fixed over the life of the 2007 farm bill. The national yield for determining target revenue would remain fixed over the life of the 2007 farm bill and would equal the average yield for the 2002-2006 crops, excluding the high and the low year.

The U.S.D.A. projected $3.7 billion in savings over the next 10 years under the proposed revenue-based counter-cyclical payment program compared with continuation of current services during the period.

The U.S.D.A. also proposed to save $1.5 billion over 10 years by tightening restrictions for eligibility to receive government farm subsidies. The U.S.D.A. proposed to reduce the adjusted gross income (A.G.I.) cap determining farm program payment eligibility to $200,000 from the current $2.5 million. The department also proposed to eliminate the provision in current law that waives the A.G.I. cap in the event a household derives 75% or more of its income from farming or ranching.

"Thus, if a producer has an A.G.I. of $200,000 or more, regardless of the source of the income, the producer would not be eligible for commodity program payments," the U.S.D.A. said.

Overall payment limits would remain at $360,000 under the U.S.D.A.’s proposal.

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