AgDM newsletter article, July 2002
by William Edwards, extension economist, 515-294-6161, email@example.com
The biggest news to hit the Cornbelt this year has been the new farm bill, officially know as the Farm Security and Rural Investment Act (FSRIA) of 2002. Although the bill contains many provisions of interest to farmers and landowners, most of attention has been focused on commodity programs and payments.
Like past farm bills, commodity payments under FSRIA are made to the person who is at risk, which is generally the tenant under a cash rent lease. Over time, however, increases or decreases in expected revenue tend to be factored into cash rent bids. So, comparing potential payments under the new bill to those received the last few years should shed some light on how rents will be affected in the future.
FSRIA provides for three types of payments related to production of commodities. Loan deficiency payments (LDPs) have been widely used for several years. The maximum LDP for corn was raised by $.12 per bushel in most Iowa counties, and the maximum soybean LDP was decreased by $.26 per bushel. If prices remain low, this change will result in slightly more revenue for most producers.
Two new types of payments are introduced in FSRIA. These take the place of previous fixed payments and disaster payments, known variously as FAIR, MLA, PFC and oilseed payments. Direct payments are based on a payment rate of $.28 per bushel for corn and $.44 per bushel for soybeans. These are paid on a fixed number of acres (85 percent of base) and bushels (early 1980s levels). In addition, counter cyclical payments are made when national market prices average below $2.32 for corn and $5.36 for soybeans during the period from September 1 through August 31. These payments offer some price protection above the levels at which LDPs are paid.
Comparisons to FAIR Act
The table below compares the gross revenue per acre for each crop using the average market price and payments the 1999, 2000 and 2001 crops under the previous farm bill (FAIR) to the gross revenue under FSRIA assuming prices are as low as they were in those years. Actual yields are assumed to be 150 bushels per acre for corn and 50 bushels per acre for soybeans, and the farmís old program yield for corn was 112.5 bushels per acre. New program yields are fixed at 93.5 percent of 1998-2001 yields.
In this example, the corn revenue per acre would be about $19 higher and the soybean revenue per acre would be about $7 higher than in the past. It should be noted, though, that costs of production for corn have increased at least $10 to $15 per acre since 1998 due mostly to higher fuel and chemical costs. Farms with higher or lower yields would have different payments, but the comparisons would be similar.
If the farm had a 50 percent corn base under the old program and is currently growing equal acres of corn and soybeans, average gross revenue per acre in the example would have been $320.50 under the FAIR Act, compared to $331.39 under the new bill. However, many farms have had corn bases equal to more than 50 percent of their crop acres, and were receiving higher payments. Under FSRIA, farms with higher corn bases will still receive higher payments, but the advantage will be less. The table below compares the average payments per acre for farms with a 67 percent corn base and a 100 percent corn base. In both cases it is assumed that the farm will maximize payments by not updating base acres and yields for the new bill, and that the current cropping program is half corn and half soybeans.
For the 67 percent corn base situation, the new bill still provides slightly higher revenue per acre than was received under the old bill. However, a farm with a 100 percent corn base will actually receive about $7 less revenue per acre. This is because payments are set more evenly between corn and soybeans in FSRIA.
Concerns over reduced yields of both corn and soybeans have sent market prices higher this summer. If prices stay at current levels, no loan deficiency payments will be available, and counter cyclical payments for the 2002 crops may be reduced, as well. For each dime that the national average market price increases, the counter cyclical payment is decreased by about $.08. So, with normal yields revenue will be up only modestly, despite substantially higher market prices, and if yields are below normal profits will decline as well. To the extent that 2002 crop profits are factored into rents for next year, it will probably be wise to wait until more is known before bargaining begins.