Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
2/5/03
FOR IMMEDIATE RELEASE
Contacts:
Robert Wisner, Ag Economics, (515) 294-6310, rwwisner@iastate.edu
Jean McGuire, Continuing Education and Communication Services, (515) 294-7033,
jmcguire@iastate.edu
Understanding Corn and Soybean Counter-Cyclical Payments in the New Farm Bill
Ames, Iowa - Farmers, landowners, and agricultural lenders should be aware of important differences between counter-cyclical payments (CCPs) of the new farm program and the old deficiency payment system that was used in pre-1996 federal farm programs. Both payment plans are based on target prices established by Congress, but there are some important differences that give target prices a different role than past programs, according to ISU Extension Economist Robert Wisner.
The Farm Security & Rural Investment Act of 2002 (FSRIA) provides a three-tier safety net for producers of corn, soybeans and other crops, that includes the counter-cyclical payments. Wisner notes that two of these safety-net components are price-sensitive. The first price-sensitive safety net component is the loan deficiency payments (LDPs.) This system of payments is calculated in the same way as in the last several years, except that loan rates have been increased for almost all major field crops except soybeans and cotton. The national average soybean loan rate has been lowered $0.26 per bushel from the 2001 rate, while the corn loan rate has been increased by $0.09 per bushel. Changes in county loan rates vary slightly from county to county.
The second component of the safety net is the direct payments, which are $0.28 per bushel for corn and $0.44 per bushel for soybeans for the 2002 through 2007 crops. Direct payments are made on 85% of the Farm Service Agency (FSA) base acreage and historical yields for the respective crops. These payments remain unchanged, even at extremely high or extremely low prices for their respective crops.
Counter-Cyclical Payments
The third component of the safety net is the CCPs. Like LDPs, CCPs, are
price-sensitive. They also are made on 85% of FSA base acreage and yields.
Yields for these payments may be updated to a recent four-year average.
Wisner pointed out that with marketing year average prices moderately
above the loan rates but well below target prices, CCPs drop to zero.
He used a corn CCP example to illustrate how the calculations are made.
First, CCPs are based on a weighted national average marketing year price
paid to farmers. For corn and soybeans, the marketing year runs from Sept.
1 through Aug. 31. The marketing year average price is calculated by weighting
monthly average prices by the volume of grain farmers sell each month
during the year. If CCPs are made, each farmer receives the same CCP per
bushel, regardless of geographic location.
Corn CCPs are paid based on the difference between the national average target price ($2.60/bu.) and the higher of:
* the loan rate plus the direct payment of $0.28 per bushel or
* the marketing year average price plus the direct payment
Maximum Counter-Cyclical Payments
The maximum corn CCP is $0.34 per bushel for 2002 and 2003 crops. It will
increase by $0.03 per bushel for the 2004 through 2007 corn crops because
of a $0.03 reduction in the loan rate for those years. Wisner points out
that with this calculation procedure, CCPs for 2002 through 2007 corn
crops drop to zero at a U.S. marketing year average price of $2.32 per
bushel. Soybean CCPs are calculated in the same way as for corn, using
the soybean loan rate of $5.00 per bushel, the direct payment of $0.44
per bushel, and the soybean target price of $5.80 per bushel. Maximum
soybean CCPs for 2002 through 2007 crops are $0.36 per bushel. The soybean
CCPs for 2002 through 2007 crops decline to zero at a U.S. marketing year
average price of $5.36 per bushel.
Payment Schedule
The economist pointed out that new farm legislation provides for CCPs
to be made available to farmers in three stages. In years when a CCP is
anticipated, as indicated by USDA, Economic Research Service price projections
for the year ahead, the first installment of the CCP is made available
to producers in the fall for the next year's crop. The second payment
becomes available in February, and the final payment is made in early
fall after the marketing year has ended and the marketing year average
price has been determined by USDA.
Corn and soybean CCPs that would be paid for various marketing year average prices are as follows:
| U.S. Average Price | Corn CCP | Corn CCP |
| 2002-03 crops | 2004-07 crops | |
| $1.90 | $0.34 | $0.37 |
| $2.00 | $0.32 | $0.32 |
| $2.10 | $0.22 | $0.22 |
| $2.20 | $0.12 | $0.12 |
| $2.30 | $0.02 | $0.02 |
| $2.32 | $0.00 | $0.00 |
| U.S. Average Price | Soybean CCP | |
| 2002-07 crops | ||
| $4.90 | $0.36 | |
| $5.00 | $0.36 | |
| $5.10 | $0.26 | |
| $5.20 | $0.16 | |
| $5.30 | $0.06 | |
| $5.36 | $0.00 |
For 2002 corn and soybean crops, USDA price projections through January 2003 indicate that marketing year average prices will be above the level that would generate CCPs. Wisner said there is still a chance that prices will decline enough as the season progresses so that CCPs will be made, but as of early February 2003 that appears unlikely. To see how approximate weighted average prices so far this marketing year compare with prices needed to generate CCPs, and prices needed for the rest of the year to generate CCPs, see Wisner's Web site: http://www.econ.iastate.edu/faculty/wisner/. The section discussing CCPs is in the left-hand column of the Web site.
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