August 29, 2003
RECOGNIZING INCOME AND BUDGETING FOR COUNTER CYCLICAL PAYMENTS
The counter cyclical (CC) program authorized
under the 2002 Farm Bill can make payments for a program year across
two calendar years. For example, payments for the 2003 program year
can occur in 2003 and 2004. Many farmers prepare financial statements
at the end of the year. At year-end 2003, income from the 2003 program
year that will be received in 2004 should be recognized on the 2003
income statement, thereby causing a matching of revenue to expenses.
At year-end 2003, however, the amount of CC payments that will occur
in 2004 will not be known. Not knowing the amount of future CC payments
presents difficult in 1) determining how much revenue to recognize
on the 2003 income statement and 2) determining the amount of CC
payments to include on 2004 cash flow budgets. This newsletter addresses
these two issues. Before discussing these issues, the mechanics
and timing of CC payments are described because they have direct
impacts on revenue recognition and cash flow budgeting.
Mechanics of CC Payments
CC payments for a crop occur when the market
year average (MYA) farm price for the United States is below a trigger
price. For 2002 and 2003, trigger prices are $2.32 for corn, $5.36
for soybeans, and $3.34 for wheat. When the MYA price is below the
trigger price, the per bushel CC payment equals the trigger price
minus the higher of the MYA price or the loan rate. For example,
a CC payment for corn occurs when the MYA price is below the $2.32
trigger price. If the MYA price is $2.20, which is above the $1.98
loan rate, the per bushel CC payment equals $.12 per bushel ($2.32
trigger price - $2.20 MYA price). If the MYA price is $1.90, which
is below the $1.98 loan rate, the per bushel CC payment equals $.34
per bushel ($2.32 trigger price - $1.98 loan rate). There is a cap
on CC payments because the higher of the MYA price or the loan rate
is used in calculating the payments (see Table 1). For 2002 and
2003, caps are $.34 for corn, $.36 for soybeans, and $.54 for wheat.
For 2004 through 2007, caps are $.40 for corn, $.36 for soybeans,
and $.65 for wheat.
Timing of CC Payments
CC payments for the 2003 program year are based
on the 2003-2004 MYA prices. For corn and soybeans, MYA prices are
determined during the months from September, 2003 through August,
2004. This means that the per bushel rate for determining the 2003
CC payment will not be known with certainty until some time after
August, 2004. For wheat, the 2003-2004 MYA price is determined during the months from June, 2003
through May, 2004. This means that per bushel CC payment for 2003
will not be known for certain until sometime after May, 2004.
Farmers can elect to receive advance payments
before the actual CC payment is known. For corn and soybeans, advance
payments may occur in October during year of harvest and February
in the following calendar year. The final payment, if any, is made
in the fall following harvest. The 2003 CC payments for corn and
soybeans may occur in October, 2003, February, 2004, and in the
fall of 2004. Since MYA prices are not known for certain in October,
2003 and February, 2004, the U.S. Department of Agriculture (U.S.D.A.)
estimates MYA prices when determining advanced CC payments. Advance
CC payments in October will equal 35 percent of projected CC payments.
The February payment plus the October payment will not exceed 70
percent of the projected CC payment.
For example, suppose the U.S.D.A. uses a $2.12
projected MYA price to determine the advanced October, 2003 payment
for corn. The $2.12 projected price means that the projected CC
payment is $.20 ($2.32 trigger price - $2.12 projected season average
price). The advance CC payment in October equals 35 percent of the
$.20 projected payment, or $.07 per bushel. Expected prices could
change between October and February. If U.S.D.A. uses a $2.02 MYA
price to project CC payments for the February payment, the projected
CC payment is $.30. Seventy percent of this projected payment is
$.21 per bushel. The February payment will be $.14 per bushel ($.21
- $.07 received in October) if the U.S.D.A. decides to pay 70 percent
of total projected payments.
2002 CC payments
Producers have not received advanced CC payments
for 2002 corn, soybeans, and wheat programs because MYA prices have
been projected above trigger prices. As of this writing, final 2002
CC payments have not been estimated. Soybeans and wheat will not
have CC payments. There is a possibility that corn could have a
small 2002 CC payment of $.01 to $.02 per bushel.
Outlook for 2003 CC payments
Considerable uncertainty exists concerning the
level of 2003 CC payments. As of August, 2003, midpoints of U.S.D.A.
projected range of MYA prices are $2.20 for corn, $5.05 for soybeans,
and $3.40 for wheat. If these MYA prices are realized, per bushel
CC payments in 2003 will be $.12 for corn ($2.32 - $2.20), $.31
for soybeans ($5.36 - $5.05), and $.00 for wheat. However, the ranges
projected by U.S.D.A are quite large. Moreover, U.S.D.A. will change
projections throughout the marketing year. Currently, MYA prices
at the low end of the range would result in the maximum CC payment
and MYA prices at the high end would result in no CC payment.
To aid in determining the size of CC payments,
a Counter Cyclical Payment Tool has been developed and placed on
farmdoc (see http://www.farmdoc.uiuc.edu/marketing/CounterCyclical/CCP.html).
At the bottom of the sheet, two lines provide projections of CC
payments through the marketing year. The first is labeled “Projected
CCP based on USDA projected average price” and provides good
estimates during the first part of the marketing year. As the marketing
year progresses and more monthly prices are obtained, the second
projection labeled “Projected CCP based on estimated average
price to date” provides good CC estimates later in the marketing
The Counter Cyclical Payment Tool can be used
to estimate CC payments when preparing year-end financial statements.
This estimation is illustrated for a farmer preparing a 2003 income
statement and 2003 year-end balance sheet. Suppose the Counter Cyclical
Payment Tool indicates that a reasonable estimate of the 2003 CC
payment for corn is $.07. Some of this $.07 may have already been
received in an advanced payment in October 2003. If the October
payment is $.02, the farmer can expect to receive $.05 for the 2003
program year in 2004. The estimated $.05 per bushel times the base
CC bushels will be shown as a receivable on the balance sheet. It
would also be shown as revenue on the income statement. For many
farmers who prepare “cash-based accrual-adjusted” statements,
revenue recognition for CC payments will occur through an accruing
adjustment that shows the difference between account receivables
at the beginning and end of the year.
Cash Flow Budgeting
Many farmers will prepare cash flow budgets for
the 2004 crop year during the winter of 2003. At this point, cash
flow estimated for CC payments for the 2003 and 2004 program years
need to be made to include on the 2004 cash flow budget.
The 2003 payments can be estimated using the
Counter Cyclical Payment Tool. Suppose that this tool projects the
corn CC payment at $.10 per bushel and a $.02 advanced payment has
been made in October, 2003. This means that a good projection of
payments in 2004 is $.08 per bushel. Dividing this $.08 equally
between the February and fall payments is a reasonable procedure.
For corn and soybeans, there also could be an
advanced payment for the 2004 program year that will be made in
October, 2004. The Counter Cyclical Payment Tool will not provide
an estimate of CC payments for the 2004 crop at the beginning of
2003 when the cash flow budget is being prepared.
The range of the advanced 2004 CC payment, however,
is known. The maximum 2004 CC payment is $.40 for corn and $.36
for soybeans (note changes in target prices and loan rates (see
Table 1)). If CC payments are projected at the maximum, the October,
2004 payment for corn will be $.14 ($.40 maximum x 35 percent) and
$.13 for soybeans ($.36 for soybeans). Hence, ranges of advanced
payments are from $0 to $.14 for corn and $0 to $.13 for soybeans.
The appropriate end of the range depends on new
crop prices used in the projections. If new crop prices are below
loan rates, CC payments at the higher end of the range are appropriate.
If new crop prices are near trigger prices, CC payments near zero
Issued by: Gary
Schnitkey and Dale
Lattz, Department of Agricultural and Consumer Economics