June 14, 2002
COMPARISON OF GOVERNMENT FARM PROGRAM PAYMENTS FOR REPRESENTATIVE ILLINOIS
GRAIN FARMS UNDER THE 1996 AND 2002 FARM BILLS
Considerable discussion has arose concerning the level of government expenditures
estimated under the recently passed Farm Security and Rural Investment Act of
2002, hereafter referred to as the 2002 Farm Bill, as compared to the 1996 Federal
Agriculture Improvement and Reform Act (FAIR), the 1996 Farm Bill. Popular press
articles have indicated as much as a seventy percent increase in government payments
under the new bill. Generally, these comparisons have not taken in consideration
the additional marketing loss assistance payments that have been paid since 1998.
This paper looks at provisions contained in the Commodity Title of the new Farm
Bill and estimates payments for representative Illinois grain farms for 2001 under
the 1996 Farm Bill and the 2002 Farm Bill. Caution must be taken in reviewing
the results as these estimates are based on a current understanding of provisions
of the new Bill. Final regulations have not been released.
The 2002 Farm Bill replaces production flexibility contract payments with direct
payments. Market loss assistance and oilseed payments, which have been legislated
year-to-year since 1998, have been replaced to some extent by counter-cyclical
payments. Counter-cyclical payments are not guaranteed and are only paid when
commodity prices for a given marketing year are below a certain "trigger"
level. The 2002 Farm Bill continues the use of loan deficiency and marketing loan
payments similar to the 1996 Farm Bill. However, commodity loan rates are changing
which may have some impact on the level of these payments. More complete details
of the 2002 Farm Bill are contained in previous FEFO's
02-10 and 02-11.
Summary data from Illinois Farm Business Farm Management (FBFM) Association
records for northern, central and southern Illinois grain farms were used in the
study. Data used from the FBFM summaries included crop yield and acreage information
for 1998 through 2001. Current farm program base acreage and yield information
was used for Dekalb, McLean and Clay Counties respectfully to represent northern,
central and southern Illinois grain farms (Table 1). Government program payment
rates were based on provisions contained in the 1996 and 2002 Farm Bills. When
calculating estimated payments under the 2002 Farm Bill, provisions that allowed
updating of base acres and yields were used when these resulted in the maximum
payments. Maximum amounts for the counter-cyclical payments were also assumed.
Total farm production flexibility contract (AMTA) payments for 2001 were estimated
by multiplying farm size by current farm program base acre and yield information,
and payment amounts listed in Table 2 for 2001. This total was then multiplied
by 85 percent, which is the number of base acres producers received payment on.
Market loss assistance and oilseed payments were calculated in a similar manner.
Loan deficiency payments were based on the average effective Illinois LDP rate
times actual production. Total dollar estimates were then divided by the tillable
acres in the farm to get a per acre amount. These per acre amounts were then compared
with actual farm record data for validation purposes.
Estimated per acre payments for a northern Illinois grain farm were $20.33
for production flexibility contracts, $25.70 for market loss assistance and oilseed
payments and $43.69 for loan deficiency and marketing loan payments. This totals
$89.72 per acre. Total amounts were $84.29 per acre for central Illinois and $63.54
for southern Illinois (Table 3). Southern Illinois farms have lower payments primarily
due to lower corn acre and yield program bases.
Total farm direct payments for 2001 under the 2002 Farm Bill were estimated
by multiplying farm size by current or updated farm program base acre and current
program yield information and direct payment rates listed in Table 4. This total
was then multiplied by 85 percent, which is the number of base acres producers
received payment for.
Counter-cyclical payments were estimated by multiplying farm size by current
or updated farm program base acre and yield information and maximum counter-cyclical
rates (Table 4). This total was also multiplied by 85 percent, the amount of acres
that are eligible for payment. Assuming maximum counter-cyclical payments for
corn, soybeans, wheat and grain sorghum for the 2001 crop is somewhat problematic.
Counter-cyclical payments are determined by subtracting from the trigger price
the higher of the average marketing year price or the loan rate. We are currently
in the marketing year for these crops and do not know what the average will be
for the year. The average marketing year price for soybeans will be below the
loan rate resulting in the maximum CC rate. However, the average marketing year
price for corn, wheat and grain sorghum may not result in the maximum CC rate.
Loan deficiency payments were based on average effective Illinois LDP rates
adjusted for the change in the national loan rate times the actual production.
The change in loan rates resulted in a higher LDP rate for corn and a lower LDP
rate for soybeans. The net result was very little change in total LDP's. It is
uncertain how changes in loan rates and the way posted county prices are calculated
will effect the change in loan deficiency payments given the same market prices.
Total direct, counter-cyclical and loan deficiency payments were then divided
by the tillable acres in the farm to get a per acre amount.
Estimated direct payments that would have been made in 2001 under the 2002
Farm bill would have been $25.61 for northern Illinois grain farms, $22.22 for
central Illinois and $16.50 for southern Illinois (Table 5). Payments are higher
in northern Illinois due to higher corn base acres. Maximum counter-cyclical payments
would have been $29.29, $29.36 and $22.19 for northern, central and southern grain
farms respectively. Central and southern Illinois grain farms are able to narrow
the gap with northern Illinois grain farms regarding the level of counter-cyclical
payments due to the fact it is advantageous for them to use updated acreage and
yield bases where it isn't for northern Illinois grain farms. Northern Illinois
grain farms would have their corn base reduced too much to make it profitable
to update base yields. Total payments, including LDP's, are $101.85 per acre for
northern Illinois grain farms, $98.01 for central and $79.51 for southern Illinois
Table 6 lists the estimated total payments and the difference per acre for
northern, central, and southern Illinois grain farms for 2001 between the 1996
and the 2002 Farm Bills. The payments under the 2002 Farm Bill are $12.13, $13.72
and $15.97 higher than payments under the 1996 Farm Bill respectively for northern,
central and southern Illinois representative grain farms. This amounts to a 13.5%,
16.3% and 25.1% increase when 2002 Farm Bill estimated payments are compared to
the 1996 Farm Bill. However, one needs to remember that the counter-cyclical payments
are not guaranteed and are dependent on commodity price levels. On the other hand,
the 1996 Farm Bill payments include MLA and Oilseed payments which were not guaranteed.
One of the decisions producers will be faced with is whether or not to update
base acres. If acres are updated, producers will also need to decide whether to
update yields or not. There are two alternatives available for updating yields.
Which of all these alternatives that results in the maximum direct and counter-cyclical
payment may also depend on the payment rate for the counter-cyclical payments.
And this rate depends on the average marketing year price. FEFO 02-11 goes into
more detail about these alternatives.
Table 7 illustrates (in bold) the alternative that yields the highest direct
and counter-cyclical payments under the four alternatives producers have given
maximum, fifty percent of maximum and no counter-cyclical payments. As the results
illustrate, the alternative which yields the maximum payments can vary depending
on each farm's situation. For northern Illinois grain farms, using the current
base acres and yields resulted in the maximum payment for all levels of counter-cyclical
payments. This is due to the fact that these farms would have their corn based
reduced too much to make up for the increase in yield base.
For central Illinois grain farms, updating acres and using the 93.5% alternative
for updating yields was the best choice with counter-cyclical payments at the
fifty percent or maximum level. However, with no counter-cyclical payments, not
updating base acres and yields was the best choice. This is due to the fact that
direct payments still use the current program yield and updating acres resulted
in fewer corn base acres.
The best choice for southern Illinois farms was updating acres and using the
93.5% yield alternative for updating yields. These farms added corn base acres
when updating and also improved their corn base yield.
As one can see by these representative farm results, the decision on which
alternative to use when updating base acres and yields may not be easy. A spreadsheet
tool to help analyze this decision can be found at the University of Illinois
farmdoc website: http://www.farmdoc.uiuc.edu/manage/FarmBill/decisiontool.html
Issued by: Dale
Lattz and Gary
Schnitkey, Department of Agricultural and Consumer Economics