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September 30, 2002
FEFO 02-18
CASH FLOWS TIGHT ON MANY GRAIN FARMS THIS YEAR BECAUSE OF
REDUCED GOVERNMENT PAYMENTS
After four years of low grain prices, this summer's price upswing
has been welcomed by producers. However, higher prices may not
completely offset lower revenue caused by lower yields as a result
of adverse weather conditions. In addition, higher grain prices
will reduce the amount of farm program payments. There will be
little, if any, loan deficiency and counter cyclical payments
this fall. In addition, the new farm bill does not contain provisions
for market loss assistance and oilseed payments that have been
paid out the past few years. These payments came about due to
additional legislative action in response to low market prices.
Higher grain prices will offset much of the drop in farm program
payments for producers with average or above average yields. This
will not be case for producers with a shortfall in production.
Even for producers with normal yields, their cash flow will be
altered considerably this year due to the drop in farm program
payments. Some producers will need to sell 2002 crop production
this fall to make up for the cash flow shortfall. Others who had
been in the practice of prepaying expenses before the end of the
year may decide not to this year.
Changes in Farm Program Payments
The 1996 Farm Bill included provisions for production flexibility
contract (often called AMTA payments) payments and loan deficiency
payments (LDP's) or marketing loan gains. Ad hoc legislation resulted
in additional market loss assistance payments for the 1998 through
2001 crop years. Supplemental oilseed payments began with the
1999 crop.
The 2002 Farm Bill includes provisions for direct payments and
counter cyclical payments. The direct payments are similar in
concept to the AMTA payments from the 1996 Farm Bill except they
now include payments for oilseeds, such as soybeans. Direct payments
are guaranteed. The direct payment rate per bushel is fixed over
the life of the farm bill while the old AMTA payment rate changed
from year to year. The counter cyclical payments are similar to
deficiency payments which existed under farm bill legislation
prior to 1996. These payments are not made unless national average
marketing year prices are below a certain "trigger"
price level. The 2002 Farm Bill continues provisions for LDP's
and marketing loan gains similar to the 1996 Farm Bill, although
national and county loan rates have been revised.
Most producers took a 100 percent advance of the 2002 AMTA payments
early this year. The 1996 Farm Bill was to continue through 2002
but the new farm bill legislation was implemented this year. Once
producers select their base acre and yield options and sign up
for the program, producers can receive their direct payments.
Direct payments will be reduced by the amount of the advance AMTA
payment they took earlier this year. Most producers should receive
additional direct payments for 2002 since the direct payment rate
is slightly higher for corn and wheat than the AMTA payment rate.
In addition, they will receive a direct payment for soybeans.
Depending on their direct payment program yield, producers might
receive another $1 or $2 per program acre for corn and wheat and
$10 to $15 per program acre for soybeans.
Result of Higher Grain Prices on Farm Program Payments
Expected lower production of corn, soybeans and wheat has resulted
in significantly higher prices for these commodities. Higher prices
are going to result in lower or no government loan deficiency
and counter cyclical payments this year. As of September 30, market
prices for corn and soybeans were about 35 cents per bushel above
the level in which producers would start receiving LDP's. Wheat
prices were about $1.25 above the LDP price level. On September
27, USDA indicated that at this point in time they would not make
any advance counter cyclical payments for corn, soybeans and wheat
because the estimated marketing year price for these commodities
was above the price level that would trigger counter cyclical
payments. USDA will evaluate this again in February of 2003. A
significant drop in grain prices could result in some counter
cyclical payments in 2003. For producers with average or above
average yields, the higher market prices to a great extent will
offset the lower government payments. However, for producers with
a significant shortfall in production, the higher market prices
will not totally offset the lower counter cyclical payments and
the elimination of market loss assistance payments.
Comparison of Farm Program Payments for 2001 and 2002
Table 1 compares estimated farm program payments for 2001 and
2002 for a central Illinois grain farm. Total payments were estimated
for each type of program payment and then divided by all the acres
in the farm to calculate a per acre payment. The sample farm has
a 55 percent corn base and a corn program yield of 125 bushels
per acre. It has a yield of 49 bushels per acre for oilseed payments
and a soybean program yield for direct payments of 39 bushels
per acre. The yield in 2001 for loan deficiency payments was 168
bushels per acre for corn and 50 bushels per acre for soybeans.
This farm has a 50 percent corn - 50 soybean rotation.
In 2001, this farm received $16.42 per acre in AMTA payments
and $21.52 per acre in market loss assistance (MLA) and oilseed
payments. Loan deficiency payments totaled $44.17 per acre with
a LDP rate of 17 cents per bushel for corn and $1.25 per bushel
for soybeans. Total payments were $82.11 per acre.
For 2002, advance AMTA payments were $15.93 per acre. The advance
AMTA payments under the 1996 Farm Bill will reduce direct payments
under the 2002 Farm Bill. Remaining direct payments are estimated
at $1.16 per acre for corn and $6.71 per acre for soybeans. As
illustrated in the table, there will be no market loss assistance
and oilseed payments this year. Also, with the increase in grain
prices, no loan deficiency and counter cyclical payments are estimated.
Total estimated payments this year of $23.80 are 29 percent of
the amount paid in 2001. Differences in farm program payments
between 2001 and 2002 will vary from farm to farm depending on
a number of factors. These factors include base acres and yields
for different program crops, crop rotations, and actual yields.
Summary
Implementation of the 2002 Farm Bill combined with higher grain
prices will result in significantly less government payments to
producers this year. Lower payments are mainly due to higher prices
resulting in limited or no loan deficiency and counter cyclical
payments. A significant drop in grain prices could change that.
The fact that there will not be any market loss assistance and
oilseed payments this year is also a major factor in lower farm
program payments. For producers with average or above average
yields, the drop in farm program payments will be offset by higher
grain prices. Higher grain prices will not offset the drop in
farm program payments for producers with a significant drop in
production. For some producers, crop insurance proceeds will offset
some of the loss in revenue due to lower yields. The drop in farm
program payments also has cash flow and income tax planning ramifications
that producers need to examine.
Issued by: Dale
Lattz, Department of Agricultural and Consumer Economics
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