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June 5, 2002                                                                                                          
FEFO 02-11

UPDATING ACRES AND YIELDS UNDER THE FARM SECURITY AND RURAL INVESTMENT ACT OF 2002

The Farm Security and Rural Investment Act of 2002, hereafter referred to as the 2002 Farm Bill, includes provisions authorizing direct and counter-cyclical payments for 2002 through 2007 crops. These payments will be determined using base acres and program yields. Farmers and landowners have one-time decisions to make concerning these acres and yields. They either can "update" acres to reflect acres from 1998 through 2001 or they can "not update" and have acres based on those used to calculate Agricultural Marketing Transition Act (AMTA) payments. If base acres are updated, farmers also can update yields used to determine counter-cyclical payments.

This paper provides information on updating decisions and is divided into five sections:

1. The "Commodity Payments under the 2002 Farm Bill" section describes direct, counter-cyclical, and marketing loan payments that will occur under the 2002 Farm Bill.

2. The "Choices for Updating Acres" section describes how acres will be determined under updating and not updating alternatives.

3. The "Choices for Updating Yield" section described the three alternatives for determining yields used in calculating counter-cyclical payments when acres are updated.

4. The "Summary of Alternatives" section summarized acres and yield choices into four, mutually exclusive alternatives.

5. The "Selecting the Appropriate Alternative" section suggests a method for selecting between the four alternatives. Examples of the method are presented. The example illustrates that the appropriate updating alternative for corn and soybean farmers depends on what happens to corn base acres as a result of updating. Updating acres and partially updating yields generally will result in higher governmental payments when corn base acres are stable or increase as a result of updating. Not updating acres often will result in higher government payments when corn base acres decrease by more than 10%. Which option results in higher government payments often is indeterminate when base acres decrease by less than 10%. The 10% break-point varied from farm-to-farm.


Commodity Payments under the 2002 Farm Bill

The 2002 Farm Bill includes three types of payments for program crops: Direct payments, counter-cyclical payments, and loan deficiency/marketing loan payments.

Direct payments: Direct payments are available for corn, soybeans, wheat, oats, grain sorghum, barley, upland cotton, and rice. Payments will be made for 2002 through 2007 crops and the payment will be the same in each year. Payments for a crop on a farm will equal:

Per bu. payment rate x program yield x (base acres x .85)

Per bu. payment rates are shown in Table 1. Program yield is further defined in the "Choice for Updating Yields" section of this paper. Base acres are further defined in the "Choices for Updating Base Acres" section of this paper. The .85 occurs because direct payments are received on 85 percent of the base acres. A farm with corn having a 120 bu. program yield and 100 base acres has $2,856 of payments ($.28 payment rate x 120 bu. program yield x (100 base acres x .85)). The $2,856 payment will be received each year from 2002 through 2007. Advance direct payments are scheduled to be issued in December of the year prior to harvest. The final payment will be made in the October the year of harvest.

Direct payments under the 2002 Farm Bill are similar to Agricultural Marketing Transition Act (AMTA) payments under the 1996 Farm Bill. The major difference is that the 2002 Farm Bill includes payments for soybeans while the 1996 Farm Bill did not include soybean payments.

Counter-Cyclical Payments: The 2002 program implemented a counter-cyclical (CC) program for all program crops. CC payments for a crop on a farm equal:

(Trigger price - higher of loan rate or season-average price) x yield x (base acres x .85)

The trigger price equals a target price minus the direct payment rate. The season-average price is calculated by U.S. Department of Agriculture for twelve months, with the first month occurring near the beginning of harvest. The yield used in calculating CC payments will be discussed in detail in the following "Choices for Updating Yields" section. This yield is an important variable that farmers have to make a decision about.

CC payments are illustrated for a farm having corn. This farm has 100 base acres of corn with a yield for calculating CC payments of 120 bu. During 2002 and 2003, corn has a target price of $2.60 per bu. and a direct payment rate of $.28 per bu., giving a trigger price of $2.32 ($2.60 - .28). The loan rate is $1.98 per bu. for 2002 and 2003. CC payments are illustrated for a season average price below the loan rate. In this case, CC payments are $3,468 ($3,468 = (2.32 trigger price - 1.98 loan rate) x 120 yield x (100 base acres x .85))).

In the above example, each bu. of corn receives a payment of $.34 per bu. ($2.32 trigger price - 1.98 loan rate). This is the maximum CC payment for corn. The maximum CC payment occurs whenever the season-average price is below the loan rate. In these cases the loan rate is used in the formula for calculating CC payments. Maximum per bu. CC payment is $.36 per bu. for soybeans and is $.54 per bu. for wheat (see Table 2).

 

 

CC payments will be less when the season-average price is above the loan rate. In these cases, the season-average price is used in calculating CC payments. CC payments will equal zero whenever the season-average price is above the trigger price. CC payments will vary from year-to-year. In low price years, CC payments will be closer to the maximum. In high price years, CC payments will be closer zero.

Table 3 shows CC payments given season-average prices that occurred between 1991 through 2000. Payments in Table 3 are illustrative only. Had a CC program been in place for the years between 1991 through 2000 the season-average prices would differ from those shown in Table 3. The existence of the CC program would influence supply and demand thereby changing prices. Table 3, however, illustrates that CC payments likely will range from zero up to their maximum rates.

 

Target prices and loan rates will vary across the sixyears of the 2002 Farm Bill (see Table 4). For corn, target price will increase from $2.60 in 2002 and 2003 up to $2.63 in 2004 through 2007. Loan rate will decrease from $1.98 in 2002 and 2003 down to $1.95 in 2004 through 2007. As a result, the maximum CC payment for corn will increase from $.34 per bu. in 2002 and 2003 up to $.40 in 2004 through 2007. Maximum CC payment for soybeans will stay constant at $.36 per bu. across all six years. Maximum CC payment for wheat will increase from $.54 per bu. up to $.65 in 2004 through 2007.

 

In some respects, CC payments replace the Market Loss Assistance (MLA) payments that occurred between 1998 through 2001. The 2002 Farm Bill formally legislates these payments in the 2002 Farm Bill.

Terminology concerning CC payments is not standard. In the above discussion, we defined a trigger price equal to the target price minus the direct payment rate. Other sources define an effective price equal to the direct rate plus the higher of the loan rate and the season-average price. These sources then compare the effective price to the target price when computing CC payment. Either method results in the same CC payment. However, differences in terminologies likely will result in confusion.

For corn and soybeans, CC payments will be made in installments occurring in October in the year of harvest, February, and October in the year after harvest. For wheat and oats, CC payments will be made in installments occurring in October after harvest, February, and July.

Loan Deficiency Payment (LDP) and Marketing Loan provisions: The 2002 Farm Bill includes LDP and Marketing Loan provisions that are similar to the 1996 Farm Bill. Updating decisions do not influence LDP and Marketing Loan payments. Therefore, these provisions are not further discussed in this paper.



Choices for Updating Acres

Farmers can choose either to not update or update acres.

Do not update acres: A farmer can choose to retain base acres used to calculate AMTA payments under the 1996 Farm Bill. These acres, hereafter referred to as AMTA acres, exist only for program crops under the 1996 Farm Bill (e.g., corn, wheat, and oats). Soybeans and other oilseeds do not have base acres under the 1996 Farm Bill. Therefore, base acres for soybeans will need to be added for the 2002 Farm Bill. Soybean base acres will equal the average of soybean acres planted or prevented planted from 1998 through 2001, as long as adding base acres for soybeans does not result in a higher number of program acres than were grown in 1998 through 2001. When total AMTA acres plus soybean base acres exceed total program acres, base acres for one or more crops will need to be reduced to stay within the total program acre limit.

 

Adding base acres is illustrated for a farm that has previous corn and soybean acreages shown in Table 5. Between 1998 through 2001, this farm averaged 50 acres of corn and 50 acres of soybeans. Program crops averaged 100 acres between 1998 through 2001.

Base acres will depend on the farm's current corn AMTA acres. If this farm has 50 corn AMTA acres, eligible soybean acres per year equal 50. Minimum soybean acres equals 45 acres, which equals the average of 40 (planted acres in 1998), 50 (eligible acres in 1999), 40 (planted acres in 2000), and 50 (eligible acres in 2001. Given minimum soybean acres, total program acres is 95 acres (50 for corn and 45 for soybeans). This farm can have up to 50 acres of base soybean acres. Increasing soybean acres requires a reduction in corn acres. More information on base acre choices is provided in Schnitkey, Gary, "Options for Determining Base Acres Under the 2002 Farm Bill", Illinois Farm Economics: Facts and Opinions, Department of Agricultural and Consumer Economics, University of Illinois, Fefo 02-16. August 30, 2002 (http://www.farmdoc.uiuc.edu/manage/newsletters/fefo02_16/fefo02_16.html).

Because corn acres usually have higher government payments than soybean acres, choosing the highest number of corn acres almost always results in the highest government payments. Hence, choosing 50 base acres for corn and 45 acres for soybeans will be the most economical alternative for the above example farm in most circumstances.

Update base acres: Under updating, base acres equal average acres planted and prevented planted for the years between 1998 through 2001. For example, the farm shown in Table 5 plants 60 acres of corn and 40 acres of soybeans or vice versa. Average acres for both corn and soybeans over the four years equal 50 acres. Therefore, this farm will have 50 base acres of corn and 50 acres of soybeans if acres are updated.


Choices for Updating Yield

Acreage updating choices impact choices for updating yields. If acres are not updated, no yield choices are available. Both direct payments and CC payments will be based on program yields (defined below). If acres are updated, direct payments still will be based on program yields; however, there will be three options for specifying yields for CC payments. Under updating, CC payments can be based on:

1. Program yields,
2. Updated yields using the "70% Difference" method, and
3. Updated yields using a "93.5%" method.

A farmer must use only one of these updating methods for all crops on the farm. Choices are defined in the following three sub-sections.

Program yields: Program yields for corn, wheat, and oats (i.e., any program crop under the 1996 Farm Bill) will equal the program yields used to calculate AMTA payments under the 1996 Farm Bill. The 1996 Farm Bill did not include yields for soybeans and other oilseed crops; therefore, these yields must be calculated. Program yield for soybeans equals the average of soybean yields from 1998 through 2001 times .7814. The .7814 equals the ratio of national soybean yields between 1981 through 1985 to national yields from 1998 through 2001. This adjustment keeps soybean program yield on a comparable base with corn and wheat yields. If a farm yield from 1998 through 2001 is below 75% of the county yield, the farm yield can be replaced by 75% of the county yield.

Table 5 shows example soybean yields for a McLean County, Illinois farm. All of these yields are above 75 percent times the county average; therefore, they are all used in calculating the average yield. The average yield of soybeans from 1998 through 2001 is 49 bu. This farm will have a program yield of 38 bu. (49 bu. x .7814).

Updating yields using the "70% Difference" method: Under this method, updated yields equal the program yield plus 70% of the difference between the average yield from 1998 through 2001 and the program yield. When a farm has a yield below 75% of the county yield, 75% of the county yield will replace the farm yield in calculating the average yield form 1998 through 2001. Soybean yields in Table 5 result in a program yield of 38 bu. and an average yield from 1998 through 2001 of 49 bu. Under the 70% difference method, this farm will have an updated yield of 46 bu. (38 program yield + .7 x (49 average yield - 38 program yield)).

Updating yields using the "93.5%" method: Under this method, updated yields equal 93.5% of the average yield from 1998 through 2001. When calculating the average yield from 1998 through 2001, the 2002 Farm Bill allows a farm yield for a given year to be replaced by 75% of the county average yield when 75% of the county yield is greater than the farm yield. For soybeans shown in Table 5, the 93.5% method results in an updated yield of 46 bu. (49 bu. average yield x .935).

Corn Example: Partially updating methods are illustrated for the corn yields shown in Table 5. None of the corn yields shown in Table 1 are below 75% of the county yield; therefore, all are used in calculating the average yield of 156 bu. The farm in Table 5 has a program yield of 125 bu., near the average of AMTA yields in McLean County. The 70% difference method results in an updated yield of 147 bu. (125 AMTA yield + .70 x (156 bu. - 125 bu.). The 93.5% method results in an updated yield of 146 bu (156 bu x .935).

Government payments are maximized by choosing the updating method that gives the highest yields. For the example in Table 5, the 70% method results in the highest yield for corn (147 bu for the 70% difference method compared to 146 bu. for the 93.5% method). Both methods result in the same soybean yield. This farm should choose the 70% difference method to maximize government payments. The choice becomes more difficult when one crop has a higher yield using one method while another crop has a higher yield using another method.



Summary of Alternatives and General Guidelines

Acre and yield updating choices can be summarized as four alternatives (see Figure 1). One, base acres are not updated. When acres are not updated, program yields are also used to determine counter-cyclical payments. Two, farmers can choose to update acres and use program yields in determining counter-cyclical payments. Three, farmers can update acres and use the "70% difference" method to update yields. Four, farmers can update acres and use the 93.5% method to update yields. For all alternatives, program yields are used to calculate direct payments.

To give general guidance in selecting between the alternatives, direct and maximum CC payments are given for a base acre of corn, soybeans, and wheat in Table 6. Payments are shown for DeKalb, McLean, and Marion Counties using average yields for each county. In Panel A, for example, the AMTA yield for DeKalb County is 130 bu. The 130 bu. equals the average AMTA yield in DeKalb County. The 157 bu. average yield equals the average of DeKalb County yields from 1998 through 2001. Program and updated yields are calculated using the AMTA and average yield. Maximum CC payments then are calculated using rates for 2002 and 2003.

Several general conclusions can be drawn from looking at payments in Table 6:

1. Corn acres generally have higher government payments than wheat. Wheat acres generally have higher government payments than soybeans. In DeKalb County, direct payments for corn are $30.94 for corn, $23.87 for wheat, and $14.21 for soybeans (see Table 6). The same trends hold for maximum CC payments. The other counties also have the same trends. This suggests that alternatives that have higher corn base acres than wheat or soybeans will be preferred to alternatives with lower corn base acres.

2. Methods that update yields result in higher CC payments per acre. In DeKalb County, for example, the maximum CC payment for corn is $50.66 when yields are updated using the 70% difference method. For the cases shown in Table 6, the 70% difference method results in the highest CC payments. This suggests that farmers will almost always prefer to update yields. When yields are updated, the 70% method often results in the highest yields and highest CC payments.

In some cases, farmers will have to trade off the corn base acre for the ability to update yields. For example, some farms have a relatively high corn base compared to the current corn plantings. Updating acres will result in the loss of corn base acres, suggesting that the farm maintain its current base acres. However, maintaining current base acres will not allow a farmer to update yields, meaning that CC payments will be lower than when base acres are updated.


Selecting the Appropriate Alternative

In examining which alternative is best for a farm, we suggest calculating total direct and CC payments for the four alternatives under three pricing scenarios:

  1. Using the maximum CC payment. In this case, the direct payment is added to the maximum CC payment to arrive at total payments. This scenario gives payments when season-average prices are below loan rates.
  2. Using 50% of the maximum CC payment. In this case, the direct payment is added to 50% of the maximum CC payment. This scenario gives payments when season-average prices are halfway between loan rates and the trigger prices.
  3. Using 0% of the maximum CC payment. In this case, the direct payment is the total payment. This scenario gives payments when season-average prices are above trigger prices.

If one alternative gives the highest government payments under all pricing scenarios, it will almost always give the highest government payments in all years. If the alternative with the highest payment varies, then a farmer will have to determine which pricing scenario is most likely to occur. An Excel spreadsheet that automates these comparisons is available at farmdoc (see http://www.farmdoc.uiuc.edu/manage/farmbill/decisiontool.html). These comparisons are illustrated in the following sub-sections for situations common to Illinois.

Corn and soybean farms with constant corn base acres when base acres are updating: Many Illinois farms have planted corn and soybeans in a 50-50 rotation over the last 20 plus years. In these cases, base acres will stay relatively constant whether base acres are updated or not updated.

Calculations are illustrated for a farm that currently has 50 AMTA corn acres. This farm has averaged 50 acres of corn and 50 acres of soybeans for the years between 1998 through 2001. If acres are not updated, the farm will have 50 base acres of corn and 50 acres of soybeans. If acres are updated, base acres will not vary from the case where acres are not updated.

Total payments are shown for a DeKalb County farm with yields exactly like those shown in Table 6. If acres are not updated, total direct and CC payments are $4,718 per farm when the maximum CC payment is received, $3,488 when 50% of the maximum CC payment is received, and $2,258 when no CC payment is received (see Table 7). Updating base acres using the 70% method results in the highest total payment in all pricing scenarios. This is the alternative that should be chosen to maximize government payments.


Corn and soybean farms with declines in corn base when base acres are updated: Some farms, particularly those that use to raise livestock, will have base corn acres drop under base acre updating. In many of these cases, there will be a tradeoff. Not updating acres will results in higher direct payments, which are certain no matter the season-average price. However, updating acres allows yield to be updated, which will result in higher counter-cyclical payments.

This tradeoff is illustrated for a DeKalb County farm with 55 base corn acres and 45 base soybean acres with no update in base acres. Updating results in 50 base acres of corn and 50 base acres of soybeans. In this case, the 70% difference method results in the highest payment when the maximum CC payment is received ($5,115 (see Table 8)). Not updating base acres results in the highest payment when no CC payment is received ($2,341 (see Table 8)).

In this case, the farmer should choose either to update acres using the 70% difference method or not update base acres. The choice will depend on price expectations.


Corn and soybean farms with declines in corn base when base acres are updated: Table 9 shows the DeKalb County farm when base acres decline by 10 acres under updating. This farm has 60 base corn acres before updating and 50 acres after updating. As can be seen in Table 9, not updating base acres results in the highest total payments under all payment scenarios. This means that the "do not update base acres" alternative should be chosen to maximize government payments.



Summary

For farmers with only corn and soybean base acres, updating decisions depend on what happens to corn base acres as a result of updating. Updating acres and partially updating yields generally will result in higher governmental payments when corn base acres are stable or increase as a result of updating. Not updating acres often will result in higher government payments when corn base acres decrease by more than 10%. Whether updated or not updated acres and yields results in higher government payments often are indeterminate when base acres decrease by less than 10%. The 10% break-point between updating and not updating is fairly robust across "average" county conditions. However, farmer should calculate these breakpoints for their own farms given the importance of this decision.

Farms that have slight decreases in corn base will likely update acres and partially update yields because of the expectation of continued low prices. This seems like a reasonable assumption given current market conditions. However, prices can change quickly. Few forecasters projected the low prices that occurred since the signing of the 1996 FAIR Act.

Issued by: Gary Schnitkey and Dale Lattz, Department of Agricultural and Consumer Economics

Department of Agricultural and Consumer Economics    College of Agricultural, Consumer and Environmental Sciences
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