| August 11, 2005: In
this third of a series of columns looking at the reasons that
might be used to justify the elimination of various components
of the current farm program, we want to take a look at the counter-cyclical
payments. This examination is triggered by three factors: (1)
the persistent call by many for the elimination of agricultural
subsidies, primarily in the U.S. and E.U., because these subsidies
are said to stimulate overproduction resulting in low prices
that harm farmers in less developed countries, (2) President
Bush’s call for developed countries to eliminate the $112
billion a year that they spend on subsidizing their farmers,
and (3) the U.S. budget crisis that puts farm spending at risk.
We are not suggesting that the possibility of getting both
the U.S. and the E.U. to eliminate their farm subsidies as
a part of the WTO negotiations is very likely. However in
late 1995 and early 1996, we did not think that the market
oriented reforms of Freedom to Farm had much of a chance of
being adopted either.
But for now our approach is very limited. We are only looking
at one government payment component of the U.S. farm program
at a time - this week its counter-cycle payments - and we
are only focusing on arguments that might be used to justify
their elimination, separate from other considerations. Thus,
we are not considering the overall financial impact of eliminating
the farm programs, the probability of such an elimination
occurring, or the possible need to replace existing government
payment instruments with other programs.
Counter-cyclical income support payment program is a new
program with the 2002 Farm Bill. This program was developed
to replace most of the ad hoc emergency payments that were
made to farmers during 1998-2001 because of unforeseen price
declines and yield shortfalls. The CCP payments are based
on historical production and are not tied to current production.
The covered crops include: wheat, corn, grain sorghum, barley
oats, rice, upland cotton, soybeans, other oilseeds and peanuts.
CCPs are paid whenever the effective price is less than the
target price. The effective price is calculated by adding
the higher of the commodity price or the loan rate to the
direct payment rate. The difference between the target price
and the effective price is called the payment rate. This payment
rate is then multiplied by 85% of the base acres times the
payment yield to determine the payment the producer receives.
Aside from adjusting for the direct payment rate, the major
difference between counter-cyclical payments and the old target
price program prior to 1996 is with CCP, the farmer does not
have to plant the crop to be eligible for the payment.
The CCPs are paid in three installments: 35% in October of
the year when the crop is harvested, 70% less the first payment
after February 1, and the final payment as soon after the
end of the crop year as is practicable.
Farmers were allowed to keep the base acres they had under
the 1996 Farm Bill plus the average oilseed plantings in 1998-2001,
so long as the base acres did not exceed available cropland.
Or, they were eligible to update base acres to reflect the
4-year average of acres planted, plus those “prevented
from planting” due to weather conditions, during the
1998-2001 crop years. The same base acres had to be used for
both direct payments and counter-cyclical payments.
For payment yields, farmers had three choices: (1) use the
program yields they had under the 1996 Farm Bill, (2) add
70% of the difference between the program yields and the farm’s
average yields for the period 1998-2001 to the program yields,
or (3) update yields to 93.5% of the 1998 average yields.
The payment limit for CCPs is $65,000 per person, per crop
year, and the three entity rule is retained. Producers with
an adjusted gross income over $2.5 million averaged over 3
years are not eligible for payments, unless more than 75%
of their adjusted gross income is from agriculture.
While the direct payments are decoupled from both production
and price, the CCPs are only decoupled from production. This
is an attractive feature of the CCPs when compared to the
direct payments. The direct payments are paid whether prices
and farm incomes are high or low, while CCPs are only paid
when prices (and presumably farm income) are low.
The CCPs allow farmers to retain planting flexibility with
the exception of new plantings of fruits and vegetables. Thus,
in a given year, it is possible for a producer to receive
CCPs for a particular crop even though they did not plant
that crop in the year the CCPs were received.
CCPs reduce farmers’ production risk by assuring that
they will receive a minimum level of revenue as long as they
keep the land in agricultural use (including fallow), and
comply with certain conservation and wetland provisions. They
also, as intended, eliminate or reduce the need for Congress
to appropriate ad-hoc emergency payments to offset depressed
prices.
One risk scenario CCPs don’t provide protection for
is one that may occur this year. If the drought in Illinois,
parts of Missouri and surrounding areas results in significant
corn production loss in those areas, farmers elsewhere may
enjoy higher prices, eliminating the need for corn CCPs. Thus,
the drought affected farmers would lose out on both the higher
prices and the CCPs.
To the extent that the CCPs, when added to direct payments
and market receipts, exceed the cost of production, it can
be argued that they contribute to dumping in foreign markets.
CCPs moderate price valleys caused by weather and other random
effects on domestic yields and foreign demand. But as is the
case with most government payment programs, CCPs do not address
aggregate crop agriculture’s basic market problem: its
ability to “right” itself after being capsized
by persistently low prices.
When agriculture’s ability to produce grows faster
than demand, prices fall. But the low prices do not cause
consumers to increase consumption nor farmers to reduce total
output produced by very much. Thus, the usual market mechanism
that should pull-up crop-wide depressed prices using agriculture’s
own bootstraps does not work as well or as quickly as it does
in other sectors.
Government payment programs, including the counter cyclical
payment program don’t address the rebalancing of market
quantities issue; they only compensate for the low prices
after-the-fact.
Daryll E. Ray holds the Blasingame Chair of Excellence
in Agricultural Policy, Institute of Agriculture, University
of Tennessee, and is the Director of UT's Agricultural Policy
Analysis Center (APAC). (865) 974-7407; Fax: (865) 974-7298;
dray@utk.edu; http://www.agpolicy.org.
Daryll Ray's column is written with the research and assistance
of Harwood D. Schaffer, Research Associate with APAC.
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