June 11, 2002

NDSU Economist Outlines Farm Bill’s Counter Cyclical Payment Calculation

The counter-cyclical payments of the new farm bill are similar to the deficiency payments producers received under the 1990 farm bills, but there are important differences, according to a North Dakota State University economist.

"Like deficiency payments, counter-cyclical payments are made on a level of production based on history rather than actual current production. Also like deficiency payments, counter-cyclical payments are based on a target price," says Dwight Aakre, a farm management specialist with the NDSU Extension Service.

"Two important differences exist, however," Aakre says. "To be eligible for deficiency payments under earlier farm bills, it was necessary to plant the program crop base to that crop or, in some cases, to an acceptable substitute. Now there is no linkage between receiving the counter-cyclical payment and crops planted. Another important difference is there is no required acreage set-aside to qualify for counter-cyclical payments as was the case with deficiency payments."

The new farm bill, the Farm Security and Rural Investment Act of 2002, contains two forms of subsidy payments that are decoupled from production. One is the direct payment that replaces the Agricultural Market Transition Act (AMTA) payments producers have received since 1996. The second are the counter-cyclical payments, which were not in the previous farm bill.

Counter-cyclical payments are intended to replace the additional supplemental payments made from 1998 through 2001. Under the 1996 farm bill, loan rates were intended to be the income safety net and the AMTA payments were added income support, Aakre explains. However the safety net provided by loan rates proved to be too low politically. A sharp drop in market prices after 1997 resulted in emergency legislation. Payments resulting from this legislation were the market loss assistance payments and the supplemental oilseed payments.

The formula for calculating the counter-cyclical payment rate is the target price minus the direct payment minus the higher of either the national average loan rate or the 12-month national average market price. The result is the counter-cyclical payment rate per bushel.

To determine the total counter-cyclical payment per farm, multiply the acreage base times 85 percent times the payment yield for counter-cyclical payments times the rate per bushel. Compute this for each program crop base to determine the total for the farm. There is a payment limit of $65,000 on counter-cyclical payments. The three-entity rule also applies to this limit the same as for direct payments.

For example, consider a farm with a 1,000-acre wheat base and a 30-bushel payment yield and the 12-month marketing year average price is below loan. The total counter-cyclical payment for wheat for this farm would be calculated as follows: 1000 acres times 85 percent times 30 bushels equals 25,500 bushels times the payment rate per bushel of 54 cents. The payment rate would be calculated as follows: the target price of $3.86 minus the direct payment of 52 cents minus the national loan rate of $2.80 equals 54 cents. This farm would receive a total counter-cyclical payment for wheat of $13,770. The target price of $3.86 and the loan rate of $2.80 applies to the 2002 and 2003 crops. For the 2004 through 2007 crops, the target price will be $3.92 and the loan rate will be $2.75. The direct payment will remain the same.

"In theory the counter-cyclical payment makes up the difference between the target price and the market price," Aakre says. "In reality, however, that will not happen for several reasons." As stated, the counter-cyclical payment is decoupled, meaning the producer’s planted acreage and payment acreage along with actual yield and payment yield may be considerably different. Local loan rates vary considerably from the national loan rates and most North Dakota rates are below the national average. Also, the 12-month national average price may be significantly above what an individual producer actually receives for the crop.

Legislation specifies that USDA shall make the counter-cyclical payments as soon as practicable after the end of the 12-month marketing year for the covered commodity. If the secretary of agriculture determines a counter-cyclical payment will be required, USDA may pay up to 35 percent of the expected amount in October of the year the crop is harvested, 35 percent after Feb. 1 of the following year and the remainder as soon a practicable after the end of the 12-month marketing year.

###

Source: Dwight Aakre, (701) 231-7378, daakre@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu