The 2002 farm bill, as it is commonly called, will be in effect from 2002 to 2007. Table 1 shows the loan rates, direct payment rates, and target prices for the life of the legislation. To see this and other tables referenced and a complete text of this article, go to the link at the end.

Payment eligibility:To receive payments on crops covered by the program (wheat, corn, grain sorghum, barley, oats, rice, upland cotton, soybeans, other oilseeds, and peanuts), a producer enters into an agreement for 2002-07.

Farmers are given almost complete flexibility in deciding which crops to plant. Participating producers are permitted to plant all cropland acreage on the farm to any crop, except for some limitations on planting fruits and vegetables. The land must be kept in agricultural uses (which includes fallow) and farmers must comply with certain conservation and wetland provisions.

Payment Limits: Payment limitations continue at $40,000 per person for direct payments. A limit of $65,000 is set for counter-cyclical payments. Marketing loan benefits are limited to $75,000. Producers with adjusted gross income of over $2.5 million, averaged over 3 years, are not eligible for payments, unless more than 75 percent of adjusted gross income is from agriculture.

Timing of Payments: A producer could elect to receive up to 50 percent of the direct payment beginning Dec. 1 of the year prior to the year the crop is harvested, and the balance of the direct payment in October of the year the crop is harvested. For counter-cyclical payments, a producer can receive up to 35 percent of the projected payment in October of the year the crop is harvested; an additional 35 percent beginning in February of the following year; and the balance after the end of the 12-month marketing year for the specific crop.

Three-Entity Rule: The three-entity rule is maintained. Under the three-entity rule, an individual farmer could receive up to twice the payment per year in total contract payments and marketing loan gains on three separate farming operations (a full payment on the first operation and up to a half payment for each of two additional entities).

Commodity Certificates: Authority for use of commodity certificates is retained. Commodity certificates could be purchased at the posted county price for wheat, feed grains, and oilseeds or at the effective adjusted world price for rice or upland cotton. The certificates are available so that producers could immediately acquire crop collateral pledged to the CCC for a commodity loan. Use of certificates was authorized in 1999.b>

Direct Payments: Fixed direct payments (DP) replace production flexibility contract (PFC) payments (sometimes referred to as AMTA payments). Payment rates for wheat, corn, barley, grain sorghum, oats, upland cotton, and rice are fixed in the 2002 Farm Act. (See Table 2.) Soybeans, other oilseeds, and peanuts are also covered under new rules established in the 2002 Farm Act.

Under this new program, farmers and eligible landowners receive annual fixed direct payments (DPs). The amount of the payment is equal to the payment rate of the applicable base crop multiplied by the payment acres times the payment yield for the farm. For example the payment for an individual rice farmer is

DPrice = (Payment rate)rice x (Payment yield)rice x [(Base acres)rice x 0.85]

To receive payments on crops covered by the program (wheat, corn, grain sorghum, barley, oats, rice, upland cotton, soybeans, other oilseeds, and peanuts), a producer enters into an agreement for 2002-07.

Program payment yields are unchanged for those crops previously covered under the PFC program. For soybeans and other oilseeds, which were added to the program, payment yields are the farm’s average yields for 1998 to 2001, multiplied by the national average yield for 1981-85, divided by national average yield for 1998-2001.

The payment limit on direct payments is $40,000 per person, per crop year, and the three-entity rule is retained. Under the three-entity rule an individual can receive a full payment directly and up to a half payment from two additional entities.

Fixed direct payments are not tied to production of specific crops, the amount of production, or the price of the crop. With planting flexibility farmers are not confined to producing crops for which they are receiving fixed decoupled payments. Planting decisions are based on expected market prices and variable costs of production.

Marketing Assistance Loans and LDPs: Loan rates for wheat, feed grains, and upland cotton are increased from previously legislated maximums. (See Table 3.) Loan rates for soybeans and minor oilseeds are reduced from previously legislated maximums. Loan rates are fixed in legislation. Also, marketing loan provisions were added for peanuts, wool, mohair, and honey.

Commodity loan programs allow producers of designated crops to receive a loan from the government at a commodity-specific loan rate per unit of production by pledging production as loan collateral. After harvest, a farmer may obtain a loan for all or part of the new commodity production.

Commodity loans may be repaid in three ways:

  1. At the loan rate plus interest costs (CCC interest cost of borrowing from the U.S. Treasury plus 1 percentage point);
  2. By forfeiting the pledged crop to the CCC at loan maturity; or
  3. At the alternative loan repayment rate

Loan program benefits can also be taken directly as loan deficiency payments. When market prices are below the loan rate, farmers are allowed to repay the commodity loans at a lower loan repayment rate.

Marketing loan repayment rates are based on local, posted county prices (PCPs) for wheat, feed grains, and oilseeds, or on the prevailing world market price for rice and upland cotton. PCPs are calculated and posted by the government each day the Federal government is open, except for minor oilseeds which are calculated weekly. Prevailing world market prices for rice and upland cotton are also calculated on a weekly basis.

When a farmer repays the loan at a lower PCP or prevailing world market price, the difference between the loan rate and the loan repayment rate, called a marketing loan gain, represents a program benefit to producers. In addition, any accrued interest on the loan is waived. When a marketing loan gain is received on a given collateralized quantity, that quantity is not eligible for further loan benefits.

Alternatively, eligible farmers may choose to receive marketing loan benefits through direct loan deficiency payments (LDPs) when market prices are lower than commodity loan rates. The LDP option allows the producer to receive the benefits of the marketing loan program without having to take out and subsequently repay a commodity loan. The LDP rate is the amount by which the loan rate exceeds the posted county price or prevailing world market price, and thus is equivalent to the marketing loan gain that could alternatively be obtained for crops under loan. When an LDP is paid on a portion of the crop, that portion cannot subsequently be used as collateral for another marketing loan or LDP.

The payment limit on marketing loan gains and loan deficiency payments is $75,000 per person, per crop year. The three-entity rule is retained. Under the three-entity rule an individual can receive a full payment directly and up to a half payment from each of two additional entities.

Commodity certificates can be purchased at the posted county price for wheat, feed grains, and oilseeds or at the effective adjusted world price for rice or upland cotton. The certificates are available for producers to use immediately in acquiring crop collateral pledged to the CCC for a commodity loan. These provisions enable producers who are facing payment limits an opportunity to benefit from the lower loan repayment rates.

Counter-Cyclical Income Support Payments: Counter-cyclical income support payments are a new program. This program was developed to provide an improved counter-cyclical income safety net to replace most ad hoc market loss assistance payments that were provided to farmers during 1998-2001. Payments are based on historical production and are not tied to current production.

Under this new program, counter-cyclical payments (CCPs) are available for covered commodities whenever the effective price is less than the target price. (See Table 4.) The payment amount is equal to the product of the payment rate, the payment acres, and the payment yield.

For example the payment for an individual rice farmer is determined as

Payment raterice = (Target price)rice –– (Direct payment rate)rice –– (Higher of commodity price or loan rate)rice

CCPrice = [(Base acres)rice x 0.85] x (Payment yield)rice x (Payment rate)rice

To receive payments on crops covered by the program (wheat, corn, grain sorghum, barley, oats, rice, upland cotton, soybeans, minor oilseeds, and peanuts), a producer enters into an agreement for 2002-07 during a one-time enrollment period.

The payment limit on counter-cyclical payments is $65,000 per person, per crop year, and the three-entity rule is retained. Under the three-entity rule an individual can receive a full payment directly and up to a half payment from each of two additional entities.

CCPs support and stabilize farm income when commodity prices are less than target.

To see the tables and a complete text of this article, click on the following link:

http://www.aragriculture.org/agfoodpolicy/DFP/select_provisions.asp. For more information, contact Dr. Bobby Coats, University of Arkansas Extension Service, rcoats@uaex.edu.

Sources of Information:

Congressional 2002 Farm Bill Short Summary http://agriculture.house.gov/fbconfsum.pdf

Congressional 2002 Farm Bill Comprehensive Summary http://agriculture.house.gov/2626fullsum.pdf

Full Farm Bill Text and The Narrative Statement of Managers http://agriculture.house.gov/fbconfrpt.htm

USDA's 1996 and 2002 Farm Bills Side-By-Side Comparison http://www.ers.usda.gov/Features/farmbill/