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The Farm Security and Rural Investment Act of 2002: what it means to you

RMA Journal, The, Dec, 2002 by Michael Boehlje, Todd A. Doehring

This article details the major provisions of the 2002 Farm Bill, then discusses its expected impact on income, cash flows, and credit risk of farmers as well as debt servicing, credit risk, and the underwriting policies of lenders.

The Farm Security and Rural Investment Act of 2002--commonly known as the 2002 Farm Bill--is expected to have a significant impact on the income and cash flow of most farm businesses. Consequently, the act will also have a major impact on farm lenders and credit requests.

Key Provisions

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The new legislation is a six-year bill that is effective for the years 2002 through 2007. As with the 1996 legislation, price support payments are partially decoupled from actual production, so at least part of the payments farmers receive are linked not to current output but to historical yields and acreages. Farmers have the option of maintaining their acreage bases and yields used for the 1996 Farm Bill or updating them based on production during the 1998-2001 crop years. The new program adds soybeans and other oilseeds as a program crop, thus making them eligible for direct payments and countercyclical payments as well as loan deficiency payments.

With respect to conservation programs, the new legislation expands the current Conservation Reserve Program and adds a Conservation Security Program, which will make payments to farmers who adopt various conservation practices. The payments under the Conservation Security Program will include incentive payments to encourage farmers to adopt conservation measures; these payments would be in addition to cost sharing to help defray the incremental cost of adopting the conservation practice.

Finally, a new dimension of the 2002 Farm Bill is a direct payment system for dairy farmers much like that for grain producers: The direct payments on milk production, calculated as 45% of the difference between a price of $16.94/cwt and the Class I Boston actual price for milk, are limited to the first 2.4 million pounds of milk produced by a unit annually. In essence, this program provides direct payments to smaller dairy producers (approximately 120 cows or less, depending on productivity) when milk prices are lower than the $16.94 target price.

The new Farm Bill includes three different payments for producers of program crops (corn, soybeans, wheat, cotton, rice, oilseeds, grain sorghum, oats, barley).

1. The loan deficiency payment (LDP) occurs if market prices are below the loan rate.

2. The countercyclical payment (CCP) is based on historical production and is made to producers if market prices are below target prices.

3. A direct payment (DP), while also based on historical production, is fixed and does not depend upon market prices.

Figure 1 compares the payment mechanisms under the old (1996) and new (2002) legislation. Basically, the new legislation formalizes the supplemental assistance that was part of the 1996 Farm Bill in the form of countercyclical payments and redefines the former AMTA payments as direct payments. In reality, the payments for corn production under the new Farm Bill, compared with previous legislation including supplemental assistance, will increase the per-acre payments modestly (for example, somewhere around $5-15 per acre for corn/soybean farms). Figure 2 shows the sensitivity of the per-acre increases (2002 compared with 1996) for corn, depending on prices and yields.

Table 1 summarizes the payment rates, target prices, and loan rates for the program crops covered under the old and new Farm Bill. The result of the three component price support systems under the new legislation is a truncation of the effective prices that farmers will receive for their crops. As reflected in Figure 3, farmers will effectively receive around $2.42-2.45 for corn under the new Farm Bill. However, note that when market prices are below the target price, price improvement does not result in any additional cash or income in the farmer's pockets, but instead only reduces the size of the LDP or countercyclical payment. Thus prices must rise above the target price for farmers to have more income or cash for debt servicing than they have when prices are low under the 2002 Farm Bill provisions. In fact, that is the exact situation faced this year by many corn/soybean farmers in the Midwest. Market prices have risen, and for those who are not facing drought conditions and yield reductions, their income s will improve little, because higher market prices mean lower government payments. For those who harvest a drought-induced short crop, incomes will be reduced, not only because of the reduced yields but also because of the loss of the LDP and CCP.

Impact on Farmers and Lenders

So what does this new Farm Bill mean to farmers and lenders? The answers to eight frequently asked questions highlight the Act's impact.

1. Will the farm program increase farmers' cash incomes? In general, crop farmers' incomes will increase modestly under the 2002 Farm Bill, probably about $5-15 per acre for corn/soybean farms when compared with previous legislation, which includes all government program payments as well as emergency payments. An important difference between the 2002 bill and the 1996 bill is that the payments are more certain--emergency legislation is no longer needed each year to make supplemental farm program payments.

Financial Services Industry

The Farm Security and Rural Investment Act of 2002: what it means to you

RMA Journal, The, Dec, 2002 by Michael Boehlje, Todd A. Doehring

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