2002 Farm Bill

Allan Gray and Chris Hurt, Purdue University

2002 Farm Bill

Decision Time

Allan Gray and Chris HurtPurdue University


2002 Farm Bill• 6 Year bill• Costs $180 billion over 10 years• Almost a $6.0 billion dollar

increase in annual spending for program crops

• Similar to emergency legislation spending from 1997-2001

• $17 billion in additional spending for Environment


What is in the Commodity Title of the Bill?

• Three Basic Support Mechanisms– Marketing Loans– Direct Payments– Counter-Cyclical Payments

• Soybeans and Peanuts become complete program crops

• Lentils, small chickpeas, wool, mohair, and honey are new commodities

• Dairy gets a counter-cyclical program


Comparison of Loan Rates1996 Farm

Bill2002 Farm

Bill2002-2003

2002 Farm Bill

2004-2007

Wheat ($/bu.) 2.58 2.80 2.75

Corn ($/bu.) 1.89 1.98 1.95

Sorghum ($/bu.) Relative to Corn 1.98 1.95

Cotton ($/lb.) 0.5192 0.52 0.52

Rice ($/cwt.) 6.50 6.50 6.50

Soybeans ($/bu.) 5.26 5.00 5.00


Comparison of DirectPayment Rates

1996 Farm Bill (2001)

2002 Farm Bill

Wheat ($/bu.) .46 .52

Corn ($/bu.) .26 .28

Sorghum ($/bu.) .31 .35

Cotton ($/lb.) .057 .067

Rice ($/cwt.) 2.05 2.35

Soybeans ($/bu.) N/A .44


Counter-Cyclical Payment Rates

2002 Farm Bill2002-2003

2002 Farm Bill2004-2007

Wheat ($/bu.) 3.86 3.92

Corn ($/bu.) 2.60 2.63

Sorghum ($/bu.) 2.54 2.57

Cotton ($/lb.) .724 .724

Rice ($/cwt.) 10.50 10.50

Soybeans ($/bu.) 5.80 5.80


Computing Payments• Direct Payments (DP)

– DP per unit X Base acres X DP yield X 0.85 = Direct Payment

• Counter Cyclical Program Payments (CCP)– Target Price – DP per unit – higher of (loan rate

or market price) = CCP per unit– CCP per unit X Base acres X CCP payment yield

X 0.85 = CCP Payment• Marketing Loan Payments (LDP)

– (Loan Rate – Market Price)*Current Production


$2.52

$ .03$ .21 $ .00

$2.28$1.98$2.60

$2.81$2.46Total

$ .00$0.34 ($0.27)Counter Cyclical

$ .21$ 0.28 ($0.21)Direct $ .00$ .29LDP

$2.60$1.69Market Price$1.98$1.98Corn Loan$2.60$2.60Corn Target

Payments Under Various Market Price Scenarios


$.695$ .046

$ .049

$ .00

$.60

$.52

$.724

$.789$.678Total $ .00$0.14($0.109)

Counter Cyclical

$ .049$ 0.0667 ($0.049)Fixed

$ .00$ .10LDP

$74$.42Market Price

$.52$.52Cotton Loan

$.724$.724Cotton Target



$3.63

$ .27$ .38 $ .00

$3.00$2.80$3.86

$3.65$3.61Total

$ .00$0.74 ($0.59)Counter Cyclical

$ .38$ 0.52 ($0.38)Fixed $ .00$ .20LDP

$4.00$2.60Market Price$2.80$2.80Wheat Loan

$3.86$3.86Wheat Target



Price Impact of Program

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90Market Price

Govt Price

EffectivePrice

MarketPrice

$2.32 = $2.60 - .28


Components of Final Price

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20$1

.50

$1.6

0

$1.7

0

$1.8

0

$1.9

0

$2.0

0

$2.1

0

$2.2

0

$2.3

0

$2.4

0

$2.5

0

$2.6

0

$2.7

0

$2.8

0

Market Price

Mar

ket +

Gov

ernm

ent

$2.60-.28 = $2.32

Loan =$1.98

Market Price

Direct Payment

CCP’s

LPP’s


Summary of Risk Impacts of 2002 Farm Bill

• Potential to substantially reduce downside cash flow risk

• Does not do a good job of protecting against yield drops


Impact of Yield Drops on Total Revenue

20%

40%

60%

80%

100%

120%

140%

90.00 92.00 94.00 96.00 98.00 100.00

National Yield Index

% C

hang

e in

Rev

enue

Market Receipts Government Payments Total Revenue


Impact on Revenues from Various Drops in Farm Level Yields When National Yields are Down 10%

96%103%

109% 116%129%

48% 48% 48% 48% 48%

88% 93% 98% 104%114%

0%

20%

40%

60%

80%

100%

120%

75.00 80.00 85.00 90.00 100.00

Yield Index

% C

hang

e in

Rec

eipt

s

Market Receipts Government Payments Total Revenue


Updating Base Acres and Yields

• Five Basic Options– Make No Changes– Don’t update base acres or yields and simply add

soybeans to fully base your acres– Maximize soybean base– Update base acres and CCP payment yields

• Don’t update yields is an option• using 70% of the difference between 98-01 average yield

and 1985 program yield• using 93.5% of the 98-01 average yield

– Trade base acres of other crops for bean base


Decision-Support Spreadsheet

• Website for Farm Bill Spreadsheet:

• http://www.agecon.purdue.edu/staff/gray/agrium/agrium.htm

• Spreadsheet Example

http://www.agecon.purdue.edu/staff/gray/agrium/agrium.htm

http://www.agecon.purdue.edu/staff/gray/agrium/agrium.htm


FSA Letter Page 1


FSA Letter from Page 2


INPUTS Complete the Yellow Cells for Example FarmThis spreadsheet is designed for each individual farm number, not for the entire farming operation.

Name or Number of Farm Example REQUIRED INPUTSEffective DCP Cropland 148.8 CALCULATED VALUESMaximum Double Crop Acres (1998-2001) 0.0 NOT APPLICABLE

Historical Farm Program Information Barley Corn Cotton Oats Rice Sorghum Soybeans Wheat2002 PFC Acres 0.0 128.1 0.0 0.0 0.0 0.0 11.5Direct Yields (PFC Yields) 0 103.0 0 0 0 0 51

Barley Corn Cotton Oats Rice Sorghum Soybeans Wheat1998 0.0 0.0 0.0 0.0 0.0 0.0 48.3 85.51999 0.0 0.0 0.0 0.0 0.0 0.0 133.8 0.02000 0.0 143.8 0.0 0.0 0.0 0.0 0.0 0.02001 0.0 0.0 0.0 0.0 0.0 0.0 143.8 0.0

Average 0.0 36.0 0.0 0.0 0.0 0.0 81.5 21.4

Barley Corn Cotton Oats Rice Sorghum Soybeans WheatIn the cells to the rignt enter the actual 0 0 0 0 0 0 43 50 1998yields for this farm. The computer will 0 0 0 0 0 0 37 0 1999determine whether to use this actual 0 150 0 0 0 0 0 0 2000yield or 75% of the county average yield. 0 0 0 0 0 0 50 0 2001

Planted Acres

Yield Per Harvested Acre


OUTPUTS Probability of Best Options for Example Farm(Based on discounted cash flows over the life of the Farm Bill)

Farm Bill Options Option 1 Option 2 Option 3 Option 5

Explanation of OptionsRetain Current

PFC Base

Retain PFC Base & Add Oilseeds Without Offset

Maximize Soybean Base by Trading

(offset)

Update Base Acres, Keep

Historical Yields

Update Base Acres, Update

Yields with 70% Rule

Update Base Acres, Update

Yields with 93.5% Rule

Swap Selected PFC Acres for Oilseed Base

Probability* 0% 100% 0% 0% 0% 0% 0%Discounted Cash Flows** 27,208 27,399 19,372 17,930 19,327 19,397 27,399Base Acres

Barley Acres 0.0 0.0 0.0 0.0 0.0 0.0 0.0Corn Acres 128.1 128.1 60.2 36.0 36.0 36.0 128.1Cotton Acres 0.0 0.0 0.0 0.0 0.0 0.0 0.0Oats Acres 0.0 0.0 0.0 0.0 0.0 0.0 0.0Rice Acres 0.0 0.0 0.0 0.0 0.0 0.0 0.0Sorghum Acres 0.0 0.0 0.0 0.0 0.0 0.0 0.0Soybean Acres 0.0 2.1 81.5 81.5 81.5 81.5 2.1Wheat Acres 11.5 11.5 0.0 21.4 21.4 21.4 11.5

CCP YieldsBarley Yield 0 0 0 0 0 0 0Corn Yield 103 103 103 103 136 140 103Cotton Yield 0 0 0 0 0 0 0Oats Yield 0 0 0 0 0 0 0Rice Yield 0 0 0 0 0 0 0Sorghum Yield 0 0 0 0 0 0 0Soybean Yield 0 34 34 34 41 41 34Wheat Yield 51 51 51 51 52 50 51

Direct Payment YieldsBarley Yield 0 0 0 0 0 0 0Corn Yield 103 103 103 103 103 103 103Cotton Yield 0 0 0 0 0 0 0Oats Yield 0 0 0 0 0 0 0Rice Yield 0 0 0 0 0 0 0Sorghum Yield 0 0 0 0 0 0 0Soybean Yield 0 34 34 34 34 34 34Wheat Yield 51 51 51 51 51 51 51

Option 4


Critical Issues• WTO negotiations• Competitiveness• Market

responsiveness• Value of land and

farmland rents• Budget costs


Treating Symptoms or Curing Problems?

• Will this farm bill reduce dependence on government?

• Will this farm bill improve crop prices?

• Will this farm bill encourage free trade and competition?

• Will this farm bill provide opportunities or maintain status quo?


Contact Information

• [email protected]• [email protected]• [email protected]

mailto:[email protected]



2002 Farm Bill

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