Farm Management Update

Quarterly Publication of Ohio State University Extension

Spring 2003

Counter-Cyclical Payments in the New Farm Bill

Matt Roberts

At a recent conference, I saw an outlook presentation by an executive of a major marketing advisory service. His presentation was typical, similar to dozens of others I have seen and givenuntil he began to discuss the implications of the new farm bill on marketing. He made a very clear point that the new Farm Bill, and specifically that the counter-cyclical payment, made crop marketing much more important, and more difficult. The previous day, an executive of a major agricultural news and services firm, speaking to a national conference, said that if prices are near or slightly above loan rates, but below the target rate, then it will be important for producers to protect the CCP. This story was carried by all of the major agricultural news outlets.

But these two, along with countless others, have already influenced many farmers that CCP is a major component of marketing decisions. During the Fall Outlook and Policy meetings, many farmers asked how they should alter their marketing strategies in response to the CCP. Fortunately, there is a simple answer: they shouldn't. Counter-cyclical payments don't matter for marketing. Unfortunately, the explanation takes a bit longer.

In response to the high yields and low prices of the late 1990s, the 2002 Farm Security and Rural Investment Act added 'counter-cyclical payments' to the commodity support programs. The CCPs act to increase payments in response to low prices, eliminating the need for market loss assistance payments like those in 1997—1999. In order for them to comply with WTO regulations limiting the amount of trade-distorting subsidies, the payments are made in response to historical acreage and yields, not realized harvest.

Before we go any further, let's clarify how counter-cyclical payments are calculated. Counter-cyclical payments are made according to:

Where TP are commodity target prices, FP are fixed payments (similar to the AMTA payments of the 1996 FAIR act), AFP is the (nationwide) average farm price, LR is the loan rate, and PFCY and PFCA are the PFC yields and acres. In words, this means that the CCP price is equal to the target price less the fixed payment less the greater of the average farm price and the loan rate. The target prices, fixed payments, and loan rates for 2002 and 2003 are:

	Fixed Payments	Loan Rate	Target Price
Corn	0.28	1.98	2.60
Soybeans	0.44	5.00	5.80
Wheat	0.52	2.80	3.86

The key to understanding CCPs and marketing is realizing that the CCP received by farmers is not affected by their marketing decisions. Marketing under the new farm bill should be done with the same goals as before: maximize profits with an acceptable level of risk. If a farmer thinks that prices will rise, he should delay sales. If prices are expected to fall, then the farmer should sell now. This was true under the 1996 FAIR act, and is still true under the 2002 FSRIA.

Consider the decision to store crops on-farm: a farmer storing grain only holds the grain as long as the expected increase in prices outweighs the cost of storage. CCP doesn't affect the expected change in prices or the storage cost. While it is true that if prices rise through the marketing year, farmers who store will receive higher prices than those who sell at harvest, this is true whether or not CCPs exist.

While the 2002 FSRIA does require farmers to make some difficult decisions, such as whether to update PFC acres and/or yields, it doesn't change how they market their crops. If storage is profitable, farmers should store, otherwise they should sell. This doesn't mean that CCPs have no farm management implications; they might be relevant to planting decisions, but that will have to wait for another issue of the Farm Management Update.