2002 Farm Program Base Acreage and Program Yield Update Decisions
Todd D. Davis
Extension Ag. Economist

You have likely received a letter from the Farm Service Agency indicating the planted acres plus prevented plated acres of covered commodities produced on your farm from 1998-2001. This information will be used in determining direct and counter-cyclical payments that you will receive over the next six years. It is important that you verify that FSA has the correct information for your farm business. If the acreage information is incorrect, you will have until August 31, 2002 to make any corrections. Producers must provide evidence of their production from 1998-2001 when making corrections. Seed receipts, sales receipts, production records, or crop insurance records can be used to verify production. Contact your county FSA office if you need to correct the program information.

This is the first step in the base acreage and program yield update process. The next step involves the decision of whether to update your base acreage and, potentially, updating the program yield used in calculating counter-cyclical payments. Producers have the option of using their current program yield, using a yield that is 70% of the yield increase from 1998-2001 over the current program yield, or using a yield that is 93.5% of the 1998-2001 average.

Should I Update Program Acres and Yields?

Producers should evaluate the potential direct and counter-cyclical payments received under their old base as well as the new base acres and alternative program yields. Since South Carolina has experienced drought during much of 1998-2001, it is important to evaluate if you should update your base acreage and program yields, as you may be better off using your old base and yield. Let's take a look at how the direct and counter-cyclical payments are calculated.

Direct Payments

Direct Payments are similar to the production flexibility contract (PFC) payments received under the 1996 Farm Bill and are based on acreage and yields from 1981-1985. Unlike the PFC payments, the direct payments will not decrease over the next six years. Direct payments are calculated as:

Direct Payment = Base Acres x Program Yield x 85% x Direct Payment Rate

Example 1: A farm has 100 acres of cotton base with a program yield of 650 lbs/acre. The direct payment rate for cotton is $0.0667 per lb (Table 1). The direct payment for cotton is calculated as:

Direct Payment = 100 x 650 x 85% x $0.0667 = $3,685.18

Table 1. Direct Payment Rates by Covered Commodity.

Counter-Cyclical Payments

The counter-cyclical payment depends upon the relationship of the U.S. Marketing Year Average (MYA) price, for a given commodity, relative to the target price for that commodity. When the effective price is below the target price, a counter-cyclical payment is made. The effective price is the higher of the U.S. Marketing Year Average price or the loan rate plus the direct payment rate. The counter-cyclical payment is calculated as:

The target prices and loan rates are listed in Table 2. The target prices tend to increase in years 2004-2007 while the loan rates tend to decrease in years 2004-2007. The combinations of changing target prices, loan rates, and price volatility creates uncertainty on the amount of counter-cyclical payments received in any given year. The uncertainty will be compounded next planting season, as under this program producers will not have to plant in any sort of pattern resembling their base acreage. Rather, they will need to consider maximizing potential returns from counter-cyclical payments plus expected revenue from crops actually planted.

Table 2. Target Prices and Loan Rates by Commodity for 2002-2007.

When the marketing year average price is above the target price, the counter-cyclical payment will not be made. Conversely, when the marketing year average price is below the loan rate, the maximum counter-cyclical payment is made. Consider a couple of examples.

Example 2: A farm has 100 acres of corn base with an 80 bushel per acre program yield. The U.S. MYA price is $2.40 per bushel.

As illustrated by Example 2, there is a chance that no counter-cyclical payment will be made. Conversely, when the marketing year average price is below the loan rate, as in recent years, the maximum counter-cyclical payment will be made (illustrated in Example 3).

Example 3: Using the same program acres and yields as in Example 2, assume that the U.S. MYA price is $1.89 per bushel.

Economic Value of Direct and Counter-Cyclical Payments

Table 3 illustrates potential direct and counter-cyclical payments for corn, soybeans, wheat, cotton and peanuts. As you can see, the total per acre payments can be quite significant.

Table 3. Total Direct and Counter-Cyclical Payments ($/Acre).

Help in Making an Informed Decision

Clemson University Extension is developing a spreadsheet that will help you decide whether to update your base acreage and which program yield is best for your farm. Your county extension agents will have this spreadsheet available to assist you in making this decision.