2002 Farm Bill Implementation Continues

By Richard Pasco

     Implementation of the Farm Security and Rural Investment Act of 2002 (a.k.a., the new farm bill) continues to move forward, but maybe not as fast nor in the same manner as some agricultural producers envisioned.  After President Bush signed the farm bill into law on May 13, 2002, many farmers believed that most of the new program details would be available by the fall of 2002.  To USDA’s credit, the Department was successful in implementing most of the major commodity and other agriculture programs in record time.  This article will attempt to report on the most significant farm program developments over the last several months and examine some of the key issues still facing the USDA in implementing the various provisions of the 2002 farm bill. 

Direct and Counter-Cyclical Program

     The direct and counter-cyclical programs provide support for feed grains, wheat, cotton, rice, soybeans, other oilseeds, peanuts, wool and mohair for 2002 through 2007.
Direct payments are issued regardless of market prices, while counter-cyclical payments are only made when a commodity’s effective price is below its target price.  Signup for the direct and counter-cyclical program for crop years 2003 and 2003 began on October 1, 2002, and ends on June 2, 2003.  The ending date for owners to select base and yield options is April 1, 2003. 

     For the first time since the 1980’s, producers can update their acreage and yield information.  This is a tremendous opportunity, but it’s very complex, and it requires producers to gain information on their operations over the past four years.  The vast majority of producers who wish to establish or update yields will be able to use verifiable production evidence such as weight tickets, loan deficiency payments (LDPs), crop insurance appraisals or sales records. 

     However, some crops were grazed, harvested as silage or hay, or fed on the farm in a manner that does not result in tangible records of measurable production.  In such cases, producers may use previous LDPs on record at the county Farm Service Agency (FSA) office to establish farm yields.  When LDPs are not available, but crop insurance records or other FSA records indicate the crop was grazed, harvested as silage or hay, or fed on the farm, then FSA may assign a yield based on the actual grain yield for three similar farms.  In cases where producers cannot meet any of these requirements, or they have experienced abnormally low yields, then 75% of the county average yield will be used as specified in the new law. 

     After program participants elect their base and yield options, they may also request their first partial counter-cyclical payment, which is equal to 35% of the entire projected rate.  For each commodity, the counter-cyclical payment equals the counter-cyclical payment rate multiplied by 85% of the farm’s base acreage multiplied by the farm’s counter-cyclical payment yield for the crop.  The counter-cyclical payment rate is the amount by which the target price of the covered commodity exceeds its effective price.  The effective price equals the direct payment rate plus the higher of:  1) the national average market price received by producers during the marketing year; or 2) the national loan rate for the commodity. 

     USDA has expressed concern about the slow pace in which farmers are signing up for the major farm programs, and has urged farmers to move quickly to sign up in order to receive intended benefits in a timely and efficient manner.  The late harvest in many parts of the country kept farmers in the field longer and the complexity of the new programs has required more time for farmers to gain the proper understanding, assemble the necessary information and make their decisions, which often involve several different commodities and unknown future market conditions.

Loan Rates for Grains

     On December 13, 2002, USDA announced the 2003 national and county loan rates for wheat, barley, oats, and other oilseeds.  The 2002 farm bill restructured national loan rates, which required changes in the county loan rates.  Farm bill conferees provided guidance to USDA, suggesting that the Department use the generally upward change in the national loan rates to revise county loan rates.  Since adjustments in county loan rates to reflect changing market conditions had not been made for grains for several years, a number of disparities between loan rates and market prices had emerged over time, which affected producer benefits. 

     Soon after passage of the new farm bill, USDA announced the most comprehensive adjustments in more than 15 years to the county loan rate structure for 2002 crops.  The restructured rates were intended to reflect the market factors affecting each crop to the fullest extent possible, and thus avoid distortions that work to the detriment of producers and the rest of the industry.

     The 2003 county loan rates for wheat have been updated and remain differentiated by each of the five major classes of wheat (i.e., durum, hard red spring, hard red winter, soft red winter, and soft white) continuing the precedent established with the 2002 loan rates.  By moving last year to this class-based system for wheat, the CCC now provides marketing assistance loans and LDPs that reflect actual market prices for each class, thus achieving a more equitable distribution of commodity program benefits among producers.

The New Peanut Program

     The 2002 farm bill drastically changed the peanut program with the establishment of a nonrecourse marketing loan program for peanuts and additional support measures similar to other commodities.  Peanuts became eligible for marketing assistance loans beginning with the 2002 crop year.  If peanuts are forfeited to USDA’s Commodity Credit Corporation (CCC), the Kansas City Commodity Office will pay the storage charges from the storage start date through the maturity date for all forfeited peanuts. 

     The new peanut program provides a clear mandate to USDA that the loan repayment rate should be set at a level so as to allow U.S.-grown peanuts to move into the domestic and marketplace, to “minimize potential loan forfeitures,” to “minimize the accumulation of stocks of peanuts by the Federal government,” and to “minimize the cost incurred by the Federal Government in storing peanuts.”  (7 U.S.C. 7957(d)(1)(B)).  These objective criteria for establishing the repayment rate are similar to the factors USDA must consider in setting the repayment rate for other commodities with marketing loan programs. 

     Peanut growers have expressed lots of uncertainty with USDA’s implementation of the new peanut program.  Many in the peanut industry are concerned that the United States is giving up on the export market since USDA will not lower the repayment rate low enough to compete with peanut production from other countries.  Clearly, USDA’s actions to date in setting the weekly national posted prices for peanuts above world market prices has undermined the expansion of U.S. peanut consumption.  If the loan repayment rate is set too high for an extended period of time, then the likelihood of forfeitures increases significantly and ultimately the government is left with no other choice than having a fire sale to reduce the inventory.

     Some producers have expressed concerns about the kind of economic changes the new peanut program will generate, including shifts in peanut production regions, entry of new farmers trying to grow peanuts now that anyone can grow peanuts, and the ability of irrigated regions to grow peanuts at the marketing loan level of $355 per ton.  USDA also has appointed a new Peanut Standards Board to develop new handling and quality standards for peanuts.

     FSA has mailed letters notifying historic peanut producers to designate the peanut acreage bases and yields to a farm or farms in order to be eligible for 2003 direct and counter-cyclical payments.  January 6, 2003, was the opening day for historic peanut producers to begin assigning the new peanut base to particular cropland on a farm.  The final date to designate their peanut base acreage and yield information to a farm or farms is March 31, 2003.  The total peanut acreage and yield designated to a farm will be used for the purpose of issuing 2003 through 2007 direct, and -- if applicable – counter-cyclical payments. 

     Congress wanted the new peanut program to be more farmer friendly, so it assigned a peanut base to the active peanut producer, who is the person taking the risk, regardless of whether that person owned land or not.  To date no regulations have been mentioned about selling peanut base, so a market for peanut base is developing in each state.  This development runs somewhat counter to the intent of the new peanut program to buy out quota owners, who were paid 55 cents per pound for the elimination of the quota.

Sugar Marketing Allotment Program

     The major change sugar policy contained in the 2002 farm bill was the return to marketing allotments, which reinstated the Secretary of Agriculture’s ability to balance sugar supply with demand during times of surplus to avoid forfeitures on CCC-backed loans that could result in government costs.  Specifically, the farm bill reinstated the authority of USDA to impose domestic marketing allotments in order to balance markets, avoid forfeitures, and comply with import commitments under the WTO and the NAFTA.  The farm bill also directed the Secretary of Agriculture to operate the sugar policy, to the maximum extent practicable, at no cost to the U.S. Treasury, by avoiding sugar loan forfeitures.

     Sugar marketing allotments were in effect for the 1992/1993 and 1994/1995 seasons with mixed results.  Both consumers and producers were unhappy with the effects of the marketing allotments, so they were dropped from the 1996 farm bill.

     On August 27, 2002, USDA announced the overall allotment quantity (“OAQ”) for the 2002/2003 marketing year based on the estimated domestic deliveries for food use and beginning sugar stock just prior to the announcement.  The OAQ was set at 7.7 million short tons, raw value (STRV).

     In setting the OAQ at this level, sweetener users believe that USDA failed to implement the sugar marketing allotments in a manner consistent with the substantive and procedural requirements of the 2002 farm bill.  Users argued that the establishment of an unreasonably low overall allotment quantity level caused prices to rise, and thus harmed sweetener users and U.S. consumers.

     On January 10, 2003, USDA announced an OAQ increase of 500,000 STRV, which raises the OAQ to 8.2 million STRV.  The beet sugar allotment was increased to 4.457 million STRV and the cane sugar allotment was increased to 3.743 million STRV. USDA also announced it will sell all remaining refined and raw CCC sugar inventories.  On January 15, USDA announced state cane allotments and processor allocations of the beet and cane sugar marketing allotments.

     The sugar OAQ for a crop year is calculated by subtracting the sum of 1.532 million STRV and carry-in sugar stocks (including inventory owned by the CCC) from USDA’s estimate of sugar consumption and reasonable carryover stocks at the end of the crop year.  The OAQ is divided between refined beet sugar at 54.35% of the overall quantity and raw cane sugar at 45.65% of the overall quantity. 

Wool & Mohair Program

     On December 16, 2002, USDA announced that producers of wool and mohair were eligible to apply for either a nine-month, nonrecourse marketing assistance loan or a LDP.  Under the new wool and mohair program, producers have until January 31, 2003, to request LDPs or loans for 2002-crop wool and mohair that have not yet been marketed and remain in storage.  Each year thereafter, the period to request loans and LDPs will extend until January 31 of the year following the crop year in which the applicable commodity is sheared.

     Wool and mohair nonrecourse marketing assistance loans provide eligible producers with interim financing on their production and facilitate the orderly marketing of the commodity throughout the year.  Instead of selling the wool and mohair immediately after shearing, a nonrecourse loan allows a producer to store the production, pledging the commodity itself as collateral.  The loan helps an eligible producer pay bills when they come due without having to sell the wool or mohair at a time of year when prices tend to be lower.

     To be eligible for a nine-month marketing assistance loan or LDP for wool or mohair, producers must demonstrate compliance with wetlands and highly erodible land conservations requirements. 

     Ungraded wool offered as loan collateral will secure a nonrecourse loan made at a rate of 40 cents per pound.  The repayment amount, per pound, for ungraded wool, without regard to quality, will be announced each Tuesday.  Instead of obtaining a loan, producers may request LDPs on ungraded wool, with the LDP rate being the difference between 40 cents per pound and the announced repayment amount applicable during the week.

     For graded wool, loans will be based on the statutory rate of $1 per pound, “grease basis” (which is directly off the animal), but will be issued to producers on a “clean basis,” using yield data from the core test report.  A core test refers to a lab test where the diameter of the fiber is measured.  Core test reports will only be accepted from a testing facility approved by the CCC.  Loan rates will be adjusted based on a schedule of quality premiums and discounts being offered in the current market.

Milk Income Loss Contract Program

     Section 1502 of the new farm bill (7 U.S.C. 7981) authorized the Milk Income Loss Contract (MILC) Program to financially compensate dairy producers when domestic milk prices fall below a specified level.  The MILC program is available to producers on dairy operations throughout the United States, if the dairy operation produces and commercially markets milk during the period for December 1, 2001 – September 30, 2005.  To be approved for the program, producers must be in compliance with highly erodible and wetland conservation provisions and must enter into a contract with the CCC to provide monthly marketing data.  Eligible dairy producers can apply for program benefits anytime during this sign-up period, which began August 13, 2002.

     As required by the 2002 farm bill, USDA will apply the same definition for a dairy operation as used in previous dairy market loss assistance programs.  A dairy operation is any person or group of persons who as a single unit, as determined by the CCC, commercially produces and markets cow milk and has production facilities located in the United States.  Producers on dairy operations are not permitted to reconstitute a dairy operation for the sole purpose of receiving additional payments. 

     MILC payments are made on a monthly basis when the Boston Class I milk price falls below $16.94 per hundredweight (cwt).  When the Boston milk price exceeds $16.94 cwt, no payments will be made to the dairy operation and production for that month will not count towards the operation’s maximum eligible production.  Payments are issued up to a maximum of 2.4 million pounds of milk produced and marketed by the operation per fiscal year.  Payments are issued no later than 60 calendar days after FSA receives production evidence for the applicable month.

     Beginning with the 2003 fiscal year, dairy producers who do not want their payments to begin with the first month of the fiscal year must select the month they want to start receiving payments.  Producers will be eligible for the payment rate in the month they select, plus payment rates for the consecutive months that follow.  All producers involved in a single dairy operation must agree to the starting month.  The dairy operation assumes the risk of not reaching the maximum payment quantity based on the month selected by its producers.

     The Boston Class I fluid milk price is announced to the public the Friday on or before the 23rd of each month.  As a result of this schedule, producers must make their payment start-month selection on or before the 15th of the month before the month for which payment is sought. 

Conservation Programs

     It is not an overstatement to point out that the 2002 farm bill provides the most significant investment in conservation in history, since the bill provides an 80% increase in funding for conservation efforts.  The new farm bill continued the Conservation Reserve Program (CRP), which makes annual rental payments based on the agriculture rental value of the land, and provides cost-share assistance for up to 50% of the participant’s costs in establishing approved conservation practices.  In October 2002, USDA made $1.6 billion in annual rental payments to producers.  The farm bill also increased the ceiling for the CRP from 34.6 million acres to 39.2 million acres, and added more partnerships and services.

     The farm bill provides a total of $5.5 billion for the Environmental Quality Incentives Program (EQIP) and to date USDA has paid out over $400 million to 19,000 applications.  EQIP offers financial and technical help to assist eligible participants install or implement structural and management practices on eligible agricultural land.  EQIP offers contracts with a minimum term that ends one year after the implementation of the last scheduled practices and a maximum term of ten years.  The new EQIP program no longer provides for geographic priority areas and the cap on large confined livestock operations is eliminated.  The new rules and regulations for EQIP are expected in the near future. 

     The new farm bill establishes the Conservation Security Program (CSP) for fiscal years 2003 through 2007 to reward stewardship and provide an incentive for addressing additional resource concerns on agricultural working lands.  Rules for the new CSP are expected to be available by mid-year 2003.

     The Wetland Reserve Program (WRP) is reauthorized in the new farm bill through 2007.  The WRP is a voluntary program offering landowners financial and technical assistance to restore and protect wetlands and associated uplands through permanent easements, 30-year easements, and long-term restoration agreements.  The farm bill increases the overall program acreage cap to 2,275,000 acres and caps annual acreage enrollment at 250,000 acres.

Country of Origin Labeling Provisions

     The farm bill added a new “Subtitle D – Country of Origin Labeling,” to the Agricultural Marketing Act of 1946” (7 U.S.C. 1638).  These new provisions directed USDA to issue voluntary guidelines by September 30, 2002, and issue mandatory country of origin labeling regulations by September 30, 2004, for covered commodities under this statute.  USDA published its voluntary guidelines in the Federal Register on October 11, 2002.  These voluntary guidelines are viewed by many as the potential blueprint for implementation of mandatory country of origin labeling. 

     In fact, the guidelines reflect the views of the Agricultural Marketing Service (AMS) in its initial interpretation of the farm bill provisions on country of origin labeling and the type of regulatory requirements that the agency would seek if it had to issue regulations today.  Fortunately, stakeholders can submit comments on the guidelines until April 9, 2003, and there is also the opportunity for Congressional hearings before the final regulations have to be implemented on September 30, 2004.  Detailed recordkeeping by retailers and the food supply chain, as to the country of origin, will be a critical element of complying with the law and the final regulations that AMS will develop and implement.