Allan Gray and Chris Hurt, Purdue University 2002 Farm Bill Decision Time Allan Gray and Chris Hurt Purdue University

Allan Gray and Chris Hurt, Purdue 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 $17 billion in additional spending for Environment

Allan Gray and Chris Hurt, Purdue University 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

Allan Gray and Chris Hurt, Purdue University Comparison of Loan Rates 1996 Farm Bill 2002 Farm Bill Farm Bill Wheat ($/bu.) Corn ($/bu.) Sorghum ($/bu.) Relative to Corn Cotton ($/lb.) Rice ($/cwt.)6.50 Soybeans ($/bu.)

Allan Gray and Chris Hurt, Purdue University Comparison of Direct Payment Rates 1996 Farm Bill (2001) 2002 Farm Bill Wheat ($/bu.) Corn ($/bu.) Sorghum ($/bu.) Cotton ($/lb.) Rice ($/cwt.) Soybeans ($/bu.)N/A.44

Allan Gray and Chris Hurt, Purdue University Counter-Cyclical Payment Rates 2002 Farm Bill Farm Bill Wheat ($/bu.) Corn ($/bu.) Sorghum ($/bu.) Cotton ($/lb.).724 Rice ($/cwt.)10.50 Soybeans ($/bu.)5.80

Allan Gray and Chris Hurt, Purdue University 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

Allan Gray and Chris Hurt, Purdue University $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$1.69 Market Price $1.98 Corn Loan $2.60 Corn Target Payments Under Various Market Price Scenarios

Allan Gray and Chris Hurt, Purdue University $.695 $.046 $.049 $.00 $.60 $.52 $.724 $.789$.678Total $.00 $0.14($0.109) Counter Cyclical $.049 $ ($0.049) Fixed $.00$.10LDP $74$.42 Market Price $.52 Cotton Loan $.724 Cotton Target Payments Under Various Market Price Scenarios

Allan Gray and Chris Hurt, Purdue University $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$2.60 Market Price $2.80 Wheat Loan $3.86 Wheat Target Payments Under Various Market Price Scenarios

Allan Gray and Chris Hurt, Purdue University

$ = $2.32 Loan = $1.98 Market Price Direct Payment CCP’s LPP’s

Allan Gray and Chris Hurt, Purdue University 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

Allan Gray and Chris Hurt, Purdue University

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 average yield and 1985 program yield using 93.5% of the average yield –Trade base acres of other crops for bean base

Allan Gray and Chris Hurt, Purdue University Decision-Support Spreadsheet Website for Farm Bill Spreadsheet: Spreadsheet Example

Allan Gray and Chris Hurt, Purdue University FSA Letter Page 1

Allan Gray and Chris Hurt, Purdue University FSA Letter from Page 2

Allan Gray and Chris Hurt, Purdue University

Critical Issues WTO negotiations Competitiveness Market responsiveness Value of land and farmland rents Budget costs

Allan Gray and Chris Hurt, Purdue University 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?

Allan Gray and Chris Hurt, Purdue University Contact Information