The
University of Georgia
Cooperative
Extension Service
College of Agricultural and
Environmental Sciences / Athens, GA 30602-4356
| Volume 19, Issue 1, February
2003 |
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Signing Up Is Hard To Do! (The Farm Bill Sign-Up Progress Report)
With just about a month
to go before the April 1 deadline, the Farm Service Agency (FSA)
reports that less than 40% of eligible farmers nationwide have
so far filed their acreage and yield options under the current
farm bill. In Georgia,
the sign-up rate is even lower (at 32.74% as of February 18)
as only 12 counties have exceeded the 50% mark while majority
have less than 30% of their eligible farmers signed up.
This situation reflects the complexity of issues that
Georgia farmers have to deal with compared to their counterparts
in other states. For one thing, Georgia farming operations are
more diversified. Moreover,
issues in the assignment and rent of peanut base have yet to
be worked out, hence, Georgia farmers need more time to make
yield and base decisions (See related article on Peanut
Base in this issue. Ed.).
Under the new farm bill,
farmers are required to file their acreage and yield options
at Farm Service Agency (FSA) offices in order to receive fixed
(decoupled) direct payments and market-based, counter-cyclical
payments. Producers have
a one-time opportunity on April 1 this year to update yields
used to determine counter-cyclical payments, but only if they
choose to recalculate their base acreage.
Producers must choose between using: a. All
"old" production flexibility contract (PFC) commodity
bases and yields (the program's default base and yield option), b. An
"updated" base and "updated" yield, or c. An
"updated" base and an "unchanged" or "old"
yield. The method that is chosen
by a producer will be applied uniformly to all covered commodities
on the farm. Failure
to meet such deadline will force farmers to accept the program's
default base and yield option. A Doing Some Math and Keeping Good Farm Records
The preference for a certain
base/yield option will depend on the uniqueness of each farm
situation. Each farm's
objective is to choose a base/yield option that will produce
the largest amount of direct and counter-cyclical payments during
the 6-year term of the current farm bill. As one extension specialist explains, the sign-up
process requires farmers to invest some time as they "spend
several hours. crunching numbers for (their) farming operations
. running what-if scenarios on a computer spreadsheet to make
many decisions presented by the new government farm program."
More than just the ability to do some math calculations,
prompt response to the sign-up process also hinges on the farmer’s
ability to maintain good farm records of historical operations.
For example, a farmer who attended one of our recent
farm financial management workshops described his own sign-up
experience as less painstaking because he has carefully compiled
farm computerized farm business records for years. A USDA Remedy
to Complex Farm Production Histories
Certain farming situations are,
however, complicated by the changes in land control arrangements
made between landlords and tenants during the period 1998-2001. In these cases, production records from different
parties that controlled (operated) the land during the four-year
period will have to be compiled and organized to produce the
base and yield estimates needed for the sign-up.
Concerned about the slow
sign-up pace nationwide, the USDA announced last January 31
a new procedure available for producers that cannot provide
evidence to prove yields because they recently purchased the
farm (or part of the farm) and cannot obtain production evidence
due to a variety of circumstances, such as when tracts of land
The assigned yield will
be at least 75% of the county average yield and the yield from
similar farms cannot exceed the county average yield.
This procedure is similar to establishing yields when
production is fed, grazed, hayed or silaged. Decision Aids
A number of university extension
programs in the country have developed different computer programs
designed to help farmers make economically optimal decisions
in choosing among available base and yield options.
Farmers in the state may want to check out the following
websites that feature these decision tools: a) University
of Georgia's 2002 Farm Bill DCP Program Base and Yield Option
Decision Aid: UGA-DCPDAvers2-b.xls (http://www.ces.uga.edu/Agriculture/agecon/fbill/fbilldec.htm): Producers in the state may want to FIRST
CHECK OUT this EXCEL-based program, which is specifically
designed for them. This program is designed for producers of
corn, cotton, sorghum, oats, wheat, soybeans, canola, sunflower
and peanuts. b) Texas
A & M's Base and Yield Analyzer (http://www.afpc.tamu.edu/models/bya/): This software could be an alternative tool to
help farmers and landowners evaluate which updating options
are best for them.
Any of these analytical tools should be able to help
farmers reach important decisions.
More than anything, farmers are encouraged to respond
to this one-time opportunity by patiently exerting significant
effort to address any complexity of farm production histories
and make sound, economic choices that maximize the benefits
of government subsidies to their farming businesses.
Cesar L.
Escalante, Don Shurley, and Nathan Smith
Extension Agricultural Economists |
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The 2002 Farm
Bill eliminated the traditional supply controlled peanut program
of poundage allotments that has been in effect for over 60 years. In its place, a marketing loan and direct and
counter-cyclical payment (DCP) program is established for peanuts. The new program creates a base for peanuts using
acreage and yield history from the years 1998 through 2001. The historical peanut producer receives this
base and has until March 31, 2003 to assign the peanut base
to a farm. Once tied to a farm, peanut base provides the right
to the producer on the farm to receive DCP payments.
The fact that peanut base is established for the historical
peanut producer adds a new wrinkle to the base and yield update
decision for Georgia producers and landowners.
Many Georgia producers rent as much or more land than
they own, particularly cotton and peanut producers.
Several of these producers find themselves in a situation
where they have more base than eligible land.
Coupled with producers who no longer intend to farm,
a market has developed for peanut base. In addition, landowners with open land are interested
in having peanut base assigned to their farm. The common question is “What is peanut base
worth?”
Present value analysis can be used to estimate the value
of peanut base. This involves projecting a future stream of
income (in this case DCP payments) and discounting the income
stream by a desired interest rate.
The minimum amount of income paid to the producer on
the farm from peanut base is the direct payments.
The direct payment is an automatic annual payment of
$36 per ton on 85% of the base or $30.60 per ton per base acre.
The maximum amount of income from DCP payments would
be $140 per ton ($36 direct payment + $104 counter-cyclical
payment). On a per base
acre basis this would be $119 per ton.
Thus, the difficulty of determining a value of base is
the uncertainty of the annual DCP payments over the next five
years of the farm bill. The counter-cyclical
(CP) payment can vary year-to-year depending upon the
average season price for peanuts which has no previous market
price history. The CP
is determined by subtracting the direct payment and the higher
of the market loan rate or the average season price from the
target price. The target price for peanuts is $495 per ton
and the market loan rate is $355 per ton.
CP = Target Price - Direct Payment Rate - Higher of Average Season
Price or Market Loan Rate Max CP
= $495 - $36 - $355 = $104
Due to the uncertainty,
the price risk figured into the value of base through a higher
desired interest rate. For
this example, a rate of 12% is chosen to reflect the risk and
uncertainty over the next five years.
A “risk free” estimate would be if you could take the
money upfront discounted at four percent and put it in a five
year CD. Additional risks to consider might be the premature
end of the farm bill, a cap on DCP payments, adjustment by Congress
to payment limitations, or a year of higher prices resulting
in little to no counter-cyclical payment.
Total annual DCP
payments for varying average season prices are given shown in
Table 1. The prices range from $350 to $425 per ton.
Multiplying the annual DCP payments by five years and
using a discount rate of 12%, the present value of DCP payments ranges from a maximum of 21.4 cents
per pound to a low of 10.7 cents per pound. If a lower discount rate is used the value will
be higher.
A market based
valuation of peanut base would involve similar sales of peanut
base. Reports of private party and auction sales so
far have mostly fallen in the range of 10 to 20 cents per
pound.
Because peanut base is assigned by acre, bases with higher
payment yields have traded at a premium to bases with lower
yields. As the assignment deadline approaches, the number
of buyers and sellers will determine the market value of peanut
base. Nathan Smith, Extension Agricultural
Economist |
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Table 1. Estimated Value of Peanut DCP Payments.
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Table
2. Present Value of Peanut
Base at Varying Average Season Prices and Interest Rates.
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Barriers
to Participation in Federal Conservation Programs
The decision of whether
or not to enroll in a federal conservation program can have
considerable consequences for the current and future production
and profitability of a farm operation.
As a result, farmers need to make informed decisions
about program participation. Ideally, each farmer's decision would be based
on an accurate assessment of the costs and benefits of participation.
Unfortunately, this is not always possible.
New opportunities and conditions for participating in
federal conservation programs emerge from each new farm bill,
and relevant program information may not always be available
to farmers. This may
cause some to forego opportunities that would be financially
beneficial to them.
To help determine if farmers
in Georgia are making participation decisions based on an informed
comparison of the costs and benefits of a program, the Department
of Agricultural and Applied Economics at the University of Georgia
designed a survey to identify factors that prevent farmers from
enrolling in federal conservation programs.
The survey focused on four programs – the Conservation
Reserve Program (CRP), the Wildlife Habitat Incentives Program
(WHIP), the Environmental Quality Incentives Program (EQIP),
and the Grassland Conservation Program (GRP). Agricultural extension agents in each of Georgia's
159 counties were asked to identify and rank the importance
of several factors in preventing farmer participation in each
program. The factors in the survey fall into three broad
categories: program information, program costs, and program
benefits. Table
1 lists each factor considered under the appropriate category.
Thirty-six
county agents completed and returned the questionnaire. Figure 1 shows the proportion of agents that
believe each factor prevents participation in each of the four
programs considered. The
three information-related factors are the most frequently cited
for EQIP, WHIP, and GRP. For the CRP, however, agents cited reduced management
flexibility most often. When
asked to rank the factors, the most important factors also tended
to be the most cited, following the same pattern as Figure
1. The survey results suggest that farmers may
not have sufficient information about the EQIP, WHIP, and GRP
to evaluate the costs and benefits of participation.
Extension efforts to increase awareness of these programs
and their requirements may lead to greater participation by
Georgia farmers. Bill Givan,
Professor and Jeffrey Mullen, Assistant Professor |
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Table
1: Factors Preventing Farmer Participation in Federal Conservation
Programs
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Income Prospects for Beef Cattle Producers
Beef cattle producers should have a profitable 2003
if they can keep a lid on costs.
Prices are expected to remain relatively high as supplies
of cattle remain tight due to decreasing cow inventory numbers.
As of January 1, 2003 USDA estimated there were 96.7
million cattle and calves on U.S. farms and ranches, a decrease
of .59 percent from last year. This marks the sixth year in a row that USDA
has reported a decrease in the beef cattle herd. Currently, the
U.S. beef herd is six percent smaller than it was in 1996.
Much of this decrease can be attributed to the severe drought
that has plagued the Western U.S. for the past three years.
It is expected that as soon as weather and forage conditions
improve out west that producers will begin retaining more
heifers and expanding their herds. This should further tighten feeder cattle supplies
in the near-term and increase prices even more.
For 2003, calf
prices in Georgia are expected to average in the low-mid $90s
for the year. Expected
prices by quarter are given below in Table
1.
Producers considering
a spring/summer stockering program should pay close attention
to buy-sell margins. Historically,
feeder cattle prices decline through summer before recovering
in the fall. Currently, the breakeven price for 500 pound
calves purchased in April/May and sold in August/September
is around $81/cwt. Using
University of Georgia Risk Rated Budgets, this
works out to an expected loss of about $54/head with the odds
of covering all variable costs of about two in ten.
Some cow-calf
or stocker producers may also be evaluating the profitability
of retained ownership in the feedlot this spring.
Current fundamentals and historical trends do not indicate
that this is a profitable investment.
Fed cattle prices tend to follow the same seasonal
pattern as feeder cattle as shown in Figure
1. Additionally,
cost of gain is higher in the summer as feed costs increase
and cattle performance is reduced.
Finally cattle placed in feedlots during the spring
will be valued at the higher spring prices. The end result is that calves will typically
be purchased or valued when prices are their highest and sold
when they are at their lowest. In summary, 2003
should be a good year for cow-calf producers as prices increase
due to decreased supplies.
It is unlikely that cattle placed in stockering or
feeding programs this spring will realize any profits.
However, it is likely that cattle placed in feedlots
in late summer or fall will be profitable next spring if feeding
costs are normal. Curt Lacy Extension Agricultural
Economist— Livestock |
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Table
1. Projected 2003 Prices for M1/2 GA Steers
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Calendar/Announcements/Recent
Publications For more information, contact your local county extension agent. We can be reached at: Agricultural
Economics Extension Offices Conner Hall, Athens, GA 30602 Tel. No. 706-542-1861 Fax No. 706-542-4131
Rural Development Center PO Box 1209, Tifton, GA 31793 Tel. No. 229-386-3512 Fax No. 229-386-3440 Georgia Southern University, Landrum Box 8112, Statesboro, GA 30460 Tel. No. 912-681-5653 Fax No. 912-681-0376 The Center for
Agribusiness and Economic Development 202 Lumpkin House, Athens, GA 30602-7509;
Tel. No. 706-542-0760 All this and more on the
Web!
¨
http://www.ces.uga.edu/Agriculture/agecon/agecon.html For our
extension programs, publications, commodity outlook reports,
presentations, decision tools
¨
http://www.agecon.uga.edu/~caed/ For feasibility,
marketing, policy studies, as well as agricultural, natural
resource and demographic data prepared by the Center for Agribusiness
and Economic Development |
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Upcoming Seminars and Workshops
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