ERS Analysis:
Counter-Cyclical Payments

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Key Changes

Counter-cyclical income support payments are a new program. This program was developed to provide an improved counter-cyclical income safety net to replace most ad hoc market loss assistance payments that were provided to farmers during 1998-2001. Payments are based on historical production and are not tied to current production.

Summary of Provisions

Under this new program, counter-cyclical payments (CCP) are available for covered commodities whenever the effective price is less than the target price. The payment amount is equal to the product of the payment rate, the payment acres (85 percent of base acres), and the payment yield.

For example the payment for an individual corn farmer is determined as

Payment rate_corn = (target price)_corn – (direct payment rate)_corn – (higher of commodity price or loan rate)_corn

CCP_corn = ([Base acres]_corn x 0.85) x (payment yield)_corn x (payment rate)_corn

To receive payments on crops covered by the program (wheat, corn, grain sorghum, barley, oats, rice, upland cotton, soybeans, other oilseeds, and peanuts), a producer enters into annual agreements for crop years 2002-07. At enrollment, producers must select between two options for determining base acres and between three options for determining payment yield.

Farmers have two options for designating base acres:

• Choose base acres equal to contract acreage for the commodity that would otherwise have been used for 2002 PFC payments plus average oilseed plantings in 1998-2001, so long as base acres do not exceed available cropland, or
• Update base acres to reflect the 4-year average of acres planted, plus those "prevented from planting" due to weather conditions, during the 1998-2001 crop years.

Each producer must select one of the two options to apply to all covered commodities for both direct and counter-cyclical payments. Base acres for peanuts can be determined separately, so long as total base acres do not exceed available cropland. Payment acres are equal to 85 percent of base acres for all covered crops.

Owners of farms will have a one-time opportunity to select a method for determining base acreage. An owner who fails to make an election shall be considered to have selected 2002 PFC contract acres and, for oilseed base, the 4-year average of oilseed plantings.

Farmers are given almost complete flexibility in deciding which crops to plant. Participating producers are permitted to plant all cropland acreage on the farm to any crop, except for some limitations on planting fruits and vegetables. The land must be kept in agricultural uses (which includes fallow), and farmers must comply with certain conservation and wetland provisions.

Three options are available to farmers to determine program payment yields for each individual crop that apply only for counter-cyclical income support payments:

• Use current program yields,
• Update yield by adding 70 percent of the difference between program yields and the farm’s average yields for the period 1998-2001 to program yields, or
• Update yield to 93.5 percent of 1998-2001 average yields.

Counter-cyclical payments for the crop shall be made as soon as practicable after the end of crop year for the covered commodity. A payment of up to 35 percent shall be made in October of the year when the crop is harvested. A second payment of up to 70 percent minus the first payment shall be made after February 1. The final payment shall be made as soon as practicable after the end of the crop year.

The payment limit on counter-cyclical payments is $65,000 per person, per crop year, and the three-entity rule is retained. Under the three-entity rule, an individual can receive a full payment directly and up to a half payment from each of two additional entities. Producers with adjusted gross income over $2.5 million, averaged over each of 3 years, are not eligible for payments unless more than 75 percent of adjusted gross income is from agriculture.

Economic Implications

CCPs support and stabilize farm income when commodity prices are less than target prices. The basis for the distribution of CCP benefits may affect producers' expectations of how future benefits will be disbursed. Payments that are linked to past production may lead to expectations that benefits in the future will be linked to then-past, but now-current, production. Such expectations can thereby affect current production decisions. For example, farmers may not fully use planting flexibility to move from historically planted and supported crops if they expect future farm programs to permit an updating of their base acreage, which forms the foundation for payments. Instead, farmers would have incentives to build a planting history for program crops, thereby constraining their response to market prices. Similarly, use of nonland inputs that affect current yields may be influenced if farmers expect that future farm legislation will permit an updating of payment yields. In addition, since CCPs are based on current market prices, producers may view the payments as a risk-reducing income hedge.

For either case, updating acreage bases or updating payment yields, economic efficiency in production is reduced because producers would not be fully responding to signals from the marketplace, but instead would be responding to market signals augmented by expected benefits of future programs and future program changes