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The Food, Conservation, and Energy Act of 2008 (2008 Farm Act) gives cotton producers access to marketing loan benefits, direct payments (DPs), counter-cyclical payments (CCPs), and average crop revenue election (ACRE) payments. In addition, many producers may benefit from subsidized crop and revenue insurance available under previous legislation, as well as from new permanent disaster assistance. Moreover, cotton producers are affected by conservation and trade programs.

Under the 2008 Farm Act, program participants are given almost complete flexibility in deciding which crops to plant. Farmers are permitted to plant all cropland acreage on the farm to any crop, with some limitations on planting fruits and vegetables on acreage eligible for DPs and CCPs. Eligibility for DPs and CCPs is based on historical production parameters, and no commodity production is required to receive payments, but the land must be kept in agricultural use (which includes fallow). Participants in all programs must comply with certain conservation and wetland provisions.

General information follows on government programs affecting cotton producers' management decisions and incomes. For further information, see the Program Provisions section in the Farm and Commodity Policy topic page, the Farm Risk Management topic page, and the Conservation Policy topic page.

Marketing Assistance Loans and Loan Deficiency Payments

The 2008 Farm Act extends nonrecourse commodity loans with marketing loan provisions for crop years 2008-12. All current upland cotton production is eligible for the program. National loan rates are established in legislation, with the upland cotton base-quality loan rate set at 52 cents per pound for crop years 2008-12.

The marketing assistance loan program is designed to provide short-term financing in all price environments, as well as to assist producers when market prices are low. Because the loans are nonrecourse, producers may forfeit the crop rather than pay back the loan if prices fall below the loan rate plus interest.

To avoid forfeitures, the marketing loan provisions allow producers to repay loans at a rate less than the original loan rate plus accrued interest and storage when the adjusted world price (AWP) for upland cotton (as calculated by USDA) is below the loan rate plus accrued interest and storage. USDA operates the program in this manner to minimize potential commodity loan forfeitures and subsequent government accumulation of stocks. When producers repay their nonrecourse commodity loans to USDA's Commodity Credit Corporation (CCC) at a rate less than the loan rate, the difference between the two rates is called a marketing loan gain (MLG) and represents a program benefit to producers. In addition, any accrued interest on the loan is waived, and storage credits may be applied.

Producers are also offered the opportunity to receive an equivalent benefit in the form of a loan deficiency payment (LDP) if they choose not to participate in the loan program. In this case, the producer can opt to receive a one-time payment on harvested production at any time the AWP is below commodity loan rates during the term of the loan. The difference between the AWP and the loan rate is the LDP rate.

The loan rate for extra-long staple (ELS) cotton is fixed at 79.77 cents per pound for crop years 2008-12. Unlike upland cotton, however, repayment rates for ELS marketing assistance loans are equal to the established loan rate plus interest.

For further information, see the Marketing Assistance Loans and Loan Deficiency Payments page in the Farm and Commodity Policy topic page.

Special Program Provisions for cotton are also included in the farm legislation with the aim of keeping U.S. cotton competitive on the world market.

Direct and Counter-Cyclical Payments

DPs and CCPs are available to eligible landowners and producers with upland cotton base acres who enter into an annual agreement with USDA's Farm Services Agency (FSA). Base acres and payment yield for DPs and CCPs are unchanged from the 2002 Farm Act. Payment acres for DPs are reduced to 83.3 percent of base acres for crop years 2009-11. Payment acres for CCPs are unchanged at 85 percent of base acres.

DPs are made based on a fixed rate set in the 2008 Farm Act. For producers with eligible historical upland cotton base acreage, the payment rate for upland cotton is set at 6.67 cents per pound for crop years 2008-12. The amount of the DP equals the product of the payment rate for the specific crop, a producer's historical payment acres (85 percent of base acres in crop years 2008 and 2012 and 83.3 percent in crop years 2009-11), and a producer's historical payment yield for the farm.

For producers with eligible historical upland cotton base acreage, CCPs are paid whenever a commodity's target price is greater than the calculated effective price for that commodity. Target prices are specified in the 2008 Farm Act. The upland cotton target price is 71.25 cents per pound for crop years 2008-12. The effective price is equal to the sum of 1) the DP rate for the commodity, and 2) the higher of the national average farm price for the marketing year or the national loan rate for the commodity. Thus, the minimum effective upland cotton price is 58.67 cents per pound--the sum of the DP (6.67 cents) and the national loan rate (52.00 cents). The maximum payment rate for upland cotton is 12.58 cents per pound--the target price (71.25 cents) minus the minimum effective price (58.67 cents). The payment amount equals the product of the payment rate, a producer's historical payment acres (85 percent of base acres), and a producer's historical CCP yield, which may differ from the DP payment yield.

For further information, as well as conservation requirements for payment eligibility, see the Direct Payments and Counter-Cyclical Payments pages in the Farm and Commodity Policy topic page.

Average Crop Revenue Election (ACRE) Program

Instituted by the 2008 Farm Act, the ACRE program is administered by FSA. Beginning with the 2009 crop year, producers of cotton and other crops can elect this optional, revenue-based CCP, which is an alternative to receiving CCPs. However, producers who choose to participate in ACRE also face reduced DPs and lower marketing assistance loan rates.

Producers may elect the ACRE alternative on a farm-by-farm basis for crop years 2009-12. Once in ACRE, the farm must remain in the program through crop year 2012. After electing ACRE, the producer must enroll annually to receive payments. Commodities eligible for ACRE payments are all covered commodities (wheat, corn, grain sorghum, barley, oats, upland cotton, rice, soybeans, other oilseeds, dry peas, lentils, small chickpeas, and large chickpeas) and peanuts for a participating farm. Also, as a condition for the farm's enrollment in ACRE, direct payments for the farm are based on 80 percent of the legislated DP rate, and marketing loan benefits are based on 70 percent of the legislated national marketing loan rate.

The ACRE program provides participating producers a revenue guarantee each year based on national market prices and State-level average planted yields for the respective commodities. The guarantee is based on a 5-year Olympic average of State-level planted yields and a 2-year average of national market prices, but payments depend on crop year State- and farm-level planted yields and national market prices. ACRE payments are made if:

1) the actual State revenue per acre falls below the State guarantee per acre
2) actual farm revenue per planted acre falls below the farm benchmark revenue per acre.

State-level ACRE payments, if triggered, are paid on 83.3 percent (in crop years 2009-11) or 85 percent (in crop year 2012) of the acreage planted or considered planted to covered commodities and peanuts on the farm. The acreage for ACRE payments may not exceed total base acreage for all covered commodities and peanuts on the farm. Payments are adjusted to farm-specific relative productivity using a ratio of the ACRE benchmark State yield to the farm's 5-year Olympic average crop yield per planted acre.

For further information, see the Average Crop Revenue Election page in the Farm and Commodity Policy topic page.

Payment Limits

The 2008 Farm Act sets the payment limit for DPs at $40,000 per person or legal entity and for CCPs at $65,000. There are no longer payment limits for marketing loan benefits (MLGs and LDPs). Payments are attributed directly to individuals, with spouses potentially eligible for a full share. The three-entity rule is eliminated. Authority for commodity certificates, formerly available as an alternative to marketing loan gains when payment limits were in force, ends after crop year 2009.

Producers with an adjusted gross farm income of more than $750,000 (averaged over 3 years) are not eligible for DPs, but remain eligible for other program payments. Persons or entities with average adjusted gross nonfarm income in excess of $500,000 (averaged over 3 years) are not eligible for DPs and CCPs, ACRE payments, marketing loan benefits, or disaster payments.

For more information, see the Payment Limits page in the Farm and Commodity Policy topic page.

Crop and Revenue Insurance

Adverse weather, as well as insect and weed infestations, can reduce a farmer's yields and result in below-normal revenue in any year. Low prices can also reduce revenue. Cotton producers can purchase crop insurance to guard against yield risk and can buy revenue insurance for protection against revenue losses, regardless of the source of loss. USDA's Risk Management Agency pays a portion of producers' premium costs for insurance policies and also pays some of the delivery and administrative costs of private insurance companies that handle policy sales. For further information, see the Crop Yield and Revenue Insurance page in the Farm and Commodity Policy topic and the Farm Risk Management topic.

Supplemental Agricultural Disaster Assistance, created in the 2008 Farm Act, provides disaster assistance payments to producers of eligible commodities (crops, farm-raised fish, honey, and livestock) in counties declared by the Secretary of Agriculture to be "disaster counties," including counties contiguous to disaster counties, as well as any farms with losses in normal production of more than 50 percent. For further information, see the Natural Disaster and Emergency Assistance Programs page in the Farm and Commodity Policy topic page.

Environment and Conservation Programs

The 2008 Farm Act expands support for conservation practices on all cultivated land (including fallow). To remain eligible for specified program benefits, farmers cropping highly erodible land are required to implement an approved conservation plan (highly erodible land conservation provisions or sodbuster) and to be in compliance with wetland conservation provisions ( swampbuster).

Programs, such as the Environmental Quality Incentives Program and the new Conservation Stewardship Program, provide assistance on lands in production. Land retirement programs--including the Conservation Reserve Program, Conservation Reserve Enhancement Program, and Wetlands Reserve Program--remove environmentally sensitive land from production and establish long-term, resource-conserving cover. The acreage cap for the Conservation Reserve Program is scheduled to decline from 39.2 million acres to 32 million acres beginning in fiscal year 2010 under the 2008 Farm Act.

For details on environmental and conservation programs, see the Conservation Programs topic page.

Export Programs

Export programs administered by USDA's Foreign Agricultural Service (FAS) help promote and facilitate purchase of U.S. cotton in foreign markets. These programs include the Export Credit Guarantee Program, Market Access Program, and Foreign Market Development Program.

Export credit guarantees are designed to help foreign importers facing foreign exchange constraints and needing credit to purchase commodities. The Export Credit Guarantee Program (GSM-102) underwrites commercial financing of U.S. agricultural exports by guaranteeing repayment of private, short-term credit for up to 3 years. The CCC does not provide financing but guarantees payments due from foreign banks, which allows U.S. financial institutions to offer competitive credit terms to foreign banks.

The Market Access Program (MAP) aids in the creation, expansion, and maintenance of foreign markets for U.S. agricultural products. MAP forms partnerships between USDA's CCC and nonprofit trade associations, cooperatives, trade groups, or small businesses to share the cost of overseas marketing and promotional activities. MAP partially reimburses program participants for these activities, which include consumer promotions, market research, trade shows, and trade servicing.

The Foreign Market Development Program, also known as the Cooperator Program, aids in the creation, expansion, and maintenance of long-term export markets for U.S. agricultural products. The program enlists private sector involvement and resources in coordinated efforts to promote U.S. products to foreign importers and consumers around the world. CCC funds are used to partially reimburse cooperators conducting approved overseas promotion activities.

For more details on these and other export programs, see the Major Trade Programs page in the Farm and Commodity Policy topic page. The FAS website also provides Export Program information.

Last updated: Monday, June 18, 2012

For more information contact: Leslie Meyer, James Kiawu, and Stephen MacDonald