December 19, 2003
Economist: Support payments underpin strong soybean market
WEST LAFAYETTE, Ind. - Christmas arrived early for soybean growers. Along with strong cash prices for the oilseed, farmers received a few dozen cents per bushel more from the government.
Corn and wheat producers weren't left off the gift list, but those growers might not be as full of holiday spirit, said Allan Gray, a Purdue University agricultural economist.
Based on the combination of market prices and government support payments, soybean farmers stand to ring in New Year's on a higher note, Gray said.
That is, if they still have crop to sell.
Farmers can calculate their government payments through an online spreadsheet developed by Gray and Andrew Falwell, a research associate with Purdue's Center for Food and Agricultural Business. The spreadsheet is available online.
"If you have soybeans to sell, you're in great shape," Gray said. "You're probably going to get $7 a bushel for your soybeans, and then you're also getting a direct payment that's the equivalent of about 44 cents a bushel for about half of your normal production level. That's a pretty good deal. You've got a high price, and then you're going to receive a government subsidy on top of that. Of course, a lot of people don't have soybeans to sell."
The direct payment is one of three government support programs for crop farmers. The other two are loan deficiency payments (LDPs) and counter cyclical payments (CCPs).
All three payments were contained in the 2002 Farm Bill.
The direct payment, a holdover from the 1996 Farm Bill, provides a standard support level for farmers, regardless of what crop they plant or where market prices stand. LDPs another longtime subsidy pay producers the difference per bushel between local market prices and local loan rates, when prices dip below loan rates. CCPs, introduced in the new farm bill, pay the amount per bushel between crop prices and a government-set "target" price, if crop prices are lower.
While they qualify for government support, corn and wheat producers aren't sitting as pretty as soybean growers in potential income, Gray said.
"For corn and wheat producers, this is going to be an average year," he said. "Corn is a tough one right now because the price of corn is in between that window where the loan rate is and where the pivot point is on counter cyclical payments. If corn prices rise, then the final amount of counter cyclical payments is going to be lower. If the price starts to move down, we might end up with even higher counter cyclical payments than what we would have expected."
On Dec. 11, the U.S. Department of Agriculture estimated the season average price for corn at $2.20 a bushel, wheat at $3.30 a bushel and soybeans at $7.25 a bushel. The estimates in the agency's World Agricultural Supply and Demand report have some bearing on support payments.
"With direct payments, it doesn't matter what the prices are because farmers are going to receive those payments anyway," Gray said. "Corn, for example, is 28 cents a bushel, multiplied by what a farmer's historical production level would have been, times 85 percent. For counter cyclical payments, producers will be paid the difference between the target price less the fixed payment, minus the World Agricultural Supply and Demand estimate price. That means for corn, the target price is $2.60 a bushel. The direct payment is 28 cents, so the effective price what we call a pivot price is $2.32. Currently, the World Agricultural Supply and Demand estimate is $2.20 a bushel for the season average, which doesn't end until next Sept. 30. So producers should expect to receive 12 cents a bushel on corn in counter cyclical payments. That's $2.32, less the $2.20 that the USDA thinks the season average price will be.
"This 12 cents per bushel may change before Sept. 30, 2004, as USDA revises its estimates of the season average price."
One support payment farmers aren't likely to receive is the LDP.
"A loan deficiency payment depends on what the price is today," Gray said. "The prices of all three crops that we worry the most about in Indiana corn, soybeans and wheat are above what the current county loan rates are, so there will be no payments. Throughout this season and before farmers harvest next year's crop, there's not much anticipation that they will be getting loan deficiency payments on any of those crops."
The support payment calculator Gray helped develop allows farmers to determine the amount in direct payments, LDPs and CCPs they can receive for their corn, soybean and wheat crops on a particular farm. For the spreadsheet to operate properly, Excel software must be installed on a farmer's computer.
When running the spreadsheet, farmers will be asked to provide their total acres of corn, soybeans and wheat; crop yields; local market prices; county loan rates; program yields; and season average prices. Most of those numbers are available through links on the calculator Web site or through county offices of the Farm Service Agency.
The calculator is updated regularly to reflect changes in season average prices, Gray said. Although the spreadsheet is a helpful tool, it is not designed to recommend marketing strategies, he said.
Additional information on government support payments is available in the paper "What to Expect from Government Support Payments for the 2003 Crop," by Gray and Falwell. The paper can be read online.
Writer: Steve Leer, (765) 494-8415, firstname.lastname@example.org
Source: Allan Gray, (765) 494-4323, email@example.com
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