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Corn+Soybean Digest

Lean Less On The Farm Bill

Congress is ready to wield an ax to cut government spending, and crop support payments may be an easy target as USDA looks to cut more than $3 billion from its budget. How much will the return from your farm be slashed?

No one knows for now. But if you grow cotton, neither you, your lender nor the merchants that sell you everything from combines to computers will be happy if major cuts are made. Larger corn growers may also be crying, along with their local communities, which would likely see tax revenues and general economic growth reduced.

Don't look for any final farm bill to come out of Congress probably before late 2007, through which the current farm program continues. But there are still major threats that may reduce what you could receive from direct payments, counter-cyclical payments (CCP) and marketing loans.

Without those support payments, or safety net, provided by the farm program in 2005, many farmers, especially those in the South, wouldn't have come close to turning a profit at today's commodity prices.

Even at the highest price offered the past year, cotton producers, whether farming 100 acres or several thousand, couldn't have locked in as much of a return as provided by the farm program.

Virtually all of the net profit received by even the most efficient cotton producers comes from the marketing loan program, says Jay Yates, Texas A&M University Extension risk management specialist in Lubbock, the heart of the nation's main cotton production area.

With the loan and a maximum CCP and direct payment combination of about 20¢/lb., growers can receive 65-75¢/lb. That's 5-10¢ above the best futures price available for 2005.

Neither Yates nor other university economists can predict how deep farm programs, particularly those for cotton, will be cut. But with the strong southern leadership in both the U.S. House and Senate agricultural committees, cotton producers will probably escape the ultimate chopping block, says Mike Dicks, Extension economist at Oklahoma State University in Stillwater. He sees more of an “across the board” cut in farm programs that don't penalize one segment of the industry more than others.

“With Rep. Bob Goodlatte (R-VA) and Sen. Saxby Chambliss (R-GA) heading the congressional agricultural committees, I don't think cotton will suffer greatly in the next farm bill,” says Dicks, who closely monitors farm policy discussion in Washington. “Cotton may be the focal point in some cases, but I don't think it will be lowered any more than any other crop. I think we are all going to have to share in the poison. I don't think we're going to see a major cut in the amount of income received, just in how the income comes.”

The support from Sen. Chambliss in the cotton program was recently evident when he acknowledged that he hoped the Cotton Step Two program remains as long as possible, even though Step Two's elimination is required by the World Trade Organization (WTO).

The amount of reductions in the payment limitations will likely be less than that sought by Sen. Chuck Grassley, R- IA, who regularly aggravates southern producers who are heavy in cotton, but with substantial acres of corn and soybeans as well. There have been calls to reduce total payment limitations to $250,000 maximum.

“That is a tough question,” says Dicks, measuring how far payment limitations will be reduced. “Will it be all or part of the three entity rule? Will it be something else?”

Looking at the typical 1,000-acre cotton farm that yields just under 2 bales/acre from irrigated production, Yates says the total received from the marketing loan, direct payments and the CCP will range from $120,000 to $135,000.

“More than all of the farm's net farm income of $60,000-80,000 comes from government payments,” he says. “From 75 to 100% of the net profit is coming from the marketing loan gain.”

For example, in mid-September, cotton prices were in the 40¢/lb. range, when figuring in a basis of 8¢ under futures (of course, basis will vary from region to region). That is far below the government loan price of 52¢. The difference is made up by the loan deficiency payment or LDP. The average LDP across the nation was more than 13¢ in September and is expected to remain in the range or higher through harvest.

But with a modest cost of production in the 55¢/lb. range (many would claim closer to 60-65¢), even the loan wouldn't keep an efficient grower out of the red. That's where the direct payments of 6.7¢, and the CCP, with a maximum of about 13.7¢, provide the cushion. These decoupled payments are made on 85% of the base acres, bringing the total to about 17¢/lb.

Those payments provide the grower with a price of about 70¢/lb. If any of those payments are cut, there is serious trouble for the balance sheet.

Yates says some would argue that the direct payment and CCP are what keep irrigation, implement and other dealers in business.

With the huge crops expected for cotton (22.3 million bales), corn (10.6 billion bushels) and soybeans (2.86 billion bushels), don't expect any long-term price increases to take the pressure off the government program.

There is discussion about how the cotton program would be cut. One theory would keep a $75,000 LDP payment limitation per farm, but do away with the three-entity rule. Currently, the three-entity rule enables growers to receive the $75,000 payment, then two half-payments per additional farm. And with generic commodity certificates, there is no limit on how much a grower and his or her partners can collect if cotton prices are severely depressed.

There are other proposals that would limit overall LDP to $150,000 for a producer growing cotton and/or corn or soybeans, and keep the direct payment total at $40,000 and the CCP at $60,000. Again, there is no more three-entity rule in this proposal. The $250,000 is still included. Still others would like to cut them out completely.

Based on September 13¢-plus LDP rates for cotton, the cutoff for an irrigated farm averaging just under 900 lbs. of lint or under two bales/acre would be approximately 1,250 acres, with an expected marketing loan payment of $145,000. That limitation would easily impact many family farm operations, says Yates.

He adds that for a Midwestern farm that yields 185-190 bu. of corn, the cutoff is also 2000-2,500 acres based on the 38¢ LDP rate seen in mid-September and expected marketing loan payment of $142,000-162,000. Lower yields would increase the acreage cutoff, while higher yields would reduce them. Soybean prices, even though depressed this year, were not yet low enough for growers to qualify for LDPs.

Consider the 2004 LDPs of more than 16¢ for cotton and 53¢-plus for corn, and the acreage cutoffs are even tighter.

According to research by The Corn And Soybean Digest, the magazine's typical reader has an average farm size of 1,480 acres, including 1,280 acres of cropland, compared to the average U.S. farm size of 694 acres.

More than likely, people who have second and third jobs outside the family farm run the large majority of those 694-acre farms. Even those with a 1,480-acre farm might have a side job to help out.

For cotton growers to make a farm work, it may easily require 1,500-2,000 acres. “We consider about 1,200 acres of irrigated production and 2,000 acres of dryland cotton as the cutoff whereby a grower has to have a second job in town,” says Yates. “That will vary from region to region.

“If you think about it, Washington's definition of a family is the guy who also has a job in town,” Yates adds.

Dicks says that for all of agriculture, gross profit and cash revenue (GPOCR), or how much cash goes to growers after subtracting cash expenses from sales receipts, “was nearly 27% without government payments and 33% with them. This shows the strong profitability of U.S. agriculture. However, there is considerable difference in this measure among the various commodities.

“For rice GPOCR is negative 3.4% and cotton is only 7.8%,” he says, further emphasizing the impact of government payments on these commodities. “This is important for many reasons. Cuts in commodity program payments will have a direct impact on the level of profitability, and the crop with low GPOCR will have a hard time continuing to farm.”

The USDA has conducted numerous farm program forums where growers of all sizes have spoken. Congress anticipated delivering a proposed budget reconciliation package, including the $3 billion from agriculture, sometime this fall. It was delayed by the damage to farmland from Hurricane Katrina. The impact of Hurricane Rita on Texas and Louisiana cotton country may also be considered.

Dicks says the major discussions on the 2007 farm program will likely begin in March. “We'll see which bills float out,” he says. “With the summer break and the 2006 congressional elections, we probably won't see any other action until the end of the year.

“The real debate will be in early 2007. Those bills still floating on the surface will be looked at. And remember, the current farm program covers the 2007 crop.”

Dicks says there will likely be moves to request a U.S. program based on whether or not the European Union and other parts of the WTO take equal action in reducing farm support payments. That is always a question in Europe and other countries, which have long been bent on protecting their farmers for fear of shortages that were seen in World War II and other wars.

Dicks see potential cuts in virtually all phases of the farm program. “For the first time, trade, commodities, conservation and environmental issues are being discussed,” he says.

“It may come down to this — do we want to save the family farm just to save the family farm, or to manage the land resources more effectively?” Dicks asks.

Then again, what is a family farm? It may take a different shape in Iowa or Illinois than in Texas or Tennessee — the Corn Belt or the Cotton Belt.

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