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ECON 339X: Agricultural Marketing

Learn about farm programs in Chad - Direct Payments, Countercyclical Payments, and Marketing Loans. Understand how fixed and decoupled payments work, as well as the importance of historical acreage and yields in determining payment rates. Discover the intricacies of Price Countercyclical Payments and the Marketing Loan Program, providing valuable income support to farmers. Familiarize yourself with target prices, loan rates, and county-level regulations. Visit the class website for more information.

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ECON 339X: Agricultural Marketing

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  1. ECON 339X: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 John Lawrence Professor jdlaw@iastate.edu 515-294-7801

  2. Today’s Topic Farm Programs

  3. Direct Payments Payments that provide income support to farmers “Fixed” – do not change with agricultural conditions “Decoupled” – do not change with individual decisions

  4. Direct Payment Base Payments are based on historical acreage and yields Payment rate is set by law Producers know the exact amount they will receive each year

  5. Direct Payment Rates

  6. Direct Payment Example Direct Payment = 83.3% * Payment Acreage * Direct Payment Yield * Direct Payment Rate $27.08 = 83.3% * 116.1 bu/ac * $0.28/bu

  7. Price Countercyclical Payments Payments that provide income support to farmers “Price Countercyclical” – payment rate changes with season average commodity price

  8. Countercyclical Payment Base Payments are based on historical acreage and yields Payment rate changes with price Producers do not know the exact amount they will receive each year

  9. Target Prices

  10. Loan Rates

  11. Countercyclical Payment Rate Countercyclical Payment Rate = Max(0, Target Price – Direct Payment Rate – Max(National Loan Rate, National Season Average Price)) Target Price, Direct Payment Rate, and National Loan Rate are set by Congress

  12. Countercyclical Payment Rate Countercyclical Payment Rate = Max(0, Target Price – Direct Payment Rate – Max(National Loan Rate, National Season Average Price)) $0.29 = Max(0, $2.63 – $0.28 – Max($1.95, $2.06))

  13. Countercyclical Payment Example Countercyclical Payment = 83.3% * Payment Acreage * Countercyclical Payment Yield * Countercyclical Payment Rate $29.52 = 83.3% * 122.1 bu/ac * $0.29/bu

  14. Countercyclical Payments

  15. Marketing Loan Program Government program meant to provide cash flow support during the marketing year Loans are nonrecourse, this means that the crop can be used as payment for the loan Available for over 20 commodities

  16. Loan Rates

  17. Marketing Loans and LDPs The program sets rates at the county level by crop Eligible production may either be put under loan or have a loan deficiency payment (LDP) taken on it The amount of the loan or LDP depends on the quantity you wish to use in the program

  18. Marketing Loans and LDPs The program is based on the county in which you will store your crop, not the county in which you produce the crop There may be advantages to growing the crop in one county and storing in another

  19. Marketing Loans Loans are for 9 months, but can be redeemed at any time To pay back the loan, you may either forfeit the crop as payment or pay an amount set by the minimum of the posted county price (PCP) or the loan rate plus interest Possible to pay back the loan at less than face value

  20. Posted County Prices (PCP) Estimate of local market prices Usually based on 2 terminal markets, takes the higher price Terminal prices are adjusted for transportation costs and other factors

  21. PCP Calculation • Example: Story County, Iowa, Corn 11/10/05 PCP = $1.40

  22. Loan Deficiency Payments (LDP) Alternative to taking the loan Works like taking the loan and paying it back the same day Can not take the loan and LDP on the same quantity If the PCP is greater than the loan rate, then you can only take the loan

  23. LDP Calculation Example: Story County, Iowa, Corn 11/10/05

  24. Loan vs. LDP The loan is like a free put option at the loan rate The loan protects you against downside price movements, but costs you interest if prices exceed the loan rate The LDP exposes you to downside price movements, but there are no interest charges

  25. Loan vs. LDP

  26. Summary of Programs Direct payments – Crop-specific income support Counter-cyclical payments – Crop-specific price support Marketing loans – Crop-specific price support ACRE – Crop-specific revenue support SURE – Whole-farm revenue support

  27. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ339/Spring2011/

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