Marketing Assistance Loans and Loan Deficiency Payments
Direct and Counter-Cyclical Payments
Average Crop Revenue Election Program
Payment Limits
Crop and Revenue Insurance
Environment and Conservation Programs
Export and Food Aid Programs
Ethanol Policy

The Food, Conservation, and Energy Act of 2008 (2008 Farm Act) provides feed grain (corn, grain sorghum, barley, and oats) 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, feed grain producers are affected by conservation and trade programs. Ethanol policies and clean air regulations also have an impact on feed grain markets.

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 feed grain producers' management decisions and incomes.

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 feed grain production is eligible for the program. National loan rates are set in the legislation.

The marketing assistance loan program provides short-term financing in all price environments, as well as assists 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 commodity loans at a rate less than the original loan rate plus interest when posted county prices (PCPs) are below commodity loan rates plus interest. 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.

If producers choose not to participate in the loan program, they still have the opportunity to receive an equivalent benefit in the form of a loan deficiency payment (LDP). In this case, the producer can opt to receive a one-time payment on harvested production at any time PCPs are below commodity loan rates during the term of the loan. The difference between the PCP and the loan rate is the LDP rate. Producers can also receive an LDP if their crop is cut for silage. LDPs for grazed-out crops continue for barley, oats, wheat, and triticale.

Direct and Counter-Cyclical Payments

Direct and counter-cyclical payments are available to eligible landowners and producers with feed grain base acres who enter into an annual agreement with USDA's Farm Services Agency (FSA). Base acres and payment yield for direct and counter-cyclical payments are unchanged from the 2002 Farm Act. Payment acres for direct payments 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.

Direct payments for crop years 2008-12 are made based on fixed rates set in the 2008 Farm Act. For producers with eligible historical corn, grain sorghum, barley, and oats base acreage, the amount of the direct payment 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 corn, grain sorghum, barley, and oats base acreage, counter-cyclical payments are paid whenever a commodity's target price is greater than the calculated effective price for that commodity. Target prices for crop years 2008-12 are specified in the 2008 Farm Act. The effective price is equal to the sum of 1) the direct payment 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. The maximum CCP rates (target price minus direct payment rate minus loan rate) are shown in the table.

For example, the minimum effective corn price is $2.23 per bushel--the sum of the direct payment (28 cents) and the national loan rate ($1.95). The maximum payment rate for corn is 40 cents per bushel--the target price ($2.63) minus the minimum effective price ($2.23). 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.

Average Crop Revenue Election Program

The ACRE program is a new program in the 2008 Farm Act and is administered by FSA. Beginning with the 2009 crop year, producers of feed grains and other crops can elect this optional, revenue-based counter-cyclical program, 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, DPs 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
AND
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.

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 direct payments, 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 direct and counter-cyclical payments, ACRE payments, marketing loan benefits, or disaster payments.

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. Feed grain 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.

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.

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, the Conservation Reserve Enhancement Program, and the 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.

Export and Food Aid Programs

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

In addition, as part of U.S. food-aid programs, USDA and USAID provide food aid overseas through the P.L. 480 program, the Section 416 program, and the Food for Progress (FFP) program. Food-aid sales, however, account for a very small portion of U.S. feed grain exports.

Ethanol Policy

Fuel ethanol (ethyl alcohol denatured with gasoline) can be used as a gasoline additive to reduce the carbon monoxide content of engine exhaust and to increase gasoline's octane rating, which reduces engine knock. Ethanol is made by fermenting and distilling simple sugars. Corn is the primary feedstuff used to produce ethanol; however, other grains (especially sorghum) are also important.

Policy incentives underlie the interest in ethanol. The Energy Policy Act of 2005 (P.L. 109-58) established a renewable fuels standard (RFS), which mandated the use of renewable fuels in gasoline. The U.S. Government blender tax credit, various State production subsidies, and some States' required use of fuel alcohol, as well as the cost and availability of substitute fuel additives, affect the amount of ethanol used.

The Energy Independence and Security Act of 2007 (P.L. 110-140) required the use of 9.0 billion gallons of renewable fuels in 2008, increasing each year until use reaches 36 billion gallons in 2022. In addition, the Act requires that an increasing share of the mandate be met with advanced biofuels, which are biofuels produced from feedstocks other than corn starch (and with 50 percent lower-lifecycle greenhouse gas emissions than petroleum fuels). Potential advanced biofuels include ethanol from cellulosic material (such as perennial grasses and municipal solid waste), ethanol from sugarcane, and diesel fuel substitutes produced from a variety of feedstocks.

Corn used for fuel alcohol production increased from less than 1 percent of total U.S. domestic corn use in 1980/81 to almost 25 percent of total U.S. domestic corn use in 2007/08. This large and rapid expansion of U.S. ethanol production affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops. Many aspects of the livestock sector are affected too. As a consequence of these commodity market impacts, farm income, government payments, and food prices also change. Adjustments in the agricultural sector are already underway and will continue for many years as interest grows in renewable sources of energy to lessen dependence on foreign oil.

Last updated: Monday, May 28, 2012

For more information contact: Thomas Capehart