July, 2003

The Farm Security and Rural Investment Act of 2002 (2002 Act) provides for direct and counter-cyclical payments, nonrecourse marketing assistance loans, and loan deficiency payments for the 2002-2007 crops to help ensure a strong and viable U.S. agriculture sector.

Direct and counter-cyclical payments reduce financial risks and help producers meet their cash flow needs. Marketing assistance loans provide producers interim financing at harvest time to meet cash flow needs without having to sell their commodities when market prices are typically at harvest-time lows. Allowing producers to store production at harvest facilitates more orderly marketing of commodities throughout the year.

Commodities eligible for direct and counter-cyclical payments and nonrecourse marketing assistance loans for the 2002-2007 crops are wheat, corn, grain sorghum, barley, oats, soybeans, other oilseeds (including sunflowers, canola, safflower, flaxseed, rapeseed, mustard seed, crambe and sesame), rice, upland cotton, and peanuts. Other commodities eligible for nonrecourse marketing assistance loans are Extra Long Staple (ELS) cotton, honey, wool, mohair, dry peas, lentils, and small chickpeas. For ELS cotton, marketing assistance loans must be repaid at the loan rate plus interest and loan deficiency payment provisions do not apply.

Direct payments under the 2002 Act are similar to production flexibility contract (PFC) payments under the Federal Agriculture Improvement and Reform Act of 1996 (1996 Act). Counter-cyclical payment rates depend on market prices and increase as market prices decline below specified levels. Counter-cyclical payments replace ad hoc market loss assistance payments, which supplemented PFC payments under the 1996 Act. Marketing assistance loans and loan deficiency payment provisions of previous legislation are continued under the 2002 Act.

Eligibility Requirements

Direct and Counter-cyclical Payments - Producers are eligible for direct and counter-cyclical payments on farms with eligible acreage bases. To be eligible for payments on these farms, producers must annually:

1. Sign a direct and counter-cyclical program (DCP) agreement with the Farm Service Agency (FSA);

2. Report how they use all their farm's cropland acreage;

3. Comply with conservation and wetland protection requirements on all their farms;

4. Comply with the planting flexibility requirements;

5. Use the cropland for agricultural or related activities; and

6. Control noxious weeds and maintain land in sound condition, if the field is not cultivated.

Nonrecourse Marketing Assistance Loans - To be eligible for marketing assistance loans, producers must:

1. Comply with conservation and wetland protection requirements; and

2. Report how they use all their cropland acreage on the farm.

Direct and counter-cyclical payment agreements are not required for marketing assistance loan eligibility.

Landowners had a one-time opportunity in 2003 to either:

1. Use their farm's 2002 PFC acreage and add acreage bases for oilseeds and peanuts that reflect average 1998-2001 plantings; or

2. Update their farm's acreage bases to reflect average 1998-2001 plantings for all commodities eligible for direct and counter-cyclical payments.

If they chose to update their farm's acreage bases, they could also update their counter-cyclical payment yields using one of the following two methods:

1. 93.5 percent of the 1998-2001 average yield; or

2. The direct program payment yield (the PFC payment yield in effect under the 1996 Act) plus 70 percent of the difference between the 1998-2001 average and the direct program payment yield.

For wheat, feed grains, rice, and upland cotton, direct payment yields are the same as the payment yields that were used for making PFC payments. For soybeans and other oilseeds, direct payment yields are based on 1998-2001 production histories, adjusted to reflect 1981-85 yields.

If no election was made before the 2002-crop election period ended, acreage bases for the farm were established using the farm's 2002 PFC acreage and adding acreage bases for oilseeds.

For these farms, direct and counter-cyclical payment yields for wheat, feed grains, rice, and upland cotton are the same as those yields used for making PFC payments. For soybeans and other oilseeds, yields were assigned based on the county acreage where the farm is located, adjusted to reflect 1981-85 yields.

Direct payments are similar to PFC payments producers received for wheat, feed grains, rice, and upland cotton under the 1996 Act. For each commodity, the direct payment equals the direct payment rate times 85 percent of the farm= s base acreage times the farm= s direct payment yield. The direct payment rates for each feed grain are as follows:

Corn - $0.28 per bushel

Grain sorghum - $0.35 per bushel

Barley - $0.24 per bushel

Oats - $0.024 per bushel

Direct payments for the 2002 crop will be made as soon as a farm is enrolled in the direct and counter-cyclical payment program.

For the 2003-2007 crops, direct payments are made after October 1 of the year the crop is harvested. Producers may request up to 50 percent of the direct payment in advance, but no earlier than December 1 of the year before the crop is harvested.

Table 1 shows the 2003 direct and counter-cyclical payment cycles.

For each commodity, the counter-cyclical payment equals the counter-cyclical payment rate (CCPR) times 85 percent of the farm= s base acreage times the farm= s counter-cyclical payment yield. Counter-cyclical payments are made when a commodity= s effective price (EP) is below its target price (TP). The effective price equals the direct payment rate (DPR) plus the higher of the:

1. National average farm price (NAFP); or

2. National average loan rate (NALR).

Target prices and loan rates are set in the 2002 Act at the levels shown in Table 2.

The marketing year for each feed grain is as follows:

September 1-August 31: Corn, Grain sorghum;

June 1-May 31: Barley, Oats.

The 2002 corn national average loan rate is $1.98 per bushel. Assuming the 2002/03 corn national average farm price is $2.25 per bushel, the counter-cyclical payment rate per bushel is calculated as follows:

TP - [DPR + (higher of NAFP or NALR)] =

TP - [ DPR + NAFP ] =

TP - EP = CCPR

$2.60 - [$0.28 + (higher of $2.25 or $1.98)] =

$2.60 - [$0.28 + $2.25] =

$2.60 - $2.53 = $0.07

The national average farm price is the market price producers receive during the marketing year as determined by the National Agricultural Statistics Service (NASS). Average market prices producers receive are published near the last business day of each month in Agricultural Prices, which can be found by visiting the NASS reports calendar Web site at www.usda.gov/nass/pubs/rptscal.htm

Note that the feed barley national average farm price is used for determining the barley counter-cyclical payment rate.

Monthly updates of U.S. Department of Agriculture's projected national average farm prices can be found in the World Agricultural Supply and Demand Estimates reports by visiting the World Agricultural Outlook Board's Web site at: www.usda.gov/oce/waob/wasde/wasde.htm

For crop years 2002-2006, the counter-cyclical payment cycle consists of two partial payments, if authorized, and a final payment.

For crop year 2007, the counter-cyclical payment cycle consists of a partial payment, if authorized, and a final payment.

If 2002-2007 partial payments exceed the final calculated payment based on the final national average farm price for the marketing year, producers are required to refund the balance.

The 2002 Act provides for 9-month corn, grain sorghum, barley and oats nonrecourse marketing assistance loans. Marketing assistance loans allow a producer growing eligible crops to store production and use loan proceeds to meet cash flow needs without selling the crop. These loans are nonrecourse because a producer pledges the crop as collateral and has the option of delivering the pledged commodity to the Commodity Credit Corporation (CCC) as full settlement of the loan at maturity.

A producer may repay a marketing assistance loan at any time. The loan repayment rate equals the lower of the CCC determined local market price (often referred to as the posted county price (PCP)) or the loan rate plus accrued interest and other charges.

A producer is also eligible for a loan deficiency payment (LDP) in lieu of obtaining a loan.

Actual loan rates are based on each commodity's national average loan rate, and they:

A producer must:

A producer retains beneficial interest in the commodity if all of the following remain with the producer:

Title to the commodity - The producer has not sold or has not delivered the commodity or warehouse receipt to the buyer. Title may be considered to be transferred before the producer receives payment for the commodity. For example, title is considered transferred if a producer executes an option to purchase without a provision in the agreement that states that title, risk, and beneficial interest remain with the producer until the buyer exercises this option to purchase and the option to purchase expires at the earlier of:

a. The maturity of any CCC loan secured by such commodity,

b. The date CCC claims title to such commodity, or

c. Another date provided in the option.

Once beneficial interest in the commodity is lost, the commodity loses eligibility for a loan or LDP and remains ineligible even if the producer later regains beneficial interest.

For further information see the FSA fact sheet on Beneficial Interest Requirements For Loans and LDPs, contact a local FSA county office, or visit the FSA Web site at www.fsa.usda.gov

Loans mature on the last day of the ninth calendar month following the month in which the loan is approved. A producer may settle an outstanding nonrecourse loan:

The loan repayment rate is the lower of the:

1. Applicable county loan rate plus accrued interest and other charges (per unit); or

2. CCC determined local market price for the respective commodity, i.e., the PCP

Loan repayment rates are established and available at each county FSA office. PCPs are based upon the previous day's market prices for each feed grain at appropriate U.S. terminal markets, CCC determines, adjusted to reflect quality and location.

A producer realizes a marketing loan gain if the loan is repaid at less than the loan principal. The marketing loan gain rate equals the amount by which the applicable loan rate exceeds the loan repayment rate.

A producer who is eligible to obtain a loan, but who agrees to forgo the loan, may obtain an LDP. The LDP rate equals the amount by which the applicable county loan rate where the commodity is stored exceeds the loan repayment rate for the respective commodity. he LDP equals the LDP rate times the quantity of commodity for which the LDP is requested.

Table 3 provides an example of how corn marketing loan gains and LDPs are calculated.

The final loan/LDP availability date is March 31 for barley and oats and May 31 for corn and grain sorghum of the calendar year after the calendar year the grain is harvested. For example, for crop year 2003:

March 31, 2004: Barley and Oats;

May 31, 2004: Corn and Grain Sorghum.

A producer may obtain a loan or receive an LDP on all or part of their eligible production at any time during the loan availability period.

Commodity certificates are available to producers to use in acquiring 2002- through 2007-crop collateral pledged to CCC for a commodity loan. Producers with outstanding nonrecourse marketing assistance loans may purchase commodity certificates and exchange them for loan collateral at USDA Service Centers. The exchange rate will be the PCP on the date the commodity certificate is purchased. Commodity certificate exchanges will not be available when the exchange rate exceeds the applicable loan rate. Realized gains from the certificate exchange, also called certificate exchange gains, equal the amount by which the loan rate exceeds the PCP. For further information, see the FSA fact sheet Commodity Certificates, contact a local FSA office, or visit the FSA Web site at: www.fsa.usda.gov

A producer who repays a loan at less than the loan rate plus accrued interest and other charges or receives an LDP must provide production evidence acceptable to CCC, such as evidence of sales, warehouse receipts, or load summary or assembly sheets.

The 2002 Act extends the 1996 Act's planting flexibility. Generally a producer may plant any commodity or crop on base acres without penalty. Some restrictions, however, apply depending on a producer's or farm's planting history.

The 2002 Act adds wild rice to the fruit and vegetable crops subject to planting restrictions, but slightly eases the restrictions compared with those under the 1996 Act. To be eligible for loan benefits and payments under the 1996 Act, producers signed 7-year contracts and fruit and vegetable restrictions applied to the entire contract period. Under the 2002 Act, producers may annually opt out of eligibility for direct and counter-cyclical payments and plant fruits, vegetables and wild rice, yet remain eligible for marketing assistance loans for all loan-eligible commodities.

A producer cannot receive direct or counter-cyclical payments on a farm where plantings include fruits, vegetables (other than lentils, mung beans, and dry peas) and wild rice (FAV/WR) on base acres unless the commodity is destroyed before harvest or meets the following statutory exceptions. Plantings of FAV/WRs are not limited:

1. In any region with a history of double cropping commodities eligible for direct and counter-cyclical payments with FAV/WRs;

2. On a farm with a history of planting FAV/WRs (using either the 1991-95 or 1996-01 period) except that direct and counter-cyclical payments will be reduced by an acre for each acre planted to an FAV/WR; and

3. By a producer with an established history of planting a specific FAV/WR, except that the acreage may not exceed the average annual plantings in the 1991-1995 or the 1998-2001 crop years (excluding any crop year with no plantings) and that direct and counter-cyclical payments shall be reduced by an acre for each acre planted to an FAV/WR.

Starting with the 2003 crop, individuals and entities whose previous 3-year average adjusted gross income (AGI) exceeds $2.5million are ineligible for many program benefits unless they can establish that at least 75 percent of their AGI is derived from agriculture. Program benefits for which individuals or entities exceeding the AGI Limit will be ineligible include:

The 2002 Act also establishes limits on payments a "person" may receive from farm programs. The definition of "person" includes individual farmers, but also encompasses limited partnerships, corporations, and other types of organizations. The 3-entity rule, carried over from previous legislation, limits to three the number of entities through which a "person" may receive payments.

The sum of LDPs and marketing loan gains for the commodities listed below is subject to a $75,000-per-person payment limitation for each crop year. This payment limitation is separate from the $40,000-per-person limitation for direct payments and $65,000-per-person limitation for counter-cyclical payments. For more information on payment limitations see the FSA fact sheet Payment Eligibility and Limitations, contact a local FSA office, or visit the FSA Web site at www.fsa.usda.gov

The per "person" payment limitations apply for each crop year for the following:

Note: Please see Feed Grains PDF for the following tables:

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact USDA's TARGET Center at 202-720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 Independence Avenue, SW, Washington, D.C., 20250-9410, or call (202) 720-5964 (voice or TDD).

USDA is an equal opportunity provider and employer.