Complex formulas will affect how you approach signing up for the new farm bill. With harvest over, it's time to visit with the Farm Service Agency to see how your farm should approach the 2002 Farm Security and Rural Investment Act.

Remember when you were a kid and you got Christmas presents that were wrapped in so many layers of packaging and paper that you had trouble getting to the real gift inside? The 2002 farm bill (Farm Security and Rural Investment Act) is a bit like that.

Briefly, the 2002 law adds new crop benefit features in the form of "direct" and "counter-cyclical" payments. Also, oilseeds--including soybeans--are made a full program crop. The farm bill has complex formulas for calculating amounts to be paid, and the set of options a farmer chooses could amount to several thousand dollars over the 6-year life of the law.

"It's unbelievably complicated," said one grain marketer, after an initial reading of the new farm legislation. "If I wanted to get this confused, I'd go talk to my father-in-law."

Better, probably, to go talk with your county Farm Service Agency (FSA) people. Since President Bush signed the farm bill into law on May 13, FSA offices have been busy putting together information to help farmers unravel the details.

"We have sent letters with basic acreage and yield information to more than 4,000 farm operators and landowners," Everette Wood, Saline County, Mo., FSA county executive director, said in mid-October. "You need your county numbers as a place to start computing your base acreage and yield for the direct and counter-cyclical payments."

The farm bill establishes three types of crop payments a farmer may receive.

Loan deficiency payments (LDP)
The marketing loan and LDP are little changed from the previous farm bill. The loan rate, in effect, sets a floor price for a crop. When the posted county price for a commodity drops below the loan rate, the LDP makes up the difference. However, loan rates are changed for most crops.

Notice that the soybean loan rate is lower than under the 1996 farm bill. However, as a program crop, soybeans now are eligible for other payments.

Direct payments
Direct payments are something new under the 2002 law and are not tied to current production or market prices. Rather, the direct payment is a level, guaranteed amount, similar to the old AMTA or "Flex" payments under previous legislation.

"The direct payment amount is linked to base acres and historic yield," said Wood. "However, this payment is guaranteed--you don't have to pay it back if prices change." Direct payment rates remain constant over the life of the farm bill.

The computation for direct payments: Base acres X 85 percent X counter-cyclical yield X direct payment rate X producer share.

Counter-cyclical payments (CCP)
If you can recall the old deficiency payments of a couple of farm bills past, counter-cyclical payments are similar--with a few important differences. Payment rates depend on the relationship between a target price (see the table below) and the market price. However, unlike older deficiency programs, CCP does not require set-asides and is not affected by what crops you plant.

The formula to calculate the CCP rate is: target price minus the direct payment rate minus the loan rate or season average market price, whichever is higher. CCP payments are greatest when market price falls below the loan rate, but are zero when the market price exceeds the target price minus the direct payment rate. The counter-cyclical payment amount is calculated as CCP rate X base acres X 85 percent X counter-cyclical yield X producer share.

Updating your base
Most farmers haven't needed to think about crop base acres much for the past 16 years or so. But, as you can see, base (payment acres) and yield are critical to deciding the dollar amount a farm will potentially receive in direct and counter-cyclical payments. You have a one-time chance to update your farm's base acreage and yield, and you need to make your decisions before April 1, 2003. Once base and yield are selected, these become permanent for the life of the farm bill.

For most landowners, the choices for updating base boil down to three options:

1. Do nothing and leave base acres as they are recorded by FSA;
2. Add oilseed (soybean) acres to the existing base;
3. Scrap the existing crop bases and replace them with an average of actual acres planted in the four years, 1998-2001.

Things get more complicated when you need to reduce or offset existing base acres in order to add oilseeds, as may be the case on many farms. With the exception of double-cropped acres (which may be counted twice to determine base), base acres cannot exceed 100 percent of the total cropland. So, if a landowner wants to add soybeans at the expense of existing base acres, he may choose which crop base or portion of the crop base to be dropped.

"Generally, there's more money with corn or wheat base than for soybean base," said Wood. "In most cases, you wouldn't want to swap corn or wheat base for soybean base. However, if part of your base is designated barley or oats, the money is potentially greater with soybeans."

Suppose that prices fall below the loan rate so that CCP kicks in at the maximum. A wheat base acre with a 50-bushel program yield is worth $53 in direct and counter-cyclical payments. However, a soybean base acre with a 30-bushel program yield is worth only $24. If the goal is to maximize government payments, a farmer would give up an acre of wheat base only if he could add at least 2.2 acres of soybean base.

In all cases, landowners make the base acreage decisions on each farm. However, landowners often assign special powers of attorney to farm operators who lease their land.

"Because of the changed language in the farm bill, we are requiring new powers of attorney from landowners," Wood said. "Powers of attorney must be executed on FSA Form 211, and if the grantor signs the form outside the FSA office, the FSA-211 must be notarized."

Updating CCP yields
Perhaps the most expensive decision producers have to make is whether (and how) to update crop yields. The yield for purposes of direct payments remains at the 2002 PFC (production flexibility contract) level. However, updating your yield history can have a big impact on CCP payments. If crop yields are not updated, FSA offices will use PFC yield for the traditional program crops or 78 percent of the "plug" (plug is 75 percent of the 4-year NASS county average yield).

"If you can prove your yields for 1998-2001, it may be well worth the time and effort," said Wood. "We will take the average yield for those four years; that becomes your yield history. If you can prove soybean yield that is above the county average, it's going to be worth quite a lot more money."

To substantiate yields, FSA requires pretty good evidence: warehouse receipts, weight tickets or LDP payment records--in years when LDP payments were made.

"For crop/livestock producers who feed all or part of their grain to livestock, yields are harder to prove," said Wood. "But we can help establish production in some cases."

Figuring the best way to go for many crop farms will involve potentially dozens of possible choices. To update base and yield with confidence, producers need to test a number of combinations of options for each crop and mix of crops and expected crop prices.

"You may want to run some low-price scenarios and some high-price scenarios to see how your payments would be affected," said Peter Zimmel, agricultural economist with the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.

Computer software is available to help in these decisions. Most county FSA offices have tools available to help estimate future payments, based on the producer's information. A "Base and Yield Update Option Analyzer" calculation is available from Texas A&M University, and can be found at Texas A&M's website: http://www.afpc.tamu.edu. FAPRI has an internet-accessible spreadsheet that helps compute various base and yield options. The spreadsheet is designed for computers with Microsoft-Excel systems and can be found at http://www.fapri.missouri.edu. A web-based version from FAPRI can be downloaded for non-Microsoft systems.

Whatever the tool used, it's a good idea for producers to assess their options before the April 1 sign-up deadline. The decisions made could amount to a great deal of money between now and the 2007 crop year.

Got MILC?
The 2002 farm bill ushers in a re-vamped dairy price support system. Essentially, the new Milk Income Loss Contract (MILC) codifies the Northeast Dairy Compact into a national program.

Sign-up began earlier this fall; program payments began in October and are retroactive from Dec. 1, 2001, for eligible producers. Dairy support payments are made in any month when the price of Class I milk at Boston falls below $16.94 per hundredweight. Payment rates are 45 percent of the difference between $16.94 and the Boston Class I price for that month.

Payments are made on a per-operation basis up to a maximum of 2.4 million pounds of milk (the production from about 140 average dairy cows) produced and sold for the fiscal year. To be eligible for the MILC program, producers must be in compliance with conservation provisions on highly erodible lands and wetlands, and must sign a contract with USDA's Commodity Credit Corporation to provide monthly marketing information.

The 11 consolidated federal milk marketing orders continue under MILC, as does the Dairy Export Incentive Program.