Policy
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The Food, Conservation, and Energy Act of 2008 (2008 Farm Act)
gives cotton 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, cotton producers are affected by conservation
and trade programs.
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
cotton producers' management decisions and incomes. For further
information, see the Program Provisions section in the
Farm and Commodity Policy topic page, the Farm
Risk Management topic page, and the
Conservation Policy topic page.
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
upland cotton production is eligible for the program. National loan
rates are established in legislation, with the upland cotton
base-quality loan rate set at 52 cents per pound for crop years
2008-12.
The marketing assistance loan program is designed to provide
short-term financing in all price environments, as well as to
assist 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 loans at a rate less than the original loan rate
plus accrued interest and storage when the
adjusted world price (AWP) for upland cotton (as calculated by
USDA) is below the loan rate plus accrued interest and storage.
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,
and storage credits may be applied.
Producers are also offered the opportunity to receive an
equivalent benefit in the form of a loan deficiency payment (LDP)
if they choose not to participate in the loan program. In this
case, the producer can opt to receive a one-time payment on
harvested production at any time the AWP is below commodity loan
rates during the term of the loan. The difference between the AWP
and the loan rate is the LDP rate.
The loan rate for extra-long staple (ELS) cotton is fixed at
79.77 cents per pound for crop years 2008-12. Unlike upland cotton,
however, repayment rates for ELS marketing assistance loans are
equal to the established loan rate plus interest.
For further information, see the
Marketing Assistance Loans and Loan Deficiency Payments page in
the Farm and Commodity Policy topic page.
Special Program Provisions for cotton are also included in the
farm legislation with the aim of keeping U.S. cotton competitive on
the world market.
Direct and
Counter-Cyclical Payments
DPs and CCPs are available to eligible landowners and producers
with upland cotton base acres who enter into an annual agreement
with USDA's Farm Services Agency (FSA). Base acres and payment
yield for DPs and CCPs are unchanged from the 2002 Farm Act.
Payment acres for DPs 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.
DPs are made based on a fixed rate set in the 2008 Farm Act. For
producers with eligible historical upland cotton base acreage, the
payment rate for upland cotton is set at 6.67 cents per pound for
crop years 2008-12. The amount of the DP 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 upland cotton base
acreage, CCPs are paid whenever a commodity's
target price is greater than the calculated effective price for
that commodity. Target prices are specified in the 2008 Farm Act.
The upland cotton target price is 71.25 cents per pound for crop
years 2008-12. The effective price is equal to the sum of 1) the DP
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. Thus, the minimum effective upland cotton price is 58.67
cents per pound--the sum of the DP (6.67 cents) and the national
loan rate (52.00 cents). The maximum payment rate for upland cotton
is 12.58 cents per pound--the target price (71.25 cents) minus the
minimum effective price (58.67 cents). 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.
For further information, as well as conservation requirements
for payment eligibility, see the
Direct Payments and
Counter-Cyclical Payments pages in the Farm and Commodity
Policy topic page.
Average Crop Revenue
Election (ACRE) Program
Instituted by the 2008 Farm Act, the ACRE program is
administered by FSA. Beginning with the 2009 crop year, producers
of cotton and other crops can elect this optional, revenue-based
CCP, 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,
direct payments 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.
For further information, see the Average Crop
Revenue Election page in the Farm and Commodity Policy topic
page.
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 DPs, 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 DPs and CCPs, ACRE
payments, marketing loan benefits, or disaster payments.
For more information, see the
Payment Limits page in the Farm and Commodity Policy topic
page.
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. Cotton 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. For further information, see
the
Crop Yield and Revenue Insurance page in the Farm and Commodity
Policy topic and the Farm
Risk Management topic.
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. For further information, see the
Natural Disaster and Emergency Assistance Programs page in the
Farm and Commodity Policy topic page.
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, Conservation Reserve Enhancement
Program, and 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.
For details on environmental and conservation programs, see the
Conservation Programs topic page.
Export
Programs
Export programs administered by USDA's Foreign
Agricultural Service (FAS) help promote and facilitate purchase
of U.S. cotton in foreign markets. These programs include the
Export Credit Guarantee Program, Market Access Program, and 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.
For more details on these and other export programs, see the
Major Trade Programs page in the Farm and Commodity Policy
topic page. The FAS website also provides Export Program information.