Farm and Commodity Policy: Program Provisions: Counter-Cyclical Payments

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Counter-cyclical payments (CCPs) provide benefits to producers with eligible historical production of wheat, corn, grain sorghum, barley, oats, upland cotton, long- and medium-grain rice, soybeans, other oilseeds, dry peas, lentils, small and large chickpeas (covered commodities) and peanuts whenever the effective price for a commodity is less than the target price. The program is administered by USDA's Farm Service Agency (FSA). Under the 2008 Farm Act, CCPs are not available to producers who elect to participate in the Average Crop Revenue Election (ACRE) Program.

Program Overview

For crop years (CY) 2008-12, producers with eligible historical production enroll annually in the program to receive payments on covered commodities and peanuts. Counter-cyclical payments are available whenever the commodity's effective price is less than the target price. The effective price of a commodity is the sum of the direct payment rate, plus either the national commodity loan rate or the national average farm price for the crop year, whichever is higher.

The counter-cyclical payment amount is calculated as the product of the payment rate, the payment acres (85 percent of base acres in CYs 2008-12), and the payment yield.

For example, the payment for an individual corn farmer is determined as:

Payment rate_corn = (target price)_corn – (direct payment rate)_corn – (higher of commodity price or loan rate)_corn

CCP_corn = ([Base acres]_corn x 0.85) x (payment yield)_corn x (payment rate)_corn

Base acreage and payment yields are based on historical parameters specified in the 2002 Farm Act. Provisions are unchanged in the 2008 Farm Act for most commodities except for any newly designated oilseed crops or newly eligible pulse crops. Base acres and payment yields for pulse crops (dry peas, lentils, small chickpeas, and large chickpeas) and other oilseeds are established in the same manner used for other oilseeds in the 2002 Act.

Counter-cyclical payments for a crop are to be made as soon as practicable after the end of the crop year for the covered commodity. Partial payments are available but will be eliminated starting in CY 2011. A payment of up to 40 percent may be made after the first 180 days of the crop year.

The payment limit on CCPs is $65,000 per person per crop year. The three-entity rule is repealed. Payments are attributed directly to the individual. Spouses qualify separately for payments. Producers with adjusted nonfarm gross income of over $500,000 averaged over 3 years or with adjusted farm gross income of over $750,000 averaged over 3 years are not eligible for counter-cyclical payments. For more information, see Payment Limitations.

Economic Implications

Counter-cyclical payments are designed to support and stabilize farm income in years when current prices for historically produced commodities are less than target prices. Thus, when market prices fall, the payments increase.

CCPs constitute a risk management instrument for farmers to address some price-related revenue risks. Some arguments suggest that this could affect production decisions of farmers:

• The revenue risk reduction aspect of CCPs could influence farmer behavior if there is some value to the farmer of reducing the variability of expected revenues, such as for a risk-averse producer.
• CCPs for one crop may provide some reduction to price-related revenue risks associated with the production of other crops because prices for different crops tend to move together.

But there are a number of other considerations that would tend to reduce any potential production effects:

• Larger farms account for most production. Research indicates that these farmers may be less risk averse, which lowers potential production effects of CCPs due to risk reduction.
• The revenue protection provided by CCPs may be partially offset by other farm programs that already provide some protection against price declines.

Because CCPs vary based on the relationship between the target price and current commodity price, payments vary across commodity base acres from year to year. The chart below provides a historical perspective regarding the distribution of payments per crop base acre. In crop year 2003/04, payments were made only for upland cotton, rice, and peanuts, and in 2006/07, payments were made only for cotton and peanuts. Prices for the other commodities were above the target price less the direct payment rate, so no payments were made. Peanuts received the highest payment per base acre, followed by upland cotton, rice, and corn, depending upon the year.

While payment rates and yields are unchanged from the 2002 Act, future distributions of counter-cyclical payments across crop base acres will continue to depend on the relationship between the CCP target price and the current commodity market price.

For More Information...

• Sector Analyses section of the Recommended Readings