USDA Cost/Benefit Analysis: CFAP 2 Price Tag: $13.21 Billion

Posted on 09/21/2020 5:16 AM

USDA issues analysis of CFAP 2

 


 

USDA says that under CFAP 2, producers will receive payments under the Commodity Credit Corporation (CCC) Charter Act with an estimated $13.21 billion being made available (after payment limitations). Link to USDA cost/benefit analysis.

     Price Changes

     Estimates CFAP 2 payments

 

     This estimated quantity (column E) is multiplied by the per-crop payment rate (column B) to arrive at estimated payments of $6.16 billion (column F). The total amount after payment limits, using the payment limit reductions associated with CFAP 1 actual payments, indicate $5.73 billion in CFAP 2 payments to non-specialty crop producers.

 

     Price-Trigger commodities. CFAP 1 payments have been made for unsold 2019 non-specialty crop inventory as of January 2020. CFAP 2 payments in this category are targeted to marketings of 2020 commodities for which data are readily available. These crops are eligible for CFAP 2 payments if a 5% or-greater price decline was realized in a comparison of the average price for the week of January 13-17, 2020 and the average price for the week of July 27-31, 2020 (refer back to Table 1). Depending on the yield for a specific location, the producer’s payment may calculate to less than $15 per acre. In such cases, the payment is raised to $15 per acre, which is the payment for the flat-rate category. If this price-decline trigger is met, the payment rate (column Bin Table 2) is calculated by multiplying the mid-January to late-July price decline (column A) by an 80% coverage factor. Estimated 2020-crop marketings (expressed as a percent) through Q4 of calendar 2020 (Column D) are then applied to 2020 production data (column C) to arrive at the quantity of estimated marketings through the end of calendar 2020 (column E).

 

     This estimated quantity (column E) is multiplied by the per-crop payment rate (column B) to arrive at estimated payments of $6.16 billion (column F). The total amount after payment limits, using the payment limit reductions associated with CFAP 1 actual payments, indicate $5.73 billion in CFAP 2 payments to non-specialty crop producers.

     Cattle changes

     Beef cattle payments

     Beef cattle (excluding breeding stock) are eligible for CFAP 2 payments given that the average mid-January to late-July live cattle December futures price declined by $12.10 per cwt., or 9.9%. Also, feeder cattle November futures declined 8.2% ($12.77 per cwt) during the same time period. Column A and column B show the prices for feeder and fed cattle based on the futures contracts in mid-January and late-July, respectively. Subtracting column B from column A gives the price deltas for this period (column C). An 80% factor applied to the price deltas multiplied by estimated cattle marketings for Q2-Q4 (column D) gives the contribution of each cattle types to gross outlays unadjusted for CCC-funded CFAP 1 payments, which totals $4.50 billion (column E). Dividing unadjusted gross outlays by marketable beef inventory (column F) gives $88 per head(column G).

 

     After adjusting for CCC-funded CFAP 1 payments of $33 per head, the payment rate is $55 perhead (column I). Multiplying the adjusted payment rate (column I) by marketable beef inventory (column F) gives the outlays accounting for CCC-funded CFAP 1 payments and is equal to $2.82 billion (column H). Using payment limitation factors derived from CFAP 1 data, net payments are estimated at $2.52 billion.

 

     In practice, payments for beef cattle will be based on a fixed number head, which is equal to the lower of the producer’s maximum owned inventory of eligible beef cattle, excluding breeding stock, on a date selected by the producer from April 16, 2020, through August 31, 2020, or 4,546 head multiplied by the number of payment limitations for the producer, multiplied by the payment rate of $55 per head.

   Hog changes

Hog payments

     Hogs and pigs (excluding breeding stock) are eligible for CFAP 2 payments given that the average mid-January to late-July December lean hog futures price declined by $39 per head. (column C of Table 5), or 26%. Gross outlays unadjusted for CCC-funded CFAP 1 payments are $2.96 billion (column E), which is calculated as the price decline delta (column C) multiplied by 80% of the Q2-Q4 hogs projected to be slaughtered (column D).

 

     The payment rate unadjusted for CFAP 1 CCC payments is $40 per head (column G), which is column E divided by column F. Subtracting out the CCC-funded CFAP 1 rate of $17 per head results in an adjusted CFAP 2 rate of $23 per head (column I). Total expected gross CFAP 2 outlays, after adjusting for CCC-funded CFAP 1 payments, are $1.69 billion (column H), which is column F multiplied by column I. Using payment limitation factors derived from CFAP 1 data, net payments are estimated at $0.57 billion. The large difference between gross and net outlay estimates reflects the ineligibility of contract production along with payment limitations.

 

     In practice, payments for hogs and pigs will be based on a fixed number of head, which is equal to the lower of the producer’s maximum owned inventory of eligible hogs and pigs, excluding breeding stock, on a date selected by the producer from April 16, 2020, through August 31, 2020, or 10,870 head multiplied by the number of payment limitations for the producer, multiplied by a payment rate of $23 per head.

 

     Broiler payments

 

     Broilers are eligible for CFAP2 payments given that the average mid-January to late-July price delta, as reported by USDA’s Agricultural Marketing Service (AMS), is $0.2607 per pound (column C of Table 6), or 29%. Applying an 80% factor to column C, and converting to a per-bird basis, provides a payment rate of $1.01 per bird (column D). Only independent growers are eligible given that contract growers do not share in the ownership risk of marketing the birds that they raise and hence are not eligible for a CCC-funded CFAP payment. According to 2017 Census of Agriculture data and NASS survey data on broiler production, 96% of broiler production was under production contracts in 2017. Therefore, USDA assumes 4% of broiler production will be paid $280 million in gross payments (column F), which is calculated as the payment rate (column D) multiplied by 4% of 75% of 2019 broiler slaughter, a proxy of 2020 non-integrator slaughter forQ2-Q4 (column E).

 

     AGI considerations and payment limitations are expected to have a minimal impact on payments due to the typical size of these operations. In practice, producers will certify their 2019 production — broilers sent to slaughter in 2019 — and be paid on 75% of that production.

 

     Egg payments

 

     Eggs: Under CFAP 2, rates are established for table eggs (those eggs intended for food use). The end uses for table eggs (shell, liquid, dried, and frozen) cannot easily be changed. For instance, many egg processing operations are “in-line” operations. These systems move eggs on conveyor belts from the hen houses directly to the processing facility (FSIS, 2015). Therefore, a separate payment rate determination is made for each end use, as shown in Table 7.

 

     All four uses are determined to be eligible for CFAP 2, based on a 5% price trigger. Column A and B show the prices for the different types in mid-January and late July, respectively. Liquid egg prices were not reported for the weeks of January 17 and July 31 in the AMS Processed Eggs: Weekly National Egg Product report; as a result, proprietary data for liquid eggs is used. While liquid eggs experienced a negative price change greater than 5%, no price data for liquid eggs is presented here because of the proprietary nature of the data. The other egg categories utilize price data from AMS. Column C shows the price deltas, calculated as column A minus column B.

 

     Rates for shell eggs and processed eggs are the price deltas multiplied by an 80% factor. Because shell eggs and dried eggs were not covered by CFAP 1, no adjustment for CCC-funded CFAP payments are needed for these payment rates and hence, the payment rates in columns D and Gin Table 7 are identical for these categories. In contrast, frozen and liquid eggs were added to CFAP 1and their CFAP 2 payment rates are adjusted downward by one-third of the CFAP 1 CCC payment rate (column G). Gross CFAP 2 payments will be made based on the adjusted payment rates (column G) and 75% of 2019 production (column E), resulting in estimated gross payments of $333 million (column F). Note that column E — 75% of 2019 production — provides a proxy for Q2–Q4 production.

 

     Because the egg industry is heavily consolidated, determining the impact of payment limitations remains difficult since not all egg uses were included in CFAP 1. USDA estimates the impact of these limitations will be similar to the dairy industry, resulting in a conservative net payment estimate of $224 million.

     Lamb and sheep payments

     Market lambs and market sheep (excluding breeding stock) are eligible for CFAP 2 payments given that the average mid-January (column A of Table 8) to late-July price (column B of Table 8) difference, as reported by USDA’s Agricultural Marketing Service, is $51 per head (column C of Table 8), or 26%. Multiplying the price decline delta by estimated Q2-Q4 lamb and sheep slaughter (column D) and applying an 80% factor, results in $69 million (column E) in gross outlays unadjusted for CCC-funded CFAP 1 payments. Dividing these projected additional costs by NASS’s estimate of market inventory of sheep and lambs that include replacements (column F) provides an unadjusted payment rate of $34 per head (column G). Total expected gross CFAP 2 outlays, after adjusting for CCC-funded CFAP 1 payments, are $55 million(column H), which is column F multiplied by column I. Netting out the CFAP 1 CCC rate leads to an adjusted rate of $27 per head (column I).

     Dairy payments

     Dairy: The average futures price delta(decline) for milk from mid-January(column Ain Table 3)to late-July (columnB in Table 3) is calculated as $2.13 per cwt (column C) — a change of about 12%. With an 80% factor applied to the price delta, the CFAP 2 payment rate — unadjusted for CCC-funded CFAP 1 payments — is $1.70-per-cwt (column D). Milk production for Q2-Q4 of 2020 is projected at 1.656 billion cwt (column E), resulting in the estimated unadjusted gross payments of $2.82billion in column F (multiplying the unadjusted payment rate in column D by projected production in column E).

 

     Subtracting CCC-funded CFAP 1 total payments as estimated in the CFAP 1 Cost-Benefit Analysis from column F, and then dividing by estimated Q2-Q4 milk production (column E), produces an adjusted payment rate of $1.20 per cwt (column H). Gross estimated payments, when accounting for CCC-funded CFAP 1 payments and rounding the $1.20 per cwt payment rate to the nearest cent, are equal to $1.99 billion (column G). After taking into account the impact of payment limitations (based on CFAP 1 data), net payments are estimated at $1.34 billion.

 

     The CCC payment will help offset additional costs incurred by dairy producers as they manage unexpected surpluses and additional marketing costs caused by the disruption to normal marketing channels due to COVID-19. Producers will certify April 1to August 31, 2020 milk production,and their September 1 to December 31, 2020 milk production will be estimated. This per-producer amount will be multiplied by the $1.20-per-cwt payment rate to obtain a producer’s payment.

 

Payment caps and CFAP 2.

     Pay cap savings

     USDA noted that the total payment that a person or legal entity may receive directly or indirectly through attribution of payments is $250,000.(Note that this payment limitation is separate from the CFAP 1 payment limitation.) Payments made to a joint venture or a general partnership are limited to the aggregated amount of payments that each individual or legal entity member of the joint venture or general partnership may otherwise receive.

 

     Consistent with CFAP 1, the total amount of CFAP 2 payments made to a legal entity, such as to a corporation, limited liability corporation, limited partnership, trust, or estate is $250,000 except:

 

     • The entity may receive $500,000 if two different members of the legal entity each provide at least 400 hours of active personal labor or active personal management or combination thereof with respect to the production of 2020 commodities.

 

     • The entity may receive $750,000 if three different members of the legal entity each provide at least 400 hours of active personal labor or active personal management or combination thereof with respect to the production of 2020 commodities.These provisions are separate from other payment limitations established by the 2018 Farm Bill.

 

     Further, USDA has determined that CFAP 1 and CFAP 2 are separate programs and that two separate payment limits are in effect due to the unprecedented and costly disruptions for agricultural producers associated with Covid-19. USDA’s first CFAP program, whose rule was published on May 21, 2020, was designed to address disruptions that had occurred by April 15, 2020. As time passed, USDA said, Covid-related impacts continue to cause unexpected changes and are forcing producers to develop or expand alternative markets and raising transportation, storage, and other distribution costs. “This disruption is out of the ordinary range of unpredictable events for which producers are normally prepared. Producers of affected commodities are experiencing higher costs as they make management decisions on their operations and continue to market commodities in this environment. These payments will help producers adjust to disrupted markets, manage surplus commodities, and expand and develop new markets.”

 

     USDA said its experience with the first CFAP program reveals that payment limitations have affected approximately 1% of CFAP 1 applications (6,000 unique applications divided by slightly more than 600,000 applications). These payment limitations (averaging across all eligible commodities) reflect 23% of payments that could have been made without payment limitations in place. (Said differently, payments were 77% of what they otherwise would have been if no payment limit was in place.) As an example, if an individual producer had a “calculated” payment of $600,000, his or her actual payment would be $250,000 and the $350,000 ($600,000 minus $250,000) would be what that producer “leaves on the table” due to the impact of the payment limitation.

 

     Dairy and livestock operations have not historically been organized to minimize the impact of payment limitations. Of those commodities affected by CFAP 1 payment limits, USDA detailed, dairy accounted for 38% of the payments that were reduced (about $1.15 billion), livestock (largely cattle and hogs) accounted for 36% of reduced payments (about $1.10 billion), specialty crops accounted for 25% ($0.77 billion), and non-specialty crops accounted for 1% (less than $20 million) (see Figure 5). Total CFAP 1 payment limitations saved the government $3.04 billion.

 

A separate $250,000 payment limit for CFAP 2 assists numerous livestock, dairy, and specialty crop operations that would otherwise not receive ANY additional payments under CFAP2 if the combined payment limit for CFAP 1 and CFAP 2 were limited to $250,000, USDA said. These producers have been — and are continuing to be — affected by the additional burdens and marketing costs imposed by Covid-19 and need assistance. In some of these specialty crop industries, USDA added, a lack of assistance to these large growers “could have significant ramifications for growers’ financial viability with resulting impacts on supply chains, prices, and product availability to consumers.” In addition, statements by members of Congress in letters to USDA and in the press make it clear that they intended for USDA to use $23.5 billion to ensure producers can adjust, even if the payments came in tranches. They expect USDA to provide a level of support that is responsive and in proportion to production, risk and losses. In the CARES Act, USDA noted, Congress could have — but did not — include any language to direct a single payment limit over all tranches of Covid-19 relief. In fact, USDA said it received a letter from 126 Members of Congress requesting that there be no payment limit for Covid-19 assistance.

 

Regarding Adjusted Gross Income (AGI), a person or legal entity is ineligible for CFAP 2 payments if the person’s or legal entity’s (including the legal entity’s members) AGI, using the average AGI for the 2016, 2017, and 2018 tax years, is more than $900,000 unless at least 75% of the person’s or legal entity’s average AGI is derived from farming, ranching, or forestry-related activities. If at least 75% of the person’s or legal entity’s average AGI is derived from farming, ranching, or forestry-related activities, the person or legal entity is subject to the payment limits discussed above.

 

The regulations in 7 CFR part 1400 Subpart E apply to the eligibility of foreign persons applying for CFAP 2. The regulations state that a lawful alien may receive a payment, loan, and benefit if that person is in lawful possession, through a lease or otherwise, of a farm.

 


 

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