Agricultural and Food Policy, Agricultural Finance,

Benson, Fred J.

Hasbargen, Paul R.

English

Research Papers in Economics

Staff PapersSeries
Staff Paper P83-7
ANALYZING THE 1983
PAYMENT IN KIND PROGRAM
AT THE FARM LEVEL
by
Fred J. Benson
and
Paul Hasbargen
January 1983
b 1
Departmentof Agriculturalandhpptied Economic
University of Minnesota
Institute of Agriculture, Forestry and Home Economics
St. Paul, Minnesota 55108Analyzing the Payment-In-Kind
Introduction
The 1983 Payment-in-Kind (PIK) was
Program at the Farm Level
quoted as being “basically simple,”
however, the economic analysis of whether or not to participate and at what
level becomes quite complex. In order to participate in the PIK program, a
farmer must be enrolled in the 1983 Acreage Reduction Program (ARP). For
further information on the ARP, see University of Minnesota Agricultural
~~ Extension Service Folder 670, “Analyzing the 1983 Acreage Reduction Program At
v’
The Farm Level”.
The PIK program has three objectives: (1) reduce production through
a further cutback in planting, (2) reduce surplus stock holdings, and
(3) to reduce
stock levels.
budget outlays that would exist with higher production and
It is intended to be in effect for the 1983 production year
and possibly the 1984 production year if stocks are not worked down to a
level more in line with demand.
Options Available
The PIK program increases the options available to a farmer. A farmer
may participate in the PIK option by setting aside an additional 10 to 30
percent of base crop acreage for wheat, corn and grain sorghum. Payment for
the additional acreage that is set aside will be made with entitlement to a
certain amount of bushels of the commodity that would have been produced.
The payment for corn and grain sorghum will be 80% of the established yield,
for wheat it will be 95% of the established yield. Entitlement will take
place at the normal time of harvest. The participant receiving the
Payment-in-Kind can sell it then or receive storage payents for it up to five
months before it is sold. The participant is guaranteed a yield and is respon-
sible for pricing and marketing the commodity.-2-
A farmer has the opportunity to take the total base acreage out of
production by bidding the percent payment-in-kind for diverting all of the
base acreage. The amount bid must be less than 80 percent for corn and
grain sorghum and less than 95 percent for wheat. If total signup in a
county is less than 50 percent of the county’s base, whole base bids will
be accepted up to a maximum of 50 percent of the total base of the county.
All land receiving l?IKis subject to the same conservation use as
the paid and non-paid diverted land in the ARP.
Configuring the Base “Acreage
Figures I and 11 show various configurations of a base acre with the various
options available in the PIK program. These figures show the percentages to
be planted and the percentages that are required to be set aside. Also shown
are the various options of the PIK program 10,20 and 30% participation
and the whole crop bid basis. The figures are representative on a one acre
basis of the total base crop acreage of a participant. This one acre model
can then be enlarged to provide a picture of the total base acreage in terms of
portions planted, portions set aside, portions receiving payments in kind and
portions receiving diversion payments. Economic analysis can then be made bet-
ween options in the ARP-PIK program as well as comparison with other crops.
Analyzing the Options
Table I is a worksheet to economically evaluate participation in the
1983 ARP and PIK program to provide the user greater flexibility when com-
paring options and allows the determination of a breakeven bid to put the
whole base acreage into the PIK program.-5-
in the 1983 program. Soybeans can be grown in many areas of the nation in
place of corn, wheat and cotton. There are no non-paid set aside requirements
for soybeans so they may prove to be very popular with many farmers nationwide.
Each producer is encouraged to use the worksheets in Tables I and II and
study the options carefully for 1983.1o-1o
10% PD
10% NPD
80%
Planted
,/ ?
FIGURE I
CONFIGURATION OF A BASE ACRE WITH VAXIOUS
OPTIONS IN THE ACRXAGE REDUCTION PROGRAM AND THE
PAYMENT IN KIND PROGIUU’4 FOR CORN OR GIUIINSORGHUM
Whole Crop
1o-1o-1o
10% PD
10% NPD
10% PIK
7o%
Planted
10-10-20 \
10% PD
10% NPD
20% PIK
60%
Planted
10-10-30
10% PD
10% NPD
30% PIK
50%
Planted
Bid
10% PD
90% PIK
,
PD . paidDiveysion
NpD = Non-paid Diversion = 12.5%of planted Acreage
PIK = Payment in Kind Acreage*
5-15
5% PD
15% NPD
80%
Planted
FIGURE 11
CONFIGUMTION OF A BASE CROP ACRE
WITH VARIOUS OPTIONS IN THE ACREAGE
REDUCTION PIIOGPM AND THE PAYMENT IN KIND
PROGRAM FOR WHEAT
5-15-10
5% PD
15% NPD
io% PIK
70%
Planted
5-15-20
P
P
. 20% PIK
60%
Planted
5-15-30
5% PD
15% NPD
30% PIK
Whole Crop
Bid
5% PD
95% PIK 50%
Planted
,,
pD = paid Diversion
NPD = Non-Paid Diversion
PIK = Payment in Kind AcreageTABLE I
WORKSHEET TO EVALUATE PARTICIPATION IN 1983 ARP & PIK
By Comparing One Composite Acre Of Each Alternative
INCOME
Expected Yield
Expected Market Price Or Loan Rate (if higher)
Portion Of Base Acre Plante#/
Loan Or Market Receipts/Base Acre
2/
Expected Deficiency Payment/Bushel-
Base Yield (ASCS)
g
Portion Of Base Acre Planted
Deficiency Payment/Base Acre
Base Yield (ASCS)
Non
Participation
(A)
(B)
(c) 1.0
(AxBxC=D)
(E)
(F)
(c)
(ExFxC=G)
(F)
Diversion Payment/Bushel(corn-$1.50;wheat-$2.70) (H)
Portion Paid Reduction (corn-.10;wheat-.O5) (I)
Diversion Payment/Base Acre (FxHxI=J)
Payment-In-Kind Ratio (corn-.8; wheat-.95) (l<)
Expected Market Price On PIK Grain (L)
Value Of “Crop-Swap” Per Acre (FxKxL=M)
Portion Elected For PIKA/ (N)
Crop-Swap Value/Base Acre (MxN=O)
TOTAL GROSS INCOME PER BASE ACRE (D+G+J+O=P)
EXPENSES (Cash Operating)
Cash Costs/Acr&’ (Q)
portion Of Base Acre Planted~/ (R)
Growing Expense/Base Acre (QxR=S)
4/
Set-.4side Net Cash Costs/Acre_ (T)
5/
Portion Of Base Acre Set AsidF (u)
Set-Aside Cost/Base Acre (TxU=V)
TOTAL CASH OPERATING EXPENSES (S+v=w) .
RETURNS LESS CASH OPERATING EXPENSES (P-w=x)
TOTAL FARM BASE BID--HOW MUCH SHOULD I BID?
Gross Income Needed In Total Base Bid (X+T-J=Y)
PIK Bu. Needed For Equal Return/Base Acre [Y*L:(I-I)=ZJ
6/
Percent To Bid For Equal Returr (IOOXZ*F=AA)
(see back for footnotes)
ARP ARP 8 PIK — —
— —
——
——
——
— —
— —
——
.
——
—.
bu. bu.
——FOOTNOTES
Typically .8 (80%); however, if non-cross compliance crop is planted
instead of the base crop, planting may occur on all base acreage not
receiving a diversion payment (90% or 95%).
There may be no deficiency payment if either (1) average price of first
five months of marketing is greater than target price or (2) a non-cross
compliance crop is planted on base acreage. The maximum deficiency
payment is 21c on corn; 65Q on wheat: 24c on oats; and 44$ on barley.
They will be reduced as the average five month U.S. price increases
over the U.S. loan rate of: corn - $2.65; wheat - $3.65; oats - $1.36;
and barley $2.16.
The portion elected for the partial PIK can be anywhere from .10 to .30.
The portion elected for PIK on a whole farm bid is .90 for corn and .95
for wheat.
If land taxes are included as cash operating costs, they should be
included for both planted and set-aside portions. Consider storage
costs--they may be appropriate for the marketing plan in mind fot each
option.
Items R and U must equal 1.0 (100%).
This total farm base bid gives no credit for the reduced labor and the
reduced risk in a total base set-aside. As open market price expecta-
tions are increased, the PIK portion of the program becomes relatively
more advantageous than the ARP, resulting in a lower breakeven bid
percentage. If expected non-participation yield increases relative to
ASCS base yield--participation becomes less advantageous and a higher
bid percentage is required. A range of prices on the PIK grain might
be considered to evaluate the possible impact of this risk variable on
the bid level and expectations from other options.TABLE II
SUMMARY ANALYSIS WORKSHEET FOR TOTAL FARM ACREAGE
1/
BASE ACREAGE –
2/ Loan or Market Receipts (D) –
Deficiency Payments (G)
Diversion Payments (J)
Crop - Swap Value (0)
TOTAL GROSS INCOME (P)
Growing Expense (S)
Set Aside Expense (V)
TOTAL CASH OPERATING EXPENSES (W)
PROGRATXCROPS OTHER CROPS TOTAL
—— —— —
xx xx
xx xx
xx xx
—— —— —
xx xx
—— —— —
RETURNS LESS CASH OPEWTING EXPENSE (X) .
CASH AVAILABLE AT SIGNUP
Z Deficiency Payments (Total Line G) + 2
% Diversion Payment (Total Line J) + 2
~/ Use the worksheet to estimate which crops and options to be considered.
Multiply the figures from Worksheet I times the Acreages considered
with each crop.
~/ Letters refer to lines from Worksheet I. Multiply Worksheet I values
times Acreage.WORKSHEET TO EVALUATE PARTICIPATION IN 1983 ARP & PIK
By Comparing One Composite Acre Of Each Alternative
by
Fred Benson and Paul Hasbargen
Extension Economists - University of Minnesota
INCOME
~xpectei Yield
Zxpected Market Price Or Loan Rate
?ortion Of Base Acre Plantec@
Loan Or .MarketReceipts/Base Acre m
Non
Participation
(A) /35
(if higher) (B) 2,<4
(c) 1.0
(AxBxC’D) ~
Expected Deficiency Payment/Bushelkj (E)
3ase Yield (ASCS) (F)
po~~ion Of Base Acre Plante& (c)
~ef~clency Payment/Base Acre (ExFxC=G)
3ase Y~eld (ASCS) (F)
Diversion Payment/Bushel(corn-$1.50; wheat-$2.70) (H)
Portion Paid Reduction (corn-.lO;wheat-.O5)
~~version pa yment/Base Acre
Payment-In-Kind Ratio (corn-.8; wheat-.95)
Expected Market Price On PIK Grain
Value Of “Crop-Swap” Per Acre
Portion Elected For PZKY
croD-swap Value/Base Acre
TOTAL GROSS INCOME PER BASE
EXPENSES (Cash Operating)
cash co5t5,Acrv
ACRE
Portion Of Base Acre Planted~/
Growing Expense/Base Acre
4/
Set-Aside Net Cash Costs/Acrw
5/ Portion Of Base Acre Set Aside-
Se~-Aside Cost/Base Acre
TOTAL CASH OPEIUTING EXPENSES
RETURNS LESS CASH OPEWTING EXPENSES
TOTAL FARM BASE BID--HOW MUCH SHOULD I BID?
Gross income Needed In Total Base Bid
PIK Bu. Needed For Equal Return/Base Acre
6/ Percent To Bid For Equal Returm
(1)
(FxHxI=J)
(K)
(L)
(FxKxL=M)
(N)
(MxN=O)
(D+G+J+O=P) 33P
(Q) /73
(R)
(QxR=S)
(T)
(u)
(TxU=W
(S+v=w) / 73
(P-w=x) /6s
(X+T-J=Y)
[Y+L:(I-I)=Z]
(IOOXZ?F=AA)
/67
#GO
*
J21&.
%i5!izi”
(see back for footnotes)FOOT!JOTES
~i Typically .8 (80%); however, if non-cross compliance crop is planted
instead of the base crop, planting may occur on all base acreage not
receiving a diversion payment (90% or 95%).
q
There may be no deficiency payment if either (1) average price of first
five months of marketing is greater than target price or (2) a non-cross
compliance crop is planted on base acreage. The maximum deficiency
payment is 21c on corn; 65c on wheat: 24c on oats; and 44c on barley.
They will be reduced as the average five month U.S. price increases
over the U.S. loan rate of: corn - S2.65; wheat - $3.65; oats - S1.36;
and barley $2.16.
3 The portion elected for the partial PIK can be anywhere from .10 to .30.
The portion elected for PIK on a whole farm bid is .90 for corn and .95
for wheae.
q If land taxes are included as cash operating costs, they should be
included for both planted and set-aside portions. Consider storage
costs--they may be appropriate for the markeqing plan in mind for each
option.
‘/ Items R and U must equal 1.0 (100%).
‘/ This total farm base bid gives no credit for the reduced labor and the
reduced risk in a total base set-aside. As open market price expecta-
tions are increased, the PIK portion of the program becomes relatively
more advan~ageous than the ARP, resulting in a lower breakeven bid
percentage. If expected non-participation yield increases relative to
ASCS base yield--participation becomes less advantageous and a higher
bid percentage is required. A range of prices on the PIK grain might
be considered to evaluate the possible impact of this risk variable on
the bid level and expectations from other options.

ANALYZING THE 1983 PAYMENT IN KIND PROGRAM AT THE FARM LEVEL

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics