PBTC 02-5

POLICY BRIEF SERIES

UNIVERSITY OF

FLORIDA

Institute of Food and Agricultural Sciences

THE EXPECTED COST OF AN INCOME SUPPORT
PROGRAM FOR PROCESSING ORANGES

By

Richard N. Weldon And John J. VanSickle

PBTC 02-5 October 2002

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ii

z V,

INTERNATIONAL AGRICULTURAL TRADE
AND POLICY CENTER

MISSION AND SCOPE:

The International Agricultural Trade and Policy Center (IATPC) was established in 1990
in the Food and Resource Economics Department (FRED) of the Institute of Food and
Agricultural Sciences (IFAS) at the University of Florida. Its mission is to provide
information, education, and research directed to immediate and long-term enhancement
and sustainability of international trade and natural resource use. Its scope includes not
only trade and related policy issues, but also agricultural, rural, resource, environmental,
food, state, national and international policies, regulations, and issues that influence trade
and development.

OBJECTIVES:

The Center's objectives are to:

Serve as a university-wide focal point and resource base for research on
international agricultural trade and trade policy issues
Facilitate dissemination of agricultural trade related research results and
publications
Encourage interaction between researchers, business and industry groups,
state and federal agencies, and policymakers in the examination and
discussion of agricultural trade policy questions
Provide support to initiatives that enable a better understanding of trade and
policy issues that impact the competitiveness of Florida and southeastern
agriculture specialty crops and livestock in the U.S. and international markets

THE EXPECTED COST OF AN INCOME SUPPORT PROGRAM
FOR PROCESSING ORANGES

Richard N. Weldon and John J. Vansickle

Richard N. Weldon, Associate Professor, and John J. VanSickle, Professor and Director,
International Agricultural Trade and Policy Center, Food and Resource Economics
Department, Institute of Food and Agricultural Science, University of Florida

Abstract: The Florida citrus industry operates in a competitive global market. However,
unlike program crops, producers in this industry do not benefit from direct income
support under the new Farm Bill. There is concern about the impact of elimination of the
orange juice tariff on the financial health of the Florida orange industry. The purpose of
this paper is to examine the level of government expenditure that would be needed to
provide income support to orange producers if the orange juice tariff were eliminated.
For the span of the Bill direct payments to corn are estimated to total $25.1 billion. By
comparison the direct expenditures incurred for an income support program for oranges
would be substantially less. In the early years with the tariff in place the expenditures are
estimated to be about $300 million and would fall below $200 million by 2007. If the
tariff were removed government support would initially be $925 million but would
decline to about $700 million in 2007. Over the six-year period, 2002-2007, the direct
payment to orange producers would be $1,538.5 million with retention of the tariff and
$4,721.8 million if the tariff were eliminated.

Keywords: income support program, oranges, tariff, FSRIA

THE EXPECTED COST OF AN INCOME SUPPORT
PROGRAM FOR PROCESSING ORANGES

Richard N. Weldon and John J. VanSickle1

The Florida citrus industry is an important contributor to the Florida economy,

accounting for more than $760 million in sales (2000/01 season) and estimated to have

greater than a $9 billion overall impact on the state. Florida is the leading producing state

in the U.S. for citrus with acreage and production totaling more than all other states

combined. The Florida citrus industry is heavily oriented to processed orange production.

Of the 832,426 acres planted to citrus in January 2000, most of that was planted to

oranges (605,000 acres). That round orange acreage produced 223.3 million boxes in

2000/01 with 95.7 percent of that production utilized for processing.

The Florida citrus industry operates in a competitive global market with Brazil as

the major competitor in the processed orange market. Florida and Brazil account for

almost 85 percent of the global production of processed oranges. The U.S. allows the

import of orange juice duty-free to countries identified with the Caribbean Basin

Economic Recovery Act. Under NAFTA, both Mexico and the U.S. agreed to phase out

all tariffs over a 15-year period beginning in 1994.

The larger concern related to the tariff is the tariff imposed on Brazilian imports.

Brazil pays the Most Favored Nation (MFN) tariff rate of 28.8 cents per pound solid for

FCOJ exports to the U.S. and 29.7 cents per pound solid equivalent for single-strength

orange juice. With current negotiations for a Free Trade Area of the Americas (FTAA),

Florida growers are concerned that elimination of the tariff would have devastating

1 Richard N. Weldon is Associate Professor, and John J. VanSickle is Professor and Director, respectively,
of the International Agricultural Trade and Policy Center, Food and Resource Economics Dept, Institute of
Food and Agricultural Science, at the University of Florida.

consequences. Analyses performed by Spreen et al. (2002) indicate that such an outcome

could result in a decline in on-tree values of $1.20 to $1.40 per box for Florida oranges.

The Florida citrus industry does not benefit from farm programs that provide

direct income support to producers of program crops that are part of the Farm Bill. Those

commodity groups that benefit from the income support measures of the Farm Bill

generally support the notion of more open markets. Most of those crops are net exporters

of their products. However, regardless of whether these programs are net importers or

exporters, the farm program stands to protect the income of those producers. As noted

there is concern about the impact of elimination of the orange juice tariff on the financial

health of the Florida orange industry. The purpose of this paper is to examine the level of

government expenditure that would be needed to provide income support to orange

producers if the orange juice tariff were eliminated and orange producers operated in

markets conditions analogous to program commodities covered by the Farm Bill.

Summary of FSRIA

The Farm Security and Rural Investment Act (FSRIA) of 2002 replaced the

Freedom to Farm Act of 1996. FSRIA provides income support for wheat, feed grains,

upland cotton, rice, and oilseeds through 3 separate payment programs: fixed direct

payments, counter-cyclical payments (CCP), and loan deficiency payments (LDP)

associated with marketing loans. The level of support is a function of the loan rate, direct

payment rate and target price (table 1) all of which were set by the new Bill.

Direct payments will be the amount of direct, decoupled payments on covered

commodities. The actual dollar amount received will be equal to the product of the direct

payment rate, the direct payment or base acres and the direct payment yields. Provisions

were also made for updating base acreage and yields.

Counter-cyclical payments will be made whenever the effective price for a

covered commodity is less than the target price. The effective price is equal to the sum of

(1) the higher of the national average market price during the 12-month marketing year

for the commodity or the national loan rate, and (2) the payment rate for direct decoupled

payments for the commodity. This effective price is subtracted from the target price to

calculate the counter-cyclical payment rate (when positive). Consequently,

payment rate = target price [direct payment rate + (higher of market price or loan rate)]

payment rate = target price [effective price]

The actual payment amount for counter-cyclical payments is the product of the

payment rate, the payment acres, and the payment yield. If market prices (plus direct

payment rate) are above target prices the producer would not receive a payment and there

would be no government expenditures for CCPs.

Marketing Loans or non-recourse commodity loans with marketing loan

provisions were extended as defined in the 1996 Bill. Loan rates (table 1) are fixed in

this legislation for the life of the Bill. For covered commodities all production is eligible

for the marketing loans and loan deficiency payments.

Table 1: Loan Rates, Direct Payment Rates and Target Prices as Set by FSRIA for
Selected Covered Commodities
Direct Payment
-------Loan Rates------ ------Rates----- ------Target Prices------
2002-03 2004-07 2002-07 2002-03 2004-07
Corn ($/bu) 1.98 1.95 0.28 2.60 2.63
Wheat ($/bu) 2.80 2.75 0.52 3.86 3.92
Soybeans ($/bu) 5.00 5.00 0.44 5.80 5.80
Cotton ($/Ib) .5200 .5200 0.0667 0.7240 0.7240
Rice (cwt) $6.50 $6.50 $2.35 $10.50 $10.50

Summary of FAPRI Baseline Analysis of FSRIA

The Food and Agricultural Policy Research Institute (FAPRI) analyzed the impact

of FSRIA on both domestic supply and use for covered commodities and the subsequent

impact on farm level prices and government program expenditures'. The FAPRI analysis

was both deterministic and stochastic (this study relies primarily on the deterministic

analysis).

For covered commodities the FAPRI analysis provides baseline projections for

the major covered commodities to 2007 and beyond, of:

Acreage (contract, planted and harvested)

Yields (actual and program)

Supply and Domestic Use

Exports and Stocks, and

Price and Returns that include

Farm Prices

Average Loan Deficiency Payment Rates

Counter-Cyclical Payment Rates.

These FAPRI estimates provide the basis for projecting annual government

program costs for basic covered commodities. Figure 1 provides projections of selected

direct government outlays over the six-year life of the farm bill. The six-year total of

$96.8 billion is the amount of fixed payments, counter-cyclical payments and marketing

loan payments for food grains, feed grains, oilseeds and upland cotton. This amount does

not reflect conservation reserve payments, disaster payments, and payments to other

commodities such as peanuts, sugar, dairy, and any other potential FSRIA Commodity

Credit Corporation outlays. These selected direct government payments total $18.0

billion in 2002 but fall steadily to $13.7 billion in 2007.

Figure 1: Selected Direct Gov. Payments. (Feed grains, food
20,000 grains, oilseeds and upland cotton)
18,000 X
16,000
14,000
6 12,000
o 10,000
E 8,000
6,000
4,000
2,000
0
0 ,---------------------------------
2002 2003 2004 2005 2006 2007
+ -Fixed Payments -4-Marketing Loans -Counter-Cyclical Payments -Total

It is estimated that in 2002 corn's share of the $18.0 billion will be $5.6 billion, or

32% of total expenditures, while cotton's $3.6 billion of expenditures is about 20% of the

total for the selected commodities. Over the life of the Bill it is projected that increases

in farm prices for corn will eliminated the loan deficiency payments and significantly

reduce the counter-cyclical payments. By the end of the Farm Bill corn's share of the

expenditures will fall to about 21% ($2.9 billion). However, over the duration of the Bill

cotton market prices remain at levels that continue to generate large loan deficiency

payments and counter-cyclical payments, so that by the 2007 cotton's share of the total is

very similar to that of corn. Tables 2 and 3 provide details on the FAPRI projections of

levels of production, prices and government rates and resulting estimates of the various

direct payment expenditures (revenues to producers) for corn and cotton under FSRIA.

Table 2: Projected Production, Prices and Returns for Corn under FSRIA for 2002-
2007'

Actual Production
CCP Production
Fixed Payment Production

Farm Price
Loan Rate
Average LDP Rate
Target Price
CCP Rate
Fixed Payment

Gross Market Revenue
LDP Payments
CCP Payments
Fixed Payments
Annual Sum of Direct Payments
Sum of Direct Payments over 6 yrs

2002 2003 2004 2005
Million bushels

10094.4
9643.7
8201.1

2.04
1.98
0.12
2.60
0.28
0.28

20593
1211.3
2295.2
1951.9
5458.4

10174.4
9643.7
8201.1
Dollars per
2.10
1.95
0.03
2.63
0.25
0.28

9847.4
9643.7
8201.1

2.03
1.98
0.13
2.60
0.29
0.28

19990
1280.2
2377.2
1951.9
5609.2

10303.2
9643.7
8201.1
bushel
2.15
1.95
0.00
2.63
0.20
0.28

Million dollars
21366 22152
305.2 0.0
2049.3 1639.4
1951.9 1951.9
4306.4 3591.3

2006 2007

10657.0
9643.7
8201.1

2.23
1.95
0.00
2.63
0.12
0.28

23765
0.0
983.7
1951.9
2935.5
25164.2

10468.6
9643.7
8201.1

2.19
1.95
0.00
2.63
0.16
0.28

22926
0.0
1311.5
1951.9
3263.4

Table 3: Projected Production, Prices and Returns for Cotton under FSRIA for 2002-
2007'
2002 2003 2004 2005 2006 2007
Million pounds
Actual Production 8166.4 8378.7 8495.6 8508.5 8514.7 8395.2
CCP Production 10907.7 10907.7 10907.7 10907.7 10907.7 10907.7
Fixed Payment Production 10515.1 10515.1 10515.1 10515.1 10515.1 10515.1
Dollars per pound
Farm Price 0.385 0.423 0.448 0.471 0.482 0.508
Loan Rate 0.520 0.520 0.520 0.520 0.520 0.520
Average LDP Rate 0.219 0.190 0.168 0.146 0.119 0.098
Target Price 0.724 0.724 0.724 0.724 0.724 0.724
CCP Rate 0.137 0.137 0.137 0.137 0.137 0.137
Fixed Payment 0.067 0.067 0.067 0.067 0.067 0.067
Million dollars
Gross Market Revenue 3816.9 4220.3 4501.1 4729.0 4844.1 5013.8
LDP Payments 1791.0 1592.6 1423.9 1244.7 1013.9 819.0
CCP Payments 1272.2 1272.2 1272.2 1272.2 1272.2 1272.2
Fixed Payments 596.1 596.1 596.1 596.1 596.1 596.1
Annual Sum of Direct Payments 3659.3 3460.9 3292.2 3113.0 2882.2 2687.4
Sum of Direct Payments over 6 yrs 19094.9

Extending Government Income Support Programs to Florida Orange Production

The analysis that follows contains an estimate of the cost to implement an income

support program for oranges produced for processing that would be designed similar to

those for the major program crops. This analysis is based on retention of the tariff on

imported orange juice, primarily from Brazil. That analysis is then repeated with an

adjustment in prices that reflects prices that are expected if the tariff is eliminated.

The key elements in the establishment of an income support program for oranges

in Florida similar to that of presently covered commodities would be the determination of

a target price and loan rate. For this study it is assumed that the relative relationship of

the loan rate, target price and projected farm price for oranges is the same as that for U.S.

corn. Corn is selected since, as noted above, it is represents about one-fourth of

government expenditures over the life of the Bill. Specifically, the target price for

oranges in 2002 of $5.62 per on-tree box (Table 3) is established as follows:

Target Price Oranges2002 = Farm Price Oranges2002 x (Target Price Corn2o02Farm Price Corn2002)
5.62 = 4.39 x (2.60/2.03)

The 2003 target price is set equal to the 2002 price. The target price in 2004 is calculated

using the above equation but with 2004 projected farm prices, then 2005, 2006 and 2007

are set equal to 2005. This is to be consistent with program commodities where target

rates are the same in 2002 and 2003 and increased to a higher amount in 2004-2007. The

loan rate is set in a similar manner. Figure 2 provides a graph of the relationship of the

target price, loan rate and the FAPRI projected farm price for corn. Figure 3 provides,

for comparison, graphs of the calculated (Table 3) target price, loan rate and projected

orange prices."

Figure 2: Prices, Expenses and Rates for Corn
3
-4- Farm Pricelbu.

Loan Ratelbu.

-. ___ -_-- ---'--- -
2 -- --_ A -Average LDP
Ratelbu.

1.5 Target Pricelbu.

S- CCP Ratelbu.

-0-Fixed
0.5 Paymentlbu.
O0 Variable
A.. ---------. --- -Expenseslbu
0 -- --- *** A *-- ----- ^ -----

2002 2003 2004

2005 2006 2007

Figure 3: Prices, Expenses and Rates for Oranges

7
-4 Farm
Pricelbox
X6 ___------ x ,, -LLoan
Ratelbox
5 "At- Average LDP
Ratelbox
4
Target
Pricelbox
3
-- CCP Ratelbox
2
0- Fixed
Paymentlbox
.Variable
------- Explbox
0-
2002 2003 2004 2005 2006 2007

The annual average loan deficiency payment rate (LDP) and the counter-cyclical

rate are calculated in a similar manner as the target price and loan rate. For example, the

average LDP rate in 2003 in Table 3 for oranges is:

LPD Rate Oranges2003 = Farm Price Oranges2oo3 x (Average LPD Rate Corn2oo3/Farm Price Corn200oo3

.27 = 4.52 x (.12/2.04)

The average LPD rate and farm price for corn are from the FAPRI baseline projections.

The fixed payment rate is found in a similar manner for 2002 and this rate is fixed for the

six-year life of the bill to be consistent with the constant fixed payment rate for the

covered commodities.

Projected Government Direct Costs Associated with an Income Support Program
for Florida Oranges (under U.S. current orange juice tariff)

Table 3 provides the six-year projected farm (on-tree) price and productions

levels for 2002 through 2007, assuming the current orange juice tariff (Spreen et al.).

Increased world consumption and world production levels of orange juice result in 2002

Florida production of 251.1 million boxes increasing to 259.9 million boxes in 2007 and

farm prices increasing from $4.39 in 2002 to $4.80 in 2007.

Table 3: Projected Production, Prices and Returns for Oranges for 2002-2007 Under
Current U.S. Tariff Assuming a Government Income Support Program
2002 2003 2004 2005 2006 2007
Million boxes
Actual production 251.2 253.2 254.7 256.0 257.7 259.9
$ Per box
Farm Price 4.39 4.52 4.62 4.71 4.76 4.80
Loan Rate 4.28 4.28 4.20 4.20 4.20 4.20
Average LDP Rate 0.28 0.27 0.07 0.00 0.00 0.00
Target Price 5.62 5.62 5.79 5.79 5.79 5.79
CCP Rate 0.63 0.62 0.55 0.44 0.35 0.26
Fixed Payment 0.60 0.60 0.60 0.60 0.60 0.60
Million dollars
Gross Market Revenue 1103 1145 1177 1206 1227 1247
LDP Payment 70.6 67.3 16.8 0.0 0.0 0.0
CCP Payment 133.9 133.5 119.1 95.3 76.2 57.1
Fixed Payment 128.1 128.1 128.1 128.1 128.1 128.1
Annual Sum of Direct Payments 332.6 329.0 264.0 223.5 204.3 185.2
Sum of Direct Payments over 6 yrs 1538.5

Under an income support program the total amount of direct expenditures is

estimated to be $332.6 million in 2002 (Table 3). This is made up of $70.6 million in

LDP, $133.9 million in CCP and $128.1 million in fixed payments. As farm level prices

increase the annual direct payments fall steadily over the six years with total payments of

$185.2 million in 2007. For comparative purposes in Table 2 the direct payments for

corn are $5.6, $5.5, $4.3, $3.6, $3.2 and $2.9 billion for 2002-2007, respectively. Total

government outlays for oranges would total $1,538.5 million over the six years

(compared to $25.2 billion for corn).

It needs to be noted that the contract or base acreage and yield for oranges is

assumed to be equal to the states harvested acreage yields and as with covered

commodities the CCP and fixed payments are on 85% of the base production.

Projected Government Direct Costs Associated With An Income Support Program
For Florida Oranges If U.S. Current Orange Juice Tariff Is Eliminated

Elimination of the U.S. orange juice tariff would ultimately translate into a

reduction in the on-tree price of Florida oranges. Table 4 provides the projected farm

price (on-tree) for Florida oranges if the tariff were eliminated immediately. The farm

price would be $3.25 per box on 2002 and increase to $3.66 in 2007 with all prices being

well below the with-tariff projections (Table 3). Consequently, the relationship of the

farm price, with no tariff, to the target prices and loan rate would change significantly. As

shown in Figure 4 with no tariff the farm price would be less than the loan rate in all

years and consequently under a government income support program would generate

significant marketing loan payments and CCP (fixed payment would not change).

Table 4: Projected Production, Prices and Returns for Oranges for 2002-2007 with
ELIMINATION of Tariff
2002 2003 2004 2005 2006 2007
Million boxes
Actual Production 251.2 253.2 254.7 256.0 257.7 259.9
Dollars per box
Farm Price 3.25 3.37 3.47 3.56 3.61 3.66
Loan Rate 4.28 4.28 4.20 4.20 4.20 4.20
Average LDP Rate 2.41 2.13 1.70 1.49 1.37 1.25
Target Price 5.62 5.62 5.79 5.79 5.79 5.79
CCP Rate 0.90 0.90 1.07 1.07 1.07 1.07
Fixed Payment 0.60 0.60 0.60 0.60 0.60 0.60
Million dollars
Gross Market Revenue 816.4 853.3 883.8 911.4 930.3 951.2
LDP Payment 604.6 538.5 432.1 380.6 353.0 325.7
CCP Payment 192.3 193.8 231.0 232.2 233.7 235.7
Fixed Payment 128.1 128.1 128.1 128.1 128.1 128.1
Annual Sum of Direct Payments 925.0 860.4 791.2 740.8 714.8 689.5
Sum of Direct Payments over 6 yrs 4721.8

Figure 4: Orange Prices with Tariff Removal and Loan Rate
and Target Price

7

6

5

4

3

2

1

0

0.80

0.70
0.60

0.50

0.40
0.30

0.20
0.10

0.00

2002

2003

2004

2005

2006

--..-----...------....---
*-- *

2007

Figure 5 gives the FAPRI projected relationship over the six-year life of FSRIA

for cotton. It is expected that the farm price for cotton, though increasing over the life of

the farm bill, will remain below the loan price for cotton and consequently generate

significant loan and CCPs. Thus the projected cotton prices (farm and target) and loan

2002 2003 2004 2005 2006 2007

Figure 5: Cotton Prices and Rates

*---- -- ------
m ---
= = == =

-- -Farm
Pricelbox

-- Loan
Ratelbox

-X-Target
Pricelbox

-- Farm
Price/lb.

Loan
Rate/lb.

Target
Price/lb.

I

rates have a similar relationship to those projected for oranges if the tariff is removed. For

this study it is assumed that this parallel relative relationship of the average LPD rate,

CCP rate and projected farm price for oranges and cotton would translate similar LDPs

and CCPs. For example:

LPD Rate Oranges2003 = Farm Price Oranges2oo3 x (Average LPD Rate Corn200oo3/Farm Price Corn200oo3

.27 = 4.52 x (.12/2.04).

Table 4 provides the six-year projected productions levels for 2002 through 2007,

assuming the current orange juice tariff is eliminated (Spreen et al). The total amount of

direct expenditures is estimated to be $925.0 million in 2002. This is made up of $604.6

million in LDP, $192.1 million in CCP and $128.1 million in fixed. This is almost $600

million above direct expenditures under the tariff (Table 3), primarily due to an additional

$534 million in LDPs. The annual direct payments fall over the six years with total

payments of just below $700 million in 2007. Total government outlays would be

$4,721.8 million over the six years.

Concluding Comments

This straightforward but elementary analysis estimated the cost, in terms of

government expenditure to implement an income support program for oranges produced

for processing similar to those for the major program crops (corn and cotton). For the

span of the Bill direct payments to corn start at a level in excess of $5.6 billion and

decline to just under $3.0 billion while cotton starts at about $3.6 billion and moderately

fall off to $2.6 billion (figure 6). By comparison the direct incurred for an income

support program for oranges would be substantially less. In the early years with the tariff

in place the expenditures are estimated to be about $300 million and by 2007 would fall

below $200 million. If the tariff were removed there would be a sizeable annual

increases in government support. From a high of $925 million payments would decline

to about $700 million in 2007. Over the six-year period, 2002-2007, the direct payment to

orange producers would be $1,538.5 million with retention of the tariff as compared to

$4,721.8 million if the tariff were eliminated.

This analysis focused exclusively on the impact of tariff elimination on Florida

orange production. Several issues would need to be addressed in a more sophisticated

and comprehensive analysis. Due to the close similarity of oranges and grapefruit from a

production and investment standpoint in Florida it would be necessary to broaden the

analysis to include Florida grapefruit. Likewise, since government programs of this

nature are national in scope it would be necessary to expand the analysis to include other

citrus, for juice, producing states, particularly California. In addition, future research is

needed to identify underlying commodity characteristics, such as cost structure and

marketing alternatives for a broader range of commodities (not just corn and cotton) that

describe or explain more accurately the relationship between market price, target prices,

loan rates, CCP rates, and fixed payment rates. It would also be helpful to assess the

implications of risk differences of covered crop versus citrus, and the impact of other

government-supported programs such as crop yield and crop revenue insurances. And

finally consumer costs and welfare implications need to be examined.

6000

5000

4000
c
2 3000
E
2000

1000

0

Figure 6: Estimated Direct Gov. Payments for Corn, Cotton, and
Oranges with & without Tariff

X -X- X- -X
A -A -*A - -A -A

2002

2003

2004

2005

2006

2007

--* Corn Cotton A Oranges with tariff -X-Oranges without tariff

SFAPRI 2002 U.S. Baseline Briefing Book, FAPRI-UMC Data Report 02-02, July 2002.
" Spreen, Thomas H., Charlene Brewster, and Mark G. Brown. "The Free Trade Area of the Americas and
the World Processed Orange Market." Journal ofAgricultural andApplied Economics, April 2003,
forthcoming.