How does the new inventory valuation method work?
As a transitional measure to more responsive programs, the method for calculating inventory changes is being amended so that losses in inventory values caused by declining commodity prices are reflected in a producer’s payment. Previously, changes in inventory quantities were valued using a year end price. With the new inventory valuation method, an opening price (P1) and an end of year price (P2) are used to value inventory. The decline or increase in value of inventory is included in the calculation of a producer’s production margin (i.e. farm income) for the year. This method is applied to market commodities but not applied to productive assets such as breeding livestock. This is because breeding livestock is not intended for market and therefore no actual market loss can be realized. If producers are entitled to more money after the recalculation, they receive additional payments. Recalculations were done beginning with the 2003 program, followed by 2004 and finally 2005.
