An Introduction to Farm Commodity Programs (1)

Geoffrey S. Becker

Specialist in Agricultural Policy

Environment and Natural Resources Policy Division

July 20, 1994

94-577 ENR

SUMMARY

The U.S. Department of Agriculture's (USDA's) Commodity Credit Corporation (CCC) is required to provide assistance to 20 specified agricultural commodities, to achieve three primary objectives: to support prices, supplement incomes, and manage supplies. Supporters contend that financial help to the farm sector also ensures consumers an abundant supply of reasonably priced food. But critics believe that basic U.S. farm policies, conceived in the 1930s, no longer meet the needs of modern agriculture or society as a whole.

OVERVIEW

The major price and income support programs of the CCC represent the heart of U.S. farm policy, by virtue of their longevity--commodity programs have been around since the early 1930s--and their cost. With annual outlays now averaging $10-12 billion, they are the most expensive and visible of all Federal farm activities.

Commodities Supported

Current law requires the Secretary of Agriculture to support the following commodities: (2) cotton, rice, wheat, peanuts, milk, tobacco, feed grains (corn, barley, oats, sorghum, rye), soybeans and other oilseeds (sunflower seed, canola, rapeseed, safflower, flaxseed, mustard seed), and sugar (sugarcane and sugar beets).

The law also permits the Secretary to support any commodity he chooses, but this discretion is exercised infrequently.

While a seemingly small numbered these 20 commodities influence the economic health of much of agriculture. They accounted for $69 billion, or 40 percent, of all cash receipts from U.S. farm marketings in 1992. The 19 crops on the list accounted for nearly 80 percent of the 340 million acres of all U.S. cropland in 1992 (milk, the other supported commodity, is a livestock product).

Many prominent farm products are not supported by the CCC programs: virtually all red meats, poultry, fruits, nuts, and vegetables, which together earned farmers another $100 billion or more in 1992. But even these producers can be affected by farm policy decisions, either because they also produce some price-supported commodities, or because Government intervention in one commodity sector can influence production and prices in others.

(In addition, producers of all types of commodities--whether price-supported or not--are served by numerous non-CCC farm production and marketing programs. Farm lending programs, soil and water conservation activities, federally subsidized crop insurance, export assistance, marketing orders for horticultural crops, and research and promotion activities are examples.)

Type and Extent of Support

Congress has devised a variety of techniques, some dating to the 1930s, for the CCC to assist producers. Generally, each was designed to achieve one of three broad policy objectives:

-- To support farm prices of designated commodities. The methods for achieving this goal have included nonrecourse loans, commodity purchases, and farmer-owned grain reserves;

-- To supplement incomes of those who produce them. Methods have included deficiency payments (based on target prices), incentive payments, marketing loans, loan deficiency payments, and disaster payments;

-- To manage supplies of particular commodities. Methods have included acreage reduction programs, paid acreage diversions, acreage allotments, marketing quotas, milk diversion and dairy termination programs, and production and marketing assessments.

Which techniques are used, the levels of aid they provide, and impacts on taxpayers, consumers, and/or other producers, differ among the commodities. Some products are supported by only one program tool; others receive their support through a combination of methods.

Wheat, feed grains, cotton, and rice producers have access to the most extensive set of program tools. Not coincidentally, these crops represented nearly $100 billion, or about 70 percent, of the approximately $142 billion in total CCC program outlays between fiscal years 1983 and 1992. Each year, USDA announces a "program" for each of these crops. If farmers choose to enroll, they agree to abide by certain planting and other requirements in exchange for a variety of potential benefits. The enrollment usually takes place by early spring, prior to planting time, at county offices. (3)

One primary benefit for wheat and feed grains producers is a CCC nonrecourse loan at harvest time. To qualify, a farmer pledges his crop as collateral and agrees to store it, usually for 9 months; he can later choose either to repay the loan or to forfeit his crop to the CCC to satisfy repayment. The loan is based on a per-bushel (or per-pound) rate; it serves as the lowest price a participating farmer will have to take for his crop. In some years, wheat and feed grains producers are permitted to, in effect, extend their loans by keeping their crops in longer storage under the farmer-owned reserve program.

Rice and cotton program participants have been using a variation of the nonrecourse loan known as the marketing loan, which requires them to repay their original CCC loan but permits redemption at less than the original rate of borrowing. The producer essentially pockets the difference as a subsidy.

Wheat, feed grains, cotton, and rice program participants also may benefit from deficiency payments, income supplements that are based upon a per-bushel (or per-pound) "target" price set by Congress for each crop. The subsidy is the difference between: (1) the average market price or CCC loan rate for the crop, whichever is higher and (2) the target price (which is set above the CCC loan rate).

In exchange for CCC loans and payments, enrolled producers must agree to participate in any acreage reduction program (ARP) announced for that year's crop. An ARP requires them to remove a designated percentage of their land from production and to devote it to conserving uses. one reason the Government uses the ARP feature is to limit potentially large, price-depressing surpluses. In some years, the ARP may be supplemented by a paid acreage diversion--either voluntary or as a further condition of eligibility--that offers an added financial incentive to take even more acres out of production.

Soybeans and other oilseeds are supported through marketing loans. The oilseeds program lacks both the deficiency payment and supply management provisions used in the wheat, feed grains, cotton, and rice programs. Net outlays for soybeans over the past decade have been minimal because their CCC loan rates have generally been set below private market prices.

Sugar, tobacco, and peanuts all utilize nonrecourse loans, but each program's supply control is its more significant operational feature. The sugar program relies on a system of restrictive import quotas on foreign sugar, along with standby authority to restrict the amount of domestic sugar that processors can market, in order to limit domestic supplies and thereby boost U.S. prices. Under the peanut program, marketing quotas (called poundage quotas) limit the quantity of edible peanuts that can be marketed; all nonquota peanuts must be used for oil or feed or exported. The tobacco program employs the most aggressive supply control tool, acreage allotments; all production of the major tobacco types is strictly limited to those farms with an acreage quota. Because the supply control features of these three commodity programs keep market prices higher than they would otherwise be, consumers rather than taxpayers bear the costs.

Dairy differs from the other commodity programs in that it relies on commodity purchases from processors, rather than on direct assistance (loans or payments) to dairy producers, to support farm prices. The CCC buys all bulk quantities of butter, cheese, and nonfat dry milk that dairy processors are unable to sell on the private market for at least the prices offered by the CCC. The CCC prices are set so that processors can afford to pay dairy farmers a price for their milk that will reflect at least the federally mandated support price. At different times in the recent past, the program has also employed two supply control mechanisms, dairy diversion and dairy termination, which paid farmers who volunteered to reduce output or to cease operations, respectively. Net outlays for the dairy program totalled more than $13 billion from fiscal years 1983 to 1992, about 9 percent of total CCC outlays.

Payment and Loan Limitations

Most farm subsidies are tied to each bushel or pound produced; therefore, higher output means higher benefits, up to certain limits. The law sets an annual ceiling for deficiency and diversion payments at $50,000 per person. However, exceptions to this basic limit actually bring the total any person can receive to $250,000 per year.

Separate, and different, limitations apply to disaster payments and various USDA conservation programs. Nonrecourse loans are not subject to payment ceilings .

Other inherent payment limits are various crops' loan rates and maximum target prices, and their arcane rules ("base" and "yield" calculations) for determining how much of each producer's output will be eligible for payments. One significant means of limiting wheat, feed grains, cotton, and rice outlays (and of reorienting programs toward the private market) is the so-called triple base rule, also known as planting flexibility. Enacted in 1990, this provision further reduces each producer's acres eligible for crop deficiency payments (in addition to land set aside by ARP) but allows the producer more discretion in what to plant on those ineligible acres.

Legislative Authority

Some standing authority for CCC programs is provided by three permanent laws: the Agricultural Adjustment Act of 1938 (P.L.75-430), the Agricultural Act of 1949 (P.L.81-439), and the Commodity Credit Corporation Charter Act of 1948 (P.L.80-806). However, while the programs retain many of the features of these laws, Congress has frequently altered them, usually through omnibus, multi-year farm bills. The most recent omnibus farm law, which is now guiding program operations through 1995, is the Food, Agriculture, Conservation, and Trade Act of 1990 (P.L.101-624). The programs also must meet certain cost-saving requirements outlined in the Omnibus Budget Reconciliation Acts of 1990 and 1993 (P.L.101-508 and P.L.103-66, respectively).

JUSTIFICATION FOR FARM PROGRAMS

In theory, by providing a measure of stability to the agricultural sector (by offering minimum prices and supplementing income), farm programs in return ensure society an abundant supply of food and fiber at reasonable prices. Several unique physical and economic characteristics are cited to justify Government subsidies. Among them are:

The weather. This highly unpredictable variable can dramatically affect annual average production and the viability of farms;

Price inelasticity. Aggregate demand for agricultural products is highly inelastic in terms of price; that is, a change in price results in a less than proportional change in the quantity demanded. Along with weather, this can cause large supply and price fluctuations in the absence of Government stabilizing mechanisms;

Many farms. Unlike most goods, farm commodities are still produced by a relatively large number of individual enterprises. A single or small group of producers therefore cannot influence prices by limiting their own supplies;

Timing and biology. Crop and livestock production are biological processes requiring months and even years, making it difficult to consistently balance supplies with consumer demand. Producers are vulnerable to volatile weather and economic changes between the time they must decide to invest in a commodity and when they can bring it to market. Major crops, for example, are perishable commodities usually harvested once a year. The programs provide for their orderly marketing not only to meet demand that extends throughout the year, but also to afford the farmer a reasonable price for his products, even at harvest time when large supplies would tend to depress prices.

Nonetheless, a growing number of agricultural economists and policy analysts believe that current commodity policy is outdated, and may even be detrimental to the needs of modern agriculture and of society in general. When commodity programs were born in the early 1930s, most of the Nation's 6 million farms were smaller, and many were in serious financial difficulty. The programs were first established to address the economic problems of this large, relatively homogenous segment of society, where about 25 percent of the U.S. population then resided.

However, in the ensuing decades, vastly improved productivity has contributed to a profound transformation of farming. It is now a big business confined to fewer and larger commercial operations; just 123,000 (6 percent) of the largest farms accounted for more than half of all farm sales in 1992. Today, less than 2 percent of the population lives on farms. The majority of the 2 million farms that remain are primarily part-time operations, and those who operate them rely on off-farm earnings for most of their income.

It has been argued that because they are tied to volume of output and to specified commodities, current programs have wrongly accelerated this trend toward concentration of production on large, specialized farms. The programs also fail to target farmers in the greatest financial need, and they threaten the environment by encouraging the production of the more erosive crops (corn, wheat, cotton) and by promoting intensive use of chemicals to increase yields, critics charge. Others believe that domestic commodity programs have become less and less effective at reducing instability in farm prices and incomes, primarily in the last 20 years when American agriculture has become an increasingly international industry. For example, when controls are used here to reduce U.S. output and boost prices, foreign producers simply increase their own production and price their products below U.S. products, it is argued.

CONCLUSION

While many policymakers are not satisfied with the current array of farm commodity programs and their high costs, few are calling for their immediate dismantlement. Congress has generally made only small, incremental changes in agricultural policy over the past 20 years. Whether new international trade rules, Federal deficit reduction, environmental pressures, and other developments will force more significant changes in the coming years remains to be seen.

Endnotes

1. This is one of a series of CRS short reports on the farm commodity programs. Unless noted, sources are various publications and documents of the U.S. Department of Agriculture.
2. The FY94 USDA appropriations act (P.L. 103-111) prohibits expenditures to support the price of honey, although separate authorizing legislation technically requires the program. The FY95 appropriation law is expected to continue this prohibition. Also, separate 1993 legislation (P.L. 103-130) phases out wool and mohair price supports by the end of 1995.
3. The CCC itself has no staff; it is a Government-owned legal entity for financing commodity operations. The CCC programs are administered by USDA's Agricultural Stabilization and Conservation Service (ASCS), which deals with farmers directly through a network of approximately 2,800 county offices.