RS20020: The Agricultural Economy:
Recent Action and Early Issues for the 106th Congress

Jean Yavis Jones

Specialist, Food and Agriculture Policy Resources, Science, and Industry Division

Updated July 1, 1999

Current Economic Setting

In 1997 after almost 2 years of continuing growth in markets and prices for U.S. agricultural products, farm prices and incomes began to fall in many sectors and regions. This was largely attributable to declining world markets, large supplies, and natural disasters. Current economic indicators do not project much change in the demand and price picture for most farm commodities in 1999. Overall, agricultural exports and prices are expected to remain low this year, and net farm income is projected by USDA to be $45.1 billion in 1999, or about 2% less than 1998 net farm income. This is substantially less than the decade high of $53.4 billion in net farm income recorded for 1996, but more than the annual average ($43.1 billion) recorded for the years 1990-1995.

Certain sectors and regions have been more affected than others by falling prices and natural disasters. Hog prices remain at near record lows although they are beginning to rebound slightly as production drops off in 1999. Stocks for other major commodities (corn, oats, soybeans, cotton, and wheat) remain high, and bulk exports of them are not expected to grow, according to USDA. While the balance of trade in agricultural exports and imports is expected to remain positive in 1999, total exports of U.S. farm products are expected to fall to $49 billion by the end of the year, down about 9% from the 1998 level ($53.7 billion). Much of this can be explained by financial instability in some key markets for U.S. farm goods, particularly in Asia (which has been the fastest growing American market for farm goods), and in Russia (where U.S. farm imports declined by about 80% between 1998 and 1997). Overall, the world economic situation suggests contraction rather than expansion of overseas markets for most U.S. agricultural goods through 1999 and into 2000. The high value of the U.S. dollar relative to other exporting countries' currencies also makes it difficult for U.S. products to be competitive in world markets.

In spite of the current farm price and demand problems, the overall farm balance sheet looks relatively strong. USDA projections for 1999 show farm assets, including real estate values, increasing and production costs and farm debt falling. Total farm household income (i.e. income derived from all sources) is expected to rise from an average of $53.7 billion in 1998 to $55.1 billion in 1999, according to the USDA. This is largely because of rises in off-farm income, which constitute most (80-90%) of total household income for average farm operators. Also expected to help offset farm income losses from declining prices and markets are government direct farm payments, which are projected to total $14.4 billion in 1999, the highest annual total of the decade. Federal spending for all agriculture programs (including conservation and export programs) currently is projected by the USDA to total $18.2 billion in FY1999. (See Agriculture Outlook, June-July, 1999, USDA, ERS, for current data on agricultural conditions. For more information on legislation passed in the 105^th Congress, see CRS archived IB Food and Agriculture Issues in the 105^th Congress.)

The "Farm Safety Net"

Falling farm income and prices for many major commodities have raised questions by some about whether the Freedom to Farm Act adequately protects farm income when prices fall. This title of the 1996 farm law (P.L. 104-127) removed the link between farm prices and target prices for individual crops. In place of this, annual lump sum payments were made available to program crop farmers based on previous planting history, irrespective of farm prices and economic conditions. These payments are fixed and gradually decline over the 7-year farm bill period. In return for giving up target prices, farmers are permitted virtually total planting flexibility. They also are eligible (albeit at lower rates) for marketing loan protection or loan deficiency payments if prices fall below the marketing loan rate, which is capped at 1995 levels.

Supporters of the policy changes made by the 1996 farm law saw benefits to farmers because it released them from the planting requirements and set-asides of earlier price support and supply management policies. The new law's transition (or contract) payments to farmers were expected to help them while they grew accustomed to making their own planting and selling decisions based on market prices and demand. There also was some expectation that transition payments made during high price years would serve as a cushion for farmers during low price periods. Risk protection was maintained under a revised crop insurance program and pilot revenue insurance projects, also authorized by the 1996 farm law. Opposition to the 1996 farm law came from those concerned about what would happen to farmers if prices declined at the same time that farm payments declined, as they began to do in 1997. Currently, there appears to be little support for reversing the major policy changes made by the Freedom to Farm Act. Many key farm legislators on the House and Senate Agriculture Committees have publicly indicated reluctance to alter the basic, market-oriented premise of that law, and are exploring refinements or other avenues, such as crop and revenue insurance to help with the current price and income situation. Not all agree; some would like to restore or redirect policy back to the target price farm income protection programs of the past.

Issues and Proposals in the 106^th Congress

Crop Insurance Reform. Many farmers have expressed dissatisfaction with the cost and coverage of crop insurance and have chosen not to participate. Under recent reforms, the law permits farmers to reject crop insurance but requires them to sign a waiver of eligibility for any federal disaster or other payments for crop losses from natural disasters if they do so. It was hoped that this would encourage more farmers to participate and also lessen the need for almost annual ad hoc emergency disaster payments by the federal government. Neither proved to be true in 1998, when the Congress approved emergency farm payments for farmers suffering from natural disasters regardless of whether they participated in the crop insurance program. There is broad agreement about the need for crop insurance reform, and some desire to expand coverage to those currently ineligible. The Senate Democratic farm package (S. 19), includes a provision extending coverage to livestock. A bi-partisan crop insurance bill (S. 529), sponsored by Senators Roberts and Kerrey et. al, would make structural changes to increase coverage, set affordable prices, and address the issue of multiple crop failures. Ag Committee Chairman Combest plans to introduce a crop insurance reform measure in early July. Senator Lugar is less inclined to address farm price and income problems solely through changes to crop insurance. He plans to introduce a bill in early July that will offer farmers additional transition payments if they take at least 2 of 8 specified steps (one of which is crop insurance participation) to better manage risk. The major issue surrounding these proposals is how to design a system that is affordable for those at high risk, attractive to those at low risk, and acceptable in terms of the federal cost. (See CRS Issue Brief IB10033, Federal Crop Insurance: Reform Issues in the 106^th Congress.)

Revenue (or income) Insurance for Farmers. Currently several pilot projects authorized by the 1996 farm law test the feasibility of allowing farmers to participate in an insurance program protecting them from major income losses when crop revenues fall below a certain level. Final results of the pilot projects are not yet in, but initial reports are favorable. The Administration has suggested expanding revenue insurance availability, but did not include a specific proposal or funding for this in its FY2000 budget proposal. The Chairmen of both the House and Senate Agriculture Committees have indicated interest in this approach. The Roberts crop insurance bill (S. 529) contains provisions that would expand the availability of revenue-based insurance products. Determining levels of revenue protection and loss levels that trigger assistance, and the cost of such a program will be major issues. (See CRS Issue Brief IB10033, Federal Crop Insurance: Reform Issues in the 106^th Congress.)

Marketing Loan Assistance. Marketing assistance loans for major crops are designed to facilitate marketing by providing short-term financing to farmers. When market prices fall below the commodity loan rate, repayment is made at the lower market price, instead of the higher loan rate and the farmer gets to keep the difference (or deficiency payment). Farmers eligible for the program also may forego loans and receive loan deficiency payments if prices fall below the loan rate. Some would like to revise the loan rates to provide larger deficiency payments to farmers. Others would like to extend the repayment period and/or extend loans to currently ineligible producers (e.g. livestock producers). These proposals appeal to those who want more of a link between farm prices and payments than is the case under Freedom to Farm. Raising the marketing loan cap was proposed and rejected at the end of the 105^th Congress, largely because of the price tag (about $5 billion), but also because of its potential for reversing the direction of farm policy and, in some views, exacerbating the oversupply/low price problem. Several bills revising marketing loan rates have been introduced in the 106^th Congress (H.R. 217, H.R. 1299, and S. 30). (See CRS Report 98-744, Agricultural Marketing Assistance Loans and Loan Deficiency Payments.)

Agriculture Spending. The 106^th Congress approved emergency supplemental appropriations for FY1999 that, in addition to increasing agriculture funding for FY1999, provide sufficient funding for, among other things, military operations in Kosovo and Caribbean Hurricane relief. The farm provisions provide $574 million for agriculture assistance to farmers, plus $149 million for P.L. 480 international food aid. It added funding for (1) farm loans and agency salaries to expedite disaster assistance ($148.4 million); (2) Section 32 surplus removal ($145 million); (3) livestock assistance ($93 million); (4) flood cleanup ($28 million) and water and flood prevention ($95 million); (5) rural area assistance ($32 million) and (6) grants to migrants and seasonal farm workers ($20 million). Meanwhile, the House has approved, and the Senate has reported FY2000 appropriations legislation(H.R. 1906 and S. 1233) that provide $60.7 billion in budget authority for the USDA ($35.5 billion of which is for domestic food programs). This total is about $1.1 billion less than the Administration request, and about $5 billion more than FY1999 non-emergency funding. Finally, the budget resolution approved by the House and Senate (H.Con.Res. 68) makes room for some $6 billion in additional spending for agriculture (over a four or five year period) to pay for longer term policy changes that are being considered by the Congress to address farm income problems.(See CRS Report RL30201, Appropriations for FY2000: USDA and Related Agencies.)

Livestock. Livestock prices have been declining for some time, with the heaviest declines in the hog sector, where average price per hundredweight fell from almost $53 in 1997 to a record low of $14.70 in December 1998. Hog Prices have risen since then, and in April, 1999 reached $30.50. Most analysts see oversupply and processing capacity limitations as the major reasons for the declines in hog prices. The Administration implemented several initiatives to help producers: $50 million in direct payments to pork producers and increased purchases of pork and other meat products for domestic and foreign food programs. Supplemental appropriations approved by the Congress for FY1999 (P.L. 106-31) added $145 million to Section 32 to buy more surplus commodities (such as pork). They also give an additional $70 million in livestock assistance to farmers and $3 million for a livestock indemnity program. Industry concentration is thought by some to have exacerbated low livestock prices, and is being examined by the Congress, along with bills that would require mandatory meat price reporting and country-of-origin meat labeling for imported meats (H.R. 169, H.R. 693, S. 675). Direct payments to swine producers (H.R. 921) and extending to them eligibility for marketing loans (H.R. 217) and crop insurance coverage (S. 19) also have been proposed. (See CRS Issue Brief IB10021, Animal Agriculture: Issues for the 106^th Congress.)

Tax Relief and Credit for Farmers. The Family Farmer Bankruptcy Extension (H.R. 808, P.L. 106-45) provides a six-month extension (through October 1999) of the sunset date for Chapter 12, a specialized form of bankruptcy relief for family farmers seeking to reorganize their debts. Bills proposing Farm and Ranch Risk Management (FARRM) accounts (H.R. 957 and S. 641) have been proposed again this year. These accounts would let farmers put aside money in good years without having to pay taxes on it until it is withdrawn (most likely in lean years when taxable income is less). Senate Ag Committee Chairman Lugar's planned risk management bill, which would offer additional market transition payments to farmers agreeing to undertake at least two of eight specified risk management strategies, includes deposits in farm and ranch risk management accounts as one of the qualifying strategies. Tax benefits for farmers are opposed by those who see this as less beneficial to low and moderate income farmers than higher income farmers who can afford to put money aside. They also face opposition, as do many revenue reducing measures, from those who want to use whatever surplus there is for other purposes. Meanwhile, in early March, the Congress approved a stopgap measure to free up funds ($470 million) being reserved until April 1, 1999 for the Beginning Farmers and Ranchers program (H.R. 882, P.L. 106-2) to help meet the immediate need for guaranteed loans in farm communities. (See CRS Report 97-572, Managing Farm Risk in a New Policy Era)

Dairy. Some $200 million in direct payments to dairy farmers, approved in last year's omnibus appropriations law for FY1999 was released beginning June 16, 1999. Final USDA milk marketing order and fluid milk pricing changes, issued by the USDA in late March, 1999 and required by the 1996 farm law, are very controversial. The proposed changes would substantially revise farm milk prices in many regions by moving away from pricing policies that currently tend to set higher prices for milk outside the Upper Midwest, where dairy farmers have long argued for a change. Those in other regions would like to maintain the current pricing system. Farmers in each of the new regions will have to vote to approve the USDA changes by October 1, 1999, or risk the loss of any federal price regulation in their region beyond that date. A legislative proposal (H.R. 1402). to adopt a different option (A1) than that recommended by the USDA, was reported by the House Agriculture Committee on June 29, 1999. This would essentially maintain minimum farm milk prices close to their current levels; it also would extend the federal dairy price support program (now scheduled to expire on January 1, 2000) by one year. Proposals similar to H.R. 1604 and S.J.Res. 22) that reauthorize the Northeast Dairy Compact and/or authorize a new Southern Dairy Compact are expected to be offered during debates on FY2000 agriculture appropriations legislation in the Senate. (See CRS Issue Brief 97011, Dairy Policy Issues.)

Agricultural Trade. Weak foreign demand and large world supplies have lowered U.S. agricultural exports, farm prices and income. The USDA now forecasts that the value of agricultural exports will decline from $54 billion in FY1998 to $49 billion in FY1999. With agricultural exports making up nearly 30% of gross U.S. farm income, most policymakers see reversing this trend as an important way to reinvigorate the U.S. farm economy. For some, this means passage of fast-track legislation that would expedite congressional procedures for dealing with legislation implementing trade agreements negotiated by the Administration. Some also want to expand market promotion and food aid efforts, exempt agriculture products from U.S. imposed trade sanctions, and force aggressive negotiations to deal with foreign-imposed trade barriers to U.S. farm products. Continuation of trade with China also is important for agriculture. Some, however, are wary of trade expanding and barrier reducing approaches, and would prefer more in the way of market protection for U.S. products (e.g. mandated labeling of foreign foods).

(See CRS Issue Brief IB10040, Agricultural Trade Issues in the 106^th Congress)

"Fast Track." This is legislation designed to expedite congressional consideration of bills that implement trade agreements negotiated by the Administration. In effect it requires up or down votes, without amendments or other provisions that might delay or undermine negotiated agreements. Many regard fast track legislation as essential to U.S. credibility in the next round of World Trade Organization (WTO) negotiations, scheduled for December 1999. Although generally supported by farm groups, fast track is resisted by some who would like U.S. agricultural interests to play a more prominent role in trade negotiations. Some also worry about the potential competitive disadvantage to U.S. products because of other countries' lower production costs (e.g., wages) and negligible environmental requirements. Fast track was defeated last year in the House and some are reluctant to bring it forward again without strong Administration support, which has not yet been forthcoming. (See CRS Report 97-817, Agriculture and "Fast Track" Legislation, and 98-254, Agriculture in the Next Round of Multilateral Trade Negotiations.)

Trade Sanctions and Agriculture. Agreement could not be reached in the 105^th Congress on a proposal that would have applied broad exemptions for agricultural products from all U.S. trade sanctions. This approach has resurfaced in several forms in the 106^th Congress. Some bills (H.R. 212, S. 327, and S. 566) would apply to current sanctions; others (H.R. 17, H.R. 817, H.R. 1244, S. 315, S. 425, and S. 757) would apply to future sanction decisions. On February 10, 1999, the House Agriculture Committee ordered reported the Selective Agricultural Embargoes Act of 1999 (H.R. 17). Among other things, it requires the President to report to the Congress on any embargo that affects agriculture. It also was referred to the House International Relations Committee, where action is pending. Senator Lugar's most recent trade sanctions bill (S. 757) includes economic assistance to farmers suffering market losses from embargoes and restrictions on embargoes of agricultural products. Efforts to exempt agriculture and medical products from trade sanctions during House Committee deliberations over FY2000 agriculture appropriations was unsuccessful (See CRS Report RL30108, Economic Sanctions and U.S. Agriculture Exports.)

China and U.S. Agriculture. China's market for U.S. farm goods ($1.5 billion in FY1998) is of interest to farm policymakers in the Congress. On the table for this year are the annual Administration decision on whether or not to extend trade with China (often referred to as "most-favored-nation" or MFN status) and China's attempts to gain admission to the World Trade Organization (WTO). In recent years, MFN extensions have been opposed by some in the Congress who dislike China's human rights policies and practices. The President is expected to agree to an extension of MFN this year, and to support efforts to make permanent normal trading relations with China. Whether this will be part of the U.S. discussions with China on its accession to the WTO, or separately handled is not clear. Legislation has been introduced that would require the Administration to review its position on this matter with the Congress before taking action (S. 743 and H.R. 884). (See CRS Report RS20169, Agriculture and China's Accession to the WTO.)