Jasper Womach
Specialist in Agricultural Policy
Resources, Science, and Industry Division

July 20, 1999

The Agricultural Market Transition Act (AMTA, Title I of the 1996 farm bill) established a substantially changed support program for producers of wheat, feed grains, upland cotton, and rice. This new program offered 7-year "production flexibility contracts" to producers with cropland previously enrolled in a target price deficiency payments program. The law earmarked $35.68 billion for contract payments to be paid over seven years in fixed but declining annual amounts and was expected to stabilize and constrain commodity program entitlement spending. No longer would payments be tied to market prices, to the planting of a specific crop, or to annual cropland diversion requirements. The new law did continue nonrecourse marketing assistance loans for most producers of grains, upland cotton, and oilseeds.

In 1998 the drop and persistence of low grain and oilseed prices led to several emergency assistance actions, raising questions about the future of AMTA. First, Congress modified the law to accelerate FY1999 contract payments. Subsequently, Congress authorized $2.857 billion in emergency market loss payments, distributed to contract holders in the Fall of 1998. Additional relief proposals have been debated in the 106th Congress, where another aid bill is believed likely to pass. Some have suggested that assistance be incorporated into AMTA by raising marketing loan rates, extending the term of loans, or reestablishing the farmer-owned reserve. This report will be updated and revised as legislative events transpire.

For decades, federal law has required the U.S. Department of Agriculture (USDA) to offer price and related support to producers of nearly two dozen individually specified farm commodities. In 1995, the primary price support tools for wheat, feed grains (corn, sorghum, barley, oats), rice, and cotton were: (1) target price deficiency payments, which increased when market prices were low, and decreased when market prices were high; (2) nonrecourse marketing assistance loans for stored commodities; and (3) acreage reduction programs, imposed as a condition of receiving payments and loans. Support for oilseeds was limited to marketing assistance loans. The Farm Service Agency (FSA, formerly the Agricultural Stabilization and Conservation Service) each year announced "commodity programs" stipulating what and how much a participating farmer could plant, and what the benefits would be, based on statutory formulas.

These programs generally derived their authority from three permanent laws that are still on the books: the Agricultural Adjustment Act of 1938 (P.L. 75-430); the Agricultural Act of 1949 (P.L. 81-439); and the Commodity Credit Corporation (CCC) Charter Act of 1948 (P.L. 80-806). However, Congress has frequently altered key provisions of these original laws-usually through omnibus multi-year farm or budget bills-to adjust to contemporary market conditions, control spending, or address other policy concerns.

The most recent authorizing legislation, the Federal Agricultural Improvement and Reform (FAIR) Act of 1996 (P.L. 104-127), suspended most provisions of permanent law for grains and cotton (Section 171). In their place, the FAIR Act established for crop years 1996 through 2002 a support program detailed in Title I, the Agricultural Market Transition Act (AMTA) -- also labeled "freedom to farm" by its sponsor.

Under subtitle I-B, 7-year "production flexibility contracts" offer fixed (but generally declining) annual payments to producers with acreage that had been enrolled in the old wheat, feed grains, upland cotton, and/or rice programs. These contract payments replace target price deficiency payments.

USDA announced a May 20 through July 12, 1996, signup period for the contracts. Since then, only producers with crop bases exiting the Conservation Reserve Program (CRP) have been eligible to enroll. Annual payments are made before the end of September; or farmers may request two installments each year, half in the previous December or January (at the discretion of the recipient) and half in September. P.L. 105-228 gave farmers the choice to receive their entire 1999 contract payment early. Legislation has been introduced (H.R. 2395) that would authorize the same early receipt option for crop year 2000 contract payments.

Available funding. Annual spending for the 7-year production flexibility contracts is specified by Section 113 of the law. The annual totals are allocated among crops based on the following percentages, intended to reflect their anticipated share of outlays under an extension of previous law: wheat, 26.26%; corn, 46.22%; sorghum, 5.11%; barley, 2.16%; oats, 0.15%; upland cotton, 11.63%; rice, 8.47%. The rice allocation is supplemented by an additional $8.5 million annually. Total spending, which is funded through the Commodity Credit Corporation (CCC), is viewed as both a guarantee to farmers and a ceiling on federal outlays.

Seven-year cumulative spending for commodity contracts is locked in at $35.68 billion. This limit was agreed upon largely to meet budget constraints. The fixed spending level applies to contract payments only; CCC annual outlays for crop loans, and for other commodity programs and related activities, can continue to rise and fall depending upon market and other conditions not directly influenced by statute. Previously, annual CCC outlays for target price deficiency payments fluctuated in response to market prices, which was perceived as a problem by those concerned about federal budget stability.

The commodity price declines of 1998 and anticipated subsequent declines in farm revenue encouraged Congress to distribute $2.857 billion in supplemental market loss assistance payments to contract holders in October 1998 (P.L. 105-277). These emergency payments effectively raised 1998 contract payments by 50%, but the outlay falls into the FY1999 budget year and does not count against the $35.68 billion ceiling on contract payments. (See CRS Report 98-952, The Emergency Agricultural Provisions in the FY 1999 Omnibus Appropriations Act)

a. The $2.857 billion in calendar year 1998 emergency market loss payments to contract holders are not included in this table.

Payments. Contracts are tied to farms and farmland. Generally, Section 111 stipulates that an individual must own or rent eligible farmland and assume all or part of the production risk to receive contract payments. Section 114 specifies that payments will be calculated annually as follows:

· USDA first determines per-unit (per-bushel or per-pound) rates for each crop by (1) calculating, for each contract crop, total national production-set at 85% of total national contract acreage times farm program yield-and then (2) dividing that amount into the total money allotted annually for each of these crops.

Table 2. Estimated Contract Commodity Payment Rates

· Each farm's total annual payment for each contract commodity is calculated by multiplying the above payment rate by 85% of the "acreage base" times the "program yield." A farm's acreage base is the average acres planted or considered planted under the old program for the prior five years for wheat and feed grains, and the prior three years for upland cotton and rice. Each farm's program yield (i.e., per-acre production under the old program) remains frozen at 1986 levels. The total annual payment for farms with multiple contract crop bases is the sum of the calculations for each of the individual contract commodities.

· There is a per person annual limit on contract payments of $40,000. Generally, spouses are jointly considered to be one person. Each person may receive up to $20,000 in contract payments for each of two additional farm entities.

Planting flexibility. Previously, each farm had an acreage base for each program crop produced on the farm, and with some exceptions had to plant the specified crop, but not in excess of the acreage base. The new law combines crop-specific bases into a single contract acreage base for each farm. Section 118 effectively permits participating farmers to plant any combination of wheat, feed grains, cotton, rice, oilseeds, or other crops on the entire contract acreage (or put the land into a conserving use). Generally, fruits and vegetables cannot be planted on contract acres; however, exceptions apply for USDA-specified regions with a history of double-cropping contract commodities with fruits or vegetables, and for individuals with a fruit and vegetable planting history. Unlimited haying and grazing are permitted on all acreage, including contract acreage. On land outside of the contract acreage, there are no constraints on the choice of crops.

Section 111 explicitly requires that contract land be used for agriculture-related activities, which includes conservation uses, and contract holders must satisfy conservation compliance and wetland protection regulations. Farmers no longer are required to buy catastrophic crop insurance to receive contract benefits, as long as they waive eligibility for any disaster assistance (Section 193).1

Repeal of annual acreage reductions. Section 171 repeals USDA's authority to impose annual cropland diversion requirements (notably, an Acreage Reduction Program, or ARP) that shift acreage out of crop production and into conserving uses. During periods of low market prices, ARPs were imposed to reduce acres eligible for payments and thereby cut federal expenditures, and also to raise market prices by reducing supplies.

Under subtitle I-C, nonrecourse marketing assistance loans, and loan deficiency payments, continue to be available after harvest for stored commodities. Section 132 generally requires that the rates per bushel (or per pound) be set at 85% of average market prices for the preceding 5 years, excluding the high and low years (the upland cotton formula differs somewhat). As table 2 indicates, maximum rates are specified for all crops. Some have minimums, and USDA has authority to lower wheat and feed grain rates by as much as 10% to minimize surpluses.

Eligibility for wheat, feed grains, upland cotton, and rice loans is limited to farms with production flexibility contracts, although the entire farm's production (not just contract acres) can qualify. However, soybeans and other minor oilseeds and extra-long staple (ELS) cotton are eligible for loans, whether or not they are grown on a contract farm (oilseeds and ELS cotton are not contract crops).

Loan repayment provisions. Nonrecourse commodity loans have a maturity term of about 9 months and bear interest.2 If a loan is not settled before maturity, the producer forfeits the collateral commodity to the government, which has no recourse other than to accept the commodity in lieu of repayment. However, Section 134 continues the availability of alternative settlement provisions, which enable farmers to repay the loans at USDA-specified rates that are intended to approximate local market prices. If that repayment rate is below the original USDA loan rate, the farmer captures the difference as a marketing loan gain. Moreover, loan deficiency payments (equal to marketing loan gains) also are made to producers who agree not to lake out loans (Section 135). (See CRS Report 98-744, Agricultural Marketing Assistance Loans and Loan Deficiency Payments.)

Under Section 135, USDA continues to calculate cotton and rice loan repayment rates based on world market prices. Wheat, feed grains, and oilseeds repayment rates are to be calculated so as to minimize loan forfeitures and government surplus acquisitions, and to encourage the movement of commodities into private markets. Daily posted county prices based on the previous day prices at nearby terminal markets have served as the repayment rates. Heavy use of LDDS for the 1998 crops revealed certain geographical inequities inherent in the program. In the spring of 1999 the USDA indicated its intent to shift to posted national prices in place of posted county prices in order to eliminate boundary problems associated with terminal price adjustments.

The combination of marketing loan gains and loan deficiency payments remain separately limited to $75,000 per person. Under the "three entity rule" on payment limitations, participation in two additional farm entities could raise the upper limit to $150,000 per person for all farm operations. Annual payment limitations apply to the sum of benefits for all crops; there is not a separate cap for each crop. Anticipated large marketing loan gains and LDPs on 1999 production are causing concern that numerous farms could reach the payment limits. This could limit the use of LDPs and encourage the forfeiture of commodities to CCC-- an outcome explicitly inconsistent with the mandated goals of the marketing loan provisions.

Section 171 suspends the farmer-owned reserve, which permitted wheat and feed grain producers (under specified low price triggers) to extend their loans for up to an additional 27 months or more. Cotton loans no longer can be extended for the extra 8 months as under previous law. So-called cotton "step-2" payments, made domestic cotton users and exporters whenever U.S. cotton prices are more than 1.25¢ per pound above world prices, are continued, subject to a 7-year spending limit of $701 million (Section 136). This limit was reached in the fall of 1998, and the U.S. cotton industry is seeking additional funding.

In 1998, commodity prices fell in response to large world supplies and dampened import demand in countries shocked by financial problems and currency devaluations. Congress reacted to the deteriorating market prices by advancing to 1998 the distribution of all 1999 crop AMTA payments, as well as authorizing an additional $2.857 billion in direct payments to contract holders (labeled market loss assistance). Observers of the farm economy believe there is a high likelihood that Congress will authorize additional assistance in 1999. This is causing renewed examination of farm support and risk management in general, and the design of AMTA in particular.

According to USDA budget data, marketing loan program payments are estimated at $2.7 billion in FY1999 and $3.4 billion in FY2000. This heavy utilization is revealing several problems. The $75,000 per person payment limitation is constraining the exercise of LDPs and encouraging the forfeiture of commodities to the CCC. The use of daily posted county prices as the loan repayment rate creates problems of inequity along several county and state boundaries, which the USDA has proposed to remedy by adopting a single national post price. County loan rates have not been realigned geographically to match changes in markets, which is a contributing factor to the geographical inequities. Relative to production costs, the national loan rate for soybeans is higher than for corn, which, contrary to market price signals, has caused farmers to favor soybean production over corn production. And, a single county loan rate for all wheat paired with separate posted county prices for each class of wheat raises questions of equity as well as possible market distortions.

Footnotes

1 The $2.375 billion in supplemental disaster assistance funds authorized by P.L. 105-277 was made available to all farmers who had suffered substantial production losses in 1998 or in 3 out of the 5 prior years, even those who had declined to accept catastrophic crop insurance and waived eligibility for disaster assistance.

2 Under Section 163, interest rates that producers pay on commodity loans are equal to CCC's cost of borrowing from the U.S. Treasury, plus 1% (this is an increase of 1% over previous law). The commodity loan interest rate was set at 504 for July 1999.