Federal farm programs for 1986-90.

Wakefield, Joseph C.

Federal Farm Programs for 1986-90

For farm policymakers, as for individual farmers, expectations at the time of sowing are not always met by the harvest. For example, when the Agriculture and Food Act of 1981 was enacted in late December of that year, it was estimated to cost about $11 billion for the 1982-85 period. The act and its cost estimate were based on the expectation that the agricultural prosperity of the previous decade would continue. The expectation was not met, and the act's final cost was $60 billion.

In the 1970's, inflation and demand had pushed up farm prices. Agricultural markets abroad had expanded rapidly. Farmers were able to market their commodities; shortages were a problem. Under these conditions, Federal spending for farm programs operated by the Commodity Credit Corporation (CCC) had been relatively low: It had averaged $3 billion annually for the decade, ranging from less than $1 billion to $5 1/2 billion. Following passage of the 1981 act, inflation began to slow and farm prices began to drop. The value of the dollar began to increase, raising the prices of U.S. farm commodities in world markets and reducing demand. Large crops abroad further reduced demand and prices, as did the worldwide recession of the early 1980's. Farmers had difficulties marketing their commodities; surpluses were a problem. As a result, spending for farm programs soared: It averaged $15 billion annually for 1982-85, ranging from $8 1/2 billion to $20 billion.

With these events as a background, Congress began in early 1985 to shape a new farm program to replace the expiring 1981 act. Their task was complicated by the continuing struggle to control the Federal deficit and the development of a financial crisis in the farm sector. The fiscal year 1986 congressional budget resolution called for reductions in spending for farm programs, and the administration, threatening a veto, was pressing to secure those reductions in the new farm legislation. At the same time, bumper crops were forecast, and continued declines in prices and exports were adding to the farmers' financial problems.

Thus, Congress was confronted with the need to shape a multifaceted farm policy--one that would bring to an end the expensive features of the 1981 act, increase farm exports, and eliminate overproduction without exacerbating the deepening financial problems of farmers. The hoped-for solution was the enactment in mid-December 1985 of the Food Security Act of 1985, which signals a significant shift in policy.

The remainder of this article will be in two sections: (1) A discussion of selected major provisions of the Food Security Act of 1985 and of some uncertainties about reaching the goals of the act, and (2) a summary of the programs of the CCC, which implements many of the provisions, and a discussion of how these programs are treated in the national income and product accounts (NIPA's). A glossary on the next page provides thumbnail definitions, amplified in the text, of a number of terms associated with CCC programs that will be used in both sections; the italicized terms in the article are in the glossary.

The Food Security Act

The Food Security Act of 1985, in a reversal of previous farm legislation, initiates a 5-year program to allow U.S. market prices for wheat, feed grains, cotton, and rice to follow world market prices. The act continues to specify target prices, but they are at their maximum levels in 1986 and decline during the life of the act. The act ties loan rates to a formula-determined multiyear average of past market prices, but also gives the CCC discretion to make even larger reductions if the previous year's prices were low or if competition is likely to be hampered by the formula-determined rate. The act also requires acreage reductions when nationwide stocks are expected to exceed specified levels; in the past, these production controls were discretionary.

The omnibus act's provisions also cover other farm programs--conservation; agricultural exports; agricultural research; and farm credit agencies, such as the Farmers Home Administration --and food assistance programs, such as food stamps.

According to estimates released by the Department of Agriculture, the act is expected to cost $169.2 billion over the 1986-90 period. The farm programs are expected to cost $100.6 billion, and the food assistance programs, $68.6 billion. The bulk of the cost for the farm programs stems from the income- and price-support programs of the CCC; they are estimated to cost $69.4 billion over the period. The agricultural conservation and export programs, together, are estimated to cost $21.0 billion, and the credit programs are estimated to cost $10.2 billion.

Under the income- and price-support programs, wheat, feed grains, and dairy products account for the bulk of CCC spending. Specific provisions of the act for these agricultural commodities illustrate how these commodity-oriented programs will function over the 1986-90 period. For grains, the provisions are aimed at boosting demand, especially for exports, as well as at reducing supply. For dairy products, the provisions are aimed almost exclusively at reducing supply, especially of milk.

Wheat and feed grains

At the end of fiscal year 1985, the CCC had $4.6 billion of wheat loans outstanding and a wheat inventory of $2 billion. Feed grain loans outstanding were $3.8 billion, and the inventory was $1.2 billion. Many features of the act are designed to reduce these loan and inventory balances.

In an attempt to lower production, as well as the CCC's cost for the wheat and feed grain programs, the act provides that, if supplies are excessive, the CCC may proclaim marketing quotas for each of the 1987-90 crops. If quotas are proclaimed, the CCC must conduct a referendum to determine if quotas will be used. If quotas are approved in the referendum by 60 percent of voting producers, the loan rate on nonrecourse loans and target prices, used in determining deficiency payments, will be set higher than without the quotas. The minimum average loan rate for wheat would be the higher of $3.55 per bushel or 75 percent of the average cost of production per bushel, excluding returns for management and risk. The minimum target price for wheat would be the higher of $4.65 per bushel or the average cost of production per bushel, with the same exclusions.

If marketing quotas are not in effect, the loan rate is reduced to $3.00 a bushel for wheat in 1986 from the 1985 rate of $3.30. (The loan rate is also set for corn, and loan rates for sorghum, barley, oats, and rye are to be set in "fair and reasonable relationship' with corn.) For 1987-90 crops, the loan rates will be set between 75 and 85 percent of the average domestic market price for the crops of the preceding 5 years, excluding the highest and lowest annual prices. Loan rates cannot be reduced more than 5 percent from the previous year. However, the CCC has the discretion to reduce loan rates below the formula levels by up to 20 percent in any year if the average market price in the previous year was low-- not more than 110 percent of the loan rate for that year--or if the reduction is necessary to maintain competitiveness in the world market.

Further, in an attempt to encourage farmers to redeem their loans and market the commodity, the act provides for a new feature referred to as a "marketing loan.' If the prevailing world market price is no more than 30 percent lower than the formula loan rate, producers may be permitted to repay wheat and feed grain loans at a rate equal to that world market price.

If marketing quotas are not in effect, the existing target prices of $4.38 a bushel for wheat and $3.03 a bushel for corn are frozen through 1987, a compromise made to bolster farm income in the short term. Target prices are to decline thereafter to the following percentages of the current levels: 98 percent in 1988; 95 percent in 1989; and 90 percent in 1990. The target price cannot be reduced below $4.00 a bushel for wheat and $2.75 a bushel for corn.

The act has a number of provisions affecting the way wheat and feed grain deficiency and diversion payments are made to eligible producers. In the past, the CCC has occasionally made deficiency payments in advance of the time when they would normally occur in the marketing cycle. In 1986, the CCC must make advance deficiency payments--apparently to help financially troubled farmers-- and may make advance diversion payments; both are discretionary for 1987-90. Payments may be made in cash or in kind, but no more than 50 percent of advance payments may be made in kind. Advance payments may not exceed 50 percent of estimated total payments.

The act also provides for two new types of payments to farmers: (1) Loan deficiency payments, and (2) inventory reduction payments. The loan deficiency payments must be made when the CCC uses the discretionary authority, mentioned earlier, to lower the loan rate below formula levels. They are made to provide farmers with the same return they would have had if the loan rate had not been reduced, and they are made in kind. The season-average market price--rather than the average price during a portion of the season, the basis for regular deficiency payments --is used to determine the loan deficiency payment rate, and the payments are exempt from a $50,000 limit on the amount payable to a farmer in a given year. The inventory reduction payments are made if a farmer reduces acreage by one-half the amount required for participation in the income- and price-support programs and agrees to forego loans and deficiency payments. The payments are calculated in the same manner as the loan deficiency payments, are in kind, and are not subject to any dollar limit. By being in kind these payments reduce CCC inventories and the budget costs of loans and deficiency payments; as well, the inventory reduction payment reduces production.

Dairy products

In recent years, the direct purchase of dairy products has been one of the CCC's most costly programs. In fiscal year 1985, the CCC purchased $1.8 billion of dairy products and had an inventory of $3.0 billion of these products at the end of fiscal year 1985. In an effort to reduce the cost of this program, the new act provides for a milk production termination, or buyout, program.

The buy-out program is a voluntary 18-month program, beginning April 1, 1986, under which milk producers can sell entire herds, including bulls and calves, for slaughter or export. Producers may submit bids to the CCC to enter into a contract to dispose of the herds. If a producer's bid is accepted by the CCC, the herd must be disposed of and the producer cannot engage in the production of milk for commercial use for 5 years. The CCC has discretion to use the program for 1988-90. To fund the program, the act assesses all milk producers 40 cents per 100 pounds of milk produced from April 1 to December 31, 1986, and 25 cents per 100 pounds until September 30, 1987. It is estimated that this program will remove 800,000 of the Nation's 11 million dairy cows from milk production and reduce the current CCC dairy product inventory.

Because the buy-out program would increase the supply of red meat, the act also requires the CCC to increase purchases of red meat by 400 million pounds during the 18-month buyout program to buffer its effect on meat producers. Of that amount, one-half would have to be used for Federal Government domestic programs, such as school lunch programs, and one-half would have to be sold for export or used in U.S. military programs overseas.

The act maintains the support price at the current $11.60 per 100 pounds of milk through 1986. The support price can be reduced 25 cents on January 1, 1987, and another 25 cents on October 1, 1987. For 1988-90, the CCC is required to alter the support price if CCC purchases are estimated to be outside specified limits--to reduce the support price an additional 50 cents if purchases are estimated to exceed 5 billion pounds, and to raise it an equivalent amount if purchases are estimated to be less than 2 1/2 billion pounds.

Conservation programs

Conservation measures have long been a feature of farm legislation. However, the 1985 act uses the conservation program, potentially the largest program ever, to reinforce the production-reduction efforts.

The act establishes a long-term conservation reserve of at least 40 million acres and up to 45 million acres of fragile land already in crop use. Farmers who participate will be offered contracts to take erosion-prone land out of use for 10 to 15 years. In return, the CCC will pay up to 50 percent of the cost of installing approved cover crops and an annual rental of up to $50,000 per year, either in cash or in negotiable payment-in-kind certificates. These rental payments will not be included in calculating the maximum amount a farmer is eligible to receive under other programs.

The act also provides for a "sodbuster' and for a "swampbuster' program to discourage future cultivation of "highly erodible' lands and wetlands. Farmers who plant crops on land so designated would lose price supports, crop insurance, Farmers Home Administration loans, and other benefits for all of their crops.

Export programs

In an effort to stimulate exports of U.S. agricultural commodities, the act requires the CCC to use at least $2 billion of CCC-owned commodities to encourage export sales. These commodities may be given to exporters at no cost to counter or offset unfair trading practices, high U.S. price support levels, or unfavorable changes in exchange rates. The CCC is supposed to spread the use of such commodities equally over fiscal years 1986-88.

Also, the act exempts certain export financing programs, including the above program, from requirements that 50 percent of specified cargoes be shipped on U.S.-flag vessels, which have higher shipping charges than vessels of other flags. However, for certain other programs, such as Food for Peace, the requirements is increased to 75 percent from 50 percent, to be phased in over 3 years. The act limits the CCC's total cost of ocean freight and ocean freight differential --a subsidy payment to exporters required to ship on U.S.-flag vessels-- to no more than 20 percent of the total cost of the export programs covered by the cargo preference; costs in excess of that amount would be paid by the Department of Transportation (DOT). However, if the funding is not available from DOT within 90 days, the above provisions are revoked and previous law reinstated.

Food stamp program

As in the past, the new farm legislation also reauthorizes Federal food assistance programs, including food stamps and other nutrition programs for low-income persons. The major provisions affecting the food stamp program are:

Automatic eligibility for households receiving aid to families with dependent children or supplemental security income benefits.

An increase in the amounts that can be deducted from gross income in determining eligibility and benefit levels: The "earned income deduction' is increased to 20 percent from 18 percent of income as defined for food stamp purposes to increase eligibility of low-income working families, effective May 1, 1986; the deduction for shelter expense is increased to $147 a month from $139 a month; and a new deduction is created of up to $160 a month for child care costs.

An increase to $2,000 from $1,500 in the liquid assets allowable in determining eligibility for households that do not include an elderly person and a broadened definition of households that are allowed $3,000 in assets. The new legislation extends the $3,000 limit to all households that include an elderly person; in the past, only households of two or more persons, at least one of whom is elderly, were allowed $3,000 in assets.

A prohibition on State sales taxes on food stamp purchases, effective at the beginning of the fiscal year following the first session of a State legislature.

A requirement that States set up job training and employment programs for employable food stamp recipients, with Federal grants-in-aid to help cover the costs.

Uncertainties

The extent to which the Food Security Act of 1985--and the shift in policy it represents--meets expectations will depend on a number of the same factors that frustrated earlier policies.

The act is designed to make U.S. farmers more competitive in world markets by reducing price supports. However, with lower support prices, if there is another large harvest in the United States and abroad, U.S. farmers could be placed in an international price-cutting war that could negate many potential benefits of the act. In addition, if foreign buyers decide to wait until crop price supports are further reduced in 1987, then the act could be detrimental to U.S. farmers in the short run.

The act is designed to end overproduction. The act's increased production controls discourage production, but its freezing of target prices for wheat and feed grains for the next 2 years encourages production, particularly with the concurrent reduction in loan rates. Farmers will decide which way--by producing less, or by producting more--they can best assure their income. The freeze on target prices, coupled with the reduction in loan rates, could also make the cost of crop programs higher than expected. Further, if the expected declines in feed grain prices result in larger dairy herds of the more efficient producers that are not bought out, then the aimed-for reduction in dairy production could be minimized or negated.

The Commodity Credit Corporation

The CCC is a corporation wholly owned and operated by the Federal Government within the Department of Agriculture.1 The CCC's function is to implement farm policy as authorized by various statutes, including the Food Security Act of 1985. The programs of the CCC are intended to stabilize and support farm income and prices; to assist in maintaining a balanced and adequate supply of agricultural commodities; and to facilitate the orderly distribution of agricultural commodities. The income and price support program will be discussed in this section.

1. This section updates and expands "Special Note.--The Commodity Credit Corporation in the National Income and Production Accounts,' SURVEY OF CURRENT BUSINESS 62 (January 1982): 6-7.

Farm income and price support

A number of CCC programs are designed to provide a cushion for producers of agricultural commodities against fluctuations in market prices. The income and price support is provided by means of nonrecourse loans, direct purchases, direct income support payments, and production controls.

Nonrecourse loans.--Accepting specified agricultural commodities-- mainly wheat, corn, soybeans, sorghum, barley, tobacco, cotton, and sugar--as collateral, the CCC can loan an amount equal to the quantity of crop put under loan times the loan rate. To be eligible for these loans, farmers must comply with any Government limitations on crop acreage and set-asides of cropland for conservation purposes. Farmers may obtain loans at any time during a crop year, whether the loan rate is above or below the market price. Even when the market price is above the loan rate, they often obtain loans if they expect prices to rise before the maturity date.

At any time during the period of the loan (9 months for most crops), farmers may redeem their crops by repaying the principal plus accrued interest and storage costs. Alternatively, a farmer may choose to default; in this case the CCC takes title to the crop as full payment of the loan and other charges. Finally, with limitations, a farmer may extend the loan for certain crops for 3-5 years by placing the crop into a farmer-owned reserve.

Direct purchases.--The CCC also is authorized to make direct purchases of certain crops and products at specified support prices to maintain market prices and farm income. In recent years, dairy products--milk, cheese, and butter--have usually accounted for the largest share of direct purchases.

Direct income support payments.-- The CCC provides three main types of direct income support, or subsidy, payments to eligible producers of wheat, feed grains, cotton, and rice: Deficiency payments, to offset unfavorable price relationships; disaster payments, in recognition of the susceptibility of farm income to natural disaster; and diversion payments, to compensate for voluntary conservation.

The CCC in the NIPA's

The NIPA treatment of the transactions of the CCC differs from that of most other government agencies in two ways. First, because the CCC is classified as a government enterprise, its operating expenses are netted against revenues in deriving the current surplus of government enterprises component of charges against GNP. Operating expenses of government agencies that are not enterprises are included in the government purchases component of GNP.2 Second, the loan transactions of the CCC are included in government purchases. Other loan transactions are excluded from the NIPA's. New CCC loans are recorded as purchases, and repayments are recorded as negative purchases; no transaction is needed in the case of a default. This section first describes the treatment of CCC transactions in the components of the Federal Government sector of the NIPA's.3 Table 1 shows estimates of the major CCC transactions for the 1970's and 1980's; the estimates through the first quarter of 1986 were not affected by the 1985 act. The section then explains how certain new features of CCC transactions under the act will be treated.

2. A government enterprise is defined as an agency--Federal, State, or local--for which operating expenses usually are covered by revenues from the sale of goods and services to the public.

3. In the NIPA tables, separate information on CCC transactions appears as follows: Tables 3.7B and 3.8B, CCC inventory change, quarterly and annually, in current and constant dollars, respectively; table 3.12, the CCC current surplus, annually; and table 3.19, relation of CCC expenditures in the NIPA's and CCC outlays in the unified budget. In addition, almost all of the agricultural subsidies in table 3.12 are paid by the CCC.

Nondefense purchases of goods and services.--For the CCC, these purchases include the change in commodity inventories resulting from CCC direct purchases, sales, and donations plus the net change in commodity loans outstanding (except tobacco loans).4 When necessary, an adjustment is made to account for the difference between CCC transactions and market prices. Nondefense purchases also include an imputation that reflects the amount of donations made by the CCC to private domestic organizations. This imputation offsets the effect of the donation on the CCC inventory change and yields the appropriate measure of CCC purchases and GNP.

4. Tobacco loans are not treated as purchases because they have a long history of being repaid, and CCC generally carries no tobacco inventory.

Subsidies less current surplus of government enterprises.--This component includes both subsidy payments by the CCC and the current surplus of the CCC. Direct payments to farmers --such as the deficiency, disaster, and diversion payments--are included in subsidies. The current surplus of the CCC is the difference between revenues and operating expenses, plus the adjustment for the difference between CCC transaction prices and market prices. Its operating expenses include administration and the cost of storing and transporting commodities.

Transfer payments to foreigners.-- This component includes CCC donations of commodities to foreign nations to meet famine or other emergency relief needs.

Net interest paid.--This component includes interest paid by the CCC to the public less interest received on commodity loans, on storage facility loans, and on export credit loans.

New features.--Several of the new features of the 1985 act that affect CCC transactions will require special treatment in the NIPA's. The treatments described below are based on a preliminary assessment about how these new features will be implemented by the CCC.

A number of new features relate to payments in kind. This type of transaction, used initially in 1983 in conjunction with the loan program, will be utilized under additional programs. The various payment-in-kind transactions, such as the interest payment certificates, will be treated in the same manner as they were in 1983: The market value of payments in kind will be recorded both as a decrease in CCC inventory change (nondefense purchases) and as an increase in farm inventories (farm change in business inventories), so that GNP will not be affected. The decrease in nondefense purchases will be offset by an equal entry in subsidies so that payments in kind have no effect on Federal Government expenditures and surplus or deficit.

The new feature that allows farmers to repay CCC loans at less than the loan rate--the marketing loan-- will also result in an imputed subsidy payment, set equal to the difference between the original value of the loan and the actual value of the loan repayment. Payments to farmers who place land in the conservation acreage reserve--called "rental payments' in the act--will be treated in the NIPA's as subsidies, as are other diversion payments. (The cost for ground cover under this program will be treated as an operating expense of the CCC.) Payments to farmers under the dairy buy-out program also will be treated as an operating expense, the assessment on milk producers to finance the buy-out will be treated as a revenue of the CCC, and the accompanying CCC purchases of red meat will be treated as a nondefense purchase.

Table: 1.--Selected Transactions of the Commodity Credit Corporation in the National Income and Product Accounts