Since the 1930’s, federal law has required the U.S. Department of Agriculture (USDA) to offer price and income support to producers of certain farm commodities.1 Authority comes from 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 (CCC) Charter Act of 1948 (P.L. 80-806). Congress typically alters provisions in these laws through multiyear farm bills or appropriations acts.
The most recent authorizing legislation, the Farm Security and Rural Investment Act of 2002 (P.L. 107-171, or the 2002 farm bill), was signed into law on May 13, 2002. This law temporarily suspends most provisions of the permanent laws. Title I contains provisions regarding farm income and commodity price support programs for the 2002- 2007 crop years. It replaced the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 (P.L. 104-127), including provisions for the 2002 crop year. Other titles in the law affect conservation, trade, nutrition, credit, rural development, and research.
This report covers grains, cotton, oilseeds, and peanuts. These commodities have similar rules, and generally account for about two-thirds of CCC outlays. Payments for dairy, sugar, and tobacco are outside the scope of this report.2 The 2002 farm bill defines two classes of commodities: “covered commodities” and loan commodities.” Covered commodities include wheat, feed grains (corn, grain, sorghum, barley, and oats), upland cotton, rice, soybeans, and other oilseeds (sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe, and sesame seed). Loan commodities include the covered commodities, plus extra long staple cotton, wool, mohair, honey, dry peas, lentils, and small chickpeas.3 Peanuts are classified separately, receive the same types of payments as covered commodities.4
To receive payments, an individual must share in the risk of producing a crop and comply with conservation and planting flexibility rules. If a landlord receives a fixed cash rent, then the tenant bears all the risk and receives the government payment. Tenants might not benefit fully, though, if landlords raise cash rents or switch to share rental agreements. Agricultural economists widely agree that a large fraction of government payments passes through to landlords, and that government payments raise the price of land. About 60% of acres enrolled in the program are rented.5
Types of Payments
Commodity program payments under the 2002 farm bill combine the direct payment framework of the 1996 farm bill with counter-cyclical payments in preceding laws. Depending on the crops farmers grow or have a history of planting, they can receive three types of payments: direct payments, counter-cyclical payments, and marketing loans. Each payment has an annual limit per farm or individual, but these limits, in practice, are not constraining because some large farms can be reorganized to meet the rules, or marketing loans can be repaid in such a way as to avoid the limits. Legislation was introduced in the 108th Congress (S. 667) to further restrict payment limits. For more information, see CRS Report RS21493, Payment Limits for Farm Commodity Programs.
The 1996 farm bill created production flexibility contract (PFC) payments, and the 2002 farm bill renamed them direct payments. These annual payments are unrelated to (decoupled from) current production or current market prices. The farmer is not obligated to grow the crop to receive a direct payment, and may plant any crop (with the exception of fruits and vegetables) without losing benefits.6 The 2002 farm bill preserves direct payments for wheat, feed grains, cotton, and rice, and extends them to previously uncovered soybeans, minor oilseeds, and peanuts. As with the prior law, the direct payment is based on 85% of the eligible “base acres” multiplied by the “direct payment yield” for each farm and the “payment rate” per unit (Table 1). For more information about crop bases and payment yields, see CRS Report RS21615, Updating Crop Bases and Yields Under the 2002 Farm Bill. The annual limit on direct payments is $40,000 per person, and can be doubled under certain rules.
Automatic payments when market prices are low were first implemented in 1973, but were discontinued in the 1996 farm bill. The 2002 farm bill reinstates such payments for grains and upland cotton and now extends them to soybeans, other oilseeds, and peanuts.7 Counter-cyclical payments, formerly called deficiency payments, make up for the difference between a crop’s target price and a lower season-average market price. The target price is a statutory benchmark defined in the farm bill. When market prices exceed the target price, no payment is made.
As with direct payments, counter-cyclical payments are tied to a farm’s base acres and “counter-cyclical payment yield” and do not depend on current production. Thus, even though the counter-cyclical program depends on market prices, it does not require farmer to market any of the relevant commodity. The annual limit on counter-cyclical payments is $65,000 per person and can be doubled under certain rules. Other payments are considered “counter-cyclical” also. For example, loan deficiency payments (described below) are counter-cyclical because they increase as prices fall.
Marketing Loans and Loan Deficiency Payments.
Commodity loans have long been part of farm policy, but the current form of marketing loans and loan deficiency payments (LDPs) began with the 1985 farm bill to keep the storage requirements of the loan program from distorting supply.
Marketing loans are nonrecourse loans that farmers can obtain by pledging their harvested commodities as collateral. The loans provide interim financing by allowing farmers to receive some revenue for their crop when the loan is requested, while at the same time storing the commodity for later disposition when prices may be higher. LDP’s are an alternative to taking out a loan, and allow farmers to market grain at any time in response to market signals while receiving the benefits of the loan program.
The “covered crops” and peanuts are eligible; extra long staple (ELS) cotton also is eligible, but not for LDPs. The 2002 farm bill reinstated loans for wool, mohair, and honey, and added dry peas, lentils, and small chickpeas.
Marketing loans provide minimum price guarantees on the crop actually produced, unlike direct or counter-cyclical payments, which are tied to historical bases. The farm bill sets loan rates at the national level (Table 1), but USDA adjusts these to local loan rates to reflect spatial difference in markets, transportation and other factors.8 The annual limit on marketing loan gains and LDPs is $75,000 per person, and this limit can be doubled under certain rules. However, gains from using commodity certificates or forfeiting commodities are not limited. Thus, the marketing loan program is effectively unlimited.
Timing of Payments
The farm bill establishes a payment schedule. Direct payments (DP) are made in two parts: a 50% advance payment in December, and the balance in the following October. Counter-cyclical payments (CCP) are made in three parts: a first payment in October of the year the crop is harvested of up to 35% of the projected payment, a second payment in the following February, and a final payment at the end of the marketing year. Thus, payments for the 2004 crop began in December 2003 with the advance direct payment, and will end by October 2005 with the final counter-cyclical payment. For tax deferral or other reasons, producers can elect to not receive advance or partial payments. Marketing loans are available anytime after the commodity is normally harvested until a specified date in the following calendar year (e.g., for corn, from fall harvest until May 31). Marketing loans mature nine months after a loan is obtained.
Federal Spending on Commodity Programs
The 2002 farm bill covers crop years 2002-2007. Given the timing of payments, federal outlays for these crop years will be made primarily in FY2003-2008. The Congressional Budget Office (CBO) periodically estimates a baseline for agricultural programs. These estimates account for projections of production, inventories, and prices.
Jim Monke, Analyst in Agricultural Policy, Resources, Science, and Industry Division