DOMESTIC FARM PROGRAMS

Income Support

Policy Area: Domestic Farm Programs, Income Support

What It Is: A cost-sharing assessment program is a means by which the costs of farm programs are shared between producers and the government. The producers' share of the cost is covered through an assessment per unit of product marketed. The magnitude of the per unit assessment depends on the degree of cost sharing (50 percent cost sharing would involve a higher checkoff than if producers shared only 30 percent of the cost) and the size of the commodity surplus. The higher the assessment, the lower the effective level of price or income support for the commodity.

Objective: To make the level of income support more responsive to the magnitude of the surplus and to help defray a portion of government farm program costs.

When Used: The 1981 farm bill provided a cost-sharing program for tobacco. A 1982 farm bill amendment provided for a cost-sharing program in dairy. For both tobacco and milk, cost-sharing programs were implemented only after a serious political threat that the whole government price support program for these commodities might be withdrawn. The dairy cost-sharing program was reinstated in the 1985 farm bill to pay for a portion of the costs of the dairy buyout program (see Dairy Buyout). In the case of the dairy buyout, producers who continue to produce milk are taxed to cover a portion of the costs for the buyout program. The 1990 farm bill established an assessment for nonfat dry milk, cheese, and butter purchases by the CCC in excess of 7 billion pounds, milk equivalent.

Experience: Producer resistance has been substantial to the "assessment" under each program. Tobacco cost sharing was eliminated in the 1985 farm bill. Dairymen chose an even higher assessment to avoid support price cuts that would have been imposed by Gramm-Rudman. Assessments have become quite unpopular with producers. When it was suggested that milk producers ought to pay the extra WIC costs associated with an increase in the price support level, milk producer support for a 1991 dairy bill fell apart.

Consequences:

• The cost-sharing concept provides an automatic adjustment to the level of income support for farmers as government expenditures rise.

• The political hassle of adjusting income support downward when supports are initially set too high is avoided.

• The assessment reduces government costs and thereby increases the political acceptability of farm programs by urban congressmen and taxpayers.

• The assessment makes the level of income support more responsive to market forces.

• The assessment places the burden of program costs directly on producers, whereas price support reduction places the burden on cooperatives, processors and exporters who traditionally hold inventories.

Policy Area: Domestic Farm Programs, Income Support

What It Is: Low yield and prevented plantings payments are paid to producers who, through no fault of their own, are unable to plant their crop or harvest a normal yield.

Objective: To reduce producers' yield and planting risks by providing them a relatively free (program compliance may be necessary) crop insurance program.

When Used: Disaster payments were first authorized by the 1973 farm bill. Disaster payment benefits were available from 1973-81 to producers who were in compliance with other program provisions. Low-yield payments were made to producers who harvested less than 65 percent (75 percent for cotton) of their normal yield. In 1982, the provisions of the disaster program were dropped, except for extreme emergencies, to reduce government costs and encourage participation in the federal multi-peril crop insurance (MPCI). Whenever widespread disasters strike, however, Congress has been inclined to provide disaster payments such as in 1986, 1988, 1989, 1990, 1991, and 1992.

Experience: Disaster programs were very expensive and encouraged expanded production of crops in high-risk areas. Low-yield and prevented-plantings payments were received mainly by dryland producers in the Great Plains and producers in the Delta States. Ad hoc disaster programs discourage producer participation in crop insurance. The effect is to undermine the crop insurance program.

Consequences:

• High treasury costs are associated with disaster programs.

• Disaster programs provide producers income assistance when they need it the most; namely, after a natural disaster.

• Disaster programs can encourage production of high risk crops in low rainfall and floodplain areas.

• In latter years, disaster payments were subject to a $100,000 payment limitation, thus discouraging program participation by large-scale operators.

• Benefits from the program are bid into the market value of marginally productive, high-risk cropland.

• Special disaster payments undermine the crop insurance program.

Policy Area: Domestic Farm Programs, Income Support

What It Is: MPCI is a subsidized low-yield insurance program for farmers.

Objective: To provide federally subsidized crop insurance to producers unable to obtain adequate crop insurance elsewhere. To replace the low-yield and prevented- plantings disaster program for grains and cotton with an insurance program available to all producers of major crops.

When Used: MPCI for wheat was first authorized under the 1938 Federal Crop Insurance Act. Federal crop insurance was available only for wheat from 1939 through 1941 when it was expanded to cotton. The program was suspended in 1943 because of low producer participation but revived in 1945 with a reduction in counties insured. After 1948, the program was extended to more counties and crops, including vegetables and fruits. The program was substantially modified in the 1980 farm bill to provide a 30 percent federal cost subsidy. In 1981, the program was expanded to all counties in the United States and to most major crops.

Experience: Federal crop insurance has not garnered high levels of producer participation. Participation has been the highest in high-risk, nonirrigated, low-rainfall areas. Problems have been encountered in developing an actuarially sound premium structure and in adequately marketing the program to producers. Experience indicates MPCI has a high cost of administration relative to commercial insurance. The propensity of the Congress to enact ad hoc disaster payments in times of weather adversity undermines the effectiveness of the crop insurance program.

Consequences:

• Limited acceptance by farmers leads to adverse loss experience and political pressure for disaster payments.

• Low participation by producers results in high loss ratios and high treasury costs.

• The program provides more extensive coverage than commercial hail insurance at subsidized rates.

• High premiums discourage widespread producer participation, and low participation requires high premiums to make the program actuarially sound.

What It Is: Deficiency payment to make up the difference between the formula loan rate and the effective loan rate or the market price for wheat and feed grains.

Objective: To compensate U.S. farmers for adjustments to the formula loan rate made by the Secretary.

When Used: The 1985 farm bill established a formula for calculating the loan rate based on historical prices. The Secretary was authorized to reduce the formula loan rate (also referred to as the basic loan rate or basic price support) up to 20 percent to ensure the competitiveness of U.S. exports. When the Secretary reduced the formula loan rate, USDA was required to make producer payments to compensate fully for the loan rate reduction when average market prices fell below the formula loan rate. The payment rate is the formula loan rate less the greater of the market price or the effective loan rate. The payment was subject to the $200,000 limit in the 1985 farm bill. The 1990 farm bill continued the 20 percent loan adjustment subject to supply/demand conditions. The Findley payment was made subject to a $75,000 annual limit, however.

Experience: Loan deficiency payments were made each year of the 1985 farm bill for wheat and feed grains because the Secretary opted for the maximum reduction in the formula loan rates of these crops in 1986-1990. The budget exposure created by payment under the 1985 farm bill resulted in a $75,000 limit in the 1990 farm bill.

Consequences:

• Adjusted loan deficiency payments can lead to large government payments overall and to individual farmers.

• Adjusted loan deficiency payments reduce the adverse effect on farm income of the Secretary's actions to make U.S. exports more competitive in the world market.

• Adjusted loan deficiency payments reduce income risk for producers.

• Lower effective loan rates make U.S. exports more competitive in the world market.

What It Is: Flexibility allows producers to participate in the farm commodity program while planting up to 25 percent of their crop acreage base to permitted alternative crops. Participating producers retain their crop acreage base. No deficiency payment is received on flexed acreage although applicable loans apply. Producers do not receive deficiency payments on 15 percent of their acreage base, regardless of whether they flex it to an alternative crop.

Objective: To reduce government costs and provide farmers an opportunity to adjust cropping patterns in response to price changes.

When Used: Mandated in the 1990 budget act, a companion piece of legislation to the 1990 farm bill. The first opportunity to utilize the flexibility provisions was with the 1991 crop.

Experience: Relatively high prices for cotton encouraged farmers to flex considerably to cotton. Oilseed production likewise was increased. Producers' net incomes declined because of the 15 percent cut in deficiency payments. Flexing to soil- conserving crops did not appear to be overwhelming nor did moves to diversification.

Consequences:

• Lowered producer returns, particularly for those who had limited flex options.

• Provided opportunities to switch cropping patterns in light of technological changes, particularly variety improvements.

• Provided opportunities to implement conservation practices.

• Reduced incentives for increased production by reducing payment acreage.

• Increased farmers' ability to respond to price signals in areas where viable alternative crops existed.

What It Is: Income insurance would involve an expansion of the MPCI all-risk crop insurance to include both yield and price risk, i.e., total crop receipts.

Objective: To stabilize farm incomes from the adverse effects of natural disasters and low prices and thus replace all supply control and price support programs with a comprehensive farm income insurance program.

When Used: An income insurance program for farmers has not been used in the United States. The 1981 farm bill authorized an investigation into the feasibility of a federally subsidized income insurance program for farmers.

Experience: None.

Consequences:

• An actuarially sound farm income insurance program may reduce current treasury outlays but, as with MPCI, such a program would be difficult to develop.

• Producers' premiums would likely be unacceptably high, and because the policy replaces a "free" risk protection program, producers would likely oppose the program.

• Participation by farmers would likely be very low, like federal crop insurance.

• Political pressure to reduce premiums below their actuarially sound levels would be substantial. Premiums set too low would lead to excessive government costs and could cause the program to act as a supply incentive even in the face of surpluses.

• The program could be flexible enough to be used for both expanding and contracting supplies and for shifting production (acreage) from one crop to another and from one region to another.

• The program could discourage production in high risk areas.

• Research indicates that the high correlation between crop prices and yields among regions would cause the program to fail because losses caused by either low yields or low prices would be widespread and catastrophic for the treasury.

Policy Area: Domestic Farm Programs, Income Support

What It Is: Marketing loan is a nonrecourse loan with a repayment rate at the world market price, as determined by ASCS/USDA. The difference between the loan rate and the repayment rate (the loan deficiency payment rate) is not subject to the basic $50,000 payment limit. It is, however, subject to a separate $75,000 payment limit.

Objective: To remove the loan rate price floor and thereby expand exports.

When Used: Marketing loans were first authorized by the 1985 farm bill. While authorized for all price supported commodities, marketing loans were only initially implemented in rice and cotton. The 1990 farm bill extended the marketing loan to oilseeds. The 1990 bill also included a GATT trigger that mandated implementation of a marketing loan for wheat and feed grains in the absence of a GATT agreement by June 30, 1992. The GATT agreement was not reached so the marketing loan will extend to wheat and feed grains in 1993.

Experience: With the release of government stocks in 1986, largely through generic certificates, market prices fell to the repayment level. Foreign country competitors objected strongly to increased price competition from U.S. commodities in the world market. The marketing loan is most effective in expanding exports when the CCC is releasing stocks. If there are no CCC stocks to release, the market price plus loan deficiency rates plus producer equities or premiums will exceed announced loan rates.

Consequences:

• Marketing loan repayment rates become the market floor price when not used in conjunction with generic certificates that release CCC stocks.

• Prices become more unstable.

• Commodities become available for export at competitive world prices, thus increasing exports when the CCC is releasing stocks.

• With an expanded payment limit on the difference between the loan rate and the repayment rate (loan deficiency payment rate), large farms have a greater incentive to participate in the program.

• Government program costs increase sharply in the presence of large surplus stocks.

• Farm program costs for competing exporting countries increase and/or their producer returns decline.

• Domestic processor/consumers gain access to U.S. commodities at world competitive prices.

• Producers' returns increase because of the potential for marketing loan payments combined with premiums (equities) that might be offered to secure release from the non-recourse loan.

Policy Area: Domestic Farm Programs, Income Support

What It Is: Payment limits set a maximum on the amount of deficiency payments, marketing or Findley loan payments, and/or disaster payments that a person can receive from the government.

Objective: To limit the level of government benefits received by a single farmer and to minimize the image of farmers becoming wealthy from farm programs.

When Used: With the establishment of direct payments to farmers in the late 1960s, questions arose as to the magnitude of benefits received by large-scale farms, particularly rice, wheat, and cotton farms. As a result of this controversy, the 1970 farm bill set the payment limit at $55,000. In 1973 the limit was reduced to $20,000, escalated to $40,000 in 1977 and subsequently raised to $50,000. The 1990 farm bill payment limit remains at $50,000 with the emergency disaster program limited to $100,000. Benefits from the marketing and Findley Loan are subject to a separate $75,000 payment limit.

Experience: As the difference between the target price and the loan rate has widened, an increasingly large number of farmers have become subject to the payment limit. The combination of pressures to reduce government costs by more strict enforcement of the payment limit, combined with more farmers becoming subject to the limit, has made payment limits more controversial. At the same time, farmer efforts to find legal loopholes in payment limit regulations have accelerated. As a result, the payment limit may not be very effective in accomplishing its objective.

Consequences:

• Strict enforcement of the payment limit reduces large-scale farmers' incentives to participate in farm programs.

• The wider the difference between the target price and the loan rates, the greater the number of farmers who are adversely affected by the payment limit.

• A larger number of farmers affected by the payment limit was one of the factors leading to the marketing loan provisions.

• Acreage reduction programs are less effective at reducing supply in the presence of payment limits.

• Payment limits encourage larger farms to divide their operations and/or convert to cash rental arrangements that reduce the effectiveness of the limit, create extra costs, and thereby make payment limits inefficient.

Policy Area: Domestic Farm Programs, Income Support

What It Is: In the United States, deficiency payments are paid to farmers to make up the difference between a price determined to achieve a politically acceptable income level (target price) and the higher of the average market price or the loan rate. Deficiency payments are made on each participating farm's payment acres and farm program yield. Payment acres equals base acres less idled (set aside) and Flex (normal and optional) acres (see Flex). The farm program yield is based on each farm's yield history. Since 1985, however, they have been frozen. Although target prices were set initially to reflect an average cost of production, they are now legislatively determined.

Objective: Deficiency payments were initiated to raise and stabilize farmer incomes to the level of the nonfarm population, while allowing farm prices to be competitive in the export market.

When Used: Target prices were authorized for cotton in 1970 and for cotton, wheat, corn, sorghum, and oats in the 1973 farm bill. The 1985 farm bill specified about a 10 percent sequential reduction in target prices by 1990. The 1990 farm bill froze target prices at 1990 levels through 1995. Deficiency payments are paid on eligible crops if the average cash price is less than the target price.

Experience: Initially, target prices were set to reflect changes in the cost of production and yield. Much debate ensued over what constituted the cost of production and which costs should be included. A 1977 change in the target price formula removed the possibility of reducing target prices to reflect yield increases. The 1981 farm program set target prices for cotton, wheat, and corn for 1982-85 without regarding inflation, crop yields, or production costs. Excess production and high government program costs resulted. Target price reductions in the 1985 farm bill and frozen target prices in the 1990 farm bill, along with Flex and the CRP, substantially reduced production incentives, stocks, and government program costs.

Consequences:

• Target prices set above market clearing levels stimulate production and reduce market prices, thereby reducing food and feed costs.

• By reducing market prices, target prices allow U.S. farm products to be more competitive in the world market while supporting farm income, i.e., an implicit export subsidy. This is a significant advantage over using support prices for raising producer income.

• Setting target prices above the expected market price can result in large treasury outlays.

• Deficiency payments provide income support of up to $50,000 to large-scale producers. Because deficiency payment are paid on eligible farm program yield, smaller scale producers receive less absolute support.

• Deficiency payments reduce income risk for producers and increase their ability to obtain financing.

Policy Area: Domestic Farm Programs, Price Support

What It Is: The CCC makes nonrecourse loans at established loan rates for wheat, feed grains, rice, cotton, sugar, wool, tobacco, and honey. The loan, plus interest and storage, can be repaid within 9 to 12 months and the commodity sold on the cash market. If it is not profitable for the farmer to repay the loan, the CCC has no recourse but to accept the commodity in full payment of the loan. Commodity loans, therefore, are frequently referred to as a price support, since national season average prices generally do not fall below set loan levels. Local prices, on the other hand, can fall below the loan rate for part of the marketing year, depending on program participation and loan eligibility.

Objective: To add price stability to the market by releasing CCC stocks when prices were high and withdrawing stocks from the market when prices were low. To encourage orderly marketing of commodities throughout the marketing year by preventing a market glut at harvest.

When Used: The CCC loan program has existed continuously since 1938 for cotton, wheat, and feed grains. During World War II, the loan rates for basic commodities were set at 100 percent of parity to encourage production of crops. In other years, the loan rates were set low to avoid encouraging production.

Experience: CCC loans were effective at stabilizing prices of feed grains during the 1960s when the price of corn was bounded by the loan rate and the CCC release price (110 percent of loan). At various times, political pressure has caused loan rates to be set above equilibrium market prices; as result, (a) the loan rates acted as a supply incentive for producers, (b) the CCC acquired large stocks of grain and cotton, and (c) the volume of exports declined as commodities were priced out of the world market. These events resulted in the marketing loan (see Marketing Loan) being authorized in the Food and Agriculture Act of 1985. In addition, loan rates were established based on a moving average formula of the previous five years' prices. The loan rate formula in the 1985 farm bill was retained by the 1990 bill to keep loan rates competitive with world prices. Further reductions in the loan rate for wheat and feed grains were allowed (see Findley Loan) to make them competitive in the world market.

Consequences:

• Loan rates with reasonable release levels act as a price stabilizing force in the market and thus reduce price risk for producers and lead to greater production.

• The CCC loan reduces price risk for farmers and consequently encourages excess resources to remain agriculture.

• The CCC loan program extends the marketing period for producers from 9 to 12 months and even longer with extensions.

• High loan rates can effectively price U.S. commodities out of the world market and necessitate an export subsidy or direct aid to export surplus CCC stocks.

• Loan rates based on the cost of production tend to increase without regard to the market clearing price and can become a production incentive as a result.

What It Is: Gives the CCC, acting through the Secretary of Agriculture, the authority to purchase commodities for government storage and/or distribution.

Objective: To support the price of commodities.

When Used: Market purchases of commodities occur whenever they are offered to CCC at the support price under the operation of the price support programs for butter, nonfat dry milk, and cheese. Regular purchases of commodities in surplus also occur in association with commodity distribution and school lunch programs. Special purchases have been mandated in particular instances (e.g., to remove excess surplus of meat from market during the dairy baaed program).

Experience: Commodities purchased under special programs (other than price support program purchases) are generally those grown by producers who have the greatest political influence. The program is frequently used to achieve specific political ends and/or to alleviate temporary surplus conditions. Commodity purchases are generally not effective in dealing with long-run surplus conditions or price suppression. Government commodity distribution programs to the needy have largely been replaced by food stamps; however, some of these programs still exist (see Commodity Distribution).

Consequences:

• Increased purchases temporarily raise market prices.

• When purchased commodities are distributed, commercial sales of the commodity are reduced.

• Storage costs for purchases commodities are high unless rapidly distributed.

• Related processing industries such as packers or milk processors are frequently important beneficiaries.

• Government commodity give-aways are often plagued with inequities, fraud, and corruption.

Policy Area: Domestic Farm Programs, Price Support

What It Is: FOR is a three-year CCC loan for wheat and feed grains. The 1977 farm bill established the FOR as a three-year extension of the CCC loan after time expires in the regular loan. Reserve stocks remain in the producers' hands until the Secretary of Agriculture authorizes release or until the extension expires.

Objective: To stabilize grain prices and provide producers a longer time period to sell their grain. To establish a food reserve of grains, thus stabilizing grain supplies and making the United States a more dependable supplier.

When Used: FOR has been in use since 1978 for wheat and feed grains. The program was modified in 1980 to allow direct entry, thus avoiding the regular CCC loan. In addition, producers were given a direct entry loan price higher than the regular loan rate in 1980, 1981, and 1982. Stocks in the reserve are eligible for release when cash prices reach a level determined in advance by the Secretary of Agriculture. The 1985 farm bill established upper limits on wheat and feed grain stocks in the FOR as a percent of estimated total domestic and export use. The maximum wheat stocks was 30 percent of estimated use, and for feed grains, the maximum was 15 percent of estimated use. The Reagan-Bush administration deemphasized the role of FOR. The 1990 farm bill gives the Secretary authority to allow FOR entry within certain limits and subject to the stocks to use ratio and price conditions.

Experience: FOR attracts large quantities of stocks when the entry price is set above the equilibrium market price. Research has shown that FOR reduces the quantity of stocks held by the private sector and causes season average prices to be at either the entry price or the release price depending on the supply-demand balance. Within that range, prices may be more volatile because of the program pulling prices to either the entry or the release price. Under the 1990 farm bill, producers are allowed to redeem FOR commodities at their discretion, thus bypassing entry/release trigger induced volatility.

Consequences:

• FOR often results in the accumulation of stocks which, in turn, result in substantial storage and interest costs.

• FOR provides farmers three years to market their grain out of the reserve.

• Setting the FOR entry price above equilibrium market price creates, in effect, an income support program.

• In the face of declining export demand, there are no provisions to reduce the FOR entry price.

• High loan levels and release prices encourage U.S. and foreign production and discourage U.S. exports.

• FOR supports prices only when producer participation is high and adequate storage is available.

• Upper limits on stocks in the FOR limit government storage costs and prevent an uncontrolled buildup of stocks.

What It Is: Acreage allotment is a mandatory mechanism to reduce the production of targeted commodities. Acreage allotments require that producers plant within a specified number of acres. The number of acres allotted to each farm is based on the farm's production history. The allocated acres may be adjusted annually to meet the supply objectives.

Objective: To reduce the quantity produced and consequently the supply of a given commodity.

When Used: Acreage allotments were used extensively during the 1950s and 1960s for the basic commodities. Allotments still exist for tobacco. Allotments were used as a means of allocating target price benefits (e.g., with rice from 1976-81). This practice has since been abandoned.

Experience: When acreage allotments were used in the absence of marketing quotas, farmers responded by farming the allotted acreage more intensely, thus increasing yields. The result was a tendency for production to return to pre-allotment levels, therefore necessitating further restrictions on allotment size. In some commodities, such as tobacco, marketing quotas were imposed to control production more effectively.

Consequences:

• Acreage allotments raise domestic prices by reducing production and supply.

• Benefits from acreage allotment programs are bid into the price of land and/or the allotments, if allowed to be traded.

• High cash outlays to purchase allotments act as a barrier to entry for many farmers, especially those just beginning.

• Acreage allotments restrict the ability of farmers to change their crop mix in response to changes in relative crop prices.

• When allotments are imposed on one crop, surpluses may arise in other crops as farmers use non-allotment acres to produce other crops. Thus, allotments are often imposed on those additional crops.

Policy Area: Domestic Farm Programs, Supply Control

What It Is: Acreage reduction consists of an annual acreage set-aside and/or acreage diversion that is generally voluntary. Acreage set-aside programs require that participating farmers idle and devote to a conserving use a percentage of their crop base acres in order to be eligible for other program benefits. Acreage diversion programs pay producers a given amount per acre to idle a percentage of their base acres. A farm's base acres are determined by the production history of the crop.

Objective: To reduce the quantity produced and thus the supply of a given commodity.

When Used: Acreage set-asides and diversions were used extensively during the 1960s and have been used continuously since 1977. These programs are generally used when prices are depressed due to a stock buildup. During the early 1980s when supplies were in substantial excess, set-aside levels rose to the 20-35 percent range. The 1990 farm bill explicitly tied the Secretary's annual acreage reduction decision to the relationship between a commodity's ending stocks and its total use.

Experience: Acreage reduction programs have been only modestly effective in reducing supply over the long run. These programs have generally been used when loan rates, target prices, or market prices were high enough to encourage farmers to expand production. Program participation, normally a function of the level of producer benefits, has been particularly high for cotton, rice, and wheat during the 1980s. To encourage participation, diversion payments may be added to other farm program benefits. By the early 1990s, commodity supplies had been reduced sufficiently by low loan rates, lower real target prices, expanded export subsidies, and increased CRP enrollment that annual acreage reduction requirements were reduced to relatively low levels.

Consequences:

• To the extent that acreage reduction programs decrease production, they reduce supply and stocks and raise prices.

• Effective acreage reduction programs reduce the volume of supply available for export.

• Slippage reduces the effectiveness of the program. (Slippage is that portion of reduced acreage that does not result in correspondingly lower production, e.g., due to removing the poorest land.)

• Diversion programs can result in significant treasury outlays.

• Payment limitations and offsetting compliance (when used) discourage participation by large-scale operators who farm large acreages for multiple landlords.

• Acreage reduction programs tend to restrict a farmer's ability to shift acreage in response to changes in relative crop prices.

• Effective acreage reduction programs increase prices for commodities, costs of production for livestock, and prices for food and fiber.

What It Is: Cross-compliance is a provision requiring a farm to be in compliance with the terms and conditions of all other commodity programs applicable to the farm as a condition of program eligibility for any single commodity. For example, if a farm produced cotton and wheat, the farm could not be in compliance and receive benefits from the wheat program without also meeting the program requirements for cotton. Limited cross-compliance differs from cross-compliance in that a producer does not have to abide by the acreage reduction requirements for other program crops on the farm, but the producer cannot plant in excess of the established crop acreage base for the other crops.

Objective: Cross-compliance has multiple objectives including those of reducing production, reducing government program expenditures, and reducing a commodity program's adverse impacts on other commodities.

When Used: Strict cross-compliance provisions have not been enforced since the 1960s. Limited cross-compliance authority was implemented in the late 1970s and authorized in the 1985 farm bill. Cross-compliance requirements were eliminated in the 1990 farm bill and new flexibility provisions were incorporated to allow limited planting of alternative crops.

Experience: While cross-compliance theoretically is essential to implementing an effective acreage reduction program for agriculture in general (across crops), farmers and their organizations have strongly resisted the implementation of cross- compliance. Even though the 1985 farm bill specifically mandated limited cross- compliance, Congress was forced to modify these provisions in "technical amendments" to make cross-compliance an optional decision for the Secretary.

Consequences:

• The cross compliance provision improves effectiveness of production controls across program commodities.

• The provision prevents spillover of surplus acreages and resources to other program commodities.

• Cross-compliance has the potential for reducing government program cost.

• Implementation of the provision can result in less program participation, especially if payment limits are a constraint.

• Cross-compliance is strongly resisted by farmers and their organizations.

• Cross-compliance restricts a farmer's ability to shift acreage in response to changes in relative crop prices.

Policy Area: Domestic Farm Programs, Supply Control

What It Is: The Dairy Buyout Program (termination program) paid dairy farmers to slaughter or export their cows and discontinue milking operations for at least five years. Farmers submit competitive bids in a buyout program.

Objective: To reduce milk production, reduce government purchases, control stocks, and cut government dairy program costs.

When Used: The buyout program was initiated in 1986 after the dairy diversion program proved unsuccessful at reducing production.

Experience: The maximum bid accepted in the Dairy Buyout Program ($22.50/cwt annually over 5 years) was more than twice as high as the diversion program. Evidence of cow trading to circumvent the intent of the program was extensive. Branding of cows destined for slaughter or export was objected to by animal rights advocates. Beef producers sought legal remedies to ensure that beef prices would not be unduly depressed.

Consequences:

• Slippage proved to be at least as big a problem in dairy as in crops -- acres cannot move at night but cows can.

• Participation was highest in those regions that have the lowest returns over variable costs.

• Farmers who were contemplating going out of business anyway were most likely to participate.

• Buyouts create strong incentives for nonparticipants to increase production. As a result, production declines tend to be temporary.

• No long-term incentives exist to reduce production.

• Increased dairy slaughter raises beef supply and depresses meat prices.

• Animal rights activists become very concerned about branding requirements and conditions surrounding the resulting animal slaughter.

• After the buyout program, beef producer interests became actively involved in dairy policy debates, expressing strong opposition to any program that would mandate reduced milk production.

Policy Area: Domestic Farm Programs, Supply Control

What It Is: The Dairy Diversion Program paid farmers $10/cwt of reduced production, from an historical base, for an 18-month period. Reduced production was accomplished by early culling of cows, reduced feeding, and modified breeding schedules. The origin of the name "diversion" is unclear since there is no diversion, just reduced production.

Objective: To reduce milk production; government purchases; government stocks of butter, nonfat dry milk and cheese; and government dairy program costs.

When Used: The dairy diversion program was authorized in 1983 and implemented in 1984. Dairy program purchase costs had exceeded $2 billion annually and the government was purchasing more than 10 percent of the milk supply.

Experience: Highest participation was in states that were already reducing production. Participating farmers reduced production by the subscribed percentage but many nonparticipating farmers increased production. Therefore, total production decreased by only 50 percent of what was anticipated. Participating farmers who stayed in production had their cows and heifers bred to go into a full- production mode at the end of the program. Therefore, production increased sharply to record levels the subsequent year.

Consequences:

• Slippage in dairy proved to be at least as large as in crops because of nonparticipant increases in production and the temporary nature of the program.

• Participation was highest in regions that have the lowest returns over variable costs.

• Farmers who were reducing production and/or contemplating going out of business were the most likely to participate.

• Strong incentives for nonparticipants were created to increase production.

• No long-term incentives exist to reduce production.

What It Is: A negotiable commodity certificate that can be redeemed by the holder for his/her farmer-owned reserve loan, any uncommitted commodities in CCC inventories, or cash. The certificates were issued to complying producers in lieu of cash payments for a variety of provisions in the 1985 farm bill. The certificate is issued for a dollar amount; therefore, the amount of commodity that can be redeemed is determined by the daily redemption price as determined by the CCC. The negotiability of the certificate allows for the sale and resale of the certificate up to its stated expiration date.

Objective: To improve on the economic and logistical problems encountered in earlier PIK programs that were applied to individual commodities available only in designated locations.

When Used: Can be used only when stocks are held in the CCC, Farmer-Owned Reserve (FOR) or under price support loan. First implemented in the 1986 farm program after the 1985 farm bill substantially expanded the authority for PIK.

Experience: Negotiable commodity certificates are not tied to a specific location or CCC commodity. The program offers more flexibility than commodity specific PIK programs. The negotiable aspect of the generic certificate allows market forces to dictate the allocation of commodities currently in CCC inventories. The market forces were evident early in the 1986 program implementation as generic certificates were being purchased at prices exceeding their par value.

Consequences:

• Generic certificates may be used in lieu of cash for a variety of farm program provisions. Multiple expiration dates, however, can become confusing.

• Flexibility as to commodity and location allows producers operating in traditional surplus-producing regions to benefit pricewise at the expense of producers in deficit regions.

• Market prices tend to weaken as commodities are released from government inventories and/or programs.

• Generic certificates offer considerable flexibility for the seller and buyer and thus may result in bids in excess of par value.

• The provision allows an off-budget mechanism for the release of many CCC held inventories.

• Since certificates are generic, increased incentives to participate in one program, (e.g., cotton) may have an adverse impact on the market prices for another commodity (e.g., dairy products) if market forces dictate the release of that commodity. This cross-commodity price impact has not received a lot of public attention but may induce program restrictions in the future.

What It Is: Long-term land retirement is a multiple-year voluntary program that removes cropland from the production of farm commodities. Requirements are generally imposed requiring that a soil-conserving cover crop, including trees, be planted. The government generally pays the landowner an annual rental rate plus a portion of the cost of establishing the cover crop. (See the Conservation Reserve Program in Conservation and Environment Section).

Objective: To remove from production cropland that is resulting in surpluses or is subject to erosion.

When Used: The program was first authorized in the 1956 farm bill as the Soil Bank Program. The Soil Bank was unpopular because it paid landowners the same per acre rental rate to retire lands with different productivity and because of the adverse effects on rural communities. In 1965, Congress re-established a land retirement program and called it the Cropland Adjustment Program. Funding was authorized for continuation of a long-term land retirement program in 1970 but was discontinued during the world food crisis of the 1970s. The 1985 farm bill contained authorization to retire up to 45 million acres of highly erosive land from production under the Conservation Reserve Program (CRP). Land retirement is politically acceptable to consumers and producers when surplus stocks and low prices are chronic problems. If needed, the land can be put back into production, as it was in the early 1970s. In the 1985 farm bill, farm organizations and environmentalists combined efforts to achieve the dual objectives of surplus control and soil conservation. To reduce the adverse effect on rural communities, the 1985 farm bill established the maximum acreage that could be enrolled in the CRP within a single county at 25 percent of the total cropland acreage unless the Secretary of Agriculture determines that higher participation would not adversely affect the local economy.

Consequences:

• Long-term land retirement is a supply control and conservation strategy that may cost less than paying storage and interest on surplus commodities.

• Long-term land retirement programs can adversely affect local agribusiness and rural communities.

• Increased prices for commodities increase production costs for livestock and food prices over time.

• Land retirement can be used to encourage conservation of cropland, promote reforestation, and enhance wildlife preservation practices.

• Long-term land retirement reduces farmers' flexibility.

• Retired land, properly cared for, may result in greater productivity when put back into use.

• Slippage is generally high because the least productive land is removed from production. However, paying for land retirement based on productivity (bid basis) increases the efficiency of the program. Slippage may be reduced somewhat if whole farms are removed from production.

What It Is: A marketing quota is a mandatory mechanism to determine the quantity of a commodity that can be marketed. The national quota, set by the Secretary of Agriculture, is based on expected domestic and export demands and is usually less than normal production levels. The national quota is allocated to each producer, based on past production. Marketing certificates may be issued to producers holding quotas that grant them the right to market a specified quantity of the commodity. The certificate, if allowed to be sold, will develop a value determined through market exchange.

Objective: To restrict production by controlling the quantity farmers are allowed to market.

When Used: Because marketing quotas are mandatory for all producers growing the quota crop, quotas must be approved by a referendum. Farmers historically have approved a quota only when a crisis existed. Quotas have generally been used in conjunction with allotments and relatively high price supports. Marketing quotas have been used regularly for peanuts and tobacco. The 1985 farm bill authorized the use of marketing quotas for wheat if proclaimed by the Secretary and approved in referendum by 60 percent of the eligible producers. These quotas would have been put into effect for the 1987-90 crop years, but they were never used.

Experience: Marketing quotas are the most effective means of controlling supply. They were initially imposed after acreage allotments proved to be ineffective in controlling supply. Marketing quotas have effectively reduced production and stock levels but only when the national quota was set at levels consistent with demand.

Consequences:

• Once a quota is in place, there is pressure to increase the national quota, thus defeating its purpose.

• Like other supply control programs, marketing quotas usually reduce the volume of exports for the quota crop.

• Marketing quotas are more efficient in reducing supply and raising price than acreage reduction programs because there is little, if any, slippage.

• Marketing quotas are associated with low treasury costs unless the quota is so large that Commodity Credit Corporation (CCC) stocks accumulate.

• Marketing quotas tend to acquire a value that reflects the capitalized added net returns producers receive from the program. This value may either be directly associated with the quota or, if tied to a land base, capitalized into the value of the land resulting in increased land prices.

• Single crop marketing quotas for major crops (e.g., wheat) adversely affect prices of crops planted on the idled acres (e.g., corn and sorghum).

• Increased prices for quota commodities increase the costs of production for livestock and food prices over time.

What It Is: A farm program provision requiring each producer to be in compliance with the program for the same crop on all farms as a condition of program eligibility. For example, if a farmer produced corn on three farms, he would have to meet the terms and conditions of the corn program on each farm before being eligible for any corn program benefits.

Objective: To aid in production control and reduce government program expenditures.

When Used: Offsetting compliance provisions were used as recently as the late 1970s. The 1985 farm bill allowed the Secretary, at least implicitly, the authority to require offsetting compliance for wheat and feed grains. The bill explicitly prohibited offsetting compliance provisions from being used for cotton and rice. The 1990 farm bill eliminated the Secretary's authority to require off-setting compliance.

Experience: While offsetting compliance is essential theoretically to implementing effective acreage reduction programs, it is not attractive politically or pragmatically. Politically, as in the case with cross-compliance, farmers and their organizations have strongly resisted offsetting compliance. Pragmatically, the multiple landlord-tenant relationships that exist throughout commercial agriculture make equitable implementation of this provision virtually impossible.

Consequences:

• The provision improves effectiveness of production controls within a commodity.

• Offsetting compliance has the potential for reducing government program cost.

• Implementation can result in less program participation, especially if payment limits are a constraint.

• Offsetting compliance is strongly resisted by farmers and their organizations.

• Offsetting compliance restricts a farmer's ability to shift acreage in response to changes in relative crop prices.

• The provision is difficult to implement with the existence of multiple landlord-tenant relationships.

What It Is: PIK is an acreage diversion program with the diversion payment in the form of a commodity rather than cash.

Objective: To reduce production, stocks, and/or direct treasury outlays (government program costs).

When Used: PIK was used in the early 1960s for one year. In 1983 it was used for wheat, cotton, corn, sorghum, and rice; in 1984 it was used again for wheat. The program has been active whenever government-owned stocks have reached unacceptably high levels.

Experience: PIK is one way to reduce stocks controlled by the government and the cost of government storage. Problems occur when the government is required to pay out more PIK commodity than it owns, as was the case for cotton and rice in 1983. An attempt was made to resolve many of the logistical problems incurred in early PIK programs by issuing generic PIK certificates under the 1985 farm program (see Generic PIK). A decision that PIK commodities were not subject to the payment limit encouraged participation of large-volume producers. In addition, PIK certificates were not subject to budget cuts under Gramm-Rudman.

Consequences:

• PIK provides an off-budget method for paying producers to divert cropland.

• PIK reduces government-owned stocks.

• PIK helps maintain supplies available to the market by releasing CCC stocks while curtailing production.

• Program effectiveness in increasing prices depends on farmer participation, slippage, and initial level of stocks.

• PIK increases the marketable supplies when it is released from CCC stocks or loan.

• Local communities, agribusiness firms, and livestock producers are adversely affected by PIK production control programs if sign-up is high.

• Instead of adjusting excess resources out of crop production in any given year, PIK's artificially high prices may actually encourage them to stay.

Policy Area: Domestic Farm Programs, Supply Control

What It Is: Two-tier milk pricing plans establish a producer base or quota with a lower price for excess production. How much lower the excess price is determines the effectiveness of the plan in controlling production. For effective control, production in excess of the base (second tier production) must be priced below variable cost to control production.

Objective: To control milk production, raise producer returns, and lower government dairy program costs.

When Used: Two-tier pricing plans for milk were proposed and debated throughout most of the 1980s as a means of bringing milk production in line with consumption but were never authorized or implemented.

Experience: Not authorized or implemented largely because of disagreement within the industry over the desirability of mandatory controls. The Reagan-Bush administrations were strongly opposed to mandatory production controls. Beef producer interests realized that cutbacks in production meant more cow slaughter and lower beef prices. Thus, they were also opposed.

Consequences:

• Milk price could increase if the excess price is high enough.

• The pricing plan would require strong import controls to be effective.

• The pricing plan would require close monitoring and control of production.

• The enhanced returns, as a result of the program, would be capitalized into the price of the quota or the value of the dairy.

• Barriers to entry for new producers would be created by the presence and cost of the quota.

Policy Area: Domestic Farm Programs, Supply Control

What It Is: Participating wheat, feed grain, cotton, and rice producers are allowed to plant less than their program payment acreage while continuing to receive deficiency payments on 92 percent of their maximum program payment acreage. If wheat and feed grain producers plant between 0 and 92 percent of their maximum payment acreage to the crop and devote the remaining payment acreage to a conserving use, they are eligible to receive deficiency payments on 92 percent of their maximum payment acreage. To be eligible for the 92 percent deficiency payment provision, upland cotton and rice producers must plant between 50 and 92 percent of their maximum payment acreage to the crop and devote the remainder to a conserving use. Minimum deficiency payment guarantees are announced for all eligible crops.

Objective: To reduce the quantity produced and thus the supply of a given commodity while protecting farm income. In addition, environmental objectives can be achieved through the conserving use requirements on land entered into this program.

When Used: The 0/92 and 50/92 programs were established for wheat, feed grains, cotton, and rice in the 1985 farm bill. Initially, all eligible crops were subject to the 50/92 provisions. Beginning with the 1988 crop, however, wheat and feed grain producers were allowed to reduce their planted acreage to zero (0/92). The program was originally designed to reduce the substantial stocks that had built up in the mid-1980s.

Experience: There has been considerable debate on the effectiveness of the 0/92 and 50/92 programs. As annual acreage reduction requirements declined in the late 1980s and early 1990s, producers utilized the 0/92 and 50/92 programs more than they had previously. This suggests to some that land in the 0/92 and 50/92 programs would not be farmed even without the programs. Others see these programs from a lender's perspective as a risk reduction tool forced on producers who cannot achieve credit levels to farm full production. To the extent that payment limits pose a problem, these programs may offer some relief. In any event, the 0/92 and 50/92 programs have idled approximately 6.4 percent of the effective base over the 1989-1991 period.

Consequences:

• Removes land from production and thus reduces supply and raises prices.

• Removes land from production that, without government support, would otherwise be unprofitable.

• Stabilizes farm income, especially with the guaranteed minimum deficiency payment.

• Reduces lender risk as operating credit needs decline relative to expected revenue.

• Allows producers to save resources through implementation of conserving use practices on idled land.