Prospects for the 1990 Farm Bill

Every four or five years the U.S. Congress writes legislation that has come to be known as the farm bill. Typically, farm bills cover the price and income support programs for certain commodities; conservation programs; agricultural trade and aid programs; domestic food distribution programs, including food stamps; some credit programs; some marketing programs for fruits, nuts, and vegetables; some forestry programs; and agricultural research. The House of Representatives and the Senate have each passed their own version of a new farm bill to replace the last one, the Food Security Act of 1985, which expires at the end of 1990. While these proposed bills have similar overall goals and approaches, they diverge in many details. One of many factors that will affect how the House and Senate reconcile differences in their bills is the federal budget deficit, as President Bush has threatened to veto any farm bill that is over budget. Some of the major issues involved in preparation of the 1990 farm bill legislation are presented below in question-and-answer format.

Will the 1990 legislation continue to pursue the goal of making U.S. grains and cotton more competitive while protecting farm income?

The new bill will follow a path similar to that set by the Food Security Act of 1985 (FSA) for keeping U.S. agricultural commodities competitive and for protecting farm income; however, some subtle but important moves away from the strong market orientation of the 1985 act have been proposed. One such move is the Senate's proposal to establish minimum floor prices for wheat and feed grains (corn, oats, barley, and sorghum). The Bush administration has criticized this proposal as being a move away from competitive, market-driven safety nets.

Congress has also proposed extending marketing loans, currently used only for rice and cotton, to other grains and oil-seeds. Marketing loans allow producers who receive a price-support loan from the government to sell their crop at the market price (rather than default on the loan) and to repay the government loan at that price if it falls below the floor price. Such loans could potentially help keep U.S. grains competitive on the world market, but are opposed by the administration on the basis of potential cost.

Guaranteed prices, or target prices, for grains and cotton will likely be kept at or near current levels at least in the early years covered by the new farm legislation, unless they are forced down by a budget agreement. Guaranteed prices are the prices used to determine direct, or deficiency, payments by the government to farmers. These payments affect farm incomes but not do not directly affect the prices paid by consumers for agricultural commodities.

To encourage foreign buyers to purchase U.S. agricultural commodities and to counter export subsidies used by other countries, the U.S. Export Enhancement Program (EEP) has offered commodity bonuses to American exporters; several export credit and promotion programs have also been authorized. Given the EEP's considerable support in Congress and in the U.S. Department of Agriculture (USDA), it seems certain that the EEP will be retained in the 1990 farm legislation, and may possibly be expanded to cover exports of higher-valued products such as processed foods.

How much farm production flexibility does the new legislation incorporate?

Many aspects of the agricultural subsidy programs have been criticized for being unnecessarily rigid and for imposing penalties on farmers who attempt to alter their plantings to respond to market signals or who experiment with alternative crop management practices. Removing some of these rigidities and disincentives would allow producers to make changes in their production patterns in response to market conditions, and to establish crop rotation practices that might yield environmental benefits by reducing the need for chemical applications to protect crops or to boost yields.

Subsidies are based on a farm's planting record, or base acreage, which is established over several years of specific crop plantings. Farmers who switch to alternative crops lose some base acreage and hence some subsidies. In the context of the 1990 agricultural legislation, flexibility has come to mean allowing producers more latitude in their planting decisions without losing base acres in later years.

Both the House and Senate bills have proposed allowing producers to shift up to 25 percent of their base acreage (the House included oilseed acreage) into other crops, including experimental and industrial crops, without losing any acreage base in future years. The USDA has proposed allowing much greater flexibility; 100 percent of a producer's base plus oilseed acreage could be shifted to other crops. Under all three proposals, farmers who took advantage of the flexibility provisions would forgo deficiency payments on the acreage planted with alternative crops.

With the threat of serious spending cuts, a compromise option has resurfaced. Known as the "triple base," this plan has been discussed as a means of adding flexibility to the programs while yielding budgetary savings. Under the triple base, producers would receive full program benefits (price supports and deficiency payments) for the production from a portion of their base, would comply with any acreage reduction (land idling) requirements, and would be free to use the "third base"—the remaining portion of their base acreage—for any crop or other approved use, such as pasture or hay production. The respective portions of the base could vary from year to year, but farmers would not lose base acreage and would continue to receive program payments on some portion of their production each year.

What is the new legislation likely to cost? Will agriculture contribute to the deficit reduction efforts?

The estimated cost of the commodity programs in both the Senate and House bills is between $55 billion and $57 billion over the next five years, compared with about $80 billion over five years under the Food Security Act of 1985. More relevant, however, is the estimated cost of the new bills as compared with the baseline cost under current law—that is, what it would cost simply to extend the FSA for another five years. Such estimates vary among sources. By congressional estimates the House bill would cost between $3.5 billion and $4.6 billion more than the baseline, and the Senate bill between $2.2 billion and $3.3 billion more. By USDA estimates the bills would result in outlays of $5 billion to $6.5 billion above the baseline over five years. The differences in the cost estimates arise because of different assumptions about the expected conditions in the agricultural sector over the next five years, and because of differences in what is included in the baseline cost.

Further, spending on agricultural programs may have to be reduced to well below the baseline levels. The United States is facing a severe budget deficit at a time when the size of future demands on government spending, such as the bailout of savings and loans institutions, are uncertain and potentially very large. Congress is now working on a five-year, $500 billion deficit reduction package. Although the details are still sketchy, it seems that the agricultural programs will be cut from the baseline level by about $1 billion in 1991 and by about $13.6 billion over five years. Spending cuts of this magnitude could mean quite significant changes in agricultural programs.

Do the richest farmers get the lion's share of farm program payments? If so, will the new farm bill change the way these payments are distributed?

The program payments that have generated the most controversy are the so-called deficiency payments, which would be the main target of budget cuts. These are direct payments from the government to farmers and farmland owners—payments that make up the difference between the guaranteed commodity prices and the price received when the commodities are sold or turned over to the government in lieu of loan repayment. Farmers and farmland owners can receive deficiency payments for only a few commodities—wheat, cotton, rice, and feedgrains.

To be eligible to receive deficiency payments, a producer must comply with land idling requirements—that is, take a portion of farmland out of production. The percentage of a farm's base acreage to be idled may vary each year. As deficiency payments are based indirectly on the number of acres in a producer's base, the larger the base is, the larger the payment.

According to a recent study, in 1988 the USDA paid $14.5 billion in direct payments, of which farm operators received an estimated $9 billion. Based on data from the USDA Farm Costs and Returns Survey, James D. Shaffer of Michigan State University has inferred that about one-third of all direct payments go to landowners who are not primarily farm operators and about whom few economic characteristics are known. Shaffer has also noted that only about 36 percent of the farms included in the survey received any direct payments, and that those payments were generally made to farms with higher average farm incomes. For example, the 3.6 percent of the farms with the highest average payments had average net cash farm incomes exceeding $96,000 and received average payments from the government of $61,623. Payments to this 3.6 percent of farm operators accounted for almost 43 percent of the total amount of direct payments disbursed (see table 1). Sixty-four percent of farms received no direct payments in 1988.

Statistics such as these, together with periodic media exposés of wealthy individuals who have been the recipients of large government payments under farm programs, raise several questions important to the issue of targeting payments. Are the recipients of payments farmers, or are they landowners who rent their land to farmers and who may have other sources of income? Among those who are farmers, how many are wealthier than the average taxpayer who foots the bill for these direct payments? These questions prompted amendments to the House and Senate bills that would impose an income limit on individuals eligible to receive payments. These amendments failed to pass Congress.

One reason the targeting amendments failed was that many members of congressional agricultural committees believe that the commodity programs have other goals in addition to that of maintaining or bolstering farm incomes. These members are particularly concerned that targeting direct payments to smaller producers might cause larger producers to drop out of the programs. Nonparticipation by larger farmers, who are responsible for most of the nation's agricultural production, could undermine the government's ability to ensure a stable food supply and stable food prices and to realize many of the environmental benefits now linked to program participation. Perhaps the greatest opposition to targeting payments, although not necessarily voiced, comes from farm and commodity interest groups, which now consider direct payments to be entitlements that are not subject to conditions (such as capping and phasing out) that are imposed on many other federal payments. Despite this opposition and other concerns, the issue of targeting farm subsidies may arise again, especially if the cost of commodity programs is not reduced and the public perceives that mainly relatively wealthy individuals are benefiting from direct payments.

Agriculture's perceived detrimental effects on the environment arise in part from the use of agricultural chemicals, which can contaminate water, and from the cultivation of fragile lands and wetlands. In addition, some cultivation practices cause or accelerate soil loss, and the use of land for agricultural production can eliminate some wildlife habitat. The farm bills passed by both houses of Congress address these concerns by proposing incentive (and disincentive) programs aimed at promoting more environmentally benign agricultural production; requirements for pesticide record-keeping, laboratory certification, and product quality standards; research on low-input agricultural systems and sustainable agriculture; and bans on exports of pesticides not registered for use in the United States, on imports of foods that do not meet U.S. pesticide residue tolerance standards, and on USDA funding for herbicide-resistant plants.

The proposed incentive programs would encourage conservation and farming practices that are less damaging to the environment. Several are aimed at protecting water quality in particular. Proposed incentives include direct payments and government sharing of costs for practices such as the planting of tree and cover crops and land restoration. Incentives would also be provided by protecting base acreages and yields and, in some circumstances, by continuing deficiency payments when the cropland base is put into a conserving use such as pasture or cover crops. Conversely, the loss of some program benefits has been proposed as a disincentive to producers to engage in practices that are damaging to the environment.

It seems certain that the 1990 farm legislation will continue the long-term land retirement program, the Conservation Reserve Program (CRP), as a means of protecting highly erodible land from damage due to annual cultivation. The current enrollment of 36 million acres is expected to be increased by an additional 4.4 million acres. The program may be expanded to include the protection of water quality, as well as the preservation of wetlands, windbreaks, shelterbelts, filterstrips, and other lands on which crop production could pose an environmental threat.

Views differ on whether rural development properly belongs in agricultural legislation. Historically, the terms "agricultural" and "rural" have been considered to mean the same thing. Even though most agricultural production still occurs in rural areas, it is no longer accurate to equate the two. The entire population of the nation's agricultural-dependent counties (those counties in which 20 percent or more of the labor force is in agriculture) is less than 7 percent of the total non-metropolitan population. The total farming population is less than 8 percent of the non-metropolitan population. Nevertheless, rural development issues often are used to justify commodity programs and are addressed explicitly in agricultural legislation.

The health of rural communities is often cited as a reason for continued or increased support for agricultural commodities, drawing on the assumption that higher prices for, or transfers to the producers of, certain agricultural commodities will trickle down and vitalize rural towns. There has been little systematic assessment of the effects of these programs on rural communities, but in the absence of clear evidence of what does help rural economies, it is likely that the agricultural commodity programs will continue to be promoted for what is viewed as their contribution to rural development.

The rural development provisions of the bills passed by the House and the Senate cover investment in rural areas, credit, public works, development of human resources, health care facilities, technical assistance, and information systems. These issues are crucial to rural communities; the decline in non-farm job opportunities, health care, education, and the availability of essential services have contributed substantially to the poor economic showing of rural communities over the last decade. However, rural development issues should probably be addressed in a legislative setting other than the congressional agricultural committees, where any rural development programs must compete for funds with the programs favored by politically powerful commodity interests.

Is there anything in the proposed farm legislation that is aimed at relieving hunger and poverty in the United States?

Despite the commonly used term "farm bill," U.S. agricultural legislation does contain provisions for domestic (and foreign) food assistance through food stamps and commodity donations, as well as for a variety of other hunger- and nutrition-related programs. In fact, as the cost of commodity programs has declined and the number of people receiving food program benefits has increased, the cost of federal food programs has exceeded that of commodity programs in recent years. Food programs will most likely be continued in the new legislation, and some small increases in funding and system improvements have been proposed. Among the changes recommended for the food stamp program are increases in the limit on income deductions for shelter and in the allowed value of cars owned by recipients; redefinition of what is meant by a household; changes in provisions for homeless people; and changes in the method of benefit disbursement. In addition, a number of provisions are aimed at strengthening the integrity of the food stamp program—that is, at getting tough on those people who abuse the program.

The House proposes to make the Temporary Emergency Food Assistance Program (TEFAP) permanent and to require the secretary of agriculture to make available to emergency feeding organizations the surplus commodities not required for other programs. However, there are two related threats to the food assistance programs. One is the federal budget deficit. Without a vocal, politically powerful constituency, these programs may well be among the first to take cuts in the effort to reduce the deficit. The other threat is that one of the needs that the programs addressed has been reduced. When the government was acquiring and storing large quantities of surplus commodities—especially dairy products—food assistance programs were a convenient means for getting the products out of storage. However, since surplus stocks have been drawn down over the last five years, it may be difficult for the government to continue food donation programs if doing so means purchasing more commodities on the open market.

Consumers rank food safety as a high priority. How does the proposed legislation address this concern?

Much of the food safety focus in the House and Senate bills seems to be on broadening knowledge about pesticide use in food production and food processing. The bills call for such measures as record-keeping by people using pesticides for agricultural use, worldwide notification of changes in the registration status of pesticides, reports on and notification of pesticide use in other countries and the use of pesticides on foods imported into the United States, certification of laboratories that perform residue tests, and certification and labeling of organically produced agricultural products.

The prohibition of exports of pesticides not registered in the United States is an attempt to break what has become known as the circle of poison, wherein pesticides not permitted for food use in the United States are exported to other countries, where they are used on food crops. Some of these crops are then imported for consumption in the United States.

One proposed study, which could have implications for food quality and food safety in the long term, would examine the effect that USDA grade standards have on the production of perishable food commodities. In particular, this study would be aimed at ascertaining whether the standards encourage farmers to use chemicals on commodities purely to produce a product that meets some appearance standard, rather than to protect against yield losses or to improve nutritional quality.

Are the GATT negotiations and the U.S. farm bill on the same track?

At the launching of the Uruguay Round of negotiations under the General Agreement on Tariffs and Trade (GATT) in September 1986, the United States (supported by a number of other countries) broke new ground with its bold proposal to eliminate all agricultural subsidies within ten years of the end of the round. In the intervening years the goal has become the more pragmatic one of progressive and substantial reduction in trade-distorting subsidies over time. The negotiations are due to conclude at the end of 1990, so any changes in agricultural policy agreed to in the negotiations would probably have to be implemented during the life of the 1990 farm bill.

It has sometimes appeared that the farm bill was being written as if the Geneva negotiations did not exist. Many observers, including Secretary of Agriculture Clayton Yeutter, the former U.S. trade representative, seem to agree that the United States should not rush to reduce or eliminate its agricultural subsidies, as they are bargaining chips for persuading other countries to reduce their own agricultural subsidies.

If an agreement is reached on reducing agricultural subsidies in the GATT negotiations, and the U.S. Senate approves the GATT agreement, it is likely that changes in U.S. agricultural commodity programs—dairy and sugar programs in particular—will be necessary. However, any changes would be phased in over a period of years, and might not take effect for several years. In addition, some form of adjustment assistance might be needed for regions and industries hit hardest by the changes. Thus the GATT and U.S. farm bill negotiations are not on the same track. However, they are not as yet diverging, nor are the differences between them irreconcilable.

How important will the new legislation be for the U.S. agricultural sector in the coming decade?

Commodity programs have long been assumed to be the major policy factors influencing the well-being of the U.S. agricultural sector. In fact, these programs are becoming less the primary instrument and more the safety net for agriculture. With the world market now taking about 23 percent of U.S. agricultural production, compared with 11.5 percent in 1930 (before the programs were initiated), conditions in the rest of the world have a profound impact on the economy of the U.S. farm sector. If the countries that now import U.S. agricultural products cannot afford to buy them—because of debt servicing problems, because they must pay more for other commodities such as oil, or because they cannot sell their exports and earn foreign currency—the demand for and price of U.S. commodities will likely drop. If the costs of producing agricultural commodities rise—because the cost of a key input such as oil rises, because some inputs are banned, or because interest rates rise—and there is no concomitant rise in the price of agricultural products, returns to farmers will decline. If other countries subsidize their agricultural exports and thus force U.S. products out of markets, the price of U.S. commodities will fall. Such events and conditions as these are often little affected by U.S. farm programs, yet their impact on U.S. farmers can be profound.

Certainly the agricultural programs influence U.S. agriculture, but other policies and actions, both in the United States and abroad, will increasingly affect the health of the U.S. agricultural sector more. To ignore the changing position of the sector in the global economy would be to make it all the more vulnerable to changes in that economy. A healthy U.S. agriculture depends on healthy economies at home and in other countries as much as it depends on the farm programs legislated every four or five years, and amended, adjusted, or fine-tuned almost annually.