Review of U.S. Farm Programs
Stephanie Mercier
November 16, 2011
AGree Goals
AGree is a new initiative to transform food and
agricultural policy over the next eight years. Our
goals are to:
 Improve agricultural productivity and environmental performance;
 Enhance the availability of and access to nutritious foods; and
 Promote opportunities for rural communities to succeed
economically.
We recognize that this complex challenge requires work over the
long term and cannot be solved quickly or through a single policy
vehicle. AGree will take a deliberative, inclusive approach to
developing policy solutions. We will use rigorous, grounded research
to understand problems and define solutions. We will engage a broad
array of stakeholders, from whom we will seek insights, guidance,
and ideas that lead to meaningful solutions.
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AGree Backgrounder Presentation
This presentation is part of a series of background resources
intended to lay the groundwork for a common understanding of the
complex issues and policies related to food and agricultural policy at
the national and global levels. It was authored by Stephanie Mercier,
former chief economist for the Senate Agriculture Committee, and
does not necessarily represent the views of AGree.
This piece is intended to provide a comprehensive overview of
federal farm programs, in order to create a shared starting point for
further discussions on food and agricultural policy. For more in-depth
background and detail, please consult the full Mercier report, Review
of U.S. Farm Programs.
We hope you find this presentation a helpful resource and
background. And we hope you will join us as we seek to transform
federal food and agricultural policy to meet the challenges of the
future.
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The Beginning of U.S. Farm Programs
 Farm safety net programs started in the throes of the
Great Depression, when farmers were facing:
– Historically low commodity prices,
– Lost crops due to the ravages of the Dust Bowl, and
– Household incomes one-third of the national average.
 Agricultural Adjustment Act of 1933 was enacted with
the main goal of:
– Reducing agricultural output by paying farmers to withhold
some of their land from cultivation, in order to raise crop
prices.
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Subsequent Policy Refinements
 Congress tinkered with support levels for crops over the
decades that followed.
 Farmers could use commodities as collateral for loans
at set commodity loan rates, could forfeit to government
if prices fell and loan value > market value of crops.
 Provided for deficiency payment to farmers if prices fell
below program target prices.
 Set soil conservation as a main goal of programs,
 Established annual set-asides to combat overproduction.
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Watershed of 1996: Federal Agriculture Improvement and Reform (FAIR) Act
 The FAIR Act represented a significant change in the
way U.S. farm policy was structured:
– Eliminated annual set-aside requirement for program
eligibility.
– Ended deficiency payment/target price system that
discouraged shifting crop mixture in response to market
signals (had to plant base crop to receive payment).
– Established fixed, decoupled payments linked to past
production (base acres), with implication that that would be
limited in duration.
– Retained marketing assistance loan program, but with high
projected crop prices that was not expected to kick in.
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Current Structure of U.S. Farm Safety Net
 Price/income support programs
 Agricultural disaster programs, including crop insurance
 Decoupled income support (direct payments)
 Farm loan and related credit programs
 Specialty crop programs
 Biofuels policy
 Conservation/environmental programs
 Additional authorities
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How Did We Get to Current Structure?
 Within a few years after passage of the FAIR Act,
Congress began to resume its old habits of piling on top
of existing policy framework.
 Asian financial crisis of the late 1990s led to a decline in
demand for U.S. agricultural exports, and a drop in
commodity prices and farm income.
 Congress responded in 1998–2001 by providing
“market loss assistance (MLA) payments” (totaling $19
billion)
 Price-based countercyclical payment (CCP) program in
the 2002 farm bill was statutory replacement for ad hoc
MLA payments
 CCP supplemented by revenue-based Average Crop
Revenue Election (ACRE) option in 2008 farm bill
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Income Support for All Program Crops
 Marketing Assistance Loan Program: Provides loans
on commodities to help smooth cash flow, generates
income support when prices are extremely low. To
minimize forfeitures, farmers can instead request
payment (LDP) on gap between market price and loan
rate. (1985)
 Direct Payment Program (DP): Provides payments
based on historical production, regardless of prevailing
market conditions. (1996)
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Income Support for All Program Crops
 Countercyclical Payment (CCP) Program pays on
fixed acres and yields when the price for a given
program crop falls below the fixed target price. Does not
require that the crop in question be planted but does
require that land be in “agricultural use” (2002).
 Average Crop Revenue Election (ACRE) pays when
state average revenue falls below target level. It pays
on actual planted acres. Enrollment is optional; it
requires giving up CCP, accepting lower direct
payments and loan rate. Must also have minimal farmlevel loss to qualify (2008).
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Components of Sugar Price Support Program
 Loan Program: Loans available to processors holding semi-processed
product (cane and beets are perishable and not amenable to long-term
storage). Product can be forfeited if price falls below loan rate.
 Marketing Allotments: Divides up allowable share of domestic sugar beet
and cane production between processors of those two crops, on a stateby-state basis. Crop produced in excess of allotments cannot be marketed.
 Feedstock Flexibility Program: Allows excess sugar to be sold by USDA
at discount to ethanol producers. Has not been implemented, as some
processors have shifted from using high-fructose corn syrup to sugar and
domestic sugar output has been reduced due to bad weather.
 Price support system supported by Tariff Rate Quota (TRQ) system under
World Trade Organization (WTO), which limits sugar imports, but faces
erosion with additional access under future Free Trade Agreements.
 Sugar support provided largely by consumers paying higher prices;
industry takes pride in “no net cost” label for program
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Components of Dairy Price Support Program
 Product Price Supports: System establishes price floor for main products
(butter, cheese, nonfat dry milk powder). The USDA can purchase at
support prices to take off market, if product meets specifications.
 Milk Marketing Order System: Segments milk price by the final use of the
product, and is designed to foster orderly marketing in regions of the
country.
 Milk Income Loss Contract (MILC): Provides deficiency payment for
dairy producers, based off of Northeast Class I price ($16.94/cwt).
Payments limited by production of up to 160-cow operation. Pays on 45%
of gap on monthly basis (2002).
 Except for MILC, most of cost burden of program falls on consumers in
form of higher prices, not taxpayers.
 Price support system is enabled by TRQs on imports of most major
categories of dairy products under WTO.
 Regional differences between dairy farm structures (small in Northeast,
Midwest, large in West) has led to heated policy debates in recent farm
bills.
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Average Dairy Farm Size by State (2007 Census of Agriculture)
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New Hampshire
298
Washington
45
Montana
66
North Dakota
196
Oregon
662
Idaho
54
Wyoming
110
Nebraska
850
California
494
Nevada
190
Utah
1010
Arizona
149
Kansas
67
Oklahoma
877
New Mexico
34
Rhode Island
77
Connecticut
66
Pennsylvania
90
Iowa
42
Missouri
82
Indiana
75
Ohio
64
0
New Jersey
District of Columbia
32
79
West Virginia 86
Delaware
Virginia
40
Kentucky
103
North Carolina
50
Tennessee
49
Arkansas
128
Mississippi
313
Texas
49
Massachusetts
130
Michigan
82
Illinois
283
Colorado
110
New York
88
Wisconsin
132
South Dakota
68
Maine
115
Vermont
89
Minnesota
83
Alabama
86
Maryland
168
South Carolina
121
Georgia
95
Louisiana
21
Alaska
0
Guam
284
Florida
153
Hawaii
Number of dairy cows
0 to 32
32 to 49
49 to 65
65 to 75
75 to 83
83 to 90
90 to 130
130 to 200
200 to 400
400 to 1011
No data
0
0 Virgin Islands
Puerto Rico
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Agricultural Disaster Assistance Programs
 Almost every new ag disaster program over the last few
decades has been established with the goal of ending
the use of ad hoc programs passed by Congress to
satisfy the demands of constituent groups who have
recently faced a serious natural disaster. But through
FY 2010, that goal had not quite been met.
 As with farm support programs, the process of
developing agricultural disaster assistance programs
has been one of accretion, with programs being added
over time to address perceived gaps in coverage, with
few if any of them being eliminated.
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Major Components of Agricultural Disaster Assistance
 Federal crop insurance program: Made widely
available in 1981, has expanded greatly since.
Required to be actuarially sound (expected losses =
total premium paid), but government pays portion of
premium. Delivered by private companies, who are
reimbursed for expenses and able to capture
underwriting gains. Policies available for >100 crops,
but 75% of coverage is for 3 crops (corn, soybeans,
wheat).
 Noninsured Crop Disaster Assistance Program
(NAP): Available for crops for which federal crop policy
is not provided. Administered by Farm Service Agency.
Provides modest indemnity (up to 27.5% value if crop is
entirely lost), for fee of $250 per crop per county.
Established in 1996 Farm Bill.
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Major Components of Agricultural Disaster Assistance
 Even with crop insurance available, Congress often stepped in with
sizeable ad hoc disaster assistance programs (17 bills spending at least
$300 million on agricultural disasters between 1988 and 2006). Hit hurdle
in G.W. Bush Administration, which required offsets for the first time.
 Standing disaster assistance program, with 5 components, added in 2008
farm bill:
– SURE (whole farm crop disaster assistance)
– Livestock Indemnity Program
– Livestock Forage Disaster Program
– Tree Assistance Program
– Emergency Assistance for Livestock, Honey Bees, and Farm-raised Fish (ELAP)
 Package not popular in South, because SURE works best in combination
with buy-up crop insurance coverage, and a lot of Southern farmers buy
minimal crop insurance coverage (catastrophic coverage (CAT)).
 Funding runs out a year early (Sept. 2011). Will be struggle to get new
money in current budget environment, especially since projected cost of
programs has increased (estimated $9 billion for next five years).
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Implications of High Crop Prices for Farm Safety Net Programs
 At current high price levels for crops, expect very little payout from
countercyclical farm support programs such as marketing
assistance loan program, CCP, and ACRE over next several years.
– ACRE could still pay out for 2011 crops in states suffering from significant yield
losses, such as the drought-stricken wheat crops in TX, OK. Won’t know until
2012 because requires full marketing year prices to calculate.
 Crop insurance outlays will remain high, because premiums are
assessed based on crop values.
 Direct payments will continue to pay out regardless of market
conditions, unless changed in budget reform legislation or 2012
farm bill.
 Disaster program outlays expected to be high in 2011, with both
flooding and drought harming crops in key regions of the country.
 CBO forecasts crop insurance outlays to exceed farm support
program outlays over next 10 years.
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USDA Loan Programs
 The USDA provides loans to farmers for four basic purposes:
– Annual operating expenses,
– Ownership of farmland and construction/repair of structures,
– Construction of farm storage facilities, and
– Cope with emergencies due to natural disasters.
 Except for farm storage, all programs are funded through annual
appropriations process.
 Loans under the first two categories can be direct (through Farm
Service Agency) or guaranteed (through local banks).
 For beginning farmers, special provisions include set-aside of
USDA loan funds for a portion of the year, plus down payment loan
assistance and preferred access to farmland held in USDA
inventories due to defaults.
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Provisions for Specialty Crop Producers
 In the 2008 farm bill, groups representing specialty crop
producers formed effective political coalition for first
time, demanded their “piece of the action.”
 The coalition declined to seek direct subsidies or similar
forms of support (such as row crop producers receive);
instead sought funds to help increase demand for
products or reduce production costs.
 Maintained strong opposition to allowing specialty crops
to be planted on base acres from row crop programs.
 Specialty crop title funded at about $1 billion for the
2008–2017 period, plus had additional programs in
other titles.
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Main Components of Specialty Crop Assistance
 Specialty Crop Block Grants: Provided to state governments based
on share of overall specialty crop production. Can be used to
“improve the competitiveness of U.S. specialty crops.” ($466
million)
 Pest and Disease Management Research Programs ($397
million+)
– Early pest detection and surveillance
– Provision of “clean” propagative material to growers
– Specialty crop research initiative ($230 million in ag. research title)
 Organic programs ($107 million)
– Organic conversion cost-share
– Data collection and reporting
– Organic research and extension (in ag. research title)
 Technical Assistance for Specialty Crops (TASC): Grants to help
resolve trade SPS issues. ($59 million in trade title)
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Federal Biofuels Policy
 Although not strictly part of the farm safety net and
largely outside of Agriculture Committee jurisdiction,
biofuels policy has had outsized effect on U.S.
agriculture in recent years.
 Since 2002, U.S. ethanol demand for corn has
increased by 3 billion bushels, which translates to
nearly 20 million acres of cropland at U.S. average
yields (about 25 percent of current corn crop).
 Corn use for ethanol is projected by the USDA to
exceed livestock feed use in 2011, although industry
disagrees somewhat.
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Major Components of Federal Biofuels Policy
 Blender’s Credit: Tax subsidy to help ethanol and biodiesel
to compete with petroleum-based fuels. Current level for
ethanol is $0.45/gallon. Expires at end of 2011.
 Ethanol Import Tariff: $0.51/gallon tariff discourages
imports. Assessed because imports are eligible for blender’s
credit.
 Renewable Fuel Standard (RFS): Establishes requirement
for minimum use of biofuels in U.S. transportation fuel sector.
 Biomass R&D, including BCAP: Focused largely on
developing and growing feedstocks and making conversion
technology for “2nd generation” biofuels from cellulosic
materials economical.
 Bio-refinery grants and loans: Both USDA and DOE.
Limited to “2nd generation” facilities.
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Implication of U.S. Biofuels Policy
 Land Use Impacts: 92 million acres of corn planted in 2011, 14
percent increase over level in 2004 prior to withdrawal of MTBEs
from market. Gain initially from other row crops, but big factor right
now is land made available from increased double-cropping of
wheat/soybeans in Midwest.
 Price Impacts: Crop prices rose dramatically in 2007–2008,
biofuels cited as driving force in “food vs. fuel” criticism. More
recent analysis now suggests biofuels demand was only one of
many contributing factors.
 Farm Program Spending: Higher prices due to all factors led to
drop in farm program spending, increase in crop insurance
spending; net decline of 79 percent between 2004 and 2009.
 Impact on Livestock Sector: Total feed costs for 2011 are
forecast by the USDA at $54.6 billion, up 98 percent since 2003.
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Conservation/Environmental Programs
 Improved soil conservation practices have been a goal of
farm support programs from the beginning, but conservationfocused programs are relatively new.
 Programs to retire environmentally sensitive land came first;
also intended to relieve pressure on annual set-asides.
(1985)
 Numerous small programs designed to encourage farmers to
adopt better conserving cultivation practices (“working land
programs”) consolidated into one large program, EQIP.
(1996)
 Farmers using most farm support and loan programs must
also abide by rules restricting cultivation on wetlands and
highly erodible cropland (conservation compliance). Does
not apply to crop insurance program. (1985)
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Land Retirement/Easement Programs
 Conservation Reserve Program (1985): Main focus is
removing land prone to soil erosion from production.
Farmers contract to retire land for 10–15 years. Qualify
through centralized bidding process (EBI).
 Wetlands Reserve Program (1990): Aimed at keeping
wetlands out of agricultural production. Contracts can be for
easements (30 years or permanent) or for 10-year cost share
to rehabilitate wetlands. Funds allocated to state
conservation directors, who make decisions on enrollment.
 Grassland Reserve Program (2002): Established to provide
incentives to owners of grassland, rangeland, or pastureland
to restore or conserve such land. Not more than 60 percent
of enrolled acres can go into easements, the remainder into
rental agreements of 10–20 years.
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Working Lands Programs
 Environmental Quality Incentives Program (1996):
Provides cost-share financial assistance and technical
assistance to farmers to promote environmental quality
on farmland still in production. By law, 60 percent of
funding goes to livestock operations.
 Conservation Stewardship Program (2002):
Designed to treat agricultural conservation in a more
comprehensive manner, and is intended to reward
farmers and ranchers who already meet very high
standards of conservation and environmental
management on their operations. Also cost-shared.
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Forestry Programs
 Most policies to encourage certain activities or practices
in privately owned forests (430 million acres) done
through federal tax code.
 Healthy Forest Reserve Program (2003): Designed to
help reduce the risk of wildfires by thinning dense
undergrowth and brush in forested areas. Provided
through 10-year cost share or 30-year easement
contracts.
 Forest Stewardship Program (1978): Provides
technical assistance to nonindustrial private forest
owners to encourage and enable active long-term forest
management.
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