MAY - JUNE 1999

In This Issue:

Emergency Farm Relief: What's Ahead?  by Randy Green
Farm Relief Proposals: A Catalog  by Richard Pasco
 


 
 

EMERGENCY FARM RELIEF: WHAT'S AHEAD?

U.S. agriculture still has a safety net. In fact, price and income supports remain responsive enough to troubles in the farm economy that they will account for 31% of net cash farm income in 1999, even if Congress does not appropriate any additional money for emergency farm relief. In the event Congress added another $6 billion in payments this year, an amount that is less than some farm organizations have advocated, government payments would make up almost 40% of net cash farm income.

The government payments help to explain a strange anomaly: Commodity prices are at rock-bottom levels and talk of a new farm crisis is in the air. Yet net cash farm income in 1999, according to U.S. Department of Agriculture forecasts, will be $300 million more than the average for 1990-95, when prior farm policies were in effect.

This anomaly does not mean that reports of distress in the farm economy are inaccurate. It shows that income levels are being cushioned only because of a major increase in the absolute amount and relative importance of government payments. In 1999, direct payments from the federal government will account for more than twice the share of net cash farm income as in the boom years of 1996 and 1997, and their dollar value will also be more than twice as high.

Moreover, the aggregate figures understate the role of federal payments in the economics of those commodities that benefit from them. Historically, the commodities that receive direct federal income assistance have accounted for only about 45% of the total value of agricultural production. Without federal payments, the situation of the supported commodities would be even worse than the aggregates suggest. By the same token, the cash aid does not directly benefit a large portion of American agriculture.

After an overview of the political scene, this article considers the current situation in agriculture, reviews the safety net provided by the Federal Agricultural Reform and Improvement Act (the FAIR Act or "Freedom to Farm"), notes the supplemental aid provided by Congress last year and considers how the safety net might be affected by two scenarios for 1999 emergency assistance.
 

The Political Backdrop

If the political handicappers are to be believed, a Congressional farm assistance package this year is as close to a sure thing as any gambler could want. It is difficult to find a farm lobbyist or Congressional staff member who does not expect Congress to legislate new payments for farmers during this year of low commodity prices, depressed farm incomes and pre-election political positioning. Democrats, especially in the Senate, are pressing for early votes on aid programs whose pricetags start at $6.5 billion and range as high as $10 billion. Republicans, reportedly working on their own relief package, have pressured the White House to send a concrete proposal to Capitol Hill. Such a proposal has not yet been forthcoming, but the Administration has frequently called for a better "safety net" under the farm sector.

Last year, Democrats and Republicans fought out ideological battles, chiefly over whether an increase in price support loan rates was the answer. Eventually, lawmakers enacted benefits well beyond those contemplated in the 1996 Federal Agricultural Improvement and Reform Act (FAIR Act), but they took the form of direct payments, not higher loan rates.

This year, Democrats seem to have put loan rates on hold and are focusing their efforts on renewing or expanding extra cash payments, as well as providing other assistance such as open-market commodity purchases through the Agriculture Department's Section 32 program. To varying degrees, many Republicans also are interested in these proposals. Moreover, both Republicans and Democrats are working toward changes in the federal crop insurance program, another component of the existing federal safety net. The 2000 budget resolution permits up to $6 billion over the 2000-2004 period to be used for risk management and income assistance, and crop insurance legislation will likely consume a large portion of that sum if it is enacted. The expected direct payments, on the other hand, may be declared emergency spending as was the case last year.
 

Current Situation

The price projections in USDA's July 12 World Agricultural Supply and Demand Estimates illustrate why agricultural income has become a hotter political issue than anytime since the late 1980s. Taking the midpoint of the Department's forecasts for the marketing year, we can anticipate -

Farmers' incomes do not move precisely in tandem with prices, for several reasons. First, revenue is not just price but price times quantity, and many farmers in a year of low prices will have larger-than-normal output to sell (indeed, that is usually one reason prices are low). Second, the total incomes of most farm operators now include off-farm income, which is often uinfluenced by crop price levels. Third, since income depends not just on revenues but on expenses as well, the low prices for grains and oilseeds do translate into lower operating expenses for many livestock and poultry producers (about 80% of the variable cost of egg production is feed, for example).

However, both net cash income and net farm income are projected to be down in 1999.(1) Specifically -

Of the two measures, net farm income is more commonly cited, although net cash income may give a more straightforward picture of how farms and ranches fare during the year, especially from a cash-flow standpoint. (2)

Significantly, neither figure includes off-farm income, which in 1999 is forecast to exceed ten times average earnings from farming activities for the average farm household. This ratio is similar to that of other recent years. It helps explain why USDA forecasts that the average farm household in 1999 will have total income of $49,828, over $7,000 higher than in 1996 when net farm income hit its high mark. If true, the forecast will mark the sixth consecutive year in which average total farm household income rose.

One should beware of reading too much into the household statistics, though. As averages, these figures combine small farms - which in many cases are part-time and often money-losing enterprises run by people who do not consider farming their primary occupation - with commercial farms whose success or failure is much more dependent on farm earnings. Many farm families nowadays are two-earner couples, but if the farm is of a commercially viable size, at least one spouse and frequently both will occupy most of their time and energy on the farm. Fluctuations in farm income will make a much greater difference in a commercial farming family's fortunes than a quick reading of the USDA household income numbers might imply.

It seems likely that USDA will revise its 1999 farm income figures downward to account for the downward trend in commodity price estimates. However, some of the price decline would be offset by increases in loan deficiency payments and marketing loan gains, so revisions may not be dramatic.

It is instructive to compare 1999 incomes to those from 1990-95.(3)

When we do, we find that -

These nominal figures do not take inflation into account, of course, but inflation has been low for most of the decade.

The farm sector's balance sheet remains notably healthier than was the case in the farm crisis of the 1980s. In 1999, average debt-to-asset and debt-to-equity ratios remained well below 1980's levels and only modestly higher than in the mid 1990s. Farm debt has been increasing, but according to USDA, total assets and equity have increased more rapidly.(4)

One troubling aspect of the current situation is the growing importance of government assistance to farm income after a period in which its importance fell. Of course, we are nowhere near the situation of the mid-1980s when, in 1986, federal farm spending hit $26 billion. However, in 1998 direct government payments amounted to $12.2 billion. In only one year of this decade were payments higher (in 1993, when they totaled $13.4 billion). If USDA's forecast for 1999 is borne out, the payments this year will surpass 1993 at $14.4 billion.

Indeed, the $16.6 billion estimate is probably low. Loan deficiency payments could be substantially higher even than the $6.6 billion assumed in this number. And, of course, the current estimate does not include any new emergency spending that Congress might enact this year.

In 1998, direct government payments were 21% of net cash farm income. In 1999, even using USDA's current estimates, direct payments will amount to more than 25% of net cash farm income. By contrast, in 1996 and 1997 direct payments were only about 12% of income. During the 1990-95 period we considered earlier, payments as a percent of net cash farm income averaged 17% - more than in 1996 and 1997 but less than today.

These comparisons can lead to several different conclusions, depending on one's perspective. On one hand, the numbers point out the seriousness of today's farm problems - after all, incomes are only being sustained by a much larger-than-normal infusion of federal cash. Without the "Marketing Loss Assistance" payments that were enacted in last year's omnibus appropriation bill, farm income would have been some $3 billion less.(5)

On the other hand, one could argue that Congress and the Administration overreacted to the downturn in the farm economy. Last year's $6 billion emergency assistance package included almost $3 billion in extra income support. If these payments had not been made, net cash income would still have almost equalled the 1990-95 average, while in that case direct payments would have amounted to 18% of net cash farm income rather than the 22% mentioned above. That was almost exactly the average percentage during 1990-95.
 

What is the Safety Net Under the FAIR Act?

As noted by Frerichs and Pasco in an earlier article in this journal, one can define the safety net in several ways. The government has enhanced farmers' ability to manage risks by expanding the crop insurance program to cover revenue risk (Crop Revenue Coverage is now widely available for major crops). Many observers would classify crop and revenue insurance as safety net components. Many would also view the Conservation Reserve Program as part of a safety net. In the past year, foreign aid has been promoted by both the Administration and Congress as something of a safety net, with the President announcing major humanitarian donations of wheat and other commodities to Russia and elsewhere.

Many producers and politicians alike, however, still think of direct price and income support as the quintessential federal safety net. It is therefore appropriate to compare these programs under the FAIR Act to the system the Act replaced.

The table below shows the implicit "safety net" for 1999 crops, without any assumption of additional federal aid. The safety net is defined as the implicit per-bushel guarantee provided to farmers by the FAIR Act, subject to some important caveats as discussed below.(6)

THE SAFETY NET FOR 1999 CROPS

($ per bu unless otherwise noted)

Commodity
Loan Rate
Season Avg. Price
Pmts (AMTA)
"Safety Net"
(Loan + AMTA)
Target Price
(1995)
Wheat
2.58
2.7
.637
3.22
4.00
Corn
1.89
1.85
.363
2.25
2.75
Sorghum
1.74
1.55
.242
1.98
2.61
Barley
1.59
1.8
.271
1.86
2.36
Oats
1.13
1.10
.03
1.16
1.45
Cotton (c/lb)
51.92
--
7.88
59.80
72.90
Rice (cwt)
6.50
6.00
2.82
9.32
10.71
Soybeans
5.26
4.30
--
5.26
None

What is the safety net? If by "safety net," we mean what is absolutely guaranteed to the farmer, the best number to begin with is the loan rate. The farm program is intended to guarantee the farmer an effective price no less than the loan rate. Under the FAIR Act, loans are still non-recourse - the farmer may simply turn over his or her commodity to the government in full settlement of the loan, a choice that is rational only if the farmer cannot obtain a higher price in the marketplace. However, the FAIR Act (like previous legislation) seeks to discourage farmers from taking this step by allowing price support loans to be repaid at the lower of the loan rate or the market price. When prices are lower than the loan rate, the difference between the market price and the loan rate is called a marketing loan gain. As an alternative, farmers can accept a cash payment which, at any given time, is equal to the marketing loan gain they would realize that day. This payment is called a loan deficiency payment (LDP).

Using the loan rate as the basis of the FAIR Act safety net will broadly capture the benefit provided by loan deficiency payments. A more thorough analysis would need to consider average actual selling prices compared to posted county prices (PCPs, which are used as a proxy for local cash market prices to establish repayment rates for marketing loans as well as to set corresponding loan deficiency payments) and other factors.

To the loan rate we can add the FAIR Act contract payment (also commonly called the AMTA payment, for the Agricultural Market Transition Act). This payment is made to all farmers who signed AMTA contracts, which took the place of the previous farm program. The sum of the loan rate and the AMTA payment for each commodity gives a rough idea of the per-unit safety net under the FAIR Act. The table above compares it to the target price under the old system.

The current guarantee seems a lot less than the target price because AMTA payments were originally calculated based on Congressional Budget Office projections of deficiency payment rates, not on the absolute difference between the target price and the loan rate. Since CBO did not project maximum deficiency payments, the FAIR Act "locked in" only a portion of the spread between the loan and the old target price as a fixed payment.

There are many differences between the FAIR Act and the old target price system that make any comparison difficult. Most obviously, deficiency payments were made on the basis of planted acres. Farmers had to plant the crop to get the payment. That is not the case under the FAIR Act. Farmers' contract payments are based on a quantity that was set at 85% of their old crop acreage bases times their old payment yield.

This quantity does not change regardless of current planting decisions. A farmer who has switched acreage from corn into soybeans since 1995 may be getting AMTA payments on a greater quantity of corn than he actually produces. On a per-bushel-of-corn basis, his safety net would be higher than implied in the table above. (A farmer who has switched plantings from soybeans into corn, of course, could make the opposite comparison.)

In neither case, though, will the farmer look at the implicit safety net (the $2.25 figure for corn, say) to guide his planting decision. Since he will receive the AMTA payment whether he plants corn or something else, he should plant neither more nor less corn simply on account of the payment.(7)

In addition, the old system never guaranteed farmers the target price on every bushel they were capable of producing. Deficiency payments were made on the basis of payment yields that were usually less than farmers' normal per-acre output. In addition, under the 1990 farm bill deficiency payments were not paid on 15% of normal acres (so-called "flex acres," which were subject to fewer planting restrictions than paid acres). Both of these limitations were, in effect, carried forward by the way the AMTA payment quantities were calculated.

Another limiting factor in the old system was acreage reduction programs (ARPs), which are not permitted under the FAIR Act. For example, the $4.00 target price for wheat was substantially less generous when the government required farmers to idle up to 27.5% of their normal wheat plantings, as was the case for several years in the mid-1980s. Since deficiency payments were only made on planted acres, an unpaid ARP reduced the value of the target price by offering it on fewer acres.(8)
 

What Did Congress Do Last Year?

Now we can consider the effect of last year's emergency aid on the implicit safety net. In the omnibus appropriation bill which contained the emergency aid, Congress mandated several benefits, including --

Remember that in the first table, we were looking at the 1999 crops, while in the next table we are looking back at the 1998 crops. In a few cases, loan rates are marginally different. In this table, we do not consider the 1998 or multi-year disaster payments as safety net components, just as we did not include the benefits of federal crop and revenue insurance in the previous table. In this article, we are focusing on programs that primarily assist farmers with income shortfalls related to market risk. However, a comprehensive inventory of federal assistance to producers must include both crop insurance and disaster aid.

THE SAFETY NET FOR 1998 CROPS - AFTER EMERGENCY AID

($ per bu unless otherwise noted)

Commodity
Loan Rate
Season Avg. Price
Pmts (AMTA)
Pmts (MLA)
Safety Net
(Loan +AMTA +MLA)
Wheat
2.58
2.65
.663
.329
3.572
Corn
1.89
1.95
.377
.183
2.45
Sorghum
1.74
1.70
.253
.126
2.119
Barley
1.56
1.95
.284
.141
1.985
Oats
1.11
1.15
.031
.016
1.157
Cotton (c/lb)
51.92
61.1
8.17
4.06
64.15
Rice (cwt)
6.50
8.75
2.92
1.45
10.87
Soybeans
5.26
5.00
--
--
5.26

Again, we have used the loan rate instead of the season average price to calculate the safety net. However, in assessing farmers' actual economic performance for the 1998 crops, it would be more appropriate to use the higher of the season average price or the loan rate. For wheat and feed grains (and, of course, soybeans, which do not receive AMTA payments directly), this does not make much difference. For cotton, though, the sum of the season average price, the AMTA payment and the marketing loss assistance (MLA) payment is actually greater than the old target price - 73.33 cents per pound. And for rice, the same calculation yields a surprising $13.12, $2.41 per hundredweight higher than the old target price of $10.71. Indeed, in the case of rice, even the sum of 1998 payments plus the loan rate exceeds the old target price marginally.

In fairness to rice and cotton growers, the same pattern would emerge for other crops using AMTA payments alone if we were considering a different year. For example, the 1997/98 season average wheat price of $3.38 plus that year's AMTA payment of $0.631 equals $4.011, slightly higher than the old target price. In addition, since many cotton and rice producers are subject to payment limitations (which were tightened 20% under the FAIR Act), their actual per unit proceeds might be substantially less than is implied by these figures.

In fact, payment limitations are emerging as an important issue for all AMTA commodities this year because of loan rate issues. The FAIR Act limits farmers to $75,000 per year in marketing loan gains or loan deficiency payments (LDPs). If a farm is organized to take advantage of the "three-entity rule" it can receive, in effect, one full payment limit plus half of two others, so that the $75,000 limit effectively becomes a $150,000 limit. However, because payment limitations have not been as important an issue for grain producers as for cotton and rice producers, it is often asserted that fewer large operations in the Midwest have organized themselves in a way that would permit them to receive the full $150,000 in benefits.(9)

With LDPs and marketing loan gains much larger than anticipated this year, the issue of payment limits has come to the fore. The July World Agricultural Supply and Demand Estimates published by USDA suggests a season average price range for 1999-crop soybeans of $3.90-4.70 (vs. a loan rate of $5.26) and a season average corn price of $1.65-2.05 (vs. a $1.89 loan rate). These price ranges suggest not only substantial LDP outlays, but also that numerous producers may be subject to the $75,000 limit. The acreage at which a producer is affected by the limitation depends on his or her yield and the size of the LDP or loan gain he or she elects.

It seems likely that the average LDP will exceed the gap between the loan rate and the season average price, since a large portion of LDPs will probably be taken at or near harvest when prices would be seasonally low. If we use the low end of USDA's forecast price range as a proxy for the posted county price (PCP), a somewhat arbitrary assumption, we can get some idea of the size at which farming operations would need to worry about payment limits.

This assumption gives an LDP of $1.36 for soybeans and $0.24 for corn. Using USDA's projected average per-acre yield of 136 bushels per acre for corn and 40 bushels for soybeans, the LDP per acre would be $32.64 for corn and $54.40 for soybeans. A farm on which half the acreage is planted to corn and half to soybeans would hit the $75,000 limit at a total farm size of 1,724 acres. Using moderately lower price assumptions and higher yields that would be more normal in the Corn Belt, one can easily bring this down to 1,000 acres. In either case, such a farm is not excessively large by today's standards, and many family-run commercial operations could be subject to the payment limitation this year.

From the standpoint of public policy, the payment limit may raise questions about the orderly marketing of the 1999 crop. A farmer confronted by the $75,000 payment limit and persistently low prices may find forfeiture of some of the crop to be the most economically rational course of action, because otherwise the payment limit will force him or her to repay a portion of loan proceeds at the original loan rate even though it exceeds the current market price. USDA could then face the prospect of owning substantial quantities of grain, soybeans, cotton and other crops.

To prevent this, some members of Congress have proposed increasing the payment limit on loan gains and LDPs. (H.R. 2530 by Rep. Bill Barrett [R-NE] was introduced July 15 for this purpose.) Some farm organizations have privately suggested that, if the law cannot be changed, USDA might utilize some form of commodity or cash certificates, which the organizations believe could be exempted from the payment limitation. One idea is to make some AMTA and Conservation Reserve Program payments in certificates, which could be used to redeem loans and thus avoid the payment limitation.

Another perspective on the issue might come from advocates of fiscal conservatism, or proponents of targeting farm program benefits to smaller farms. At the time the FAIR Act was enacted, it was widely assumed that most grain producers would be limited to $80,000 in direct payments even if they had organized their operations as described above to capture, in effect, two $40,000 payments. This assumption reflected the belief that prices were unlikely to fall below the loan rate for grains and oilseeds, so that there would be no marketing loan gains or loan deficiency payments, but only AMTA payments (which are the subject of the $40,000 limit).

Now, however, low prices will mean that many farmers receive $230,000 in direct federal payments: $80,000 in AMTA payments plus $150,000 in loan deficiency payments. Proponents of payment limitations may ask why taxpayers should give any individual a transfer payment of as much as $230,000, to say nothing of expanding it further. One could also argue that the FAIR Act's safety net is more generous than portrayed by its opponents, if it accommodates as much as $230,000 per farming operation during hard times.

What Will Congress Do This Year?

If Congress again provides emergency relief to farmers, it seems likely to be similar in structure to last year's effort, which was contained in the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999. How generous will it be?

Below we consider two possibilities among many: First, that Congress would simply provide the same level of MLA payments as last year(10); second, that Congress would adopt an amendment filed to the Senate agriculture appropriations bill by Sen. Tom Harkin (D-IA). Sen. Harkin does not specify per-unit payment amounts in his amendment, but the portion he sets aside for MLA payments to AMTA commodities is $3.9 billion, an amount 1.37 times the total MLA amount made available for 1998 crops ($2.857 billion). Therefore, we have simply multiplied 1998 MLA payment rates by 1.37.
 


HYPOTHETICAL PAYMENT SCENARIOS FOR 1999 CROPS

($ per bu unless otherwise noted)

Commodity
Loan Rate
Season Avg. Price
Pmts (AMTA)
Pmts (MLA = '98)
Safety Net
(Harkin Formula)
Wheat
2.58
2.70
.637
.329
.451
Corn
1.89
1.85
.363
.183
.251
Sorghum
1.74
1.55
.242
.126
.173
Barley
1.59
1.8
.271
.141
.193
Oats
1.13
1.10
.03
.016
.016
Cotton (c/lb)
51.92
--
7.88
4.06
5.56
Rice (cwt)
6.50
6.00
2.82
1.45
1.99
Soybeans
5.26
4.30
--
--
--

The next table shows the total safety net implicit in four scenarios: the FAIR Act, a repetition of last year's payments and the leading Democratic proposal of Sen. Harkin, with the old target price included for comparison.

Once again, it is appropriate to point out that using the target price can be misleading. The FAIR Act structure is arguably a lower safety net than the old system in bad times, but it provides substantially more income in good times because, unlike deficiency payments, decoupled AMTA payments do not decline or disappear when prices are high. The old system appears more generous if one looks at only one year at a time. The FAIR Act may be more generous if one looks at a period of several years. Indeed, most early analyses showed that it was, at least in the sense that payments to farmers during 1996-98 were higher under the FAIR Act than they would have been under the previous farm policy. Many farmers used the combination of high prices and high payments in 1996 and 1997 to pay down debt, make capital investments or otherwise improve the financial condition of their operations.
 


HYPOTHETICAL SAFETY NET SCENARIOS FOR 1999 CROPS

($ per bu unless otherwise noted)

Commodity
FAIR Act
1998 MLA Scenario
Harkin Scenario
1995 Target Price
Wheat
3.22
3.55
3.67
4.00
Corn
2.25
2.43
2.50
2.75
Sorghum
1.98
2.12
2.29
2.61
Barley
1.86
2.00
2.05
2.36
Oats
1.16
1.18
1.18
1.45
Cotton (c/lb)
59.80
63.86
65.36
72.90
Rice (cwt)
9.32
10.77
11.31
10.71
Soybeans
5.26
5.26
5.26
None

Other Safety Net Proposals

Emergency assistance to farmers and ranchers will probably not be limited to MLA payments. Among other ideas that have been proposed are the following:

The variety of these proposals illustrates one important limitation of providing farm income relief through either the mechanism of AMTA contracts (as in last year's emergency package) or loan rates (as in last year's Democratic proposals). Only a portion of U.S. agriculture benefits from such programs. Livestock, poultry, oilseed, fruit and vegetable production are not directly associated with AMTA payments, although many producers of these commodities also produce AMTA commodities like corn or wheat.

Perhaps for this reason, Congressional interest is also high in crop insurance reform, commodity purchases and other initiatives. Thus, far from being an off-year for farm legislation as many had expected, 1999 may turn out to be the most legislatively active since the FAIR Act was enacted in 1996.
 


NOTES

1. Farm income statistics are calculated on a calendar year basis, while price projections are normally made on a crop-year basis and government payments typically tabulated by fiscal years. These different measurement periods often create confusion, but the broad trends and patterns in the forecasts are relatively unaffected.

2. Both measures start with gross cash income, which includes crop and livestock receipts, government payments and other farm-related income. Then net cash income is simply the result when total cash expenses are deducted. Net farm income adds or subtracts the change in value of inventories held on farms and ranches, adds non-cash income (chiefly the imputed rental value of farm dwellings) and subtracts non-cash expenses like depreciation. Net farm income normally ends up being a lower figure than net cash income.

3. We exclude 1996 and 1997 as unrepresentative because of abnormally high prices, instead focusing on the six-year period 1990-95, which included some good and some not-so-good years. But if we included 1996 and 1997, the last two years would still not look catastrophic. Comparing 1999 with the entire 1990-97 period would  leave projected 1999 net cash income less than $1 billion below the average, and 1999 projected net farm income would be $1.6 billion below the average of $45.4 billion.

4. Although these financial indicators suggest a sounder, less-extended sector than in the 1980s, they also illustrate part of the current squeeze in which many farmers find themselves. One reason for still-rising asset values is USDA's projection that 1999 real estate values continue to inch up despite low prices. For a non-land-owning operator paying cash rental rates that still reflect high price expectations, this is a problem rather than a solution.

5. The disaster payments mandated along with the MLA payments were not disbursed until 1999 and therefore did not add to 1998 income.

6. In thinking about the implicit safety net, we can start with the assumption that the average unit of production receives the higher of the season average price or the loan rate. The average bushel of wheat will be sold at the average market price. If that is above the loan rate, the farmer will sell into the market and may or may not use the wheat marketing loan program as a temporary marketing tool or cash-flow enhancer. If the average price is below the loan rate, on the other hand, the producer will still realize the loan rate because he will either place his wheat under loan and realize a marketing loan gain when he sells, or he will give up loan eligibility and take a loan deficiency payment. Either the gain or the payment is assumed to equal the difference between the loan and the market price, on average.

In reality, this is too simplistic. Many astute farmers in 1998 realized some extra income by taking their LDPs at the point when prices made a bottom but selling at a higher price. (It helped to have on-farm storage to make this work.) They netted more than the loan rate because their individual selling price exceeded the posted county price (PCP) on the day they elected their LDP.

However, it is important to realize that things can work the other way too. If a producer takes an LDP on half his production, that is an irrevocable choice with respect to that half of output. It is no longer eligible for the loan, so the producer is not guaranteed a minimum price. If the producer's timing is bad and prices weaken after he takes the LDP, he will realize less than the loan rate.

7. The loan rate, of course, will be relevant to the farmer's planting decision if he expects prices to be low - a fact which many observers credit with a portion of the increase in soybean acreage in 1999 despite the prospect of low soybean prices, since the loan rate for corn is set at a relatively lower level than that for soybeans, given normal price and cost relationships between the two crops.

8. Whether the ARP also increased the value of farmers' output by limiting supplies has long been a matter of debate, but is not the topic of this article.

9. For a more complete discussion of the FAIR Act's provisions, see an article from the May-June 1996 issue of this journal.

10. Our first scenario duplicates last year's payments rather than assuming they would bear the same proportion to basic AMTA payments as did last year's MLA payments. The latter assumption would slightly reduce the assumed size of the 1999 MLA payments. Since we believe many members of Congress will evaluate this year's relief package by how its total dollar cost compares to last year's, and since last year's MLA payment rates were an artifact of the total amount that was negotiated among the Congressional leadership, we think it is reasonable to set the 1999 payment rates at least equal to 1998.
 

FARM RELIEF PROPOSALS: A CATALOG

Proposals for emergency farm relief are multiplying rapidly, with the price tag of each new proposal higher than the one before. For example, the primary rallying point among Senate Democrats has been an amendment offered by Sen. Tom Harkin (D-IA) to various appropriation measures. That proposal would cost $6.5 billion. However, statements by Harkin and other Senators, including Minority Leader Tom Daschle (D-SD) suggest they may support up to $10 billion in new assistance. Sen. Kent Conrad (D-ND) has offered a $9.4 billion package.

In the same way, farm organizations are calling for increasing sums. The American Farm Bureau Federation made headlines when it supported $9 billion, and the National Farmers Union has now called for $17 billion. Meanwhile, commodity organizations have made proposals that are also ambitious but generally confine their specifics to the individual commodity represented by the group.

This article summarizes several major proposals. A glossary at the article's conclusion identifies terms and abbreviations. In most cases, direct links to the text of these proposals are provided at www.AgricultureLaw.com.  At that site, click on "Farm Income Relief" under "Hot Topics."

Because the debate on farm income relief is so far proceeding on a separate track from crop insurance reform, this article does not summarize crop insurance proposals except to the extent that they appear as discrete portions of the various income assistance plans. However, extensive information on all pending crop insurance proposals is also available at www.AgricultureLaw.com under the "Crop Insurance" section of "Hot Topics." It is worth noting that at least one proposal described there, by Senate Agriculture Committee Chairman Richard Lugar (R-IN), combines elements of both crop insurance and income assistance by offering supplemental AMTA payments contingent on certain risk management activities by producers.
 

AMERICAN FARM BUREAU FEDERATION

NATIONAL FARMERS UNION
 
  • "Producer Economic Equity": $11.775 billion.
  • "Inventory Management": $1.25 billion
  • "Regulatory Transition": $1 billion
  • Federal tax credit for state and local property taxes.
  • Full deductibility of health insurance premiums.
  • Mandatory livestock price reporting.
  • Country-of-origin labeling for food products.
  • Reform Food Quality Protection Act.
  • Conservation and Credit: $700 million
  • Trade and Food Aid: $2 billion
    • AMERICAN SOYBEAN ASSOCIATION NATIONAL ASSOCIATION OF WHEAT GROWERS H.R. 2395 (COMBEST AND OTHERS) AMENDMENT No. 1048 TO SENATE AGRICULTURE APPROPRIATIONS BILL (HARKIN)


    AMENDMENT No. 1244 TO SENATE AGRICULTURE APPROPRIATIONS BILL (CONRAD)

    Glossary:

    MLA Payments: Market (or Marketing) Loss Assistance Payments. Enacted as part of last year's omnibus appropriation bill to supplement incomes for farms with AMTA contracts. Calculated as a percentage of the AMTA payment (last year, about 50%).

    AMTA: The Agricultural Market Transition Act, Title I of the FAIR Act, commonly known as Freedom to Farm.

    AMTA Payment: The basic decoupled income support payment that takes the place of deficiency payments. Also known as contract payments, Freedom to Farm payments.

    AMTA Contract: The long-term income support contract signed by almost all producers who held acreage bases of wheat, feed grains, upland cotton and rice. Contracts are for seven years (1996-2002) except for expiring CRP contracts, which can be for shorter periods but also expire in 2002.

    Marketing Assistance Loan: Price support loans for wheat, feed grains, upland cotton, rice and oilseeds. Also known as marketing loans, non-recourse loans.

    LDP: Loan deficiency payment. A cash payment that may be taken as an alternative to eligibility for marketing assistance loans. The LDP on any given day is equal to the marketing loan gain for that day. When an LDP is elected for a quantity of production, that quantity is no longer eligible for placement under loan.

    Marketing Loan Gain: The gain realized by a producer who is permitted to repay a marketing assistance loan at the posted county price (PCP), a value intended to reflect local market conditions. The concept is to allow market prices to fluctuate freely while ensuring the producer the full benefit of the loan rate, while avoiding government acquisition of commodities.

    Section 32: A statute under which the U.S. Department of Agriculture purchases commodities on the open market for use in school lunches and other feeding programs. USDA operates the program to emphasize of commodities that are in surplus.

    FARRM Accounts: Farm and Ranch Risk Management accounts, proposed in pending legislation but not enacted. Would allow farmers to shelter a portion of farm income from taxation for up to five years, place the funds in an interest-bearing account and pay taxes on the funds as ordinary income in the year withdrawn from the account.